Kratos Defense & Security Solutions, Inc. Stock

Hello, and welcome to Kratos Defense & Security Solutions Second Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to Marie Mendoza, VP, General Counsel. You may begin. .

Thank you. Good afternoon, everyone. Thank you for joining us for the Kratos Defense & Security Solutions Second Quarter 2026 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 in Regulation G. Non-GAAP financial measures should not be considered unitization from or as a substitute for financial information presented in compliance with GAAP. Accordingly, at the end of today's press release, we have provided a reconciliation of these non-GAAP financial measures to the company's financial results prepared in accordance with GAAP. Eric?

Thank you, Marie. Kratos' second quarter results reflect the execution of the Kratos team and that our strategy, including making internally funded investments, be first to market with relevant hardware and software that is engineered upfront for affordable mass production is aligned with the Department of War's priorities.

Representative of this alignment, Kratos' last 12-month book-to-bill ratio of 1.3:1, total last 12-month bookings of $1.99 billion, the number of opportunities for Kratos continuing to increase with the bid and proposal pipeline of $15 billion now, and our business momentum forecast to accelerate into the second half of this year and continuing the '27.

Kratos' second quarter year-over-year organic growth rate was 19.1%. We are forecasting third quarter organic growth of approximately 19% to 25%. And we are forecasting fourth quarter year-over-year organic growth of approximately 19% to 31%. We are increasing our forecasted full year 2026 organic revenue growth up to 19% to 23%. I am emphasizing that these are all organic growth numbers. Kratos' EBITDA margins also are increasing and are forecast to continue to increase in the second half of '26 and into '27 as the business scales, production increases and we realized financial leverage on our fixed infrastructure cost.

We are generating and forecasting for increased margins while we are making significant investments as we pursue large new Department of War opportunities that are being presented to us, and also with the recent strength of the shekel adversely impacting our Israeli operations profitability. We began the second half of '26 and look forward to '27. We are more confident than ever in Kratos' future prospects, including for the following reasons.

We have recently received new hypersonic system program awards, including Kraken One, Kraken Two and Nemesis. We have received a new directed energy counter UAS system program award with an initial value of approximately $160 million. We have received a new space domain awareness system production award with an initial value of approximately $100 million. The space force is now receiving a new EW system that includes Kratos Hardware. We have recently received approximately $400 million in new hypersonic and other funding, and we expect to receive significant additional funding in the second half of this year.

We hope to announce shortly a successful recent Kratos Rocket system flight event directly related to missile defense. And we have been recently informed that we have received a new contract for a missile system program of record. The Pentagon has requested multiyear procurement authority for multiple munitions, and missiles, including PrSM, AMRAAM, JASSM, LRASM, TLAM and MFT, FAD, Patriot, low-cost hypersonic strike systems, family of affordable mass munitions and low-cost containerized cruise missiles.

These are all Kratos supported programs or programs that we are positioning to support in the future. Why is this significant? The family of affordable mass missiles, the FAMM program, for example, which the Air Force's Future Years Defense Plan or FYDP calls for 27,000 low-cost cruise missiles, has been a top strategic priority of Kratos' jet engine initiative, and it's now happening.

The Pentagon is also looking to acquire 10,000 cruise missiles under the low-cost containerized munitions program, another low-cost missile opportunity Kratos has been targeting for our engines. Other new low-cost cruise missile programs Kratos is supporting or positioned for include ERAM, ETV, ground launch cruise missile and JDAM-LR, together representing an estimated potential opportunity for tens of thousands of Kratos small turbojets.

We believe that JDAM-LR alone, which includes the Kratos [indiscernible] could be one of the largest single opportunities for our company with the potential for tens of thousands of systems by itself. As a result, we are currently placing initial orders with our supply chain for the components for 3,000 small Kratos TDI, Spartan turbojet engines, we expect to produce 4 customers in 2027. And we currently plan to order components during '27 for an additional 5,000 engines expected to produce for customers in 2028. The average selling price of a Kratos Spartan engine, this is a turbojet is approximately $50,000. We will produce the Kratos Spartan turbojet engines in our new now operational state-of-the-art manufacturing facility in Michigan.

In addition to these low-cost cruise missile systems, it was reported, the Air Force is looking to acquire over 11,000 JASSM and LRASM missiles over the next 6 or 7 years. This is an opportunity, Kratos' Blade works turbofan engine family and our partner, General Electric Aerospace, have been pursuing. Kratos' new Blade Works facility in Oklahoma, where we recently broke ground and where we plan to produce these turbo fans is expected to be operational next summer with schedule we are closely coordinating with our partner and the customer.

We currently plan on turning on our BladeWorks turbofan engine supply chain in either Q4 of this year or Q1 of next so we can meet future customer required delivery schedules. Additionally, Kratos' partner GE, has recently revealed a new small turbofan design optimized for the cost profile of the CCA market, sized for a range of mission applications. We are expecting Kratos' engine business to be one of our company's largest and fastest growing over the coming years.

Kratos' hypersonic business, which generated approximately $200 million in revenue in 2025, and we are currently tracking for $400 million in '26, increasing to at least $700 million in 2027 is positioned to become Kratos' largest business with significant increased government funding in the hypersonic area expected for the foreseeable future.

We expect to begin receiving the first of the 120 solid rocket motors we previously procured in Q3 this year. And with Kratos' new hypersonic system integration facility in Indiana operational, we see these as key elements of our hypersonic business expected future growth trajectory.

Kratos' hypersonic and Rocket Systems business has several additional large, new opportunities we are pursuing, including certain in-source selection which we expect to be awarded by the end of this year. We are confident in our hypersonic business's forecasted growth trajectory, including based on the [ several $100 million ] in funding we recently received and also it was recently reported that the Mach-TB program funding over the next 5 years as reflected in the department's justification documents, is approximately $7 billion. An additional data point on why we believe that Kratos' [ hypersonic ] business will be a primary future growth driver for Kratos for the foreseeable future is the threat.

And as it was recently reported that using U.S. intelligence estimates, that China could have approximately 4,000 hypersonic missiles by 2035, and Russia could have 1,000. There is not only a drone missile and space arms race underway, but also a hypersonic arms race, each of which Kratos intends on supporting the Department to win. Kratos' microwave electronics and SATCOM business headquartered Israel is working with the Israeli MOD and our partners, Israeli Aerospace Industries, Rafale and Elbit to replenish stockpiles of advanced weapons, interceptors, SATCOM and other assets used in the Iran conflict.

Kratos has over 700 employees in Israel, and we are working on and have access to certain of highest technology battle-proven systems in the world. Kratos' Israeli employees, business partners and presence is a clear differentiator for our company globally. Kratos' Satellite C2 and space demand awareness business, our company's largest is also rapidly growing and expecting significant future margin expansion with space having never been more important for global security and as space increasingly comes a war-fighting domain.

On the commercial side, Kratos' relationship with our partner, global satellite operator, SES, is outstanding with SES being an industry-leading technology company with a future technology and business road map that is truly exciting for SES, its customers, industry and for Kratos. Kratos' industrial gas turbine business area continues to ramp. It is currently one of the fastest-growing business areas in our company, with certain industrial gas turbines, we are working on being air cooled, which we believe is truly differentiating in the market.

Kratos Unmanned Systems business had a solid Q2, and we expect to receive an additional Marine Corps Valkyrie order by the end of this year. It was reported that in recently released Marine Corp budget justification documents that Marines plan to spend $1.28 billion on their CCA program over the relevant 5-year period.

Kratos Valkyries are in Europe with our partner, Airbus, and we continue to work with a number of customers on tactical fire jet, including Taiwan. It was recently reported that Taiwan is planning to adopt a new version of the Valkyre in addition to tactical firejet initiative, Mighty Hornet. Certain Kratos jet drones are now flying with Kratos jet engines, increasing performance, capability and time to market for our customers. number of opportunities that Kratos has across our company has never been stronger and continues to increase both in the United States and internationally. The Department of War is looking for companies like Kratos to invest, move rapidly, mass produce and feel the product fast in large quantities at a practical cost and Crans is stepping up and executing.

Kratos is currently in an investment phase aligned with the department's reindustrialization initiative, which is related to the number of long new long-term program opportunities for receiving. We're focused on organic growth execution, winning large, new programs, supporting the United States and the Department of War and generating a return for our investors. Deanna?

Thank you, Eric. Good afternoon. In summary, our second quarter performance exceeded our forecasted revenue and EBITDA targets. And as Eric mentioned, we continue to be on track to meet our previously reported full year 2026 revenue goal of approximately 15% to 20% of organic revenue growth and approximately 100 basis point improvement in adjusted EBITDA margin performance from our reported 2025 operating results. .

Revenues for the second quarter were $458.8 million, above our estimated range of $400 million to $410 million, with consolidated organic growth rate of 19.1% comprised of an organic growth rate of 22% in our KGS segment and 8.1% in our Unmanned Systems segment. Notable year-over-year organic revenue growth in our KGS segment included our defense rocket support, turbine technologies, microwave products and space training and cyber businesses with organic revenue growth rates of 50.2%, 43.3%, 29.5% and 8.7%, respectively.

Adjusted EBITDA for the second quarter was $38.2 million, above the high end of our estimated range of $30 million to $35 million, reflecting the increased revenue and revenue mix. Unmanned Systems second quarter 2026 revenue was up $5.9 million or 8.1% organically, with the increase primarily driven by Valkyrie-related activities. KGS' second quarter 2026 revenue was up $101.4 million year-over-year from the second quarter of '25 with organic revenue growth of 22%, excluding the impact of the recent acquisitions of Nomad and Orbit, which contributed $40.2 million.

Second quarter 2026 cash flow used in operations was $11 million primarily reflecting the working capital requirements related to the revenue growth impacting our receivables by approximately $59 million and increases in inventory of approximately $10 million and increases in prepaid and other assets approximately $14 million, primarily reflecting prepayments for long-lead materials as well as investments we are continuing to make related to certain development initiatives.

In our unmanned systems, rocket systems and space and satellite businesses. Free cash flow used in operations for the second quarter of '26 was $18.9 million after reflecting funding of $17.2 million of capital expenditures and net of $9.3 million in proceeds from the sale of Valkyries, which were reported as company-owned capital assets and previously classified capital expenditures when manufactured 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 and 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 decreased from 130 days during the first quarter of 2026 to 114 days during the second quarter of '26, primarily reflecting the achievement of billion milestone events. Our contract mix for the second quarter of '26 was 67% at fixed price, 29% cost plus and 4% time and material contracts. Revenues generated from contracts with the U.S. federal government during the second quarter of '26 were approximately 69%, including revenues generated from contracts with the DOW. Non-Dow federal government agencies and [ 4 ] military sales contracts and 20% generated from foreign customers and 11% generated from commercial and state and local entities.

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 cost. Our third quarter '26 revenue guidance reflects an estimated revenue mix and estimated 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 as well as the estimated impact of foreign currency impacts, including on our microwave products is rail business, which is being adversely impacted by the strength that the Israeli shuffle versus the U.S. dollars as we are paid in U.S. dollars for work performed that pay our vendors and workforce in shekels.

Simply stated, Kratos' second quarter and 6 months ended adjusted EBITDA would have been $2.5 million and $2.8 million higher, respectively, if the increase in the shekel over the past 6 months have not occurred. Further, our forecast for the full year includes an estimated impact of approximately $5 million to $7 million negative impact to EBITDA related to the continued estimated impact of the strength of the shekel.

Our third quarter revenue guidance of $460 million to $480 million reflects estimated organic revenue growth of approximately 19% to 25% as compared to the third quarter of '25. Our revised full year cash flow guidance has been updated to include the working capital requirements related to the recent decision to commence procurement of the materials and equipment in the third and fourth quarters to ramp our production of jet engines to 3,000 in 2027 to address the demand for engines for small cruise missiles. Also includes the shift in timing of construction and procurement of related machinery and equipment, removed certain capital expenditures, which are now funded under customer contract and includes a shift in classification of investments for various drone opportunities which will be classified as a use of working capital in our operating cash flow as work in process or inventory rather than capital expenditures when incurred. The forecasted total investments for the year effectively remains unchanged at approximately $250 million to $270 million. However, the geography of where certain of these investments are reported on our cash flow statement have shifted between inventory or working capital and operating cash flow versus capital expenditures or investing cash flow.

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

[Operator Instructions] Our first question comes from the line of Sheila Kahyaoglu with Jefferies. .

Eric, and Deanne great quarter on the growth side. The full year growth rate still implies a meaningful acceleration in the second half and maybe I'll hone in specifically on hypersonics. Eric, I think you mentioned $400 million this year, still going to $700 million next year. How do you think about that in the second half? And how did that fit with some of the CapEx changes as well as we think about the growth?

Go head, Deanna.

Yes. For the hypersonic business, Sheila, the expectation going from Q2 to Q3 sequentially is approximately $20 million to $25 million of increase in that same $20 million to $25 million, maybe up to $30 million incremental in Q4 from Q2's level.

And the big piece operationally, Sheila, is the our hypersonic system integration facility is operational now in Q3. And we have multiple lines -- production lines, integration lines, if you will, for the motors that are now coming in and the flyers that will be coming in. We integrate them and we have the launch manifested out there, they'll go and that op tempo increases Q3, Q4, and then it increases significantly in 2027, which we have the contract for and the funding for.

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

I wanted to start off asking about the engine business. And I think you've spoken a lot about the hypersonics business being sort of the fastest-growing piece of the company. It sounds like the engines have a bit of a chance to catch up. And so -- maybe if you can a little more color on the phasing of that and maybe the distinction between the turbo fans and the turbo jets and how the different pieces of that will ramp up, let's say, over the next 2 to 3 years and how that will compare to where things are going on hypersonics?

Yes. Very good. So let's talk turbojets First, Turtle Jet, I think 250 pounds of thrust on down. This is our Spartan family, which we build in Michigan. These are not PowerPoints. These are all engines that work that are flying today. I went through, Seth, the various programs. There are many more that are out there. There are literally, as I said, and you can see it in the budget justification docs in the Jbooks.

Tens of thousands, multiple tens of thousands of low-cost, $300,000 cruise missiles that are coming beginning next year. The ones publicly that I can talk about that we're designed in on and I'm probably going to miss some here is JDAM-LR, [indiscernible] we're on several with Northrop Grumman, and we're on several more with Lockheed Mark. The big one, of course, is JLR with with Boeing. We're designed in on all those, and we're in on many others. We have a build plan that indicates what we need to build in '27 and '28 and '29. We have leaned forward and we have placed the orders now for the components for 3,000 engines to be built in 2027, and we're at least 3,000 customers.

And then we have a build plan where we're going to be ordering, as I mentioned in the remarks, the components for 5,000 more engines for 2028. And I'm not going to give a specific number for 2029, that could increase significantly. The selling price average for these is $50,000 each. So that's those. On the turbofans. So these are roughly -- it can adjust 600 pounds of thrust on up. These are much bigger, much more sophisticated. These go and, as I mentioned, JASSM and LRASM, I gave you the numbers that were coming that have been publicized there on the increase for those 2 types of cruise missiles.

There are several others we cannot talk about here because we're either under an NDA. That factory is going to be up and running, as I said, in the summer of '27 in Oklahoma. It's mapped into missiles coming off the production line in -- late '27, '28. That will begin LRIP in 2028. That's the partnership with GE. It's a 50-50 partnership. And so any numbers I give financially just divide them by 2, because it's 50-50. And as I mentioned, there are thousands of those plans as well. Those are the 2 biggest for us, those turbojets and those turbofans. .

Okay. Excellent. And then maybe just one to follow up on the guidance for this year. You mentioned some of the headwinds from the shekel. It seems like that's limiting some of the margin expansion that's happening here in Q2 and Q3. Is there anything else we should be aware of with regard to margin? And then are there some mix factors that are pushing the margin back up in Q4?

Seth, you're correct. So the biggest headwind that we're facing is that shuttle impact. So the impact for the second quarter was about $2.5 million. the first quarter was much smaller at $300,000. The estimate that we are forecasting at this point is about $5 million to $7 million for the year. So we're expecting that strength, unfortunately, to continue for the second half. So that is some of the headwind. Otherwise, we would have expected to see more margin expansion in the third and fourth quarters. but that's the single most significant headwind from a margin perspective.

And at some of those other platforms we're on, we're on CMMT or COMET, we're on speed racer. We're on [indiscernible]. We're on Silver Fox. We're on Gray Wolf, and we're on Lumber Jack in addition to JDAAM LR. So those are the public ones I can talk about. .

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

Eric, Dan, nice results. Eric, you mentioned Taiwan, maybe you could give us an update on the developments with the Mighty Hornet. It certainly seems like it's well positioned and now -- it sounds like there's interest in Valkyrie. Maybe you could just give us a Taiwan download here.

Yes. So on the first one, the Mighty Hornet, which is the derivative of our tactical fire jet and this is one of the Kratos drones now that has a Kratos engine. So I think it's another first for Kratos, we're the first company under the same roof that's building a plane and building an engine.

We have flights coming up. with a customer soon. I'm not allowed to give the specific dates. We're going to do some things, and we have to hit some things. Assuming they go well, the customer is talking about putting us into production first half of next year.

on the Mighty Hornet, those would be produced initially in Oklahoma. On the the Valkyrie derivative. I was very surprised that the customer came out. I did the interview that they did and they talked about this. They talked about the reason that they want to do it is because the Valkyrie is flying. It's proven. It's flown with the Air Force, it's flown with the Marine Corps. It's deploy weapons. Very importantly, I believe they also talked about is it's rail launched, but it also is runway capable. So it has incredible flexibility. And they talked about a different propulsion type of aspect they wanted to have with the airplane, and they're talking about making a decision also in the first half of next year. I have to leave it there because that's what they said, and I'm under an NDA that appears both of those appear to be progressing very well for us.

Terrific. And then just could you give us an update on kind of overall production or capacity capabilities for Valkyrie now the things are starting to move forward on a number of different fronts.

Yes. And so we're increasing our production rate right now, as I've talked about before. We -- I believe as we get into '27, we'll be up to [ 1.5 ] plans on average a month. So we'll be getting to 18. I had mentioned a couple of calls ago, I think that we were looking to get on an average of 40. It's going to depend on the configuration where we ultimately get to that the customers want. So for example, if the predominant number of the airplanes that the customer want are rail launched or trolley launched, will be closer to the 40 number. .

If the type of airplane that they want is -- that the customer wants is conventional takeoff or land [indiscernible], it will be closer to a 35 number. because they're a little bit more sophisticated to make in the factory and the customer will want less of them. And so we're tracking for a ramp in '27 that we head into -- we're going to be able to handle our U.S. customer, you know who that is, hopefully, the Taiwan customer. And we have 2 other international customers. I'm hoping we're going to be able to get through State Department, and we're going to be able to announce those very soon.

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

I believe, Eric, in the beginning, you mentioned DRAaM, that extended range, munition, which I think is called the Rusty Dagger. And is that another 1 of the derivatives that's coming that's driving some of your engine growth? .

I cannot talk about any of those because of NDAs. I can't -- the ones that I mentioned to Seth are the ones I can talk about.

Okay. And then just for the follow-up question. So it's great to see that Valkyrie production rate rise at your expanded facility. In the past, you've also had a number of other CCA-type tactical unmanned aircraft with perhaps greater performance that have been through various phases of development. Are any of those still in the running? Or are we just still now to fire jet Valkyrie delivers?

No. There are 2 others that are in the running. Both of them now are classified. We are -- we are under contract on both of them, and one of them is in the release of weapon space. So there are -- so in addition to tactical fire jet and Valkyrie, there are 2 others that are under contract.

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

Eric, maybe just a clarification. You called out the new GE engine that's going for some of that, I think the increment to CCA is a little higher thrust. It wasn't exactly clear when I -- as I read and we read the PR on that as to how you would be partnering with GE on that one. So could you maybe just either confirm or just explain that how that is either the same or different maybe than the first GEK engine, if you could.

Absolutely. So on the -- we have a number of, I'll call them, programs going with GE. The 1 that's most public and that's most talked about is the GEK partnership. And that's for a range of a certain thrust class think missiles. It falls into those missiles. And that's a 50-50 partnership, and that's one that we're that I've been talking about, we're moving forward with them on those certain missile systems. We are also working with them in a contractor role, but it's more than a contractor, it's a partnership role. And I have to be careful here because we're under NDA, but everyone that they've talked about, we're working on that I'm aware of. if I'm missing any, I apologize.

So we are working on them. I would look at Kratos with GE, GE brings incredible depth, breadth, technology, credibility, capability especially if you're talking building 10,000 jet engines that are going in 2 million cruise missiles. Kratos brings the ability to do very low-cost engineering and NRE and very low-cost mass reduction of those engines, which makes us a very formidable team. So just think of that on all of these small engines, how we're working with

Great. That's terrific. I appreciate that added clarity there. Dan, maybe a follow-up for you. But Eric, feel free to chime in, too. I appreciate all the callouts for the KGS growth rates across the different business lines. pretty high double digits for a lot of those. Can you -- it's probably easy just based on the prepared remarks to understand how durable the Defense and rocket support business growth rate is turbine too. But as far as microwave products and space, I guess I'm just trying to understand, as we think about modeling these out a little bit or to supplying them to what we're doing is how how much those latter to, again, the microwave and space kind of those percentages that you called out for the quarter, is that sort of a decent kind of foreseeable future next couple of quarters in next year, type of growth rate? Or -- could there be some flux to those?

I think there may be some flux in the microwave one. So but it will still be meaningful -- we're still forecasting meaningful growth rates, but they may be a little bit lower than what we just experienced in this last quarter. And I think the space satellite and training and cyber business, that should be probably along the same lines of what we just did in the second quarter.

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

Eric and Jon, congratulations on strong results. You could maybe talk a little bit about -- you guys have been through a couple of cycles with sometimes when washing throws a wench at things. You've expressed a lot of confidence on on the outlook, but just how you're thinking about maybe risks of extended time periods, budget and any kind of interruptions.

That washing might throw at you?

Yes. Yes. So our forecast basically assumes there's going to be a Q4 CRA. So October, November, December, it will get settled up sometime in January. That's kind of what we're. How we've modeled everything else because that's kind of what we've seen for out of the last 5 years. .

A significant amount of our work is program of record based. So it's in the base budget. It's in the base appropriation. We have some work that was in reconciliation bill 1 or Big Beautiful Bill 1, a significant amount of that we have received the funding for the money is obligated, we've seen it. So we are in pretty good shape on the $1 trillion spend for fiscal '26, which was $850 million plus $150 million.

As we head into '27, we're looking at a $1,150 billion base. So it's up 15% on the base, and I think that's prebipartisan. And I think that's a minimum of what we're going to get. As we all know, there's a reconciliation to. It's now called reconciliation 4 for $350 billion to get '27 potentially up to $1.5 trillion. My tummy tells me we're going to be somewhere between $1.15 trillion and $1.5 trillion. And even if we're not at $1.15 trillion that's significant growth within that growth, as I think you can all see, in that bubble where there's only so much money, there's a huge shift going on to lower cost mass munitions.

The future for structure for the foreseeable future look at it like a barbell. On one side, there's going to be a ton of attritable and extendable and [ attritable ], expendable munitions, drones, missiles, et cetera. On the other side -- on the other side of the barbell, there's going to be a handful. There's always going to be exquisite weapons and munitions. And there's not going to be a month in the middle. As you know, we're the merchant supplier to both the new defense technology companies, and we're producing our own low-cost weapon systems as the prime on the left.

And on the right-hand side, we are the go-to or military-grade hardware supplier to [indiscernible] exquisite. So we feel pretty good about our spot irrespective of what may happen in the budget dynamics.

It sounds like just starting to see some contributions from the -- you mentioned the hypersonic facility opened in Q3. Is there any else -- any other new capacity contributing to 26 that we should be aware of versus all of '27?

Yes, remember, Anaconda, which is our radar program. So the Anaconda facility is underway. It's not ready yet, but because of the demand of what we're doing, we are already starting to work on SPY One radars. So that is ramping a little bit in the second half of '26. When this facility comes online middle of next year, this Anaconda, Anaco-Cambradar facility, radar refurbishment facility is going to be one of the next legs up for us going into '28. And again, we've got the contract, we've got the program, et cetera. And the other one, Helios Helios. Helios, We're going to be hopefully breaking ground on that later this year. That will be up and ready to go into '27 begin of 28. This is a hypersonic system or amber and laser facility. A lot of the work is classified, but that is going to be another leg for us step up in 2028.

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

You're well Yes. In the same way that you provided color on kind of the step-up in the hypersonics business, can you provide something similar to KTT or maybe I guess throw some numbers at you and maybe [indiscernible] read of that, if that's all right. s it safe to assume an incremental like $150 million next year related to the turbo fans. And if so, I know that the base business is pretty small, probably call it barely 8 figures as of now. Excluding this, how should the rest of the KTT business grow into next year?

Yes. So the forecasted big jump for 2027 over 2026 on the engines is the Turbo jets. That's a big jump. The turbojets. And that's the low-cost cruise missiles. And if you guys know -- you see what's required next year missiles that the airframers have got to put together and deliver next year, 2028, 2029. That big step up '27, '28 is the turbojets -- on the turbofans.

If everything comes together according to plan and according to the funding documents 2028, that steps up big time in '29 and '30. And so '28, '29 is where we will be at a significant production rate for both if the plan holds for both the turbojets and turbofans. And KT and KTT is in there, of course. Now drilling down even more into KTT. We do -- we have a lot of engine programs but I don't talk about or we'd be here for ours, all right? We are -- we put out a press release in the past week or 2 on a critical element engine of a new weapon system. This

is in KTT. If this goes into production, which would be second half '27, beginning of '28. This could be a $200 million, $300 million a year run rate program by itself. But we don't talk about it because we can't. But we designed it, it's ours, okay? There's a space program where we are working on the propulsion system for the prime. If that programs to go, that's going to begin in KTT in '28. We've got some biggies out there that we're designed in on. We're the guy. I think on the first one, we're under an exclusivity arrangement that if it goes, and I think it's going to go in the funding docks, it's going to be another step up for us. So that's kind of the framework on how we're looking at the two.

Got it. actually helpful. And then now pivoting maybe to unmanned systems. You added that organic growth of 10% to the guide, which is new. Can you provide us a little more color on how that should progress through the second half and into '27? And I guess, on that point, with the increase in '26 should we assume some level of growth into '27 as well. I'm pretty sure right now your preliminary '27 outlook does not really account for much KUS contribution.

We have to be very careful here because of the customer, all right? And so we can't get into much details on this because then it will give away what they're doing. You could probably tell in today's prepared remarks that I purposely because it's the fact, focus -- tried to focus everybody on where we have very clear line of sight quarterly, yearly, the hypersonics, the engines in the space business. I mean those 3 alone are just there.

Our space business is ripping and a lot of the work is classified. On the drone side, we're going to be very cautious, and we may not be able to report it to you until we ship it and it shows up in the numbers. And then we may not be able to say much about it, but you're going to know what it is. And I'm sorry, I don't like to operate that way, but we have to based on what the customers told us here.

No, I understand, and I appreciate what color you can give. Eric, I'll leave it there.

Our next question comes from the line of Clarke Jeffries with Piper Sandler.

Just sort of a clarifying question around that expansion that you did to Oklahoma City. Trying to put in context what you've said earlier in the call around maybe some upside with Mighty Hornet. Just how does this expansion kind of put you on track for expanding the sort of [ 165 ] high-performance jet drones. Seems like Mighty Hornet or the Tactical Fire Jet would be early in fiscal '27, but Also, how much does the expansion explicitly help that 35 to 40 production run rate for Valkyrie in out years? And then 1 follow-up.

Yes. Yes. So right now, as you said, we're -- I think we're the largest jet drone producer in the world that I'm aware of, maybe outside of the Ukraine at 165 or 170 a year. The Oklahoma facility, and this ties back to a question, Mr. Crawford asked. The Oklahoma facility right now is producing Valkyries, fire jet tactical fire jet and one other. We've just recently approved an expansion of the facility by another 50,000 square feet or so that is happening, okay? .

That additional 50,000 square feet is going to be needed for -- it's a mix now. Valkyrie Firejet target drones what you can imagine with what everything that's going on in the world right now, the target drones are in great demand because so many people are buying missile systems radars, they've got exercise the weapon system and train the crew, okay? It's also going to be very important for tactical firejet and Mighty Hornet. And then very importantly, Mr. Crawford asked about some other drone programs. one of these goes into production, I think it will second half next year, we're going to build that other one at this facility because it's going to have a classified space. .

Perfect. And then just you talked about about 2 months ago or maybe a month ago, $150 million single award for counter UAS, Solar Shield. Just curious what's the expected time line for that contract? And maybe help us think about [indiscernible] like mobile CUS from the Department of Energy might look like long term.

Yes. So that one, we got a -- this is a very important program. We received -- I forget, number, $30 million or $40 million of funding already right out of the shoe. So we have begun on this. This is part of our ramp, by the way, into Q4 of this year. One of the reasons we're comfortable with our Q4 is because of this program, and we got the funding for it. .

As you probably saw, this is with the Department of Energy, and it's related to securing nuclear assets, okay? It's a mobile and transportable system. We are the prime. We are the prime system integrator. We are responsible for the entire system working, including the directed energy weapon system. If we're successful, I believe this program is going to grow or this initiative is going to grow significantly because this type of a capability is needed right now, and we're the guy that has it at low cost, low cost. We're doing these systems in Montana. So that's the backdrop there. It's ramping now. It's going to be big in Q4 and it's going to continue to ramp into 2027.

Our next question comes from the line of Pete Skibitski with Olympic Global.

Just want to review a couple of things. Eric, you mentioned the $7 billion in the -- for Mach-TB over 5 years. So I guess would it be reasonable for us to factor in that business being $1 billion plus of a run rate starting in 2028 or so just on...

Brother, yes, that's what's there to take a look at the justification documents and you can -- I'm not trying to be coy here. because Dianne and I -- we got a forecast for this year, we got an outline for next year. I don't want to get ahead of myself in any of this. But this is one of the reasons for the last couple of calls, including today's call. I've been trying, as I said a minute ago, to orient the investors on our hypersonic franchise. It's growing rapidly, and if things come together the way you're indicating, which is there, this could be very, very substantive for the next 5 years.

Yes, that's great. That's great. Okay. Just shifting gears to JASMM and LRASM. Obviously, these missiles have been around for a long time, right? So is that a dynamic that's going on the DOW, they want a second source engine supplier and you guys are filling that role? And if that's a dynamic, what do you think your share would be on that when you kind of ramp?

Yes. It's a double dynamic. It's -- obviously, the department is trying to foster the industrial base. They have the reindustrialization initiatives I mentioned, and they want additional competition. the current provider on JASSM and LRASM is outstanding. It's an outstanding company. The CEO is outstanding. They are doing a great job.

But the quantities, as I mentioned, and those I think 10,000 or 11,000, they're incredible. They're going up 3X or 4x a year. And so it's second source for national security purposes and its quantities and capacity to do it. And I don't want to get into any numbers here in specific, but GE and Kratos, we're looking at thousands of these over thousands over a period of time. .

Our next question comes from the line of Austin Moeller with Canaccord.

So it seems like in the Iran war, there's been a pretty significant expenditure of both cruise missiles and Rocket artillery. So just given the opportunity there to add turbojets or guidance kits on to what would be considered dumb bonds, do you have a sense of how many JDAMS, SDPs or other dumb bombs are out there available for you to add turbojets or guidance kits to.

Tens and tens and tens of thousands. There are many numbers -- it's a great question. There are many numbers floating around on putting a wing kit on and bolting on a small turbo yet and now you have extended range and reach. It's much more capable. The numbers are staggering. We have an initiative in Kratos that we've had going on. Another one I just haven't talked about because I give you guys so much, you've heard about demilitarization, demil. So think of what you just said, you take old ordinances and you burn it or you destroy it, or you take stuff out of it and then you dispose of it.

It is expensive to demil. We have an initiative going in here. We're actually doing it. We're remilling it where it's less costly to repurpose an existing ordinance for something you just talked about than it is to destroy it. And it's one of our -- we're doing that under the radar under the cover because I don't want anybody else to figure out what we're doing. But it ties exactly into what you're saying because of the amount of ordinances out there that is scheduled to be demilled, but we're remilling it. That's our plan is to remil it.

Okay. And there are some large contracts that are starting to go out for the space component of Golden Dome. Do you have a sense on when we might start seeing already appropriated dollars either from Big Beautiful bill, which you say a lot of that's gone out or from the '26 space force budget to purchase virtualized or software-defined ground system to support these satellites that are going to be going up.

That's another great question. So about -- in the last 3 weeks, 2 companies were awarded a multibillion-dollar constellation for exactly what you're talking about. We are the ground for one of them with our software-defined command and control TT&C and tracking. We can't talk about it. I don't think we're ever going to be able to talk about it, but it's exactly what you just said and our team on and where the ground. On other programs that we have, 2 of which we've announced in the last 2 quarters, we are seeing -- we have seen significant funding and it's increasing. As I mentioned in my prepared remarks, where I said there's a hypersonic arms race going on. The big dog is the space arms race. And we've all heard about LEO and MEO and GEO. LEO is happening now. And LEO is another major opportunity area for Kratos because of the nature of our software-defined command control.

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

Eric and Deanna, you continue to call out pretty significant investment, $40 million to $45 million for the rocket system inventory build. Can you just update us, Eric, and apologies if I missed it, but update us on what you're seeing on that supply chain, how you're handicapping risk on that supply chain, if you think about the ramp of hypersonics and some of your other businesses and sort of your optimism that, that supply chain continues to get the kind of improvement and unlock that you need to see the ramp in your business?

Yes. So our to solid rocket motors on L3 Aerojet is [indiscernible] built it on floors. They are doing an outstanding job for us. We don't have, what I'll call, a partnership agreement with them, but they're a true partner of Kratos. And they are doing an incredible job. They have met every milestone on time on budget. So at least when it comes to [ Zeus ], for us, they're doing a hell of a job. And part of it may be because they see the next 5, 7 years, what's coming in addition to what we've already done. Okay.

On the second one, [ Orio ], this is our partner, Northrop Grumman, at Northrop orbital ATK, Ken here again, when it comes to us, I can't speak for what I read in the press about other system issues. They are outstanding with us. I mean we're getting ready. We're looking at having to place another order for dozens and dozens more, and they have been very accommodating and again, they're on time and on schedule. So I can only speak for Kratos, but on the -- we do some other ones, but those are the 2 primary ones. L3 Harris and Chris is great and Northrop Grumman and Cathy is great, and they're just outstanding.

Okay. That's excellent, Eric. [indiscernible] Prometheus and where you stand and some of the next major milestones as we think about that facility?.

Ken, you broke up a little. When I think about which facility, Buddy?

Prometheus, sorry, the investments there on the motor side.

Yes, I'm so glad you said that. If you all haven't seen it a podcast came out this morning, on Prometheus with a major publication, and it walks through the entire campus, it walks through the platforms and walks through the timing, it walks through everything with our partner, Rafael. So Go take a look at that for details on what I'm about to say, it's incredible.

I didn't know it was coming out this morning and it did. Ken, we are on track for first fire next year. We are on track with our partner, Rafael. And I got to tell you, Rafale is outstanding. They are stable, outstanding, and they are bringing proven military grade qualified energetics. This is so far ahead of any of these other guys that are saying they're going to stand up an energetic facility. They got to get qualified, et cetera, et cetera, et cetera. So this is going to begin middle of next year. I think we'll get into production, '28, we'll get into production.

Our next question comes from the line of Joe Gomes with Noble Capital.

So you guys are talking about the 3,000 and then the 5,000, starting to add up -- are starting to get the ordering of the component parts later this year and into -- into '27. As you look at the supply chain there, are there any critical suppliers for certain parts or multiple part suppliers for the components there that maybe we need to keep an eye on.

Yes. So Joe, as you know, we have lots of Kratosims here. One of my favorite Kratosims was what's the most important part. It's the one you don't have to complete a system. So we got to make sure every one of our vendors and every one of our suppliers including their backup and the backup to the backup is qualified.

We're giving them production quantities, so they're in production and they're going through quality, through delivery and through integration. So we are -- this is one -- obviously, I'm not going to say we're bullet proof, but this is so important to the company, to our company. We are going to incredible lengths with the people we're bringing in from the auto industry from the Department of War from primes that are coming in to work with us to work for Kratos to set up these lines, work the supply chain work, the quality, control and delivery schedules with them and redundancy. So we are -- this is a huge effort because, as I said, you just said, we're going to do a minimum of 3,000 next year, a minimum of 5,000 in 28. It could be 8,000 -- 10,000 in '29 if things come together. So -- and these are just to turbo jets. We have to do the same thing with the turbo fans beginning. As I said, we're going to start ordering for those probably I said Q4 this year, Q1 next year, probably Q1, we're going to have to start ordering for those, and then we'll make a very big order. Q4 '27 or Q1 of '28 because the factory will be set.

Okay. And then Eric, I just want to try and get your views on this or your point me in the right direction here. So as you know, there's a big private company out there, which I consider a peer in the same space as you guys that's been raising capital here at valuations at multiples of where Kratos is trading at an enterprise value to EBITDA. Or excuse me, revenue basis. And I'm wondering, am I incorrect that are not a peer, is there a disconnect something there that we saw Kratos stock run up, and now it's come back down.

And this private company is now saying there's rumors out there that are raising even more money at even a higher valuation that just as I sit here looking at the 2 companies kind of shake my head and just seeing. Am I missing something? I'm just trying to get your view as to what the disconnect there is.

Yes. Anduril is an absolute peer of Kratos, we're peers, okay? They have Lattice, their software that ties everything together. We have open space. Our software that ties together space assets, space vehicles, space ground, et cetera, et cetera. They have unmanned jet drones. Kratos has unmanned jet drones. You may have seen recently now they're getting into the hypersonic area, we're in the hypersonic area, okay? .

There is solid rocket motors, they acquired Adranos, so they're in solid rocket motors. We're in solid rocket motors with our partners and then also our new facility with Rafale. They are an outstanding company. I want them to succeed. The United States needs them to succeed. We are absolute peers. No question about it. The only difference I see between, and they are partners with us. We work together, and I can't talk on what we're working together on.

The only difference I see right now between the 2 of us is financial because they're private and we're public. And because they're private they can take different approaches on things and invest more because they don't have to -- -- they're not held to yet -- if they get public, then they'll be held with. They're not held to certain matrixes that our public company has held to. So that might be an advantage for them. I have some advantage on them being public and it brings me access to certain things.

From a valuation standpoint, I can't speak to that. I think I said on the last earnings call or the one before it. In my opinion, I'm the CEO, I drink the Kool-Aid. Kratos is the most valuable defense company there is. And you listen to our calls, you look at our program, look at our growth rates. I mean, we could grow 30% in Q4. and make money, okay? And we're going to -- and we keep -- we're going to keep going at '27 and '28. We're the most valuable one to our investors, and we're the most valuable one to the department, and I'm sure they would say the same thing that they are.

our next question comes from the line of Cashen Keeler with BNP Paribas. .

You guys brought up a pair of facilities this year, you're bringing up some more next year. Can you maybe just talk about or quantify any start-up costs related to ramping these what the payback periods look like? And what sort of awards you might need to get to that 100 basis points of margin improvement next year as well?

Yes. I didn't hear the first part of your question. You said investing in and then it blipped a little bit, investing in what?

Yes. No, you're just bringing up some more facilities next year. Just curious on start-up costs related to ramping those and payback periods as well.

Got it. Yes. So just a good question. So as a reminder, we don't do a build it and they will come. We don't do that, okay? We built our hypersonic integration facility because we won the Mach-TB program and some other programs. So we knew what the operational tempo would be. We built a facility to satisfy that plus some other things I think we're going to get. We did not build our new Turbo jet engine facility in Michigan until I was extremely comfortable that we were going to be designed in to multiple cruise missiles, which I went through today. We've just now broken ground on the facility in Oklahoma for the turbofans with our partner, GE you've heard me talk about the programs.

I can't get into much more detail than that, but it is not a build it and hope they come. It is a build it because we have a program or we have a partner or we have a contract and we can model out the quantities, we can model out the profitability, and we can model out the rate of return we're going to get on our investment. Anaconda, which I mentioned, the RADAR one. I think that's one. I think that, that program was announced for us goes through 2053, publicly for the radars. That's on Anaconda. On Helios, we've already got 2 or 3 customers signed up that who said that if we built that [indiscernible] facility for the hypersonic test, they would sign up. So everything we do, we've got a customer, a partner, a program or funding, and we can do a rate of return calculation, so we know we're getting an adequate rate of return for our investors.

Our next question comes from the line of [indiscernible] with Cantor Fitzgerald. .

This is Gabe on for Colin Canfield.

Can you discuss how your customers are talking about CCA volumes relative to their national security outlook, specifically, where is Kratos seeing customer pricing production schedule pulled to the left. How should we think about that momentum versus U.S. production scaling?

If I'm not -- if you could see me, I'm smiling because that program, that is one you haven't heard me talk about that for a long time. I cannot talk about the CCA program. with the Air Force, can't talk about it. It is a classified, super classified program, and we can't say anything. On the Marine Corp CCA program, you saw how I said today, it's been reported that the program of record is this much money. It's been reported because that's how I have to talk because I'm not approved to talk about anything. So again, I'm sorry, but I just can't get into any of that because we do not have approval to discuss it.

Okay. Understood.

[Operator Instructions]. Our next question comes from the line of Brian Dobson with Clear Street.

First of All, congrats on a great quarter. And this is Jona Henchel speaking on behalf of Brian Dobson here at Clear Street. Given the Valkyrie momentum you've described that, I'm curious what kind of updated color you can provide when it comes to the LRIP Phase 1 timing?

L -- what... .

What were the the last few words you...

The last part, you broke up. the What timing?

LRIP Phase 1...

I got it. I got it.

So as I said in my prepared remarks, we expect to receive by the end of the year, an additional award where we're partnered with Northrop on that [ MACH Tag ] air program with Northrop in the Marines. That's all I can say right now is that we expect something by the end of this calendar year. .

Okay. Understood. And then just a quick follow-up. When Valkyrie ended up scaling? I'm curious how can we think about margins in that segment?

Right. Yes, I think 10% to 15% EBITDA margin depending on configuration. And that's domestic, very important domestic because we got another -- a number of international ones going. And the international ones are typically higher fee for us because they're international, and there are different aspects. And in certain instances, we're not held [indiscernible] through the negotiation Act because we're not sole source. So international, think 15% to 20%, domestic think 10% to 15%, depending on configuration and quantity. .

Yes. Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Eric for closing remarks.

Great. Excellent. Thank you for joining us this afternoon, and I look forward to talking to you when we report Q3, I think, in the first week of November. Thank you.

That concludes today's conference call. Thank you for your participation. You may now disconnect.

Good day, and thank you for standing by. Welcome to the Kratos Defense & Security Solutions First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, Marie Mendoza, Senior Vice President and General Counsel. Please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us for the Kratos Defense & Security Solutions First Quarter 2026 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 in Regulation G. Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP. Accordingly, at the end of today's press release, we have provided a reconciliation of these non-GAAP financial measures to the company's financial results prepared in accordance with GAAP.

Eric?

Thank you, Marie. Kratos' balanced business model of making internally funded investments, including property, plant and equipment and the rapid development and fielding of relevant products for the Department of War while also generating organic growth, increased profitability and value for all Kratos stakeholders is succeeding. The success is reflected in our Q1 results, including a 1.6:1 book-to-bill ratio, a record backlog of $2 billion and increased opportunity pipeline up to $14 billion, and the $14 billion is after the 1.6:1 book-to-bill, reflecting Kratos' accelerating growth trajectory.

As Deanna will go through in detail, we significantly exceeded our first quarter forecast across the board, with EBITDA being particularly strong as a result of execution and product delivery mix with Kratos' Microwave Electronics, Turbine Technologies and Unmanned Systems businesses each having a particularly strong Q1. Based on our current program execution and delivery plans, both Kratos' Q3 and Q4 are also expected to have particularly strong profitability, including Kratos' OpenSpace satellite command and control and telemetry tracking and control software deliveries, which are forecasted to be meaningful in both Q3 and Q4.

As I will discuss in detail today, with the current geopolitical and threat environment, Kratos' space and satellite business is incredibly well positioned, including with our open space software and our globally owned and operated space domain awareness system. I am not able to provide any details for security and other reasons, but Kratos' satellite business is active across the globe. The business is rapidly accelerating, including as reflected by a 3:1 book-to-bill ratio in Q1 for our satellite business. There are tens of thousands of satellites planned for orbit in the coming years, both blue and red, and Kratos' ground systems and software are the gold standard of the industry.

There is a generational recapitalization of the U.S. industrial base underway. The Department of War is looking to nontraditional defense technology companies like Kratos to play a significant role, and we are committed to doing our part to ensure that the department and our country are successful. Our industries and Kratos' total addressable market is rapidly expanding with the fiscal 2027 national security spend currently projected to be $1.5 trillion, an approximate $411 billion increase above 2026.

I will emphasize that there are a very limited number of defense technology companies like Kratos that are qualified today with real existing capability and products to address the significantly -- the significant and growing market opportunity. Building military-grade hardware and software products that must work every time is hard, and Kratos' recognized capabilities and affordability are competitive differentiators for our company, which is being reflected in our financial performance.

As we have seen, the department is now executing multiyear weapon system production framework agreements, including with several of Kratos' partners on several Kratos-supported programs, including in the missile and air defense system areas, which is good for the country, the industry and is very good for Kratos. These up to 7-year framework agreements, certain of which are calling for increased production orders of magnitude greater than today's production levels are providing clear demand signals from the department to industry and what we believe are significant long-term growth opportunities for Kratos.

The department's demand signals are real, they are happening, and Kratos, along with our partners are participating and stepping up to ensure Department of War success. Kratos, along with other successful defense technology companies in the industry are making defense industrial base investments now in property, plant, equipment and facilitization to address this demand and to position our companies for significant future cash flow and additional value generation.

Since our last report to you, the department stated that they intend to spend 2025's entire $156 billion reconciliation bill related to defense in fiscal 2026. This bill, as you know, includes funding for Kratos' hypersonic, Valkyrie CCA, solid rocket motors, jet engines for drones, missiles and loitering munitions and other Kratos programs. This is very important as only approximately $30 billion of the $156 billion had been obligated into April. As a result, we have increased confidence in our business plan and full year 2026 forecast, and we expect to see accelerating future growth throughout '26 and into '27 with both the funding and spend timing now both in place.

We also have increased confidence in our forecasted year-over-year 100 basis point increase in our EBITDA margins for both '26 over '25 and for '27 over '26, including as a result of expected increasing production and revenue, the resulting leverage on our fixed manufacturing and other fixed costs and the mix of higher-margin products and software. Simply stated, as we grow, our profit margins are increasing. Since our last report, we have had several meetings with the Department of War leadership, and we are confident that Kratos' strategy, business plan and approach are aligned with the department's objectives.

I have also had several meetings with congressional leadership on both sides of the aisle. And I am confident that regardless of which party controls congressionally, the future United States national security spend is increasing. As it is acknowledged that the global threat profile, it's not harvisan and doesn't care who's in charge, it's there, and both sides are familiar and aware of this.

National security priorities include hypersonic systems, propulsion systems, space and satellite systems, unmanned systems, drones, air defense, missile, radar and counter UAS systems and microwave electronics. Each are primary business areas and core competency areas of Kratos and all of which are supported in the planned $1.5 trillion 2027 national security spend.

As a result of Kratos' alignment with the department, increasing funding and our relevant past performance qualifications, the number of opportunities that Kratos continues to successfully receive and the number of new opportunities that are being presented to Kratos continues to increase, including as reflected in our opportunity pipeline, which now exceeds $14 billion. I will emphasize again that there are not enough qualified defense technology companies like Kratos to address the current and expected future weapon system demand of the department.

We are extremely fortunate to have the team that we do and the uniqueness and scarcity value of Kratos' capabilities is clearly apparent. Kratos' affordability as a technology pillar is an increasing differentiator to both our customers and to our partners as demonstrated in our ability to rapidly design and engineer relevant products upfront for low-cost production at scale. This is a clear department requirement, including as reflected in the framework agreements and also as demonstrated by recent and ongoing conflicts.

Additionally, Kratos' better is the enemy of good enough ready to field today, and our first-to-market pillar is aligned with the Secretary's United States Arsenal of Freedom vision and is advocation for companies like Kratos to deliver 85% of the solution that exists today and now, not a maybe and potentially unachievable someday in the future 100% solution.

Operationally, our major programs and initiatives remain on track, including on the Marine Corps MUX/TACAIR program, we are currently negotiating contractual terms of the expected receipt of what I will refer to as Valkyrie program LRIP Phase 1 this year, and we are moving forward with our plan to increase Valkyrie annual production up to approximately 40 drones annually by early 2028. receiving new hypersonic program awards, certain of which we have now been verbally informed that we have been successful on.

We have received a separate $1 billion-plus sole-source hypersonic program expansion, verbal award, which we now also believe we will be receiving shortly. And since our last report, we have had several successful Kratos hypersonic system missions.

Kratos' hypersonic franchise is expected to be a key growth driver for our company for the next several years. We expect to begin small jet engine LRIP later this year for cruise missiles and powered munitions, and we are planning to produce several thousand engines in 2027 and further increasing this engine production into 2028. Accordingly, we are pulling together a detailed program plan, including with our suppliers to ramp up to annual multiple thousand engine production beginning next year, with supply chain we expect to turn on shortly.

Kratos small jet engine business is expected to be a significant growth driver for our company with increased margins for the next several years. We have also now received a new multi-hundred million dollar directed energy weapon system program with Kratos as the prime. As I mentioned earlier, Kratos' OpenSpace software continues to clearly differentiate Kratos' satellite business with our customers as OpenSpace is a distributed, virtualized and open capability system that securely enables real-time processing of RF signal and sensor data at scale in a highly distributed cloud, ground entry point and edge environments.

Kratos' OpenSpace software platform serves as the core networking capability supporting all Kratos OpenSpace solutions, including satellite C2, earth sensing and observation, space domain awareness, space control and SATCOM, and this is for Kratos' largest business, our space and satellite communication business and our space domain awareness business. Kratos OpenSpace is a crown jewel of our company, and it's analogous to defense technology company, Anduril's Lattice software platform.

Kratos satellite business recently won a $447 million U.S. Space Force prime contract for the Resilient missile warning and tracking program, a MEO constellation designed to detect and track ICBM launches in addition to dimmer maneuvering hypersonic missiles and threats. This contract award was a significant contributor to the 1.8:1 first quarter KGS book-to-bill ratio. This program is part of a broader missile warning and tracking architecture that is built being fielded across multiple orbits. I encourage you to think golden donut.

On this new prime program award, Kratos will provide the ground system and software to operate the satellites after launch, including sending commands, receiving sensor data and processing that information for delivery to military operators. Kratos' space and satellite business is expected to be a primary driver of our expected increased revenue and profit margins in Q3 and Q4 of this year and is also expected for significant growth and margin expansion in '27 and 2028.

Artificial intelligence is also a key element or differentiator of Kratos' space satellite and space demand awareness business, in addition to AI also being key to Kratos' unmanned systems business and our jet drones. Artificial intelligence is helping drive Kratos' business. Additionally, the dual commercial national security use of Kratos' software, hardware and offerings also continues to differentiate Kratos, including affordability as we spread the research and development over multiple defense and commercial markets.

Additionally, Kratos' dual-use applications also accelerate our speed to market and both rapid technology development and fielding of relevant products as we move fast and efficiently as we are investing our own money. A recent dual-use example since our last report, we now expect to receive a separate new additional industrial gas turbine program for artificial intelligence-related data centers by the end of this year with another well-known global industrial technology company.

Our hypersonic system integration facility, new Anaconda radar program facility, Helios hypersonic program facility, GEK turbofan engine facility and Prometheus' solid rocket motor initiatives are each tracking to be online either later this year or next, each of which we expect to contribute to continued future Kratos growth and value generation for all of our stakeholders.

In closing, the department is providing nontraditional defense technology companies like Kratos a generational opportunity in rebuilding the U.S. defense industrial base, building an arsenal of freedom, participating in multibillion-dollar multiyear programs and generating significant value. Kratos is aggressively participating in the current build and growth phase of the Department of War's rebuild defense industrial base plan with Kratos focused on generating an appropriate rate of return for each investment we make and for expected significant future sustained cash flow generation when the critical mass of production programs is achieved on these initiatives.

And as I mentioned before, based on the current global threat environment and our congressional meetings, we believe there is bipartisan support for continued increasing future national security spends for the protection of the United States and the deterrence of our enemies.

Deanna?

Thank you, Eric. Good afternoon. As we have included a detailed summary of the first quarter '26 financial performance as well as the initial second quarter and updated full year 2026 financial guidance in the press release we published earlier today, I will focus on the highlights in my remarks today.

Revenues for the first quarter were $371 million, above our estimated range of $335 million to $345 million, which estimate did not include the recently closed Orbit acquisition. Excluding the impact of the Orbit acquisition, revenues were $357.7 million, above our estimated range, which had included the Nomad acquisition as the transaction was closed at the time we provided our estimate.

Q1 '26 revenues include consolidated organic revenue growth of 15.8% with the largest contributors to the overachievement in our Unmanned Systems, Defense and Rocket Support, Turbine Technologies and Microwave Products businesses. Notable year-over-year organic revenue growth was reported in our Defense rocket Support, Unmanned Systems, Turbine Technologies and Microwave Products businesses with organic revenue growth rates of 45.8%, 30.9%, 20.3% and 12.3%, respectively.

Adjusted EBITDA for the first quarter was $38.7 million, above the high end of our estimated range of $25 million to $30 million, reflecting the contribution from the recently closed Orbit acquisition as well as the increased volume and a favorable revenue mix. Unmanned Systems first quarter '26 revenue was up $19.5 million or 30.9% organically, with the increase primarily driven by Valkyrie-related activity. KGS first quarter '26 revenue was up $48.9 million year-over-year from the first quarter of '25 with organic revenue growth of 11.8%, excluding the impact of the recent acquisitions of Nomad and Orbit, which contributed an aggregate of $20.6 million.

First quarter '26 cash flow generated used in operations was $27.4 million, primarily reflecting the working capital requirements related to the revenue growth impacting our receivables by approximately $28.7 million and increases in inventory of approximately $14.7 million and increases in prepaid and other assets of approximately $26.5 million, primarily reflecting prepayments for long lead materials as well as investments we are continuing to make related to certain development initiatives in our Unmanned Systems, rocket Systems and Space and Satellite businesses.

Free cash flow used in operations for the first quarter of '26 was $43.1 million after reflecting funding of $19.9 million of capital expenditures and net of $4.2 million in proceeds from the sale of Valkyries, which were previously reported as company-owned capital assets and classified as capital expenditures and therefore, reflected as an inflow in investing activities when sold.

As we planned, we are continuing to make investments to expand and build out certain of our manufacturing and production facilities in our microwave products, rocket systems, hypersonic and jet engine businesses to meet existing and anticipated customer orders and requirements and investing in related new machinery, equipment and systems.

Consolidated DSOs or days sales outstanding increased from 121 days during the fourth quarter of 2025 to 130 days during the first quarter of '26, reflecting the 22.6% revenue growth impact of the acquisitions as well as the timing of milestone billings and contractual funding, certain of which were and have been impacted by the extended federal government shutdown and CRA.

Our contract mix for the first quarter of '26 was 73% revenues generated from fixed price contracts, 23% generated from cost-plus contracts and 4% generated from time and material contracts. Revenues generated from contracts with the U.S. federal government during the first quarter of '26 were approximately 69%, including revenues generated from contracts with the DOW, non-DoW federal government agencies and foreign military sales contracts and 21% generated from foreign customers and 10% from commercial customers.

Now moving 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 related costs. Our second quarter and updated full year '26 guidance now includes the estimated contribution from the recently closed Orbit acquisition. As Orbit had previously reported its financial results under International Accounting Financial Reporting Standards, we are in the process of aligning its reporting to U.S. generally accepted accounting principles, or GAAP.

Accordingly, we have included conservative estimates in our updated guidance at this time.

Our second quarter '26 guidance reflects the estimated revenue mix and less leverage on elevated administrative, manufacturing overhead and bid and proposal costs that we have ramped in the business to support the forecasted full year '26 growth. Our second quarter revenue guidance of $400 million to $410 million reflects estimated organic revenue growth of 4% to 7% as compared to the second quarter of '25.

Our updated full year '26 revenue guidance of $1.7 billion to $1.760 billion includes the estimated contribution from the Orbit acquisitions and includes an estimated organic revenue growth rate of 15% to 19% over '25 actual performance. And as you may recall, our ' 25 actual performance exceeded our original forecast.

Operating cash flow guidance includes the 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 time 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 '27 and into '28 as well as the completion of certain of our unmanned systems and related derivatives and vehicles.

Additional forecasted investments in '26 include our funding of the Prometheus joint venture established last year, which we estimate will occur ratably throughout '26 for an aggregate for the year of approximately $50 million. Our Anaconda radar program, our Helios hypersonic and Arc Chamber program, our Indiana hypersonic integration facility, our GEK and Blade Works engine facilities, investments for additional machinery and equipment to enhance throughput and production at our recently acquired Nomad facilities and our Vulcan Kraken Elysium, Nemesis Hermes investments for certain drone-related opportunities and other initiatives.

Eric?

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

[Operator Instructions] Our first question will come from Sheila Kahyaoglu of Jefferies.

Great quarter. Maybe if I could just talk about the -- if you could elaborate more on the strong start to the year and the fiscal revenue raise. Could you speak to where you see the most strength, Eric? I know you talked about it in the prepared remarks as well and maybe compare that to early results you're seeing from Orbit and Nomad?

Yes. So internally, as I said in the remarks, Sheila, our engine business, KTT, is ripping right now. It is ripping. And you can just think about the number of missile programs that are out there, the number of drone programs that are out there, the number of space programs that are out there. We're involved with many, many of these, and it's increasing.

On the Microwave Electronics side, as you know, we're headquartered in Israel. And our 3 big customers, partners are Israeli Aerospace Industries, Rafael and Elbit. And we know the conflicts that's been going on over there. We are designed in on virtually every missile and radar system over there. And all those stocks are being -- need to be restored and rebuilt, and we're involved in that. And it is very, very strong.

And in Unmanned Systems, our Unmanned Systems business was particularly strong in Q1. This is on the tactical side that's joining it. We have a lot of stuff going on, on the tactical side. And we made some important execution milestones in Q1. on the acquisitions, I'll start with Nomad. Nomad is going to be incredibly powerful for us. They are in the counter UAS area. They are in the SATCOM area, not C2 and not TT&C, but SATCOM area. And they are doing some very interesting things, let's just say, the missile defense area.

And as Deanna mentioned in her remarks, we're going to be making some capital investments over the next 12, 18 months, and we expect them to be one of our strongest organic growers starting next year. And Orbit is a crown jewel, Sheila. It's in Israel, where we are, same customers, same programs. Their SATCOM is on unmanned aerial systems, unmanned ground systems, unmanned water systems. manned systems, and they are a very unique company, and their growth rate is going to be consistent with what we see for us. So Q1 across the board was particularly strong for us, Sheila.

Great. And maybe just double-clicking on the hypersonic revenue opportunity a little bit more, tracking to the $400 million this year and stepping up to $700 million next year, I believe, still. How much of that is coming from the Middle East conflict? And what's your visibility on the $700 million?

Right. I can't -- I'm not allowed -- I can't comment on the Middle East. I would think not -- go with not a lot, but I can't comment on that. The visibility on the 700, let me give you the pieces. In the reconciliation bill, which has now been -- now the Department has said they're going to fully obligate the entire $156 million this year, there was $400 million in there for the MTB program, which is ours. So there's $400 million of the $700 million click.

On the 2027 defense budget that's being asked for, the $300 million is covered plus some. The testing requirements for hypersonic systems and not just the weapon platform, but guidance system control systems, seeker systems, communication systems is incredible, and we're the ones that have the program on it. So we feel extremely strong on our forecast in our hypersonic business for the next several years.

And our next question will come from the line of Mike Crawford of B. Riley Securities.

Just to continue on the Unmanned Systems front, the 40 drone annual production rate for Valkyrie, is that primarily in Oklahoma? And can you just remind us where else you're building Mako and fire jets and derivative drones?

Yes. So Valkyrie right now is 100% in Oklahoma for the airframe, et cetera. The avionics and electronics are down in Florida. Mako is in Sacramento, California. The next big one that's going to probably be ramping, Mike, starting at the end of this year, next year with the Mighty Hornet program is the tactical fire jet. We have moved substantially all of that production to Oklahoma. And Mike, on that one, very importantly, we have now successfully -- we are successfully flying the tactical fire jets with Kratos jet engines.

So we are totally vertically integrated on our tactical fire jet CCA right now. So we've driven costs down even more with higher performance. And Mike, I'm being told that Kratos is the only company in the world that builds the plane and the engine under the same organization. So those engines, Mike, they're built in Michigan. The tactical fire jet engines are built in Michigan.

Okay. And then are you able to comment on how well you're competing against Beehive and that one Chelsea-based company for supplying engines to other tactical jet and crew low-cost cruise missile providers?

I believe that we have won the vast majority of the opportunities that have been presented to us, if not every one of them. This is why, Mike, we are -- Deanna and I right now are working with the team, putting the program plan together with the supply chain, getting ready to turn them on to build like 3,000 engines next year. ramping to maybe 5,000 or 6,000 in 2028. These are all tied to programs. So we feel real good.

And that's on Auburn Hills. That's GE is something completely.

No, that's -- these are all -- this is 100% Auburn Hills, think 250 pounds of thrust on down, okay? Think the Air Force's family of affordable mass missiles, the FAM program. Think that program is for 30,000 missiles over the next few years.

Yes. One final question. Just I don't know if you can, but could you maybe just provide a little deeper dive into what kind of SATCOM miniaturization IP from orbit you might combine with your preexisting microwave electronic capabilities to provide a new solution?

Yes. Yes. So the vast majority of Orbit's antennas, this is, for example, Mike, right now are parabolic. So I think very little parabolic antennas like a DIRECTV antenna shape, but very small that are on drones and airplanes and unmanned boats and stuff like that. And we are going to electronic antennas. We Kratos, our microwave business is already building electronic antennas. So I think flat panel phased arrays and AES's advanced electronic scan array antennas. So we already have the customers. We have the platform. We have the program. We're going to slowly transition with our microwave electronics business to the electronic antennas, which have far more capability than the parabolics.

And our next question will be coming from the line of Peter Arment of Baird.

Eric, there recently was a successful flight of the JDAM LR, the long range, which I guess was renamed from the Tower JDAM. Can you maybe talk a little bit about how you see this ramping up? I know you talked a little bit about a lot of engine production out of TDI. How quickly should we expect the ramp up on that platform?

Yes, you saw that. So that is now the GBU 75. That's the official name. And the program of record is currently for 25,000. It's expected, Peter, to go much higher, several tens of thousands more. Now I have to be careful because I'm not the prime, Boeing is the prime. There was significant funding for that in the reconciliation bill, which is now fully funded with the money being obligated. So this ties into our plans getting ready for LRIP next year and then full rate production for the following year.

And so now without talking about that specific program, I just can't, that program and several of the other ones that you all are aware of that I've walked you through before, several of these are expected to go into LRIP later this year, no later than next year. And Peter, this is how we're getting to maybe 3,000 engines next year, 5,000 or 6,000 engines in '28 and even more in '29. And these are platforms we are designed in on. We're already on them.

Yes. It's incredible. Could you talk a little bit about -- or what can you say about on Florida Turbine's involvement in competing for, I guess, it's the Saunch cruise missile and some of the opportunities there. I know Kratos is one of a few players there. I don't know what you can say, but you're in the engine business now, Eric.

Yes. Okay. So let's talk about what's publicly out there. We have been -- Kratos has been selected for the development of the engine for the submarine launch cruise missile nuclear. So we've won slickaman, okay? As GE announced, GE and our partner, GE announced, we have now been selected for the engine for the next class of attritable and extendable CCAs. We've been down selected on that, right? We were just informed in the past week that we -- us and GE, we just won another one.

Now this next one, I'm going to say very carefully. The 7-year framework agreements. You've seen 7-year framework agreements on missile systems. We have been selected as the engine GEK. -- we have been selected as the engine for the expanded production. I think it's going up 4x, I think, is what the announcement was 4x current production for 2 of those missile platforms already.

Terrific. Lastly, just staying, I guess, with GEK. Should we anticipate the fact kind of you're moving in that direction and higher thrust that we could see those starting to be incorporated into future Valkyries, how you're thinking about that?

I can't talk about it. I'm getting -- I can't. I can't talk -- I'd like to, but I can't talk about it, I apologize.

And our next question will come from the line of Noah Poponak of Goldman Sachs.

Depending on your location, it all feels the same at the moment. Eric, can you guys size even if very roughly at this point, annual revenue that is from the hypersonics business and that is from power and propulsion. And obviously, there's some degree of overlap between the 2, if you could express that as well.

Yes. So for the total public information that we've provided for our hypersonic business, which is our defense rocket support business, the expectation for 2026 is $400 million. And then for next year, the expectation is for $700 million.

And then so think of those, Noah, as primarily right now solid rocket motors for the hypersonic business right now. Next year, I'll be talking to you about air breathers, but not right now. On the cruise missile engines, we're talking about, these are air breathers. We're currently on the smaller ones, our current run rate annually, I think is about $10 million. And so we're talking about thousands of engines and think of selling price depending on which engine of $40,000 to $60,000 each.

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

Yes. So part of it -- so on the margin piece, part of that's related to the mix that is expected. So we did have quite a favorable mix in the first quarter. The other piece of that is we have been ramping infrastructure costs, manufacturing costs bid and proposal costs. So that is not being absorbed as much in the second quarter just because of the ramp that we're building up for the production and the growth for the second half.

As far as the revenue step down, if you will, from Q1 to Q2, some of that's in our unmanned systems just based on the timing of some production and shipment in the first quarter as compared to the second quarter. That's primarily the biggest change, if you will, from sequential quarters.

Yes. We're trying to be conservative. We are. The issue out there in the industry right now is on the government side, the program offices and the contracting offices. The amount of money they are trying to get obligated and under contract is incredible. I just told you now there's an additional $120 billion that they're trying to get obligated between now and the end of the fiscal year. And so we're trying to be conservative. It's all lined up. But if we don't get the awards, the DE250s aren't done, we can't execute on it. And we're cognizant of that backlog right now in the government program shops.

Okay. That makes sense. Appreciate that. And then I guess just maybe talking a little bit more about margins over time. You have an interesting go-to-market and an interesting model that would seemingly allow for your margins to go higher. And over the last few quarters, as the organic growth has accelerated, the margins have tracked. What's the latest thinking, I guess, on where margins go beyond this year and what the potential is over time?

Yes. I would go with what we put out there for now. We're looking for year-over-year 100 basis point increases. So 26 over 25, 100 basis points, 27 over 26, 100 basis points. You can probably pencil in if you want to, 28 over 27, 100 basis points. And we're pretty confident in this. And the balance, as you know, is we have so many opportunities right now. Our bid and proposal costs we're being told if you bid, you're going to win, which we're winning are significant millions of dollars.

But we are putting in the money on the bid and proposal to win like this recent space program, $450 million that we were encouraged to bid. We bid it, we won it. That was a that was a very expensive bid. And so we're balancing those costs against making sure that we hit the 100 basis point increases every year.

Okay. Yes, I would think at some point, you would achieve some escape velocity of leverage with -- you've invested so much in the business and then you get the revenue growth. But it sounds like for the time being, still just reinvesting back into those opportunities, so that makes sense.

And our next question will be coming from the line of Ken Herbert of RBC.

I wanted to follow up on your comment around timing and some of the challenges in actually taking funding levels into contracts. As we think into -- heading into fiscal '27, there's obviously quite a step-up more broadly in funding for drones and you think about the Defense Autonomous Warfare group and funding levels there.

How do you see -- 2 questions. How do you see that broadly impacting sort of opportunities across your portfolio, not only for the Valkyrie or other systems, but on the engine and other side? But then second, I guess, more importantly, what's your confidence level that we see sort of the kind of step-up they've talked about in drone and counter drone funding and that it actually happens in a timely manner, I guess?

Yes. So on that funding, as you know, right now, the placeholder is $56 billion over 5 years. That's the program you're talking about, Doug. And when you talk drones, I'm going to talk drones and loitering munitions, which both fall underneath it. Our confidence on the engine side, we'll start there, is extremely high. If you triangulate the missiles they're talking about, I named one program with 30,000 of them.

And you take a look at what's going on in the world and the attrition of our exquisite missiles right now and how long it takes to rebuild them and how expensive they are, we are highly -- we Kratos are highly confident that on the small jet drone, jet loitering munition, jet missile side, we have great confidence in our in our step-up forecast. Very good.

All right. Now let's go to the drone side. We are being very careful. We've made the decision we are going to be the merchant supplier of engines. So we are going to be -- our plan is to be on every other system provider's missile or drone or loaded ammunition, be a merchant supplier. What does that mean? We are picking and choosing our spots very carefully where we are going to actually build the entire system. So we're not competing with our merchant supplier partner on the engine side, okay? So there are 1 or 2 that we're involved with right now where we're comfortable we're not competing or going to cause a problem on the merchant supplier side.

But Ken, our primary focus is it's better to have part of something than all of nothing. And our part of something is to be on everybody's engines than to bid on dog systems where there are 10 guys bidding. And even though we think we're the best always, we might not win because the government is trying to rebuild the industrial base and rebuild different competitors.

That's helpful. And if I could, how do you think about the fact that a lot of the funding for dog in particular, is coming through expected reconciliation relative to base budget? And are you handicapping those any differently as you just think about fiscal '27?

Right. Yes. So obviously, for '26, I'm all happy. That's all bolted in at what, $1.150 billion. So as you know, on the $1.5 trillion that the department is going for '27. The base budget piece is $1.150 billion, and the reconciliation bill is $350 billion. Very importantly, if that makes it, I believe it's going to make it based on my recent meetings, as I talked about on the Hill. The new baseline for the base budget is $1.150 billion, which never goes down.

The only time it ever went down was under Obama and sequestration. And so you take that $1.150 billion base and that goes up 3%, 5%, 6% a year. The dog program will be adequately funded as a new program that we'll be able to successfully execute our business plan, even if there are no future reconciliation bills.

And our next question will be coming from the line of Jonathan Siegmann of Stifel.

A lot of progress on a lot of vectors. Maybe one you didn't talk about as much was Prometheus, the solid rocket JV. You mentioned $50 million of CapEx this year. Just wondering, there was some earlier Defense Production Act Title III money for that campus. Does that change the level of investment that Kratos and the partner is putting in? Or does that represent opportunity to increase the scope of that facility?

Great question. Yes. So the department of -- so we had the Prometheus groundbreaking earlier this year, I guess, a few months ago. And the day after the groundbreaking, the department came out with its own press release that they're putting in $100 million into the camp, the energetics campus on their own, which was great. So right after we put out a groundbreaking press release, the department put that out.

Continuing on your question, there is absolute opportunity here for Prometheus, Kratos and Rafael with the department for significant additional department funds to be put into Prometheus to both pull production to the left and increase it for existing platforms that we're "on and new platforms they want us on. Prometheus, in my opinion, is going to be a grand slam home run for the United States, the Energetics business and for Rafael and Kratos. The department is with us -- our customer is with us, and we're planning right now, we're going to have first fire next year, first fire next year, yes.

That's great. And then maybe I'll just add on one. You touched on it with Orbotech. Just looks like a great acquisition and a really strong final quarter as an independent company. And if our math is right, your revenue in Israel now is approaching about 10%. And last year, you upgraded your manufacturing facility. Could you maybe talk a little bit about the prospect of the enlarged business there? And how much exposure does it have to a munition restock that will unfold given the conflicts there?

Yes. So Deanna, are we near 10%?

Yes.

Yes. So we're near 10%. We have very large exposure to munition restock. So just think Tamer on Iron Dome. -- think Arrow, right? We're on those. I can keep think Barak, Sling of David. We're on all of them. And it's us and Orbit on a lot of stuff, too. So we expect -- we are forecasting and expect significant growth in our Israeli business for the foreseeable future for the restock and for new systems that our big 3 partners, Rafael, Elbit and Israeli Aerospace Industry are working with us on. As I think you know, I believe, I think we're the largest independent merchant supplier of microwave electronics outside of the United States. and it is growing rapidly.

And as I think you also know in the U.S., we're back in the game in the microwave business. It is growing incredibly fast also. And this is where some of our highest margins are because a lot of this is catalog pricing. It's not subject to PNA, which is normal. And this is one of the key aspects tying into Noah's question on margin expansion and why in the future, maybe we can do better than 100 basis points as our merchant supplier businesses get bigger relative to the system businesses.

And our next question will be coming from the line of Joe Gomes of NOBLE Capital.

I apologize, I just joined the call, so I missed a lot of it. I was on another one. And if I ask any questions that have been asked already, I apologize in advance.

No problem.

So I wanted to ask kind of start out with -- you talked about all the opportunities, Eric, and all the things that you're bidding on. And basically, you said, hey, people are coming to us saying, if you bid on it, you win it. How is that impacting your ability to employ -- get employees for these programs that you're winning? Is the labor situation gotten any better? Has it gotten worse? Maybe you can provide some color there.

Yes. Okay. So it's gotten better in the past year, 6 months, but it's not great. especially in turbomachinery engineers for propulsion systems. They don't exist. It's very hard in the turbomachinery area. We -- you heard -- you may not have heard. In my prepared remarks, I talked about we've been verbally told we're going to receive another industrial -- very large industrial gas turbine program at the end of this year, beginning of next year by another company. This industrial gas turbine area for power generation, it's an incredible opportunity right now.

And if we had the people, this is an area we could accelerate our growth even more, Joe. We really could. But these are the same guys that are working on our cruise missile programs. They're working on our hypersonic air breathing programs. They're working on our space programs. And I don't want to say guys, guys and gals, of course. So our #1 operational challenge right now as a company is obtaining and retaining qualified people.

And then if they need to be able to obtain and retain a security clearance, that adds another layer on it, especially in certain states where marijuana is legal to smoke because you can't get a security clearance if -- and I'm not passing judgment here, if you like to do that. So that's the dynamic. It's not as bad as it was 1.5 years ago, it's better, but it's not great.

Okay. And then one more. Obviously, a lot of the questions deal with the military side of things here. But you and I have talked a lot in the past about some of the more commercial, the truck platooning, logistics automation and kind of release or 2 of that in the last 6 months or so. I'm just wondering where does that business stand? Are you going to be able to grow that business here in the near term with all the focus on the defense side?

Yes. So our unmanned ground system business is doing great. As you know, we're in the soybean farms, we're in the sugar beet farms. We're in the timber land. I think we're in 15 states now driving unmanned on the roads. It's doing very, very well. But as you said, there's just so much going on, on the national security side. It's not a strategic focus area for us. But because our technology is so good and so cost affordable, they're coming to us. Joe, we're in discussions right now with a global farming equipment company.

You would know who they are. And it's possible by the end of the year, we're going to get a contract with them, and we're going to turn their farming equipment into unmanned systems out on the farms. So it's happening, but I cannot tell you that it's a major strategic initiative because it's not, and I apologize.

And our next question will be coming from the line of Pete Skibitski of Alembic Global.

Guys, on the growth in KGS in the first quarter, I'm just trying to figure that out. Was that mostly MachCTB driving the growth there? And then the $1 billion sole source, I think, addition that you mentioned, Eric, I think in your opening remarks, was that an increase in the ceiling of MachCTB? Or was that something different?

Go ahead.

Yes. So the organic growth in KGS is it's partially driven by MachCTB, but also in our microwave business as well as our KTT business. So it was across those 3 divisions within KGS.

Yes. On the other one, I can't get ahead of the customer until they announce it, but we've got 3 separate very large initiatives going on the hypersonic side, 2 of which we've been verbally told we're winning. The third one, I think we're also going to get. I want to wait until the customer comes out on it until I say anything just because I don't want to get in front of them. And it should be very soon on 1 or 2 of these.

Okay. Fair enough. And then I guess last one for me, maybe for Deanna. Just on the $160 million in CapEx this year, just what's the best guess that you think we should model in, in terms of how that profile is going to look in kind of through the midterm? It seems like a lot of the spending here will continue for some time, just judging from the amount of initiatives you guys have underway.

I think it would -- and obviously, we're not giving any guidance for next year, but I think the elevation of CapEx will continue. I don't think it will be at that level. But just with the initiatives we have going on, I think it will be -- continue to be elevated in '27.

And our next question will be coming from the line of Austin Moeller of Canaccord Genuity.

So you mentioned the win on the $447 million contract for ground management integration of the missile warning and tracking satellites in MEO. So at this point, you now provide ground station capability across all 3 orbital inclinations, LEO, MEO and GEO. So should we think that Kratos has a place competing on the recompete of scar with OpenSpace? And do you think there's an opportunity there for both the flat panel phased array antennas and the parabolic?

That's a very, very insightful question. You're exactly right. We are across all 3 of those orbits. And we're also -- I've been learning and I've been learning a lot about Cislunar orbit lately, too, because we're now in Cislunar orbit also. But to your question on scar. So obviously, we were partnered with AeroVironment on scar. We delivered all our stuff out previously. So the recent termination for convenience didn't impact us at all because we had already delivered out our piece.

When it comes out, if it comes out, we will definitely take a look at it to see if we -- it's something we want to prime or do we want to partner again with AV or partner with somebody else. We'll look at it. I just don't -- I don't know right now enough details on it. But to the next part of your question, on a parabolic antenna versus an AESA antenna or phased array antenna.

Here's my opinion, okay? I go back to what the Secretary said on November 7 in the arsenal of Freedom speech. Bring me 85% of the solution now that I can field now, not something that I may or may not get 2 or 3 years from now. Mike Tummy tells me that parabolics will win there. That's what -- but I don't know, this is my opinion, just based on what's coming out of the department.

Okay. And then if we talk about drone dominance for just a second, on future gauntlets, do you expect other drones in the Group 2 to 5 category will be requested and procured at scale? And do you think Kratos is in a strong position given your manufacturing scale to ramp production and take greater economics on future production loss for Gauntlet 1 and other gauntlets?

On your first 2 questions, yes and yes. So yes, yes and yes. We -- we're in source selection right now on something related to that, so I can't get into too many details. But as I think I said on the last -- I think I said on the last call, but if I didn't, I'll say it now. On Phase 2, we got some real compelling solutions on Phase 2. And what I understand on future phases, we have some really super compelling solutions. So we'll see. But Chris, the answer your question is yes and yes.

And our next question will be coming from the line of Andre Madrid of BTIG.

Deanna, could you maybe provide a split of Unmanned Systems sales between Valkyrie and Target? I know Valkyrie drove the strong growth, but I wanted to see just how much was between the 2.

Yes. The tactical revenue for the quarter was about $20 million.

And that $20 million was almost exclusively Valkyrie? Or was there some other stuff?

It's predominantly Valkyrie.

And I know you built a lot of those Valkyrie kind of ahead of schedule. I guess just when we think about Valkyrie sales again or tactical drone sales in isolation, just how should we think about the cadence through the rest of 2026? I mean, is 2Q going to be a step down? I know you kind of already alluded to that a bit, but like -- I mean, just like, I guess, how significant should we expect of a step down and then kind of a rebound through there at the end of the year?

Yes. The step -- there will be a step down. We haven't given guidance for the break between KGS and unmanned, but there will be a step down. As far as the produced units that we've been building as capital-owned assets, it's going to depend on the configuration of what we have built and what the customer is ultimately ordering. So if it's the same configuration and we get the contract for that, then if those are complete units, then that revenue would be recorded immediately.

If they're 50% complete, then we would record revenue at 50% at the time of the award and the remaining would be as it is completed. If it's for a different configuration other than what we have in inventory or in fixed assets, then it would be based on that build process and the revenue would be reported accordingly.

Got it. Got it. That's helpful. And then one more. I mean, when I -- Eric, maybe this one for you. You mentioned this directed energy down selection as a prime. Historically, I haven't thought of this as an end market that you guys play in directly. Is that true? Is this like a new entry? Or is this something that has been -- you've been actively supporting for some time and has just been more behind the scenes and just not directly addressed?

Kratos has been involved in directed energy weapon systems and laser weapon systems for years and years and years and years and years. We -- I just -- I haven't talked about it. We -- over the past year, internally and tied in with an acquisition we've made, we try to go 1 plus 1 equals 4. And this is a counter UAS system. It's mobile. We're the prime. It's several hundred million. It's going to start ramping next year. It should be very big in '28. And this is an area where probably now that we've won this one, it will open the door for us to win more.

And our next question will be coming from the line of Michael Leshock with KeyBanc Capital Markets.

Apologies if I missed it, but I wanted to ask on the backlog and the significant growth there in the quarter. Did you see any impact from the government shutdown delaying some awards that could have potentially driven your backlog even higher?

Yes, we did, and we're expecting to see them in Q2. Right now, Q2 backlog is looking -- bookings, pardon me, is looking real good right now because it's freeing up.

Great. And then one on hypersonics, just given the very strong environment there and the new awards you mentioned, it sounds like the demand is clearly there. Is there anything that could potentially drive revenues above the $700 million target in '27 that you've talked about for that hypersonics franchise, whether that's additional investments or alleviating any bottlenecks? Anything there that you could call out to drive even more growth in hypersonics?

There is absolutely the opportunity for us to be well ahead of that in '27. Here's what it is. It's the supply chain. It's the engines and the materials for the glide vehicles and the air breathers. -- this is what -- this is it right here. As you know, we have under order now, I think, 120 motors that are starting to come in Q3. And this is also one of the reasons, Noah, why there's a slight dip in Q2. And then we're going to integrate them with the front end and then they're going to be launched.

And we have the launch manifest for '27 and '28. But what's the most important part, it's the one you don't have. And so all the subelements have to come in to be able to get the systems out on the range and get them launched. So there's clear -- the demand is there. The funding is there. The customer intent is there. And this is a great question on why the U.S. department is rebuilding the industrial base. It's not there to do what they want to do, and that would be the inhibitor for us.

And our next question will be coming from the line of Cashen Keeler with BNP Paribas.

Just starting on capital deployment, you obviously upped the CapEx guidance a bit and completed some acquisitions, but you also raised a good amount of equity in the quarter. So as you look ahead, how are you thinking about capital deployment here? Is it mainly just going to be focusing on those organic investments? Or can we expect that you'll be active with M&A moving forward as well?

Yes. On the -- clearly, let's do the easy one first. Clearly, the growth opportunities we have, we are in a great position now in the eyes of our customers to execute on what we have and to the additional awards they intend to give us. So think the engines, for example. Probably in Q3, we're going to start placing the orders for the components and the subsystems for a lot of jet engines, which we will have programs for and contract for, which we'll start selling in '27 and '28.

Those are the -- there's the solid -- 120 solid rocket motors I just mentioned to you. We've made some payments on those. We're going to have to continue to make payments on those. Those tie right into the $400 million revenue for hypersonic this year and the $700 million next year, got to have the motors. There's cash going to be deployed. So -- and I can keep going, but I can give you the programs to customers where the cash for working capital will be deployed, but then we'll get it back in revenue and then receivables when we collect it.

On the M&A side, we are not aggressively pursuing anything, nothing, 0, all right? However, right now, there are a couple, 3 small companies where they're retiring. This is very similar. They know us. They've come to me. They're thinking about retiring. What they build it's exactly consistent with what we do. It's not like handbrinades. It's our sweet spots. And we are talking with these gentlemen and their lives. And if it makes sense, we'll do something with them, but these are small. So we have no plans right now, nothing on the radar screen or anything significant. That could change. I never say never, but that's where we're at right now.

Okay. That's helpful. And then on Valkyrie, there were just some comments in the press out of one of the industry trade shows about Valkyrie and the Mu Air program. I think one of them was just on whether or not they're looking for conventional takeoff and landing STOL or VTOL. So just curious if any of those decisions impact your ability to ramp to the 40 units a year? Or are your production lines fairly modular that you can adapt to those requirements?

That's a great question. Good for you. So you saw that. Yes, that -- that's very relevant to the question asked earlier on the revenue recognition on the Valkyrie. So 5 years ago, 4 years ago, because of the war games that were performed, runway independence was it. That was the winner. That was 5 years ago, the winner 6 years ago. Had to be runway independent, Chinese are going to blow up all the runways. Valkyries launched off a rail, go get them. So we started building our Valkyries on a rail -- runway independent.

Kendall comes in as Secretary of the Air Force. Halfway through his term in 2022, we're going to do the Agile Combat employment program, ACE, where we're going to have all these little bitty runways all over the Pacific, so runway independence doesn't matter. We want wheels. So now what you've just seen is it moving back to runway independence. Take a look at what Shield AI is doing. They're building the X-back, which is a runway independent, superduper Cooper Scooper drone.

I'm going through all of that with you because with our current customers, we have orders and we're going to receive orders for a certain mix. We're going to build those and we're going to deliver them. But along the way, the wind could change. If that Marine Corps thing you talked about, it talked about both runway independent and CTOL versions. And so it's still kind of in flux now. And thank God, we have 3 versions that we can build, rail launch, take the rail launch one, put it on a trolley, launch it off a runway.

So runway capable, rail launch and then full CTOL, conventional takeoff and landing with the landing gear internal. This is why when I initially said last call that we -- I think I said we're going to do 35 to 45 a year or something like that. I said depending on mix. The 40 that we're going to get up to by the end of '27, beginning of '28, if it's all CTOLs, it might be 30 -- if it's a mix, it will be 40. It just depends on the mix. And I'm not trying to obfuscate this. I'm telling you that this is happening real time.

We have an inventory of a handful left of the Rado launch ones, the rail launched ones. We're building right now numerous CTOL ones, numerous that will be ready next year. And as the hand of cards comes out, we'll let you know as soon as we can what -- by customer, what it looks like.

And our next question will be coming from the line of Brian Dobson of Clear Street.

So earlier, you were describing a generational recapitalization of the U.S. defense industry. You mentioned some conversations that you have on the Hill. But beyond that, what gives you confidence that this can endure through multiple administration changes and perhaps several budget cycles? And to that point, how do you see Kratos evolving and growing to meet the needs of the Department of Water over the next few years?

Yes. So on the first part of your question, like I said, I spent a lot of time on the Hill since our last call, both sides of the aisle with senior leadership. So the Chairman and the ranking members ask and ask and then on down from there. There is no doubt in my mind defense national security spends are going to continue to increase because of the threat profile. Is it going to be $1.5 trillion or $1.3 trillion? I don't know.

Under the DEMS, are there going to be reconciliation bills? Or is it all going to be in the base budget? I don't know, but it's probably all going to be in the base budget. But they're going to -- but then the DEMS, I'm not saying this negatively, this is policy. They're going to require equal discretionary nondefense to go up too. So there might be different mixes here, but I -- unless global peace breaks out based on what's going on geopolitically, the trajectory is up and to the right for national security spending.

And now tying into the second part of your question, and I said this twice on the call because it's very, very, very important. You have the 5.5 traditional primes, 5.5 okay? Then you've got Kratos. You got a lot of new defense technology companies that are coming and they're coming, but there is a massive supply-demand imbalance right now. There is an incredible demand for military-grade hardware and software. Kratos has military-grade hardware and software, and we're the low-cost guy.

And that isn't going to change for multiple years. It's not like we're having to take share from anybody right now. The pie is growing. The total addressable market, '27 over '26, for example, looks like it's going to go up $400 billion. So our primary focus is execution. We must execute, deliver products that work every time at an affordable price in large quantities. And we are going to do fantastic as the financials are showing. We're going to let the financials and the growth rate, the organic growth rates and the margin expansion do the talking. That's our plan.

And our next question will come from the line of Gavin Parsons with UBS.

Eric, Kratos is already pretty fixed price heavy, but I'd love to hear your thoughts on the White House executive order last week on fixed price contracting, if that has any competitive implications.

Right. There are colors of fixed price. So fixed price production contracts are extremely beneficial for the government and for the contractor because as you go down the learning curve as you're producing, you become more efficient, so you can make more money. And at the same time, you can lower your price to the government. So your margins can go up and their cost of paying you can go down because you're getting so efficient. Fixed price development contracts, we don't do those. Those are scary.

So this is why Boeing gotten so much trouble over all the years. They took fixed price development contracts, building something that had never been built before. And if you can't get it to work, you got to keep going. We don't do fixed price development contracts. We're not big enough to be able to handle it. From our direct discussions with the department on programs, we are clearly the low-cost provider. We are looked at as a low-cost provider.

Let me give you an example. We recently had multiple successful ballistic missile target launches, Kratos. I can't get into the details. It wasn't announced, but we had multiple. Our ballistic missile targets, so these represent adversaries ballistic missile targets, decoys shafts, layers, all kinds of countermeasures, et cetera. Our most expensive all-in one, I think, is $15 million a shot. I think the competing one is $100 -- now the competing -- now go back to the Secretary. I'll take 85% of the capability now at a very reduced cost.

So I'm making this up because I don't know what the right thing is. We can do 95% of what the $100 million one can do. So we're looked at very favorably for that. Same with our engines, same with our drones, I can go on and on. So our focus on very capable military-grade systems that are affordable, not exquisite is our sweet spot, not low cost, not exquisite, but very capable military grade that works. That's our focus.

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

Great. We appreciate your time and all your questions, and we truly look forward to briefing you in a few months on the second quarter. I think we're going to have a lot more exciting things to update you on. Thank you.

And this concludes today's program. Thank you for participating. You may now disconnect.

Good day, everyone, and welcome to Kratos Defense & Security Solutions Fourth Quarter and Fiscal Year 2025 Earnings Conference Call. [Operator Instructions] 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 nonlarge 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 ground breaking 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 softwares. 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.

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 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 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 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 $1.59 billion (sic) [ $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.

[Operator Instructions] Our first question comes from the line of 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?

Right. Yes. So thank you for the question. As I mentioned, take a look at the -- there was an interview on 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 been -- 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 #1 priority is to do it with our partner, but this is an area of expertise for us, and we have -- 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?

Yes. 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's doing with the prime because we're partnered with the primes on, as you said, THAAD and Patriot and indirect fires, if picked, on Integrated Battle Command System, on SHORAD. I could go on and on. This is important for us, what is happening here.

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.

Okay. Got it.

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, Mike, I was -- 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' hypersonic integration facility that's 90% complete, right? Okay. 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. 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 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, where 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 win, 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 stock 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 Mako. 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 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 -- that is -- no, no, don't look at it that way. No, no. Look at $10 million per aircraft for Kratos. Okay? Might be a little less, might be a little more depending on the configuration. As you know, we have 3 different Valkyries now that are 3 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 million, you're in good shape 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 -- so we have a family of small drones, Class 1 drones, some Class 2 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 in summary is there are different phases, Phase 1, Phase 2, Phase 3, et cetera, and the winners of the initial phase, which we are, we can pick our spot when we want to bring our suite of airplanes and our drones in based on the requirement of the phase.

So I don't want to get ahead of myself, but 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 soon if we continue with Phase 1.

And then on -- so these would be more offensive.

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. 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. So on the business side, in my opinion, this is one of Kratos' 1 plus 1 equals 4s. 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, many -- a number of which Nomad is one, 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 missiles. And that is the business objective we saw for Nomad. I'll let Deanna comment on the financial piece.

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 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 prepared 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 Airshow 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 will -- I'd like to emphasize the reason why we've won where we are, we are where we are, is because our Tactical Firejet 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 going to 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.

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. So what you just said at the end there is exactly correct. We -- putting aside -- assume a normal growth trajectory for our 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 the 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 and 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 $0.5 billion 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, and 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 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 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 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?

Right. So as I mentioned, we're looking at approximately, to get to a run rate of production rate, an annual production rate of approximately 40 per year, think 35 to 45. And so the midpoint was the 40. What -- the #1 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 launched or if it's going to be rail launched. So that's the #1 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 2 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, one of the -- 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 2 CCA programs and then expansion beyond that, if you win it, is perhaps third and fourth CCA programs.

No, no, no, don't characterize it that way. Look it as one plus we're going to continue to have, I call, demonstration airplane. So science and technology and RDT&E that are going to be sold every year. Think 4 or 5 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 I might not -- we might not be able to get there, a handful of whitetails 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 that could come over and check out, and we deliver them. And so those are flex factors also, but think one program. If we have additional programs with quantity, we may have to take that number up if we're going to hit deliveries 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?

Right. So on the first one, we are very sensitive and cognizant 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. Okay? I got -- 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 return -- 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. Okay? On something like an engine, we're going to have to -- there are deposits required. We're going to have to make deposits and things like that. So that's going to be cash out. I mentioned the timing of the appropriation like the '27 appropriation. God willing it happens on October 1. 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.

So 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.

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. So use 40,000 or 50,000 in engine, okay, somewhere in there per engine. We -- okay. We have been informed by 2 customers. These are not -- these are customers. We're designed in. It's our engine. That platform has been designed around. It might be 3 -- 2 or 3 that they intend on us beginning to go into LRIP in the second half of this year. So I think hundreds of airplanes that we start -- hundreds of engines, pardon me, that we start to build, okay, with deliveries beginning in '28, all right?

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, where we're delivering hundreds of engines, and we're getting ready to build thousands of engines to deliver in '29. So it's coming.

One I can -- 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 Powered JDAM and the maritime strike version with Boeing. In the last 2 weeks, it was given a new designation. I believe it's called [ PJDAM-XR ] and they talked about some of the things I'm talking to you about here, right?

As we're also -- I think it's pretty -- I think it's publicly out there that we are on a number, I think, 3 of Lockheed Martin's low-cost cruise missiles. We are -- I think it's out there. I think I can 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 of years.

That's great color, Eric. And just one last one on -- you've given us a lot of details on the growth opportunities. Outside of hypersonics this year, what is kind of the next 1 or 2 that you would highlight as the next main growth drivers for you in '26?

So number one is -- I haven't talked about this a lot. It's our Microwave Electronics business. I mentioned I was in Israel very recently. I was with Israeli -- on the microwave thing specifically, I was with Israeli Aerospace Industries, and I was with Rafael. 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 SPYDER. This is Sling of David. This is BARAK. I can go on and on. So we are -- we do microwave electronics for both of those.

Our U.S. microwave business, I don't talk about it a lot. It's competitory. 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 is 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. We -- 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 this -- these software-defined products. And then in '28, I think our space business is going to knock it out of the park. Those are the 3 -- hypersonics, microwave electronics, engines and space. Those are the 4.

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

Good results. Just wanted to ask in the -- 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?

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.

Driven by hypersonic -- the hypersonic business and the microwave and space.

Yes, microwave and space.

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.

Got it. Got it. If I could sneak in maybe just one more bigger picture, if you could -- 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 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 or year-end. There is about $5 million of investment that we put into the venture. And then as we -- as there are operating results for Prometheus, it will be our percentage at 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 would just be one line income or loss in investee depending -- obviously, in the beginning of the start-up activity, I would think there's going to be some operating losses because there's going to be depreciation that's going to be -- it's going to be a lot of noncash losses with depreciation of the facilities. And -- but it will just be our percentage of that whatever the income or losses on the income statement.

Right. No, 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 the -- we knew that all these multiyears were going to be coming. Does that present more opportunities for rocket motors you'll be manufacturing there?

Yes, sir. That's a great question. Last week, I was with the Rafael 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 '27. 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 million, $200 million, $400 million, $1 billion in revenue, something like that. And so think 2030, 2031 at full rate production for the first 3 phases. It's $1 billion in revenue. Think 20% and divide by 2.

Our next question comes from the line of Pete Skibitski with Alembic Global.

A couple of questions. First one, just to clarify on the '26 growth unmanned, I want to make sure I understand. I thought you guys said your share of MUX TACAIR would be about $120 million, and it will 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 TACAIR contract?

No, what I -- 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 with -- shipment in 2025, and that was, let's call it roughly $20 million, but it was not on a percent complete basis, so an apple to an apple. So as we move forward, it will be more on percent complete, so -- and we have not included a lot of the -- any production awards in that forecast. So 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 on hypersonics, the growth you're going to see over the next couple of years. Eric, I just want to get a sense of which contract vehicles are driving that growth. Is MACH-TB the majority of the growth? And when you talk about all these Zeus and Oriole SRMs on order, are those all under MACH-TB? Are those other contract vehicles? And maybe to some extent you can name those other contracts.

Yes, there are others. So number one is MACH-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 3 primaries, MACH-TB, a Navy/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 it's -- MACH-TB will be Zeus, maybe Oriole, but also all of your partners' missiles that they are...

Yes. The big -- in MACH-TB, the big drivers for us is Zeus 1 and 2, Erinyes, Dark Fury and some other things I can't talk about that we're going to be flying.

For our next question, it comes from the line of Andre Madrid with BTIG.

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 -- I'm just trying to find the puts and takes there because I think I might have expected more from the MUX TACAIR award than we saw. Maybe just like the puts and takes on the segment.

Yes. So the tactical revenue for the fourth quarter was roughly $8 million 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 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, there was the increment 2 of CCA that they said that they had selected 9 companies for that were in given concept refinement contracts. Can you disclose whether or not you were one of those companies?

I can absolutely not talk about that.

Got it. Got it. 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?

Yes. That's actually a very good question. So in Unmanned Systems, those are all Class 4 -- call it, Class 4 aircraft. They're jets. And you got -- and down in Huntsville, which is in DRSS Class 1 and 2. Very good question. That's why. And obviously, because the customers are different, the supply chain is different, et cetera, et cetera, et cetera, we left them separate.

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

Just kind of a quick one for me. Most 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 million, 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 kind of in a similar fashion?

Yes, sure. So what slipped? It's really 2 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 into '26.

As far as for '26 moving into '27, right now since we just started the year, we believe everything is going to be incurred in '26 that we forecasted. But some of that's going to be construction related, so some may push out. But at this point, we think that's a good range for 2026.

Our next question is from the line of Hans Baldau with NOBLE Capital Markets.

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

Yes. Right now, where we stand right now, I don't believe there's any -- there's 0 risk. I believe those airplanes will all be spoken for under what we have. I don't see a risk there.

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

Okay. I'm going to -- 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.

One moment for our next question, is from the line of Austin Moeller with Canaccord Genuity.

So 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 we're prime or we're working with one of the traditionals, okay, 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 TACAIR, which you're partnered with Northrop as 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, 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 great question. I cannot -- I'm -- I cannot talk about that right now. Excellent, excellent question.

Our next question comes from Cashen Keeler with BNP Paribas.

So I guess on the organic growth outlook for the year, it's a bit lower than the initial 15% to 20% you had laid out last quarter. So I guess, is that just mathematically coming in higher for the year on revenues? Or is there anything else that's driving that lower for the year?

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 that is -- so it is a mathematical.

Yes, we're -- the business is doing great. We -- 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 and investments in the pipeline right now. But as we think about free cash flow longer term, is there a time line 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 it. I mentioned on the last call. We're starting to see it now on the -- it starts on the operating cash flow. And 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 I went through -- Deanna went through a list. I went through several in my prepared remarks where, 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 multiyear 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 and then -- because you guys are punitive on this, and then the goalpost moves because 2 new opportunities came that generate a significant return for the shareholders. 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 then providing companies like Kratos, the nontraditionals, with significant large opportunities, we're going to go for these right now and build a hell of a company here.

Our next question comes from the line of Clarke Jeffries with Piper Sandler.

I wanted to ask around the guidance of -- the guidance philosophy for hypersonic, mentioning an expectation to double hypersonic this year and 75% '27. Where was that compared to a quarter ago? And just maybe you can help us level set on the areas where you're not including in the base case hypersonic revenue versus where you are. That would be very, very helpful. And then one follow-up.

Yes. So the #1 is the engines in the motors, the 120 motors that are going to start coming in late Q2, early Q3, and then those deliveries are going to ramp throughout '27 and '28. Those are tied to missions and launch manifests. And our Aerojet Rocketdyne on Zeus and ATK on Oriole, they've really stepped up, and so we are getting much more comfortable now with that.

Okay. Number two, the glide vehicles. There's one company in the United States 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 -- 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 of 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 to you.

Now where you were going on that. There's a -- I mentioned I'm very -- I'm hopeful that there's another $1 billion sole source or 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. 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 the number of tactical drone opportunities that you're talking about that are sort of in the pipeline, just wondering if you could frame Group 3 versus Group 4 kind of opportunities? And then just generally with the context of drone dominator, how interested are you in Group 1 and 2 in terms of really putting more investment capital against those opportunities?

Right. We are very, very interested in Group 5, so Valkyrie, Mighty Hornet, Tactical Firejet, 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 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 won a slot. I believe we won it because of our design capability and the capability of the drones. Okay? 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.

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

Eric, maybe if we could just -- one big picture question and one micro one. If we could just dig into the size of your microelectronics -- 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.

Yes. So the growth for the year was about organic 17%.

Got it and...

Big programs are Iron Dome, Tamir, Arrow, BARAK. There's next 2 -- the next 2 are classified. So those are the big 5, 2 classified and those 3 I mentioned.

Perfect. And maybe you've given us so much color on this call. Can you -- I don't know if it's easy to just tell like the 3 upcoming catalysts we look for with Kratos.

Yes. From my opinion, number one is, as I mentioned, I'm expecting that we're going to receive a very large potential $1 billion, $1 billion-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.

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.

And our last question comes from the line of Gavin Parsons with UBS.

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 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 2 relative to timing of things that will accelerate for us.

And then the second part, 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?

Yes. 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 involving 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 that's one of our closest, if not closest partner. I mean, they talked about it last week or 2 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. Okay. I believe Tom or his CFO said in their earnings call and their transcript, I believe they said, check me, that by the end of '29 or 2030, they need to deliver 300 or 400 indirect fire systems. Kratos builds a significant amount of the hardware for Dynetics, for indirect fires that they get them 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 multiyear orders, there is nothing bad here for Kratos. There's -- I don't want to -- there's nothing in my -- that comes to mind competitory, and this could be an accelerator for us going forward.

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. 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.

Good day, and welcome to the Kratos Defense & Security Solutions Third Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Marie Mendoza, Senior VP and General Counsel. Please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us for the Kratos Defense & Security Solutions Third Quarter 2025 Chorus 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 line as we discuss future strategic initiatives, potential market opportunities, operational outlook, financial guidance and other forward-looking statements during today's call.

Today's call will also include a discussion of non-GAAP financial measures as that term is defined in Regulation G. Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP. Accordingly, at the end of today's press release, we have provided a reconciliation of these non-GAAP financial measures to the company's financial results prepared in accordance with GAAP.

Thank you, Marie. Our Q3 financial results are representative of the increasing demand for Kratos' military-grade hardware or systems and software to support the national security of the United States and its allies. Also reflecting this demand, today, we have increased our full year 2025 revenue forecast, which now reflects 14% to 15% organic growth over fiscal '24. This is up from our original forecasted growth of 11% to 13%.

Additionally, we have increased our full year 2026 organic revenue growth forecast to 15% to 20%, up from our previous 13% to 15% above expected annual 2025 revenue. And we are providing today a preliminary 2027 revenue growth target of 18% to 23% organic growth above the 2026 revenue range, which is 15% to 20% above 2025. Also importantly, we are projecting an approximate 100 basis point EBITDA margin expansion for 2026, above 2025 and another approximate 100 basis point margin expansion again in 2027 over 2026 as we scale the business and transition to more profitable contracts.

We expect our EBITDA margins to expand even though we continue to make significant and potentially increasing bid proposal and related investments as the number of opportunities Kratos has continues to grow. I want to emphasize very importantly, none of these forecasts include the Orbit acquisition we announced today. We will include Orbit once that transaction closes, which is scheduled for hopefully, in Q1 of next year.

Directly related to Kratos' accelerating growth trajectory, Congress, the administration on the Pentagon are all aligned to reform DoD procurement practices and rebuild the U.S. defense industrial base. This is represented in presidential executive orders, the Senate Forge Act, the House Speed Act and the DoD's initiative to improve the acquisition process, each of which are expected to be good for Kratos. Additionally, the funding to support these national security initiatives for the United States and its allies is being put in place with an expected 2026 U.S. security spend of approximately $1 trillion, NATO allies increasing their security spend from 2% up to 5% of GDP and Pacific Allies expected to do the same.

United States, industry and Kratos are at the beginning of a generational recapitalization and rebuild of the West National security apparatus to address the existing geopolitical threat environment and to deter and to feed our enemies. I believe that this global recapitalization build is structural in nature, both policy and threat driven. This is not temporary or one-off and this will be a multiyear, multi-decade and duration exercise.

Directly related to this rebuild and increased opportunity set, Kratos is making significant investments in facilities, plant, equipment, et cetera, to rapidly scale and support major new program wins we have received and that we expect to receive. Importantly, Kratos does not build it and hope that they will come. Our investments are made with program contract or partner commitment line of sight and with expected ultimate rate of returns that are acceptable to Kratos' stakeholders.

I will reiterate that the number of additional or new opportunities for Kratos is at a record level. It is increasing, and it has accelerated over the past few months and Kratos is positioned to take advantage. The government this summer announced that Kratos' Valkyrie would become a program of record with the Marines under the MuxtacAir program. We are now able to report that this program is officially underway and will include the Kratos Valkyrie aircraft with Kratos' and [indiscernible] partner, Northrop Mission Systems.

We, Kratos and Northrop together expect to receive the initial formal contract award in the next few months. We had expected the award sooner, but similar to many awards across industry and Kratos it has been delayed as a result of the federal government shutdown. The [indiscernible] program expected to progress from evaluation of various mission scenarios and the associated military methods of employment through low rate production and then to full rate production. We expect that Valkyrie systems under the program of record will include [indiscernible] or Rocket assisted takeoff and conventional takeoff aircraft as well as multiple mission configurations.

The joint Kratos Northrop Roman system will provide a state-of-the-art CCA capability at a price point that will enable the Valkyrie system to be procured distributed and operated in very high quantities, which addresses the consistent war gaming result for the need for affordable mass to provide an advantage and a win for the United States. [indiscernible] brings exactly this.

I can now also officially say that Airbus has partnered with Kratos to develop a German variant of the Kratos Valkyrie CCA. And in the third quarter we just ended, we shipped the first 2 Valkyries to Airbus under this new contract. As a result of the pending European need, the opportunity space here is substantial including as evidenced by the Ukraine Russia war and the significantly increased defense spending committed by the European nations. The first Valkyrie opportunity in Europe will be with the German Air Force solicitation for their own CCA, and this is our joint initial focus with Airbus.

The European CCA system will leverage the developed and proven baseline Kratos Valkyrie configured with Airbus specific German mission systems to satisfy the operational needs unique to the threats in that region. Air-to-ground and air-to-surface capability is expected initial key in the European theater as noted by several of the countries that we have been working with in addition to the United States.

Consistent with the approach we have taken for the United States Marines, this mission configured Valkyrie provides a CCA that can be procured and deployed en masse, matching the quantities needed to deter the threat and to feed the threat should have come to that. Very exciting for Kratos, our partner, Northrop Grumman, recently announced they are actively looking at their [indiscernible] Jet powered modular munition as an armament for the Kratos Valkyrie. We encourage you to go to Northrop's website and certain recent publications for more information on the Lumber Jack, on the Valkyrie with the Lumberjack being a truly incredible technologically leading system.

Through Kratos' many initiatives with Northrop, I must say that I believe that Northrop is one of the most proactive and innovative of all the national security companies out there, including recent new defense companies that have emerged in the market. Additionally, Kratos recently unveiled our Ragnarok low-cost cruise missile, which Kratos' Ghost works has been working on in stealth mode and which we displayed stowed in the weapons bay of Kratos' Valkyrie at the U.S. Marines Miramar Air Show in September.

The Ragnarok is a $150,000 internal and external carry high-performance strike system that Kratos has specifically developed for the Valkyrie and also for certain other systems. We believe that Kratos' Valkyrie, which is in production and flying since 2019 and is a clear competitive differentiator for Kratos with customers that are not interested in the PowerPoint or having to invest hundreds of millions or billions of dollars in a forever development program. The Valkyrie exists, it is in production, it is flying, it is coming and Kratos, our customers and our partners are getting ready.

Consistent with our past practices, we have not included sales of production quantity Valkyries in our base case financial forecast we provided today, only limited RDT&E type quantities. We will continue to be conservative and only includes large production quantities in our forecast when we have programmatic, contractual funding and/or delivery quality. Kratos has been working with and supporting Taiwan for about 20 years with high-performance unmanned jet aircraft systems, employed as targets for their military to train and test against.

As we recently announced, we're excited about our collaboration with Taiwan's NCSIST or National Chengshan Institute of Science and Technology. This is the one's DARPA equivalent to develop a comacosivariant of Kratos' in production flying today tactical fire jet system. The combination of our most recent and capable advanced version of the tactical fire jet which Kratos Ghost Works also has been working on in stealth mode, configured with NCSIST's mission systems and weapons is called the Mighty [indiscernible]. The Mighty [indiscernible] will be capable of ship hunting and ship killing and certain other key missions for Taiwan, which I am unable to discuss publicly but which I believe will be a big surprise for a certain country.

By combining the technology skill sets of Kratos and NCSIST, we're creating a unique system with an incredible performance to cost ratio at a cost point that is expected to enable extremely large numbers to be fielded affordably.

Once again, similar to Kratos' Valkyrie, Kratos' tactical fire jet is currently flying in production and well down the production execution and cost learning curves and our customers can come and see their aircraft and the actual costs. Ultimately, these systems are expected to be produced in Taiwan under license from Kratos, which arrangement is expected to provide key advantages to both parties. For example, under the contemplated arrangement, Taiwan would control their production rate and employ their country citizens, while Kratos will receive a license fee, with Kratos also freeing up U.S. production capacity for the U.S. CCA opportunity and related jet drone aircraft opportunities with U.S. production rates are expected to increase rapidly for Kratos.

It was also recently announced that Korea Aerospace Industries has signed an MOU with Kratos to develop AI-enabled manned-unmanned teaming systems to integrate piloted aircraft with collaborative drones for future Korean Air opportunities and operations. This agreement provides KAI, a U.S. partner in Kratos with proven flying and production unmanned combat platforms while aligning with Seoul's push to inject artificial intelligence and autonomy into next-generation air power. The Kratos KAI partnership aligns with South Korea's effort to scale artificial intelligence-enabled systems and expand defense exports turning the Kratos partnership into both a strategic and industrial initiative.

We are excited about our agreement with KAI. And here again, I believe that Kratos' success differentiator is that we have significant experience with actual artificial intelligence and augmented autonomy or auto pilot flying jet drone aircraft today. We don't do first attempts, power points or renditions.

Since our last report to you, Kratos' Athena jet drones have had a successful series of customer flights, including in swarms which included a leading VC-backed artificial intelligence company's software system onboard Athena. Importantly, we have additional tactical drone opportunities we are pursuing, one of which I believe could be a catalyst for the company and that I now expect Kratos to receive in the next few months, which Kratos Ghost Works has been heavily involved with.

Additionally, there are also 2 other new opportunities, which I believe that Kratos remains in a sole-source position on including one opportunity with Kratos' new Clone Ranger drone system that our Ghost Works recently publicly released. I believe that contributing to the positive momentum we are seeing with Kratos' drone business. the Trump administration and the State Department have recently announced they will revise U.S. policy related to the sale of drones internationally, the missile technology control regime or MTCR in order to address the rapidly changing threat technological and competitive environment.

These changes in MTCR policy and related rules interpretations that have been published are expected to be favorable for U.S. drone and missile-related companies, including Kratos, and we believe that we are already seeing the benefit in certain of our international drone and missile-related initiatives, including as related to Kratos' engines on certain systems. We believe that Kratos is the world technological leader in developing, building and flying affordable tactical jet drones and I emphasize affordable. This is a word of concept, none of our competitors we are aware of ever discussed, and we believe this is a clear differentiator for us now.

Kratos' market-leading jet drone position did not happen overnight. We've been at it for over a decade and the market is finally coming our way due to the current state of warfare, Kratos' first to market positions, that Kratos has actual in production on flying jet aircraft and the low cost and affordability of Kratos' jet drone systems.

Since our last report to you, we have formally received contracts on both Poseidon and DMOS, with DMOS being Kratos' -- being with Kratos' teammate Leidos on the sea-launched cruise missile nuclear or Slikemen program. With the Kratos Leidos team was 1 of the teams down selected. Also importantly and separately, it was also reported that Kratos Turbine Technologies, as the prime has received a contract related to the [indiscernible] propulsion system. Sliceman is a top national security priority and is expected to be a multibillion-dollar program of record.

[indiscernible], a single award to Kratos as the prime with the current anticipated total potential value of approximately $750 million is classified is expected to begin ramping for Kratos in 2028 once the new Kratos dedicated facility, which is already underway is complete. As we were able to recently announce we have now also been successful on and received the formal contracts on both Anaconda and Helios respectively. Helios is a next-generation hypersonic materials testing center that Kratos will own and operate, and we expect to shortly be able to announce the location for this major new Kratos facility and program.

Anaconda will also be Kratos owned and operated. It's a state-of-the-art radar integration complex located in Indiana for the AM SPY One radar sustainment and modernization efforts. Both Anaconda and Helios are expected to be multiyear, multi-decade Kratos programs with the potential of each being a $1 billion franchise opportunity for Kratos over the lifetime of the requirements based on the DoD's expected demand with these respective Kratos owned and operated facilities expected to be complete in 2028 when operations are planned to begin.

To provide you an example of how valuable Anaconda and Helios are to Kratos, certain of the current systems Anaconda will be sustaining or suspected to be in service through 2065. We are continuing to pursue projects [ Nemisys, Aries, Vulcan ] and others which we hope to be able to update you on in the first half next year, plus there are several additional new opportunities we have now been approached with that we are assessing. [ Promius ] with our partner, Rafael, is on budget and on schedule for 2027 operations with [indiscernible] having made a number of experienced solid rocket motor and energetic-related hires, including the Chief Operating Officer.

Kratos' GEK Turbofan initiative with our partner, General Electric Aerospace and Kratos' new production and test facility in Oklahoma is also on budget, on schedule and expected to begin operations in '27. Separate from GEK, we have now been informed that we will be receiving 2 initial turbojet engine program low-rate initial production contracts from 2 separate customers for 2 separate systems which we expect to be executing on in Q2, Q3 next year.

Similar to Kratos' jet drones with Kratos small jet engines, we made the internally funded investments to be first to market with actual relevant working products, which has enabled us to be designed in on several new low-cost cruise missiles, drones and other systems, and we are now heading towards production. We expect that in the future, as the merchant supplier of affordable small jet engines, Kratos will be in production on multiple programs and systems.

On our Boom Supersonic program, we are excited that our work with Boom is positioning for its next big step with the planned first run of the Symphony engine next year. Kratos is the world technological leader in developing, building and flying affordable hypersonic systems, including our first-to-market hypersonic flyers [indiscernible] Dark Fury, our first-to-market [indiscernible] solid rocket motors and certain other hypersonic systems we have now successfully flown.

We expect Kratos' hypersonic franchise, including [indiscernible] program and additional programs we have, including 1 with our partner, Lockheed Martin, to be an important future growth driver for Kratos beginning in 2026. Similar to Northrop, Lockheed is an incredibly important partner of Kratos with actual working bleeding-edge technology systems and capabilities. We have a unique position in the satellite industry with Kratos' first to market open software demand control and other capabilities have earned us a large and growing share of the national security market. And Kratos is also a technological leader in software-defined networks for commercial satellites and in space domain awareness or SDA, including with our globally owned and operated SDA system.

Kratos' satellite business with our virtualized C2 and TT&C capabilities is well positioned for the Golden Dome and other missile defense-related initiatives. Okay, importantly, in 2019, Kratos acquired Florida Turbine Technologies, which is now Kratos KTT. A core capability of Florida turbines or KTT, in addition to jet engines and propulsion systems for drones, missiles, hypersonics and space systems is also industrial gas turbines or IGTs, which we have helped build and support for 25 years. With the artificial intelligence and related data center market explosion, we are all seeing there is currently not enough power capacity in the United States to satisfy the related expected future data center demand.

I can now report that Kratos is under contract with the well-known technology industrialist, both company and individual related to IGTs for power generation for data centers, including specifically artificial intelligence initiatives. We are under a very restrictive NDA, but I will say that the potential opportunity for Kratos here is Kratos and our partner are successful in executing the plan, which Kratos is laser-focused on doing is large and could be another franchise type opportunity or catalyst for the company.

We have certain critical tap milestones that we need to hit through the end of 2026, at which time I will have better clarity on the probability and potential of this initiative, but I did want to mention it this to you as we are now under contract with this new opportunity. Since our last report, we've announced that Kratos will be the exclusive Chaparral Vital cargo drone aircraft manufacturer for Elroy Air, another opportunity that if our partner's business plan is successful, based on the potential market demand, including with the Department of Defense, could be an additional future growth catalyst for Kratos.

On the IGT and Elroy Air opportunities, both of which are dual use, commercial national security-type market opportunities, Kratos was chosen as the partner as Kratos is a leading technologist in these respective areas, and Kratos can rapidly engineer, develop, demonstrate and be first to market with low-cost, high-volume manufacturing ready products. We are also now currently in discussions on additional potential large impact dual-use aircraft-related programs in Kratos Turbine Technologies wheelhouse. The internal name we have for this is Pegasus, which I'll be able to hopefully update you on in my next quarterly report.

Today, we announced that Kratos is acquiring Orbit for a purchase price of approximately $356 million. Orbit is a leading global provider of mission-critical satellite-based communication systems for unmanned aerial, seaborne, undersea and land systems and also manned military and other systems. Orbit provides its hardware products and systems to major air forces, traditional prime contractors and emerging new defense and space companies. Orbit's customers are worldwide, including Israel, the United States, Europe and the Pacific region with most of Orbit's large customers already being existing customers of Kratos.

Since the acquisition -- once the acquisition is complete, Orbit, which is headquartered in Israel, will report through Kratos' Microwave Electronics division, which is headquartered in Jerusalem. And as you know, has been rapidly growing its unmanned systems, space and satellite capabilities. The acquisition of Orbit is expected to be immediately accretive across virtually every financial matrix for Kratos. Orbit checks every box in the Kratos acquisition, including outstanding leadership and culture, mission committed employees and leading technology with real battle-proven hardware products and systems that are right in Kratos' sweet spot.

The combination of Kratos' microwave technology and Orbit's communication technology is expected to provide new growth opportunities that are currently not available to either company on a stand-alone basis, this includes the [indiscernible] area. With the global recapitalization of weapon and space systems underway, Orbit significantly advances Kratos' position to take advantage of this situation including internationally and in Europe. Also importantly, this was a negotiated transaction between Kratos and Orbit.

This significantly reduced disruption to both companies' operations and the commitment that we have to our joint national security-focused mission. Orbit's most recent published annual revenue was approximately $70 million and EBITDA of approximately 23%.

Once again, I want to emphasize, none of Orbit's financial information is included in the financial guidance that Kratos has provided today, and we will not include it in our financial forecast until the acquisition is complete, which, as I mentioned before, is currently expected sometime in Q1, probably March '26. Deanna.

Thank you, Eric. Good afternoon. As we have included a detailed summary of the third quarter financial performance as well as the initial fourth quarter and modifications to full year 2025 financial guidance in the press release we published earlier today. I will focus on the highlights in my remarks today. Revenues for the third quarter were $346.7 million, above our estimated range of $315 million to $325 million with overachievement of forecasted revenues across all of our businesses with the single largest increase in our Unmanned Systems business, including a shipment of tactical Valkyries to an international customer, which received regulatory approval in the third quarter.

As a reminder, when we provided our third quarter guidance, we had indicated that out of an abundance of caution due to the uncertainty of the timing of regulatory approval we had forecasted this shipment in the fourth quarter. Additional notable organic revenue growth was reported in our defense rocket support and space training and cyber businesses with organic revenue growth rates of 47.2% and 21.2%, respectively.

Adjusted EBITDA for the third quarter of '25 was $30.8 million, also above our estimated range of $25 million to $30 million, reflecting the increased volume offset partially by continued increase of contractor 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 third quarter '25 revenue was up $23 million or 35.8% organically reflecting the shipment of international tactical Valkyries.

AGS third quarter '25 revenues was up $48.7 million year-over-year from the third quarter of $24 million with organic revenue growth of 20%, excluding the impact of the February 25 acquisition of certain assets of Northern Millimeter Inc. Third quarter '25 cash flow used in operations was $13.3 million primarily reflecting the working capital requirements related to the revenue growth and passing our receivables by approximately $25 million, 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 third quarter of '25 was $41.3 million after reflecting funding of $28 million of capital expenditures. As we planned, we are continuing to make investments to expand and build out certain of our manufacturing and production facilities in our microwave products, rocket 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 103 days in the second quarter to 111 days, reflecting the over 26% revenue growth and the timing of milestone billings. Our contract mix for the third quarter of 25% was 70% fixed price, 27% cost plus fixed fee contracts and 3% time and material contracts. Revenues generated from contracts with the U.S. federal government during the third quarter of '25 were approximately 67%, including revenues generated from contracts with DOW, non-DoW federal government agencies and FMS contracts. In the third quarter of '25, we generated 16% of revenues from commercial customers and 17% from foreign customers.

Now moving to financial guidance. Our financial guidance we provided today includes our expectations and assumptions for our supply chain execution, the impact of the federal government shutdown and for employee sourcing, hiring, retention and the related cost. We have increased our full year '25 revenue guidance from $1.29 billion to $1.310 billion to $1.32 billion to $1.33 billion reflecting an organic growth rate of 14% to 15% over 2024 and and maintain our adjusted EBITDA guidance of $114 million to $120 million, reflecting the expected mix of revenues and an elevated level of new opportunity, pursuit costs and other investments.

Our fourth quarter revenue guidance of $320 million to $330 million reflects an estimated organic growth rate of 11% to 14% over Q4 of '24, which growth is reflective of the elevated bid proposal and other investments we are making. Our guidance continues to include the impact of increased material and subcontractor costs on certain of our multiyear fixed contracts, specifically in our Unmanned Systems target drone business, where we have experienced cost growth from certain ancillary materials on our target and for which we are unable to seek recovery from the customer until the renewal of future production lot contracts occur. We are continuing to aggressively manage costs where we can to minimize the impact to our margins.

We are adjusting our full year free cash flow and operating cash flow estimates primarily as a result of the increased organic revenue growth we are experiencing and the related future contractual payment milestone and other expected customer payment dates and also reflecting Kratos making long lead material purchases ahead of contract funding award to meet customer execution time line, which has resulted in an increase in our customer accounts receivable balances.

Additionally, the federal government shutdown and its impact on government program, administrative and other offices and functions has resulted in certain expected government contract receivable payment dates to be delayed resulting in an increase in customer accounts receivable days sales outstanding. The collection of these receivables is expected in the future. It is only a timing-related matter of the expected collection date.

Additionally, certain of the new facility, facility expansion, machinery equipment and other capital expenditures and investments we had planned for 2025 are now expected to be incurred in 2026, including as a result of our managing the company's cash expenditures to the degree that we can control, which has resulted in any reduction in our full year 2025 capital expenditure forecast. Kratos' operating cash flow guidance also assumes certain investments in our Rocket Systems and Unmanned Systems businesses related to the procurement of [indiscernible] and related systems and the completion of certain derivatives of our unmanned systems vehicle of approximately $28 million to $32 million.

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

[Operator Instructions]

The first question comes from Sheila Kahyaoglu from Jefferies.

This is Ellen, on for Sheila. Maybe to start, you noted that the German Air Force is procuring Valkyrie. Can you give us a little bit more color on the international opportunity for that program? And any thoughts on the revenue contribution from Valkyrie in the next few years would be great as well?

Right. So specifically, Airbus procured the Valkyries. Airbus has procured the Valkyries specifically related to a CCA opportunity initially with the German Luftwaffe. However, as I alluded to in my prepared remarks, because we have flying aircraft and now they're in Europe with Airbus, we're going after another -- a number of additional tactical drone or CCA opportunities in Europe. And we have the advantage here because, again, we have actual flying aircraft that have been flying since 2019.

Also, as I mentioned in my remarks, in our financial forecast, the only revenue only that we have for anything we said for Valkyrie is for RDT&E and S&T and like the 2 we just sent to Airbus. We are not including any production level forecasted revenue in our numbers until out, as I said, we have absolute clarity, programmatically funding and delivery dates. So we have no fall starts.

Great. Sorry about that on Airbus. And can you tell us a little bit more about the revenue synergy opportunities from Orbit? Congrats on that acquisition.

Yes. The -- it's competitive, but this is what I'll tell you. The vast majority of antennas right out there right now are parabole of fixed or their hardware. And Kratos' microwave business is an expert in AES, silicon-based and other types of radar enhancement technologies that are being deployed right now. And we see a very good opportunity. I said 1 plus 1 equals 3. It's probably going to be 1 plus 1 equals 5 with our technology, Orbit's technology, their installed base and their customer base. .

Your next question comes from Seth Seifman from JPMorgan.

I wanted to ask about the Valkyrie progress with the Marines and you talked about kind of moving up to full rate production and looking at a level of a fleet size that could really bring affordable mass -- and so how do you think about that ramp up over the next several years and what they might be looking at?

Right? Seth, so what I -- what we see here is this is going to be your typical program of record, where for near term, midterm, long term. Near term, the infrastructure is being put in place to handle production quantity types of Valkyries that are going to be deployed with the customer. And so this is -- and I can't get into too many details, but it's a typical program of record.

The personnel are being identified and allocated or assigned and budgeted for by the government. There is going to be launch equipment, there is going to be recovery equipment. There is going to be communication equipment. There is going to be logistics. There's going to be spares. There's going to be training. All of that infrastructure is going to be put in place. That has begun. While that is happening, there will be Valkyrie sales with Northrop Grumman systems on it in the near term, okay? So they can start utilizing the aircraft, right?

Then midterm, we'll go into full rate production once that infrastructure is out there. And long term, that full rate production, I believe, is going to go for a number of years. and it will be for my opinion, dozens and dozens and dozens of aircraft initially because of the affordability and the low cost point and the mission that they're specifically targeting.

Dozens and dozens as an annual rate or as a cumulative program objective?

Annual .

Annually, that's what I thought. Okay. Okay. Excellent. Very good. Cool. And then as we think about the EBITDA progression over the next couple of years and we think about when we kind of flip over to cash positive or as the cash burn starts to narrow. I know probably not a good time to give specific guidance in that regard. But just in terms of maybe a framework for people to think of more qualitatively about how that evolves along with the EBITDA growth?

Yes. So we have absolute line of sight now, Seth, on when the business will turn cash flow positive and then how it will start to ramp. We have line of sight on it. We can see it, okay? The flex point here is the number of program opportunities that continue to come to us and they're increasing. And let me dig into this a little bit for you so you understand what's going on here.

This started 6, 9, 12 months ago and it's been accelerating where if the government customer has a viable alternative to what I'll frame as a traditional in certain areas, they're giving that viable past performance, qualified company, Kratos, a chance. Take a look at the last couple, 3, 4 months. We won Helios, multiyear decade program. We won Anaconda, multiyear decade program. We won Poseidon, which I have not talked about previously, it's classified, we won that, okay? We are being encouraged to bid prone on very large program opportunities and it's accelerating.

So based on the hand of cards we have right now, we have line of sight on this in a few years. However, the opportunity set a multi-hundred million dollar billion opportunities continues to increase. This is one of the reasons our EBITDA margins, I expected them to be up higher. They're not because of the bidding proposal and the capture costs because these are big programs we're expending. So we can see where those lines are going to converge, but they may move out a little bit if the opportunity set continues to come at us and the strength that has been.

Your next question comes from Michael Ciarmoli from Truist Securities.

Nice results. I don't know, Eric or Deanna, the accelerating organic growth in the guidance for '26, '27, definitely encouraging. Can you give us maybe a little bit more detail around what what specifically is driving that acceleration? I mean, I know, Eric, you just mentioned some of the wins. Is that the driver? And can you maybe parse out the growth between KUS and KGS, and maybe just back to the question, Seth was asking on Valkyrie with the Marine Corps. Is that baked in there or not?

Yes. The Valkyrie with the Marine Corps is not baked in to any numbers we gave today. When that happens, that is going to be a step function upside. Now to the first part of your question, our hypersonic franchise it will be the clear driver of growth for us for the next 2 or 3 years. And this is programmatic. This is not just [indiscernible]. We are on a number of programs we cannot talk about. I alluded, we're on several with Lockheed Martin for example. And they are all either just starting or they are ramping.

I'll tie into that hypersonic franchise, our rocket system business. Think ballistic missile targets, think sub orbital vehicles, I can't say much more about that. We are the industry leader in those areas. So this is missile defense-related stuff, right? So -- and they go hypersonic speeds, which is why they're in our hypersonic franchise. Also in KTT, okay, we are building the engines for numerous hypersonic weapons. We can't talk about it. We're under NDA, a lot of them are classified. Those are going to be going into production '26, '27.

So number one, the biggie, the hypersonic franchise across the company. It is growing. And Michael, it's possible in the next 2 years, 3 years, our Rocket System business is the biggest division in the entire company, and it's going to pass space, okay? Another big growth driver for us is the Space business. okay? If the whole thing has turned around in the last 6, 12 months on us -- 6, 9 months on us. We have the issues with the commercial guys, they couldn't get their satellites up. It has been -- that has been blown away by what's going on, I'll say, in the national security area, including the classified area for Kratos with our ground systems to command and control the stuff that's going up. It's the growth rate on that business considering it's a $400 million business. I think that division is $400 million or so. I think it's going to $500 million or something like that next year. On programs we've won, it's up $100 million, something like that, okay? So the space and satellite business is looking great.

Third, Microwave electronics. The microwave electronics business, both internationally and domestically, [indiscernible] you and I are chatting about here, what does it need? Microwave electronics. And then the next one is engines. And it's engines for missiles, engines for drones, engines for -- these are not hypersonic engines. This is separate thing, turbojets and turbo fans. And then another big one that's taking off is that our C5ISR business is all the hardware we build for virtually every prime for virtually every missile radar and air defense system they build. We build the hardware. We are the merchant supplier of military-grade hardware for air defense systems.

And so you look at Northrop or Lockheed or Raytheon, I can go on, the systems they're talking about, we're on them. So those are the ones that are -- we just have programmatic clarity, which is why we're looking at 15 to 20 next year in [ '18 to '23 ] and '27.

Okay. Got it. That's great detail. Just for clarity, is the GEK800 engine in that forecast? Or is that beyond? .

No, that kicks in. So that facility is going to come online in '27. So that's going to be, hopefully, this time next year when we're giving '28 8 target, that's going to be 1 of the big step-ups in '28. .

Your next question comes from Mike Crawford from B. Riley Securities.

Just to continue on that hypersonics discussion. If you look at like any other provider like say, [indiscernible], which has its low-cost black-fired hypersonic missile. When they do testing, that's got to be on one of your [indiscernible]?

Okay. I cannot talk about [indiscernible], but I can tell you that it was recently announced by 2 separate companies. You can go look. They're going to be launching things on Kratos' systems. I'll give you a specific one that happened yesterday, Mike. Take a look at hypersonics with an X down in Australia. They just closed the funding round. They have the DART hypersonic drone. We have exclusive rights for that in the United States. That specifically will be launched on Kratos' [indiscernible].There's a lot of information on that because of the funding round they just closed. The spirit of what you said is correct. I just have to be careful on NDA [indiscernible].

Okay. I understand. And maybe then just shift gears. What opportunities do you have in next-generation command and control?

That's primarily -- that's primarily -- we can't -- I can't talk about that early. We're involved in it. I'm not going to get into it. Sorry. You're asking some stumping questions my friend.

Your next question comes from Jan Engelbrecht from Baird.

Eric and Deanna, grass in a really strong trend. I'd like to get some more details on Valkyrie. Just if we look at the 26 presidential budget request, there was $158 million for the prototype. That's a 12-month contract -- but then in the reconciliation bill, there's $270 million for sort of our quality of development integration and production of Marine Corp unmanned combat aircraft. And to my knowledge, Valkyrie is sort of one of one. So just wanted to get your thoughts there. And then also just the recent marine force design up there in October. They said that were going to be 2 more flights this year. Is this for calendar year 2025? Or is it government fiscal year '26?

Yes. Yes. So on the first part of your question on the budgeting and what you saw in the reconciliation, Bill and your takeaway on that is absolutely correct. Absolutely correct. And that is 1 of the areas on how that will be spent over fiscal -- fiscal '26 and '27. That is something that's being ironed -- was being ironed out real time is kind of delayed now with the government shutdown. So that's what's going on there.

Your question on Marine Force structure, I cannot for obvious security reasons, get into flight schedules. However, I'm glad you brought that up. I did not mention it in my prepared remarks. You may have seen the paper the marines put out last week.on their force structure and their priorities. And on 2 of the critical capability areas, the Valkyrie was specifically called out, which tie them to they're moving out on their program of record.

Perfect. That's really helpful. And then if I can have a quick follow-up, on [indiscernible]. So I just wanted to sort of understand exactly what solid rocket motor area credit is going after. I would assume that it's sort of small diameter, tactical missiles, but does it extend to larger missile spend applications. And then just what -- how should we think about sort of a realistic market share capture? Sort of how long it's operational by 2027, the facility, but then as you do qualification and testing just so we don't get ahead of ourselves for when revenue can ramp? If you could just size that up for us as well.

Yes, sir. So initially, Prometheus will be on tactical missiles exactly as you referred to. So I'll give you an example, so like a [ Tamir ], for example. So tactical missiles, not large rocket systems like [ Zoos ], which is like 32 or 33 inches or Oreo, which is like 23 inches. These are going to be tactical in nature. And as you know, we have -- I can't use the word commitment. We have an indication from our partner, Rafael for both on the rocket engine and the energetic of tens of thousands of those once this is up and running. That ties into the second part of your question on the market share, okay?

Our primary initial thesis that closes the business cases with our partner, Rafael and missiles energetics requirements and solid rocket motor requirements that Rafael has both internationally and in the United States. Business cases closed with that. Now to answer your question. We are already -- we have been in discussions for several, several months now with the platform guys. So think Lockheed, think Raytheon, think [indiscernible], the guys that don't necessarily want to go to ATK or Aerojet because they're part of another company, there are competitive reasons to get their solid rocket loaders, Okay.

The demand, as you know, is incredible, and it's going to be there for the foreseeable future. We expect, as I've said before, that once this is up and running, both with the Rafael piece and the third-party piece, this will be $1 billion or multibillion-dollar valuation business. I don't want to give market share guesses right now. My perspective is, and I'm pretty sure I'm right, the market opportunity here is so big because the demand is so big, especially because there is no merchant supplier out there that has qualified systems other than Prometheus, we're going to do great.

Your next question comes from Jonathan Siegmann from Stifel. .

So in the news, there was the XQ58 lion with AI by the Air Force. I was wondering if you could comment a bit on that and any kind of update on opportunities with the Air Force. And then second, on the Valkyrie again, just you're partnered with a handful of companies on 3 continents that integrate the mission systems with the aircraft. Some of these new guys are pitching their secret sauce as their own AI attached to a specific aircraft. Can you just kind of contrast your open mission system architecture with the new entrants?

Yes, I'm glad you mentioned that. Yes, the Valkyrie has been flying with the United States Air Force. We've been flying with F-22 now F-35, F-15s, F-16s, and we're doing that we're doing that relatively routinely. I believe the Air Force put something out on that. I cannot get ahead of the customer, but I'm the CEO. I drink [indiscernible]. I feel great about our position with the Valkyrie and our other drones with the Air Force because they've been flying since Valkyrie since 2019. And -- they've deployed weapons, they're low cost, they're affordable. They are flown with multiple artificial intelligence. I call it augmented autonomy packages, both in the government and of many of the other guys that are out there. .

So second part of your question, take a look at Athena. I can't talk about that's classified, but Athena has been flying for quite a while, and it just knocked out a number of Athenas informed with one of the new defense tech artificial intelligence companies software on board, just knocked it out of the park. And so that customer is getting an incredible amount of data from that. And there are many more of those that we're doing. We just don't talk about them. Again, it's RDT and [indiscernible].

On the third part of your question, I don't want to speak for any of these other companies. I'll speak for Kratos. Okay. We have been flying augmented autonomy, artificial -- if you will, artificial intelligence, the new buzzword, okay, interloop autopilots for years, decades, we have people that have been doing this, okay? So have the big primes. This is not a black box type thing, in my opinion. It's just not black box type thing. And we should know since we have probably 8 to 10 different jets flying with it right now.

So I'm not going to comment about the other guys. I'm not worried about them 1 bit in any way at all. We're going to win, and I think by today's report, especially with this MTCR rule change and this interpretation on the position paper that Marco Rubio put out at state, the fact that we've got these planes flying right now. You said about the continents and everything, this is why. And we're going to be -- I think this time next year, we're going to be under contract for jet aircraft in a handful of 5 different countries.

Your next question comes from Anthony Valantine from Goldman Sachs.

Eric, I just want to quickly return to some of the Valkyrie comments that you guys made. Maybe 2 quick ones for you there. What do you guys have in WIP today? And what's the current annual capacity for Valkyrie? .

Yes. So Anthony, we are producing our second lot of -- so we just about completed the first lot of 12 and the second line of 12 should be completed mid next year sometime.

And on the first lot, the second lot -- a number of the first lots have been sold and virtually every 1 of the second lot have -- they're white tails, but they've got a name on the tail, where we're expecting them to go if things go our way. On the second part of your question, today, right now, we can do 50 a year.

Okay. That's helpful. And then, Deanna, maybe on the margin front, I know you guys have talked about this target drone program in the past. It's been a drag, and I think it's supposed to be for multiple more years. How much of a drag is that in '26 and 2027 implied margins?

There's still a drag clearly in 2026 and '27, it's a little bit less because part of the drag is related to our manufacturing overhead. We expanded our Oklahoma target drone facility about a year ago, so -- and it's not at full capacity right now. So that excess overhead cost is also part of the margin drag in addition to the 2 target drone contracts when we're on 5-year production lot contracts. We're about halfway through that. So we've got about another 2-plus years to go. We should be renegotiating the next 5-year production lot in the next year or so.

So we are doing what we can to mitigate the cost as much as possible, doing large supply buys with our suppliers to get as much quantity discounts as we can. But we do have about another 2-plus years to go on that.

Yes. And so coming at it just a different way. In 2028, those 2 contracts will be renegotiated. We should be in production on Valkyrie and/or tactical Firejet and/or Clone Ranger in this new facility, which will reduce their overheads -- the fixed overhead. All of that will be a force multiplier. We could see a significant step up in margins in '28 because of those reasons.

Okay. That's perfect. Super helpful. Eric, maybe like a little bit more high level there. I'm sure you're aware of this, but there's a lot of these defense tech companies out there that are kind of talking about the ability to drive margins that are, let's just call it, 20% EBITDA plus as a result of them spending more on IRAD and having more software and just doing things at scale and at low cost.

So I'm curious, for you guys once you get through the growth opportunities that you have over the next X number of years, is there a reason to believe that this could be a 20%-plus EBITDA margin business? Or is it lower and more in line with Prime? Like how do you guys think through that? And how should we be framing that?

Yes. So on the first part of your question, whoever these guys are that are telling you this, ask them -- tell them to read the truth on negotiation rules or TINA. And then you judge for yourself based on what they're doing if they can make 20% EBITDA margin based on TINA, okay? .

So now to Kratos. Our margins, as we went through today, and as Deanna and I just explained to you, they are going to continue to go up, '26, '27, '28. They would have gone up more in Q3 and in Q4 and for forecasted next year. The bid and proposal in the capture costs that we are expanding right now on new opportunities as prime is incredible. And I mean, look what we just reported. We just reported a 23% growth. We just increased next year's organic growth up to 15% to 20%, and we're projecting the following year's organic revenue growth to be 18% to 23% above next year's 15% to 20%. This is all new programs we've either won or going after and the customers have said, we think you're going to win.

So that's suppressing the margins a little bit. Let's say that cools down a little bit going into '28, '29. This also ties into the question earlier, Anthony, about my line of sight on positive cash flow, okay? This ties into it. If the assumption is that this incredible growth period starts slowing down a little bit, say, 29% or 30%, the BNP will come down, the development contracts which are lower margin will come down. The lines will cross. Our margin rates are going to go up significantly, and we're going to start generating significant cash flow. That's what our models look like right now.

Your next question comes from Ken Herbert from RBC.

Eric, I wanted to ask about the expected procurement reform changes that should get announced later this week by Hegseth and Feinberg. To the extent to which you follow these because they really seem to lean into commercial pricing policies, sort of speed of technology to the Warfighter things that you seem to obviously have leaned into as well. To the extent to which you can comment, how do you view these potential reforms benefiting Kratos and maybe shifting some of these dynamics around either top line or margin opportunity?

Yes. Great question, Ken. I read the sixth page summary briefing that came out this morning on that. Obviously, I'm looking forward to see what the Secretary is going to say on Friday. I believe this is going to be exactly consistent with [indiscernible], with the House SPEED Act with the 3 or 4 executive orders. This is now the Pentagon coming forward. think that this is going to be outstanding for Kratos because what this is basically saying, and I think take a look at what the Marine Corps said yesterday, bring us your products, let us test them and we'll buy them. .

This whole procurement paradigm is changing. It has to change because speed. We have to deploy things, and we have to do it quickly. So I'm very excited about this. Again, I frankly believe this is one of the reasons the venture guys are backing all these new defense tech companies and all the money they've spent on lobbyists, they're helping shape this, they're doing this and which is great for Kratos. And let me tell you what I see coming here is let's take a look at the $1 trillion spend, 50% of that, goes to the war fighter salary as metal in his retirement. That leaves $500 million. About half of that $500 billion or $250 billion is buying hardware and stuff from contractors.

Let's just pick a number, let's just say, 10% of that a year is not going to go to the traditionals anymore. It's going to go to guys like Kratos, that's $25 billion a year, that's going to start flowing to guys like us and the new defense tech guys, that's going to be growing 5% or 6% a year. That's when I talk about structural, and that's what I think you're referring to the Secretary is going to do on Friday. This is structural. It's administration, it's Department of War or Department of Defense, whatever we call it. It's the House, it's the Senate, and it's because of the threat.

Appreciate that, Eric. Just 1 quick follow-on. I mean, obviously, this isn't the first time we've tried fairly ambitious procurement reform -- what do you think is different now in terms of how do you handicap this to perhaps be more successful or to stick, obviously, beyond sort of what's contemplated?

So I think from now until the next election or January of '29, I think that this is going to rip, and it's going to accelerate because of this administration, you mentioned [indiscernible]. There are a number of other ex entrepreneurial, commercial venture guys, private equity guys that are in the administration. So that's important. The administration has many of these people in the right places. That's number one. .

Number two, I'm going to go back to the new tech companies and the venture capitalists that are funding them. They are spending an enormous amount of money lobbying, trying to change the policies. I mean take a look at one of the acts I read and you go to somebody's website, it's like it was taken right off of their website, one of the new defense tech guys. So that is a big change we didn't have before. And one of the reasons the military is doing it and this administration is doing it as they're looking at this money as a force multiplier to their budgets.

This is why contracts are changing now to incentive based. In other words, you 4 guys you win, you each to develop and bring us something. And if whoever gets there first or second, we're going to down select the 2, you get a prize of $100 million. Now you can go to gate #3. Literally, there are procurements coming up that we're involved in that are like this. And so companies whose DNA is to not buy back stock, not pay dividends, but to take your shareholders' money, which we treat every dollar as our own and develop a new product for a specific need or requirement. This is why we're being successful.

Your next question comes from Colin Canfield from Cantor.

So maybe just summarizing the building blocks that you gave in terms of the guidance. It sounds like, based on what we have today, call it, roughly $2 billion revenue line item of $27 million -- and then we get upside from there, call it, maybe Q2 to Q3 on a mix of recore production and then probably Air Force ECA developmental work. So as we think about those building blocks, a, does that building block it -- or does that make sense? B, what are some of the additional U.S. customers beyond Marine Corps and Air Force that you feel really strong on. And then C, is it fair to characterize that starting point as fundamentally being kind of a production doubling cycle as we're going from like low rate initial production to full rate production over a 3-year period subset.

If it's 2 in '28, and it's more like 2.4%. And then maybe it's like 5 years from now, it's a $5 billion. Does that all make sense? .

Yes. Okay. So on your base case assumption that you're talking about, let's put aside tactical drones, put those aside. I'll come back to them. All right. the growth rates we gave you today, which I fully expect will continue into '28 when we give our target next year, that excludes tactical production. Let me give you a big one that's coming that I haven't talked about in a long time, but we are under contract, okay? We are under contract for the ground transporters for Sentinel. This is a multi-hundred million dollar initial contract before it goes into production. This is going to start ramping '27, '28, '29.

So there's a big program of record out there. We are on, it's enormous. I can't get ahead of my partner, Northrop. This is going to kick in for us in some of those out years. That is in our forecast because it's a program of record. Okay. Let me give you another one, please keep this one in mind, too, the jet engine production. Okay. think depending on the size of the engine, these are just the turbojets, this is not GEK, $30,000 to $50,000 per engine for us, okay? So if we get to 1,000 engines a year in '28, which if you take a look at some of these low-cost cruise missile programs that we are designed in on that's not out of the ordinary, that helps get you there.

So putting it to tactical drones aside, we are looking at line of sight on being a multibillion-dollar company over the next several years. As you said, we're going to get to 2 relatively soon. then let's bring in the tactical I don't want to talk specifically about the Marines or the Air Force. I can't do that, okay? But if you take the Valkyrie and what we're doing with the marine, in Europe. One of the other ones I talked about that we're sole source on, but I think I'm going to be able to talk about a lot when we report Q4 in February, okay?

We could be producing -- let's be super duper conservative. 2028, let's say we're doing 50 a year at $10 million each. There is an incremental $500 million, okay? Tactical fire jet okay, use $500,000 to $700,000 per plane just depending on the mission system, okay? This could be 200 to 300 a year by 2028. That's what we're talking here. This is a very important system internationally. This is one of the reasons these rule changes and interpretations are so important for us. right. Okay.

Then there are some other ones that you alluded to. I can't talk about if we're successful on them, I think we're going to be successful in at least one of them, that would start being very material also in 2018. So that's why -- that's the meat on the bone on why I agree with your vision, let's say, through 2030.

Got it. Definitely. Definitely appreciate that color. And then as we think about kind of, we'll call it, like the production style work of essentially like we think of the umbrella, right, it's [indiscernible], with both of them being extremely competitive for each of the mission sets. But the production volumes that follow those likely demonstrate some relative growth that's either exponential or logic, right? More platforms coming on in more software. How do you think about all of that goodness that we just talked about in terms of those building blocks versus the potential upside of those software partners getting more significant growth and thus driving more production towards Kratos?

Okay. So yes, that's a good question. Deanna calls this my CEO stars aligned vision, okay? Let's say that -- [indiscernible] is right with the Barracuda, okay? Let's say that some of the -- let's say [indiscernible]. Let's say, some of these guys are right. On the air reading engine side, okay? This is also the big guy, so take a look at Comet, take a look at lumber Jack, take a look at Franklin, take a look at MACE, take a look at CMMT, okay? All of which are going to need some type of a brain as you're talking about for their mission. They're all going to need engines, and we see how warfare now is quantity.

And it's not going to be quantities of $3 million [indiscernible]. It's going to be barracudas, it's going to be things like that. So let's say my 1,000-engine-a-year type of a thing is low by 2 -- 2,000 a year at $50,000 or 3,000 engines a year at $50,000. This is how we will participate if they're successful, and I hope they are for U.S. national security.

Got it. Got it. And just last 1 to make sure that we have the accretion dynamics ironed out in terms of Orbital -- but maybe just if we do the rough math, it sounds like it's $350 [indiscernible] for LTM EBITDA and then roughly [indiscernible]. So at, let's call it, let's call it a mid-teens, low teens EBITDA multiple of takeout for Remedy's sake. What are the key IP technologies that you view you're getting within that asset?

Okay. So the number 1 that I'm focused on is their miniaturization technology on unmanned aerial vehicles, unmanned ground systems, unmanned ships and unmanned submersibles which has proven in my mind, this is a significant -- this ties into your question on how we're going to ride the coattails on them. This is another avenue for Kratos to participate in vast quantities of systems that need communication capabilities in very difficult environments, including A2AD. This is how I see it for them.

Your next question comes from Andre Madrid from BTIG. .

Eric, Indiana. You previously mentioned were early on the call, you said that hypersonics could be the largest single franchise within the business. And then I think on a note back in early October, you said that this would be a multibillion-dollar franchise for Kratos. Obviously, there's a big difference between being the biggest business and multibillion dollar when might you see it reach the $1 billion range? And what are the puts and takes of that growth across the BUs. I get that that's a lot, and I know there might be the issue of NDAs, but at least what needs to happen for that to occur?

I believe in -- Kratos calendar 2028, it's a $1 billion-plus business franchise. Nothing needs to -- okay, this will happen unless the global piece breaks out. That's it. That's it. That's what it is. .

And the puts and takes, I guess, like, obviously, that touches a lot of the BUs. .

So the puts and takes, I'll take -- I'll do the take first because I'm the optimist. Okay. depending -- you're going to laugh at this one, since we're in the idle of a government shutdown. If the government gets it shipped together and we get budgets or continuing resolutions kind of sort of on time, we could get there in '27, okay? That's the take. The puts, it doesn't happen until '29. We have garment shutdowns and the children argue with each other, and we have more continuing resolutions with additional reconciliation bills and it's a mess, then it's 29%. It's really the funding of the programs of the various programs we have. .

Got it. Got it. No, that checks out. And then maybe a quick one, Deanna, on the CapEx push out on the '26. I mean what business units or programs are going to be most affected by that push out?

It's primarily in the KGS business. So it's our integration payload facility in Indiana. So that's just some of the timing of construction that will happen predominantly in '26 and then our advanced manufacturing facility in Bermingham. So the GEK facility that we're building in Oklahoma, that wasn't scheduled to start until '26 anyway. So just -- it was predominantly those two first ones that I mentioned. .

Your next question comes from Austin Moeller from Cannacord Genuity.

Eric and Deanna, so how do you view your expected long-term revenue mix for U.S. versus international Valkyrie sales, just given the recent commentary and announcements of international partnerships for it.

The -- so let's talk relative and then absolute. On a relative basis, the U.S. is going to be far and away the biggest because that's where the biggest budgets are. And in some of the earlier commentary we were talking about with the [indiscernible] air program, et cetera. However, on absolute dollars, let's go -- we go back to the previous discussion. And what I know some of the programmatic buy plan are on certain of the international guys we're chasing with Airbus. '28, '29 -- let's say -- it's 20-year let's say, internationally, it's 20 or 30 Valkyries a year at $10 million each. So there's a couple $300 million in revenue. That on a relative basis is going to be -- could be very small to the U.S. But on an absolute basis, it could be very important to us.

And Austin, while you're -- since you mentioned this, I want to emphasize something. One of the opportunities that we're chasing that I believe in the tactical high-performance bigger jet drone area is that I believe we're sole source on if this all comes through the government approvals and everything. It's not a Valkyrie. Take a look at our clone Ranger. If you throw that in your bucket international, if that comes to fruition, we're going to know in the next year and then I'll be able to crisply answer your question. International absolute could be even bigger, still on a relative basis small to the U.S., but it could be even bigger because that's a real customer out there that's interested in the clone ranger.

Okay. And what are your thoughts on the Army CCA program that was announced at AUSA? Would this be rail launched or use runways? And would it be potentially paired with Army rotorcraft?

Great. Great question, great question. My opinion is these are not going to be tied to runways for the obvious reason. These are -- and expeditionary reasons. These are going to be rail launched or they're going to be [indiscernible]. You've seen a lot of [indiscernible] come out recently. So these are not going to be runway dependent. They're going to be rail launched or [indiscernible], primarily rail. It's the best way to do it. And I do believe that they will be loosely tied to man helicopter -- loosely type demand helicopter gunship. A lot of them, especially if they use our technology, they're going to be pretty autonomous.

Your next question comes from Pete Skibitski from Alembic Global. .

Eric, I don't know if you can answer this or maybe, Deanna, on MCT, do the economics of that program change for you if you use a Kratos flight test asset [indiscernible] versus a supplier's test asset?

There are different margin rates depending on the content of what we're providing, yes. I can't get into the specifics, but it is...

Okay, higher content is better for you. Okay. And then on Helios, you got the [ $68 million ] contract in October for the new facility. When does that facility come online? And kind of what further awards or contracts are you kind of expecting there? And -- is that connect [indiscernible] or is that fully separate?

Yes. It can be connected to [indiscernible], but it's not tied to it at all, and I'll explain why. So obviously, this is an art and a laser facility for incredible heat to test hypersonic weapons and materials. So it's going to use an enormous amount of power, like crazy electricity. We're down to 2 sites. We're going to be making the decision probably in the next 30 days that either have the infrastructure and the power capacity already or they're willing to put it in, okay? .

This ties into something in my prepared remarks that Kratos does that other companies out there don't do. We don't know and start building a generic 1 billion square foot facility somewhere without a program. okay? Because programs are specific and they require different types of business structure, different types of security, different types of power. So -- and you need a customer that's going to pay for a rate of return. The initial $68 million is to get the facility going, et cetera, et cetera.

So Kratos will build the facility, Kratos will pay for the facility. It will come out of our CapEx. The customer is giving us a contract where we're going to be able to recover that either in the overhead rates on the contractor through a lease plus a rate of return. This is why it's so incredibly positive that our shareholders invest in us to let us do this. It is an incredible force multiplier for us. One facility is up and running. The number of systems, the backlog on hypersonic or high-speed related systems with exotic materials that need to be tested, is incredible here in the United States. As you know, we mall shut this capability down, and that's why Russia and China caught up to us.

So this will be similar to Anaconda and annuity for Kratos. We will own the facility. We will operate the facility. And it will go as I said on Anaconda on the Slide 1, 4 decades. And it will be a multi-hundred million dollar, $1 billion revenue stream for us over time.

Okay. Great. I appreciate it. Last quick one for me. I don't know if you can answer this either, but [indiscernible], can you maybe at least tell us what segment that is going to be in?

No. But I'll make you feel good on this. One of the reasons our book-to-bill was 1.2:1. We got the first big block of Poseidon. So that's -- I'm glad you asked and I wanted to point that out that a big part of our book to bill was the first piece. It was a first piece of Poseid.

Okay. Well, KGS book-to-bill was pretty strong this quarter.

No, I'm not talking .

Your next question comes from Joe Gomes, Noble Capital.

Been a long call, a lot of questions, so I'm going to ask you 1 real quick 1 here, Eric. So with the acquisition -- proposed acquisition of Orbit, a bunch of these CapEx that you've talked about -- how comfortable are you right now with where your cash position is? .

I'm extremely comfortable, like we're in a a very good position. And if I think the opportunity sets out there, so we've had a similar result that we had before, I got to look at that. But right now, I'm looking at -- that's how I feel about it. .

There are no further questions at this time. I'll now hand back to Mr. DeMarco for any closing remarks.

Great. Thank you all for joining us. I appreciate the Q&A. I look forward to speaking with you all when we report Q4 at the end of February. Thank you. .

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.