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…

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…

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.