Q3 2019 Earnings Call
The speakers presentation, there will be a question and answer session.
Ask a question during the session you want me to press Star one on your telephone. Please be advised today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today Marie Mendoza Senior VP General Counsel. Thank you. Please go ahead ma'am.
Thank you good afternoon, everyone. Thank you for joining us for the Chris Defense and security solutions third quarter 2019 conference call.
With me today is Eric Demarco greatest is president and Chief Executive Officer, Indiana line create as executive Vice President and Chief Financial Officer.
Before we begin to substance of today's call I'd like every went to please take note of the Safe Harbor paragraph that 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.
Keep these uncertainties and risks in mind as we discuss future strategic initiatives.
In some market opportunities operational outlook and financial guidance 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 gap.
Accordingly at the end of today's press release, we have provided a reconciliation of these non-GAAP financial measures to the Companys financial results prepared in accordance with gap.
With that I'll now turn call over to Eric to Mark.
Sorry [laughter].
That's great of transition for making significant investments and executing on development programs.
Executing on newer increased production programs.
This transition as reflected in our financial performance, including organic growth.
It improved business mix, which is driving higher margins profit EBITDA rate.
Represented a third quarter financial highlights for Kratos include or revenues increased 15.5% over the prior year.
And importantly, our unmanned systems revenues organically increased 37% over Q3 of 18.
Our operating income increased approximately 14% over the prior year and our adjusted EBITDA increased 22% over last year.
We generated 10.2 million of third quarter operating cash flow, which brought our nine month operating cash flow generation to 30 million at our nine month free cash flow generation, a 12 million.
The free cash flow generation is even after the substantial investments, we're making it our new Oklahoma drone facility and the build out of a separate new secure drone facility.
And at the end of Q3 Credo since LTM adjusted EBITDA was 75 million.
We believe that these financial results are representative of the long term growth platform, we're building, including as reflected by the third quarter. Its trailing 12 months book to Bill ratio of <unk> unmanned systems Division of 1.3 to one where we are forecasting the strongest future growth for the company.
Additionally, kratos is on for position for a number of existing new and planned for programs of record, which are expected to see significant future funding and grow as reflected in the pending 2020 deal de budget and in the five or fiscal year defense plan or the fed up.
We also believe that affordability of Kratos is offerings, which have done a key element of our success will be highly desired irrespective of which political party is that office or controls to Congress.
In Q3, our industry, leading target drone business, we're solar single source to the United States Army Navy and Air Force.
Generated particularly strong performance.
Since our last report to you we have received a number of contract awards, including International Awards.
Global demand for threat representative target drones used to exercise radars and a weapon systems continues to grow and Kratos is target drone opportunity pipeline contains several large new opportunities.
When you see the large prime contractors receive a missile and radar and a weapon systems program Award.
These systems related platforms on the operators need to be exercised and trained and kratos is aerial seaborne in ground target drone or a key element and providing that operational readiness function.
With the production programs. We are currently executing on the new contracts, we expect to receive and the expected increased operating tempo as the U.S. military and our allies transition from fighting terrorism.
Addressing Russia and China.
We expect our target drone business to continue its organic growth trajectory up to approximately 250 million annual revenue over the next few years.
Since our last report to you Kratos is Valerie successfully completed its third test flight with all test points being achieved [noise].
As reported the aircraft did suffer some very minor damage on recovery as the air cushion, which is provided to create us by a certain vendor suffered an anomaly during parachute descent.
The Valkyrie like all of Cradle since high performance Jack you ABTS with our target drone heritage is designed to be extremely rugged and quickly repaired and reuse damages sustained and performing operational missions and as a result, the valkyrie as easily repairable.
The system robustness that we have is representative of the extremely high quality of Kratos has engineer in our execution teams.
The jet drones, we produce.
Very very importantly, based on the flights performed to date and the resulting data generated no changes are needed to any of the valkyries airborne control systems, which is impressive for any newly developed system.
Specialty so for high performance in jet you I guess.
We believe that our customer set is extremely pre pleased with the execute 58 A. systems performance to date.
We do not expect any delays in future orders from our customers as a result of this air cushion of normally.
As this question is only utilized for test events and does not contemplated to be used operationally.
Since our last report to you we have received additional contracts and increased Valkyrie funding, we believe demonstrating increasing customer commitment and providing us confidence that we will receive future unit or production orders from multiple customers for the Valkyrie.
The Air Force Association Conference was held during the third quarter.
Which we had numerous potential new customers come by the Kratos booth to discuss the Valkyrie unmanned system concepts of operations needs requirements timing of deployment and what the customer community envisioned for the execute 50 a day.
Additional highlight of the Air Force was up at a conference at the Air Force Research Laboratory Booth was a replica execute 50 today and then Alpharel video showing the Valerie as the Sky Board program drone.
The air for I'll also discussing the Valkyrie as a vanguard program.
As a result, the customer feedback we continue to receive the contracts we have been and expect to receive we're more confident than ever that if we continue to successfully execute the Valerie will become a future program of record.
We believe that there is currently in excess of 100 million in the pending 2020 budget for the El Capitan Valerie related programs and we expect this to be increased or plus stop by an additional 50 to 100 million. What's the 2020 Deo de budget is approved.
Based on this expected funding and the recent discussions with our customers. We expect the first substantial valproic Valkyrie related order within approximately 90 days after the 2020 budget takes effect.
On the Gremlins program, we have now deliver the gremlins their vehicles to our prime partner Dianetics since our last report to you USA Air Force has designated the Gremlin as the X 61, a which we believe is an important milestone for this current research agency program.
During the third quarter as a result of the Ridgecrest earthquake in California, which impacted the China Lake range. The gremlins demonstration flights were announced to be delayed and dianetics. Our prime partner is currently working to identify an alternative range site.
As a result as a result of this situation at this time, we are currently planning for the Gremlins program to complete its demonstration series in the second half of next year.
Based on recent discussions with dianetics and directly with government representatives and the customer we believe that customer interest in the Gremlins program similar to the Valkyrie has continued to increase due to the gremlin systems capabilities affordability and re usability.
And we now have increased confidence that gremlins will ultimately transfer to a service partner and also become a formal future program of record.
We expect to receive initial orders for the Gremlin U.S. once the demonstration flight schedule the successfully completed.
We have now received additional funding for program F and we're working towards the next series of demonstration flights to begin early next year.
We expect this phase of programming demonstration flights to conclude around the middle of next year and based on most recent customer input. We are confident that once the demonstration series of successfully complete we will receive initial program that system orders.
Credo Spartan drone program remains funded and on track however, due to this programs nature unable to comment further at this time.
Program Apollo has recently received in excess of 10 million in funding with the significant future funding increase now expected.
Program that Atos has received an excess of $17 million funding also now with a significant future funding increase also expected.
As I've previously.
Previously mentioned, we believe that Santos if successful has potential opportunity as large as we see for Kratos is Valerie.
And since our last report to you. We have received approximately 9 million in funding on two new tactical drilled related program initiatives.
On Kratos is make all platform I'm unable to discuss specifics at this time due to the restricted nature of the customer funded program Mako is associated with.
I think that you can see from this report why we believe that customer access acceptance and market demand for Kratos is affordable high performance drone systems and capabilities continues to increase and as gaming gaining momentum.
Kratos has initiative with Aerovironment is tracking for early 2020 flight and payload demonstration and we are currently identifying an appropriate range location for the exercise.
All other kratos tactical drone programs and initiatives I have previously mentioned to you remain on track.
We believe that kratos or the industry leader in our class of tactical drones and that Kratos has the only tactical drones in this class flying or in existence today, which include the makeup of about Greece and Gremlin.
We believe this is extremely differentiating to our customers and competitively importance to our objective of ultimate rebuilding of very large tactical drone business.
As we begin Q4 substantially all of Kratos unmanned systems business forecasted revenue is currently in backlog and we are forecasting strong 2020 over 2019 organic growth and increased margins for this business.
And the third quarter Kratos satellite business.
Industry leader in ground command and control continued to make progress on addressing is changing market and its related business transformation and positioning which I discussed in detail on the last call.
Our satellite businesses new opportunity pipeline is robust we are actively pursuing multiple large new program opportunities, both DLD and commercial and we have high future expectations for this business.
Missile and hypersonic vehicle tracking satellite programs are providing a particularly large opportunity for kratos satellite business.
A kratos team was recently successfully selected for the space sensor program, providing what we believed to be a large future future growth opportunity for our company.
We also believe that the new space Development Agency, which was recently established and his vision for hundreds of small satellites potentially hosting multiple payloads operating in a mesh network.
Also provide a new and very large opportunity for kratos satellite see two business.
Kratos satellite businesses, where we routinely make the highest high R&D investments and the company and we're looking for strong future performance inorganic growth returns.
Polluting had expected business mix change, yielding somewhat lower revenues with higher margin rates, which I discussed on last call with you.
Growth drivers for Kratos satellite ground equipment business include new Leo MEO and yields systems and constellations, including the classified area and the continued growth in the high throughput and spot beam satellites systems.
Representative programs of records. We support include AG, Jeff servers, WGS and Emuil, Wes and we are currently positioning for very significant role on the next generation OPI, our overhead persistent infrared system, which if successful would be an additional significant.
Future organic growth driver for Kratos.
We currently expect year over year 2020 over 2019 exact organic growth for our satellite suit see two business with increased margins.
Kratos is microwave electronics business has been focused on achieving sole source designed in positions on a number of new platforms and systems and programs of record.
Since our last report to you the initial order timing on certain of these large new opportunities has become much clearer as certain of our prime system customers have now receive their initial orders and have indicated that the kratos related orders are expected to be we received soon.
For example, Kratos is designed in on a certain airborne E.W. system in our prime partner just last week.
Its initial order for the first 350 systems and we have been told that we will receive our 350 system order by Q1 of 2020.
Doses content on this program is approximately $45000 per system and both we and our prime partner expect the total number of systems to ultimately be far greater than this initial 350.
We are expecting an exceptionally strong Q4 2019 from our micro microwave business with a substantial portion of our microwave business is expected Q4 revenue currently in backlog.
For our microwave business, we are forecasting year over year organic growth for 2020 over 2019 with increased margins.
Three representative programs or platforms, we support including Barack Iron Dome Arrow F 15 and 16.
Kratos is turbine technology finished third quarter performing on track and as we expected since our acquisition of Florida turbines earlier this year.
Our next generation drone and tactical missile engine development programs, including in the hypersonic and classified areas also remain on track to our forecast.
The tactical missile and drone market for the take K T class of engine is expected to expand and grow significantly over the next several years with the expected demand for these engines to be in the thousands and we are positioning our company to participate in this very large market opportunity.
For customer and competitive reasons, we will no longer be providing any specific details on these next generation propulsion system programs for the platforms, we are focused on and targeting.
Great Us C is our modular systems division performed as expected in Q3, and our Q4 outlook is solid with substantially all of Q4's expected revenue currently in backlog.
Since our last report to you. Our C is our business has been successfully designed in on or we are positioning for designed in on positions on a number of new for Kratos large system programs of record.
As a result, our C is our businesses currently forecasting solid 2020 over 2019 organic revenue growth.
Representative programs, we support include Patriot Fad shore Rad servers and CPP.
Kratos is rocket support business, where we already prime contractor in a prime systems integrator for hypersonic BMD target than other missions was recently awarded a prime sole source contract for up to 33, Kratos proprietary rights Oreo rocket motors from a U.S. government customer.
We had not previously mentioned this opportunity, which has a total potential value to kratos of up to approximately 150 million in which is expected to be a significant financial contributor to kratos beginning next year.
In our rocket support business, we have recently been informed that our team was unsuccessful and one of the new for Kratos large ballistic missile defense target opportunities. We had previously mentioned, which we were tracking and expecting an award in the second half in 2019.
As little impact Kratos has 2019 from this opportunity lost as it was heavily factored in our forecast. So it could have been a significant financial contributor to Kratos beginning in 2020 had we've been successful.
We're currently in pursuit of a number of additional new hypersonic and BMD target opportunities in both the prime contractor and teaming roll certain of which may be awarded the next few months.
Do you asked National security focus that increased funding on hypersonic systems and capabilities are providing credo significant opportunities due to our proprietary proven at affordable hypersonic launch systems, and we expect kratos opportunity set to continue expand in this area.
We are currently forecasting year over year 2020 over 2019 organic revenue growth for rocket support business.
Great doses training systems Division is executing on a number of large programs. In this business continues to have one of the strongest opportunity and business development pipelines in the company driven by operational readiness requirements in new and upgraded weapon systems.
Since our last report to you we have received some very exciting news as cradles was selected as the prime winter by the US Army for a program to develop a virtual prototyping pull it back to evaluate physical and psychological warfare on this under simulated real world scenarios.
This is a large prime contract win for Kratos is training business as this could be a very large future program and growth driver for our company.
As we mentioned the last quarter's call we were in a recompete or Rs and Fms training services contract in Saudi Arabia, the company's largest at approximately 55 million an annual revenue in 2019.
With our existing contractual period of performance, we're running through the end of this year.
We were recently informed we were not successful in the Recompete. However.
As a result of certain information we learned in the post award Debrief, we protested decision and we have just received potentially very favorable news on the protest.
As a result of the information we have received the situation has now pending and though fluid. We currently expect to continue executing on this program into at least beginning of Q2 of next year as the matters result.
But for our fourth quarter and full year 2019 financial guidance, which we are reaffirming that Deanna will cover as I mentioned in my previous remarks, while we do need certain new bookings. We believe that we have our 29 forecast substantially in backlog at this time with final results depending on execution.
And business mix.
Consistent with prior years practice, we plan to provide our fiscal 2020 financial guidance with our full year fiscal 2019 financial report, which is currently planned for February 20.
We believe this schedule will provide us with increased visibility into both the timing and funding content of the final deal do you budget, which is particularly important this year with the current continuing resolution authorization underway, which typically prohibits new program starts and increased production on existing programs both.
All of which we believe our relevant to kratos.
However, irrespective of short term continuing resolutions and result in deal the budget delays, we believe that Kratos is future long term organic financial trajectory is up to the right with increasing revenue margins profit and cash flow for the platform programmatic and opportunity reasons I have discussed today.
Yes.
Thank you Eric Good afternoon create this is third quarter 2019 revenues of 184.1 million were at the high end of our estimate of 175 to 185 million and our adjusted EBITDA of 20.4 million exceeded our estimate of 16 18 million due to a favorable favorable mix of revenues and execute.
Question, primarily in our space in satellite communications business.
Excluding the impact of the recently acquired FTT entity, which contributed 16.3 million in revenues Kratos revenues grew organically, 5.3% in the third quarter compared to the prior year.
Great as adjusted EPS of nine cents per share also exceeded our forecast of five cents to seven cents per share for the quarter.
In the third quarter Kgs generated revenues of 138.4 million up 9.8% from 126.1 million for Q3 18, adjusted EBITDA at 15.5 million or 11.2% of revenues up from 14.1 million in Q3 of 18 and operating income of it.
7.1 million up slightly from 11 million in Q3 of 18.
Excluding the impact at the FTT acquisition Kgs revenues decreased 3.2% year over year, where approximately 4 million, which resulted from the continued reduction in the company's legacy government services revenues, which declined 5.1 million in the third quarter as compared to the prior year.
Operating income and adjusted EBITDA were impacted by a favorable mix of revenue, including higher margin software revenues and leverage on fixed manufacturing overhead and administrative expenses.
Revenues in our unmanned systems segment increased 37.2% from 33.3 million in the third quarter of 2018 to 45.7 million and adjusted EBITDA increased 88.5% from 2.6 million to 4.9 million in this third quarter of 2019.
Our Q3 consolidated operating income was 11.5 million up from the third quarter 2018 operating income of 10.1 million.
Our adjusted EBITDA for the third quarter is from consolidated continuing operations, including net income in trade attributable to non controlling interest and excludes noncash stock based compensation costs of 2.8 million and foreign transaction losses of 800000.
On a GAAP basis net income for the third quarter was 2.5 million, which includes 100000 of income attributable to non controlling interest.
Tax provision of 2.8 billion.
Moving onto the balance sheet and liquidity, our cash balance, which 181 million at September 29.
At quarter end, we had several amounts outstanding on our bank line of credit and $5.7 million of letters of credit outstanding.
Debt outstanding was 294.8 million at quarter end and net debt was 113.8 million. Our LTM adjusted EBITDA was 75.1 million with a net leverage ratio of 1.5 to one.
Cash flow generated from continuing operations for the third quarter was 10.2 million less cap capital expenditures of 8.1 million free cash flow from operations of 2.1 million.
Our dsos increased from 115 to 120 days due to the contractual milestone payments on long term delivery projects in our training solutions and unmanned systems business terms.
Our contract mix for the quarter was 83% generated from fixed price contracts, 12% come cost plus contracts and 5% and time and material contract.
Revenues generated from contracts with the U.S. federal government during the quarter, where approximately 69%, including revenues generated from contracts with the DLD non Deo de federal government agencies, and Fms contracts, which were approximately 8%.
We generated 10% from commercial customers and 21% from foreign customers.
Our book to Bill ratio for the quarter West 0.9 to one but the trailing 12 months was one point.
So to one our bookings were 172.5 million for the quarter with total backlog of six to 8.7 million.
Just as a reminder, we typically do not include I'd like to contract values in our bookings or backlog for instance, we recently received 35 million dollar sole source I Q contract from the US Air Force for subscale aerial target spares in September under which we included 1.7 million in our bookings.
Backlog as of September 29.
Representing the amount that have been funded through that day.
Today, we are reaffirming our full year revenue guidance of 720 to 740 million adjusted EBITDA guidance of 71 million 77 million and free cash flow guidance have $10 million to $20 million and the expected final cash receipt of the retained working capital of the company's divested PSS business of approximately 46 million.
We expect capex to be at elevated levels for full year 2019 with continued expected significant outlays in Q4, as we make the necessary investments for manufacturing in test climate for a new Oklahoma facility and a new secured facility and capital aerial target turns for the company plans to manufacture.
In preparation of fulfilling expected customer requirement.
We expect our estimated cash taxes to be approximately two and a half to doing half million for F. Why 19, reflecting the impact of the over 300 million net operating losses that we have.
Eric Thank you Deanna will now turn it over to the moderator for any questions.
As a reminder to ask a question you want me to press Star one on your telephone to withdraw your question press the pound key please standby well, we compile the Q and a roster.
And our first a question is from Josh Sullivan from Seaport Global Your line is now fan.
Good evening.
Just with regard to the Veltri program.
Outside of the continuing resolution timing what are the remaining steps for the program before a large order how many more flight tests and required here.
And Josh are taught the first part I couldn't hear to talking on the on the value.
Yes on the victory program, how many more flight test are required before before an order.
So well.
I don't know how many flight tests are required.
For an order I believe we could receive an order before any more flight test occur for example.
So they're not I do not see them as directly linked together.
Okay.
And then just on the organic growth in BMD segment in 2020 that you're referencing does that assume any waiting on winning some of these hypersonic contracts are going after or can you hit that independent of those wins.
We are the vast majority of the majority of it we believe we've got with.
That over 30 rocket motor order, we just received.
So the primary item that could impact of Josh would be timing on when we got to 2020.
2020 budget.
And then just the 60 million related to the company owned aerial target drones are building was that increase and then given you're investing in the drones with the products will you own the IP for whatever programs are going after.
Yes, Josh that was increased by about 2 billion in total Capex has not increased but components within the capex for unmanned.
Shifted a little bit and those are those our targets that we owned that we have the IP on.
And then just on the competitive environment.
Outside of the Valkyrie than Spartan project up are you seeing.
Competitive response are you still the only better in some of these programs.
Oh, No Durham, there has definitely better competitive response data toasts.
Was competitive.
Spartan.
Was competitive.
We're going after one right now.
That is competitive.
So there there is definitely.
Competition in this area.
Got it thank you.
Sir.
Thank you. Our next question is from Noah Poponak from Goldman Sachs. Your line is now fan.
Hello, everybody.
Good morning.
I'm not sure we are Eric.
Good evening to you.
Good.
Maybe along that.
So you know I wanted to ask about the margins.
No there.
Better margins in the quarter and you kind of opened up your prepared remarks, I'm talking about the shift in.
Mix that's.
It didn't sound specific to the quarter it sounded like you view it as a.
Ongoing shift in mix, improving the margins and so on one hand early stages of new work can be lower margin on the other hand, you guys have had heavy investments I think come out.
Faster volume growth can just have dropped through and it seems like you have a much more substantial degree of automation involved in future work. So.
Should we be thinking about these threeq margins as a new baseline that you work off of to go higher from here.
Or is the third quarter really benefiting a lot from mix.
In our satellite and space business, which as you know as the biggest and the company.
There is a transition moving more towards software defined elements than hardware.
Which is driving increased margins.
We believe that is going to continue.
Into next year and into the future until it stabilizes so our satellite business.
Particularly in.
Where we're doing the space situational awareness, where we own and operate the global network and in the products that we're delivering which are moving more towards software margins are definitely increasing their.
Revenue is coming down somewhat as it moves to software.
On the drone side.
As we transition from these development programs.
To low rate initial production.
A full rate production.
Right and that right now that which is occurring in the target drone side as Deanna mentioned, we are getting increased margins there as quantities go up in the production facilities, we're getting leverage on the fixed manufacturing costs.
We expect that we expect that to continue more going forward as more units go through the factories and we get the leverage on them. So those are the two primary areas where margins are going up and they are kind of sort of for different reasons.
Is there something offsetting those thanks.
Let me thing.
Probably depending on how the training business Recompete turns out and the structure of that contract going forward that very likely could have reduced margins to it and I because of the situation, we're in which I said.
We're in a good moved about how this is appears to be trending right now.
Thats live I don't want to get into too much but our training business margins at least on that major program, if its sustained could start coming down somewhat.
Our commercial satellite.
This where we this is where we built earth stations.
Teleports, which do command and control and they do signal monitoring there is commercial pressure there. So those margin we do not expect goes to increase and depending on the nature of the business, we could see some compression there.
So all in Eric do what's your level of confidence so you expand the margins in 2020 versus 219.
Hi.
Okay.
If I take the guidance for 2019.
If I go to the midpoint of the revenue.
In order to be at the midpoint of EBITDA margin in the fourth quarter would have to be down 200 basis points sequentially, even have to be the lowest margin of the year, which is usually not the case.
Is that conservatism or is there something specific in the mix in the fourth quarter.
We are trying to be cautious because of the CR rate that currently goes through the third week in November and very possibly could go through the end of the year and what that potentially could do for example, as you know typically in the third quarter in the fourth quarter because its.
Rounds that federal fiscal year, we add in the set particularly in the satellite business, we get drop ship orders of equipment and software sales yes.
And some of those can be very high margin.
So are those out of the guidance.
We have but we are looking at them on a case by case basis, and factoring not knowing what's going to happen after November 20 seconds or whatever that datas.
I understood.
Okay.
Related to the CR.
I believe you said you should see about reorder within 90 days post a final 2020 budget.
So as it is it looking increasingly likely you'll have.
Yes.
Not insignificant Valkyrie revenues in 2020.
Is it looking so Jonathan.
Let's say that last part again I want to make sure instead, well I guess just prior to today it felt like the timeline on Valkyrie.
Maybe 2021 and beyond revenues look very likely and obviously, that's what matters most but just in thinking of the pieces for next year I thought dockery revenue contribution was more of a coin toss, but it sounds like you're saying you would expect an order just a few months into next year.
Unless I heard that incorrectly.
No I am expense I am expecting.
A material.
Ill Cori related order within 90 days after the 2020 budget becomes effective.
Okay.
And then just last item and I'll go back in the queue did you quantify the the training the annual revenue contribution from the training program Oh, how the Recompete.
Yes, and so.
What we've said on the last last quarter's call. What we talked about the Recompete is that because of the restructuring that I mentioned the minutes ago. It was looking to be something like 25 or $30 million a year going forward.
However for this year and 29 team because of the op tempo that has been going on in the structure of the contract. It is about 50 million.
So we replaced we were planning on it coming down because of the structure. So this year with 50 55 next year was 20 530.
Because of the structure change.
And then if I heard you correctly.
Because of the timeline of protest.
It sounds like you will at least half of that extended into mid 2020, even if you ultimately don't keep it.
Then obviously for JBT Akiva.
Is that correct right, yes, so what I, what I said was that right now based on and again. This is live so I don't want to get to add anybody but based on most recent communications were expecting to maintain at at least into the beginning of Q2.
Okay.
Okay. Thanks, so much.
Yes, Sir.
Thank you. Our next question is from Seth Seifman from JP Morgan. Your line is now open.
Hey, good afternoon. This is actually done on for Scott.
Hi, Ben I bet.
So I guess I wanted to hone in on.
The organic sales.
And kgs for a bit I mean youve.
You know given some encouraging commentary today about 2020.
You've been talking about this business pretty positively the last few quarters.
If we kind of dig into Q3 and strip out.
PTT and even taking out.
The headwind from government services to kind of the rest of this business was pretty flattish.
So I guess, how do we kind of square square that up.
You know kind of the go forward outlook for for this business.
Right. So in NR Kgs business, let's take training for example.
We work on very large programs.
Like for example, we are in production right now on KC 46.
We are in production on a number of Marine Corps common aircrew trainers. These are tens of millions of dollar programs. We are in them a massive program with the Navy.
So when we when these programs when were awarded them our book to Bill in that quarter can be three or four to one.
But that it runs out for two or three years.
If you see if you see what I mean.
And so there are a number of things that we're pursuing right now, but if we're successful on there could be a significant blip upwards.
At our book to Bill ratio that will carry that LTM forward at 1.2 or 1.3 to one.
For a while so that's one this that dynamic of that business, which is also the same NRC five is our business.
Very very large programs and I believe it looks like you're going to see that in Q4 at our Sci Fi bias, our business relative to a very large platform.
Were sole source on so we're going to get it if we do get it in Q4, youre going to see a significant upward tick because of the size of it and the and it's going to be all funded and how far it goes into the future.
And then them while the satellite side on the space side that business. It's a mix of very large programs like I mentioned OPI are.
Tom.
As you know we have an integral part on severs OPI ours kind of sort of follow on Decembers I believe we're going to get a significant sole source position on LP IR, which if that happens will be a significant uptick in bookings and backlog for that period Theres. Another part of the of the satellite business that we were just answering with no about.
That is on the software side that is more of a book and burn where we get them quarter to quarter.
And so there's that mix going on that's kind of how I reconcile what's going on and kgs.
Okay. Thanks.
That's pretty helpful.
Yes, and I guess on on a.
Continuing resolution.
The risk is increasing that we see this extended.
Not only to the ended the year, but possibly I mean, we're hearing what about you know what happens if it's a full year CR I guess, which of your business units.
And the growth outlooks there are most at risk if we see some CR that extends.
2020.
So on.
So the good news is on the base business we're in a.
Coming in 2019 was 720 billion dollar defense budget. We're now in production on Navy SSH key we're in production on apps that we're in production on another one so the good news is as we've achieved production on a lot of diesel the base business.
There were an extended continuing resolution is very solid were in production.
If the CR rate as extended for example, we cannot get to full rate production.
On SS 80.
We're going to be stuck and I'll refer to that over three okay. For example, there is a restricted program I can't say a lot about we are in L. rip on it it is.
And it's a very good program very profitable, we can't get to full rate production on that.
Thats that half of that program happens to be on or unmanned systems business.
On the tactical drone side.
We have the development funding from the 19 budget.
And less there is a reprogramming, which only occurs from time to time, we cannot move into significant production in the tactical area without a 2020, but.
Okay, and so the outlook for Kgs, you think is mostly on affected by.
Well I want to be I want to be very clear it's unaffected.
It it cannot see significant growth increases in ramps in production without the budget. It can hold court.
But as you know there were no new production programs under a CR and there are no increases to existing production programs under a CR unless theres a reprogramming.
Right right makes sense and just the last one.
Can you.
Give us that percentage of the.
On demand sales this year that comes from.
Technical drones.
I don't have that off the top of my head because we don't have production revenue in that area right now it's substantially substantially all.
Target aerial drone target ground drones and target seaborne drones and the related.
And in controlling avionics electronics.
Sorry, I don't have that right here with me.
Thanks.
Thank you. Our next question is from Ken Herbert from Canaccord. Your line is now Ben.
Hi, Eric and Deanna.
Hi, Ken.
I wanted to first dig into grumblings, a little bit I know, we've been following and you've talked about the.
Capacity issues around flight test ranges is at a similar dynamic with gremlins that you could potentially.
They get a follow on contract or incremental contracts without.
Corresponding progress on the flight test side or is this program really dependent upon continued progress on the flight test and demonstration with the upcoming milestones, which means a contract maybe the soonest is second half of 20, depending upon scheduled at the flight test program.
Right. So obviously since we're not though the prime dianetics as I don't ever want to get ahead of them.
But from what we've seen with about Korea, and what we expect.
With the Valkyrie I I think it's absolutely possible.
That there could be drone orders.
Before a phase or a series of demonstration programs is complete.
Okay, but but it sounds like from your commentary that I mean, CR issues. Aside would you would you view that as a relatively low probability or.
Something that maybe has a a decent chance.
I think to be concern I think to be safe and to be conservative I would I would I would go with the assumption that once the the demonstrations are successfully completed then you move too.
Two unit orders I think that would be the safe way to go.
Okay.
And if I could Eric just take it bigger question I mean, obviously your customer on the or for side has talked a lot about about the digital twin or digital threat or.
Digital manufacturing issue as you think about how they are really trying to drive.
Rated development processes and testing of weapons systems I.
I know you own the IP on the boundary and it's obviously attributable but to what extent did you sort of follow that design or incorporate that into design process and how much optionality or flexibility does that give you on that platform sort of moving forward and what's the risk of getting ahead of things, but it's pretty clear the programs like the Bell Creek will undergo.
Go fairly substantial refresh an upgrade cycle since the technology moves forward and I'm, just trying to get a sense as to your position on that considering the major focus of your customer.
That's a great that's up that's a great question, Let me let me give you the analogy of this.
The F 15 has been flying since the seventies.
And Boeing has now come out with that EPS.
Fifteenx.
And if you look at the airframe.
The airframe of that four or 4.5 generators and fighter is substantially almost exactly the same as it was in the seventies.
Hold that thought relative to the Valerie.
The Valkyrie as an incredible airfreight.
For security reasons, I can't say a lot about it but if you look at it you know what I mean.
It has been specifically designed.
To be modular with open architecture for payloads.
So the reason the 15 is still flying today is because of new electronic warfare systems, New is our systems New Earth systems.
Okay.
New weapons systems Valkyrie has been designed the exact same way with open architecture plug and play modularity.
So for that type of a system. It is extremely flexible in it we designed specifically to address the thought you have right there.
Okay excellent. Thank you very much Eric and Deanna.
Got it.
Thank you our next questions from Mike Crawford from B. Riley FBR. Your line is now open.
Thank you Eric why build the company owned targets I understand.
Why you build company owned tactical drones like to make them and the victory, but unless.
It was hypersonic, where you're trying to demonstrate something ahead of a known requirement and I don't understand why you would go the company owned target.
So we.
Just completed in the last few weeks.
Very large target operation.
For an international customer at an international range very large multiple multiple fire jet targets.
The reason, we got that job.
Because we had 10 or 15 fire Jets company owned assets look at it is on the shelf.
With that customer set and we want to do it often 90 days, there's no way, we could build them in 90 days with the production plans, we have and everything else going on we pulled the company owned assets off the shelf, we put together a contract that was a lease would they are we seeing them. So they are leasing the flight their leasing the representation, but in that.
That agreement when they shoot them down they buy it and it's no longer company owned so now the numbers I'm going to give you. An example, because I can't get into the detailed let's say, we brought 20 of them down there. We owned all 20 of them their hours if they didn't should any of them down we get all 20 back their customer there credo salt, but if they shoot 10 of them down.
They pay for that can.
We get the 10 that a lot that survived back those are still company owned and they go back into capital.
Okay. So it gives us the flexibility to react very quickly to customer demands, which gives us a competitive advantage.
Okay.
Great. Thank you and just maybe if I could dig in a bit further on the margin front. If you looked at some.
And.
Specified future date, where an unmanned systems you have target revenue approaching 250 million here and maybe tactical revenue.
Nearly twice that much.
And running at a good full production rates at all your.
Facilities do you have a sense of where what the EBITDA margins might be an unmanned systems at that point in time and more of a steady state like point in time.
Yep 14, 15%.
Okay, great. Thank you. Thank you.
Thank you. Our next question is from Joe comes from Noble Capital. Your line is now open.
Thank you.
Last quarter, you talked about you'd plates the.
Engine order.
And you talked a little bit today about the 90 days of the budget being.
Adopted of getting orders.
Are you still very comfortable with where you are in the engine orders could you give a little more color detail there appreciate it.
Yes, absolutely, we absolutely are and Joe very candidly about three weeks ago because of what's going on with the customer set we had the discussions about actually ordering more.
Engines, because right now it appears what the customer and its plural customers.
What they envision is they want to start receiving the drones in 21.
And with a 12 month than what the 12 month lead time on the engine.
The only way we could hit what they are communicating to us they would like.
Yes to order is to order the once we already ordered and potentially depending on how things are lining up.
We may in fact order, some more which which not only helps from a customer standpoint, but helps from a company standpoint, because these engines are specific and what will just talk about the Valerie because.
Looking at this for different things for the Valerie, Let's let's say, we're we get this award of an order by the end of March and that would assume a end of year through the end of the are continuing resolution.
Well, we got that order and Theres significant significant progress has been done built done building those engines.
If we believe these are going to qualify for a percent complete accounting instead of a unit to delivery. We believe right now that's what it appears to be so that could be beneficial for us. It in my example that we could start generating revenue in Q2 on the effort in per to date on the engines plus any other effort we've been doing on the program.
Okay.
Thanks on that and if you could just provide a little more.
Detail on the you talked about the the legacy government services business that it was down in the quarter I mean, where do we stand on that business. Today. You know is it just going to be bled off our wouldnt, what do we see for that business.
So that business right now is about 50 to 55 million a year in revenue.
And Joe it's terrible business everything is LPTA low price technically acceptable.
It's all the costs shoot out it's all commoditized.
It's it's very difficult.
Thank God, we're in a product and systems business.
So where were still bidding.
We're still trying to win but we don't bid low.
You know, we're not going a bit dumped on low.
And so.
It's probably going to continue to trail off.
Okay, great. Thank you.
Yep.
Thank you. Our next question is from Michael Ciarmoli from Suntrust. Your line is now fan.
Hey, good evening guys. Thanks for taking the questions.
How are you.
Eric just on that continuing resolution can you talk about how its it is already or it may impact order flow are you seeing anything on bookings and then you know as it relates to you sort of gave US I think a pretty good timeline last quarter of gremlins expecting the first half order.
On a two Spartan asking a some of the revenues they were supposed to get in 2020, I think Omega first half award does any of that change or slide to the right a little bit under a continuing resolution.
Yes, so we as I went through we've received some we've been fortunate enough to receive some.
But.
You heard me mention bikes, we expect significant future funding.
On Fatos.
We expect significant future funding on Spartan.
Those are moving to the right they're tied to the budget that's what it that's what it looks like to us directly tied to that 2020 budget.
Okay, and so yes, we've been fortunate we've gotten some but there's a handful or so that are just moving on us they're sitting there we've won them their hours.
But it just their move and so out that tells me, they're tied to a 2020 budget being approved.
Okay.
And then just back to the margins I think kind of what no was sitting on and Mike you mentioned in 14% to 15% EBITDA margins. It sounded like with volume you can get better overhead absorption but.
How should we think about you know I guess, specifically maybe in Oklahoma. The production scheme, there you've been prototype Valkyries you've got a.
Step up you can you just talked about ordering the engines.
Kind of transition from prototyping to.
Even lower rate production I mean do we.
There are a little bit of a hiccup there with with natural learning curves as you sort of.
Begin to industrialize that process away from just prototype.
Yes, so that's a good cost and so in autumn and Oklahoma right now we are building production fire jets.
In our plan over time.
Is to transition a significant amount if not all of the fire jet production. So the M. M 78.
Out of Sacramento to Oklahoma. So the autoclave has arrived it's up and running we're going to start building aero structures. There soon.
And we need to do that.
Because of our 177 production increases for the Navy in Sacramento, we cannot move that cause the qualifications and we are seeing also seeing increases with the air force in the 167 and we have some other things going on in Sacramento that cannot be moved so we're going to move the fire jet we're building those in SAP in Oklahoma right.
Now we're going to continue to move those however, now to your point.
There will definitely be a learning curve.
On the tactical drones.
Just like there is other target drone.
Where and just like there was on F 35.
Where the first one cost acts the second one cost wise, which is less than acts. The third one cost the which is less than why as you learn as you build them and it comes down so.
Mike Mr. Crawfords question was when you are steady state in this normalized so thats how its still I took it but when you are in initial production and El Rep.
You do not have the efficiencies that you will have when you're in full rate production. So you will not have the margins.
Got it.
Last one for me can you just getting an update on the I think that last.
Missile target contract a teaser contract win when you expect to hear something from that and maybe kind of order of magnitude.
How that would impact revenues versus the current run rate of that program.
Right. So so right now that.
That solicitation it looks like it is due to come out either late this year, but I plan on Q1 because of what's going on in Washington, Okay.
So if the solution solicitation comes out into water. So I would look for a Q3 or two four award.
This is what those things that are being pushed to the right.
Order of order of magnitude what we're looking at right now this can change because we have not seen the solicitation yet is 25 to 50 okay.
A year.
Got it.
Perfect. Thanks, guys.
Thank you.
Thank you our next questions from Pete Skibitski, Some alembic Global your line is now open.
Good afternoon, guys nice quarter.
Eric just can you size, maybe the army holiday program it sounds like you're pretty pretty high on that program.
I'm very.
Oh proud of the team.
Our training team knocked it out of the park on this one.
Extremely competitive bid, but it was not low price technically acceptable it was best value.
And we wanted my opinion because of our technology.
And.
The initial award is a multi multi million dollar award that we're working on.
But the scope of this and what this touches.
It's very.
Very significant I I can't say more than what we put out a little brief press release to get ahead of the customer.
But but this this is credo. This is leading edge technology integrated together to bring a solution to the customer that is very high tech, but it's not bleeding edge, so theres not a ton of risk.
Where it can be a win win and we're looking for a multi year.
Growing program here.
Okay. Appreciate just one more question and I'm not even sure if you're tracking this but this idea of having a system design agent for Skyworks seems to be kind of moving along.
I think that impacts your role there on that program. It sounds like you know kind of in ecosystem approach at the Air Force kind of thinking about this could you guys are you tracking at and what's your thoughts on Oh, yet where were tracking it very closely.
We we responded to the RFP.
I believe the RFP will probably come out in Q1.
I do not believe that that approach in any way adversely impacts.
Kratos.
Sky Board isn't a high program.
It's an artificial intelligence program.
We are providing the platform or the platforms and I want to say it that way because.
It could be platforms.
Relative to the tactile affordable tactical drone element of that a high.
Program.
So where where we're audit we're tracking it I'm highly confident we will participate in this one way or another when it comes to fruition.
This structure that they've been talking about for the past month, it's very interesting I see what theyre doing but in no way is that adverse for our aspect of this.
Okay, but how are you, saying that you could potentially you look to prime <unk> on the Sta role as well.
It will be additive to the drone role.
You know or not and I don't I don't want us I don't want us to say that specifically to ask Ivor because I don't know yet however, remember gremlins.
We primed it and we partnered it and in Phase one we won one of each.
Right, Okay, Okay fair enough.
Okay.
Thank you thanks for the congrats.
Okay.
Thank you our next questions from Noah Poponak from Goldman Sachs. Your line is now open.
Eric could you just some circle back and just give us a fresh update on the.
On the total BMD hypersonic target opportunity.
Topic, because you know pretty pretty recently there was the three programs you had one the first north up on the second to third was outstanding but then a few weeks ago, you had the Oreo rocket Motor award that seem to.
At least through US came out of nowhere and then in your prepared remarks today, you said you're in pursuit of multiple BMD and I guess on target off some of which could be word in the next few months. So that seems knew it was this just rapidly evolving or what's the update.
So.
Prime system integrators that are winning.
Hypersonic weapon programs.
They need to test.
Aspects of it.
They need to test the front end.
They need to test what I'll call.
Telemetry.
In the right place at the right time at the right speed of things.
And.
As you know we have a proven system that has been doing that for a long time on programs like high cause in high fire and fast.
And so we.
See that I have to be careful here, we see the potential opportunity to support.
Guys that have been winning.
System programs to help test for them to test their systems very rapidly in the very affordably. So they can hit their deployment deadlines.
I'm, assuming those are considerably smaller than something like the third one you talked about priming and it being a billion dollars program.
Correct, absolutely, yes or.
Yeah, but they could come out you pretty quickly.
Yes, Sir.
Okay.
And then.
On Gremlins what is the updated.
Flight test timeline.
So I would again I'm not dynamics of the Prime However, dianetics their program manager get an interview.
In the past three weeks that is public.
Where they have indicated they have like they have identified an additional range.
A new what.
They are working I said plan on Q1, they are trying to get something done.
In Q4 this year.
And so I encouraged I don't want to speak for them I encourage you to take a look at that they're working that.
So I think previously.
You guys had estimated.
Tests like before the end of 2019 and then the final test like mid 2020.
I understand earthquake her out of everyone's control, but.
Sounds like the initial this has slipped as a result, maybe talks into the end of 29 team.
The the fine on mid 2020 is that still rough order of magnitude, what we should be thinking.
Ice in the prepared remarks, though it said that right now I'm planning on the second half of 20 because of that anomaly and hopefully things will change and it'll be sooner than that.
Okay.
Thank you.
Thank you.
Thank you at this time I'm showing no further questions I would like to turn the call back over to Eric Demarco for closing remarks.
Thank you very much for joining us this afternoon, as we will be circling up with you.
We report our fourth quarter in the in February Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.