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Good day, and welcome to the Kratos Defense & Security Solutions Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Marie Mendoza, Senior VP and General Counsel. Please go ahead.

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

Thank you, Marie. Our Q3 financial results are representative of the increasing demand for Kratos' military-grade hardware or systems and software to support the national security of the United States and its allies. Also reflecting this demand, today, we have increased our full year 2025 revenue forecast, which now reflects 14% to 15% organic growth over fiscal '24. This is up from our original forecasted growth of 11% to 13%. Additionally, we have increased our full year 2026 organic revenue growth forecast to 15% to 20%, up from our previous 13% to 15% above expected annual 2025 revenue. And we are providing today a preliminary 2027 revenue growth target of 18% to 23% organic growth above the 2026 revenue range, which is 15% to 20% above 2025. Also importantly, we are projecting an approximate 100 basis point EBITDA margin expansion for 2026 above 2025 and another approximate 100 basis point margin expansion again in 2027 over 2026 as we scale the business and transition to more profitable contracts. We expect our EBITDA margins to expand even though we continue to make significant and potentially increasing bid proposal and related investments as the number of opportunities Kratos has continues to grow. I want to emphasize very importantly, none of these forecasts include the Orbit acquisition we announced today. We will include Orbit once that transaction closes, which is scheduled for -- hopefully in Q1 of next year. Directly related to Kratos' accelerating growth trajectory, Congress, the administration and the Pentagon are all aligned to reform DoD procurement practices and rebuild the U.S. defense industrial base. This is represented in presidential executive orders, the Senate FoRGED Act, the House SPEED Act and the DoD's initiative to improve the acquisition process, each of which are expected to be good for Kratos. Additionally, the funding to support these national security initiatives for the United States and its allies is being put in place with an expected 2026 U.S. security spend of approximately $1 trillion. NATO allies increasing their security spend from 2% up to 5% of GDP and Pacific allies expected to do the same. United States, industry and Kratos are at the beginning of a generational recapitalization and rebuild of the West National Security apparatus to address the existing geopolitical threat environment and to deter and defeat our enemies. I believe that this global recapitalization and rebuild is structural in nature, both policy and threat-driven. This is not temporary or a one-off, and this will be a multiyear, multi-decade and duration exercise. Directly related to this rebuild and increased opportunity set, Kratos is making significant investments in facilities, plant, equipment, et cetera, to rapidly scale and support major new program wins we have received and that we expect to receive. Importantly, Kratos does not build it and hope that they will come. Our investments are made with program contract or partner commitment line of sight and with expected ultimate rate of returns that are acceptable to Kratos' stakeholders. I will reiterate that the number of additional or new opportunities for Kratos is at a record level. It is increasing, and it has accelerated over the past few months, and Kratos is positioned to take advantage. The government this summer announced that Kratos' Valkyrie would become a program of record with the Marines under the MUX TACAIR program. We are now able to report that this program is officially underway and will include the Kratos Valkyrie aircraft with Kratos' incredible partner, Northrop Grumman Mission Systems. We, Kratos and Northrop together expect to receive the initial formal contract award in the next few months. We had expected the award sooner, but similar to many awards across industry and Kratos, it has been delayed as a result of the federal government shutdown. The MUX TACAIR program is expected to progress from evaluation of various mission scenarios and the associated military methods of employment through low-rate production and then to full-rate production. We expect that Valkyrie systems under the program of record will include both RATO or rocket-assisted takeoff and conventional takeoff aircraft as well as multiple mission configurations. The joint Kratos Northrop Grumman System will provide a state-of-the-art CCA capability at a price point that will enable the Valkyrie system to be procured, distributed and operated in very high quantities which addresses the consistent war gaming result for the need for affordable mass to provide an advantage and a win for the United States. MUX TACAIR CCA brings exactly this. I can now also officially say that Airbus has partnered with Kratos to develop a German variant of the Kratos Valkyrie CCA. And in the third quarter we just ended, we shipped the first two Valkyries to Airbus under this new contract. As a result of the pending European need, the opportunity space here is substantial, including as evidenced by the Ukraine-Russia war and the significantly increased defense spending committed by the European nations. The first Valkyrie opportunity in Europe will be with the German Air Force solicitation for their own CCA, and this is our joint initial focus with Airbus. The European CCA System will leverage developed and proven baseline Kratos Valkyrie configured with Airbus-specific German Mission Systems to satisfy the operational needs unique to the threats in that region. Air-to-ground and air-to-surface capability is expected initial key in the European theater, as noted by several of the countries that we have been working with in addition to the United States. Consistent with the approach we have taken for the United States Marines, this mission-configured Valkyrie provides a CCA that can be procured and deployed in mass, matching the quantities needed to deter the threat and defeat the threat should it come to that. Very exciting for Kratos, our partner, Northrop Grumman, recently announced that they are actively looking at their Lumberjack jet-powered modular munition as an armament for the Kratos Valkyrie. I encourage you to go to Northrop's website and certain recent publications for more information on the Lumberjack, on the Valkyrie with the Lumberjack being a truly incredible technologically leading system. Through Kratos' many initiatives with Northrop, I must say that I believe that Northrop is one of the most proactive and innovative of all the national security companies out there, including recent new defense companies that have emerged in the market. Additionally, Kratos recently unveiled our Ragnarok low-cost cruise missile, which Kratos' Ghost Works has been working on in stealth mode and which we displayed stowed in the weapons bay of Kratos' Valkyrie at the U.S. Marine's Miramar Air Show in September. The Ragnarok is a $150,000 internal and external carry high-performance strike system that Kratos has specifically developed for the Valkyrie and also for certain other systems. We believe that Kratos' Valkyrie, which is in production and flying since 2019, is a clear competitive differentiator for Kratos with customers that are not interested in the PowerPoint or having to invest hundreds of millions or billions of dollars in a forever development program. The Valkyrie exists. It is in production, it is flying, it is coming, and Kratos, our customers and our partners are getting ready. Consistent with our past practices, we have not included sales of production quantity Valkyries in our base case financial forecast we provided today, only limited RDT&E type quantities. We will continue to be conservative and only include large production quantities in our forecast when we have programmatic contractual funding and/or delivery clarity. Kratos has been working with and supporting Taiwan for about 20 years with high-performance unmanned jet aircraft systems employed as targets for their military to train and test against. As we recently announced, we're excited about our collaboration with Taiwan's NCSIST or National Chung-Shan Institute of Science and Technology. This is Taiwan's DARPA equivalent to develop a Kamikaze variant of Kratos' in-production flying today tactical fire jet system. The combination of our most recent and capable advanced version of the tactical fire jet, which Kratos Ghost Works also has been working on in stealth mode configured with NCSIST's Mission Systems and weapon is called The Mighty Hornet 4. The Mighty Hornet 4 will be capable of ship hunting and ship killing and certain other key missions for Taiwan, which I am unable to discuss publicly, but which I believe will be a big surprise for a certain country. By combining the technology skill sets of Kratos and NCSIST, we're creating a unique system with an incredible performance to cost ratio at a cost point that is expected to enable extremely large numbers to be fielded affordably. Once again, similar to Kratos' Valkyrie, Kratos' tactical fire jet is currently flying in production and well down the production execution and cost learning curves and our customers can come and see their aircraft and the actual costs. Ultimately, these systems are expected to be produced in Taiwan under license from Kratos, which arrangement is expected to provide key advantages to both parties. For example, under the contemplated arrangement, Taiwan would control their production rate and employ their country citizens. While Kratos will receive a license fee with Kratos also freeing up U.S. production capacity for the US CCA opportunity and related jet drone aircraft opportunities, which U.S. production rates are expected to increase rapidly for Kratos. It was also recently announced that Korea Aerospace Industries has signed an MOU with Kratos to develop AI-enabled manned/unmanned teaming systems to integrate piloted aircraft with collaborative drones for future Korean air opportunities and operations. This agreement provides KAI, a U.S. partner in Kratos with proven flying and production unmanned combat platforms while aligning with Seoul's push to inject artificial intelligence and autonomy into next-generation air power. The Kratos KAI partnership aligns with South Korea's effort to scale artificial intelligence-enabled systems and expand defense exports, turning the Kratos partnership into both a strategic and industrial initiative. We are excited about our agreement with KAI. And here again, I believe that Kratos' success differentiator is that we have significant experience with actual artificial intelligence and augmented autonomy or auto pilot flying jet drone aircraft today. We don't do first attempts, PowerPoints or renditions. Since our last report to you, Kratos' Athena jet drones have had a successful series of customer flights, including in swarms, which included a leading VC-backed artificial intelligence company software system onboard Athena. Importantly, we have additional tactical drone opportunities we are pursuing, one of which I believe could be a catalyst for the company and that I now expect Kratos to receive in the next few months, which Kratos Ghost Works has been heavily involved with. Additionally, there are also two other new opportunities, which I believe that Kratos remains in a sole source position on, including one opportunity with Kratos' new Clone Ranger drone system that our Ghost Works recently publicly released. I believe that contributing to the positive momentum we are seeing with Kratos' drone business, the Trump administration and the State Department have recently announced that they will revise U.S. policy related to the sale of drones internationally, the Missile Technology Control Regime, or MTCR, in order to address the rapidly changing threat in technological and competitive environment. These changes in MTCR policy and related rules interpretations that have been published are expected to be favorable for U.S. drone and missile-related companies, including Kratos, and we believe that we are already seeing the benefit in certain of our international drone and missile-related initiatives, including as related to Kratos' jet engines on certain systems. We believe that Kratos is the world technological leader in developing, building and flying affordable tactical jet drones, and I emphasize affordable. This is a word of concept none of our competitors we are aware of ever discussed, and we believe this is a clear differentiator for us now. Kratos' market-leading jet drone position did not happen overnight. We've been at it for over a decade, and the market is finally coming our way due to the current state of warfare, Kratos' first-to-market position that Kratos has actual in production and flying jet aircraft and the low cost and affordability of Kratos' jet drone systems. Since our last report to you, we have formally received contracts on both Poseidon and [ Deimos with Deimos ] being Kratos' -- being with Kratos' teammate Leidos on the sea-launched Cruise Missile Nuclear or SLCM-N program, where the Kratos Leidos team was one of the teams down selected. Also importantly and separately, it was also reported that Kratos Turbine Technologies as the prime has received a contract related to the SLCM-N jet engine propulsion system. SLCM-N is a top national security priority and is expected to be a multibillion-dollar program of record. Poseidon, a single award to Kratos as the prime with the current anticipated total potential value of approximately $750 million is classified, is expected to begin ramping for Kratos in 2028 once the new Kratos dedicated facility, which is already underway is complete. As we were able to recently announce, we have now also been successful, won and received the formal contracts on both Anaconda and Helios, respectively. Helios is a next-generation hypersonic materials testing center that Kratos will own and operate, and we expect to shortly be able to announce the location for this major new Kratos facility and program. Anaconda will also be Kratos owned and operated. It's a state-of-the-art radar integration complex located in Indiana for the AN/SPY-1 radar sustainment and modernization efforts. Both Anaconda and Helios are expected to be multiyear, multi-decade Kratos programs with the potential of each being a $1 billion franchise opportunity for Kratos over the lifetime of the requirements based on the DoD's expected demand with these respective Kratos owned and operated facilities expected to be complete in 2028 when operations are planned to begin. To provide you an example of how valuable Anaconda and Helios are to Kratos, certain of the current systems Anaconda will be sustaining are suspected to be in service through 2065. We are continuing to pursue projects Nemesis, ARES, Vulcan and others, which we hope to be able to update you on in the first half next year, plus there are several additional new opportunities we have now been approached with that we are assessing. Prometheus with our partner, RAFAEL, is on budget and on schedule for 2027 operations with Prometheus having made a number of experienced solid rocket motor and energetic-related hires, including the Chief Operating Officer. Kratos' GEK Turbofan initiative with our partner, General Electric Aerospace and Kratos' new production and test facility in Oklahoma is also on budget, on schedule and expected to begin operations in '27. Separate from GEK, we have now been informed that we will be receiving two initial turbo jet engine program, low-rate initial production contracts from two separate customers for two separate systems, which we expect to be executing on in Q2, Q3 next year. Similar to Kratos' jet drones, with Kratos small jet engines, we made the internally funded investments to be first to market with actual relevant working products, which has enabled us to be designed in on several new low-cost cruise missiles, drones and other systems, and we are now heading towards production. We expect that in the future, as the merchant supplier of affordable small jet engines, Kratos will be in production on multiple programs and systems. On our Boom Supersonic program, we are excited that our work with Boom is positioning for its next big step with the planned first run of the Symphony engine next year. Kratos is the world technological leader in developing, building and flying affordable hypersonic systems, including our first-to-market hypersonic flyers, Erinyes and Dark Fury, our first-to-market

Thank you, Eric. Good afternoon. As we have included a detailed summary of the third quarter financial performance as well as the initial fourth quarter and modifications to full year 2025 financial guidance in the press release we published earlier today, I will focus on the highlights in my remarks today. Revenues for the third quarter were $346.7 million (sic) [ 347.6 million, ] above our estimated range of $315 million to $325 million with overachievement of forecasted revenues across all of our businesses with the single largest increase in our Unmanned Systems business, including a shipment of tactical Valkyries to an international customer, which received regulatory approval in the third quarter. As a reminder, when we provided our third quarter guidance, we had indicated that out of an abundance of caution due to the uncertainty of the timing of regulatory approval, we had forecasted this shipment in the fourth quarter. Additional notable organic revenue growth was reported in our defense rocket support and space training and cyber businesses with organic revenue growth rates of 47.2% and 21.2%, respectively. Adjusted EBITDA for the third quarter of '25 was $30.8 million, also above our estimated range of $25 million to $30 million, reflecting the increased volume, offset partially by continued 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 third quarter ' 25 revenue was up $23 million or 35.8% organically, reflecting the shipment of international tactical Valkyries. KGS third quarter '25 revenues was up $48.7 million year-over-year from the third quarter of '24 with organic revenue growth of 20%, excluding the impact of the February 25 acquisition of certain assets of Norden Millimeter, Inc. Third quarter '25 cash flow used in operations was $13.3 million, primarily reflecting the working capital requirements related to the revenue growth impacting our receivables by approximately $25 million, increases in other assets of approximately $3 million, primarily reflecting investments we are continuing to make related to certain development initiatives in our Unmanned Systems business. Free cash flow used in operations for the third quarter of '25 was $41.3 million after reflecting funding of $28 million of capital expenditures. As we planned, we are continuing to make investments to expand and build out certain of our manufacturing and production facilities in our microwave products, rocket systems, hypersonic and jet engine businesses to meet existing and anticipated customer orders and requirements and investing in related new machinery, equipment and systems. Consolidated DSOs or days sales outstanding increased from 103 days in the second quarter to 111 days, reflecting the over 26% revenue growth and the timing of milestone billings. Our contract mix for the third quarter of '25 was 70% fixed price, 27% cost plus fixed fee contracts and 3% time and material contracts. Revenues generated from contracts with the U.S. federal government during the third quarter of '25 were approximately 67%, including revenues generated from contracts with the DOW, non-DOW federal government agencies and FMS contracts. In the third quarter of '25, we generated 16% of revenues from commercial customers and 17% from foreign customers. Now moving to financial guidance. Our financial guidance we provided today includes our expectations and assumptions for our supply chain execution, the impact of the federal government shutdown and for employee sourcing, hiring, retention and the related costs. We have increased our full year '25 revenue guidance from $1.290 billion to $1.310 billion to $1.320 billion to $1.330 billion, reflecting an organic growth rate of 14% to 15% over 2024 and maintain our adjusted EBITDA guidance of $114 million to $120 million, reflecting the expected mix of revenues and an elevated level of new opportunity pursuit costs and other investments. Our fourth quarter revenue guidance of $320 million to $330 million reflects an estimated organic growth rate of 11% to 14% over Q4 of '24, which growth is reflective of the elevated bid proposal and other investments we are making. Our guidance continues to include the impact of increased material and subcontractor costs on certain of our multiyear fixed price contracts, specifically in our Unmanned Systems target drone business, where we have experienced cost growth from certain ancillary materials on our targets and for which we are unable to seek recovery from the customer until the renewal of future production lot contracts occurs. We are continuing to aggressively manage costs where we can to minimize the impact to our margins. We are adjusting our full year free cash flow and operating cash flow estimates primarily as a result of the increased organic revenue growth we are experiencing and the related future contractual payment milestone and other expected customer payment dates and also reflecting Kratos making long lead material purchases ahead of contract funding award to meet customer execution time lines, which has resulted in an increase in our customer accounts receivable balances. Additionally, the federal government shutdown and its impact on government program, administrative and other offices and functions has resulted in certain expected government contract receivable payment dates to be delayed, resulting in an increase in customer accounts receivable days sales outstanding. The collection of these receivables is expected in the future. It is only a timing-related matter of the expected collection date. Additionally, certain of the new facility, facility expansion, machinery equipment and other capital expenditures and investments we had planned for 2025 are now expected to be incurred in 2026, including as a result of our managing the company's cash expenditures to the degree that we can control, which has resulted in a reduction in our full year 2025 capital expenditure forecast. Kratos' operating cash flow guidance also assumes certain investments in our Rocket Systems and Unmanned Systems businesses related to the procurement of rocket and related systems and the completion of certain derivatives of our Unmanned Systems vehicle of approximately $28 million to $32 million.

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

[Operator Instructions] Your first question comes from Sheila Kahyaoglu from Jefferies.

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

Right. So specifically, Airbus procured the Valkyries. Airbus has procured the Valkyries specifically related to a CCA opportunity initially with the German Luftwaffe. However, as I alluded to in my prepared remarks, because we have flying aircraft and now they're in Europe with Airbus, we're going after another -- a number of additional tactical drone or CCA opportunities in Europe. And we have the advantage here because, again, we have actual flying aircraft that have been flying since 2019. Also, as I mentioned in my remarks, in our financial forecast, the only revenue, only that we have for anything we said for Valkyrie is for RDT&E and S&T and like the two we just sent to Airbus. We are not including any production level forecasted revenue in our numbers until, as I said, we have absolute clarity programmatically funding and delivery dates, so we have no false starts.

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

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

Your next question comes from Seth Seifman from JPMorgan.

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

Right. So what I -- what we see here is this is going to be your typical program of record, where for near-term, mid-term, long-term. Near-term, the infrastructure is being put in place to handle production quantity types of Valkyries that are going to be deployed with the customer. And so this is -- and I can't get into too many details, but it's a typical program of record. The personnel are being identified and allocated or assigned and budgeted for by the government. There is going to be launch equipment. There is going to be recovery equipment. There is going to be communication equipment. There is going to be logistics. There's going to be spares. There's going to be training. All of that infrastructure is going to be put in place. That has begun. While that is happening, there will be Valkyrie sales with Northrop Grumman Mission Systems on it in the near-term, okay? So they can start utilizing the aircraft, right? Then midterm, we'll go into full-rate production once that infrastructure is out there. And long-term, that full-rate production, I believe, is going to go for a number of years, and it will be for my opinion, dozens and dozens and dozens of aircraft initially because of the affordability and the low cost point and the mission that they're specifically targeting.

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

Annual.

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

Yes. So we have absolute line of sight now, Seth, on when the business will turn cash flow positive and then how it will start to ramp. We have line of sight on it. We can see it, okay? The flex point here is the number of program opportunities that continue to come to us and they're increasing. And let me dig into this a little bit for you so you understand what's going on here. This started 6, 9, 12 months ago, and it's been accelerating, where if the government customer has a viable alternative to what I'll frame as a traditional in certain areas, they're giving that viable past performance qualified company, Kratos, a chance. Take a look at the last couple, 3, 4 months, okay? We won Helios, multiyear decade program. We won Anaconda, multiyear decade program, okay? We won Poseidon, which I had not talked about previously, it's classified. We won that, okay? We are being encouraged to bid prime on very large program opportunities, and it's accelerating. So based on the hand of cards we have right now, we have line of sight on this in a few years. However, the opportunity set of multi-hundred million dollar, billion dollar opportunities continues to increase. This is one of the reasons our EBITDA margins, I expected them to be up higher. They're not because of the bid proposal and the capture costs because these are big programs we're spending. So we can see where those lines are going to converge, but they may move out a little bit if the opportunity set continues to come at us and the strength it has been.

Your next question comes from Michael Ciarmoli from Truist Securities.

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

Yes. The Valkyrie with the Marine Corps is not baked in to any numbers we gave today. When that happens, that is going to be a step function upside. Now to the first part of your question, our hypersonic franchise, it will be the clear driver of growth for us for the next 2 or 3 years. And this is programmatic. This is not just MACH-TB. We are on a number of programs we cannot talk about. I alluded, we're on several with Lockheed Martin, for example. And they are all either just starting or they are ramping. I'll tie into that hypersonic franchise, our rocket system business. Think ballistic missile targets, think sub orbital vehicles, I can't say much more about that. We are the industry leader in those areas. So this is missile defense-related stuff, right? So -- and they go hypersonic speeds, which is why they're in our hypersonic franchise. Also in KTT, okay, we are building the engines for numerous hypersonic weapons. We can't talk about it. We're under NDA, a lot of them are classified. Those are going to be going into production '26, '27. So number one, the biggie, the hypersonic franchise across the company. It is growing. And Michael, it's possible in the next 2 years, 3 years, our Rocket System business is the biggest division in the entire company, and it's going to pass space, okay? Another big growth driver for us is the Space business. okay? The whole thing has turned around in the last 6, 12 months on us -- 6, 9 months on us. We have the issues with the commercial guys, they couldn't get their satellites up. It has been -- that has been blown away by what's going on, I'll say, in the national security area, including the classified area for Kratos with our ground systems to command and control the stuff that's going up. It's the growth rate on that business considering it's a $400 million business. I think that division is $400 million or so. I think it's going to $500 million or something like that next year. On programs we've won, it's up $100 million, something like that, okay? So the space and satellite business is looking great. Third, microwave electronics. The microwave electronics business, both internationally and domestically, everything you and I are chatting about here, what does it need? Microwave electronics. And then the next one is engines. And it's engines for missiles, engines for drones, engines for -- these are not hypersonic engines. This is separate thing, turbojets and turbo fans. And then another big one that's taking off is in our C5ISR business. This is all the hardware we build for virtually every prime, for virtually every missile, radar and air defense system they build. We build the hardware. We are the merchant supplier of military-grade hardware for air defense systems. And so you look at Northrop or Lockheed or Raytheon, I can go on, the systems they're talking about, we're on them. So those are the ones that are -- we just have programmatic clarity, which is why we're looking at 15 to 20 next year and 18 to 23 in '27.

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

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

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

Just to continue on that hypersonics discussion. If you look at like any other provider like say a Castelion, which has its low-cost Blackbeard hypersonic missile. When they do testing, that's got to be on one of your MACH-TB or MACH-XL vehicles, yes?

Okay. I cannot talk about Castelion, but I can tell you that it was recently announced by two separate companies, you can go look, that they're going to be launching things on Kratos' systems. I'll give you a specific one that happened yesterday, Mike. Take a look at hypersonics with an X down in Australia. They just closed the funding round. They have the DART hypersonic drone. We have exclusive rights for that in the United States. That specifically will be launched on Kratos'

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

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

Your next question comes from Jan Engelbrecht from Baird.

Eric and Deanna, congrats on a really strong print. I'd like to get some more details on Valkyrie. Just if we look at the '26 presidential budget request, that was $58 million for the prototype. That's a 12-month contract, but then in the reconciliation bill, there's $270 million for sort of, I'll quote it, the development, integration and production of Marine Corps unmanned combat aircraft. And to my knowledge, Valkyrie is sort of one of one. So just wanted to get your thoughts there. And then also just the recent Marine Force Design Update in October. They said there were going to be 2 more flights this year. Is this for calendar year 2025? Or is it government fiscal year '26?

Yes. Yes. So on the first part of your question, on the budgeting and what you saw in the reconciliation bill and your takeaway on that is absolutely correct. Absolutely correct. And that is one of the areas on how that will be spent over fiscal '26 and '27. That is something that's being ironed -- was being ironed out real time, it's kind of delayed now with the government shutdown. So that's what's going on there. Your question on Marine Force structure, I cannot, for obvious security reasons, get into flight schedules. However, I'm glad you brought that up. I did not mention it in my prepared remarks. You may have seen the paper the Marines put out last week on their force structure and their priorities. And on two of the critical capability areas, the Valkyrie was specifically called out, which ties into they're moving out on their program of record.

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

Yes, sir. So initially, Prometheus will be on tactical missiles exactly as you referred to. So I'll give you an example, so like a Tamir, for example. So tactical missiles, not large rocket systems like

Your next question comes from Jonathan Siegmann from Stifel.

So in the news, there was the XQ-58 flying with AI by the Air Force. I was wondering if you could comment a bit on that and any kind of update on opportunities with the Air Force. And then second, on the Valkyrie again, just you're partnered with a handful of companies on three continents that integrate the mission systems with the aircraft. Some of these new guys are pitching their secret sauce as their own AI attached to a specific aircraft. Can you just kind of contrast your open mission system architecture with the new entrants?

Yes, I'm glad you mentioned that. Yes, the Valkyrie has been flying with the United States Air Force. We've been flying with F-22s now, F-35s, F-15s, F-16s, and we're doing that relatively routinely. I believe the Air Force put something out on that. I cannot get ahead of the customer, but I'm the CEO, I drink the Kool-Aid. I feel great about our position with the Valkyrie and our other drones with the Air Force because they've been flying since -- Valkyrie since 2019. They've deployed weapons, they're low cost, they're affordable. They are flown with multiple artificial intelligence, I call it augmented autonomy packages, both of the government and of many of the other guys that are out there. So second part of your question, take a look at Athena, I can't talk about, that's classified, but Athena has been flying for quite a while, and it just knocked out a number of Athenas in swarms with one of the new defense tech artificial intelligence company's software on board, just knocked it out of the park. And so that customer is getting an incredible amount of data from that. And there are many more of those that we're doing. We just don't talk about them. Again, it's RDT&E and S&T. On the third part of your question, I don't want to speak for any of these other companies. I'll speak for Kratos, okay? We have been flying augmented autonomy, artificial -- if you will, artificial intelligence, the new buzzword, okay, interloop autopilots for years, decades, we have people that have been doing this, okay? So have the big primes. This is not a black box type thing, in my opinion. It's just not a black box type thing. And we should know since we have probably 8 to 10 different jets flying with it right now. So I'm not going to comment about the other guys. I'm not worried about them one bit in any way at all. We're going to win, and I think by today's report, especially with this MTCR rule change and this interpretation and the position paper that Marco Rubio put out at state, the fact that we've got these planes flying right now, you said about three -- the continents and everything, this is why. And we're going to be -- I think this time next year, we're going to be under contract for jet aircraft in a handful of five different countries.

Your next question comes from Anthony Valentini from Goldman Sachs.

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

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

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

Okay. That's helpful. And then, Deanna, maybe on the margin front, I know you guys have talked about this target drone program in the past. It's been a drag, and I think it's supposed to be for multiple more years. How much of a drag is that in 2026 and 2027 implied margins?

There's still a drag clearly in 2026, and '27 there is -- it's a little bit less because part of the drag is related to our manufacturing overhead. We expanded our Oklahoma target drone facility about a year ago, so -- and it's not at full capacity right now. So that excess overhead cost is also part of the margin drag in addition to the two target drone contracts where we're on 5-year production lot contracts. We're about halfway through that. So we've got about another 2-plus years to go. We should be renegotiating the next 5-year production lot in the next year or so. So we are doing what we can to mitigate the cost as much as possible, doing large supply buys with our suppliers to get as much quantity discounts as we can. But we do have about another 2-plus years to go on that.

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

Okay. That's perfect. Super helpful. Eric, maybe like a little bit more high level there. I'm sure you're aware of this, but there's a lot of these defense tech companies out there that are kind of talking about the ability to drive margins that are, let's just call it, 20% EBITDA plus as a result of them spending more on IRAD and having more software and just doing things at scale and at low cost. So I'm curious, for you guys once you get through the growth opportunities that you have over the next X number of years, is there a reason to believe that this could be a 20%-plus EBITDA margin business? Or is it lower and more in line with Prime? Like how do you guys think through that? And how should we be framing that?

Yes. So on the first part of your question, whoever these guys are that are telling you this, ask them -- tell them to read the Truth in Negotiations rules or TINA. And then you judge for yourself based on what they're doing if they can make 20% EBITDA margins based on TINA, okay? So now to Kratos. Our margins, as we went through today, and as Deanna and I just explained to you, they are going to continue to go up, '26, '27, '28. They would have gone up more in Q3 and in Q4 and for forecasted next year. The bid and proposal and capture costs that we are expending right now on new opportunities as prime is incredible. And I mean, look what we just reported. We just reported, I think, 23% growth. We just increased next year's organic growth up to 15% to 20%, and we're projecting the following year's organic revenue growth to be 18% to 23% above next year's 15% to 20%. This is all new programs we've either won or we're going after and the customers have said, we think you're going to win. So that's suppressing the margins a little bit. Let's say that cools down a little bit going into '28, '29. This also ties into the question earlier, Anthony, about my line of sight on positive cash flow, okay? This ties into it. If the assumption is that this incredible growth period starts slowing down a little bit, say, '29 or '30, the B&P will come down, the development contracts which are lower margin will come down. The lines will cross. Our margin rates are going to go up significantly, and we're going to start generating significant cash flow. That's what our models look like right now.

Your next question comes from Ken Herbert from RBC.

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

Yes. Great question, Ken. I read the 6-page summary briefing that came out this morning on that. Obviously, I'm looking forward to see what the Secretary is going to say on Friday. I believe this is going to be exactly consistent with Wicker's FoRGED Act, with the House's SPEED Act, with the 3 or 4 executive orders. This is now the Pentagon coming forward. I think that this is going to be outstanding for Kratos because what this is basically saying, and I think take a look at what the Marine Corps said yesterday, bring us your products, let us test them and we'll buy them. This whole procurement paradigm is changing. It has to change because of speed. We have to deploy things, and we have to do it quickly. So I'm very excited about this. Again, I frankly believe this is one of the reasons the venture guys are backing all these new defense tech companies and all the money they've spent on lobbyists, they're helping shape this, they're doing this and which is great for Kratos. And let me tell you what I see coming here is let's take a look at the $1 trillion spend, 50% of that goes to the war fighter's salary, his medical and his retirement. That leaves $500 billion. About half of that $500 billion or $250 billion is buying hardware and stuff from contractors. Let's just pick a number, let's just, say 10% of that a year is not going to go to the traditionals anymore. It's going to go to guys like Kratos, that's $25 billion a year that's going to start flowing to guys like us and the new defense tech guys, that's going to be growing 5% or 6% a year. That's when I talk about structural, and that's what I think you're referring to the Secretary is going to do on Friday. This is structural. It's administration, it's Department of War or Department of Defense, whatever we call it. It's the House, it's the Senate, and it's because of the threat.

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

So I think from now until the next election or January of '29, I think that this is going to rip, and it's going to accelerate because of this administration, you mentioned Feinberg. There are a number of other ex entrepreneurial, commercial venture guys, private equity guys that are in the administration. So that's important. The administration has many of these people in the right places. That's number one. Number two, I'm going to go back to the new defense tech companies and the venture capitalists that are funding them. They are spending an enormous amount of money lobbying, trying to change the policies. I mean take a look at one of the acts I read and you go to somebody's website, it's like it was taken right off of their website, one of the new defense tech guys. So that is a big change we didn't have before. And one of the reasons the military is doing it and this administration is doing it is they're looking at this money as a force multiplier to their budgets. This is why contracts are changing now to incentive based. In other words, you four guys, you win, you each develop and bring us something. And if whoever gets there first or second, we're going to down select the two, you get a prize of $100 million. Now you can go to gate #3. Literally, there are procurements coming up that we're involved in that are like this. And so companies whose DNA is to not buy back stock, not pay dividends, but to take your shareholders' money, which we treat every dollar as our own and develop a new product for a specific need or a requirement, this is why we're being successful.

Your next question comes from Colin Canfield from Cantor.

So maybe just summarizing the building blocks that you gave in terms of the guidance. It sounds like, based on what we have today, call it, roughly $2 billion revenue line item in '27 and then we get upside from there, call it, maybe Q2 to Q3 on a mix of Marine Corps production and then probably Air Force CCA developmental work. So as we think about those building blocks, a, does that building block -- like does that make sense? B, what are some of the additional U.S. customers beyond Marine Corps and Air Force that you feel really strong on. And then C, is it fair to characterize that starting point as fundamentally being kind of a production doubling cycle, if it's like going from like low rate initial production to full rate production over a 3-year period such that if it's $2 billion in '28, and it's more like $2.4 billion, and then maybe it's like 5 years from now, it's like $5-ish billion. Is that -- does that all make sense?

Yes. Okay. So on your base case assumption that you're talking about, let's put aside tactical drones, put those aside. I'll come back to them, all right? The growth rates we gave you today, which I fully expect will continue into '28 when we give our target next year, that excludes tactical production. Let me give you a big one that's coming that I haven't talked about in a long time, but we are under contract, okay? We are under contract for the ground transporters for Sentinel. This is a multi-hundred million dollar initial contract before it goes into production. This is going to start ramping '27, '28, '29. So there's a big program of record out there. We are on, it's enormous. I can't get ahead of my partner, Northrop. This is going to kick in for us in some of those out years. That is in our forecast because it's a program of record. Okay. Let me give you another one. Please keep this one in mind, too, the jet engine production. Okay. Think depending on the size of the engine, these are just the turbojets, this is not GEK, $30,000 to $50,000 per engine for us, okay? So if we get to 1,000 engines a year in '28, which if you take a look at some of these low-cost cruise missile programs that we are designed in on, that's not out of the ordinary, that helps get you there. So putting the tactical drones aside, we are looking at line of sight on being a multibillion-dollar company over the next several years. As you said, we're going to get to $2 billion relatively soon. Then let's bring in the tactical. I don't want to talk specifically about the Marines or the Air Force. I can't do that, okay? But if you take the Valkyrie and what we're doing with the Marine in Europe. One of the other ones I talked about that we're sole source on, but I think I'm going to be able to talk about a lot when we report Q4 in February, okay? We could be producing -- let's be super duper conservative. 2028, let's say we're doing 50 a year at $10 million each. There is an incremental $500 million, okay? Tactical fire jet, okay, use $500,000 to $700,000 per plane just depending on the mission system, okay? This could be 200 to 300 a year by 2028. That's what we're talking here. This is a very important system internationally. This is one of the reasons these rule changes and interpretations are so important for us, All right? Okay. Then there are some other ones that you alluded to. I can't talk about if we're successful on them, I think we're going to be successful on at least one of them, that would start being very material also in '28. So that's why -- that's the meat on the bone on why I agree with your vision, let's say, through 2030.

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

Okay. So yes, that's a good question. Deanna calls this my CEO stars aligned vision, okay? Let's say that Anduril was right with the Barracuda, okay? Let's say that some of the -- let's say Castelion is right, okay, with Bluebeard or Blackbeard, okay? Let's say some of these guys are right. On the air-breathing engine side, okay? This is also the big guy, so take a look at Comet, take a look at Lumberjack, take a look at Franklin, take a look at Mace, take a look at CMMT, okay? All of which are going to need some type of a brain as you're talking about for their mission. They're all going to need engines, and we see how warfare now is quantity. And it's not going to be quantities of $3 million JASSMs ER, XR and LRASMs. It's going to be Barracudas, it's going to be things like that. So let's say my 1,000-engine-a-year type of a thing is low by 2,000 a year at $50,000 or 3,000 engines a year at $50,000. This is how we will participate if they're successful, and I hope they are for U.S. national security.

Got it, got it. And just last one to make sure that we have the accretion dynamics ironed out in terms of orbital. But maybe just if we do the rough math, it sounds like it's 350 divided by 15 for LTM EBITDA and then roughly, call it, 350 divided by, let's call it, 20 to 30. So at, let's call it, a mid-teens, low teens EBITDA multiple of takeout for revenue sake, what are the key IP technologies that you view you're getting within an asset?

Okay. So the number one that I'm focused on is their miniaturization technology on unmanned aerial vehicles, unmanned ground systems, unmanned ships and unmanned submersibles which has proven -- in my mind, this is a significant -- this ties into your question on how we're going to ride the coattails on them. This is another avenue for Kratos to participate in vast quantities of systems that need communication capabilities in very difficult environments, including A2/AD. This is how I see it for them.

Your next question comes from Andre Madrid from BTIG.

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

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

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

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

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

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

Your next question comes from Austin Moeller from Canaccord Genuity.

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

The -- so let's talk relative and then absolute. On a relative basis, the U.S. is going to be far and away the biggest because that's where the biggest budgets are. And in some of the earlier commentary we were talking about with the MUX TACAIR program, et cetera. However, on absolute dollars, we go back to the previous discussion. And what I know some of the programmatic buy plans are on certain of the international guys we're chasing with Airbus. '28, '29 -- let's say, internationally, it's 20 or 30 Valkyries a year at $10 million each. So there's a couple of $300 million in revenue that on a relative basis is going to be -- could be very small to the U.S. But on an absolute basis, it could be very important to us. And Austin, while you're -- since you mentioned this, I want to emphasize something. One of the opportunities that we're chasing that I believe in the tactical high-performance bigger jet drone area is that I believe we're sole source on if this all comes through the government approvals and everything. It's not a Valkyrie. Take a look at our Clone Ranger. If you throw that in your bucket, international, if that comes to fruition, we're going to know in the next year and then I'll be able to crisply answer your question. International absolute could be even bigger, still on a relative basis small to the U.S., but it could be even bigger because that's a real customer out there that's interested in the Clone Ranger.

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

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

Your next question comes from Pete Skibitski from Alembic Global.

Eric, I don't know if you can answer this or maybe, Deanna, but on MACH-TB, do the economics of that program change for you if you use a Kratos flight test asset versus --

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

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

Yes. It can be connected to MACH-TB but it's not tied to it at all, and I'll explain why. So obviously, this is an arc jet and a laser facility for incredible heat to test hypersonic weapons and materials. So it's going to use an enormous amount of power, like crazy electricity. We're down to two sites. We're going to be making the decision probably in the next 30 days that either have the infrastructure and the power capacity already or they're willing to put it in, okay? This ties into something in my prepared remarks that Kratos does that other companies out there don't do. We don't go and start building a generic 1 billion square foot facility somewhere without a program. okay? Because programs are specific and they require different types of business structure, different types of security, different types of power. So -- and you need a customer that's going to pay for it for a rate of return. The initial $68 million is to get the facility going, et cetera, et cetera. So Kratos will build the facility, Kratos will pay for the facility. It will come out of our CapEx. The customer is giving us a contract where we're going to be able to recover that CapEx either in the overhead rates on the contractor through a lease plus a rate of return. This is why it's so incredibly positive that our shareholders invest in us to let us do this. It is an incredible force multiplier for us. Once the facility is up and running, the number of systems, the backlog on hypersonic or high-speed related systems with exotic materials that need to be tested is incredible here in the United States. As you know, we basically shut this capability down, and that's why Russia and China caught up to us. So this will be similar to Anaconda in annuity for Kratos. We will own the facility. We will operate the facility. And it will go, as I said on Anaconda on the Slide 1, for decades, and it will be a multi-hundred million dollar, billion dollar revenue stream for us over time.

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

No.

I thought I'd try.

But I'll make you feel good on this. One of the reasons our book-to-bill was 1.2:1, we got the first big block of Poseidon. So that's -- I'm glad you asked and I wanted to point that out to you that a big part of our book-to-bill was the first piece. It was a first piece of Poseidon.

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

No, I'm not talking.

Your next question comes from Joe Gomes from Noble Capital.

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

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

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

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