Q3 2020 Kratos Defense and Security Solutions Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Kratos Defense and security solutions third quarter, Tony Tony Earnings Conference call. At this time, all participants I know listen only mode. After the speakers presentation, there will be a question and answer session.
That's the question during the session you will need to press star one on your telephone if you acquire any further assistance. Please press star zero.
I would now like in the competency of speaker today, maybe even does in a senior VP General Counsel. Please go ahead ma'am.
Good afternoon, everyone. Thank you for joining us for the crews defense <unk> Security solutions third quarter 2020 conference call with me today is Eric Demarco <unk>.
President and Chief Executive Officer, and Deanna, then Hey, this is 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 paragraphs sales included at the end of todays 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.
Pension market opportunities operational outlook and financial guidance during today's call.
Today's call will also include a discussion of non-GAAP financial measures at that term is defined in regulation G. non-GAAP financial measures should not be considered in isolation from or if you substitute for financial information presented in compliance again.
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 yeah.
Ill now turn the call over to Eric to Mark.
Thank you and good afternoon.
In Q3, we continue to execute on our strategic plan, including being an industry leader focused on the recapitalization of strategic weapons systems by the U.S. and its allies.
To address the nation state Russian Chinese threats.
Since our last report to you we've made important progress, which we believe further positions the company for unexpected and sustained up into the right organic growth trajectory.
Which include.
We received from the U.S. Navy the EPS 80, BQM 177 target drone full rate production.
On tract with an initial estimate a total value of approximately 130 million in our unmanned systems Division with the initial funding recently received for the first 35 target drones at approximately 30 million.
Receive from Northrop Grumman and RC five is our business GBS de contract Phase One award with an expected initial value of approximately 160 to 200 million to create us.
Receipt of a 950 million a BMS, Matt I'd like to contract award by Credo space and satellite communications and unmanned systems businesses.
There's a BMS contract award is in addition to the 400 million dollar Mac Sky Board I'd like to contract Award Kratos unmanned systems business previously received.
Microsoft announced that it is working with Kratos satellite business on its a sure orbital space satellite ground system as a new service offerings.
It was publicly relief, but a new kratos affordable high performance turbine engine is on the speed racer tactical system.
And receipt of an award from an international customer for 20, Kratos target drone systems by unmanned systems business.
Chris This is positioning as a commercial culture venture backed technology and product company.
Addressing that the national security market is providing a competitive advantage for our company. We believe is represented by our third quarter 1.8 to one book to bill ratio or $873 million backlog.
And the 8.3 billion dollar opportunity pipeline, we currently have.
Related to Kratos is commercial based non traditional and disruptive government contracting and delivery model. The deal de continues to progressive we change its procurement approach.
Including utilizing other transaction authority or OTI a contract vehicles.
Craters servers, and other rapid solicitation and technology access vehicles.
Which are beneficial to our company.
Great. This is recognized as an industry leader in the rapid development and fielding of affordable low cost systems, which will be of increasing importance irrespective of administration with federal budget pressures conflicting funding priorities and the need to address nation state peer threats to the United States.
At Kratos affordability is a technology and our approach to make internally funded investments in advance of contract award.
Utilization of digital digital engineering, and proven leading edge technology as compared to unproven bleeding edge technology.
Results in faster Credo system development, and fielding time reduce schedule risk lower overall cost in a first to market competitive advantage for our company.
For example, Kratos has turbine technologies in 18 months with from a clean sheet next generation affordable engine design.
The engine core run test to just a few weeks ago with ground altitude and flight test now scheduled.
For our business for fiscal 21 over 20.
With growth and profitability accelerating and expanding in 22 as next year's Gvhd related investments wind down and revenue in margins increase.
And <unk> is next generation engine business, we continue to make progress on a number of funded new engine programs, including Kratos as MGN being reported to be on the new speed racer tactical system as I previously mentioned.
With speed racer. It has now been reported the Kratos as engines are designed and on to new tactical platforms speed racer and Gray Wolf.
And I can report to you that there are several additional programs that we are also currently on we're planning to be on which we hope to be able to update you on in the future.
We believe the customer demand signal unexpected total addressable market for <unk> class of affordable high performance engines as large and increasing.
Including as related to many of the drone and tactical system programs are unmanned systems business is currently on are pursuing.
Including Skyboard Gremlins Golden Horde, Ace Abms, Ibs Arsenal plain Palatize munitions and the Reaper replacement.
Unmanned drones tactical missions and powered munitions all require engines with the engine typically being the number one cost item in this type of systems bill of material.
This replacement of legacy technology, and the cost reduction opportunity is driving the demand signal from our customers is.
Is extremely large quantities of these low cost increased performance affordable attributable drone tactical missile and powered munitions are expected to be procured to address the threat.
Additionally, I can also report to you that K T. T is now under contract on certain hypersonic program in June initiatives, which I hope to be able to provide you details on in the future.
We are currently forecasting year over year organic revenue growth <unk> engine businesses for 2021 over 2020.
With certain increased capital and other investments in 21, as we execute on development programs in conjunction with our government customers and work towards future production.
Kratos is microwave electronics business also continues to perform well with continued growth forecast as we either begin or expect to see increased production on a number of programs was kratos as currently designed and on.
The microwave electronics market space is one of the top funding priority areas for the us and its allies.
As missile radar electronic warfare communication in other systems are upgraded and new platforms are fielded to address the increasing threat.
Gradovs is microwave business continues to have a near record backlog and opportunity pipeline and we are forecasting increased F Y 21 over FY 2000 organic growth for this business.
Important programs for Kratos is microwave business include Buraq Iron dome swing of David Arrow El RASM, two RASM the F 15, and F 16 and gripping.
<unk> rocket systems business had a strong Q3 and we are currently executing on a number of programs, including building and performing system system integration on vehicles for missile defense related and other initiatives.
Based on the number of programs and systems Kratos as Rss business is currently working on and the increased number of new opportunities. We are now pursuing including of the hypersonic program area.
2021, and 2022 are both currently expected to be heavy mission launch years for Kratos, assuming no additional COVID-19 related or other delays and the current launch manifest holds.
We currently expect year over year organic growth for a rocket systems business for fiscal 21 over 20.
With 2021, having increased capital in <unk> in certain other investments as we are developing a new system in conjunction with a certain customer set.
Kratos as target drone business also had a solid Q3 and.
Including receiving the sole source full rate production award from the U S. Navy on the SSAT program I mentioned before.
The three year value for SSA TFR, Peter full rate production was announced at $130 million with the ultimate SSAT program related amount to kratos over this initial three year period expected to be tens of million dollars greater than the 130 million.
Driven by payloads spares peculiar and other related program materials solutions and services.
We expect the SSA program and the <unk> 177 target drone to be one of <unk> largest and most important programs and systems for many years and a key future growth driving for our company.
With the SSAT full rate production award.
A significant and sustained multiyear production ramp for the SSAT program is now expected to begin for Kratos in Q3 or Q4 of next year.
As I previously mentioned, we recently received a multi million dollar contract from an international customer for 20, new target Drome systems, which is expected to be an important financial contributor beginning next year and we now expect this customer to make annual recurring buys of Kratos target drone systems.
We have also now reached agreement with the second international customer on an even larger target drone opportunity.
And we are awaiting U S government approval to finalize this new contract, which is currently expected to be approved around Q2 of next year.
If current timing Holt, we expect this new opportunity to be important financial contributor to Kratos beginning in 22.
We are currently in negotiation with United States Air Force on a multiyear sole source full rate production extension contract, which we expect to complete and receive around mid next year.
We also expect to receive full rate production on an additional separate sole source contract in Q3 of next year, which of current expected contract award timing holds would become a significant increased financial contributor to Kratos beginning late next year early and 22.
Grottos as industry, leading target drone business is expanding its customer base and growing rapidly as the us and its allies field, new weapon radar and other systems to address nation pier threats and these systems need to be tested and exercise for operational readiness.
We are now in pursuit of two new large target and target drone program opportunities from the U S government, which we are successful could provide the next step up in future growth for this business beyond our current growth expectations.
For competitive reasons, I will not be saying too much about these opportunities in the near term.
We are expecting organic growth for kratos as target drone business for fiscal 21 over fiscal 20.
With organic growth expected to continue beyond 21 based on current programs current contracts unexpected new opportunities.
The tactical drone market opportunity that <unk> pursuing continues to grow and gain momentum based on customer demand signals.
As you know kratos as for affordable high performance Tactical jet drones flying today that we can publicly disclose which we believe is an important competitive differentiator for <unk>.
Has that kratos drones all of them are manufactured in the United States, which is also important competitively.
Before drones, but we can talk about publicly include the Valkyrie Gremlins Mako, an air Wolf and we are under contract on a number of additional related and or derivative tactical drawn programs all of which are in conjunction with a United States government customer or Parker.
Great US has recently received a $400 million Skyboard Mac IDI to contract.
Skyboard gives the overarching program for developing small low cost high performance armed drums that can accompany man's fighter jets into combat is affordable force multipliers.
The Skyboard program is one of the services top science and technology priorities under the Vanguard initiative to deliver game changing capabilities within three years to the Warfighter.
Based on most recent publicly available information funded Skyboard task orders, including for drone aircraft are expected to be awarded by the USAF very very soon.
We also expect to see other non Skyboard program drawn related contract awards in the coming weeks and months.
As we are currently now in source selection on Skyboard and these other opportunities including for Valkyrie I cannot comment further at this time other than to say our confidence in the ultimate success of Kratos as Valkyrie and Kratos as other tactical drones systems has only increased since our last report to you.
<unk> Gremlins has now completed second flight and there were a flight scheduled for later on this year, assuming no additional COVID-19 related or other delays.
We continue to expect the Gremlins program with our prime partner Dianetics to transition to a service next year and our expectations for future Gremlins high quantity production have never been stronger than they are today.
<unk> Air Wolf program flight schedule is now anticipated for later on this year and into next year also assuming no additional covid related or other delays.
<unk> Rattlesnake program with their environment system flights are now also scheduled for early next year, assuming no additional covid related delays.
<unk> development program is on schedule and on track and if we are ultimately successful here with our partner, we see an opportunity for Kronos potentially similar in size to the opportunity we ultimately see for Valkyrie.
The U S. D. O D continues to provide demand signals that there will be thousands of affordable high performance jet drones in the disposable reusable expendable and attributable classes.
We believe that Kratos is extremely well positioned with both are drone business and our turbine our engine business to address this opportunity.
The Air Force's now also defined the price range of between $2 million and $20 million as the target for this emerging class are attributable unmanned aircraft systems and.
And kratos his entire family are attributable tactical drones currently fits within or below this price target range.
Major drone or tactical system related programs Kratos is unmanned and turbine businesses are either participating in currently are pursuing that we can talk about publicly include Skyboard gremlins abms Golden Ord L Cat L cast D. The Arsenal plain Palatize munition speed racer Ib's.
Gray Wolf and the Reaper replacement.
On the Reaper replacement opportunity Grossest Ghost works, which work is compartmentalize, an extremely confidential is considering offering what we believe would be an extremely disruptive and paradigm changing low risk affordable solution.
Operationally in Oklahoma City, the production plan for the 12 Valkyries is continuing with initial delivery now scheduled for around Q2 21, aligning with most recent customer demand signals.
Similar to the other competitive advantage, we believe cradles has including for affordable jet drones flying today. We also believe that Kratos is up and running production line in Oklahoma with deliveries off of the line. Beginning next year is also an important competitive differentiator an advantage to our company.
We are expecting significant year over year organic growth for <unk> tactical drone business for FY 21 over FY 20 with.
With the degree of the growth determined by the timing and type of expected contract awards. The ultimate length of the current continuing resolution and timing of a federal fiscal in 21 budget.
2021 will also see investments for K U S D. As production ramps up on the initial precontract valkyrie as being rendered manufactured in Oklahoma.
Kratos of space in satellite business continued his business momentum and positioning for future organic growth, including with Microsoft announcing the launch of a zoo or orbital a ground station as a service for the satellite industry that Kratos are supporting.
Is your orbital will connect satellites directly to Microsoft's cloud computing network.
Kratos is collaborating with Microsoft to enable absorbed an orbital with Microsoft using five kratos products from our new open space line to enable the assure orbital underlying Clark cloud architecture.
<unk> products facilitate the processing of the signals from the satellites to the antenna and then into the cloud environment and Kratos as open space Digitizer converts the space analog R F signal into network ready digital packets.
The ground as a service offerings like Microsoft's <unk> orbital represents one way in which ground systems are being disaggregated from the space layer, which is an incredibly important industry trend for creators.
As it is providing a large new market opportunity that previously only the satellite in space system providers had access to and with this trend Kratos now has access to this market.
For example, in addition to assure orbital I will now report to you that Kratos is also under contract or collaborating with other major new entrants to this market, which we are under NDA and we see this area is a key contributor to our forecast it very strong satellite businesses future organ.
A growth rate.
Simply stated Kratos his position with web 2.0 companies is extremely strong.
Additional factors driving technological evolution and the high expectations, we have for our ground space business segment include five G, which I have discussed in detail previously proliferated Leo and multi orben operations.
The space industry is undergoing tremendous innovation and growth, including small cube.
Software defined payloads and proliferated leos with it being recently reported that approximately 40000 small fats are forecast to be launched into orbit in the future all of which will be needed to be able to communicate and connected to the ground based infrastructure, that's where creators comes in.
<unk> space architecture is based on industry standards and software defined networking technologies that have been proven in the telecommunications industry.
Which is entirely consistent with kratos as low cost low risk deliver on schedule strategy by utilizing proven leading edge technology versus unproven bleeding edge technology.
Additionally, the cradle satellite network technology being used by your orbital is also based on the same foundation that is needed by certain government programs to enable defense applications, including for connectivity to commercial space systems, which is one of the government's stated priorities and goals.
As part of the enterprise management and control effort Kratos is providing warfighters the ability to roam with satellite communications, whereby warfighters can receive and transport satellite mission data from various satellites and multiple domains very similar to the way cellphones can roam today as <unk>.
Well as the unified common operating picture across multi dining systems.
With these recent collaboration agreements on contract awards, we believe that Kratos of space in satellite business is positioning for an impressive growth trajectory, which we are forecasting to begin in the second half of 21 and accelerating into 22 based on current programs contracts and opportunities.
We have also received or expect to receive in 2021, a number of new confidential or classified program awards and as a result, we will be beginning and investment in certain skills and other security related investments next year with the ultra or ultimate order of magnitude of the investment being depends.
<unk> on the opportunity set in our success rate on these opportunities.
Representative programs Kratos satellite business supports today includes the hypersonic and ballistic tracking space sensor or HB TSS program.
The next generation overhead persistent infrared or <unk> program.
Tactical intelligence targeting access Notre the tightened program.
Advanced Battle management system, Abms Wideband global satellite WGS advanced extreme high frequency satellite.
Jeff and space based infrared or silver.
And finally in our space business the integration of AFC signal is going well with no major issues and no major surprises.
Oh, if you can see from today's report substantially all of our businesses are performing well and organically growing with an increasing number of opportunities both the number and size.
Challenges Cradles currently face include the continued commoditization and reduction of our legacy services business due to LPTA contract Awards and.
And our training business with a high risk international contract Recompete now going on which if we're not successful with resultant approximately 35 million negative revenue and related margin impact four kratos in 21 compared to 20.
Is related to COVID-19, the Kratos employees have done nothing short of an outstanding job executing and a truly difficult and challenging environment.
Covid has clearly adversely impacted kratos, thus far in 20.
Including in our commercial turbine, our commercial satcom and rocket launch business areas and also importantly in our tactical drone business, where virtually every <unk> program an opportunity has now been delayed or put significantly to the right. As a result of Covid related D O D and contractor work at home travel social.
Distancing in other restrictions, including very importantly, the impact on a range operations and related emissions.
However, irrespective of Covid and normal business challenges, we all have as we look forward kratos as future has never been brighter than it is today.
As a company, we have better visibility or clarity to our future business and financial forecast them ever including is represented by our queue three book to Bill ratio backlog in new opportunity pipeline.
For 2021, we are currently affecting significant revenue growth over 2020 with the magnitude of this forecasted growth determined in part by the length of the current CRA the timing of the federal fiscal and Dad 2021 budget, the timing and type of expected contract awards, including in the tactical drone area.
And COVID-19 related impacts of the business, which will deal with as they come.
With that I'll turn it over to Deanna.
Thank you Eric Good afternoon. This is third quarter of 2020 revenues of $202 million as we forecasted and in our agent 195 to two O 5 million and adjusted EBITDA for the third quarter was $24.6 million above our expectation and $17 million to $20 million due primarily to a favorable mixes.
Revenues, including certain programs and products and more mature life cycles.
In the third quarter, our unmanned systems segment reported revenues 53, 5 million up $17, 1% from the third COVID-19, due primarily to target training programs, including the essence 80 177.
Navy.
Unmanned systems generated adjusted EBITDA, five 6 million.
499 in the third COVID-19, primarily reflecting the increase increased revenues.
<unk> reported revenues at $145 million.
$131 million.
19, reflecting $10 $2 million from the recent Nancy acquisition and organic growth in our defense rocket microwave products and see five ISR businesses.
This increase was offset partially by a net reduction of approximately six 3 million in our training solutions business, which was related to the previously disclosed reduction in scope of certain international contracts.
Kgs's some quarter of 2020 revenues also included a net reduction in $2.8 million and the companies ATT business, resulting primarily from COVID-19, and task and commercial Arrow instance area, partially offset by increases.
And business.
Kgs and quarter of 2028, chested EBITDA increased to $19 million from $15.5 million in the third quarter of 19.
And favorable Nixon revenues, including certain programs and products and more mature in life cycles.
<unk> adjusted EPS and 14 per share was above our forecast is eight to 10 cents per share for the quarter gap EPS was two cents per share.
R Q3, consolidated operating income was $12.7 million from the third COVID-19, operating income of $11.5 million, reflecting the increased revenue volume any favorable mixing revenues.
Also included in the queue 320 operating income with an increase in non-cash stock compensation extensive $2 2 million increased R&D expenses and three 1 million primarily interested in satellite business and increased depreciation extensive 500000.
Alright, just did EBITDA for the third quarter, it's from consolidated continuing operations, including net income or loss attributable to noncontrolling interest and excludes non-cash stock based compensation cost 5 million acquisition and restructuring related costs of 400000, and foreign transaction gains and losses of 700000.
On a GAAP basis net income for the third quarter was $2.4 million, which includes a tax provision of $5 million and in Los from discontinued operations and 200000.
Moving on to the balance sheet and liquidity, our cash balance was 374.
$7 million at September 27, we antihero amounts outstanding our baseline of credit and $6 1 million of letters of credit outstanding.
That outstanding was $300.3 million per quarter and.
Net cash at quarter end and was $74.4 million.
Cash flow generated from operations for the third quarter was $8.3 million less capital expenditures that to eight 9 million, we're free cash flow use them operations of 600000.
During the quarter, we collected 400000 related to the retained working capital of the legacy PSS business that we sold in 2018, bringing the total receipts we have collected to six 8 million since we sales business.
Our contact mix for the quarter was 76% generated from explains contracts, 20% from cost-plus type contracts and 4% on time immaterial contracts.
Revenues generated from contracts with the U S government, where 72%, including revenues generated from contracts with the D. O D 90, federal government agencies, and Fms contracts, which were approximately 3%.
We generated 8% from commercial customers and 20% from foreign customers.
Our backlog at quarter end with $873 1 million up sequentially from second quarter and backlog of 683 $4 million with bookings $356 7 million any book to Bill ratio 1821 third quarter of 2020.
I did backlog at quarter end was 579 $3 million with 293 $8 million unfunded with our bookings in pipeline caviness visibility into our expected future revenue flow over the next 18 to 24 months.
The new accounting standards <unk>, depending on the contract terms and customer set revenue will be even recognized over time, we're unimpressed incomplete basis or any point in time, whereas units are delivered to the customers.
In general Nathan the new accounting standards contractual terms with international customers will typically be recognized any point in time, whereas units are delivered which can spend over an 18 to 24 months period of time.
And now for our financial guidance.
Affirming are full and year of 2020 guidance of revenues of $740 to 780 million and adjusted EBITDA of $72 million to $78 million. We're also firming a full year 2023 cashflow guidance of a generation of 7 million two of use of 18 million, including capital expenditures of approximately 36 to 40 million.
Which reflects certain previously expected outlays for a manager and systems now being reflected his inventory, whereas uses an operating cash flow.
Of 2020 capital expenditure forecast currently includes expected outlays and 11 to 15 million associated with the production of 12 Valkyrie aircraft prior to receipt of expected customer awards. Therefore. These aircraft are currently reflected his company owned tactical drive until receipt of the related customer awards.
We will Jessie initial forecasted capital expenditure outlays in the ultimate balance sheet classification of these investments once expected customer orders and the nature of the contract terms can be estimated.
Create as his fiscal year 2020 guidance excludes any potential contribution from extended valkyrie, either tactical Jerome production or system contracts with expected orders to be taken into consideration in our financial forecasts. Adjusted one such contracts orders are received and the related financial contribution can be estimated.
Which would be dependent on criteria, including the type of contract vehicle scope timing and period of performance.
A full year 2020 guidance range also includes our current forecasted business mix in the fourth quarter, our assumptions at the expected impact of COVID-19, and the estimated impact at the current continuing resolution CRA on our industry business operations and forecast financial results.
<unk> CRA, which began on October 1st since our last report to your new or increased contract and production awards are delayed and cannot occur until the relevant federal fiscal year budget is approved Aida 2021 federal fiscal year budget.
Consistent with previous years, we currently intend on providing treatises initial fiscal 2021 financial guidance. When we report are all year 2020 results, which will enable us to incorporate current information and impacts from expected tactical drone awards the election Ciara.
And the estimated impact 19, including to our technical term business programs and initiatives and Eric mentioned before and the most recent information on the very large international training Recompete.
Thank you Diana with that we'll turn it over to the moderator to address any questions.
Thank you as a reminder to ask a question you would need to pass Taiwan on your telephone so let's try and question <unk>.
Please sandbag will be compared to Karen Davis.
First question comes from my Coffee <unk> Securities.
How often.
Thank you <unk> can you talk a lot about investments that you'll be making in fiscal 21, I know you're not going to give guidance until.
February or so for for 21, but can you talk.
Is there any way you can put more quantitative numbers around the investments from these various programs that you.
Probably a better visibility into at this point.
Right as you as you said I am not going to I'm not going to get into the details on 21, Mike I will tell you.
That the number of opportunities.
Particularly in the space business.
Has.
Increased substantially in the past few months.
Substantially.
Including in the classified realm.
Additionally.
We are under an NDA with north what we're going to honor, but under GBS D.
This is going to be.
One of the largest programs put put tactical aside from the largest program in the company.
But we can see for a long long time as this works through the first phase with idea of the dollars on it and it goes to production and we have to make some investments therefore, what we're going to be building.
These are massive systems, we're going to be building.
And so what we're looking at is definitely tied to contracts like Gbs's D.
But I'm not going to I'm, not going to get into $2 right now I'm not prepared to do it all are a lot more clarity.
Wins et cetera, when we when we speak again in a few months.
Okay.
Given the transition in the space and satellite business.
When are you acquired integral system 2011, and I think it was it was much more of a hardware business and so now I think maybe revenues.
Are probably maybe not growing but but EBITDA margin would be is that the case and is there like a a revenue and EBITDA margin type profile that.
You can share that business does that today within government systems in order that could be fearsome no yep, and so I'd like to your point and we talked about this over the past year or so there's been a transition going on from what Geo synchronous orbit satellite from the large monolithic ground stations that were dedicated to them that we were involved.
That were very hardware intensive that transition has been going away from that to US you absolutely spot on set to software divine ground equipment. We we are crossing that point right now where the down draft on the revenue.
Is about over from the large systems and now it's increasing so as we go forward both.
Revenue in our space business and margins are forecast to increase including in the current quarter going into next year and then starting in the second half of next year as some of these things I talked about today, we start working on and delivering we see if ramping significantly revenue.
And margin <unk>.
Late next year into 22, we're looking at minimum grow minimal growth rates in the space business and I'm going to exclude some very large binary opportunities that if they get will dramatically increases minimum ret top line growth rates of 10% minimum with significantly increased margin rates expanding but.
Cause it's software.
Okay. Thank you and then last question.
All equally awaiting developments on the tactical combat Jerome shot but.
And we are pleased very pleased to see the full rate production.
What about full rate production on other continental target programs is that something that you are still trying again or an orange county, not able to even comment no.
Mike I may not have been clear I mentioned in my prepared remarks.
Every everything is on track.
We will get that next year will get in the full rate production on some other ones, including the one you were talking about as well.
Excellent. Thank you yes.
Yes, Sir.
Thank you Yeah. Our next question comes from Kent Herbeck with Canaccord Your line the Taliban.
Yeah, Good afternoon, Eric Indiana.
Hi, Ken.
Hey, Eric I, just wanted to follow up on the tactical drone or I'm, sorry, the target drone question.
Is it fair to assume that now that you've got four right on the outside and visibility on the other programs that that business should still get to sort of $250 million run right is that the right way to think about it and if it is what's the timeframe we should think about.
Absolutely.
Absolutely we are tracking right to it the only flex point.
Ken the only flex point and this is the.
The continued timing on budget and continue resolution because we're in El Rip low rate initial production too on certain programs right now we've been awarded L. Rip three you might example, which is substantially increased quantities of money, we can't get L. Rip three until we get a 21 budget.
Okay, we can't move into full rate production on certain things until we get a 21 budget.
And so can we are we are absolutely moving right toward the quarter billion that we talked about.
And.
International Award was part of that we got it the second International Award I talked about which which we've won but now it's in the U S Government Department review.
And.
Next.
I see it no later than 22.
You know it just kind of.
So so if we if we get obviously a 21 budget in some point in December.
Barring any other sort of major change.
The run rate for twenty-two sounds very reasonable.
Yeah, we need to get will need to get for the final piece will need to get the 22 budget.
We will need that because there are two programs that are either new.
Or an or one of them were in production on that's going to have increased production tied to 22.
Which is you know begins October 121, so we'll just have to see where that one falls and we will get there.
Okay, great and if I could just one follow up on the tactical side I know, there's probably not a lot you can say around the valkyrie, but.
Continue to sound very confident in an initial production contract. The Air Force is obviously expanded the number of companies involved in the initial opportunities year and the program a stripe organ in particular.
How are you viewing the competitive landscapes and any change there and then also how do you view from a technology standpoint. It seems like there's risks that the hardware side could be held up by by the ability of AI and other aspects of the program to really move forward at the pace that the hardware is that.
Is that a is that a fair way to think about the risk and is that something that you think could be a concern moving forward.
On the second part of your question I believe you are spot on on the AI.
The AI is absolute critical component of Skyboard and these other programs.
And that can be that can definitely be a gating factor on timing depend.
Depending on that how that comes along as you know on Skyboard for example, lighthouses the system design agent.
On the AI and we have an upstairs, we obviously have an outstanding relationship with them. So your point. There is good that is right on that's not a concern of mine because it it it kind of is what it is.
But but that can be a gating items I'm not focused on that.
Now on your other question on the competition.
We are playing our game.
You know, we as I've gone through we have multiple jet drone flying today.
We have active production lines. So we know what our costs are we know we're not going to speculate and gas and then say overwhelming and give a change order and do that to the customer.
I believe our probe R programs, all having U S government sponsors and being built in the USA is an incredibly important differentiator incredibly important alright. The fact that the Valkyrie has been flying for over a year and a half now the makos been flying since 2015, we're doing payload integration payload test all.
All of this is giving us space ahead of the competition.
All of it in my mind Okay.
And I think most importantly price point in cost point.
We are we are the affordable provider, we know that they know that and so what the customer of course is going to be objective and they're going to make their decision and we totally respect that but we believe we are extremely well positioned.
To take part in what we see is going to be a giant new market across expendables.
<unk>.
A turtle Bulls.
I don't think we're going to get into the exotic category I don't think we are.
And as I indicated our ghost works is doing something very interesting relative to reap a replacement.
Great. Thanks for all the car yeah.
Yes.
Thank you.
Our next question comes from Peter I meant with bad.
How often.
Good afternoon, Eric Deanna, Eric Thanks for all the details maybe a question just to focus a little bit on the on the top line guidance kind of the range for the year, you reaffirm that but and implies kind of a big speaker swing factor in the in the fourth quorum topline maybe what are some of the puts and takes that which you at the bottom and or the top.
Under that range.
Okay. So the biggest factor that we've been looking at relative to this is the following.
Okay. Obviously, we're in the CRA that goes to December that's number one all right. We have an election coming we don't know what's going to happen with that.
That has brought in that if things don't go according to some People's plan, maybe there's going to be a government shutdown. We don't we don't know.
That all right now let me give you a very important one okay.
Timing of customer sign off on our products.
Okay. The covid restrictions have been significantly impacting travel, including customers coming out to sign off on products. So that we can we can execute delivery or revenue and also our ability for our people to travel to customer sites in particular international where they're not letting them.
Eric ins in without a quarantine period. So if we deliver a large space system, which we have several that were supposed to be delivering we deliver them. We have to go there and get it signed off and that has been an issue.
And so we've tried to map all this out relative two hour range.
In queue for and I know it I know, it's rather large but there are some big moving pieces in here and we wanted to just to make sure that we encapsulated the mall and what we provided.
Okay.
That's helpful and and just on the corner specifically under.
Kgs operating margins nine five I think that's kind of the one of the highest margins we've seen in.
Many many many quarters and it sounds like you view this to be sustainable and maybe even transitioning into the double digits. How does the AFC signal kind of impact margins going forward right and so we had Ah you're right. The margins there were very very strong and Deanna mentioned the majority of certain of the programs were on so where we.
We are on certain weapons system programs, which had some certain I'll say deliveries our execution in the quarter that were very very favorable to us, but now to your sustainability question. Okay I.
I believe that number is going to be reached re achievable and sustainable for us once we get going on GBS D O.
Okay, we're gonna be making some investments as Mister Crawford mentioned that we have to start now because we've been awarded the contract and we've won.
And so I don't think I could be wrong, because the team is doing great. We're going to execute at that margin level in the next couple of quarters few quarters result, however.
However.
We've got some programs we've won that once we get going we're going to get right back there and in the future. We think we're going to see it.
Alright, and then just lastly, you've talked about the international kind of training headwind potentially.
For 21, I think it was 35 million you mentioned when will you know on that in terms of the timeline.
So right now the current contract were on.
Assuming there is an option that is supposed to be exercise that I believe is going to be exercised we are good through January.
On the current vehicle.
Assuming we get that option and that's supposed to come very soon now we're good through January.
The reason why I'm I said that this is high risk is versus other ones that were involved in is because there is no intellectual property technology or product differentiator on this one.
Okay, we have some things in our favor for competitive reasons, I'm not going to get into them.
But because we don't have those differentiators, which we do in our 90% of our company the products and technology business.
It's risky and I wanted to make sure I was very clear on that with the group.
You should have a calling thanks Eric.
<unk>.
Thank you and next question comes from micro Charmonium mature Securities. Your line is how often.
Hey, good evening guys. Thanks for us to come in your questions here in my results.
Alright, Eric maybe just to stay on a few.
Peters.
Question, there I'm on the fourth quarter, what what about the EBITDA range. I mean, you may not the low end up your revenue guidance for the fourth quarter. It seems like EBITDA is going to be down is that anything changing in terms of mix or or anything you know that that's influencing EBIDTA in the fourth quarter.
So so number one.
R C five ISR business.
All right. We had some big is Deanna said on some big programs and the state where they're at in their life cycle at the and things like that it was very strong in in Q3.
That's not gonna happen again in queue for it's going to make a lot of money, but it's.
Don't see that happening again.
Now.
As as you all have chatted with Deanna and I about on Q3 and Q4 before.
Typically in Q3 and Q4, we in our space business in our cyber business, we get a number of orders from customers.
I believe it's because it's around the federal fiscal year, and an obligation of money and spending money.
If we as we have in the past get a number of those in November and December those are extremely profitable because this is very specialized software.
And that would be significantly additive to the EBITDA. So that's a swing factor what happens on that and we don't typically know about those until December.
Okay those are the ones.
Okay. That's helpful. What about the the order flow, obviously very strong the backlog up significantly was there any contribution from.
The backlog for messy.
And that was about 30 $35 million like.
Okay Perfect and then just just last one Eric I know you're not gonna.
Guide to 21, but you talked about a number of the individual markets and product lines being in position to grow organically.
Do you still see even if the training.
Los goes against Yeah that that protest goes against you you know do you have enough confidence in the other product lines, but that you can grow organically next year and I guess, even just.
Thinking about kind of level setting expectations I mean, you talked about the <unk>. The other investment should we think about you know just just margin expansion free cash flow being a bit temper and in relation to all of those items.
On the second part I would.
It's because of the nature on some of these big programs that we won and the profitability of them of them early on because of the related investments that we have.
We're going to be making to the first part of your question.
Let's say that the training goes against US Yes, we we absolutely believe we will still grow 21 over 20 and it'll be.
Important it's not going to be like 5 million Bucks, it's gonna be a lot.
We've got some we've got some good stuff common and if we get the CRA done and we get to the 21 budget and we get move and all that stuff.
Half of next year when that kicks in will be strong.
Got it perfect alright, Thank you I'll turn back in the queue.
Yes, Sir.
Thank you. Our next question comes from Sierra Catherine <unk>, Caroline how open.
Good evening, Indiana and Eric.
Wanted to just follow up on the backlog at you had.
Pretty nice sequential step up how do we think about that conversion and any changes to duration and NFU noted. It was a September award for GBS D and the backlog.
Yes.
Yes, yes, it was okay.
And.
Again, we have to be you saw how we talked about that we're doing that with guidance from the prime think of a belt think of and again that's phase one that's the development phase think of a bell curve.
Its development for the first year 18 months, but the bell curve is going up.
Then you start delivering some things in that development and the Bell curve goes up big in the middle over that six or seven year period. So if they say starting in year, two or three and then the bell curve starts coming down but at that time, hopefully phase two which is production the entire team would be successful.
Okay. Thank you and then I am sorry, if I missed this as well I think earlier this month you receive that.
<unk> 177 production a lot one contract can you just go over the timelines of main production programs and where you are in the length lifecycle and maybe potential volume step up.
Absolutely so on so on.
The one you just mentioned on the Navy SSAT, we've been we've been unable rib, we're going to be finishing up L. Rip over the next few quarters or so and then we'll be moving into production on full rate production year one.
Some time later next year and.
And then that will go for three years, we were awarded a three year contract sole source of base here plus two years and so that that is why we were chatting about one of the other questions earlier 2022, and 2023 are looking very very strong because of the full rate production on that one we have a.
Another contract it's confidential it is in L. Rip.
It is scheduled to go into FRP next year, if all of that timing holds and I believe it will we will see a significant uptick on that one late next year no later than 22.
On the Air Force. We are also sole source. There. We are currently in production. Your <unk> excuse me 16, we are negotiating the next five years.
Production sole source.
We expect to be awarded that middle of next year that we do not see any break in the production line.
Alright, and based on what we are seeing relative to that we expect that to step up not a lot but step up.
In 22 going forward.
This one that we just announced with the international customer for the initial 20.
We're going to be getting going on that next year will start delivering goes probably in the second half of next year into 22, and as I mentioned that customers indicated they're going to be doing similar annual buys with us which is great.
So we've got like if there was some other ones the U S Army.
They're buying dozens.
Target drones from US right now if you if you're interested pull up <unk>.
S program and you'll see about a month ago out in out of Whitesands. The army shot down I think they announced 10 of our target drones.
There's also a new anti cruise missile systems going on the east coast and West Coast.
It has been publicly disclosed they've been shooting down or target drones with a certain customer. So she'll have the target drone business is doing great and it's ramping.
Okay. Thank you so much.
Thank you and.
Question comes from child comes in Nova Capital Your line the Taliban.
Thanks have a good evening here from the East coast.
Most of my <unk>.
Questions have been have been asked already bought.
Not only during the third corner, but also in the year to date and you mentioned a little bit.
You've seen Ah.
Pretty percentage wise big increase in R&D spending.
And I was wondering if you could give us a little more color to that and how long do you think that is going to last.
Great and Kaney detailed there would be appreciated that's a great question.
So that that is our space business.
And these are our software defined products.
And this is this is why we have been announced with Microsoft This is why.
Said, we're under NDA, but with some other big guys. This is what's what's driving or five G.
This is why I when I was.
Dressing a question earlier I said, our space business is going to grow it has begun and this is going to be long term and it's not pie in the Sky I don't believe I believe this is going to need to continue because our space business is now truly turning into a technology Blake.
It's got to have higher margins.
It's going to have good growth organic growth.
And we're going to need to spend R&D to make sure. We stay ahead of everybody else, where I believe we are today with the software defined products.
Okay, great. Thanks, Thanks for that Eric and then just what I know I've asked what's in the past and just kind of like to keep abreast here, but.
A couple of quarters ago, you mentioned, how you were looking to hire over 200 people and I think I asked a question last quarter and you said it was going well just wanted to get an idea of given the state of the labor markets out there.
How confident are you guys are how is that progressing and getting up the the number of employees you need to increase the production going forward.
Right I'll also another great question. So so recently some very large companies have either announced or they are laying off thousands of people in the aerospace industry.
Including even though they don't highlighted in their defense businesses.
This is providing us a significant opportunity pool.
Of guys and gals that are outstanding.
That have experience, but particularly in our drone area.
And in our system development area and system design area.
So that has helped that is helping us and we're being able to help people that are that are getting ripped because of other companies issues.
And that is helping us and so I'm not saying this is easy it is not okay, but that that recently.
In the past few months because definitely helped us out here, we have I don't have the number in front of me we have several hundred wrecks right now.
Big ones in the drone business in the space business.
In our C five ISR business it's.
I think it's over 100, right now that we need to hire.
And we're going to be.
Talked about the investments, we're going to be opening an entire new facility.
To build the structure the ability systems.
Great. Thanks, Eric I appreciate it yes, Sir thank you.
Thank you as a reminder to ask a question you would need to pass style one on your telephone.
Our next question comes from set Seitman with T P Morgan Caroline how often.
Thanks, very much and good afternoon, Eric in Indiana.
In terms of the you know.
Several growth opportunities that you outline for for next year.
You were looking at the magnitude of those what would be maybe the.
The top two or three that you would highlight in terms of.
What would contribute the most and and 21.
Unmanned systems.
Valkyrie target drones and other tactical drums is number one.
Okay.
Number two number two.
Our space business.
Our space business is looking.
Great.
Okay.
Number three and this one it's just going to depend on timing.
Our rockets system business.
We have.
I can't give you the precise numbers, we have over 25 launches.
In the next 30 something months.
That's how strong thises and that ties into that.
At the end of one woman, who was that contract. We've got lesser was 30 30 rocket motors.
We got a contract laughter, we talked about 430 rocket motors, they're all spoken for.
HM.
Alright, Okay, and then maybe as a quick follow up you think about you talk for Awhile and you mentioned kind of reaching that.
$200 million to $250 million level on the target <unk> business. When we think about the the F 35 in particular in the wider range of international customers that that continues to get sold to should we think about that as a as a market that.
Has kind of reached a full rate production at that point or.
As you look at the international marketplace in the growth of the installed base.
A market that continues to grow.
It's going to.
Right question, it's going to continue to grow because as the international customers buy things like F 35, or they buy aegis or pack three or they buy on thereby standard missiles, three or standard missile six they.
They want to exercise those weapons systems against the highest.
Threat profiled target drones in the world which are hours.
On the <unk> 177, which is now going into full rate production countries wait until the U S goes into full rate production on it and they start deploying it to the field of the fleet then they start buying them.
Which is gone now start happening.
Alright and to your point on other or additional markets. This this was publicly available that's why I want to say this deal there is a new hypersonic projectile.
That was reported.
Shot down our target drones that we're representing something somewhere in the past few weeks, that's an entire new market now for us These new hypersonic weapons, they need to practice against the threats, we build the threats.
Oh very good thanks very much.
You got it.
Thank you and next question comes with how long.
<unk> the Kennedys, Yeah line is how often.
Hey, Thanks for taking the follow up Eric can I just.
Put you on the spot when do you think you'd get the Skyboard order, you know where where do you think we are with that.
We are in source selection.
I am sorry.
You think anything's changed from like previously communicated timeline.
You think the C. R has anything to do with it election anything else anything pushing it to the right at all in your mind or.
Bye bye.
You have put me on the spot and I am sorry.
The program is in source selection I'm.
I am not saying a word.
Got it alright, I figured I'd try it thanks.
[laughter].
At level. Thank you.
Alright.
Thank you I'm not showing any further questions at this time I would now like to turn the call back over to act in my account for closing remarks.
Very good. Thank you for all joining us this afternoon, and we look forward to come.
Communicating to you again with you all again soon as we can thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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