Q3 2021 Kratos Defense and Security Solutions Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the greatest defense and security solutions third quarter.
<unk> conference call.
Today's call will also include a discussion of non-GAAP financial measures as that terms defined in regulation G. Non.
Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information for that is in compliance of the gap.
Accordingly at the end of today's press release, we have provided a reconciliation of these non-GAAP financial measures to the company's financial results prepared in accordance with GAAP.
That I will now turn the call over to Eric tumor. Thank.
Thank you Marie good afternoon.
In the third quarter criticism unmanned systems business generated revenues of $61.3 million, which represents organic growth of 14.6% over the third quarter of 2020.
<unk> space satellite and cyber business generated revenue of 72 million organically, increasing 17, 5% over the third quarter of 2020.
Our unmanned systems in space businesses of our company's largest there are fastest growing and are both expected to continue to generate very strong year over year future revenue growth.
This is representative of the successful execution of our internally funded investment organic growth focused strategy, which growth. We believe R. C. Five ISR or rocket system microwave electronics and engine businesses will each also see in the future based on recent program wins like GB.
D Iron Dome next generation small engine development contracts and opportunities.
We currently have multiple under contract large and new programs, where we are expecting significant future increases, including subs sonic aerial target or SSAT with the United States Navy Skybord Vanitas Air Wolf Off-board sensing station ground based strategic deter.
Current overhead persistent infrared.
Tactical intelligence targeting access node, the hypersonic ballistic tracking space sensor and several classified programs among others all of which are under contract, which also provides the confidence in our future year over year growth forecast and up until the right trajectory.
As you know the final revenues from our legacy International training business, which contributed approximately $35 million in 2020 revenue and over $14 million. This year before completely winding down in queue to have been masking kratos as overall core business growth rate, which we will continue to hide.
Right for you until financial performance is comparable in Q3 next year.
Excluding that legacy training revenues Kratos was 21 over 2020 forecasted overall organic growth rate is still forecast at greater than 8% with this growth. Even after we saw approximately 31 million of Q3, and Q4 21 revenues deferred the future periods.
Due to COVID-19 related travel supply chain and customer issues, which we identified as potential execution risks on our queue to call with you including in the Q&A.
I will emphasize here again as I did in queue to that substantially all kratos as Q3 and Q4 forecasted revenue was and is already under contract with customers.
Accordingly, irrespective of these issues with which all will eventually pass.
<unk> a great position today, we continue to execute we control what we can control, we're winning new programs that were driving the business plan.
Specifically to execution since our last report to you. We have received a $374 million sole source single award target drone related contract with United States Air Force of which we expect to realize substantially all if not the entire 374 million <unk> amount and <unk>.
Revenue over the period of performance.
The United States Navy's SSAT program office PMA two O. Eight recently completed three back to back test flights with Kratos his newest subsonic aerial target drone. The <unk> M 177, a in preparation for full operational capability of this kratos target drone system, which.
Is now expected to come later this year and we now expect the next sole-source full rate production contract to come in the next few months.
Our tactical drone related programs continue to progress, including a recent successful series of customer flights for Kratos as air Wolf drone and fourth anecdotes, which we know with these successes expect significant increased future revenues.
We have successfully competed for and received an AFR L O BSF or off-board sensing station affordable Tactical Jet drone program Award, which we believe has potential future growth opportunities similar to Kratos as Valkyrie, the Gremlins program Air Wolf and Vanitas.
We believe that Kratos as recent receipt of the <unk> Award for a new low cost attributable unmanned aircraft program demonstrates kratos as digital engineering and technology leading position.
The Obs's drone system continues to expand kratos as industry, leading family of affordable disposable reusable amateur edible drawn systems.
Each with their individual capabilities and mission focuses.
With the <unk> Award we continue to believe that <unk> is the best positioned company to realize incredible growth in the forecast to be incredibly large tactical drone area. As Kratos continues to successfully bid for and received significant awards in this area.
<unk> Ghost works, including our Air Gap Group played a key role in our Obs's success and Kratos as Ghost works is now currently focused on additional new program system opportunities certain of which we expect to hear on in the coming months and hopefully we will be able to report to you.
<unk>.
And Justice and just a few weeks ago as I noted <unk> Ghost works at a successful vanitas flight as this program initiative continues to progress.
On August 16th the Air Force reiterated his commitment to be ready for a 2023 Skybord Vanguard program of record under which Kratos as Valkyrie and Mako jet drones are both recognize participants.
The Kratos Valkyrie under the contract with the Skyboard program are expected to be delivered shortly and the Valkyrie aircraft under contract with the El cat or low cost attributable aircraft technology program, which also remains on track also now are scheduled for delivery.
In addition to Skybord in El Cat, we have been in discussions with additional customers and program offices for Valkyrie, which funding is anticipated in the pending 2022 budget. If everything holds is currently expected.
It was recently reported that the general in charge of the Air Combat Command stated that the first low cost attributable jet drones could be in a stealth red are role as adversary four fifth generation fighters.
And that low cost attributable aircraft systems will be a future growth industry.
We believe that kratos as Valkyrie and its capabilities would be an excellent system for this adverse air mission and we understand that they are currently a significant funding planned in the 2022 budget NDAA markup for this AD Air initiative, which we view as another large new potential opportunity for Kratos Valkyrie.
It was also just reported that Kratos as Valkyrie was specifically mentioned this week by the government for a certain new mission an opportunity in the Pacific region, which we have been working on.
These are just the most recent examples of where kratos as clear industry, leading position an affordable high performance made in America jet drones with multiple classes flying today, we don't have powerpoints renditions flying today or the Valkyrie Gremlins Air Wolf, Mako and others and this is a clue.
Here first to market competitive advantage for our company and why we are so confident in our future success and growth trajectory.
The production of the initial 12 <unk> remains on track on our Oklahoma facility with the possibility now based on the 2022 D. O D budget. Once finally approved that we may be making a decision to accelerate and pull certain of these 12 to the left completing them sooner if possible in <unk>.
Conjunction with our customers input.
And we now have begun planning for a potential second Valkyrie production spiral lot. In addition to the current initial 12 and production.
To begin next year with would also be in close cooperation with our customers demand signals and expected funded contracts.
We recently announced that criticism air Wolf Tactical drone system completed a 100% successful flight at the Burns flat, Oklahoma arrange facility.
This air Wolf mission, which was the inaugural flight at the Burns Rat Burns flat range location included multiple new payloads carried by kratos variables, including a proprietary kratos artificial intelligence and autonomy system, which has been developed by credo, specifically for high performance jet drone aircraft.
Grottos was there will flight demonstrates the value that the burns flat range facility asset brings to kratos, including the ability of <unk> Ghost works to know conduct flights rapidly affordably and in a secure confidential environment away from the competitors site.
Tomatoes as Air will also recently performed another successful flight series. In addition to the Burns flat site flight, including a critical customer flight, which was 100% successful and we are optimistic that these recent successful flights will lead to future program opportunities.
And it was also recently reported that Kratos is there will combat drone launched the loitering munition in flight another important milestone for the system as we move toward Mrs. Michelle <unk>.
On Gremlins. It was recently reported that an additional new test series is now planned for the program with our prime partner Dianetics with the potential additional contract award in the first half of 22.
This potential additional phase will reportedly feature operations focus testing and mission demonstrations that could include a single operator controlling multiple gremlin vehicles, and payloads and intelligence reconnaissance and surveillance missions facilitated by certain types of electronic and cyber payloads.
This phase would serve as a pilot program to develop and mature military mission capabilities and assist the DARPA Gremlins program to successfully get through the infamous Dodd valley of depth and transition successfully to a military service and program of record, which kratos fully expects will occur similar.
The Valkyrie, an arrow rules.
It was also reported that multiple service branches have been involved in conversations about the future of the Gremlins program after transition, including the Air Force The Marine Corps and now the U S Navy and that DARPA intends to bridge the Deogee valley of depth with at least two drone programs both of which are currently supported by <unk>.
One of them, including Gremlins.
Grottos as Mako Tactical jet drone also continues to achieve success under various programs and initiatives, but I've I've mentioned before most of this is now classified.
The <unk> development program remains on track, including the recent successful flight as our each of our other tactical drawing programs and initiatives.
We expect significant future year over year organic growth for <unk> unmanned aerial jet drone business, both tactical and target of the demand for these types of drones and systems continues to increase.
Directly related to kratos as affordable drone initiatives.
The Air Force Research Lab recently announced that Kratos as part of their team under the design for manufacturer of attributable aircraft primary structure or D maps program.
Which is an AFR L aerospace system Directorate team of researchers researchers and engineers, which has now successfully tested a new low cost attributable aircraft fuselage and wings design.
As you know attributable refers to a new class of unmanned aircraft that our purpose designed and routinely reusable built affordably to allow a combatant commander to tolerate putting them at risk and improving Accretable aircraft technology is crucial to providing the operational warfighter with the tool that is affordable and eat.
Easily manufactured in tight time constraints.
The airfoil stated that the autonomous collaboratively platforms are ACP. These will play an increasingly important role in various air force missions and that the main tenants of Acp's, our autonomy affordability speed of design and build and mission effectiveness each of <unk> strength area.
The demos programs directly addressing these characteristics, which are critical to the ability to develop affordable attributable drone systems and large numbers and present the military challenged appear adversaries.
The announcement of <unk> participation in D maps is incredibly important to our unmanned tactical drone system long term strategy and success and once again as representative of Kratos as industry, leading position in the next generation UAV area.
Simply stated as I believe is reflected in today's report unmanned jet drones will be joining the combat air forces flying alongside manned aircraft carrying additional munitions, performing surveillance and jamming and making attacks including to protect their manned wingman.
Low cost affordable unmanned drones systems will affordably increase the size and capability of the air fleets without adding additional pilots and unlike manned systems. These drones are designed for short operational lives, reducing or eliminating the cost of depot level maintenance or service life extensions R. C lips.
So needless to say, we are extremely excited and optimistic for kratos as unmanned systems business and all related next generation engines, which go in these systems as.
As well.
Chronos of space and satellite cyber business has now successfully delivered the first set of products to support the U S Army tactical intelligence targeting access node or Titan space to ground system prototype, which is being developed by <unk> partner Northrop Grumman.
The purpose of the space to ground tightened system will be to provide near real time data to commanders at all levels for timely targeting solutions.
In Q3 are space and satellite business continued to successfully perform and deliver on OPI arc overhead persistent infrared missile warning satellite program and one of our businesses largest programs.
Tomatoes, and space satellite and cyber business also supports Aea, Jeff W. G. F F. B I R. M U O S H Etfs and many other confidential classified programs.
Our third quarter, adjusted EBITDA was stronger than stronger than forecast, primarily due to a more favorable mix and our space satellite cyber business, including certain government agency programs.
We expect a favorable mixed to continue in the fourth quarter and thereafter based on our backlog opportunities and execution plans.
We also continue to forecast future year over year organic growth with increasing margins for kratos of space satellite and the cyber business.
From a value creation standpoint for our shareholders.
<unk> space on satellite businesses, approximately 200 million $280 million excuse me and revenue grew.
Rowing organically approximately 17, 5% with mid teen EBITDA margins, which are expected to increase.
There is currently incredible interest in the space and satellite industry driven in part by forecast significant future market growth, including estimates of as many as 100000 operational satellites in orbit by 2030 up from 3500 today and a future one trillion dollars pay.
This economy.
<unk> is the industry leader in satellite ground systems, including our new first to market open space virtualization products and the vast majority of the satellites in orbit and that are going into orbit, we're going to require ground infrastructure to successfully perform their mission, including command and control telemetry tracking in control.
T T and C modems recorders antennas, digitizes and more all of which are <unk> product and solution areas.
<unk> is also the only company in the World.
The <unk> owned and operated global space domain awareness network, which value was substantially increasing and in demand by our commercial customers as more satellites go up that can interfere or crash into each other our customers want to know where they are what they are doing and they want situational awareness and kratos can.
Provide that to them with our global network.
Great Us a space and satellite businesses, both in industry and the Kratos Crown jewel with valuations of assets and businesses in the space and satellite industry, receiving valuations as high as 15 times revenue was recently reported and we are focused on continuing to invest and create significant value for our shareholders.
With this asset.
Since our last report <unk> rocket support systems business provided multiple advanced ballistic missile targets for the first test aegis weapons system thirty-three FTM thirty-three supported by the United States Navy and missile Defense Agency and we have multiple additional future missions currently plan.
And.
Which are part of our forecasted future organic growth trajectory.
We expect future year over year organic growth <unk> rocket support systems business, including growth in the ballistic missile target sounding rocket special mission and hypersonic systems areas.
R. C. Five ISR business received approximately $13.2 million in program awards, including for a large U S National Security program, which we hope we're going to be able to provide details Q1 in the future.
R. C. Five business is currently under contract for or in pursuit of multiple large missile radar space satellite and other system related programs. Many of which are focused on the recapitalization of strategic weapons systems to addressed appear threat.
We continue to expect future year over year organic revenue growth for <unk>, five ISR business, including significant expansion and growth and the GBS D program beginning in the second half of next year and then further increasing into 2023 were kratos as a subcontractor to Northrop Grumman.
Criticism turbine technologies business or ATT received an approximate 3.2 million dollar contract award for the development of a next generation small engine for a certain national security program and K TMT Kcet is currently under contract and in development for several next.
Nation turbojet turbofan and other engines for certain national security priority areas, including unmanned aerial drones systems cruise missiles powered munitions and other platforms and systems.
ATT expects to receive a large multiple tens of millions of dollar additional engine related contract in the next few months continuing this businesses momentum, which also includes our engine businesses work on Gray Wolf speed racer and several other missile empowered munition programs.
We're also forecasting 2022 over 2021 year over year organic growth for ATT and both our government program areas and in our commercial program areas, where we are now expecting recovery from the recent COVID-19 related industry impacts.
We expect future year over year organic growth in our microwave electronics business. This was driven in part by Israeli demand, India and other international radar missile communication and satellite system demands and buy a recapitalization of hundreds of iron dome interceptors of which kratos as a supplier.
As we know physical federal 2022 began on October 1st 2021, with no physical twenty-two budget in place in the U S government now operating under a continuing resolution through at least December 3rd of 21.
A continuing resolution continues to pre existing appropriations at the same levels of the previous year with no New program starts no transitioned from development programs to progress to production programs and no increases in existing production program.
Each of which directly is related to kratos, especially in light of the new and increasing programs. Kratos has recently received and is currently executing under.
The possibility of see ours is a primary reason why we typically wait until the our fourth quarter to provide the next year's financial guidance. In this case the guidance for fiscal year 2002, as the length of the Ciara will directly impact Kratos as next fiscal year forecast in performance.
Accordingly, we will provide our FY twenty-two forecast in February when we report our queue for in our full year 21 results.
As I mentioned in our queue to report an earlier today similar to many other companies in the industry supply chain issues and delays, including is related to Covid continue to be a challenge, especially is related to increasing lead times for critical parts from vendors and vendors canceling or significantly changing previously committed to.
Delivery schedules at the last minute.
We have recently seen approximately $31 million or under contract revenue differed from our third and fourth quarters of 2021 to future periods, primarily as a result of COVID-19 supply chain and customer related issues.
These issues include our microwave electronics space and satellite and see five ISR business as being unable to timely received certain parts, which were previously committed and COVID-19 related international quarantine and related travel restrictions and our commercial satellite business, where we are unable to enter.
And countries to execute on her deliver under contract customer systems.
As soon as we can practically enter the countries to complete the work or we received product from certain suppliers will be able to execute and record the related revenue.
Also included in the $31 million is an approximate $14 million shift from 21 to future periods in our C. Five business on a large in excess of $150 million under contract Kratos program. We are working on where we understand our customer had to rebate baseline.
Their execution plan and schedule and cooperation with the government request.
On September 9th 2021, the President issued an executive order mandating that by December 8th 2021, all federal contractor employees must be fully vaccinated against COVID-19, and less excluded by certain limited exemptions.
The company is moving to comply with the President's Executive order. However, as a result of the executive order Gradovs in our subcontractors are suppliers partners customers at all are experiencing certain disruptions, including but not limited to employee distraction on rough some retirements resignations et cetera, and other such.
<unk> that we had not previously anticipated our plans for.
All of which we are now monitoring we're managing to the best of our ability and which potential impact. We have included in today's forecast.
Irrespective.
Fective of these challenges as I discussed today.
<unk> continues to successfully execute the business plan or unmanned systems in space on satellite communication businesses have industry, leading growth. We continue to win large and important new program opportunities and we're forecasting continued strong year over year organic growth with increasing profit margins.
In closing Kratos as business model is organic growth based one where we are making targeted internal investments and pursuing and winning large new program opportunities.
Accordingly, we do not expect to pursue or consummate any acquisitions upsize.
Only maybe potentially small tuck ins that are clearly aligned with our current business and strategy.
Deanna.
Thank you Eric Good afternoon. This is third quarter 21 revenue for $200 $6 million. We're at the midpoint of our estimated range in 199 for 205 million. Unfortunately during deliveries from our vendor and supply chain base and travel restrictions have resulted in the delay and our ability to execute and deliver are uncertain of our context.
Mary and our commercial ground satellite an antenna and see.
Which resulted expected third quarter revenues at $8.3 million to be deferred to future periods.
As we mentioned on our last column, we provided the guidance range for the third quarter and full year revenue and EBITDA forecasts assumed an increase in execution delivery timing and our supply chain ability to deliver on time and on budget and our ability to hire necessary resources.
Unfortunately, similar to what we are seeing across the industry, our ability to execute and timely delivery has been impacted by supply chain challenges encourage restrictions, including international travel restrictions.
Or two 321 consolidated operating income rates 10.5 million down from the third quarter of 2020 operating income of $12.7 million, which includes thirdquarter twenty-one increases in stock compensation expense of $1.4 million increased R&D at 300000 primary and a man says.
Business and increase SG&A costs, and $5.1 million, including increased head count in our immune systems business.
Total head count in our unmanned systems business has increased 130.
755, and two three of last year to 885.
Net loss with $2.4 million per quarter and back.
And two cents per share compared to gape EPSN too.
The third quarter of 2020 included in the net loss for the third quarter with a tax provision five seven.
Hum.
Four 6 million, where in approximately 124% tax provision right.
Primarily the result of non deductible non-cash stock compensation expense and taxes related to international based income.
As a reminder, we have over $280 million less federal net operating losses, which substantially see on domestic.
Income tax payments.
We generated adjusted EBITDA of $23.8 million for the third quarter above the range of our expectation of 16 to 20 million.
Primarily reflect any more favorable mix of revenues and criticism space satellite and cyber.
Technology business.
And the third quarter.
Segment reported revenues of $61.3 million $14, 6% from the third quarter 20, due primarily the ramps and production and target programs, including the 167 and work performed on the Valkyrie program.
Unknown systems generated operating income at 2.6 million.
Three $7 million in the third quarter of 2020, primarily reflected in an increased mix of development type programs and increased RMB and that makes sense.
Approximately 500000 and increased SG&A constant one 6 million.
I meant systems generated adjusted EBITDA for $7 million down from five $6 million in the third quarter of 2020.
<unk> reported revenues of $139.3 million in the third quarter down from $145 million in the third quarter of 2020, reflecting a reduction legacy government service services revenues of 6.2 million down from $17.4 million in the third quarter of 2022 $11.2 million in it.
Third quarter of 2021, and and 5.5 million year over year decrease resulting from a previously disclosed reduction in international contracts entertaining solutions business.
On a pro forma basis, excluding these reductions revenue grew organically five 8% in the third quarter of 2021 as compared to the third quarter of 2020 reflect in a year every year reduction of $1.8 million from the ANC acquisition offset by organic growth across our space satellite and cyber defense.
Rocket and microwave products business.
As discussed earlier Kgs third quarter revenues were negatively impacted by the delays in supply chain deliveries, resulting in revenues approximately $8.3 million expected quarter deferred future periods.
Please get reported operating income or $14.6 million up from $14 $1 million in the third quarter of 2022.
Kgs adjusted EBITDA.
For the third quarter of 21 was $19.1 million.
Lightly from $19 million in the third quarter of 2020.
Our consolidated adjusted EBITDA for the third quarters from consolidated continuing operations, including net income or loss attributable to noncontrolling interest and excludes non-cash stock based compensation cost of $6.4 million acquisition and restructuring related costs are 300000 net income entry entry.
<unk> to Noncontrolling interest in 500, K any foreign transaction lots of 200 K.
Moving under the balance sheet and liquidity, our cash balance with $369 million September 26.
Arrow Mountain outstanding our bank line of credit and $6 $6 million of letters of credit outstanding.
That outstanding when it's $296.5 million, a quarter and and that cash at quarter end with $73.4 million.
Cash flow generated from operations for the third quarter was $12 6 million masks Capex, a $12 9 million or use a free cash flow from operations of 300000.
Contact mix was 75% fixed price, 20%, plus and 5% time and materials.
Revenues generated.
Contact with the U S federal government during the quarter with 72%, including revenues generated from contracts with the D. O D 90, or the federal government agencies, and Fms contracts, which were approximately 4%.
Regenerated, 9% from commercial customers and 19% from foreign customers.
Backlog at quarter end was $839 1 million down sequentially from 21 and.
Second quarter past $865 $6 million with booking $274 $2 million in a book to Bill ratio of 90 to one for the third quarter of 21 are.
A book to Bill ratio for unmanned systems business was one one to one for the third quarter of 21 with bookings of $74 million.
Of the $374 million from the airports.
I am so sorry target currency, Eric mentioned earlier pulling it in that amount initially obligated of $30 for a million dollars are included in our backlog and booking amounts under quarter.
As expected we have continued to see contract awards in the fourth quarter.
Third quarter, and we have booked over $50 million in additional words in the month of October in our immune systems business.
Funded backlog at quarter end with $618 million with $221.1 million unfunded for.
For the last 12 months ended September 26, 21 book to Bill ratio is one to one with tunnel bookings of $779 million.
A book to Bill ratio for the last 12 months ended September 26, 21, which one.
Oh, the one for unmanned systems, one one to one parking space satellite and cyber business and 0.9 to one or two Gis segment.
And now moving on the financial guidance.
We are adjusting our 2021 revenue guidance range from 810 million to $850 million to $805 million to $815 million, primarily to reflect continued and increased supply chain and customer delays covered related quarantine issues and restrictions, including where we are unable to enter certain countries to execute.
Added on or deliver systems for customers.
Judgement, primarily reflects over $31 million.
Andrew contract revenues that has been deferred primer third and fourth quarter of 2021 revenues to feature periods included in our satellite microwave electronics and <unk> our businesses.
We expect supply chain customer in Covid related disruption and delay to continue industrywide as related to crater for the foreseeable future, which we are taken into consideration in our future forecasts.
The adjustment also reflects the creators customer rebaseline execution plan and schedule, an in greater than $150 million five ISR under contract creators program with which shifted certain tasks approximating $14 million in revenues into future periods, including 2023.
At the midpoint of this revenue range of $810 million, excluding the AFC acquisition and the international training contract creators revenues are forecast to grow organically over 8% year over year from 2000 22021.
We are adjusting our full year 21, EBITDA guidance range of 81 to 87, million% to 80% to $84 million to reflect the impact of their revenue shipped it for March 3rd and fourth quarters to future periods.
We are improving our 21 three.
Free cash flow used some operations guidance of 30 to 40 million 3 million $20 million to $30 million.
To reflect expected reductions in our days sales outstanding and increased collection and lower than initially forecast capital and other investments at certain initiatives are ahead of schedule under budget are reduced for other reasons.
The four year 21 estimated operating cash flow includes approximately five to 6 million of planned investment in a rocket support systems and engine business for new products, including in the hypersonic area and efforts to increase criticism market share as well as approximately $5 million of the required payback of the 2002.
Different employer related payroll taxes.
The 2021 capital expenditure forecast currently includes expected outlays in for approximately $25 million associated with the current.
With the continued production of Valkyrie aircraft prior to receipt as expected customer awards. There for these aircraft are currently reflected his company owned assets until the C. As the related customer awards.
Creators, who are Jessie 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 determined.
In addition, the capital expenditure forecast includes investments and the company space satellite and cyber business.
Secure facilities and the company owned space domain awareness network capital investments related to the recent GBS D Award and investments related to the company's chairman and market support businesses.
Great. Thank you Diana will now turn it back over to the moderator for.
For questions.
Ladies and gentlemen, you once I think.
Question at this time.
Number one I touched on telephone.
To your question has been answered.
Are you a mystery.
Q.
Once again that style one on your Touchtone telephone.
Yeah first question comes from nine Sheila.
Since I'm Jeffrey.
And.
Hey, good afternoon. Thank you so much for that time, maybe you think I think about a lot of these and warranty one like I'll be at that in Belgrade moving forward.
Lots of good things that can you summarize it for us in terms of how we should be thinking that that growth outlook for next year.
It seems like we have a pretty robust templeton growth outlook.
What programs are the biggest incremental drivers and does anything go away I think about 2020 count.
Right nothing so an unmanned areas nothing goes away that comes to mind at all.
There will be we are forecasting increases and the biggest one is probably going to be in the tactical area.
And this is going to be Valkyrie related.
<unk> related.
And we will have to see if that additional phase four gremlins skips awarded that I mentioned.
We're going to get third year full rate production in the next few months on SSAT. This is going to be one of the top two target drone programs in the company. So that's going to be a significant matter for for next year.
And I am not going to get into the.
Percentages of growth because it's going to be a lot of it's going to be tied to the continuing resolution and the length of the continuing resolution because we've got a number of programs and development that are going to be transitioning to production I got a number of production programs that are going to increased production all of which are tied to the 22 budget and climbing.
But we are expecting significant organic growth in our unmanned systems business year over year twenty-three over 22, absolutely we see it.
And then maybe a margin tobacco.
One more profitability of Israeli guide next quarter above our expectations now how do we think about that next heading thank you foreign.
What jumps on that I think of them treatment.
So driving the big improvement with primarily in the space area.
There are a few military programs, where it's national security programs, where on and one in particular.
And it has it has phases and one of the phases was was changed which generate a very positively for us was generated significant profit margins.
Two three.
We expect our our profit margins to remain strong.
And potentially continuing to increase just depending on the mix and.
And that's not just for Q4 Sheila but.
Probably for next year them the mix of business is improvement improving let me tell you what I mean by that.
Development programs typically bring a lower margin than the production programs or the later programs and.
And so you are going sitting there going okay. You just got to be associate that's going to carry a lower margin, but in 2018 1920, we want a number of programs and development that are now transitioning to production.
And the space and satellite area and microwave and an unmanned.
So the waiting is moving more and more to the more mature programs, which is going to be a natural lift on our margins.
Which is also because our manufacturing facilities, including in Oklahoma, where we're building the tactical drones.
We're filling them up with more products. So for example, we're building a lot of air worlds right now.
So that's spreading the fixed overhead over a greater number of unit, which is also driving profitability. So we have a few things that are working in our favor from an increased margin expansion area.
Okay. Thanks, a lot.
Yup.
Your next question comes from the lineup.
Your line is open.
[noise] Hi, good afternoon, Eric Indiana.
Good afternoon.
Eric I wondered if you could just level set us on Valkyrie production of the other I think <unk> still 12, you're producing this year, how many are under contract and when do you expect all of them, perhaps to be under contract and how do we how should we think about.
Production levels on that particular platform into 2022.
So we were with the customer set all of them on the under contract vehicles in the past few weeks.
We are still explicitly being told him we cannot talk about quantities yet.
It might be for National security reasons, I'm not sure right now so I can I can get into the specifics on that.
Right now.
So now to to level set.
And the.
Under the Skyboard program.
Which as we talked about today with the Air force reiterated that they're looking forward to be a 23 program of record, which would begin obviously in October of 22.
And.
And a number of other areas.
Or lock that are lined in the marked MDA.
Including adverse there.
Expeditionary Air.
And one other one that I am not sure is publicly out there.
We have line of sight.
Significant additional valkyrie orders.
So the level said as as 122 budget is approved then becomes law and.
And we see exactly where this comes out.
Then we're going to be making some decisions as I indicated we're we may have to accelerate and pull to the left some of the 12th that we're building to get them.
Out there to the customer's hands quicker.
And we're probably going to be making the decision to start ordering along leads especially in this environment for the next block and write Malkin, we're thinking about another 12 it.
It will be a spiral I'm not going to get into to anything at all on what that spiral is because it's very very competitive information against our competitors.
And so things are definitely firming up and we're going to know a lot more when that final budget is.
Act.
Okay. That's helpful and if I could maybe without getting into specifics how is pricing trending for these aircraft. Obviously you you're the low cost leader there attributable but are you as you incorporate AI as you incorporate other aspects into these aircraft are you able to see a path.
Two two some better pricing or how should we think about that.
I would I would not look for better pricing.
Above the ranges that we've put out there previously.
This was this was going to be one of the primary reasons why we are going to win.
We're not just going to win with Valkyrie, we're going to we're going to win if not across the board substantially across the board because your point is spot on.
We deliver a valkyrie, depending on quantities for three four or $5 million each the.
The customer may have integrated into a 1 million or 2 million or $3 million worth of sensors or payloads or something so they still have a less than 10 million dollar low cost aircraft, which just recently it was this week or last Friday the.
The Air Force PEO said, that's the target and that's that's one of the reasons why we are where we are.
Great. Thanks, Aerocolpos a factor.
Yes.
Your next question comes from the lineup Mike Crawford.
The community you're in any campaign.
Uhm, Thank you regarding via <unk>.
Uhm.
Different wrong term implications for <unk>.
A margin profile.
Oh, Dear friends production, given I think the government's gonna some of the data rights to this airframe.
There are not margin implications relative to that aspect, Mike based on the way we see the program.
Working out however, there will be significant positive margin implications for us this tied into a I'm not going to get into specifics because of the competitiveness, but back to my comment we're going to have more tactical aircraft in our in our robot factories.
Which is going to spread the fixed cost over greater unit, which is going to drive the cost down for the government, which is a win for them and it's got a probably enable us to increase our margin somewhat while still giving the government a better deal.
And so this is part of our plan on consolidating the tactical production, where we can into like facilities to drive those costs down and as you also know.
Significant greater than 50% of the bill of materials for the tactical drones is the same as the target drones. So as our tactical Drome portfolio was ramping up we're getting additional leverage on that supply chain across both target and tactical drones, which also should lift margins.
Okay. Thank you remember.
Final question can you.
Talk more about this runway independent Air Force cargo mentioned in the Pacific that you alluded to earlier, including harming times, a reusable valkyrie could actually be reused.
[laughter].
I didn't allude to it but I understand what I know exactly what you're talking about of course.
A valkyrie can be used.
Multiple multiple times.
It's not designed for one or five or 10 or 20 missions. This designed for more than than that.
And.
What you're what you're referring to what was disclosed.
I couldn't have laid out or described certain of the valkyrie attribute better than the air Force did.
And again like this is why I think I think we're a winter of all the points or heading to this all happening.
Soon.
As they need capability.
The Valkyrie may need capability like the gremlins, they need capability like their world and.
Well first to market and we bought the aircraft and we all know budgets are going to be constrained.
We want <unk> I don't see any other development programs on the horizon, None, we'll see what happens with MQ next.
And so this all ties into us winning an increasing margins.
Okay. Thank you.
Your next question comes from Diana.
<unk>.
Okay.
Good afternoon. My first question is for Deanna is the $369 million in cash you guys have sitting on the balance sheet is that enough to support the production lamp and all of these new major program Wednesday about hurry Obs us Air Wolf et cetera.
Or do you think you're going to have to look at potential capital raised.
At this point in time, we but we believe that it is sufficient obviously if there is more.
Multiple production runs going.
Depending on the size, we may have to revisit that but at this point in time it is sufficient.
Okay, Great and then Eric.
You talk about that second batch of Valkyrie, you're planning the second set of 12 is the plan to do what you did before and essentially pay for the initial production of those out of pocket or.
Are you planning to have that essentially be paid for by.
Production contract and does that is that timing and 22 or do you have to wait for skyboard can be program of record for that.
So right now our plan is absolutely not to go and produced as far a lot on a 100% cradles resources that is not the the plan right now.
However.
Our line of sight with with a number of customers is really clarifying.
And as I had and as I said, a couple of times now.
If the 2020 NDAA marked up went through as it was today, we would probably be making the decision to start ordering the long waits.
It's that good for us, especially coming out of the Senate it looks great.
So we're going to we're going to wait and we're going to see what are my my plan today is to not to do anything unless we're closely coordinated with the customer set we have clear line of sight on sales or use because there may be a service model use of any additionally aircraft we.
Build.
That decision.
I think we're going to be making bye bye Q1, Q2, depending on the 22 budget stuff.
Sure.
Okay, and then just one quick follow up.
The Army's announcement about testing the air will put they put a dollar amount on that contract.
Now you saw that no no. Good good job cuts seeing what the army was saying about that no. They have not put a dollar amount on it.
We are but it's a very low cost.
Very low cost stone.
System.
So they have not to this point, but Austin I want to go back to one other thing on your previous question.
A key part of our strategy that we've been winning with as we make the investment to build the aircraft and have them as capital or an inventory that has also been a huge win for air Wolf.
This has been a huge win for Mako.
Okay Dianetics as an outstanding partner I never want to get ahead of them, but we do things like that with diabetics.
And it's a winter for us and.
And so this ties into what I said at the end instead of making large gigantic acquisitions or things like that.
We're probably going to build airplanes.
Which gives us a competitive advantage Wilson, the tactical area and the target area, where customers can come and they don't have to wait a year or two or five we can deliver them immediately.
Okay, great. Thank you so much.
Your next question comes from the lineup.
Saint some J P Morgan.
Yeah.
Thanks, very much and good afternoon.
The afternoon.
I was wondering Eric if you could give us an update on.
Space and kind of.
To what degree.
Or the any of the delays that you were speaking about with regard to supply chain.
Affecting open space roll out and sort of the the plan to wrap up there.
From last quarter, how how is that progressing.
Both open space is.
Is moving along right right now.
The number of military and National Security, we programs, we have that we've won including in the classified area.
We've been focusing a lot in that area right now, which is one of the reasons why you are seeing the organic growth in the space business and it's going to continue to go when I ripped off the programs were on in there and they're ripping.
So we have reallocated some of our resources from the commercial open space area over to the dark side, Okay, now with that being said.
What if you take a look at what's going on with the standard forward I see does suggest joined it. This is on the open architecture standards Board for Virtualized ground systems, where kratos as the chair. So I think space commands. There Navy is there differ has now joined it.
So this is happening.
On the virtualization of the ground system area and we are rolling out.
We are.
Hating the products right now with multiple customers and I've mentioned the number of customers in the past.
And this is definitely going to be one of our mid and longer term.
Growth drivers.
As it rolls out.
So that's what's going on in that area right now both from a business mix standpoint, and a resource allocation.
Okay, great. Thank you.
And then maybe just a real quick follow up but when we think about the C. R. I know in the past uhm sometimes.
It requires you guys to go out and start acquiring long wait items in the other hand, I know you've talked about that with regard to the spiral.
On the Valkyrie, but.
Maybe you in on some of the tactical programs, where you go I have full rate production.
That's something we should be prepared for.
We had a 22, yes, sir and yes, good good point and also on the target drone side too.
Right.
Because.
Our sole source with Navy Army Air Force, we know what's coming as you are indicating there a budgetary things and because the customer is our partner, we very well may make the decision like in the engine area for tactical and target drones to place them on order. So when the customer finally gets his budget and is funding we.
Haven't delayed their program.
Right, Okay, Okay, and then relatedly with.
It seems like the delays.
Most of it is in the area as you pointed out within kgs. When we just think about all the different kind of supply chain exposures that are that are out there on the unmanned side are things contained in our fort within <unk> I know you guys do a lot of your own work there.
I think it's contained enough with the <unk> that the kind of supply chain risks an unmanned are are much lower.
We are as you are indicating substantially vertically integrated.
And the unmanned area.
The only area, where it might get us and we bought a significant amount of engines.
Last year.
A significant amount across all platforms.
And so the current supply chain issue would really have to extend.
For it to impact us.
In the in the unmanned area, but if we got the inclination that it was gateau extent, we might make a decision to even lean forward in order additional engines two years in advance.
Right.
Great Okay.
Thank you very much.
Thank you.
Your next question comes from the lineup Skibinski Some Olympic global.
Okay.
Hey, good evening, Aaron can be yeah.
Eric was wondering if you could give us some more color on the airforce multiyear target a year or that you received back in August.
And I think it's Deanna mentioned you got the initial worn under the idea queue. So it sounds like you could start work immediately I wasn't sure. If you could recognise revenue until they're delivered.
Surmised 2022.
But maybe you can clarify all that and then will there be additional payload related contracts to go along with that.
Just wanted some some some more car on that thanks.
Yes. So yes, we can start immediately because of Deanna mentioned, we received the initial funding what was like third 30 $30 million of funding. So we can start immediately right now we're finishing up previous production runs and locks. So what this what this will do it will it will ensure that there are no breaks and.
Production and no gaps in our financial performance. So that's the significance of the initial funding that that contract came in much larger than I thought and we thought it was going to.
And for the obvious reasons, we know what's going on out there lots and lots of target drugs are being used exercise systems and to your other question yes.
There are additional contracts expected related to things like.
Payloads, an ancillary equipment and things like that that go along with all of our target drone programs.
So this is this is the core.
Program vehicle, though the single award Audi accurate.
Got it okay and just.
Between the Navy and I think in the past you've mentioned classified target opportunities in international So there's still a few more pretty chunky target contracts out there for you over the next six months.
Absolutely. So there are two.
One one.
One is an international one.
It as if the previous administration had one I'm convinced we would have gotten it by now.
I understand it's almost through the final review process. So hopefully we will be announcing this hopefully in the next couple of three but we're going to announce this but it's a biggie and as you know this is a brand new customer and so what that means. This includes all the ground equipment. That's gotta go with the range to launch and recover the targets and then.
That we were at the razor and the razor blade model within in the future will be filling significant additional targets to them.
There is a confidential program, we have I'm not going to talk about it much but it is expected it as an el Rep right now and.
In L. Rip quantity of our increasingly it is expected right now to go into full rate production either late next year or early 23.
So we've got some some good ones out there and then of course, there's a new biggie coming called <unk> gap next generation aerial target a very large new program. That's coming that we believe is right in our bailiwick that we're going to be going after.
And then just to add onto that Pete on the International target Award that we're expecting when that is awarded due to the terms and conditions of the international contract and the revenue recognition guidance there would not be any percent complete on that that would be recorded silly <expletive>.
Targets are delivered which would not we would not anticipate until 2023 to commence.
Okay. Okay. That's great. So that's three additional contracts plus a mate.
You do the Navy full right out there also.
Rock.
No you've heard it correctly and it may be full rate production, absolutely, which is which is why the operating capabilities and I talked about for full red operating capability is very important.
That's great that's great. It's just one last one just.
I think it was due to come.
Tuesday October bookings in Ust I think you've said $50 million just on October.
She was pretty strong.
Any color on what programs that involves.
Well I can tell you the one because we announced that it <unk> access so that's one of them.
Yeah that was $60 million or something like that.
Just under 18 17 and change.
Okay. Okay.
Okay I appreciate all corners.
Thank you.
Your next question comes from the line of the joke.
Oh yeah.
Good afternoon, Eric and Deanna.
The afternoon good afternoon Sir.
So.
Just wanted to clarify something Eric Kgs.
You mentioned how the.
Revenues came down and.
Overall, but how.
Satellite.
Fiber was so strong.
What else and if I'm looking at that and some of your other product lines was at all related to push out or what are some of the product lines, where we're a little bit more coming in a little bit weaker than expected.
No.
Nothing came in weaker than expected, we as we set up the last call virtually all of the revenue what our Q3 and Q4 wasn't is under contract.
Literally okay.
There are countries I'm not going to save them, but you know who they are is primarily in the Pacific rim, where we cannot go into because of Covid.
<unk>. So we can't go get satellite systems.
Signed offline can't do it.
<unk>.
On microwave electronics areas.
Where we have firm commitment dates where suppliers of said we will have this stuff to you by this date.
They call up and they say sorry, we're out by two or three months.
And so those are the types of things that where where we've been seeing we're continuing to see which we've tried to incorporate into our forecast.
Okay.
Thanks for that clarification, and then the other day I guess been airforce kind of talked about eliminating at least three of their their fighter families does that that'd be positive or negative impact on.
Crinose.
The Air Force just the other day and Air Force magazine.
And I believe it was directly related to what you're referring to.
Talked about high performance jet drones are going to be a massive part of the force structure in the in the future.
And they went into the attributable they went into their low cost nature of their high performance. They went into not having to have the pilot survivability systems and the drones.
And then they talked about and we know why this is the sustainment tail in the logistics tail of maintaining them.
The peak the points are coming together.
He said so I believe what I just mentioned to you that the Air Force published just the other day I think it's probably directly related to the planned reduction and legacy aircraft that would not be.
Applicable for appear on pure fight.
Okay, and one more if I may.
So some of the news here recently has has been with China in the Hypersonics.
Have you seen any response from your customers that one.
Be a positive for Crinose based on.
The Chinese on launch of Hypersonics.
I'm, sorry, I cannot comment on that and I apologize.
No worries thanks Mary.
Our next question comes from the line of Michael Chamonix.
Security here then.
Hey, good evening guys. Thanks for taking questions here.
Eric We mentioned supply chain a couple of times just thinking about some of these programs you have maybe even valkyrie stuff. That's very early development, maybe not iron cloud on contract how are you thinking about.
The raw material pricing environment, I mean is that going to apply any pressure to you are there any contracts, where you might be executing on an older IDI Q Task Award, where you are now seeing a little bit.
<unk> pressure and you might have to wait for the next one to kind of readjust, but is that going to be a headwind at all.
We are absolutely seeing some of what you're talking about.
In certain areas like in the call posit area in the wire harness area. We have we have long term agreements on the pricing and and the engine area, which is number one and the bill of materials. We have a long term agreement I think we just bolted in another three years or something like that however.
There are certain areas, where we are absolutely seeing some price increases and the target and tactical drone area.
Where we've tried to incorporate them into our pricing, but as you know most of these are firm fixed price contracts with firm fixed price options.
Which we will have to figure out how to deal with.
Okay got it.
I think it came up before about the bookings in the quarter, just giving this environment CR should we kind of calibrate our expectations for bookings to be challenged maybe at least the next two quarters and then maybe along with that what percentage of your backlog is kind of shippable, but.
Do have line of sight into now over the next 12 months, but if you're trying to ring fence risk or areas better slide now.
Were you looking at that backlog Yep, I would definitely because of the CR and as I was talking about development programs go into production production growth programs going to increase production those are either directly or indirectly tied with the 22 budget and so my Tummy tells me with no 2022 budget there will be no contract award because.
They won't they won't awarded without the obligated funds, so definitely definitely for potentially for Q4 and even if it even if it's resolved by the end of the quarter. How the government is in getting back to going again, so maybe it's like you've set of Q1 or Q2, okay.
Okay.
The the important thing that I try to look at and you don't mean, Mike I'm most optimistic guy in the World is most of these contracts from talking to you about their on multiyear multi decade programs that were sole source on so I know, they're going to come but it's the timing that drives me nuts.
Okay. Okay.
The last one I had you called out spaces cyber and how strong. It was I think he said, it's currently 280 million at mid key margins.
I mean, if we look at that as part of Kgs that sort of implies maybe 40 million of EBITDA and the rest of kgs 300 million plus or minus.
Only running around six 7% EBITDA margins.
I would've thought the services low, but I would've thought maybe microwave electronics, even some of the engine hardware would've been would have been a little bit stronger on EBITDA figure out that.
That correctly based on the answers you throughout you are kind of but here's the piece it has to do with like our corporate G&A.
Okay. So that's about $40 million excludes corporate G&A and because it's the big and because it's the biggest business with the biggest revenue and then the biggest number of employees et cetera.
The biggest part of corporate G&A.
You see what I'm, saying, so I got it.
Makes sense alright.
Alright, perfect I will jump back in the queue guys. Thanks, those but thank you.
Your next question comes from the line of SITA.
Pardon me.
Yeah, Good afternoon, Eric Indiana.
Good afternoon, Eric.
Eric question, I mean, just talking about the targets her own business and tactical.
Your target home business has been growing substantially and I think now you are you to north of $200 million just on that business alone, but how should we think about our how do you view. This skyline on on the tactical it seems like the opportunities. There are eventually that it's going to be the out in terms of these.
Size of your target business.
What needs to happen in terms of do we need to get the IMC Valkyrie. Other things are you thinking about that longer term.
So.
First part of your question I, absolutely believe that our tactical drove business.
To be substantially larger.
Then our target drone business.
In the future.
Substantially orders of magnitude maybe multiple times larger.
The customer said has talked about acquiring reusable disposable attributable drones like cruise missiles.
Buy them put them on the shelf yet.
Get ready to use them when you need to use them and that's how our that's how our tactical drones are they have the target drone legacy where they can be stored clip the wings onto lit up and off it off it goes.
So what what needs to happen.
We are absolutely Pete in the infamous Deogee valley of depth with the number of art.
Technical drones.
The government talks about at DARPA talks about it the airforce talks about it.
We are doing everything we can I'm really glad you asked this question.
This question, we are doing everything we can with the D O D.
<unk> customers that the Pentagon customer set and congressionally to encourage them to because of the threat.
Out there in order to help the defense industrial base in order to for stem Science Technology Engineering math.
The move faster than the existing infrastructure military DLD bureaucracy and infrastructure allows them to do.
And that's.
That's what we're doing and this is why I continue to reference to you all.
That we have a handful of jet drones in different classes flying today nobody else does.
With Oss I think we're undefeated I don't think I don't think.
We've ever lost a tactical drawn solicitation that we've participated in I don't think we've ever lost.
I don't see any future no more.
More future ones on the horizon coming that are funded from budgetary.
So that all tells me that with our existing family of aircraft. The ones that we've won that we're developing that this is going to happen and when it happens where the guy is going to happen with that's how I see it.
I appreciate it thanks, Eric.
Okay.
Yeah.
Question and answer session I would now like to turn the conference back to Mister Erick New Michael.
M I.
Thank you very much for joining US afternoon, we really appreciate the opportunity to update you.
Really look forward to updating you again, when we report Q4, and we head into 2002. Thank you.
Ladies and gentlemen. This concludes today's content. Thank you for your authentication and have a wonderful evening you May August.
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