Kratos Defense & Security Solutions, Inc. (KTOS) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Kratos Defense & Security Solutions Fourth Quarter 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Marie Mendoza, Senior Vice President and General Counsel. Please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us for the Kratos Defense & Security Solutions Fourth Quarter and Full Year 2024 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. With that, I will now turn the call over to Eric DeMarco.

Thank you, Marie. We achieved our financial objectives for 2024 with Kratos positioned for sustained and increased future growth and profitability as we begin 2025, with the United States beginning a generational recapitalization of defense and strategic weapon systems and with national security funding expected to significantly increase here in America and with our allies. Key highlights from today's financial report include 2024 organic revenue growth of 9.1%, fourth quarter cash flow from operations of over $45 million, Q4 and full year book-to-bill ratios of 1.5:1 and 1.2:1, respectively. Kratos is forecasting 2025 organic revenue growth of 10% over 2024. And today, Kratos is forecasting 2026 organic revenue growth of 13% to 15% over our fiscal '25 revenue growth forecast of 10%. Also importantly, beginning in 2026 and continuing into 2027, we are currently looking at significantly increased EBITDA margins for Kratos as certain existing programs either begin or see increased production, certain long-term fixed price contracts we have been working under for a number of years are renewed at higher rates, enabling us to recover going forward the past few years' inflation-driven increased supply chain and labor costs and Kratos realizing leverage on our fixed costs as our revenue base organically grows. In 2024, we demonstrated again that the Kratos balanced business plan approach, including making internal investments, being first to market to meet customer demand and profitably grow the business and making money, generates value for all Kratos stakeholders. Additionally, the Trump administration, the new Secretary of Defense, the DOGE initiative and the proposed Forged Act, which we are particularly excited about, are all looking to increase innovation, reduce cost, increase efficiencies, receive more for less and rapidly field relevant hardware and systems now, not in the future based on a PowerPoint presentation, each of which we believe Kratos is uniquely aligned to address. Kratos is a defense industrial-based hardware manufacturing company, not a people-based services or consulting company. The savings from DOGE and the Secretary of Defense's announced 8% reallocation of defense budgets, we believe will be beneficial for hardware companies like Kratos as Kratos' products are in demand, ready to go now and the U.S. defense manufacturing industrial base is being recapitalized. Areas of emphasis noted by the new administration include hypersonic systems, unmanned systems and drones, space and satellite communication systems, each which are certain of Kratos' largest business areas. Additionally, we believe that the President's recently announced Iron Dome or Golden Dome for America initiative will be significantly positive for our company with Kratos' proven hardware and systems in air defense, space and missile defense, radars, space and satellite sensing, hypersonics propulsion systems, solid rocket motors and directed energy systems. Also importantly, we expect to see increased demand for Kratos' target drone, ballistic missile targets and hypersonic target franchises as the new Iron Dome USA or Golden Dome system will need to be tested and the war fighter trained against threat representative targets. Relevant Kratos programs include Israel's Iron Dome, Iron Sting, Arrow and Sling of David and in the U.S., THAAD, Patriot, Aegis, Arthur, Rother, Jaylen's, HPTSS, Titan and other systems, certain of which are already being mentioned as elements of the President's Iron Dome initiative. It is possible that initial significant Golden Dome funding could be included in the proposed 2025 supplemental, which could be very good for Kratos in the mid- to near term. Kratos is a recognized industry leader in developing upfront for scale and also being able to produce at scale affordable qualified military and national security-related hardware, products and systems that work every time for the war fighter. This is what we do. We are a mills hardware products and systems company, which is not easy to do, and we believe Kratos' capabilities and our proven past performance qualifications are incredibly valuable to our nation's national security and also the Trump administration's national security vision. Directly related to Kratos' MIL-STD hardware capabilities and past performance calls, Kratos has recently received several large new program awards including in the hypersonic area with the MACH-TB 2.0, the largest award in our company's history at approximately $1.5 billion, positioning Kratos for significant projected future revenue growth and margin expansion. MACH-TB is intended to provide an affordable bridge between hypersonic ground tests and system-level flight tests, which will reduce overall hypersonic development risks and time and provide rapid transition of innovative hypersonic technologies to the war fighter. As a result of these program wins, and additional new programs, we have high confidence of being awarded in '25 and '26. Consistent with Kratos increasing our forecasted organic revenue growth for '26 up to 13% to 15% with increased EBITDA margins, we will also be making investments over the next 24 months, including in property, plant and equipment in order to successfully build, integrate and deliver the related program hardware, products and systems and successfully execute on these opportunities. A key element of Kratos' strategy also includes working very closely with our partners, including the traditional prime system integrators and also certain of the new defense technology companies. We believe that Kratos' affordability, speed of execution, innovation, MIL-STD hardware capabilities and rapid building techniques bring added value differentiation to both our partners and our customers, and we are seeing an increasing number of teaming and partnering opportunities as a result. Over the last several months, Kratos' affordable hypersonic systems, including Kratos' Erinyes and Dark Fury hypersonic vehicles and Kratos' Zeus and Oriole rocket systems continue to progress, including the execution of several successful flight missions. Kratos' ability to go from a clean sheet design to multiple successful hypersonic flights, including glide vehicles, propulsion and other systems in approximately 2 years at a cost multiple orders of magnitude lower than previously performed is just a recent example of the strength of Kratos' industry-leading software, digital engineering, technical hardware and system integration capabilities. Kratos' hypersonic franchise is rapidly expanding, including additional systems we are now working on as we are able to provide our customers with actual flying low-cost, reliable systems at scale, not pretty pictures or websites. Kratos being first to market and having multiple successful flights of our glide vehicles and other systems has generated significant customer interest, which we expect to turn into future funded opportunities. With Kratos' MACH-TB hypersonic program award, we will be announcing in the near future the location of a major new Kratos hypersonic production, test, integration and execution campus in the United States in conjunction with the customer, where a large amount of the work under the MACH-TB program will be performed. The new MACH-TB program campus and facility will be separate from the new Prometheus facility I will discuss shortly. Consistent with Kratos' internal investment strategy, Kratos' MACH-TB hypersonic campus and facility is not a 'build it and hoped for they will come'. But rather, we typically have a customer, a program or contract award or a partner commitment before we commit significant resources so that we are comfortable with the rate of return on our shareholders' investment. Kratos' MACH-TB hypersonic system campus and facility will be an important capital investment in '25 and '26. And once complete, the MACH-TB program is expected to begin to significantly ramp up thereafter. Under MACH-TB, we currently expect to generate nominal revenue in the second half of '25 as we began to receive and integrate certain long lead hypersonic system, solid rocket motors and other elements we ordered previously in anticipation of the award with this initial work being performed at existing Kratos facilities with an expected significant program ramp beginning in '26 and increasing in '27 with the new facility coming online. We are also now zeroing in on the location for a separate from MACH-TB and separate from Prometheus additional new Kratos hypersonic system initiative facility called Project Ares, which location we hope to identify and report to you in the second half of this year with customer-funded work beginning in '26. Kratos Turbine Technologies in our jet engine and propulsion business, which were key contributors to our '24 performance are also positioned for continued future growth, including in the missile, drone, loitering munition, hypersonic, supersonic space and other areas, with propulsion systems being certain of the highest priority and well-funded national security areas. The demand for Kratos' engine and propulsion systems, including our Spartan family of small jet engines for cruise missiles is strong and increasing, and we continue to expand our current facilities and establish new facilities to successfully execute the program awards we have already received and others we expect to receive. We have moved out on our new jet engine test and production facility in Oklahoma, which is directly related to our partnership with General Electric Aerospace and certain missile and drone programs with this facility expected to be completed in late '26 or '27 and forecasted revenue contributions expected to begin thereafter. Kratos Turbine Technologies Blade works has been focused on a new classified jet engine program we have for a large new tactical airborne system, which program could become one of KTT's largest in the future. And also, a separate classified program, which aerial system flight is planned for later this year. Kratos' C5ISR, air defense missile radar, CUAS and directed energy hardware business has a near-record backlog and opportunity pipeline, including a new hypersonic weapon system program we recently received. Kratos' C5ISR hardware business has several programs beginning production or expected to begin production in '25 and '26, including this new hypersonic program and the new defense of GUAM system. Kratos' microwave electronics business, which supports Iron Dome, Tamir, Iron Sting, Arrow, Barak and other systems also has a record level backlog and opportunity pipeline with the expansion of our existing microwave facility and our new production facility, both in Israel expected to be completed in '25. A few weeks ago, Kratos acquired the business of a small U.S. microwave company, Project Phoenix or Norden Millimeter that we have known for a number of years, which will provide us accelerated access to certain new customers and programs we've targeted. Kratos' Unmanned Systems business is also forecasting growth for 2025 with the potential to significantly exceed our current forecast we provided today. If certain tactical drone opportunities come to fruition on the currently anticipated time line. Since our last report to you, and including recently, there has been a lot in the press on drones, the types of drones needed to deter our enemies and importantly, that drones must be low cost and able to be fielded in large quantities with the new administration's initial indications on drones also being positive. It was recently announced that Kratos has received an additional Valkyrie-related contract with the Marine Corps. And in the announcement, the Marine stated that the Marine Corps are at the vanguard of collaborative combat aircraft or CCA development and that the Marines intend to field an operational CCA quadrant with a tactically relevant aircraft equipped with effective affordable mission system payloads. Additionally, the Marine Corps also recently published its latest Marine Corps aviation plan, including a detailed update on Project Eagle, a secretive initiative, which includes a 2-year experimental test phase of Kratos' Valkyrie with flight tests increasing in 2025. Kratos Valkyrie has been performing under the PAC-P program with the Marines with the Valkyrie now transitioning to the much larger (MUX) TACAIR program, which looks to enhance the effectiveness of F-35 fighter aircraft in peer near-peer conflict by acting as a loyal wingman capable of providing offensive and defensive assistance by leveraging various capabilities. Kratos' customer-funded Apollo and Athena programs are also proceeding well, and I am particularly pleased with Thanatos, which I believe similar to Valkyrie is going to be a game changer for Kratos. Though we remain convinced that Kratos' tactical drone business is going to be very successful, we will remain cautious and not include potential significant tactical drone sales in our financial forecast until we receive or extremely confident of a contract. Kratos' target drones are in demand, including with the increased global demand for air defense, missile, radar and other systems, all of which need to be regularly tested and exercised and the war fighters trained against threat representative targets. And as I mentioned earlier, we expect Golden Dome USA to be a new opportunity set for Kratos' target drone business. Kratos continues under contract with a government customer where we are integrating Kratos' low-cost jet engines into several Kratos drones, including as previously publicly disclosed, Kratos' Air Wolf and Fire jet, which are scheduled to fly later this year. Once successful, we expect that Kratos' jet engines will reduce cost and increase performance and reliability of these Kratos systems, and we believe that Kratos will be one of the only vertically integrated companies that produces a jet aircraft and its engine within the same organization, reducing supplier risk cost and increasing speed of execution. The engine integration plan is part of Kratos' company-wide initiative to vertically integrate certain critical components and subsystems in order to reduce supply chain and cybersecurity risk, lower cost and reduce delivery time to our customers. Related to our vertical integration initiative, Kratos is continuing to invest in 3D printing, additive manufacturing, machining, milling, laser, machinery and other equipment related to hardware, composites, carbon materials and other exotic Mill-STD-related materials to support Kratos' programs, contracts, partners and our customers. We are currently in the process of expanding our tactical and target drone engineering production test and integration facilities in anticipation of both new and increased current program activity. Kratos' ghost works, including our air gapped capability, has been focused on Thanatos and an additional Valkyrie variant that we are developing and now also a new black system. We expect Kratos' satellite communication business with our OpenSpace virtualized C2 and TT&C software system to return to growth in 2025, including as we have recently received a number of national security-related program wins, which is reflected in this business's fourth quarter 2.3:1 book-to-bill ratio. We currently expect Kratos' satellite business to be a primary contributor to Kratos' forecasted increased EBITDA margins in '26 and '27. This is based on current program delivery expectations. The geopolitical and global security landscape, which aggregate funding exceeds $2 trillion with the United States accounting for approximately $1 trillion of this amount is providing a robust opportunity set for companies like Kratos with opportunities for Kratos having never been stronger and that are continuing to increase. Representative of the large number of customer opportunities and initiatives that have recently approached Kratos or become available to Kratos include in the hypersonic area, Project Ares, Project Helios, Project Anaconda and Project Vulcan, each of which similar to Prometheus and our engine partnership with GE Aviation, I hope to be able to provide you in the future with the nature of the programmer opportunity, its location and the customers or partners we're working with on each one. Our industry continues to operate under a CRA with no 2025 defense budget currently in place with the current CRA scheduled through March 14 of '25, at which time Kratos and the entire industry will have been operating under CRAs for approximately 12 of the past 18 months. which is the primary reason we are being cautious with our initial '25 financial guidance we provided today. Execution challenges include the difficulty in obtaining and retaining qualified personnel, including those willing and able to obtain national security clearances, the related cost of these individuals, supply chain issues and the increasing cost of materials in certain areas. We are focused internally on execution of our record backlog and opportunity pipeline, winning new program awards, of which we expect several with no acquisitions of size contemplated. Now for our Prometheus announcement today. We have announced that Kratos and RAFAEL have established the Prometheus Energetics joint venture, a U.S.-based merchant supplier of solid rocket motors and energetics. Kratos is honored to partner with RAFAEL and be the trusted agent to introduce RAFAEL's energetics technology and implement their proven manufacturing processes and procedures in the U.S. market. Kratos has a deep decades-long relationship with RAFAEL, including Kratos' Israeli-based microwave electronics business, where today, we have several hundred personnel located and working on Israeli missile radar, satellite and other national security systems. Kratos has a long history of successfully advancing innovation, developing disruptive technologies and rocket motor specifications to enhance war fighter capabilities, and Kratos makes the ideal partner for RAFAEL here in the United States. Prometheus is an approximate 50-50 partnership between Kratos and RAFAEL. With the manufacturing facilities to be located on a 500-acre site in Bloomfield, Indiana, near Naval Surface Warfare Center Crane and will include Prometheus' corporate headquarters, solid rocket motor and energetics engineering, test, production and integration facilities where approximately 300 people will ultimately be employed. RAFAEL will be the anchor customer for Prometheus and intends to have Prometheus produce tens of thousands of solid rocket motors and energetics for existing and expected future demand. Prometheus will be CFIUS, FOCI, et cetera, compliant in order to be able to fully address United States as well as Israeli national security requirements. Kratos and RAFAEL have each committed to invest up to approximately $87.5 million in capital for the establishment of Prometheus and the required property, plant, equipment and personnel needed for the new state-of-the-art energetics manufacturing campus and facilities. Kratos and RAFAEL's investments are expected to be made ratably over the approximate next 2 years with the majority of the investment currently contemplated to be made in '26. The total aggregate approximate $125 million investment in Prometheus is expected to potentially be substantially offset or reduced by various industrial base related funds we have been working on securing since last year. Prometheus is projected to begin production in '27 after construction of the plant and once RAFAEL's technology transfer is completed and certified for operation. Now very importantly, the solid rocket motors energetics and warhead manufacturing operations to be executed by Prometheus during production will utilize the same proven fully qualified technologies and processes currently used in RAFAEL's Israeli production facility for multiple missile programs. This will significantly reduce risk and time to market for Prometheus. This is the qualification, which is another first-to-market type competitive advantage for Kratos and Prometheus. As I mentioned, RAFAEL intends for Prometheus to produce tens of thousands of SRMs and energetics delivered over multiple years to address its increased demand. As such, Prometheus has a currently forecasted annual base case revenue of several hundred million dollars a year, once at rate production, which would close the business case for Kratos' investment. Accordingly, this is not a 'build it and hope they come' type situation. As part of the phased approach we are taking, strategic objective merchant supplier Prometheus is expected to expand into the development, build-to-print and manufacturing of additional customer SRMs and warheads to meet ever-expanding domestic needs supporting the U.S. industrial base. With Prometheus' significant intended base case production quantities intended by RAFAEL, we are confident that Prometheus will be extremely cost competitive as a merchant supplier supporting the U.S. industrial base as a result of the intended large quantities of RAFAEL sourced energetics produced at the Prometheus manufacturing facilities and the leverage of these quantities over the required fixed cost base. We also believe that Prometheus as a merchant supplier of SRMs and energetics will be very well positioned for the Trump administration's new Golden Dome initiative. Prometheus has already met and coordinated with the U.S. government, potential U.S. customers and these customers' future demand requirements. As a result of our preliminary work related to potential third-party customers, Prometheus' potential longer-term future annual revenue is currently expected to reach up to approximately $1 billion in revenue annually as Prometheus becomes a supplier for additional systems and platforms produced by key U.S. primes and others. Prometheus and its strategy is consistent with Kratos' capabilities, including Kratos being a leader in hypersonic or advanced systems, strategic systems, ballistic missile targets, suborbital research vehicles, sounding rockets, and solid rocket motors. Kratos has served the U.S. advanced systems, hypersonics and missile defense communities for decades, delivering numerous novel systems and flight tests. Also, Kratos is the only company today delivering both propulsion and advanced flight systems with Kratos advanced and hypersonic systems, including the low-cost Erinyes glide vehicle, Dark Fury, Zeus and Oriole solid rocket motors and other Kratos systems and technologies. Accordingly, we believe that Prometheus, once up and running at full rate production, will be a step function catalyst and value creation for all Kratos stakeholders, Prometheus customers and the U.S. defense industrial base. I'll now turn it over to Deanna to talk about the accounting for Prometheus and then to go through the financial results for our fourth quarter in 2024.

Thank you, Eric. Good afternoon. As Kratos will own approximately 50% of Prometheus, we will reflect the results of Prometheus in our consolidated financial statements under the equity method of accounting, under which Kratos will record approximately 50% of Prometheus' net income on a single line income from investee in our consolidated income statement. We intend to continue to report Kratos' operating income, net income and adjusted EBITDA, and other financial matrices from the Prometheus results in order for all Kratos stakeholders to be able to follow the progress of the company, the investment made in Prometheus and the future return on Kratos' investment in Prometheus. All financial guidance provided today does not include the estimated impact of Prometheus. I'll now turn to this quarter's current results and full-year results. As we have included a detailed summary of the fourth quarter and full-year financial performance as well as the initial first quarter and 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 fourth quarter were $283 million in our estimated range of $270 million to $295 million, which includes notable strength in organic revenue growth in virtually all of our businesses, including our Unmanned Systems, Turbine Technologies, Microwave products, C5ISR and defense rocket support businesses offset by the expected industry-related impact in our commercial satellite business, which includes impacts from OEM delays in the manufacturing and delivery of software-defined satellites. Adjusted EBITDA for the fourth quarter '24 was $25.2 million, also in our estimated range of $21 million to $26 million, reflecting a more favorable mix of higher-margin revenues, offset partially by increased bid and proposal costs associated with a large potential opportunity as well as increased subcontractor and material costs on certain multiyear fixed price contracts. Unmanned Systems organic revenue growth was 10.3% for the fourth quarter and KGS organic revenue growth was 1.6% for the fourth quarter, which included organic growth in our Turbine Technologies, C5ISR, defense rocket support, and microwave products businesses of $19.7 million, offset by the expected decline of approximately $16.1 million in the space and satellite business. Cash generated from operating activities was $45.6 million, which includes favorable customer milestone and advanced payments. Free cash flow generated from operations was $32 million after funding capital expenditures of $13.6 million. 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, and hypersonic businesses to meet existing and anticipated customer orders and requirements and investing in related new machinery, equipment, and systems. We are also continuing to manufacture the 2 production lots of Valkyries prior to contract award with these investments expected to continue and expand in 2025, which I will cover later. Consolidated DSOs or days sales outstanding decreased from 105 days in the third quarter to 104 days in the fourth quarter. Our contract mix for the fourth quarter was 69% from fixed-price contracts, 25% from cost-type contracts, and 6% from time and material contracts. Revenues generated from contracts with the U.S. federal government during the fourth quarter were approximately 68%, including revenues generated from contracts with the DoD, non-DoD federal government agencies, and FMS contracts. In the fourth quarter of '24, we generated 13% of revenues from commercial customers and 19% from foreign customers. An operational priority remains the hiring and retention of skilled technical labor across the company with total Kratos head count of 4,067 at the end of the fourth quarter as compared to 4,047 at the end of the third quarter and 3,932 at the end of the fourth quarter of '23. Now moving to financial guidance. Our financial guidance we provided today includes our expectations and assumptions for our supply chain execution and for employee sourcing, hiring, retention, and the related cost. We have also taken into consideration in our '25 guidance operating under a federal fiscal year '25 continuing resolution authorization, which currently expires March 14, 2025. If the current CRA is not resolved by March 14, the industry and Kratos will have operated under CRAs without a DoD budget for approximately 12 of the previous 18 months. With Kratos having a number of new and existing programs and contracts, which are directly being impacted by the current CRA. Kratos' '25 financial forecast and guidance provided today assumes that the current CRA will be resolved by March 14, 2025, and that a U.S. federal and DoD budget, which includes no unexpected funding cuts impacting our business, occurs. If the current CRA goes substantially beyond the existing March 14, '25 deadline or if there are significant reductions or changes to programs, contracts, or initiatives that Kratos is or expects to be involved with, we will evaluate Kratos' '25 and future financial forecast at that time based on the existing facts, circumstances, and expectations. Our forecasted revenue guidance for '25 includes the estimated impact of the recent Project Phoenix or Norden asset acquisition, which is expected to contribute approximately $20 million to $24 million in revenues. Excluding the impact of the recent acquisition, our forecast includes organic revenue growth from 2024 of a range of approximately 9% to 11%. 2025 Unmanned Systems revenues are estimated between $285 million and $295 million or approximately 5% to 9% organic growth. As Eric mentioned earlier, we will remain cautious and not include any potential significant tactical drone sales in our forecast until we receive them. As a reminder, the 2024 target drone revenues included approximately $19 million in revenues from a foreign target drone shipment, which was recorded as revenue upon shipment, which will impact the year-over-year comparison for target drone and overall revenues for Unmanned Systems. Tactical drone revenues are forecasted to be approximately $45 million to $50 million for 2025, up from approximately $36 million in 2024. Non-tactical or target drone revenues are forecasted to be $240 million to $245 million in FY '25 compared to $247 million in '24, which included the $19 million related to the international target drone shipment. KGS revenues are forecasted to be between $975 million to $990 million for FY '25, up from $865 million in '24. Organic revenue growth for KGS is estimated to be approximately 10% to 12% with organic growth expected across all business units within KGS with the most notable drivers expected to be in our hypersonic and ballistic missile target business. We have taken into consideration the impact of increased material and subcontractor costs on certain of our multiyear fixed price contracts, specifically in our Unmanned Systems target 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. As we have discussed in the past, these production lots are typically negotiated and awarded in 5-year production lots with certain of these having been negotiated in 2020 and 2021. We are working to mitigate the continued future impact of cost growth on these materials as much as possible. As we mentioned earlier, we are making investments for capital expenditures for property, plant and equipment, including the expansion of our manufacturing and production facilities and related inventory builds in our rocket systems and hypersonic businesses, primarily related to the recent MACH-TB 2.0 contract award, the continued manufacture of 2 production lots of Valkyries prior to contract award to meet anticipated customer orders and requirements, the expansion and build-out of our microwave products production facilities, the expansion and build-out of our small jet engine production and test cell facilities and the build-out of additional secure facilities for our federal secured space communications business in accordance with contract and customer requirements. We have provided the details of these investments in our press release published earlier today. In addition, we are making investments of approximately $25 million to $30 million related to certain inventory buildups for our hypersonic and ballistic missile target business and enhancements to certain unmanned vehicles that are not included in our capital expenditures estimates as these amounts will be reflected as investments in other assets and not property, plant and equipment and will, therefore, impact our forecasted 2025 operating cash flows. We have not included the estimated investments for Prometheus in our guidance provided today. As Eric mentioned, the majority of the investments are contemplated to be in 2026. Although these investments were not included in our guidance today, certain of these investments, including the Prometheus-related investments were contemplated when we did our equity raise last year. As a reminder, we ended the year with $329 million in cash, 0 drawn on our $200 million line of credit and $185 million on our term loan.

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

[Operator Instructions] Our first question comes from Josh Sullivan with The Benchmark Company.

Eric, as Kratos becomes more and more of a merchant supplier, low-cost engines, the Prometheus rocket motor JV here for hypersonics, what does that do to the long-term margin profile or your strategy for the company?

Yes. That's part of the strategy. The margin profile, as Deanna and I indicated, is going to start to lift now in definitely in '26 and in '27. It's because of the merchant supplier and the margins we're getting on those. And also, as Deanna mentioned, we got -- having long-term contracts that get renewed, 5-year contracts that get renewed every year is great for predictability. It's great for planning. But if you have an aberration in inflation like we did in 2021, '22, we can't pass that on to the government until we can re-up the contracts. We've started re-upping them this year. We're going to get clear of virtually all of them, and then we'll be in great shape going into '26. So that's, those are the factors on our margin profile going forward.

And then just on MACH-TB 2 program, you know the program will be a bridge for future products, but Kratos has a history of converting affordable bridge products to tactical products. Is there any reason we wouldn't think you walk down that path eventually?

There is no reason for you to think that we would not do that.

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

Lots to ask about. I guess maybe one question just about MACH-TB. When we think about the evolution of this contract, how it ramps up? What drives both revenue and profitability? Is it kind of an overtime contract? Is it kind of the cadence and velocity of testing events that drive both revenue and profit and how we think about this evolving over the next few years?

Yes. So, Seth, the MACH-TB contract is primarily an aerial test contract. There are not enough test assets in the United States of America on the ground and definitely not in the air. And why not in the air? Because Kratos is one of the, if not the only company, that is hypersonic, relevant hypersonic systems flying today. That's us. The industrial base is in trouble, which is one of the great opportunities for us and the government sees that. The long lead items for SRMs, for the flight vehicles, for these assets, including most of them are ours, is long, up to a year. So, like I said on the call, we're going to get a little bit of revenue this year because we, Kratos, we lean forward. We went out, we bought some solid rocket motors, and we bought some hypersonic light vehicle material and we built them that we're flying them. You saw another one was announced last week. We've now started to order a significant amount of stuff, which we're going to get beginning of next year. We're in close conjunction with the customer on this and the OP tempo, which is all laid out. It was specifically laid out when we did this program. So, we've got the road map on launches with the customer, our launches and all the team members underneath us. It's planned to significantly ramp starting in '26, ramp even more in 2027 and '28. And what's happened recently, I couldn't be more happy about, including just today, we're underneath the Secretary of Defense, another confirmation individual came out and specifically said, we need more hypersonic testing. We need more aerial hypersonic testing. HECSAP has said that we are in a great position here because there is a dearth of testing capability in the country.

Okay. Great. And then just as a follow-up, the investments this year, it's definitely helpful to have kind of the layout of those investments in the release, and it makes a lot of sense to do them given the requirements and you certainly have the balance sheet for it. When we just think about how to model out the level of investment going forward and kind of where cash flow goes after this year, even if it's qualitative, are there any kind of guidepost you can provide in that regard?

Yes. Seth, so the Prometheus investment is not included in these numbers. And as we mentioned in our prepared remarks, the lion's share of that is expected in '26. So that will be something that will be different from '25. But a number of these other items should be nonrecurring with all the build-out of facilities that we have laid out in the press release. Most of those should be complete in '25. The only other one that would not be completed in '25, Eric had mentioned earlier, is our turbo jet facility that we are starting to build in 2025, but predominantly should be completed in '26. So those would be the 2, I would say, plus ups from the maintenance CapEx that we have historically incurred.

Okay. Very helpful. Thanks very much.

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

Thanks. Can you talk about what your objectives are with your Defense Electronics business? At one point, you owned all of the lease, you sold most of it to Ultra Electronics, you retained the Israeli piece. You bought CCT a couple of years ago and now Norden. So, I imagine you must have with Norden, $50 million, $60 million, $70 million of such revenue now and you talked about in your remarks some accelerated capabilities. Could you just go into that in a little bit more detail?

Yes. So, as we know, Kratos has incredibly positive relationships with the traditional primes and also now with some of these new defense technology companies. And as you indicated, Mike, we had a very substantive microwave business in the US. We sold it. The noncompete ended a few years ago and we made a decision to re-enter the market. Over the past few years, and it has accelerated recently, the primes are coming to us, they want an alternative, and they know we can do it. And the team that we put together at Kratos Microwave North America is the gold standard team. I don't want to get into it, but they're the gold standard team. The primes know them and they like them. So, our objective, to Josh's question upfront, we are going to be one of, if not the lead merchant supplier of microwave electronics in the United States. That's our mission. That's what we're going to do. We have an incredible microwave business in Israel. The technology is leading edge on the brink of bleeding edge. And as you know, we're on virtually every Israeli missile and radar program. So, we've got the pedigree underneath all of Kratos. We have now getting some critical mass, and we are looking forward over the next year or 2 to updating you on this is going to be one of the most rapidly growing and high-margin businesses in the entire company. That's our plan.

Okay. Thank you, Eric. And then what, in particular, was it that drove this 2.3:1 book-to-bill in space in fourth quarter?

That was primarily related to some of the national federal satellite programs that we were awarded during the period.

Yes. And Mike, related to that, I'm glad you asked that. Over the past 6 months, and it's accelerated over the past 3 months, Kratos is being encouraged to prime more. Heretofore, we would have said, okay, our highest probability as part of something instead of all of nothing if we lose would be the team. We're being encouraged by the government customers to prime more and we've been doing it and we've been winning. So that's what's happening here. And so even though our commercial SATCOM business for the reason Deanna talked about and Airbus and Thales having issues with their software-defined satellites is flat right now. The national security business is looking great and the pipeline since we last spoke to you all 4 months ago, the quality of it and quantity has increased substantially. So, we might have some upside here this year. It's looking good.

Okay. Thank you.

Our next question comes from Jan Engelbrecht with Baird.

Good evening Eric and Deanna. Just a quick question on DOGE and the Space Development Agency. We saw the director, there was a sort of disruption in leadership and the willingness from the government now to move towards more fixed price contracts within space. I was wondering if you could just talk more about your position in space and obviously, you're very comfortable operating in a fixed price world. Just what you're seeing there for 2025 and beyond, specifically on the space business.

Yes. And so let me qualify on the fixed price. We are very comfortable on fixed price production contracts or fixed price leading technology contract, leading, not bleeding. We are not comfortable one bit at Kratos on fixed price development contracts on bleeding edge stuff, including stuff that's never been done before. Other companies do this and they blow their brains out. We are very wary of this. So, we are, again, we're extremely comfortable in the fixed price environment. If we know the game field, we know the technology, it's a production contract, et cetera. We, as I mentioned to Mike, and I'll just talk, I don't want to talk about SDA particularly. I don't like to do that, but I'll talk about the space environment on the government and national security side. The number of opportunities right now for us is incredible. It's accelerated dramatically over the last 6, 3, 1 month, incredibly. And you can read about what's going on out there and the new administration, one of their priorities, space. President Trump's Iron Dome or I saw now it's Golden dome. Golden Dome, one of the key aspects of it is space tracking systems, which we're good at. Space communication systems, which we're good at. Space domain awareness, which we have. So, my tone has changed incredibly since I last spoke to you on our space business because the game field has changed.

Great. That's really helpful. And just a quick follow-up. Just on the marine aviation plan, can you just give us some more details about what it entails that the marine variant has not sort of graduated from PAC P over to Maksitak Air in terms of testing or funding or any other details we should expect for '25?

Yes. Brother, I cannot. We are really, we are very close with the customer. We can't say more than the prepared remarks, virtually all of which is in the public domain already. And so, I apologize. I just can't -- I can't go beyond what we've said.

No, I completely understand. Thanks Eric, thanks Deanna.

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

Hi, good afternoon Eric and Deanna. I appreciate, Eric, the incremental commentary in terms of the expected acceleration in 2026 growth. You've obviously got some tailwinds in hypersonics and space, it sounds like, and microwave electronics. But as we think about that, call it, $175 million in growth at the midpoint in '26, can you provide any more details or specifics or confidence around particular programs or how we think about the primary contributors to that growth?

Yes. Okay. MACH-TB, number one. Number 2, a separate hypersonic program we've won. okay? Number 3, a certain air defense system program that we are going into production on. Let me tell you some of the ones that we're on. We're on IBCS, which Northrop has been awarded production on. We are, as you know, Northrop is an incredible partner of Kratos. We are on a number of radar systems for Northrop Grumman and for Lockheed Martin. Lockheed is another incredible partner of ours. We have several of those that are ramping up, right? IPIC with Dynetics, I believe, and I never get ahead of our prime. I believe Dynetics or Leidos, they were awarded LRIP and full rate production together recently. Okay, which was not expected. We built a lot of hardware with our partner, Dynetics, which is a great partner. We're actually teamed together now on another very large program. So those are some of the ones that are just going to drive the growth. Also in our turbofan business, certain missile program. I have to be careful. That's one that's going to add to it as well. So, we've got pretty good line of sight right now on '26. That's a very good line of sight. We also do on '27. I just didn't want to get ahead of ourselves, but the next couple of 3 years we're bolted in. They look solid.

That's super helpful. And as you think about maybe a step change in the margin profile into '26 and beyond, like can you maybe help just a little bit with sort of magnitude of that? And maybe as you think about the business longer term as a merchant supplier and everything you've talked about that's obviously behind the strategy, which should result in better margins. What do you think the potential sort of EBITDA margin of the business could be in the out years?

I'd look at up 100 basis points or so in '26, up 100 basis points or so in '27. And I'll say 100 to 150 basis points in '26, 100 to 150 basis points in '27, 100 to 150 basis points in '28. That's the trajectory we're looking at for an increase here. Continuing I could be very precise if we would have budgets on October 1, but we're not going to. So, timing could move around a little bit, but that's going to be the up-and-right trajectory because we've got these lower-margin fixed-price contracts. They're not falling off. We're renewing them. We're getting them re-upped with higher rates. The new contracts, obviously, we're bidding with the higher rates that takes into the inflationary impact. And the organic growth we have, the leverage we're getting off of our fixed G&A, and in the production areas, the fixed manufacturing cost is significant. So, we have some force multipliers here that's really going to help us beginning in '26. Ken, it was going to happen this year. But as I said, we're in another 6-month continuing resolution and 12 or 15 of the last 18 months have been under a CRA. And so no new contract awards. which have the new rates in them that we're waiting for. That's been part of the problem.

Our next question comes from Michael Ciarmoli with Truist Securities.

Lots of detail. Eric, I wanted to ask about a little bit more on Prometheus, but you mentioned a lot of different programs. One I don't think we heard you talk about. So, I wanted to get some color on what's happening with Boom Supersonic. They've obviously had some positive developments. And then just on Prometheus, when we think about that opportunity, are you going to be going after or is this predicated on new program wins and white space? Or are you going to actually be taking share from existing in-production programs for some of the shortages that we've been hearing about? And I'm assuming this is both U.S. weapon system opportunities and sort of homegrown NATO ally opportunities as well?

All right. So, on Boom, I'm going to answer the question, but understanding we are under a very tight, tight NDA with Boom, okay? From my perspective, Boom is knocking it out of the park. They have the right business plan, the right airplane at the right time. This is Eric DeMarco's perspective, okay? The market right now, in my mind, is wide open to another commercial aircraft manufacturer. There's Boeing, there's Airbus, they're wide open. and Boom's success recently going supersonic, the first commercial supersonic aircraft in the U.S. ever is incredible. In addition to that, as you know, we're developing the engine for them with them, okay? We are on track to be orders of magnitude less costly and orders of magnitude faster than it's ever done before because as you know, a bunch of our guys and gals have done did F-22 and F-35. So, this is a very important program for Kratos. We've got one of our A teams on it, and our mission is to make Boom successful. So, I'll pause there. If you have any questions on that, then I'll go to the next.

I guess, presumably, that's not in the revenue growth plan. I mean you're talking some pretty compelling visibility, '25, '26, even '27, presumably if Boom executes well, that would be additive.

Right. So, we're at a run rate with them. We are doing everything we can to manage cost to be a great partner to them, okay? And so no, that is not a major or even a medium-term growth driver for us. That program is not. We have several other ones. On the second part of your question, I got to be very careful here because obviously, RAFAEL is owned by the government, the Ministry of Defense is involved, et cetera, et cetera, et cetera. Our plan is to service RAFAEL and all their needs first with Prometheus. That's first, okay? That's the base case. okay? We are looking at a number of white-field opportunities, new ones that are out there. There are a lot, and this is in the United States and internationally. There are a lot of new weapon systems out there, lots and lots of them. As I said, the key difference here, Kratos and RAFAEL and Prometheus, is we're MILL-STD qualified already on weapon systems. All these other guys that are trying to get in, they're not qualified. We're qualified, okay? So that's what we're trying to do. And primarily, my opinion, right now, we're going after white field stuff. And there's so much demand out there. Sure, we might bump into some guys here and there, but that is not the mission here.

Our next question comes from the line of Noah Poponak with Goldman Sachs.

What's happening with Sentinel and from your perspective? And what does that mean for your position on the program?

Yes. So, we work with Northrop Grumman, as I said before, Northrop Grumman is an incredible partner with Kratos. And we are on the ground transporters for the missiles and the warheads and other things like that. So, look at us as part of the missile piece. That's where we are. So, we are not part of the silos or the ground the underground infrastructure and stuff like that, that you've been reading about. So that is the premise from my perspective, Northrop is knocking it out of the park. They're doing a great job and this program is doing a great job. I mean I'm not getting ahead of my partner here, but we're talking about systems that were put in the ground in the '60s and '70s. And it's been pushed to the right forever for all kinds of reasons by the Pentagon and by Congress. And now we have no choice. And so, my perspective, it's going great, and Northrop is doing great.

So the reexamining of requirements related to ground, even though you discussed being tethered to parts of the program that are ground, your parts of the program are different than what's being reexamined?

The ground piece that's being reexamined, the silos, the communication infrastructure underground, the command and control modules, underground, the launch modules, underground. Kratos has nothing to do with any of that. Think of us as part of the missile because we move the missiles around.

Right. So, on the ground, you're on the ground but above ground.

It's a good question. We're above ground.

Just wanted to be sure there. Okay. Got it. Just maybe trying to go a little, get a little more from you on this capital expenditure you're going to make. $130 million is double, it's really kind of triple where you were run rating not long ago. Has your opportunity set tripled? Or has your customer asked you to take on even more of the upfront funding? And I guess, just how much negotiation did you have around how much time lines can slide in this industry and therefore, who should pay for what?

Yes. So, Noah, so if we look at where we were last year, so it's approximately double where we were last year. And in that $125 million, $135 million, there's approximately $30 million related to the Valkyrie second lot build. So those are, conceivably, you could call that inventory, but the way we classify it is as capital. So those are for based on customer indicated demand and requirements. So we expect to sell those. So I would take that $30 million off. And then related -- specifically related to MACH-TB, that's about $22 million to $24 million. That's for the $1.4 billion contract that we just were awarded. And we are, what we didn't say in the prepared remarks is we are, actually, I think Eric did, is we are looking to offset some of our investment with industrial-based funding and other type of funding that is out there. But we have not assumed any of that offsetting the CapEx. In addition, so we've got about $15 million to $16 million that's related to building a new facility, production facility in Israel and then expanding one of our existing facilities there, that's $15 million to $16 million. That is nonrecurring. So that is, and that is based on customer demand, record backlog, record pipeline there.

And on that one, Noah, we received recently a $0.25 billion contract in Israel for a new classified system. That's starting to ramp next year. We had to build this new part of this new facility for that program. So, it will be recovered in that program. In addition to that, our Israeli microwave business, we've now won a number of space-based microwave programs. Where now we're actually going on the birds. So, we need space qualified facilities. So, we're building those out for these programs, the cost of which over time in the future will be recovered in the rates, okay, on those programs, okay? Also, on MACH-TB, in addition to what Deanna said, the campus and the facility to do all the integration work in the, we'll build it, we'll depreciate it in the future. The depreciation goes into the rates, we get paid for it. So, and that's why I went out of my way on the prepared remarks to say we don't do a build it. We typically don't do a build it and they will come. We've got to contract a customer or a program. The customer has said, we're going to give you this program, you stand up the facility, you can recover it over time in the rates, and that's what we do.

Okay. Great. I really appreciate all that detail. And maybe just last one, Eric. Valkyrie, you've detailed the customers that have maybe kind of moved to the front of the line versus who was originally there. Are those, how are those tracking versus what you thought 3 to 6 months ago? And then with the maybe originally intended customer, some interesting comments on force multiplying fighter fleets from the new administration, but I guess it's early days. So, where do they, where do they stand on what they want to do with Loyal Wingman.

Yes. So, the easy one first. The Marine Corps is an outstanding customer. They are knocking everything out exactly as they've communicated. So, nothing has changed from my perspective of any significance with them. They are completely tracking, okay? I was surprised when they announced Project Eagle, which, of course, I knew about and what the Valkyrie is doing there and what their plan is with the Valkyrie. That was surprising to me, but I'll take that as a good thing. There are several other things like that out there that are happening that we can't talk about that could be announced by the government, and I think you all would find them encouraging. So, from my perspective, Marine Corps is great. It's on track. They are at the front of the line, okay? On the other customer. So, on the other customer, you might have saw on the Secretary of Defense's 17 protected programs. That program is one of the protected programs. So, I look at that as a good thing for us, mid and long term. I can't talk much more about that other than what was out there because of the security classifications on this. I cannot get ahead of my skis with that customer publicly.

Our next question comes from Trevor Walsh with Citizens JMP.

Just wanted to maybe step back around the facilities build-outs and just maybe make, or ask a larger strategic kind of level question for you, Eric. I appreciate all the commentary around building out kind of the vertically integrated process. Just having, being kind of the main supplier, et cetera. There's some other maybe more venture-backed funded companies out there, kind of talking about plans for kind of mega facilities, mega factories to kind of do it all in kind of one-stop shop fashion. Wondering that seems sort of different, obviously, from how you guys are approaching things. Can you maybe just give us some of the puts and takes around kind of how you think about those 2 approaches differently and whether that's something you guys would think about longer term or if there's just kind of significant downside in your mind in terms of that approach or how that may or may not work out?

Yes. I'll definitely talk about Kratos' approach because I know that one. As we've been chatting about this afternoon, we are very fortunate. We have incredibly great relationships with Lockheed, with Northrop, with Leidos, with Dynetics, with General Electric Aviation, with RAFAEL, right? And so, our model because we're a publicly traded company. We know, I know a lot of the investors personally, they're focused on rate of return as they should be is we will not make, we typically, because I don't want to say never because you never know what's going to happen. We typically do not make a significant investment in something like Prometheus or something like GEK, General Electric Kratos or something like that, unless we have a customer that's committed that's going to buy stuff. The partner is going to step up and pay a significant amount of money to offset our risk, okay? We don't do a build it and they will come. That's not our model. And I don't see us doing that. We are very comfortable with what we're doing and our partners are very comfortable with what we're doing. And the reason why our partners do this with us, and this has really come to the forefront in the last 6 months, 3 months because affordability finally matters fiscally. Kratos is affordable. Our hypersonic systems are 1/10, 1/15 the cost of other stuff. And we're doing multiple successful flights. Customers are taking note and they're coming to us, okay? This is one of the primary reasons I believe we got MACH-TB was Zeus, Ares, and some other things we're not talking about, okay? We spent -- we talk to the customer in advance. We look at their strategy documents. We spent $5 million or $10 million or $15 million demonstrating and flying a relevant system that meets, I don't want to say a requirement because it gets gray in there, meets a need that they have, and then we win. And that's what's happened with our engines now, both the turbojets and the turbo fans, the solid rocket motors, the hypersonic flyers. It's happening right now with our tactical drones. It's happening. One of the best decisions we ever made, and I know it's not obvious yet, is building the Valkyries. Because customers are coming to us and they're flying them and they're putting mission systems on them because cutting through all the bulls** that's out there, there's nothing else flying other than GA. GA is a great company, by the way. There's nothing else flying. And so mission systems can get tested. The concept of operations can get tested, blah, blah, blah. That's all happening with Kratos' tactical drones. I just can't get into details because I'm not allowed to. So that's our philosophy. So, you can compare that with the other guys. I really don't know what there is. You can compare it to them, and I'm sure there are pros and cons.

That's great. Maybe just one clarification for Deanna, if I can. So the MACH-TB facility that Eric mentioned was the new kind of site to be determined. Is that incorporated in that '22 to '24 line item in the breakout in the press release? Because I think you had said some of that. Got it. Okay. But some of that's going into '26, I think if I heard it correctly, '25 and '26. So is there... Little extra.

A little bit. Yes.

Our next question comes from Joshua Zoepfel with NOBLE Capital Markets.

This is filling in for Joe. So just kind of a couple of housekeeping questions. Most of them might have been answered. You guys touched on it a little bit earlier, but can you kind of just get a little update on the facilities in India and Israel? I know you guys said in '25, but I know you guys previously expected it to be in Q2. Is that still on target for that?

On track. If it moves into July, we're on track because we have customers that need the product. And so they're with us, and we're working it. So, on track for Q2.

Okay. And then on India, is there any sort of time line for that one? Just anything, any color on that?

On which one...

The microwave product facility in India?

In India. yes. You think the U.S. government is slow. Boy, and I have ants in my pants. I'm going to say in 2026, right? But this time next year, you ask me and I say 2027, that's India time. And I love India, but it's just the way that it is. So, we're not going to put a lot in our financial plan until that facility is actually up and running because things move at a different pace sometimes.

Okay. That's helpful. And then kind of just looking at 2025, this is the unmanned segment. I know you guys have had a little bit of the margin kind of compression there. But it sounded like last quarter, leverage is going to be off this fixed infrastructure. How should we look at that kind of profile coming in this new year?

I think we're going to continue to see some of the pricing pressures that we've seen on cost growth from inflation on subcontractors because that's where we're seeing the biggest impact on those fixed-price contracts. So, we will continue to see a headwind in 2025.

So we have 2 programs that are multiyear programs, target drone programs, okay? Both of them are coming up now for renegotiation on the next 5-year lot. So, we're going to get this fixed, okay? There are 2 subcontractors out there that you all are aware of nationally. And they have been raising costs significantly, all right? So, we're going to get it addressed in the contract, and you guys know me, I'm working on a backup plan or a vertical integration plan because we can't have this.

Our next question comes from Andre Madrid with BTIG.

I guess just looking specifically on Tactical Drones, there were a couple of things you guys called out last quarter that I was hoping we could revisit. The first being Apollo was in contract documentation. I think Athena was under contract and that Valkyrie had also been down-selected for an international program. Can we just get any updates on those, if possible?

Yes. Apollo is under contract, and we're working away. Athena is under contract and my Tommy tells me later this year because of the nature of the work, it's going to be expanded. So that one is going great. And on the international one, we won. We've won. And yes, we've won, and we're working with the State Department right now, and that's all I'm going to say.

Could you give any color on maybe just the cadence of these programs, like as a whole, maybe just to not give away too much info? Like how should we be thinking about the step-up?

Yes. So, part of the revenue increase that Deanna talked about in the unmanned business for '25 over '24 is a result of Apollo and Athena, okay?

And international is not getting baked in yet?

The international one, a little baby, we've hedged it. I've hedged it because it includes the delivery of airplanes. we've hedged it, yes, because this is all cool, but it's international, it's State Department. We had a change in administration, which has slowed things down. And so, we're going to be very cautious here until we get it done. But we won.

Okay. No, that's great to hear. No, very glad to hear that. And pivoting away from that, if I could just squeeze in one more. If we look at Space and SAT, I know you kind of talked to the demand levels across government and commercial and their different values. But could you maybe just talk to us about what mix currently stands at the business and what you might want it to look like in the out years in terms of how much commercial versus Gov?

Yes, it's like 2/3, 1/3 right now, 2/3 Gov, 2/3 national security, DoD, other government agencies, stuff like that. 1/3 commercial, roughly. Probably, it's got to go to 80-20 government commercials because the government is kicking butt and it's growing and the commercial is going to be kind of sort of flat, okay? We need these satellites to go up, okay? The operators need these satellites to get fixed and go up. The operators, they're smart. They're not going to deploy. We've already won the programs. We've won. They are not going to deploy our ground equipment until the satellite is up in the sky, which makes perfect, I hate it, but it makes perfect business sense and it's what I would do. And so that's the dynamic we've got going here.

Our next question comes from Peter Skibitski with Alembic Global.

I'll try to be quick here, just a couple. Deanna, just to wrap up kind of the margin discussion, the margin headwind in '25 is all at targets in USD. Are you expecting KGS to actually expand margins in '25? Or are there headwinds there as well?

We're expecting some expansion in KGS. The lion's share is in Unmanned Systems.

Okay. And then just the last one. On the CapEx spend on the Valkyrie second production lot, that $30 million this year, does that complete that second production lot? And are you expecting future lots to be capitalized as well? Or are you going to switch to more of an inventory spend after that?

So the second line of 12 is substantially done. The second lot of 12 will there will be a little bit carryover into '26, but the lion's share is in '25. As far as future production, we would expect it probably to be more traditional in inventory rather than CapEx.

If we lean forward again, but based on how things are tracking with 3 customers, 3, okay, that our customers, I think we're going to sell what we're building, and then we're not going to need to lean forward anymore, and it's going to go to a more traditional programmatic relationship. We would have done what we needed to do to get installed get the initial orders and go into production. So, I don't think we're going to lean forward. It's unlikely we will lean forward again and build additional capital Valkyries. We're not going to need to do that.

Our next question comes from Ellen Page with Jefferies.

Eric, Deanna, it's actually Sheila Kahyaoglu. I don't want to pull a Noah, Eric. I don't want you to be upset with me. So, I'm on. You called out Thanatos as a particularly promising program along with several others within KUS. What is sort of the next steps as we think about the contract progression there and what it's being set for?

Yes. We got a number of flights between now and the end of this year, all the way into Q4. We've been very successful so far. We have to continue to be successful in what we're doing here with this, and it's confident, I can't talk about it. Assuming we're successful, we are hopeful that in '25, we will get a follow in 2026, excuse me. In '26, we will get a follow-on contract and they'll actually start ordering some units to expand the concept of operations they're trying to develop for this platform.

Okay. And then maybe as a follow-up, I know DOGE was asked about earlier. How have you thought about bracketing that into your guidance?

Yes. So, in my opening remarks, Sheila, I talked about DOGE. DOGE is a huge win for us, and we're seeing it. So, we don't have consultants. We don't have service contracts. We don't have labor-based contracts. We build spec hardware. And the DOGE cuts, that money is going into rebuilding the manufacturing of the defense industrial base, which is Kratos, which we're seeing, and it's going into buying hardware that's ready to go right now. We've already received some contracts in the past month directly related to what's going on here in the reallocation of resources. DOGE is a huge win for us. The FORGED Act, Senator Wicker, what he's trying to do is outstanding for us. And as I mentioned, one of the undersecretaries that's being confirmed to take a look at his comments yesterday, it's phenomenal for us relative to drones, hypersonics, affordability, and low-cost hardware. So, hardware is the place to be right now and having past performance calls up and running manufacturing facilities where we're building relevant mill spec stuff. That is in demand across the board. And that's what was our book-to-bill ratio?

1.5:1.

We just did 1.5:1, and it looks like 2025 is going to be another gangbuster booking year because people are coming and buying our stuff. So, DOGE is good for Kratos.

That concludes today's question-and-answer session. I'd like to turn the call back to Eric DeMarco for closing remarks.

Great. Excellent. I know it went long today, but obviously, we announced Prometheus, and I told you we were working on it and that we were in the red zone, et cetera, et cetera. We got it. So, I apologize it took so long, but we wanted to give you all the information on it because it's a big win for the United States. It's a big win for Kratos and RAFAEL and our industrial base, et cetera. So, thank you, and we look forward to talking to you when we report Q1, which I think will be the first or second week of May. So, thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.