US FY26 Budget Asked for Unmanned Programs Totals ~$8.8B
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Disclosures for BTIG, Various Companies, July 18, 2025

Analyst Certification I, Andre Madrid, hereby certify that the views about the companies and securities discussed in this report are accurately expressed and that I have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report. I, Ned Morgan, hereby certify that the views about the companies and securities discussed in this report are accurately expressed and that I have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report. Regulatory Disclosures Ratings Definitions BTIG LLC’s (“BTIG”) ratings, effective June 12, 2017, are defined as follows: BUY – A security which is expected to produce a positive total return of 15% or greater over the 12 months following the recommendation. The BUY rating may be maintained as long as it is deemed appropriate, notwithstanding price fluctuations that would cause the target to fall outside of the 15% return. SELL – A security which is expected to produce a negative total return of 15% or greater over the next 12 months following the recommendation. The SELL rating may be maintained as long as it is deemed appropriate, notwithstanding price fluctuations that would cause the target to fall outside of the 15% return. NEUTRAL – A security which is not expected to appreciate or depreciate meaningfully over the next 12 months. NOT RATED – A security which is not rated or covered by BTIG. UNDER REVIEW – Effective immediately, coverage of the following securities is Under Review. Ratings, price targets, disclosures, and estimates for the companies listed below are suspended and should no longer be relied upon. Distribution of Ratings and Investment Banking Clients BTIG must disclose in each research report the percentage of all securities rated by the member to which the member would assign a “buy”, “neutral” or “sell” rating. The said ratings are updated on a quarterly basis. BTIG must also disclose the percentage of subject companies within each of these three categories for whom the member has provided investment banking services within the previous twelve months. Current Rating Distribution (as of July 18, 2025): Coverage Universe Count Percent Inv. Banking Relationships Count Percent Buy 266 63.3% Buy 83 31.2% Neutral 151 36.0% Neutral 34 22.5% Sell 3 0.7% Sell 0 0.0% For purposes of FINRA ratings distribution rules, BTIG’s stock ratings of Buy, Neutral and Sell fall into Buy, Hold and Sell categories, respectively. Company Valuation and Risk Disclosures AeroVironment (AVAV, Buy, $300 PT) Valuation: We value AVAV based on a sum of the parts (SOTP), utilizing a high-40x multiple on the Autonomous Systems segment and a mid-30x multiple at the Space, Cyber and Directed Energy segment. We believe both of these multiples are conservative when considering where peers are currently trading, the company's robust backlog, and growing defense budgets around the globe. Altogether, we assume a 44x EV/EBITDA multiple on FY2026 estimates. Risks: Downside risks include: ■ Department of State restricts further Switchblade exports to peripheral allies. ■ Higher mix of services work (e.g., contractor-owned, contractor-operated [COCO] activities), which would be a headwind to margins. ■ Further DoD program award delays. ■ Further continuing resolutions and budget uncertainty could affect customer payments, which would be a headwind to free cash flow. ■ Potential dilutive M&A activity in lower-growth end-markets.

General Dynamics (GD, Neutral) Valuation: Our DCF assumes a discount rate of 12.2%, a 2030E-2034E FCF growth rate of 3%, and a terminal growth rate of 2%. This assumption arrives at a PT that would imply a 13x multiple on our 2026 EBITDA estimates. This translates into a 0.9x relative multiple to the current S&P 500 NTM EV/EBITDA multiple, in line with where GD has historically traded. We believe this multiple is fair given that upside from G700 and G800 entry into service and higher defense spending growth globally is offset by regulatory hurdles and supply chain challenges at both Aerospace and Marine Systems. BTIG does not provide price targets for Neutral-rated stocks. Risks: Upside risks include: ■ G700 and G800 deliveries exceed expectations. ■ More US NATO allies place orders for Abrams MBTs and other land vehicles (LAV, Ajax, Piranha). ■ The US Navy selects a 30-year shipbuilding plan that calls for higher volumes of Columbia-class, Virginia-class, and Arleigh Burke-class vessels. Downside risks include: ■ G700 and G800 deliveries miss expectations. ■ Cooling of tensions in Eastern Europe and the Middle East motivate US allies to curb procurement of land systems and munitions. ■ The US Navy opts to procure fewer vessels in favor of maintaining existing capacity.

Kratos Defense & Security Solutions (KTOS, Neutral) Valuation: Our valuation is based on an EV/EBITDA multiple on 2026 estimates. Historically, the company has traded at a 1.5x relative multiple to the S&P on NTM estimates. However, the current share price implies a 2.9x relative multiple based on our estimates, nearly three standard deviations above the historical average. If we assume the KGS segment is valued at a 21.5x EV/EBITDA multiple, consistent with where SMID cap defense peers are currently trading on 2026 estimates, this implies an above 100x KUS multiple. Furthermore, we believe a low-20x multiple for KGS is generous given that 48% of the segment sales are from services revenues, which are generally lower margin. Given the lack of a significant program of record (PoR) at the Unmanned business, we find this multiple difficult to justify. BTIG does not assign price targets to Neutral-rated stocks. Risks: Upside risks include: ■ Skilled labor retention efforts begin to pay off, enabling KTOS to take on more higher-margin work. ■ Valkyrie receives its first major production award. Downside risks include: ■ KTOS continues to struggle with turnover, further delaying margin expansion. ■ Valkyrie is not downselected for major drone companion programs, like future increments of CCA.

Leonardo DRS (DRS, Buy, $49 PT) Valuation: We value the company on an EV/EBITDA basis utilizing a 25x multiple on 2026 estimates. In our view, this multiple is appropriate given it's in line with where SMID cap defense peers are trading. Based on this EV/EBITDA multiple, we arrive at a 1.8x relative multiple to the S&P 500 NTM EV/EBITDA multiple, which is over three standard deviations above the historical average of 1.2x but only slightly above where DRS is currently trading (1.7x). DRS has traded at a 1.3x relative multiple over the last twelve months. We believe a multiple above the historical average is justified given the higher growth outlook, improving EBITDA margin profile from rising Columbia-class submarine volumes at higher shipset prices, and potential upside from accretive M&A activity. Risks: Downside risks include: ■ Cost overruns associated with supply chain issues and labor constraints restrict margin expansion. ■ Leonardo SpA opts to not reduce its DRS ownership stake any further. ■ Accelerated retirement of legacy land vehicles and naval vessels reduces market share of the Advanced Sensing & Computing segment. ■ Failure to win subcontractor awards to supply electric drive propulsion systems for the DDG(X) and KDD(X) programs.

Northrop Grumman (NOC, Buy, $575 PT) Valuation: We value NOC based on a ten-year discounted cash flow (DCF) analysis. Our DCF assumes a discount rate of 8.9%, 2030E-2034E FCF growth rate of 2%, and terminal growth rate of 2%. With these assumptions, we arrive at our PT of $575. We think this valuation is conservative given that it assumes a slightly higher equity cost of capital and only low-single-digit FCF growth in the early 2030s and into perpetuity. Risks: Risks to our rating include: ■ Budget pressures affecting timing and sizing of contract awards ■ Continued rising costs on the B-21 stealth bomber and Sentinel ICBM programs. ■ Problems at the OEM level impacting F-35 center fuselage deliveries and consequent revenue recognition and free cash flow

Company–Specific Regulatory Disclosures BTIG LLC expects to receive or intends to seek compensation for investment banking services in the next 3 months from: AeroVironment (AVAV) BTIG LLC had an investment banking services client relationship during the past 12 months with: AeroVironment (AVAV) BTIG LLC managed or co-managed a public offering of securities in the past 12 months for: AeroVironment (AVAV) BTIG LLC has received compensation for investment banking services in the past 12 months from: AeroVironment (AVAV) BTIG LLC expects to receive or intends to seek compensation for investment banking services in the next 3 months from: Northrop Grumman (NOC) Other Disclosures Additional Information Available Upon Request General Disclosures Research reports produced by BTIG LLC (“BTIG”) are published for and intended to be distributed solely to BTIG institutional and corporate clients. 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An analysis of U.S. defense budget data by the financial services firm, BTIG, showed a 66% year-over-year (YOY) increase in funding for unmanned/counter-unmanned programs in fiscal year 2026 (FY26), driven only by the recently passed reconciliation bill (One Big Beautiful Bill), reported Analyst Andre Madrid in a July 18 research note.

Companies under BTIG coverage that stand to benefit the most from the budget increase are AeroVironment Inc. (AVAV:NASDAQ), General Dynamics Corp. (GD:NYSE), Kratos Defense & Security Solutions Inc. (KTOS:NASDAQ), and Northrop Grumman Corp. (NOC:NYSE).

Madrid explained that BTIG reviewed the U.S. FY26 defense budget request, compared it to two previous data sets. One was FY26 projected defense funding in last year's request, and the other was FY25 enacted defense funding. BTIG took this approach because new administrations typically do not include in the first budget request the Future Years Defense Program, which are estimates of U.S. Department of Defense funding, manpower and force structure needs over the next five years. BTIG compiled and published its findings in the second report of its "Unmanned Bible" series.

The figures cited in this report are conservative as they do not account for classified work and programs beyond procurement, for one, and research, development, testing and evaluation, for another, the analyst pointed out.

"We believe the real collective unmanned/counterdrone budget could be reasonably higher," Madrid wrote. "Classified programs alone could arguably add another 20% of funding."

The Key Takeaways

Here are the highlights of BTIG's conclusions:

Total Budget: A total of about US$8.8 billion (US$8.8B) was requested for unmanned and counter-manned programs in FY26.

Increased Request: Funding for these programs in the FY26 budget and the reconciliation bill together is 66% higher year-over-year (YOY) than FY25 enacted appropriations and 56% higher YOY than prior FY26 estimates. Excluding the reconciliation, the FY26 base request is 10% higher YOY than FY25 enacted funding and 3% higher YOY than prior FY26 estimates.

Thus, the bulk of the funding increase for manned/counter-manned programs is in the reconciliation bill. It adds to funds mostly for medium unmanned surface vehicles, collaborative combat aircraft, counter-small unmanned aerial systems and small/medium unmanned undersea vehicles plus about US$500 million (US$500M) for counter systems.

The largest contributors to this growth are U.S. Army research, development, testing and evaluation at 65% and procurement at 170% along with U.S. Navy procurement at 56%.

By Domain: Among the different domains, which are air, ground, sea and counter, air remains the most funded. The amount requested for air in FY26 through the base budget and the reconciliation bill was US$4.6B, a 44% increase over FY25 enacted levels.

The sea domain is the fastest growing in terms of budget requested, up 184% YOY, largely driven by US$1.1B in reconciliation funding for medium unmanned surface vehicles.

The counter domain is the second-fastest growing, reflecting a 73% YOY increase to US$1.9B.

By Account: Of the two accounts, procurement and research, development, testing and evaluation, most funds requested for unmanned/counter-unmanned programs were for procurement. This figure was up 118% over FY25 enacted levels. This, according to BTIG, is likely driven by the need for existing solutions due to global threats and higher near-term demand given escalating conflicts.

By Program: The two largest unmanned programs are the Navy's medium unmanned surface vehicles program followed by the Air Force's collaborative combat aircraft program. Most of the funding for these is from the reconciliation bill, specifically 100%, or US$1.1B, for the former, and 86%, or US$678M, for the latter.

By Branch: The Navy, including the U.S. Marine Corps, remains the branch that requested the most funding, at 52%, and the branch with the greatest number of manned programs, at 30, for air and sea. Its three largest programs are medium unmanned surface vehicles, ground based air defense and the MQ-25, accounting for US$2.3B in funding cumulatively.

Next is the Army whose funding request, for 20 different programs, accounted for nearly one-third of the total request. The three largest asks in terms of programs were small unmanned aerial systems, counter-small unmanned aerial systems, ground robotics and a new addition, unmanned aerial system launched effects agile systems development, for a total of US$1.8B. This amount was 400% higher than FY25 enacted funding.

Companies With Exposure

Madrid pointed out the companies under BTIG coverage that have the most exposure to the U.S.' spending increase on unmanned systems and how.

AeroVironment Inc.

This company stands to benefit the most from funding of offensive and defensive unmanned capabilities. With respect to offensive, AV aims to beat out Redwire Corp. (RDW:NYSE) to win the Long Range Reconnaissance program, funded at about US$325.1M in FY26, and due to be awarded in three to six months. Already the Short Range Reconnaissance program was awarded in fall 2024, to Red Cat Holdings Inc. (RCAT:NASDAQ), about US$400.9M in FY26 funding. Both programs comprise the Small Unmanned Aerial Systems line item, the third-highest among unmanned system programs with more than US$50M of FY26 funding, behind unmanned surface vessels first and collaborative combat aircraft (Air Force) second.

As for defensive, AeroVironment could capitalize on the US$1.9B laid out for counterdrone systems through the legacy business of its acquisition, BlueHalo, offering kinetic, directed energy and radiofrequency solutions.

BTIG has a Buy rating and a US$300 price target on AeroVironment. This implies a potential return for investors of 8% given the company was trading at about US$278.56 per share at the time of Madrid's report.

General Dynamics Corp.

This company could benefit from various budget line items. They include the Marine Corps' unmanned carrier aviation program, ground robotics, small/medium unmanned undersea vessels and unmanned surface vessels.

BTIG rates General Dynamics Neutral and does not have a target price on it. At the time of Madrid's report, General Dynamics was priced at about US$300.09 per share.

Kratos Defense & Security Solutions Inc.

This company could benefit through its KUS, or unmanned systems segment. A collaborative combat aircraft award from the Marine Corps would be a big win. In support of this program, US$58M in funding is allotted for MUX TACAIR Increment I, for instance. Previously, the Marines awarded Kratos US$34.8M for Valkyrie mission system integration, and BTIG believes that given its existing relationship with the Marines, Kratos could be the first company to garner a collaborative combat aircraft award from this service branch, noted Madrid. Also, KUS could benefit from demand for target drones, from which most of its current revenue comes as opposed to from tactical drones.

BTIG has a Neutral rating and no target price on Kratos. Kratos was trading at about US$58.91 per share at the time of Madrid's report.

Northrop Grumman Corp.

Whereas this company has strong exposure to many areas of priority, it stands to benefit from funding for RQ-4 modernization, the MQ-4 Triton, the Marine Corps collaborative combat aircraft program (in partnership with Kratos) and unmanned underwater vehicles.

BTIG has a Buy rating and a US$575 per share price target on Northrop Grumman. From the company's US$523.83 share price at the time of Madrid's report, the return to target is 10%.