Q4 2021 Kratos Defense and Security Solutions Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to Kratos Defense and security solutions fourth quarter 2021 earnings Conference call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question. During this session you will need to press Star then one on your telephone.
If you require any further assistance. Please press Star then zero I would now like to turn the conference over to your speaker for today Ram and Dan Mendoza Senior Vice President and General Counsel you may begin.
Good afternoon, and thank you for joining us for the Christmas sense of security solutions fourth quarter and fiscal 2021 conference call with me today is Eric Demarco, Creative President and Chief Executive Officer, and Deanna Lund Kratos Executive Vice President and Chief Financial Officer.
Four we begin the substance of today's call I'd like everyone to please take note of the Safe Harbor paragraph that is included at the end of today's press release.
This paragraph emphasizes the major uncertainties and risks inherent in the forward looking statements we will make this afternoon.
Please keep these uncertainties and risks in mind, as we discuss future strategic initiatives potential market opportunities operational outlook and financial guidance during today's call.
Today's call will also include a discussion of non-GAAP financial measures as that term is defined in regulation G. non-GAAP financial measures should not be considered didn't actually isolation from or as a substitute for financial information presented in compliance with GAAP.
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, but that I will now turn the call over to Eric Demarco. Thank you Murray.
Good afternoon.
As we reported today cradles finished fiscal 'twenty, one with approximately 10, 7% organic growth, excluding our training business, which legacy LPTA contracts will be completely out of our financials. After Q2 of this year.
Our 2021 revenue growth included growth of approximately 24% and 19% respectively.
Our largest businesses unmanned systems and space satellite communications and cyber.
We reported a fourth quarter book to Bill ratio of one five to one.
That includes 2.4 to one in our unmanned systems business.
One two to one in our Kgs segment.
<unk> the company for continued future organic growth and providing us with confidence in our 2022 forecast that we're providing today.
Yeah.
Kratos is Q4 and fiscal 2021 financial performance and our 2020 to forecast organic growth.
A representative of the strength of <unk> business model and our team.
Considering the continuing global Covid pandemic, and recent omnicom variant impacts, which have spiked for kratos in Q4, and thus far in Q1 'twenty two.
The continued and increasing disruptions in the supply chain.
And the federal government and our industry also operating without a federal budget and under our CRA Since October <unk> 2021, all of which Dan is going to discuss in detail.
As we begin 2022, we believe Kratos is continues to be uniquely positioned and aligned with the United States and its allies National security priorities.
Including affordability.
And rapid development testing and fielding of hardware products and systems.
And the tactical drone area.
The customer recently communicated its commitment to and continued prioritization of affordable loyal wingman for small deploying tactical drones and autonomous systems for the future for structure.
These comments include additional new planned for drone program opportunities for the <unk> 'twenty 'twenty three budget request and potential envisioned concepts of operations, including drones teaming with multiple manned platforms.
For example, the.
The customer noted that loyal wingman drones in the manned unmanned teaming may include the F. 'twenty two.
35, the B 21, and the next generation air dominance or N gas system, a system of system quarterbacks to the drones.
These applications are in addition to previously discussed drone loyal wingman are a force multiplier applications, including with the F 15 aerial tankers and other manned aircraft.
The customer also stated that they envision up to five loyal wingman jet drones per manned fighter aircraft.
Which would represent a very large market opportunity.
Based on what has recently been communicated it's possible that in the future certain credo tactical drone initiatives programs or platforms that you are familiar with may be combined into new programs or prioritized or de prioritized.
And you May also become aware of certain additional credo drone programs or platforms or systems, including from tradeoffs as Ghost works.
This may occur as the customer prioritizes certain technologies capabilities drone systems initiatives mission requirements et cetera.
As they move toward initial operating capability or IOC and fielding.
With the numerous tactical drone programs Kratos has successfully competed for and received.
The family of Affordable jet drone aircraft, we have flying today and additional systems, we have in development, including with the customer. We believe that kratos is uniquely positioned to address this increasing and accelerating market opportunity.
When the customer is ready for scale production and fielding.
Also.
With Kratos is operating active tactical and target jet drone production lines at multiple facilities today, where we are producing hundreds of high performance jet drone aircraft. We also believe that Kratos has further uniquely positioned to support customer requirements, if certain geopolitical or other events word of war.
Kirk and affordable rapid platform acceleration where necessary.
The.
<unk> also recently emphasized that national security is of increasing importance, including that certain loyal wingman and other drone programs will be classified at high security levels and no longer routinely discussed publicly.
Accordingly.
We will be very limited in what we can disclose and discuss publicly going forward from a tactical drone customer programmatic and platform perspective and.
And we will defer to the customer to take the lead in any detailed public communications.
Since our last.
Last report to you <unk> drone initiatives have continued to make progress, including as represented by our financial results, including our unmanned systems business as Q4, 24% year over year growth rate in <unk>.
Book to Bill ratio of two four to one.
And our 2022 tactical drone revenue forecast is expected to be greater than 2021.
With the year over year future revenue growth trajectory expected to continue in the future.
The manufacturer of our first Valkyries are the 12 serial production lot continues several of which are currently under customer funded contract or commitment and certain of which now have customer flight scheduled.
As I have mentioned previously once we have an approved 2022 budget and the 2023 budget request and future Years' Defense program or fight up we should have the information necessary regarding possibly moving ahead with a second valkyrie serial production lot adjusts.
Our current internally funded investment profile for the valkyrie or for derivatives.
Or for potential other new platforms, including potentially certain cradles ghost work initiatives.
In the fourth quarter. It was reported that Kratos is X 61, a gremlin drone was successfully recovered in flight by a C 130 aircraft.
As dynamics as the prime on the Gremlins program, we are unable to comment further on grumblings at this time.
So I will mention that <unk> is an incredibly important and valuable strategic partner of Cray doses and we are working together on a number of additional exciting initiatives and opportunities.
It was recently reported that a kratos air Wolf drone launched an aerovironment tactical drone and a demonstration including for drone swarming range and mission extension capabilities and enhancements, including for a B E vs industry leading systems.
Aerovironment tactical drone systems are an incredible asset.
A b a b as a valuable partner to kratos in certain scenarios, we are working.
<unk> Ghost works in our industry, leading digital engineering group has been very busy as you can imagine with everything that is going on in the tactical drone area.
Including as related to <unk>, new demo GOR bond system, which was recently unveiled and several others.
We are currently under contract and bidding on multiple additional tactical drone opportunities, which are a key element of tradeoffs is 'twenty, two and future forecast growth trajectory.
Since our last report to you we have received a $51 million sole source production contract from the United States Navy for <unk> 177 target drone systems, including 50 drones for the Navy seven drones for Japan, and eight drones for Saudi Arabia.
The international customers are of particular importance, representing additional new growth opportunities for Kratos has 177 target drones system.
The BQ and 177 platform and related Navy program is an important element of <unk> future growth trajectory, including domestic and international opportunities, where the infrastructure to launch operate and recover cradle says drones are analogous to the razor and the drones are analogous to the razor blades.
And our recurring revenue model.
The QL 177 is one of the highest performing unmanned aerial drone systems in the world and it is just recently enter full rate production, which is expected to continue sole sourced to kratos for many years into the future.
As a data point to date, we have produced over 170, EQM 177 jet drone aircraft.
This $51 million sole source U S Navy contract award and program.
Along with the $370 million U S Air Force sole source target drone award cradles received late last year.
Divide us confidence in our 2022 financial forecast and expected future years' growth trajectory.
As an additional data point on the outset program. We are currently in production year 17, with the beat you 167 for the Air Force once again sole source and to date, we have produced over 500 of the 167 jet drone aircraft.
We have a confidential program that also continues to progress is currently in low rate initial production and is expected to achieve full rate production in the future.
All sourced to Kratos, which also provides us confidence in our forecast in future year growth trajectory.
We are a teammate on another large unmanned aerial drone system program, where it was recently announced that the most recent full rate production award has now been made by the customer with this program representing an additional key called Ponant of our 2022 financial forecast and future growth trajectory.
As cradles is not the prime on this program we are unable to provide further information at this time.
We also just received a contract from a new international customer for cradles target drones infrastructure and support equipment for multiple tens of millions of dollars with this new customer award also providing us confidence in our future financial forecast.
Credo space satellite and cyber business with credo as being the first to market industry leader and software based and defined ground command control and telemetry tracking and control systems is also positioned for future year over year growth, which we are forecasting for 2022 over 2012.
One and continuing thereafter.
There are currently approximately 4500 satellites in orbit today.
Number which is expected to grow by some estimates up to 100000 by 2030.
This expected satellite growth is being driven in part by the rapidly dropping cost of launch systems to put satellites into orbit and technological advancements related to the satellites themselves, including smaller faster and more powerful and capable satellite systems.
Satellite operations are also growing in complexity, including proliferated constellation's spectrum management challenges interference avoidance across Leo MEO and Geo high rates of satellite Handovers five advancing and more.
Great OS as future forecast growth trajectory is tied directly to this large.
Standing market opportunity the successful launch and operation of the planned four satellites and the anticipated market penetration and success of our first to market products and systems.
Our plan continues to be to make internally funded R&D investments to achieve designed in positions on new satellite constellations and what the operators.
Then once the satellites are launched in orbit and operating for Kratos to see revenue growth and margin expansion as we transitioned from development and testing to operational services.
Several of the satellite opportunities, we are pursuing and or team Don as strategic partners are classified in nature and therefore, we may be limited in what we can discuss publicly however, our recent financial performance, including approximately 19% Q4 growth in a rapidly expanding.
Handing opportunity pipeline provide us confidence in our 2022 and future financial forecast.
Since our last report to you create OS has made a small tuck in acquisition cosmic H E. S, which is just an incredible technology based product and solution provider in the space signals in cyber domains with Carolyn John's culture and commitment to the mission exactly consistent with.
<unk>.
For example example.
<unk> belief.
Is that actual security needs arise faster than requirements and cosmic builds adaptable mission driven solutions that empower the warfighter to confront urgent and changing threats in the space and cyber domain.
Threats that emerged too quickly for the traditional acquisition cycle to address.
Cosmic also bring several new customer sets to kratos with the majority of cosmetics work being classified.
Cosmic <unk> margins are currently lower than credo space satellite and cyber business, including due to the existing nature and maturity of certain work they perform at their contractual arrangements. However, the margins are expected to increase as we move forward as certain cosmic work matures or transitions to higher end products and execution delivery.
<unk> turbine technologies and engine businesses for drones missiles powered munitions space hypersonic and other systems continues to make progress, including the receipt of our first small serial production contract for <unk> jet engines.
We expect our engine and turbine businesses to generate 2022 over 2021 year over year organic revenue growth.
Including growth in K T Ts space rocket hypersonic MRO and specialty engineer. He is as multiple established and new rocket system and launch entities engaged credo for complex technology and hardware for their propulsion systems.
<unk> rocket systems business, which includes and supports target ballistic missile and hypersonic systems or.
Our microwave products business, which supports missile radar space satellite and communications systems.
And our <unk> ISR business, which supports the drone hypersonic space satellite missile radar and strategic deterrent systems are each expected to generate year over year 2022 over 2021 organic growth based on current backlog and the opportunity pipeline.
We recently announced that Kratos is rocket systems business has teamed with hypersonic <unk> to develop and fly the dart hypersonic drone.
Which will be powered by the fifth generation Spartan zero emission clean hydrogen scramjet engine.
The hypersonic scramjet powered dark drone will be multi mission capable and three D printed out of exquisite materials.
Additionally, <unk>.
<unk> rocket systems business is also investing in coordination with the government customer set in the design and development of an additional new affordable hypersonic vehicles vehicle named are nice and a complimentary affordable boost system.
Affordable Credo is designed to boost system will accelerate the credo developed and cradles manufactured Aaron These hypersonic vehicle to speeds greater than Mach five before release at.
At which at which point <unk> will perform pre determined mission sets.
The credo boost system and Kratos erroneous hypersonic vehicle, which we believe are exactly consistent with recent SEC Def priorities, including low cost and moving fast, which we have been working on for some time now continue to make progress as we move towards initial flight.
Aerojet Rocketdyne as a key partner to create ups on certain of our hypersonic rocket system missile defense and other national security programs.
Since our last report to you tradeoffs have successfully closed on an additional very small tuck in acquisition in their microwave electronics areas ETT.
Similar to cosmic <unk> was a negotiated transaction with the principal David tie with Ctg's business being consistent with kratos as existing microwave products business, including with <unk>, having a focus on space and satellite systems, which I am very interested in.
Also similar to cosmic <unk> will provide a channel to additional new customer opportunity sets for kratos with David having built a solid rapidly growing first glass business and an outstanding team of professionals and employees.
In summary, Kratos had a solid 2021, despite the global Covid pandemic continued and increasing supply chain disruptions and a federal government continuing resolution through our entire fourth quarter.
Even with these continuing issues and challenges we are forecasting year over year organic growth for 2022 over 2021 of approximately 5% to 10% or 7% at the midpoint, excluding the training business. Additionally.
Additionally, we have the opportunity for increased future growth in the tactical drone area. Once the government moves forward and procured affordable high performance jet drones, which the customer has recently publicly stated they are planning to do.
When the customer makes this decision.
Kratos will be ready.
For our initial 22 financial guidance of which Deanna will be providing the details I want to emphasize a few points.
The current CRA has obviously been going on for the past five months since October 121, and is currently expected to continue at least through March 11 2022.
The CRA has directly adversely impacting our industry and creatives, including as related to our 2020, new financial forecast and in particular, our 2022 first quarter the entirety of which has been covered by a continuing resolution to date.
Based on our current backlog forecast execution and delivery pipeline and with an expected March 'twenty two D. O D budget approval, we expect trade offs in the second half of 'twenty two to be substantially greater than the first half.
Simply stated we have the programs the contractual backlog and the visibility for 'twenty two.
We need the budget and then we will have a lot of executing to do over the last nine months of credo since fiscal year, assuming we get this budget in March.
From an operational standpoint, <unk> space satellite and cyber business, our company's largest and very rapidly growing is transitioning from long cycle dedicated hardware centric ground infrastructure products and programs to quicker turn software based and defined virtualized.
Solutions.
As we saw most recently in 2021.
This new and increasing software element of our satellite business and the related quick customer order development delivery aspect results in cyclicality cyclicality.
Cyclicality of customer orders and revenue generation and profit rates, including around the September 30, Federal government fiscal year end when.
When the government customer typically obligate substantial funds and make significant procurement decisions to ensure 100% budgeted funding utilization.
Also contributing to our space satellite and cyber business of cyclicality and expected increased revenue and profit around tradeoffs as Q3 and Q4 of 'twenty. Two is a calendar year end is also when non Dod customers typically procure products and solutions, including for similar budgetary spend reasons.
Accordingly for 'twenty, two and going forward for <unk> space and satellite cyber business, we expect to forecast increased revenues and margins in our fiscal Q3, and Q4 with substantially lower expected revenue and margins in Q1 and Q2 to reflect this business cyclicality, we have experienced.
Including just finished 2021.
This business cyclicality also impacts the leverage tradeoffs receives on our fixed overhead G&A research and development on other expenditures.
Obviously, when we have higher revenues, we generate higher profit margins as we just saw in Q4.
We have reflected this expected county in second half increased operating leverage and anticipated revenue mix for our space satellite and cyber business in the 'twenty two financial guidance, we provided today, which we believe believe maybe even more pronounced this year as a result of the ongoing extended continuing.
Resolution.
With that I'll turn it over to Deanna.
Thank you and good afternoon.
We have included a detailed summary of the fourth quarter and fiscal year financial performance and financial guidance in the press release, we published earlier today I will limit my comments to the highlights in my remarks today.
Craig This is fourth quarter 2021 revenues of $211 6 million, which at the midpoint of our estimated range of $205 million to $215 million.
We achieved the midpoint in spite of continued COVID-19 related supply chain and other delays, which impacted revenues by $11 $2 million during the quarter with the most significant impact in our <unk> ISR and our international commercial Satcom businesses.
Our Q4 'twenty one consolidated operating income was $9 2 million up from the fourth quarter of 2020 operating income of $9 million, which includes fourth quarter 2021 increases in R&D of $1 4 million, primarily in our space and satellite and unmanned systems businesses and increased SG&A costs of $4.
$8 million, primarily resulting from our increase in revenues as well as due to increased head count.
<unk> systems business, resulting from the growth in this business.
In particular total head count in our unmanned systems business has increased 90 heads from 812 in Q4 of 'twenty to 902 in Q4 of 'twenty. One is this business experienced a 24% increase in revenues from 'twenty 'twenty to 2021 with additional future growth expected.
Net loss was $2 6 million for the fourth quarter of 'twenty, one and a GAAP loss of two cents per share compared to net income of $78 1 million in the fourth quarter of 2020, and GAAP EPS of <unk> 62, which included a nonrecurring tax credit of $75 3 million.
Included in the net income for the fourth quarter was a tax provision of $4 5 million on income tax income before taxes of $3 million or an approximate 150 per cent tax provision rate.
As a reminder, we have approximately $235 million of U S. Federal net operating losses, which we expect to continue to substantially shield us from domestic base federal income cash tax payments.
We generated adjusted EBITDA of $23 4 million for the quarter.
At the higher end of our expected range of 20 to 24 million, which included a more favorable mix of revenues and creative space satellite and cyber business, resulting primarily from higher margin software sales and work performed on certain confidential programs as well as a more favorable mix in our microwave products business.
In the fourth quarter, our unmanned systems segment reported revenues of $54 4 million up nine 9% from the fourth quarter of 2020, including ramps in production in certain trend programs, including the DQ on 177 and Valkyrie related work.
Kgs reported revenues of $1 $57 2 million in the fourth quarter of 'twenty, one up from $56 9 million in the fourth quarter of 2020, which included year over year growth in our space satellite and cyber business of $14 6 million and in our microwave products and turbine technologies businesses of five 4 million.
Offset by a $9 4 million year over year decrease in our training solutions business, resulting primarily from the loss of an international training contract and a year over year reduction of $2 5 million and our C. Five ISR business, resulting primarily from supply chain and COVID-19 related disruptions.
On a pro forma basis, excluding the reduction in our training business Kgs revenue grew organically six 8% in the fourth quarter of 'twenty, one over 2020, including organic growth across our space satellite and cyber business at 9% and organic growth.
In our microwave products and turbine technologies business.
As discussed earlier Kgs's fourth quarter revenues were negatively impacted by disruptions and delays in COVID-19 related supply chain deliveries and other issues, resulting in revenues of approximately $10 7 million expected in the fourth quarter deferred to future periods.
Kgs is fourth quarter 21, operating income and adjusted EBITDA were positively impacted by a favorable mix of revenues, including increased software product deliveries, which were previously expected in the first quarter of 'twenty, two replacing certain lower margin work in hardware products that were originally forecasted for Q4, 'twenty one which.
<unk> are now forecast for execution and delivery in Q1 of 'twenty two.
FY 'twenty, one cash flow from operations improved approximately $10 million to $15 million from our original FY 'twenty, one forecast of $20 million to $25 million, primarily due to the estimated investments in nonrecurring engineering in our ballistic missile target business, which was originally forecasted at $10 million compared to the 4 million that was <unk>.
<unk> in 2021 as well as additional customer advance payments that were received in 2021.
In addition, actual cash capital expenditures were approximately $9 million to $14 million less than originally forecasted for 'twenty one.
In summary, these differences in our original 2021 estimates of investments and nonrecurring engineering costs and capital expenditures, primarily represent timing differences totaling $15 million to $20 million whereby these expenditures are now expected to be incurred and funded in 'twenty two.
Our contract mix for the quarter was 79% fixed price, 18% cost type contract and 3% time and material contracts rare.
Revenues generated from contracts with the U S Federal government.
During the quarter were approximately 66%, including revenues generated from contracts with the D. O D. Non Dod federal government agencies and Fms contracts.
In Q4, we generated 9% of revenues from commercial customers and 25% from foreign customers are.
Our backlog at quarter end was $953 9 million up sequentially from third quarter end backlog of $839 1 million with consolidated bookings of 323 million and a book to Bill ratio of 1.5 to one for the fourth quarter.
Funded backlog at quarter end was $6 $53 7 million with $300 2 million unfunded for.
For the 12 months ended December 26, our consolidated book to Bill ratio was one to one with total bookings of $840 million.
Moving onto financial guidance, our fiscal 'twenty two financial guidance. We provided today includes our current forecasted business mix and our assumptions related to the expected continued impact of employee absenteeism supply chain disruptions and related expected price increases travel restrictions and other COVID-19 .
Related items that have or are currently impacting the industry and tomatoes.
In January and February of 'twenty, two tradeoffs experienced a significant increase in the intensity and effects of COVID-19, including the new omicron variant and the related impact to our employees absenteeism consultants vendors suppliers customers et cetera, which impact included loss of weeks of manufacturing and production funky.
<unk>.
<unk> systems, <unk>, five ISR and microwave products businesses.
We have assumed that these COVID-19 related impacts to our business, which are significantly impacting our fiscal first quarter 'twenty two for cash will begin to subside and our second fiscal quarter and continue to improve throughout our fiscal 'twenty two.
As Eric discussed there is currently no federal fiscal 'twenty to October 121 to September 30, 22 defense budget in place and the defense industry is currently operating under a federal budget continuing resolution authorization with creators has been operating under throughout the fourth.
Quarter of fiscal 'twenty, one and thus far during our first quarter fiscal 'twenty two under our CRA. There are no new start program awards for new programs of record no increases in production on existing programs and no transition from existing development programs to production.
Among other things all of which impact us there.
The effects of the current CRA and continue supply chain delays and disruption adversely impacted <unk> fourth quarter of 'twenty, one and are expected to adversely impact greatest this fiscal 'twenty two in particular first and second quarter financial performance, which current estimated impact has been included in our 'twenty two financial guide.
<unk>.
We currently estimate that the impact to our first quarter revenues is $12 million to $15 million and $2 million to $4 million to our adjusted EBITDA.
The existing CRA currently expires on March 11th 22 at which time, we have assumed that a federal fiscal 'twenty two defense budget will be approved and become law, which assumptions included in our 'twenty two financial guidance. However, once finalized the approved and authorized 22 D. O D budget may be different and include.
Substantially different funding amount than what we are currently estimating and its timing is uncertain at this time.
Additionally, the longer the CRA continues beyond its current 311 22 exploration date, the greater the potential adverse impact to the defense industry and the company.
If the current CRA goes substantially beyond the current 311 exploration date.
We will update our financial guidance when we report our first quarter results if necessary at that time.
Although we have operated under an extended CRA in previous years the most.
Recent government D O D fiscal 'twenty one budget from October one 2020 to September 30 of 'twenty. One was signed into law as of October 2020, which meant that the industry and create us had a D O D budget for the entire last fiscal year.
The situation is much different for fiscal 'twenty two as we have been operating under an extended CRA for over five months.
In addition, the impact of the extended CRA, maybe more pronounced for <unk> and 'twenty two due to a number of expected new program starts or expected increases in production lot size quantities and anticipated transition from development efforts to production, including in our unmanned systems space satellite in cyber and rocket systems business.
And see if she five ISR business areas.
As a result of these factors as we have discussed we are forecasting approximately flat organic growth for our first quarter of 'twenty two at the higher end of our estimated range compared to 21, excluding the expected.
Contribution from the recent acquisitions of CTG in cosmic <unk> of approximately $10 million to $12 million in revenues.
Offset by the loss of the international training contract, which contributed $8 3 million in Q1 of 'twenty one.
Our quarterly forecasted EBITDA performance is also impacted by these industry and cyclicality factors, including our inability to realize leverage on our fixed G&A.
Overhead manufacturing and research and development costs, particularly in our 'twenty 'twenty to Q1 and Q2 operating periods.
Additionally, our forecasted first quarter EBITA is further impacted by our expected mix of revenues, including an increased mix of lower margin development programs in international commercial satellite hardware programs and an expected reduced volume of higher margin software solution deliveries, which were delivered earlier than originally anticipated in the fourth.
Quarter of 'twenty one.
As we continue to transition our space and satellite business from a hardware to software focused solutions financial performance will tend to be more cyclical lumpy and more sensitive to delivery schedules.
As we have discussed before and I had noted previously <unk> FY 'twenty. Two estimated revenues include the final impact of the 2021 loss of a large international training contract, which contributed approximately $13 million to the company's FY 'twenty, one first and second quarter revenues.
The loss of this international training contract present, a 'twenty two versus 'twenty, one revenue comparison headwind create us in our first and second quarters. This year.
As I mentioned previously our fiscal 'twenty two guidance includes the estimated contribution from the recently closed GTT in cosmic a S acquisitions, which consists of revenue and adjusted EBITDA of approximately $45 million and $1 5 million to $2 million, respectively, respectively. As Eric mentioned the profit margins for Kosmos I'm currently.
Sure then our space and satellite business due to the existing nature of work they perform in their contractual arrangements.
On a pro forma basis, we are forecasting pro forma organic revenue growth, excluding the loss of the international training contract on a consolidated basis at the midpoint of our $880 million to $920 million range of approximately 7%.
For unmanned systems business, we are forecasting annual revenues of $2 $45 million to $255 million with expected growth in our tactical business from approximately $55 million in 2021 to $70 million to $80 million or over 35% growth at the midpoint range.
Our tactical business grew from approximately $30 million in 2020 to approximately $55 million in 'twenty one.
The revenue trajectory of our unmanned systems business is expected to be more heavily weighted in the second half of 'twenty two with the expected ramp driven by expected funding and related contract awards. Once a budget is in place.
The recent international contract target drone contract that Eric mentioned earlier is not currently expected to contribute to 2022 due to the contractual terms and the new revenue recognition standards under which revenue is currently expected to be recognized as targets are delivered rather than its progress is completed on a percentage of completion basis.
For our Kgs business, we are forecasting FY 'twenty, two revenues of $635 million to $665 million with pro forma organic revenue growth, excluding our training business up approximately 6% at the arrangement point.
The largest piece of our kgs business, our space satellite and cyber business is forecasted to grow organically approximately 10% with estimated organic revenue growth for fiscal 'twenty. Two we're all kratos business units expected with the exception of our training and legacy government services business.
As I mentioned earlier estimated FY 'twenty two free cash flow includes approximately $15 million to $20 million of a carryover from FY 'twenty, one representing non recurring engineering investments in capital expenditures that were timing differences that were not funded in 2021, but are expected to be incurred in 2022.
We expect 'twenty to capital expenditures.
Penetration to remain elevated at approximately $55 million to $65 million, which includes approximately $25 million to $30 million for expected normal annual maintenance capital expenditures.
As Eric stated R 22 estimated Capex budget does not currently include an additional spinal production lot for VAALCO east above the initial 12 production lines or other potential investments in tactical drone systems.
We will make any necessary changes to our forecast when and if an additional lot of investment has initiated.
As we have discussed we are currently awaiting for the CRA and approval of the 2022 defense budget in the 2023 D O D.
Budget request and future Years' Defense program submission each of which program and related funding content may significantly impact greatest his current 'twenty two and future.
Internally funded investment expectations in particular with respect to the company's unmanned systems business.
Accordingly, once these funding commitments become law or finalized.
And we have assessed them, we may adjust our current.
Currently forecast internal investment and capital expenditure plans.
Finally, we also announced today the refinancing of our six 5% senior notes and $90 million revolving line of credit with a new five year 200 million revolving credit facility and five year 200 million term loan a we have drawn approximately 200 million under the term loan and approximately $100 million on the new revolving.
That facility with the 100 million remaining and borrowing capacity on the revolver. The proceeds of borrowings under the new facilities, a $300 million along with cash funded by the company for the premium of $3, two 5% and accrued interests were approximately $16 million.
Funded to the trustee for redemption of the company's outstanding 300 million note, which is expected to close on March 14th 2022.
As a result of the refinancing the company expects to record one time charges of approximately $13 million to $15 million in its fiscal 'twenty. Two first quarter comprised of a three to five call premium and the write off of deferred financing costs associated with the original financing transactions.
Cost of this refinancing, including the call premium is expected to be recouped in approximately 12 months with expected savings of approximately $10 million to $13 million in cash interest payments annually based on current interest rates and the amounts currently drawn.
The borrowing rate under the new facilities is that so far which is the replacement of LIBOR plus.
Plus certain adjustments, which is currently approximately just over 2% versus six 5% under the senior notes. The rate is adjustable. So we will monitor the market closely to determine of hedging would be beneficial in the future.
Eric.
Great. Thank you Deanna.
I want to conclude.
With a couple of thoughts relative to what the employees of the company have accomplished over the past few years.
Over the past several years, we've made substantial internally funded investments Inc.
Including in the development of a suite of affordable high performance jet drone aircraft that are flying today.
And that we believe are ready now to be the pentagon's low cost attributable force multiplier unmanned combat system.
We developed the low cost rocket system that has had numerous successful missions, including hypersonic.
And we are developing a more advanced system and that affordable hypersonic vehicle aerospace with initial flight now being planned.
We have developed and are the first to market with a truly software based virtual satellite ground operating command and control T. T M C.
<unk> open architecture system open space, which we believe will be market disrupting.
And we are working to develop a next generation of turbojet turbofan and other exotic amgen's for drones missiles powered munitions and other systems with the first of our engines now entering limited production for an aerial vehicle with additional production awards expected.
We're working closely with our Pentagon customer set and Congress, including to invigorate. The U S. Industrial base increased competition Foster real innovation drive down costs and secure our country.
The same quantity has a quality all of its own is becoming more and more relevant every day.
And we are accomplishing all of this while we continue to organically grow <unk> revenue or profit or expected cash flows as we reported today.
With an unwavering focus on delivering value for the shareholders.
Thank you to our employees in all credo stakeholders, who are committed to the successful execution of the mission.
And with that I'll turn it over to the moderator for questions.
Thank you.
Ladies and gentlemen, as a reminder to ask a question you would need to press Star then one on your telephone.
So withdraw your question press the pound key.
Again, Thats star one to ask the question.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Mike Crawford with B Riley Securities. Your line is open.
Oh, thank you.
Is the decision on the Ob SaaS demo Gorgon down selected expected this year or is that a 'twenty 'twenty three of them.
I believe Mike the customer announced that it will be.
Q4 of this year I believe.
Okay.
And then.
Did you say that.
The CGT and cosmic Aes acquisition made in the fourth quarter or were some of those acquisitions made in the first quarter and are their earn outs associated with them that you can discuss.
Yeah, Mike So the CPT acquisition was performed in the fourth quarter part of the purchase price was actually paid though in the first quarter and the cosmic acquisition was in our first quarter and there there are no earn outs.
The first one that closed right at the end of the quarter right yes.
The fourth quarter, Yes, Youre right Mike.
Like literally like the last day of the quarter something like that.
And then combined you paid what for the two.
About $60 million.
Okay 60 million.
And then Joe.
Thank you forgive me not about guidance just final question for me would be.
What if anything should we be looking for not only in this forthcoming delayed.
Government fiscal 'twenty to budget, but also and the soon to emerge 23 budget requests related to skyboard or anything else that will give us some more clarity on where you might be able to go particularly with tactical unmanned systems.
I believe Mike probably right now the most public available data point, we can talk about relative to that.
As the Secretary of the Air Force, where he said that he is looking to put into the 2023 request and the related fight up.
Funding for two new <unk>.
Additional unmanned combat drone aircraft.
Okay.
In addition to that for the 23 budget as you I think youre aware.
The.
NDA signed by the President for the 'twenty two.
There are a handful of.
Items in there related to current cradles programs.
We're waiting for that would could potentially fall over into 2023 those are the two.
Alright, Thank you very much thank you.
Thank you.
Our next question comes from the line of Christopher rigor with Bahrenburg capital market. Your line is open.
Herk, Indiana. Good evening, Thank you very much for the time.
Good afternoon.
So if the current continuing resolution continues to be pushed out obviously credo isn't the only company impacted.
So what sort of lingering effects, particularly on your supply chain.
Would you anticipate to be the most pronounced and what can you do on.
Your end to sort of mitigate these effects.
We've.
I think we talked about in Q2 of last year and we've continued since then we've routinely been buying ahead, where we can.
All critical components critical subsystems for our systems in the past months relative to our 2022 plan forecast, we put out today, we met with all the operating president and there are specific areas, where we are leaning forward and where we're going to try to buy a significant amount of.
Stock.
I think we've already placed the orders to get it under contract and get it in here and fix the pricing because pricing is running on us and we're going we're doing this ahead of contract awards, we have visibility on the program. It's a credo program, but the contract award may not be made yet where we're leaning forward and making those purchases as well so that though.
Those are the key things, we have been doing and we're continuing to do to mitigate as much as we can.
Great. Thank you helpful.
Just one more I guess, a bigger picture with regard to volcker and Skyboard what needs to occur from here on on your end with your partners in that the D O D.
In order for Skyboard could become a program of record.
I am unable to address that specifically now I want to but I can't if you take a look at the recent secretary of the Air Force comments that.
These I need to wait for the customer to talk about things things, where things are moving and we need to let the customer take point.
Okay fair enough. Thank you very much thank you.
Thank you. Our next question comes from the line of Sheila with Jefferies. Your line is open.
Hi, This is actually Allen on for Sheila.
I'm just looking at the 2022 margin guide.
Implied down about 50 bps at the midpoint, how much of that is mix versus supply chain and to see our and all the other one time items.
Called out and can you give us any color across kgs versus Batman.
So.
As you know in 2021, similar to 20 and 19, we continue to win a significant number of new tactical drone development programs. So for example at the end of 'twenty. One we were awarded Obs.
Just under $20 million contract, that's going to be substantially all embarked in 2022, It's a development program and development programs typically carry lower margins.
Margins also very importantly, GBS D, where we are teamed underneath Northrop Grumman.
GBS D is based on our schedule is going to start significantly ramping in Q3 very significantly.
And that's going to continue to ramp Q3, Q4, and then into 'twenty two and beyond as you know this is the development phase with Northrop Grumman before production is awarded those margins in development programs. We will we will typically record at a lower revenue rate until we get more comfortable as we head toward.
<unk> production and then in addition to that we have won a number of classified programs, including in the space satellite communication in the drone area that our development that are carrying lower margins. So these are all water forming the foundation why of why I'm, saying with such confidence our future year growth.
<unk> is up into the right because we've been winning these programs, which means we're getting designed in on big potential production programs, that's what's causing the mark the margins coming down a little bit thus far.
And 'twenty two.
Just to add to that and win them.
Related to the supply chain and Covid impact for estimated for fiscal 'twenty to that's $20 million to $25 million on the top line and five to 8 million on the EBITDA line, that's having a pretty significant impact on some of our higher margin businesses, especially in our microwave products business. So that is impacting clearly <unk>.
And the margins there and then couple of other areas, but the most pronounced one is in our microwave products business there and that is that is impacting the overall rate.
Thanks helpful. That's it for me.
Great. Thank you.
Thank you.
Our next question comes from the line of Peter Arment with Baird. Your line is open.
Yes, good evening, Eric and Deanna.
Hi, Peter Hi, good afternoon.
Hey, Eric.
Can you talk a little bit about the.
Further outlook, if we think beyond 2022, I know the target business target drone business you had always thought would ramp through you know $250 million plus how do you think about that that business now outside of just the taxable.
Yep.
We're making slow methodical progress towards that the SSAT getting full rate production and now receiving that most recent production award is going to be an.
An important step for us that confidential program that is in L. Rip I wish I could give you more information on it I cannot that is heading toward full rate production, probably next year. Okay. The international contract that I talked about today. If you. If you recall I mentioned that I think a year.
And then I said this one has been tied up because of the change in administration with department of state.
We just got it okay. We have several others that we're expecting to get so those are all trending in the upward direction.
In the other direction.
We received about three years ago, a sole source $100 million just under 100 million dollar contract with the government agency for target drones.
I My opinion I believe for funding reasons with this service it has rolled out thus far much slower than I had originally expected. So that's kind of been going the other.
The direction.
Those are the details at the at the forest over the tree level.
The more and more new weapons systems that are being sold they need to be exercised against target drones and so the business. I think is just going to continue to move up and toward to do the right.
That's helpful.
Yes.
Yeah International contracted Eric's mentioning that has been delayed by about a year and now that we are we've received that award, though because of the revenue recognition standards, we won't see any contribution in 2022, because there's certain terms in our international contracts that typically are on them.
Revenue as it shipped rather than on a percentage of completion basis. So there will be no contribution in 'twenty, two but we will see that contribution in 'twenty three as we deliver.
Okay. That's helpful. Thank you and then just quickly on space.
Gross I am sorry, if I missed this earlier.
How are you looking at the growth there just given all the activity and how well you're positioned on the kind of redoing a lot of the ground stations and should we expect to see the margins continue to grind higher with from a software perspective yep.
Yep.
As we reported today, we just came off 19%.
And so.
I wish I was chuckling, because you know we do a one one book to bill ratio, but thats on a 19% growth rate.
What I mean, so it's where we're growing and we're booking a lot of work.
I believe this year and I believe in the next several months.
Certain customers are going to make some announcements.
Relative to Kratos.
And what <unk> is doing with those customers.
That are going to tie directly into where we see this business going over the next several years. Okay. We are.
Being first to market as you know is a key differentiator for us against the primes in particular, we need to be first to market to win.
Our space team at our satellite team they are incredible.
And being first to market with this software defined open space virtualization <unk> system.
This could be as significant as what we're going to pull off in the unmanned drone area. So I see continue up into the right as I and as I said in my remarks, it's not going to be as smooth as it used to be because these are multiyear hardware programs anymore. We're getting designed in and we're shipping more and more software so over.
In time margins are going to continue to increase and.
And the revenue trajectory is going to continue to be up until the right.
And all of that is being supported by those statistics I gave with which are just some of the the space and satellite market right now is ripping.
And our number one operational challenges getting the number of people to support it.
I appreciate it I'll jump back in queue. Thanks.
Thank you.
Thank you.
Our next question comes from the line of Ken Herbert with RBC. Your line is open.
Hi, good afternoon, Eric and Deanna.
I can.
Hey, Eric I, just wanted to start off with.
Sort of a higher level question.
Obviously in another CR, you're you've got a number of significant opportunities as you think about sort of your crossing this the valley of death as you think about.
Not only on the on the tactical drone side, but but engines in space in other markets how would you.
I characterize or maybe rank the opportunity of some of your markets from a timing standpoint, I mean should we still think about.
As drones is obviously the next maybe significant.
A significant catalyst or it sounds like maybe there's more opportunity near term on the space side I'm just looking for you to maybe sort of recalibrate the expectations here of the different parts of the business.
Yes.
I I.
Personally continue to believe that on the drone side.
We're going to continue to grow significantly up into the <unk>.
Up until the right I mean, the the.
The growth numbers that Diana gave for our tactical drone business, we bought from 30 million to 55 million to 75 million. Kevin. These are all development programs. These development programs are going to turn into production programs.
Some of them might be a single or double but some are going to be in my opinion a homerun.
And the flurry of public information.
Just one service the Air Force starting in my opinion last year in Q4 at the Reagan Institute and its been accelerating since then.
And with additional new programs.
We're clearly in the right place at the right time with the right products.
We're going to do it here this is going to happen and as I've said in my prepared remarks, when the customer is ready to begin serial production will be ready for them and I'm not going to get ahead of myself on when that will be I.
Hope its sooner rather than later and I believe it will be.
Our space and satellite business.
We are in felicitation on a number of programs right now.
Very large multiple tens of millions for kratos, if not more.
As I've talked about on previous calls the open architecture.
Approach that we've taken now and the non program of record centric approach, we've taken on ground systems for the entire market not a particular program.
Is enabling us to address an entire different aspect of the satellite industry, we were never able to address before.
Those bids are in.
And it's possible we'll be sitting here. This time next year and you're going to ask me that question and I'm going to say space and satellite and drones now are equal because they're both hitting it out of the park. So space and satellite is is right there.
What we're doing in the hypersonic area you haven't heard me talk about it much before I'm not going to talk about it much more than what I've said today, but we've been working on our own hypersonic.
Vehicles.
Systems.
And if we're successful.
That could be coming up in the next couple of years or so.
And then I see the engines are going to be a slow steady build we've received our first production contract I think by the end of the year, we're going to get another production contract and then a funding holds in the 'twenty three budget request, that's coming as I understand it's going to 23% and 24 could be breakout years for that business.
That's kind of how I see it playing out for US we've got a handful of horses in the race.
And and we're going to win some of these races.
Great I appreciate that Eric Thanks, and if I could apologize if you mentioned this earlier, but beyond that as we think about the capex investment in 'twenty two.
Can you just break that out by maybe either the segments or how we should think about some of the key sort of key initiatives on the on the capital side this year.
Sure so.
You said that the guidance. We gave is 55 to 65 that normal maintenance capex is about $25 million to $30 million.
What I would say the one offs or the nonrecurring or special items would be there's.
Approximately $18 million to $20 million related to the Valkyrie. So that's the continued build of the original 12, a lot and then there is build out to skip through secured compartmentalize facilities for our space business as well as our unmanned systems business and that's about $11 million to $13 million.
Kyle more nonrecurring and then there is about $5 million to $6 million related to the GBS D program. So those that should bridge you to what the normal recurring the 25 30, and then to get to the midpoint of our 55 to 65 Capex guidance.
Perfect I appreciate that thanks, Dan and thanks, Eric Thank.
Thank you Taylor.
Thank you. Our next question comes from the line of Austin Moeller with chemical White Your line is open.
Good evening. My first question is for Deanna I think we previously talked about we have a we know what the contract value is but it's expected for the development stage of GBS D, which is expected to ramp up in the second half of this year.
I was just wondering if you guys could put any ballpark around what we should expect.
The revenues of the ramp up in the second half of this year for hypersonic.
Unfortunately, we are limited in what we can say Gee do too.
N D. A that we're under so I can't comment I'm, sorry Austin.
Okay. My next question is for Eric So.
If we think about the current environment here with.
With <unk>, we've just.
<unk> discussed the several dozen air walls are currently being constructed the army of course has announced that they have it under contract. So would it be appropriate to think that one of the several drone new drone programs of records.
The.
Secretary Kendall has implied would be into fiscal year 'twenty three budget request might include a interval.
Austin, I'm, sorry, but youre going to be all for too.
I cannot talk about that I'm, sorry, I apologize I can't talk about this at all.
Okay. Thank you.
Okay.
Yeah.
Thank you. Our next question comes from the line of Joe Gomes with Noble capital.
Your line is open.
Yeah.
Good evening.
A lot here on the continuing resolution obviously that.
I have to deal with the federal government and I was thinking you know some of these programs that don't relate to the federal government and one that you know.
Popped out.
About a year ago, you guys were talking about your autonomous truck was in eight locations.
Eric you've seen have been very excited about it at the time and I'm. Just wondering if you could give us a little bit more of a update or some color on the status of that program.
Absolutely I'm glad you asked.
We have continued to make very important progress here.
As you know or as a reminder, our competitive differentiator here.
As we develop the technology in conjunction with the Dod to.
To convert previously manned systems like unmanned tank or a manned combat vehicle or a manned truck into an unmanned system or an unmanned robot a kit.
And for.
For competitive reasons I'm not going to give you the exact precise what we're doing.
But I believe in the next 345 months, we are going to make an announcement or two in conjunction with companies that are affiliated say with agriculture.
Or with mining.
And think of lots and lots of vehicles that are not crowded like on a highway so theres not certain types of approvals that we need where.
Where we are going to be converting these entities vehicles to robots to perform their work.
And in agricultural environment, where mining environment.
With with the wind at our tail here being it's these are very low cost systems, but also the trucking towards the driver shortage.
The driver shortage I read about it in the Wall Street journal, but its very acute.
In particular in the agricultural areas, where you need a bunch of drivers for a certain harvest period of time.
Which is a perfect application for our kits.
Uh huh.
I believe we're going to be talking about that if not when we announce Q1 I believe hopefully when we announce Q2 in <unk>.
This is going to be <unk>.
Exciting for us in our own little way.
Great. Thanks, Thanks for that.
And you know in the release you talk about how you know.
Factory revenues of about $11 2 million were being deferred into future periods last quarter. It was about 8.3.
Maybe you can just give us a little color on the timing of how long you think those are going those revenues are being deferred for.
Yep. The so I'll give you an example of an area.
Aluminum.
I have come to understand there are five aluminum smelters in the United States and they are booked out two to three years.
And so certain of these programs need aluminum we placed our order.
We bought internationally too I don't think I'm allowed to say, where we've gone same thing can't get it in for these applications.
Those are probably pushed out I'm going to state to 'twenty three.
That's one.
Another area in the satellite business and in the microwave business.
Is it a field programmable gate arrays F.
F P G as specialized ones for certain applications, we have we're getting quoted.
Beyond 12 months lead times now and here's.
Here's something that we've been dealing with that there's really nothing we can do about will have a committed delivery date.
Not a month before not two weeks before the week that we're supposed to get the delivery will get a phone call.
Can't get it to you will get it to six months.
So I'm going to say I don't think we're going to see much of this stuff until late second half of this year probably 2020.
Three.
Just because we can't get it.
Okay, great. Thanks for that I'll get back in queue.
Thank you.
Thank you as a reminder, ladies and gentlemen that star one to ask a question.
Our next question comes from a line of Pea.
Okay.
With all of its global your line is open.
Hey, good afternoon, Eric and Deanna.
Afternoon.
Hey, guys. Just so we're on the same page with regard to the CR, if we do get a full year CR.
Is it is it does the bottom end of your guidance kind of contain that scenario or is it likely would go below the bottom end of your guidance and that kind of scenario no one wants to contemplate.
I don't even want to think about this.
If.
You know I I, when I don't know something I'm going to tell you.
I don't I don't know.
I don't know with some of our programs, especially in the classified area would be part of reprogramming buckets.
What I mean that in the CR. They can do some reprogramming for mission critical National security, many of which were on that could help us.
I don't know, but but our target drone business, where we've won programs we've won contracts, but they need to be funded with 22 money.
Those would probably move to the right.
Certainly the tactical drone ones, where were transitioning from say development phase one to development phase II or otherwise those would probably move to the right.
I've I've read what Northrop has said relative to GBS D. In summary, not good so that would probably not be good for the whole team on GBS D C.
So.
Not good and I'll just leave it at that.
Yeah, No fair enough fair enough also had a question on them on a program I'm going to mispronounce many times are knees.
The $10 million to $12 million engineering costs for that program. So it's being capitalize it sounds like it's going to flow through cash flow this year, but it won't be much of an EBIT impact this year to spend on it is that correct am I understanding that right.
So that that go ahead, yeah. So that is not the same program that was referring to the nonrecurring engineering, that's a different program.
Within the same hypersonic bucket is that right.
Yeah, Yeah, and the same rocket system propulsion.
Okay.
Yes, Sir okay.
Same question now its being capitalized, but we won't see much of an EBIT impact this year correct.
Correct correct correct.
Because we own we own the systems, we own the technology there their hours that's correct.
Okay.
And then how are you guys thinking about whether it would be.
Named system or <unk>, how do you think about the market size there.
Do you need to win a competitive award or are you something.
Something that.
Our government customer is really kind of targeted before can you give us a sense for how big and how near term those opportunities could be.
The hypersonic area.
Is one of the.
Best funded highest priority national security areas of the United States today and for the foreseeable future.
As a result of what the.
Russia, and China are known.
There are.
Hypersonic offensive systems or a hypersonic.
Defensive systems, there, a hypersonic test and evaluation systems all of these systems.
Our needed now.
Now.
As you may have seen the secretary of defense called the summit.
Certain key team members to the I think to the Pentagon it turned out to be a virtualized meeting on.
Relative to hypersonic.
<unk>.
This I don't believe that this will be the.
<unk> opportunity size, the Tam total addressable market for us that the drone business is going to be.
That space and satellite business is going to be I don't believe that I do believe.
It could be attempt to 50 $10 million to $50 million a year of high margin business for us because of the nature of what we're doing which I can't talk about.
Okay. That's great that's great I appreciate it and last one for me the international <unk> contract that you guys. Just finally got can you size that and can you remind us how big that is and over how many years do you expect it to be.
It's approximately $25 million.
Okay.
And it's over a few years.
Okay.
That's all I can say.
Okay. Thanks.
Thanks, Scott, but but but similar to the other other the important I want to emphasize this that every chance I get I want to emphasize this.
These target drone programs.
Part of the initial buy.
Is the launch equipment, the flight control equipment the recovery equipment.
That's the razor.
And the target drones get shot down and Thats the blades and that's why these are all so important and tie into that $250 million ultimate target no.
No pun intended objective that we're driving towards so every one of these are critically important similar to the new Saudi and Japan target drone.
We got with the United States Navy.
Perfect. Thank you thank.
Thank you.
Thank you.
Our next question comes from the line of bound Sam Staff Seeker with choice Securities. Your line is open.
Hey, guys on for Mike Mueller here.
Thanks for the time I was just wondering and apologies if I missed this earlier if you guys could provide any additional details on the revenue contributions for the two acquisitions and maybe a little bit additional detail on I know you said the margins would improve moving forward, but it would be more accurate timeline or just detailed you can provide around that as well thanks sure sure.
So for the full year, the acquisitions are expected to contribute about $45 million in revenues and one and a half to $2 million of EBITDA.
And then for the first quarter $10 million to $12 million of revenue.
And on the second part of the question Sam on Cosmic we expect to start seeing margins increase in 2023.
Yeah.
Great. Thank you and then one additional question if I could sneak it in is regarding labor I know you guys sort of absenteeism was an issue I'm, assuming just related to Omaha and people being out sick, but do you guys see any additional issues with that moving forward past first quarter of this year or do you feel pretty confident where you sit.
Based on the way things are trending for us right now theyre getting better.
So if things don't go go sideways on us.
We should be in pretty good shape.
Beginning of Q2 April ish, we should be in pretty good shape.
As I indicated when I was talking about the space business, our number one operational challenge.
Is hiring people for the programs we're winning.
And I know, it's not just credo, that's an industry wide issue.
But in the unmanned area in our space and satellite area.
Our hypersonic area, our rocket system area.
We're really putting our best foot forward to obtain the right people in many cases that have the right clearances or can get the right clearance to execute these programs.
Great. Thank you.
Thank you.
Thank you.
I'm showing no further questions in the queue I would now like to turn the call back over to Eric for closing remark.
Thank you all for joining us and we will see.
Speak to you when we report.
Q1.
Have a good afternoon.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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