Kratos (KTOS) Q4 2025 Earnings Call Transcript

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DATE

Monday, Feb. 23, 2026 at 5 p.m. ET

CALL PARTICIPANTS

• President & Chief Executive Officer — Eric M. DeMarco
• Executive Vice President & Chief Financial Officer — Deanna Hom Lund

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TAKEAWAYS

• Revenue -- $345.1 million for the quarter, above guidance of $320 million-$330 million, with 20% organic growth driven by Space and Satellite, Turbine Technologies, C5ISR, and Microwave Products.
• Adjusted EBITDA -- $34.1 million, slightly above the high end of the $29 million-$34 million guidance range, reflecting improved volume and mix, partially offset by higher subcontractor and material costs and elevated proposal pursuit expenses.
• Backlog -- Record year-end backlog of $1.573 billion and a record opportunity pipeline of $13.7 billion.
• Book-to-bill ratio -- 1.3 to 1 for the quarter, indicating strong order intake relative to revenue.
• KGS segment growth -- Kratos Government Solutions revenue increased $54.6 million year over year, with 22.2% organic growth, excluding the Norton Millimeter Inc. acquisition.
• Unmanned Systems segment -- Unmanned Systems revenue increased $7.4 million, or 12.1% organically, primarily due to Valkyrie program activity; tactical drone revenue was approximately $8 million-$9 million in the quarter.
• High-growth business lines -- Defense Rocket Support, Microwave Products, and Space Training and Cyber reported organic growth rates of 47.4%, 32.4%, and 22.7%, respectively.
• Cash flow -- Cash flow from operations was $12.1 million; free cash flow used in operations was $100,000 after capital expenditures of $24.2 million, partially offset by $12 million in proceeds from Valkyrie asset sales.
• Capital expenditures -- 2026 forecasted capital expenditures are $135 million-$145 million, with $30 million-$35 million rolling over from prior-year construction delays.
• Contract mix -- Fourth quarter revenue mix was 70% fixed price, 26% cost type, and 4% time and material contracts; 67% of revenues came from U.S. federal government contracts.
• DSO increase -- Days sales outstanding rose to 121 days from 111 days sequentially, attributed to revenue growth and federal administrative delays from the government shutdown.
• Hypersonic franchise -- Management expects to double hypersonic franchise revenue in 2026 (to about $400 million) and increase it by over 75% in 2027 (to approximately $700 million), contingent on program awards and integration of large solid rocket motor orders.
• New facility investments -- Facility buildouts are advancing, including the Maryland hypersonic site, Indiana hypersonic integration facility, and Birmingham manufacturing expansion, aligning with booked and projected hypersonic and engine contract demand.
• Prometheus joint venture -- The Prometheus solid rocket motor/energetics facility with Rafael has begun construction, with Kratos forecasting approximately $50 million in aggregate investment during 2026.
• Space and Satellite milestones -- Epic Command and Control software passed factory acceptance testing with Airbus’ OneSat next-generation satellite platform; business reported a book-to-bill ratio of 1.2 to 1 and record $600 million backlog.
• Major program awards -- Kratos was verbally informed of an initial $500 million program win in its space and satellite business and reported selection for hypersonic missile and propulsion development by the Pentagon.
• Production rate increase plan -- Kratos plans to scale Valkyrie tactical drone production from eight to approximately 40 aircraft annually by 2028, contingent on contract definitization and federal budget approvals.
• Microwave electronics -- Microwave Products business showed 17% organic growth in 2025, with at least 50% of revenue sourced from missile and air-defense programs.
• Tuck-in acquisitions -- Acquisition of Nomad Global Communication Solutions (LTM revenue of $75 million) closed; Orbit Technologies acquisition expected to close by the end of Q1 2026, with financials excluded from current guidance.
• Guidance for 2026 -- Full-year revenue guidance is $1.59 billion-$1.675 billion, reflecting 12.7%-18.5% organic growth, and Q1 guidance is $335 million-$345 million revenue (7.5%-9.5% organic growth); adjusted EBITDA forecasted at $25 million-$30 million for Q1.

RISKS

• Deanna Hom Lund stated, "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."
• Ongoing increased material and subcontractor costs continue to pressure margins in unmanned systems, with Deanna Hom Lund stating the company is "unable [to] seek recovery from the customer until the renewal of future production lot contracts occurs."
• Company guidance acknowledges ongoing use of working capital to fund growth due to increased accounts receivable and inventory, with further delays in government contract funding impacting collections and liquidity.

SUMMARY

Kratos Defense & Security Solutions (KTOS +1.77%) reported high double-digit organic revenue growth, record backlog, and a robust book-to-bill ratio, supporting management's outlook for accelerating growth in 2026 and 2027. Executives disclosed significant program wins and major pipeline opportunities across hypersonics, tactical drones, space software-defined systems, jet engines, and microwave electronics, with facility investments calibrated to support anticipated contract demand. Management emphasized alignment between Kratos’ R&D-led, capital reinvestment strategy and evolving U.S. and allied defense priorities, highlighting sustained funding visibility and market position as a qualified, non-traditional prime and merchant supplier to leading defense contractors.

• Eric M. DeMarco said, "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," reflecting industry urgency and operational readiness.
• Management outlined that no major contracts are rolling off in the near or medium term, minimizing visible revenue attrition risk for the outlook period.
• Investment in program expansion—including Prometheus, Anaconda, Helios, and Poseidon—is set to drive both topline and margin enhancement over the next 24 months.
• Guidance does not include pending Orbit Technologies' contribution; future updates are contingent on deal closure, signaling potential upward revision in subsequent quarters.
• Kratos’ status as both a prime and a sub-contractor on large defense programs, such as MUX TAC Air and Drone Dominance, is enabling diversification of revenue streams and positioning the company as a key industry supplier.

INDUSTRY GLOSSARY

• Book-to-bill ratio: A measure comparing the amount of new orders ("bookings") received to the revenue ("billings") recognized in a period; a value greater than 1 indicates growth in backlog.
• KGS: Kratos Government Solutions, the company’s segment focused on defense hardware, space, satellite communications, and related national security work.
• Unmanned Systems: Kratos’ segment for unmanned aerial, ground, and sea-based platforms, including tactical drones and related products.
• MUX TAC Air: Marine Air-Ground Task Force Unmanned Aerial System Expeditionary program, awarding contracts to produce collaborative combat aircraft (CCA) such as the Valkyrie drone.
• Prometheus: Kratos’ joint venture with Rafael for solid rocket motor and energetics manufacturing.
• SRM: Solid rocket motor, propulsion components used in hypersonic and missile platforms.
• OpenSpace: Kratos’ software-defined networking and command and control solution for satellite ground systems and space situational awareness.
• DSO (days sales outstanding): An efficiency metric reflecting the average number of days it takes to collect payment from customers after a sale.
• Valkyrie: Kratos’ jet-powered tactical drone platform targeted for collaborative combat aircraft programs.
• CCA: Collaborative combat aircraft, category of unmanned aerial vehicles to operate alongside manned military fighter jets.

Full Conference Call Transcript

Eric M. DeMarco: We finished 2025 exceeding our financial objectives for the fourth quarter. Generating approximately 20% Q4 year-over-year organic revenue growth generating a 1.3 to one book to bill ratio on top of this 20% growth rate. Having a record backlog of $1,573,000,000, a record opportunity pipeline of $13,700,000,000, and with the opportunity set for Kratos having never been stronger, and expected to continue to increase based on recent events, of note, generating a 1.3 to one 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 US federal government shutdown being resolved, the 2026 NDAA being signed, the fiscal 2026 defense appropriations bill being signed, and the President, the Chairman of the SASC, each proposing future defense budget increases of approximately 50% up to $1,500,000,000,000.

Additionally, discussions have already begun on a second additional 2026 reconciliation bill, including a potential additional $450,000,000,000 for defense. There is a generational recapitalization of the defense industrial base underway, driven by the 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 US and its allies expected to increase for the foreseeable future. Crisply stated, we now have a $1,000,000,000,000 annual defense spend that is expected to increase for the foreseeable future.

And as a result of the defense industry consolidation began with the infamous DOD Last Supper in 1993, there are few qualified companies with proven capabilities to address the required military grade hardware, software, and weapon systems demand. Kratos is one of the few non-large traditional prime contractors which in my opinion is qualified to adequately address this demand. 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 day’s 100% potential threshold, at a ridiculous high cost. As you know, pillars of Kratos’ strategy since we founded our company include “better is the enemy of good enough” and “ready to field today,” and affordability as a technology. Both of which I believe are aligned with the Secretary’s comments and clear differentiators of Kratos in today’s environment. Another Kratos strategy pillar, also since our inception, is that Kratos makes true internally funded investments ahead of government funding enabling Kratos to move fast, efficiently, and affordably for manufacturing capability, and relevant products for the warfighter.

Additionally, Kratos’ practice of not paying dividends or buying back our stock but of investing our capital in the defense industrial base is also aligned with the vision of the current administration. And also the related opportunity environment which Kratos is realizing the benefit from. Kratos’ strategy of being first to market with actual relevant products is clearly a differentiator to our customers and partners, as we are seeing firsthand the demand for Kratos’ jet drones, hypersonic systems, jet engines, satellite-defined software systems, and solid rocket motors. Having products and not power points 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. 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.

Eric M. DeMarco: Now have 120 Kratos, Zeus, and Oriel solid rocket motors on order. With deliveries of the SRMs to Kratos for system integration expected to begin in Q3 of this year. Which SRMs are directly related to either under program contract or expected hypersonic and other launches that we plan to perform. Related to these solid rocket motor orders, Kratos’ hypersonic franchise is expected to ramp rapidly beginning now this year. Kratos’ Zeus solid rocket motors were specifically designed by Kratos for affordable, rapid, full rate production to enable national security customers to fly more often faster, and farther using fewer rocket motor stages at a substantially reduced cost, and demand for Kratos’ Zeus SRMs is significant.

Our newly opened Maryland hypersonic facility, our soon to open Indiana hypersonic system integration facility, and the expansion of our Birmingham advanced manufacturing facility for hypersonic systems along with the solid rocket motor deliveries are key elements of Kratos’ expected near term and future revenue growth trajectory and EBITDA increase. These new Kratos facilities are specifically designed and built for identified programs and systems, and the related security requirements. With specific capabilities identified with our customers and optimized for large scale integration and production speed, efficiency, and cost.

It was recently reported that Kratos has been selected by the Pentagon to develop highly maneuverable Mach 5+ 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 $1,000,000,000 plus hypersonic program related opportunity by the end of this year. Which we believe will be sole source to Kratos as prime on an existing national security initiative. We are expecting to approximately double Kratos’ franchise revenues in 2026 over 2025. Up to approximately $400,000,000 and then potentially increase over 75% again in 2027, up to approximately $700,000,000.

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 initiative’s coordination with the Department of War, the department last week also announced the groundbreaking of a new munitions campus where Prometheus is located and Prometheus will be the primary business presence.

Kratos’ space and satellite business, our company's largest, recently achieved an important milestone with the successful completion of a factory acceptance testing between Kratos’ Epic Command and Control software system and Airbus OneSat next generation software-defined satellite platform. The Airbus OneSat software-defined satellite platform offers dynamic, in-orbit reconfiguration capabilities, significantly increasing satellite mission capabilities and flexibility, which drive new levels of complexity for the ground command and control systems that manage them. The significance of this successful acceptance test with Airbus is that Kratos’ Epic C2 software is expected to unlock the agility of Airbus’ OneSat platform enabling operators to instantly reshape coverage reconfigure the missions in orbit.

Kratos’ OpenSpace 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, software, these are not PowerPoints or convenient talking points. We actually do it. In my opinion, Kratos’ suite of internally funded and developed software-defined command-and-control, 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 domain 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 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 tools 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 twelve month book to bill ratio of 1.2 to one and now having a record backlog of $600,000,000 at the 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 $500,000,000 program award 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 2025, 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 margin for our company, which we once again expect and forecast to occur in Q4 2026. The Department of War has recently established a new acquisition model to expand munitions procurement and production, including delivering long term demand signal certainty to the industry, and incentivizing private investment to increase production.

Related to this initiative, the Department of War has executed multiple up to seven year deals including with Lockheed and Raytheon for air defense, missile related, and other systems, including several programs that Kratos supports. 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, important Kratos technology differentiator. And we are a go to provider of hardware for our national security related and partners.

Accordingly, we applaud the Department of War on these long term production agreements and plans, which clarity provides companies like Kratos the long term planning visibility for investment, resource allocation, and financial forecasting confidence. In Kratos Turbine Technologies and our engine business, there are several new low cost cruise missile, drone, hypersonic, and loitering munition programs and systems that require next generation new technology, engines, and propulsion systems. And here again, Kratos is first to market. Including with our Spartan family of jet engines which are running and flying today.

We continue to win important new engine related program awards, including what we were able to report this morning, that Kratos and our partner GE Aerospace have now received an award from the Air Force to design an engine for the expendable combat collaborative aircraft or CCA. I can now also report that Kratos expects to begin low rate initial production of small engines in the 15,000 engines for a system that has been specifically designed around a Kratos Spartan jet engine. Directly related to the expected future quantities of low cost missiles, drones, and powered munitions required. We are now in our new 40,000 engine per year capacity facility in Michigan.

The expected ramp in our engine and propulsion system businesses which can generate certain of our company's highest margins including from the financial leverage we expect to realize on certain fixed manufacturing overhead and other costs as the business ramps, are expected to be contributors to our expected increased overall rate of EBITDA margins as we progress through 2026 and into 2027. 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 eVTOL area, under what we refer to internally as Project Pegasus where Kratos is designing and is expected to deliver propulsion systems including for a very well known eVTOL company. Kratos’ technology and propulsion systems in the eVTOL area is another representative example of Kratos being a provider of real dual use products. Kratos Microwave Electronics is also expected future high growth business area for our company, including in the US, 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 recent met recently met in Israel with my very close partners, including the CEOs of Elbit, Rafael, and Israeli Aerospace Industries, each of which Kratos has been working with for decades. Simply stated, virtually every national security system globally needs military grade microwave electronics. And we are focused on investing in and growing this business area to support our partners.

Consistent with our expectations and what we communicated in our Q3 update call, we recently announced that our teammate, Northrop, received the MUX TAC Air collaborative combat aircraft or CCA program award with Kratos Valkyrie as the CCA aircraft equipped with Northrop’s mission systems. It was also reported that MUX TAC Air was a competitive CCA solicitation that Kratos’ Valkyrie won and was selected for. As I have mentioned before, Northrop is an incredibly valuable partner of Kratos. And one of the most innovative technology companies in the industry and this includes the new defense technology companies. Reported, this initial MUX TAC Air award is approximately $2,230,000,000 and will be split approximately fifty-fifty between Kratos and Northrop.

An approximate twenty-four month period of performance also consistent with our previous expectations. As a reminder, there is initial MUX TAC Air funding of $275,000,000, included in the 2025 reconciliation bill and an additional $58,000,000 included in the 2026 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 on being the first CCA expected to be fielded.

But I encourage you to take a look at this data as I believe it validates the current favorable competitive positioning of Kratos Valkyrie and the future expectations that we have for this system. Importantly, we have now also successfully received another separate US tac drone program of record contract award. But we are not allowed to provide any details at this time. Additionally, I believe that we are in a sole source position for two additional tactical drone opportunities including for Valkyrie, which we will hopefully receive in late Q4 this year.

We are also in another competitive CCA solicitation with the Valkyrie and a partner, which we also currently expect to be notified on by the end of this year or early next. As a result of our recent progress, we intend to execute a plan to increase our production from a current approximately eight aircraft annually up to a projected annual production rate of approximately 40 aircraft annually by the 2028. We currently expect to have definitization 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 $1,000,000,000 Drone Dominance plan to acquire small lethal drones over the next two years. We have a family of small drones in this class that we have not discussed previously. This is a phase one award. This program is scheduled to move very rapidly. And if we continue to be successful in future phases, Drone Dominance could be another meaningful program to our company. Kratos’ Mighty Hornet tactical fighter jet CCA program initiative continues to progress with the Taiwan NCSIST, and we have certain future flight related milestones we need to achieve.

With the potential production decision possible late this year or early next. As was recently reported, with the Taiwan NCSIST, the ultimate objective of this program is for very high quantities of affordable mass fleet of Mighty Hornet systems to be deployed in Taiwan. Kratos’ Athena program and UAS had additional successful flights under contract with the US 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 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 twenty four months contributing to the expected future growth margin, and value increases for the business. New initiatives that Kratos is currently either pursuing or assessing that I can mention, include Kraken and Ares, both in the hypersonic area, Vulcan in the rocket system area, and Elysium which is the largest. And for competitive reasons, I will not get into it this time. Each of these if successful, have either customer or partner backing. Kratos’ business plan remains unchanged.

Including that we do not buy back stock or pay dividends, but rather we invest our capital in rebuilding our country's defense industrial base. Rapidly developing, producing, and delivering affordable relevant systems to the warfighter, 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?

Deanna Hom Lund: 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 $345,100,000 above our estimated range of $320 to $330,000,000. With overachievement of forecasted revenues across the majority of our businesses, with a revenue organic growth rate of 20% over the fourth quarter 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 Q4 2025 was $34,100,000, just above the high end of our estimated range of $29 to $34,000,000. Reflecting the increased volume and revenue mix offset partially by continued increased subcontractor and material costs on certain multiyear fixed price contracts in our Unmanned Systems business revenue mix, and elevated bid, proposal, and other new opportunity pursuit costs.

Unmanned Systems fourth quarter 2025 revenue was up $7,400,000 or 12.1% organically with the increase primarily driven by Valkyrie-related activity. KGS fourth quarter 2025 revenue was up $54,600,000 year over year from the 2024 with organic revenue growth of 22.2%. Excluding the impact of the February 2025 acquisition of certain of Norton Millimeter Inc. Fourth quarter 2025 cash flow generated by operations was $12,100,000 primarily reflecting the working capital requirements related to the revenue growth impacting our receivables by approximately $29,000,000 and increases in inventory of $20,000,000 and increases in other assets of approximately $3,000,000. 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 Q4 2025 was $100,000 after reflecting funding of $24,200,000 of capital expenditures net of $12,000,000 in proceeds from the sale of Valkyries which were reported as company-owned capital assets and previously classified as capital expenditures and, therefore, reflected an inflow in investing activity 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 Q4 2025 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 US federal government during the fourth quarter were approximately 67% including revenues generated from contracts with the DOD, and non-DOD federal government agencies and FMS contracts. Now moving on to financial guidance. Our financial guidance we provided today includes our expectations and assumptions for our supply chain’s execution, the impact of employee sourcing, hiring, retention, and the related cost. Our first quarter and full year 2026 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 2026 guidance to be the lowest in revenue and adjusted EBITDA, which includes the impact of the extended US federal government shutdown in the Q4 2025 with impact to certain contract awards, program, and funding. Our first quarter revenue guidance of $335,000,000 to $345,000,000 reflects estimated organic growth of 7.5% to 9.5% as compared to the 2025.

Adjusted EBITDA guidance of $25,000,000 to $30,000,000 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 2026 growth. Our full year 2026 revenue guidance is $1.59 to $1,675,000,000, 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 subcontract subcontractor costs on certain of our multiyear fixed price contracts specifically in our Unmanned Systems target drone business where we have experienced cost growth from certain ancillary materials on our targets and for which we are unable seek recovery from the customer until the renewal of future production lot contracts occurs. We are continuing to aggressively manage costs where we can to minimize the impact to our margins.

Our operating cash flow guidance includes a continued use of working capital to fund our organic revenue growth which includes the increase in accounts receivable and the impact of delays in contract funding to enable customer billings and collections and increases in inventory and related prepaid asset balances as we ramp production and procure long lead materials for our target and tac 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 2027.

As well as the completion of certain of our Unmanned Systems and related derivatives and vehicles. Additional forecasts and investments in 2026 include our funding at the Prometheus joint venture established last year which we estimate will be ratably throughout 2026 for an aggregate for the year of approximately $50,000,000, funding of the pending Orbit Technologies acquisition, our Anaconda radar program, our Helios hypersonic and ARC chamber program, our Indiana hypersonic integration facility, our GEK and BladeWorks engine facilities, and our Vulcan, Kraken, Elysium, Nemesis, Hermes, and other initiatives. Our forecasted capital expenditures of $135 to $145 million for 2026 includes approximately $30 to $35,000,000, which was originally forecasted for 2025, which has moved to the right.

Eric M. DeMarco: Great. Thank you, Deanna. We will now open for questions.

Operator: Star 11 on your telephone and wait for your name to be announced. To remove yourself, press star 11 again. Our first question comes from the line of Josh Sullivan with Jones Trading. Please proceed.

Josh Sullivan: Good evening, Eric. Deanna? If I could just start off with a question on maybe some of your perspectives on defense tech valuations in the market reports of Anduril reportedly have $60,000,000,000 $3,000,000,000 in funding. What do you think that means for Kratos? And what would an order of magnitude of nearly $8,000,000,000 allow Kratos to accelerate? You just mentioned a number of programs and wins you are working on. And then tied in with, you know, the Secretary's comments you also mentioned. Okay.

Eric M. DeMarco: So I believe that Kratos is the most valuable defense company in the industry. Private or public. I am taking nothing away from Anduril or any of the other defense tech companies. I want them to all succeed. For US national security. But we are the most valuable and I can go through that if you would 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 are doing, invest significant amounts to rebuild the industrial base like we are doing, but always be mindful of generating an adequate return on investment for the investors.

So that is how I see it, Josh.

Josh Sullivan: Got it. And then I guess just on Kratos’ partnership with Boom and the superpower IGT, know, I know there is 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 have announced?

Eric M. DeMarco: Right. Yep. So 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. To your question, Josh, when Kratos acquired Florida Turbine, in 2019, the primary business of Florida Turbine was industrial gas turbines. That is our expertise. Kratos’. We have not been focused on it and talking about it because we have been we 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 we are moving out on this aggressively.

Our number one priority is to do it with our partner. But this is an area of expertise for us and we have a we are a merchant supplier. And there are multiple companies in this area that are coming to us now for our assistance.

Josh Sullivan: And then and then just one last one on the THAAD order you can you just remind us of Kratos’ exposure on the ground and infrastructure equipment?

Eric M. DeMarco: Yeah. So as I alluded to in the remarks, the Department of War moving out with the big primes on the air defense systems and the missile systems, Lockheed and Raytheon, multiple platforms on each one of them. I mentioned I mentioned Northrop looking to I think they said they are gonna go up four 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 battle command systems, etcetera, etcetera, for virtually every missile and radar system. So this is this is significant for Kratos, for our business. And for our clarity going forward.

These long term I will call them supplier commitment agreements, the Department of War is doing with the prime. Because we are partnered with the primes. On, as you said, THAAD and Patriot and Indirect Fires. IFPC, on Integrated Battle Command System on SHORAD. I could go I could go on and on. This is this is important for us what is happening here.

Josh Sullivan: Great. Thanks for the time.

Eric M. DeMarco: Thank you.

Operator: Thank you. Our next question comes from the line of Michael Frank Ciarmoli with Truist Securities. Please proceed.

Michael Frank Ciarmoli: Hey, Eric. Evening. Nice results, and thanks for all of 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 will have roughly $200,000,000 in cash. And know, I think, obviously, spending your own money, not doing buybacks or dividends clearly align. But have you talked or engaged with the Department of War or even Office of Strategic Capital? I mean, there has been some pretty creative transactions out there. Just curious terms of color there.

Deanna Hom Lund: Yeah. And Mike, thanks for the question. So the CapEx table that we have 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 have we have tried to present what we think are is the worst case for 2026.

Eric M. DeMarco: Got it. And, yeah, and my a data point on that, take a look. Announced yesterday or the day before, they just received another 40 or 45 middle. In Title III funding we are Kratos is right in the middle of that on Title III funding, IBAS funding, etcetera. And as Deanna said, throwing the gross number out there. But I believe you will see significant number of offsets this year.

Michael Frank Ciarmoli: Okay. That is 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 do not know if it is easy to maybe tie it to the $13,700,000,000 pipeline you talked about, but anything jumping off the page there?

Eric M. DeMarco: Yep. The hypersonic franchise, like, I was obviously, I was at I was in Indiana this week. I was at Crane for the groundbreaking of Prometheus. And right next to right next to where we were breaking ground, is Kratos’ hypersonic integration facility that is 90% complete. Right? Right next to that, we have broken ground on Anaconda. And behind it, we are gonna 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.

Michael Frank Ciarmoli: Okay. Okay. That is helpful. So that $700,000,000 line of sight you talked to, I mean, it sounds like there could be upside to that. Based on breaking around the national okay. Absolutely.

Eric M. DeMarco: No question. If we were to get a 2027 appropriations bill kinda sorta on time, instead of a four month continuing resolution. That would be a home run for Kratos.

Michael Frank Ciarmoli: Got it. Okay. Good stuff. I will get out of the way here. I got there is a lot of detail there that you have given, but thanks for the call, I guess.

Deanna Hom Lund: Thank you. Thanks, Mike.

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

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

Eric M. DeMarco: Absolutely. We are 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 are gonna do that. I mentioned that we have 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 when 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 is a risk reduction. For Kratos. And we are getting a full stop profit margin on the aircraft. And last point, I am really glad you asked this. Last point, we are kinda sorta turning into the merchant supplier of tactical jet drones.

Because we are the only guy that has anything flying right now. You have 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 are 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 is what we are gonna do.

Anthony Valentini: Okay. And that makes sense. Eric, I think that you had talked about in the past that being $10,000,000 a copy. Is that the right way for us to continue to think about it with Northrop the prime and 50/50, you know, split of the revenue? So you guys are $5,000,000 of content per aircraft.

Eric M. DeMarco: That is not that is that is no. No. Do not do not look at it that way. Nope. 10 look at $10,000,000 per aircraft for Kratos. Might be a little less, might be a little more depending on the configuration. As you know, we have we have three different Valkyries now. That are three different ones, rail launched, trolley launched, conventional takeoff and landing. So depending on the type of aircraft, it might move around a bit. But if you use 10, you are in good shape. For Kratos.

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

Eric M. DeMarco: There is nothing of significance rolling off. We have zero recompetes of any size. For the foreseeable future. We won the last one last year, command and control of the space segment. For seven plus years. We are in a very fortunate position because we are a hardware company. And an intellectual property company.

Anthony Valentini: Okay. Great. Thank you, Eric.

Eric M. DeMarco: Thank you.

Operator: Our next question comes from the line of Michael Roy Crawford with B. Riley Securities. Please proceed.

Michael Roy Crawford: Thank you. I hope you are doing well in that Gauntlet competition that started five 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 counter UAS area?

Eric M. DeMarco: We have a family of small drones, class one drones, some class two drones that we just have not 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 gonna be successful in the first round. And we were. And the way this works in summary, is there are different phases, phase one, phase two, phase three, etcetera. 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 do not 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 is really all I should say about it because it is literally in we are gonna be going out there very, very soon if we continue with phase one.

Michael Roy Crawford: And then on so these would be more offensive and so you are not involved in the counter UAS phase of that competition?

Eric M. DeMarco: I have been focused on the offensive one, Mike. 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.

Michael Roy Crawford: Okay. Thank you. And just one more for me. Can you just go a little bit into the CAPE capabilities that you have gained with Nomad and maybe potential LTM revenue that business had.

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

Deanna Hom Lund: Yeah. So LTM fiscal year revenue is about $75,000,000, Mike.

Michael Roy Crawford: Okay. Excellent. Thank you very much.

Operator: Thank you. Our next question comes from the line of Jonathan Siegmann with Stifel. Please proceed.

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

Eric M. DeMarco: I will 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 are preparing for. Where we have to do something. Our understanding is that if we are successful there, we have done something like this before, so this is not a bleeding edge type of a thing. That a production decision will be made in the second half of this year, Q4. I believe the Taiwan agency that we are working with, they did an interview, I think, at the Singapore Air Show few weeks ago, where they have said that they are looking for hundreds, if not thousands of these.

And to be deployed ASAP as a deterrence. That is the extent of what I can discuss with you right now. I would like to emphasize the reason why we have won where we are is because our tactical fighter jet and our Airwolf small tactical jet drones have been flying for a long time. They are both in production. The customer comes to the factory. They can see them in production. They can see the cost buildup. So they know what they are gonna cost, and we can give them actual flight performance data.

And we are seeing this more and more now as I mentioned in my remarks, many customers feel that they are out of time and they need to start fielding things now in order to deter, and that is where we are in Mighty Hornet.

Deanna Hom Lund: 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 is gonna be as performed. But for aircraft, it is gonna depend on the contractual terms of whether it would be percentage completion or at delivery. So it will be dependent on that.

Michael Roy Crawford: Okay. Great. Thanks for the color, guys. I will go ahead and hand it back over.

Operator: Thank you. Our next question comes from the line of Kenneth George Herbert with RBC Capital Markets.

Michael Frank Ciarmoli: Yeah. Hi. Good afternoon, Eric and Deanna. Hey, Eric. You talked about the funding backdrop and the supplemental, the $450,000,000,000 that sounds like will get requested and debated here this spring. How do we think about your top line organic growth numbers you have put out maybe if we are in a $1,500,000,000,000 potential for fiscal 2027 relative to a sort of a you know, maybe low to mid single digit growth in spending all in.

I mean, it sounds like you are gonna hit your numbers even if defense spending comes in at slight growth relative to fiscal 2026 in 2027, but how do you think the puts and takes and the budget impact your outlook here in the next one to two years?

Eric M. DeMarco: Yep. So what you just said at the end there is exactly correct. Putting aside assume a normal growth trajectory for our defense budget, so let us say 5% a year. We are in great shape to achieve, if not exceed, our forecast for 2026 and 2027. With it potentially accelerating in 2028 and 2029. 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 gonna be, as I mentioned before, number one is gonna be the hypersonic area.

That is gonna be a significant growth driver for us. Number two, and this is very recent, our space and satellite business. As I mentioned, we were just informed that we have won a brand new just under half $1,000,000,000 program. So, hopefully, we are gonna 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 is gonna be kicking in later this year, and I expect it to accelerate in 2027 and seriously in 2028, is the small engines. We are designed in on a number of new cruise missiles.

And I expect us to go on LRIP later this year, and we could get into full rate production as early as 2027. We are in really, really good shape under the current funding construct. If the budgets go from $1,000,000,000,000 to $1,500,000,000,000, I believe if the priorities do not change, I do not believe they will because the threat environment is not gonna 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 is gonna be more demand than supply of stuff.

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

Eric M. DeMarco: Yeah. Very recently in the past three weeks, four weeks, we have seen an acceleration. I believe it is because a month ago or so, the 2026 appropriation was signed. So I think that is what is driving the acceleration that we are seeing. We are starting to see some of the reconciliation money come in. I think there is $120 of the $150,000,000,000 is gonna be spent in fiscal 2026. We are starting to see that come in. I anticipate that is gonna be accelerating this quarter, Q1 and Q2. So overall, right now, Ken, the environment is very good and it is improving for us and I believe for the industry.

Michael Roy Crawford: Great. Thanks, Eric.

Eric M. DeMarco: Yep.

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

Colin Michael Canfield: Hey, thank you for the question. Maybe if you could talk about the sensitivity of the tactical drone production quantities that you have discussed in a sense how do we think about kind of the 40 units per year versus the other branch opportunities that you are considering?

Eric M. DeMarco: Right. So as I mentioned, we are looking at approximately to get to a run rate, production rate, an annual production rate, of approximately 40 per year. Think 35 to 45. So the midpoint was the 40. What the number one driver on that is the mix of airplanes. Whether it is going to be a conventional takeoff and landing, a CTOL, whether it is gonna be a dual capabilities, a runway and rail launch or it is gonna be rail launch. So that is the number one that is gonna drive that. Number two is this.

Under the program, we have and I cannot 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 have been trying to communicate to you that we have some other potential customers that I think we are gonna get. Specifically for the Valkyrie. We are gonna get better clarity on that between now and the end of this year. Those two factors, mix and the clarity we are gonna get on some of these other opportunities on types of planes and quantities, that is gonna drive where we ultimately end up on our annual run rate.

Oh, and I want to mention one of the key the third key factor is the engine. The long lead on that is about fourteen 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.

Colin Michael Canfield: Got it. So sounds like the 40 is perhaps two CCA programs and then expansion beyond that, if you wanted, is perhaps third and fourth CCA programs.

Eric M. DeMarco: Nope. Do not characterize it that way. Look at it as one, plus we are gonna continue to have I called demonstration airplane. So science and technology and RDT&E that are gonna be sold every year, I think four or five, like, I think we have in our plan for this year. And then on top of that, I want to have a number think of a handful, and we might not be able to get there. A handful of 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. They could come over and check out, and we delivered them.

And so those are flex factors also. But think one program. If we have additional programs with quantities, we may have to take that number up if we are gonna hit deliveries in 2028 and 2029.

Colin Michael Canfield: Got it. Thank you for the color. And then perhaps one follow-up. Under another kind of construct in place, how do you think about the sensitivity of cash investment versus that production schedule? And then relative to 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?

Eric M. DeMarco: 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 could private and raised $8,000,000,000. We have a balanced approach, and we are gonna stay balanced. We are gonna organically grow the company. We are gonna satisfy the customer. We are gonna generate a return, a profit for the investors. If we did not 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. Many of these drone areas because we do not have to develop anything.

We got the airplanes. We would go into production. The customers would buy them. But we have to be cognizant of cash like you said. We are very cognizant of the cash and the investing. We are mapping that into the customer funding profiles that we have. On something like an engine, there are deposits required. We are gonna have to make deposits and things like that, so that is gonna be cash out. I mentioned the timing of the appropriation, like the 2027 appropriation. God willing, it happens on October 1. It probably will not. So that can impact the cash until the appropriation comes through. The customer gets the money, and they can pay us.

We have a major simultaneous equation that we are always managing. To make sure that we satisfy the contractual requirements and we do not get too far ahead of ourselves on the capital side. Does that kinda answer it?

Colin Michael Canfield: Great. Thank you. I appreciate it.

Eric M. DeMarco: Yep. Thank you.

Operator: Our next question comes from the line of Peter J. Arment with Baird. Please proceed.

Peter J. Arment: Yes. Good afternoon, Eric, Deanna. Eric, nice results as always. On the Spartan Jet engine opportunity, what is the best way to kinda frame up when things could start to move into production and scale things up there?

Eric M. DeMarco: Yep. So use $40,000 or $50,000 an engine. Somewhere in there per engine. We have been informed by two customers these are customers we are designed in. It is our engine. It is that platform has been designed around. It might be three. Two or three. That they intend on us beginning to go into LRIP in the second half of this year. Think hundreds of engines that we start to build, with deliveries beginning in 2028. If things work out the way I think they are going to work out, and again, go back to the 2027 appropriation and timing, 2028, we could see, like, a step function.

Where we are delivering hundreds of engines, and we are getting ready to build thousands of engines to deliver in 2029. So it is coming. One I can mention to you that is out there that is public that we are the engine on if you pull it up. So you may have seen what happened with the Powered JDAM and in the Maritime Strike version with Boeing. In the last two weeks, it was given a new designation. I believe it is called PJM XR. And they talked about some of the things I am talking to you about here.

We are also I think it is publicly out there that we are on a number, I think, three of Lockheed Martin’s low cost cruise missiles. I think it is public that we are on one of Northrop Grumman’s. And we are on at least a handful of these new defense technology guys. That have won ETV, Franklin, and MACE. So there is a lot of them out there that are coming. And that is how I see it playing out over the next couple years.

Peter J. Arment: Yeah. That is great color, Eric. And just one last one on, you know, you have given us a lot of details on the growth opportunities. Outside of hypersonic, this year, what is kind of the next one or two that you would highlight as the next main growth drivers for you in 2026?

Eric M. DeMarco: The number one is the one I have not talked about a lot. It is our Microwave Electronics business. I mentioned I was in Israel very recently on the microwaves 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 do microwave electronics for both of those. Our US Microwave business. Do not talk about it a lot. It is competitive. We have recently received a production award on a very large well-known missile program.

I am under an NDA with the prime. I cannot talk about it. We are 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, etcetera, needs microwave electronics. We are all over it. We are designed in and we are 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. Virtually everything we are bidding on, we are winning.

And it is 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 is where the game is at. So our space business is looking great in the second half of this year, when we start delivering a bunch of these software-defined products. And then in 2028, I think our space business is gonna knock it out the park. Those are the three, hypersonics, microwave electronics, engines, space. Those are the four.

Michael Frank Ciarmoli: Got it. Thanks, Eric. Thanks, Deanna.

Deanna Hom Lund: Thanks, Peter. Thank you.

Operator: Our next question comes from the line of Seth Michael Seifman with JPMorgan. Please proceed.

Seth Michael Seifman: Hey. Thanks very much, and good afternoon. And 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 kinda what does that mean for Valkyrie in 2026? I know you mentioned you were not including production yet. But how do we think about what is in there?

Deanna Hom Lund: Yeah. So the Valkyrie related activity that is some of the new contracts we just received. That we have just talked about earlier, and that is expected to continue in 2026.

Seth Michael Seifman: Okay. If we were breaking down the expected growth between the segments, I know you guys have sometimes talked about that. How do we think about KGS versus Unmanned?

Deanna Hom Lund: The lion's share of the growth is expected in KGS.

Eric M. DeMarco: Driven by hypersonic the hypersonic business and the microwave? Microwave and space. And space. Those are the three big horses.

Deanna Hom Lund: Because as we mentioned earlier, as Eric mentioned in his prepared remarks, we are 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 have provided guidance on.

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

Deanna Hom Lund: 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 $5,000,000 of investment that we put into the venture. And then as there are operating results for Prometheus, it will be our percentage at 49.9%. So you will not 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 is gonna be some operating losses because there is gonna be depreciation that is gonna be a lot of noncash losses with depreciation of the facilities. But it will just be our percentage of whatever the income or loss is on the income statement.

Seth Michael Seifman: Right. That is super helpful. And maybe, Eric, when you think about the growth there, at the time that you did this, I know that we knew that all these multi-years were going to be coming. Does that present more opportunities for rocket motors to be manufactured there?

Eric M. DeMarco: Yes, sir. That is a great question. Last week, I was with the Rafael team and 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 of what this looks like. We are gonna be producing beginning in 2027. And this is a classic high growth model. This is very similar to Kratos. And then when it gets to full rate production, it is projected to be a significant cash generator. It is gonna go something like $100, $200, $400, $1,000,000,000 in revenue. Something like that. And so think 2030, 2031 at full rate production.

For the first three phases, it is a billion in revenue. Think 20% and divide by two.

Seth Michael Seifman: Excellent. Thanks very much for all the color.

Eric M. DeMarco: Yep. Thank you.

Operator: Our next question comes from the line of Peter Skibitski with Alembic Global. Please proceed.

Peter Skibitski: Hey. Good afternoon, guys. Couple of questions. First one, just to clarify on the 2026 growth in Unmanned, I want to make sure I understand. I thought you guys said your share of MUX TAC Air would be about $120,000,000. And it will be over a couple of years. So we should expect Unmanned to grow at least $60,000,000 or so in 2026. Is that a fair assumption? Just on the MUX TAC Air contract?

Deanna Hom Lund: No. Answering Seth's question earlier, I said it will be relatively flat year over year. So there is not as much growth in Unmanned because as a reminder, in 2025, we had the Airbus shipment in 2025. And that was let us call it roughly $20,000,000. 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. And we have not included a lot of the any production awards in that forecast. So it is not an incremental $60,000,000. It is roughly I would call it more like flat year over year at what we have assumed in the forecast today.

Peter Skibitski: Got it. Okay. Fair enough. And then last one for me is just, on hypersonics, the growth you are 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 MachTB the majority of the growth? And, you know, when you talk about all these Zeus and Oriel SRMs on order, are those all under MachTB? Are those other contract vehicles? And to some extent, can you name those other contracts?

Eric M. DeMarco: Yep. There are others. So number one is MachTB. Number two is the Navy program that is coordinated very closely with the Missile Defense Agency. Very closely. Number three, it is with a prime. I cannot talk about it. But it is with the prime. Those are the big three primaries. MachTB, a Navy slash MDA program, Space and Missile Defense Command may be in there somewhere too, a little bit. And then a big prime.

Peter Skibitski: Got it. So MachTB will be, you know, Zeus, maybe Oriel, but also all of the other you know, all of your partners’ missiles that they are—

Eric M. DeMarco: Yeah. In MachTB, the big drivers for us are Zeus one and two, Erinice, Dark Fury, and some other things I cannot talk about that we are gonna be flying.

Peter Skibitski: Okay. Great. I appreciate the color.

Operator: For our next question, please. It comes from the line of Andre Madrid with BTIG. Please proceed.

Andre Madrid: Eric, Deanna, thanks for taking my question. Could you maybe provide more color as to what the split between Target Drone and Tactical Drone revenue was in the quarter? I mean, was Target Drones especially impacted? And this held the segment back and prevented, you know, I am just trying to find the puts and takes there because I think I might have expected more from the MUX TAC Air Award than we saw. Maybe just like I said, the puts and takes on the segment.

Deanna Hom Lund: Yeah. So the tactical revenue for the fourth quarter was roughly $8 to $9,000,000.

Andre Madrid: Got it. Okay. That is helpful. And I guess, kind of on the same subject, maybe a little less, but, you know, talking about CCA potential opportunities being the GEK 1,500. Are there any anchor customers in place for that platform yet?

Eric M. DeMarco: I cannot, sorry, brother. I cannot talk about this. I cannot talk about it.

Andre Madrid: Nope. That is all good. I get it. And then if I may, you know, there was the increment two of CCA that they said that they had selected nine companies for that were given concept refinement contracts. Can you disclose whether or not you were one of those companies?

Eric M. DeMarco: I can absolutely not talk about that.

Andre Madrid: Got it. And then, I guess, one last one. The Drone Dominance program, it seems like that is flowing through DRSS as opposed to KUS. Could you maybe just explain the reason why there?

Eric M. DeMarco: Yep. That is actually a very good question. So in Unmanned Systems, those are all class four aircraft. They are jets. And then down in Huntsville, which is in DRSS, class one and two. Very, very good question. That is why. And, obviously, because the customers are different, the supply chain is different, etcetera, etcetera, etcetera. We left them separate.

Andre Madrid: No. That makes total sense. Alright. I will leave it there. Thanks both so much.

Deanna Hom Lund: Thank you.

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

Trevor James Walsh: Great, thanks. Hey, Deanna and Eric. Thanks for taking the question. Just a quick one for me. Most of them have been asked already. On the CapEx color that you gave, Deanna, around some of the spend from 2025 slipping into 2026, which is how we get to that $135. What can you just elaborate a little more? Was that a single initiative worth of, or was it more broad based across the spend expected in 2025? And then relatedly, is there anything that could slip into 2027 in a similar fashion? Thanks.

Deanna Hom Lund: Yeah. Sure. So what slipped, it is really two programs. So it is 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 2025 but they slipped in just from a timing perspective into 2026. As far as 2026 moving into 2027, right now, since we just started the year, we believe everything is gonna be incurred in 2026 that we forecasted, but some of that is construction related so some may push out. But at this point, we think that is a good range for 2026.

Trevor James Walsh: Perfect. Super helpful. Thank you.

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

Hans Baldo: Hello. I am on a call for Joe Gomes. And so on the second Valkyrie production, the $25,000,000 to $28,000,000 in CapEx you are planning for 2026, can you help us understand the downside protection there? If the contract awards or delivery schedules slip, how exposed Kratos is.

Eric M. DeMarco: Right now, where we stand right now, I do not believe there is any risk. I believe those airplanes will all be spoken for under what we have. I do not see a risk there.

Hans Baldo: Okay. Thank you. And with the Microwave Products, how much is that tied to missile and air defense programs specifically versus other applications?

Eric M. DeMarco: At least 50%. 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.

Hans Baldo: Okay. Alright. That is helpful. Thank you.

Operator: Thank you. One moment for our next question. It is from the line of Austin Moeller with Canaccord Genuity. Please proceed.

Austin Moeller: Hi. Good evening. So just my first question here, Eric and Deanna, $400,000,000 incremental for TB, $4,600,000,000 for space and boost glide interceptors, and $3,000,000,000 for hypersonic defense systems was in the big beautiful bill. Then in the fiscal year 2026 appropriations, there was $13,500,000,000 added specifically for Golden Dome within the Space budget. So just thinking about the programs that you are 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 2026 versus 2027?

Eric M. DeMarco: Right. So on our related programs, either we are prime or we are working with one of the traditionals. The funding on the ones you just went through, the vast majority of it is Q2, Q3, and Q4 of this year. And then 2027 will be very significant for that funding. That is how we see it.

Austin Moeller: Okay. And on MUX TAC TacAir, which you are 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?

Eric M. DeMarco: What a great question. I cannot talk about that right now. Excellent question.

Austin Moeller: Well, great. Thank you very much.

Eric M. DeMarco: You got it.

Operator: Our next question comes from Kashyin Kailer with BNP Paribas. Please proceed.

Kashyin Kailer: Yeah. Hi, guys. Thanks for squeezing me in here. So I guess on the organic growth outlook for the year, it is a bit lower than the initial 15% to 20% you have 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 is driving that lower?

Deanna Hom Lund: That is 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 mathematical.

Eric M. DeMarco: Yeah. The business is doing great. We beat the heck out of the Q4 numbers and now that we have an appropriations bill and the shutdown is done, hopefully, 2026 will be really good too.

Kashyin Kailer: 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?

Eric M. DeMarco: Absolutely. I mentioned this on the last call. We are starting to see it now on the off starts on the operating cash flow. The operating cash flow is starting to increase, and it is gonna start to ramp in 2027 and 2028. It is just gonna depend on the number of new opportunities that we are presented with from the department. And I went through, Deanna went through a list. Once again the customer has come to us. And they have said, here is an opportunity. You can get a very long term multiyear decade program if you will 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 do not want to give you a time and then the goal post moves because two new came that generate a significant return for the shareholder. So 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 nontraditional, with significant large opportunities, we are gonna go for these right now and build a hell of a company here.

Kashyin Kailer: Got it. Thanks for the color.

Eric M. DeMarco: Yep.

Operator: Our next question comes from the line of Clark Jefferies with Piper Sandler. Please proceed.

Clark Jefferies: Hello. Thank you for taking the question. I wanted to ask around the guidance philosophy for hypersonic, you know, mentioning an expectation to double hypersonic this year and seventy five percent in twenty seven. You know, where was that compared to a quarter ago? And just maybe can you help us level set on the areas where you are not including in the base case hypersonic revenue versus where you are. That would be very helpful. And then one follow-up.

Eric M. DeMarco: Yeah. So the number one is the engine. And the motors, the 120 motors that are gonna start coming in late Q2, early Q3. And then those deliveries are gonna ramp throughout 2027 and 2028. Those are tied to missions and launch manifests. And our Aerojet Rocketdyne on Zeus and ATK on Oriel, they have really stepped up and so we are getting much more comfortable now with that. Number two. The glide vehicles. There is one company in the United States that has the carbon-carbon material for our systems. We have placed the long leads. We have a number of vehicle systems’ worth of materials coming in starting in Q3.

And then that is gonna accelerate into 2027 and 2028. And then on top of that, and I know I have said it a couple times, we now have an appropriation bill, which was 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 will say the middle of the fairway numbers we provided you. Now where you were going on that. I mentioned I am hopeful that there is another billion dollar sole source, I think we are gonna get. And let us say we get that by the end of this year. That could be additive to 2027.

You know, we would have to take a look at long leads and things like that, but that could be additive to 2027. And could provide upside on it.

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

Eric M. DeMarco: We are very, very interested in group five. So Valkyrie, Mighty Hornet, Tactical Fighter Jet, Airwolf, Mako, that is our expertise, low cost, high performance, jet drones. So group five is the sweet spot. That is where I did most of my talking today because that is where the customers are coming to us. Group one and two, 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. We will 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.

Clark Jefferies: Perfect. Thank you very much.

Eric M. DeMarco: Yep. Thank you.

Operator: Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Please proceed. Good evening, Eric and Deanna. Eric, maybe if we could just one big picture question and one micro one. If we could just dig into the size of your microwave electronics business, just given the production rate increases we are seeing can you size it? What was the growth in 2025? How do you think about the growth in 2026? And what are some of the larger programs driving it?

Deanna Hom Lund: Yeah. So the growth for the year was about organic 17%.

Eric M. DeMarco: Big programs are Iron Dome, Tamir, Arrow, Barak. The next two are classified. So those are the big five. Two classified and those three I mentioned.

Sheila Kahyaoglu: Perfect. And maybe you have given us not much color on this call. Can you distill the three upcoming catalysts we should look for with Kratos?

Eric M. DeMarco: From my opinion, number one is I am expecting that we are gonna receive a very large potential billion dollar plus hypersonic opportunity. I think we are gonna get that. That is looking pretty good. I am 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 cannot control that. I am hopeful that happens. That financially and from a company standpoint, is a catalyst. Number three, I think it is 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.

Sheila Kahyaoglu: Understood. Thank you so much.

Eric M. DeMarco: You are welcome.

Operator: Thank you. Our last question comes from the line of Gavin Parsons with UBS. Please proceed.

Gavin Parsons: Good evening. Thank you.

Deanna Hom Lund: Good evening. Thank you.

Gavin Parsons: You guys have a lot to talk about. A lot going on. 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?

Eric M. DeMarco: For the near term, it is great visibility and sustainment. And we will see what happens over the next quarter or two relative to timing of things if that will accelerate for us.

Gavin Parsons: 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 is the risk there?

Eric M. DeMarco: We really do not compete with the traditionals. We rarely do. 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 gonna be involved in Golden Dome. We build the hardware for, we partner with them. With Northrop, we are delivering them tactical jet aircraft. So what the primes are doing now and leaning forward, this is going to be an accelerator for Kratos. Take a look at Northrop; that is one of our closest, if not closest, partners. They talked about it weeks ago. They are looking to increase production on Integrated Battle Command System by 4x.

We build a significant amount of the hardware on IBCS. That would be incredible for us. Take a look at Leidos Dynetics. I believe Tom or his CFO said in their earnings call, I believe they said by 2029 or 2030, they need to deliver three or 400 Indirect Fire systems. Kratos builds a significant amount of the hardware for Dynetics for Indirect Fires, that they get them to 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 is nothing that comes to mind, competitor.

And this could be an accelerator for us going forward.

Gavin Parsons: Very clear. Thank you. Thank you so much.

Operator: And this concludes our Q&A session. I will turn it back to Eric DeMarco for closing comments.

Eric M. DeMarco: We appreciate you all joining us and taking the time to ask us the questions. Sincerely, your in the business. We look forward to chatting with you when we report Q1. Thank you.

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