Peter Skibitski • Alembic Global Advisors

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Executive Robert Sullivan affirmed the 100% free cash flow conversion target but noted sales growth creates pressure. Executive Mike Hartnett confirmed a defense surge would require more CapEx, stating they are already planning 5 years ahead for certain plants. Sullivan added that while SG&A investment continues, a good portion of gross margin expansion is expected to flow through to EBITDA.

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Chairman, President and CEO Dr. Michael Hartnett explained the oil and gas weakness is an inventory correction expected to normalize over nine months. Regarding tariffs, he stated Mexico is a 'nonissue' due to contractual clauses and minimal value-add, while a significant China tariff would be a net positive for RBC by creating a supply shortfall. He also noted that the Defense capacity expansion in Tucson is for a leased building and the capital impact is within the normal budget. Rob Moffatt, Director of Corporate Development, added that excluding oil and gas, the industrial OEM business was only down about 2.5%.

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CEO Mike Hartnett stated the company's second-half forecast conservatively assumes Boeing is in production for only one of the next three months and confirmed commercial aero revenue is expected to be down sequentially. CFO Robert Sullivan clarified the backlog increase was driven primarily by the defense side. Hartnett added that they are not seeing any impact from the government's continuing resolution as their defense bookings are mainly long-term contracts with OEMs.

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CEO Lynn Bamford explained that a cross-functional 'Tiger team' is mitigating over $20 million in potential tariff impacts through operational flexibility and targeted pricing discussions with customers. CFO K. Farkas added that the exposure is primarily within industrial products and related to China. Farkas clarified the commercial aerospace guidance increase was entirely driven by new cockpit voice recorder business related to the FAA mandate, not Boeing production, and represents a sustainable, long-term revenue stream.

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CFO Chris Farkas clarified that the Q4 margin was primarily impacted by unfavorable mix, including higher naval defense sales, lower process valve sales, and fewer high-margin international arresting systems sales. He noted that the bulk of the 2025 restructuring savings will benefit the Aerospace & Industrial segment, while efforts in Defense Electronics are focused on footprint optimization and capacity expansion, with some disruption continuing into Q1.

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CFO Deanna Lund clarified that the space business grew about 2% organically in Q1 and is expected to be up for the full year, driven by a strong book-to-bill from national security awards. Regarding MACH-TB, she confirmed a ramp in the second half of 2025 with a further ramp in 2026. CEO Eric DeMarco added that revenue recognition is tied to the delivery of long-lead items.

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CFO Deanna Lund confirmed the 'lion's share' of the 2025 margin headwind is in the Unmanned Systems segment, with some expansion expected in KGS. She and CEO Eric DeMarco explained that the second Valkyrie lot is substantially completed in 2025 as a capital expenditure, but future production is expected to be treated as traditional inventory as they will no longer need to 'lean forward' and build speculatively.

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CEO Eric DeMarco quantified the commercial satellite headwind at $30-$35 million in revenue for the year, emphasizing that the rest of Kratos's business has completely offset this decline. He also concurred with the analyst that the business likely bottomed in Q3. CFO Deanna Lund confirmed that the previously provided full-year revenue guidance for the KGS segment remains unchanged.

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CEO Rex Geveden confirmed the reconciliation bill includes funding for defense enrichment and DoD reactors and stated that DOE support for nuclear is accelerating, not waning. EVP and CFO Robb LeMasters added that due to the raw material issue, Q2 Commercial margins will be lower than usual, with a stronger-than-expected recovery in the second half of the year.

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President & CEO Rex Geveden described BANR as a larger, commercial derivative of the Pele military microreactor, sharing technology and personnel. He noted that while customers have not published firm schedules, both programs have expanded testing scopes and will continue development over the next few years. EVP & CFO Robb LeMasters positioned microreactors as a key future growth area following SMRs.

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CEO Rex Geveden explained that BWXT's production schedule is a couple of years ahead of the shipyards, giving them early visibility into supply chain pressures, which they have managed well. CFO Robb LeMasters added that the Government Operations growth was due to strong, broad-based execution, particularly in Advanced Technologies like Project Pele and DRACO, and improved labor digestion at naval sites, rather than any specific pull-ahead of orders.

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President and CEO Christopher Kastner clarified the $50 billion in awards is not a direct addition to backlog but acknowledged medium-term upside potential. EVP and CFO Thomas Stiehle explained Ingalls' lower margins are due to a lack of positive EAC adjustments, not negative performance, citing post-COVID operational challenges. He expressed confidence in a recovery but did not provide a specific timeframe.

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President and CEO Christopher Kastner stated that any contract change on CVN 79 for additional capabilities would be an equitable adjustment and not inherently impact margin rates. CFO Thomas Stiehle explained that margin improvement is expected to be a gradual ramp that follows the revenue mix, with profitability rising as post-COVID contracts become the majority of work by 2027. Kastner cautioned against expecting a sharp step-change, noting the company's conservative approach to initial program margins.

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CEO Christopher Kastner confirmed the design change on SSN 800 was a factor in its schedule delay and could have potential upside upon negotiation, but it was not the sole issue. Regarding Ingalls, he acknowledged they face the same 'green labor' challenges as the rest of the industry but noted they are meeting milestones and have less opportunity for positive adjustments at present, expressing confidence in the team.

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Chairman and CEO Scott Donnelly confirmed the military sustainment growth comes from legacy platforms like the H-1 and V-22 and is expected to continue. He affirmed that the USV market is growing, drawing an analogy to the proliferation of unmanned aircraft. He positioned Textron as a long-term, well-funded player with programs like CUSV and Tsunami that can compete effectively against new startups in the space.

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Scott Donnelly, Chairman and CEO, said the continuing resolution is disruptive but not having a major impact, as customers are executing against expected budgets. He sees potential positives from a pro-business climate and a focus on accelerating military programs. However, he identified tariffs as a 'wildcard,' acknowledging uncertainty and potential risk for operations and key suppliers in Canada, such as Bell's commercial assembly and Pratt & Whitney Canada.

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CEO Scott Donnelly estimated FLRAA revenue at around $900 million for the current year, with a potential increase of $100-$200 million next year, pending budget approvals. He characterized the cabin in-sourcing as a low-risk transition, given it occurred early in the program's development phase with strong collaboration from Spirit.

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James Taiclet, CEO, stated that the company is insulated because laws and contracts already constrain them from using Chinese-sourced inputs. He mentioned the existence of stockpiles and the company's 'antifragility' strategy of developing U.S. sources. Maria Lee, an executive, added that they have sufficient supply in the value chain to meet current year delivery commitments without disruption.

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CFO Jesus Malave clarified that achieving these rates is 'not dependent on additional supplementals,' as much of the capacity expansion is already committed or under contract. He cited strong, allocated funding for programs like PAC-3 (650 units/year), GMLRS (14,000), and HIMARS (96), viewing the funding as 'fairly low risk.'

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CEO Bill Ballhaus stated that progress on the Common Processing Architecture (CPA) is proceeding as planned, with a ramp to full-rate production expected to make full capacity available in the second half of the year. He noted this progress has already led to significant production awards and a competitive takeaway. Regarding order flow, Ballhaus pointed to the solid trailing 12-month book-to-bill of 1.12 as a positive indicator and expressed confidence in enduring demand drivers.

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CEO William Ballhaus explained that the company no longer uses the term 'challenged programs' due to significant progress. He confirmed the CPA production ramp is proceeding methodically, which helped unlock over $50 million in follow-on orders. Executive David Farnsworth added that while Q2 revenue volume might be lower due to a pull-forward into Q1, the gross margin percentage is expected to remain in a similar range, albeit with less benefit from operating leverage.

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CEO Charles Blankenship stated that the company has not seen any impact on bookings from the defense CR. Regarding guided weapons, he indicated that visibility does not extend much beyond early 2026.

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CFO Carlos Macau stated that he expects D&A in fiscal 2025 to be very similar to fiscal 2024 as a percentage of sales, though it could increase with new acquisitions. He also explained that inventory levels should moderate as the company has now taken delivery of long-lead-time items ordered post-COVID, expecting a return to more historical levels of working capital consumption.

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Eric Mendelson, Co-President, confirmed that significant supply chain problems persist, with vendor challenges and past-due backlogs impacting all parts of the business, especially complex repairs requiring a full bill of materials. Victor Mendelson, Co-President, explained the weakness in medical and other markets was a classic case of customer over-ordering and inventory destocking, noting he is now seeing signs of it bottoming out with higher quote activity.

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Wahid Nawabi, Chairman, President, and CEO, explained that the company strategically chose not to compete for the SRR program to focus on larger, more valuable market opportunities where it can deliver greater value. He clarified that the other Army award for company-level UAVs is a smaller, experimental effort for a potential future Medium-Range Reconnaissance program and does not threaten the distinct, billion-dollar Long-Range Reconnaissance (LRR) program, where AeroVironment is strongly positioned with its P550 platform.

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CEO Wahid Nawabi clarified that LUS (Lethal Unmanned Systems) is the Army's term for fulfilling immediate loitering munition needs, for which Switchblade has been selected. LASSO, in contrast, is the Army's long-term, multi-year program of record. Regarding FPV drones, Nawabi described them as a different, less sophisticated category, stating that AeroVironment intentionally does not compete in this market as Switchblade addresses more complex missions with higher precision and mission success rates.

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Executive Patrick Winterlich agreed that it's reasonable to expect volume leverage and margins to improve as 2025 progresses and build rates increase. He noted the V-22 program is sunsetting next year but advised against overplaying its impact on the broader Space & Defense segment, which has many moving parts.

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