Q1 2022 Kratos Defense and Security Solutions Inc Earnings Call

May 5, 2022

Welcome to the Cree toes defense and security solutions first quarter 2022 earnings Conference call. My name is Daryl and I will be your operator for today's call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. During the question and answer.

If you have a question. Please press zero one on your Touchtone phone as a reminder, this conference is being recorded I will now turn the call over to Marie Mendoza Senior VP and General Counsel Murray you may begin.

Thank you. Good afternoon. Thank you for joining us for the defense and security solutions first quarter 2022 conference call.

With me today is Eric Demarco, <unk>, President and Chief Executive Officer, and Deanna Lund, <unk> Executive Vice President and Chief Financial Officer.

Before we begin the substance of today's call I'd like everyone to please take note of the Safe Harbor 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 line as we discuss future strategic initiatives potential market market opportunities operational outlook and financial guidance during today's call.

This call will also include a discussion of non-GAAP financial measures as that term is defined in regulation G. Non.

non-GAAP financial measures should not be considered in 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.

I will now turn the call over to Eric Demarco.

Thank you Marie good afternoon.

Since our last report to you.

<unk> been several positive developments for the industry and in particular for Kratos.

We'll go through today, and which provide additional confidence in this year's financial forecast and the future outlook for your company.

As we had planned for in our 2022 financial forecast for 2020 to Dod budget was approved in March.

It was important for a number of <unk> programs that are in or are transitioning from development are in low rate initial production and transitioning to full rate production or which are in production and had planned for increases to that production.

Q1 book to Bill ratio was low as expected as we were in the middle of a six month CRA.

However, coming off of tradeoffs as Q4s, one 5 million to one book to Bill ratio, our Q1 bookings and combined with what I will discuss today substantially all of Kratos as 2022 revenue in our financial forecast.

Is now either under contract or there is funding in the 2022 budget and we are awaiting contract.

Where we have been informed that we have been selected and we are awaiting contract where.

Where we expect to receive the contract.

So highlights in the 2022 budget related to create those include in.

And the tactical drone area and related to <unk> 2000, 2020 cradle to 2022.

The 2022 budgeted funding areas, which are not classified in which I can discuss include approximately $160 million in aggregate funding for Skyboard Obs S attributable.

<unk> Air combat operation.

<unk> add air UX, and very importantly funds.

Funding for a new <unk> tactical drone customer, which we now expect to be under contract in the second half of this year and expect to be providing several cradles valkyries too in the future.

I will reemphasize that these are non classified publicly available areas only and importantly, the initial funding amounts in the 2023 budget. In these areas are currently expected to be substantially greater based on the initial request than these 2000 22022 amounts I just one.

Through with you.

Additionally, the Air Force has stated that many of these current programs initiatives and related technology areas will be feeders or transitioned into certain new additional tactical drone programs that have now been announced and we are very excited about this as the momentum for <unk>.

Low cost high capability force multiplying drones is clearly accelerating along with additional and increased funding.

We're also excited that all of the services and in particular, the air services elements of the services are now moving towards affordable mass, including low cost attributable autonomous drone systems.

Included as reflected in the 2022 budget, the 23 budget request and the fight up.

And Craig dose with a family of affordable attributable jet drones flying today.

With others in development and with Credo as having several active production lines producing approximately 150 aircraft annually is positioned to immediately address is expected to be very large new market area.

With the release of the 2022 budget. The 23 request in the fight up we have made the decision to maintain the current Valkyrie production run at 12 aircraft for now.

Certain of which Valkyries are complete and our emission system integration and flight preparation with the customer.

Also based on recent events, including communications from the Pentagon and in close coordination with the cradles customer. We are now leaning forward with the Credo Ghost works resources on an additional new tactical jet drones, we are under contract for in order to maintain the schedule for this program for the customer Rick.

Quest.

<unk> Ghost works also continues to work on several important initiatives, including one which is specifically targeted at a certain competitor based on information we became aware of and once we are complete we expect this initiative to become an important and significant additional advantage a differentiator for creators.

Additional important funding in the 2022 budget directly related to <unk>, and our 'twenty, two financial forecast and future year expected future growth trajectory.

<unk>.

Funding for Kratos as U S. Navy that EQM 177 target drone program, which is ramping production with the <unk> program expected to be one of <unk> largest programs for the foreseeable future, which is a key element of <unk> Q3 to Q4 sequential 2022 revenue and profit increased financial forecasts.

Last in the second half of the year.

We now expect a large additional <unk> production program contract later this year.

Funding for the United States Air Force apps at EQM 167 target drone program also one of our largest which also is a key element of our 2022 financial forecast and second half.

Funding for a confidential program in our unmanned systems Division with this program currently in low rate initial production and which program is expected to transition to full rate production with increase in quantities and where we are now expecting an additional production contract award and our significant financial increase in the second half.

This year.

The 2022 budget included funding for GBS D, where Northrop is deployed under which program. We are forecasting a significant ramp up in increase for kratos in the second half of this year with <unk> expected to be one of <unk> largest and fastest growing future programs.

GBS D is currently a greater than $200 million Credo program. It is just beginning and it is one of <unk> biggest expected Q3, Q4 and future growth drivers.

Similar to GBS D. Other large expected to be multibillion dollar strategic programs of record that Kratos is supporting that.

And that <unk> is now under contract on or we expect to be under contract on very shortly include Fad I Bcs.

Yes sure Ed.

<unk> hundred 53.

TPS, 77% and FPC with our strategic partner light OS in diabetics.

The 2022 budget includes funding for Kratos as rocket systems business, including for our new Zeus affordable launch system and related to <unk>, New Aeron. These hypersonic vehicle, which are progressing toward initial flight.

Light cradles of tactical drone systems, where we are leveraging off of our target drone business and experience and where we believe our drones are the highest performance drones in the world <unk> Hypersonic initiative is leveraging off of our industry, leading affordable rocket launch ballistic missile target systems and previous hypersonic.

Graham experience to rapidly develop and deliver to the customer a complete affordable hypersonic system capability.

Great doses rocket systems business is also engaged with hypersonic and Australia, which recently received its funding and the dark hypersonic drone vehicle.

And our rocket business, we have several launch missions currently scheduled to end in backlog and we are forecasting additional future missions to be committed by customers throughout 'twenty two.

The 22 budget also includes funding for certain <unk> directed energy laser system initiatives and programs, which kratos products and systems are part of our expected financial ramp in the second half of the year.

As I mentioned in addition to the 22 Dod budget being approved the initial 23 budget request was released which included substantial increased funding for hypersonic tactical drones GBS D of strategic deterrence missile defense space and satellite systems microwave electronics and <unk>.

<unk> are all of course core kratos business areas.

The global recapitalization of strategic weapon systems has continued to accelerate including as a result of the Russian war in the Ukraine and as we have discussed with you for quite some time, we believe that <unk> is uniquely positioned for this strategic system recapitalization.

<unk> unique positioning for the recapitalization of strategic weapon systems by the U S and our allies.

Includes credo as being the industry leader in affordable targets and target drone systems, which stimulate adversary missile aircraft drone and other threats, allowing our forces weapon and other systems to engage in meaningful defensive exercises.

We expect credits as target business to continue to grow in the future and related to this growth. We have recently been informed that we will be receiving a sole source new approximate $100 million drone related contract, which we expect to receive later this year.

We are also currently in pursuit of three additional brand new targets related opportunities, including as related to potentially new peer adversary missile and other airborne threats that have been identified.

To be satisfied in Q2.

Once the close of the acquisition of Sras completed <unk> will be the industry leader in the study analysis assessment Technology review and testing of special an exotic materials for weapons in space system applications, including Hypersonics and strategic deterrence systems.

Simply stated substantially all exquisite or exotic weapons in space related systems utilize special materials that need to do special things.

And SRV positions cradles directly in the center of virtually all of these past president and future and substantially all of US are he's workforce is highly classified.

In 2021 S are regenerated revenue of approximately $30 million. So unexpected with an expected June to close this year's financial contribution of SRA cradles is not expected to be significant however.

Once integrated with creative and based on certain funding in the 22 budget that was just approved and what is expected to be included in the final twenty-three budget and the incredible U S National security focus on Hypersonics strategic deterrence in space related systems, we expect to 20% to 23 over 2022.

And future year over year revenue and EBITDA growth trajectory can be strong with expanding margins for us already.

That's already will be integrated into <unk> rocket system hypersonic business and once the transaction, formerly closes we will be able to provide you with additional information on the business of some of the programs.

Great lessons microwave electronics business continues to have a near record or a record backlog, including in the space and satellite areas with substantially all of 20 twos forecasted revenue currently in backlog.

<unk> space satellite cyber business, our company's largest continues to see customer acceptance for our first to market virtual software based open space satellites, <unk> and <unk> and see ground system.

Including one web which create US is now under contract with to deliver an advanced spectrum monitoring system to monitor analyzed and review spectrum to support high quality of service for one webs fleet of low Earth orbit satellites.

The space and satellite industry and market continues to experience significant growth and expansion with growth is expected to continue for the long term and we believe cradles his industry, leading ground infrastructure systems products software and technology uniquely positions cradles to participate and rapidly grow in this area.

Accordingly.

In addition to our one web contract award.

We have also recently just received an additional very large and extremely important new satellite program Award, where <unk> is the prime which we hope will be announced shortly and.

And Additionally, we have just been informed that we have one and should receive in Q2, two additional large brand new space program opportunities.

The potential unexpected combined value of just these three new programs to create OS as several hundreds of millions of dollars of revenue over the program periods.

Each of these opportunities include cradles as open space virtualization technology with a significant software component with each of these being included in our forecasted Q3 and expect a significant Q for revenue EBITDA unprofitability increases.

Our space satellite and cyber businesses in absolute critical element across achieving our financial objectives and expected industry, leading organic growth trajectory.

And the four new programs two of which we have received including one web and to which we have been informed by the customer that we have one and then we expect to receive in Q2. We believe is just the beginning of an incredible disruptive technology growth trajectory for this business and significant value creation for creators of stakeholders.

<unk> turbine technology and engine businesses continue to progress with our turbojet turbofan engines for missiles drones empowered munitions similar to other cradles businesses. The recapitalization of strategic weapons systems to address peer threats and the need for jet drones, new improved longer range and more powerful cruise missiles.

<unk> and powered munitions also including extended range are well funded priority areas, including in the 22 budget and the twenty-three request.

<unk> engines, which are running today are designed it on several new missile and drone and powered munitions systems and we are working to be designed and on several other systems and programs and we continue to progress from development and test quantities to expected future cereal production.

With the execution of the 2022 defense budget, we now expect to receive in the next few months and approximately $50 million sole source contract for next generation affordable engine technology in drums.

Also.

I am able to announce today that K T T. As a key member of the Rolls Royce team for the recapitalization of the B 52 bomber fleet engines are reported 2.6 billion dollar program and that Cradles has now received its contract from Rolls Royce, which is expected to be one of katie's largest programs and which is one.

The key elements of <unk> 22 financial forecast.

In Q3 Q for projected sequential growth is this new large programme ramps for creators.

Additionally, space systems rocket engines, and hypersonic related systems are also providing a growth market opportunity for <unk> turbine technologies with the space propulsion area being one of the fastest growing and K T T.

We are under NDA now with several of these space customers certain of which are the highest profile space companies in the industry, where kratos is currently under contract and providing products and solutions for their mission success.

From a business opportunity in total addressable market perspective, <unk> opportunity pipeline has never been stronger and we continue to receive or be informed that we will be receiving new or additional program or contract awards, many of which are single or sole source.

Across the company. We're currently in pursuit of her and source selection on several program opportunities certain of which we expect to hear on in the coming weeks and months and if we are successful will be important catalyst for <unk> and position of for even stronger future organic growth.

<unk> affordable product and system in technology portfolio. We believe is second to none in the industry and is a key reason why we expect to generate industry, leading future year organic growth with a ramp beginning in the second half of this year.

Simply stated we believe that credo strategy has enabled us to have the right products and technology addressing the right needs and missions and requirements at the right time, all at an affordable cost.

And on affordability, we believe that affordability will be of increased importance in the future as an increasing amount of U S. Defense budgets are needed for the recapitalization of the strategic triad, which is occurring right now and which will be continuing for the next several years and at the Pentagon continues to embrace quantities of systems.

As well as technological quality to address both Russia and China.

Operationally, we are focused internally and an execution, including is related to the 2022 budget being recently approved in March and so we are now working with our customers and contracting offices for <unk> to get under contract and received funding as quickly as possible in order to achieve our customer related contractual and find.

Cancel objectives.

This is of particular importance for <unk> based on satellite business. So we have received or have been informed that we will be receiving or expect to receive several significant new program awards, which are a key driver for second happened future forecast and our signature and are expected significant future year over year organic growth trajectory <unk>.

Supply chain in Covid related including customer employer employee supplier on other issues have continued and are expected to continue for the foreseeable future.

Additionally, inflationary pressures are increasing including with suppliers and the workforce, where <unk> is doing what is necessary to both retain an uptake employees by paying more in increasing salaries and compensation.

Which is impacting our near term margins, including Q1 and Q2, but obviously we have to do this and we have to do what is required we need a qualified workforce and the team in place to execute.

Also is tradeoffs is primarily a product company with the vast majority of <unk> contracts and programs being firm fixed price our ability to pass cost increases onto the customer in the near term is limited under existing contracts or priced options, which is currently impacting us, including Q1 and Q2.

But we have included cost escalations into the new bids and new or unpriced options, new opportunities contracts and programs, which we expect to begin mitigating this impact in Q3.

Like all companies in the industry, we are managing our way through these issues most of which are now expected to continue for the foreseeable future.

Okay and closing.

The industry now has a 22 budget twenty-three budget request in a fight up each of which are favorable forcados, including in the drone space satellite and strategic deterrence areas.

Irrespective of the macro challenges industry and cradles are facing the success of <unk> strategy is now clearer than ever with the core cradles product and technology focused national security business positioned in a macro growing market with significant budgetary increases expected for the foreseeable future.

Well <unk> core business is generating significant revenues and EBITDA.

And where we are also positioned transformative potential future growth with industry, leading products in space satellites, and drones, which cradles growth trajectory, we expect to begin in the second half of this year.

And to continue thereafter.

I will turn it over to Deanna.

Thank you Eric Good afternoon, as we have included a detailed summary of the first quarter financial performance and financial guidance in the press release, we published earlier today I will focus on the highlights in my remarks today.

Okay does this first quarter 2002 revenues of $196 $2 million, which at the midpoint of our estimated range of $190 million to $200 million.

We achieved the midpoint in spite of continued and increased COVID-19 related supply chain and other delays, which impacted revenues by $15.3 million during the quarter.

With the most significant impacts NRC, five ISR and our international commercial Satcom businesses.

R Q1, 22 consolidated operating loss was $1.2 million compared to operating income of $4.9 million in the first quarter of 21, which includes first quarter twenty-two increases in R&D at $1.2 million, primarily an unmanned systems business, an increase of 800000 and non-cash stop compensate.

<unk> expense and increased SG&A cost of approximately $5 million.

Primarily resulting from a recent cosmic aas in CPT acquisition and to a lesser degree reflecting at $1.1 million increase.

Business.

In particular total had counting our unmanned systems business has increased 70 foreheads from 842 and Q1 of 21 to 916 in Q1 of 22, which reflects anticipated year over year go out.

Net loss was $15 $9 million by the first quarter of twenty-two any gap lots of 12 cents per share compared to net income of $1.9 million in the first quarter of 21 and gap EPS of one cents per share.

Included in the first quarter net losses.

13 million dollar charge for debt extinguishment related to the redemption at the company, 6.5% senior notes during the quarter.

We generated adjusted EBITDA at $13.8 million for the first quarter exceeding the higher end of our expected range of $10 million to $13 million.

Unmanned systems segment reported revenues of $52.6 million in the first quarter of 2000 to.

Compared to $55.9 million in the first quarter of 21, primarily reflecting the current expected production ramp and cycle on certain programs.

Kgs reported revenues of $143.6 million in the first quarter of twenty-two compared to $138.3 million in the first quarter of 21, including contribution of $14.7 million from the recently acquired Cosmic 80, Atkins GTT entities offset partially by the loss of an international <unk>.

<unk> contract, which contributed revenue of $8.3 million in the first quarter of 21.

Q1, 22, kgs revenues unfavorably impacted by continued and increasing supply chain COVID-19 and related delays and disruptions.

Which impacted current quarter revenues and favorably by approximately 14.6 million at these <unk> revenues would defer to future period with the most notable impact in a commercial satellite M C. Five ISR businesses.

As expected first quarter 2002, operating income and adjusted EBITDA for unmanned systems and Kgs included and make some more development base revenue, which I typically lower margin and due to less leverage on fixed overhead manufacturing SG&A and development infrastructure.

Q1, 22 cash flow from operations with the use of $7.9 million, including it used by the increase of inventory balances of $15.3 million during the quarter, primarily in our satellite microwave electronics.

ISR businesses in anticipation of the ramps and production in the second half of the year and in part to advance inventory levels in an attempt to mitigate the impact of supply chain disruption.

A contract mixed with a quarter was 68% fixed price 2007 per cent cost plus 5% time and material.

Revenues generated from contracts with the U S federal government during the quarter, where approximately 71%, including revenues generated from contracts with the D. O D 90, federal government agencies and Fms contracts.

And Q1 of 22, we generated 10% of revenues from commercial customers and 19% from foreign customers.

Our backlog at quarter end with $982.1 million compared to $953.9 million at the end of Q4 21 with consolidated bookings of $198.2 million in a book to Bill ratio of one to one for the first quarter of 22.

Funded backlog at quarter end was $685.7 million with $296.4 million I'd find it.

The 12 months ended March 27th 22, Ah consolidated book to Bill ratio, which 1.1 to one with total bookings of $873.3 million.

Moving to financial guidance.

A second quarter 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 emulated expected price increases and other COVID-19 related items that have or are currently impacting industry and create.

It is.

Throughout the first quarter create us experienced a significant increase in the intensity and effects of COVID-19, and the related impact to our employees absenteeism consultants vendors suppliers customers et cetera, which impact included loss of weeks of manufacturing and production functions in or unmanned systems C. Five ISR.

[noise] microwave products business.

We have assumed that these COVID-19, and supply chain related impacts to our business, which significantly impacted our fiscal first quarter twenty-two operation will continue to have a similar impact in the second fiscal quarter of approximately 15% to $17 million in revenues in $2 million to $4 million and our adjusted EBITDA.

We currently expect the situation to improve significantly in the third quarter.

As a result of each of these factors. We have discussed we are forecasting approximately flat organic revenues for our second quarter 2002 revenues at the higher end of our estimated range compared to 21, excluding the expected contribution from the recent acquisitions of C. T T and cosmic a yes.

<unk> $10 million to $30 million in revenues offset by the loss of the international training contract, which contributed approximately $5 million in revenues and Q2 of 21.

This should be the last quarter of headwind, resulting from the loss of this constant track as it was completed in the second quarter of last year.

Our quarterly or Cassidy. The top performance has also impacted by these industry in Tel Aviv factors, including our inability to realize leverage on our fixed SG&A overhead manufacturing and research and development costs, particularly in our first and second quarter operating period.

Additionally forecast this second quarter EBITDA is further impacted by our expected mix of revenues, including an increase mix of lower margin development programs and international commercial satellite hardware programs and unexpected lower volume on the higher margin software solution deliveries, which are expected in the second half of 22 with and expect.

Ramp and the third to the fourth quarter based upon contracts, we have been awarded or happen important we will be awarded.

As we continue to transition are spaced on satellite business from a hardware to software focus solution. We believe our financial performance will tend to be more and lumpy and more sensitive to delivery schedules.

As we mentioned last quarter, we will continue to monitor interest rate since Ah refinance facility is based on a floating rate of sofa, which is a replacement of LIBOR.

When certain adjustments, which is currently approximately 2.5% the rate is adjustable so we will monitor the market closely.

To determine if hedging it would be beneficial in the future, especially since rates have recently increased.

Very good thank you Diana.

We will turn it back over to the moderator for any questions.

If anyone has a question it's zero one.

Then one.

And if you wish.

It's zero two our first question comes from Sheila.

Go ahead shoot.

Mmm.

Eric how are Ya, Indiana.

Hear me ma'am, yes.

Yes, Hi, Sheila.

Oh, just talking about maybe you're sending out <unk> <unk>, what's happened in Ukraine.

Well position from a macro per second.

You know what you're seeing in terms of future orders, what part of your portfolio.

The right now are the two best positions or the drones.

Based on satellite communications.

They are.

Really really well positioned.

A very close card charging third.

As our combat system R C five ISR business.

The.

The book of business, we have the orders I think we're going to win over the next 306 12 months on very large program of record weapons systems.

Is significant.

So those are the three.

That that sounds super helpful.

<unk> I'm guessing you don't sell any internationally right now not how do you think about the actual pipeline for that and the ability to sell internationally.

Right and the target drone area, we have multiple international customers. So we have relationships with the customers that would either be you'll be related to the tactical drove customers internationally.

So we we have a significant international business at any one point in time, but with five to 10 different international customers were right now delivering a significant number of drones internationally I'm hopeful we we have one more box to check and we're going to be able to report a brand new multi tens of millions of dollars new international.

It will target drawing customer hopefully in queue do.

So we we.

We're very comfortable with our international positioning on both the target and tactical drone side.

Okay and then what.

Ram significantly as <unk> 2022 guidance in a second half.

The biggie the jumped mine right off the bat is Gbs's D.

Now that the budget is in place or a partner Northrop is phenomenal.

It is looking very very significant also coming to mind those programs I mentioned those based on satellite.

I mean, the one the ones that we received a contract on the two other ones that we've been told we have one and we're going to be receiving the contracts and cute too.

The the ramp is significant.

And as I mentioned in the prepared remarks, a significant part of these as open space of software based.

Which means should be significantly higher margin, which is why we're looking at significantly higher margins what are the reasons and the.

The second half of this year.

Okay. Thank you so much.

And our next question comes from the <unk> go ahead Sir.

Oh, thanks, Thanks, very much and good afternoon.

I guess on but following up on an open space, maybe Eric if you can refreshing for a little bit can you tell us a little bit about how how the procurement are made there I.

On the government and civil side and kind of what the process is like for forgetting spect in and then kind of what the Simpsons.

Software defined kind of what your relationship is with the customer kind of through the process and kind of you know how we could think about a product like open space you know gaining share over time does it happen and kind of you know big leaps is it is it like a gradual.

Improvement, where where where are the where's the most target rich environment in terms of I'm seeking out new customers, including on the on the government side.

Yeah absolutely.

So.

Clearly for us.

New satellite constellations new operators.

Is the greenest field opportunity for us versus trying to get into an established constellation with established traditional legacy fixed ground equipment.

The multiple new constellations that are going up.

Military.

Other security related.

And commercial is significant.

And as I've gone through in some detail before and I'll just touch on lately here and the way I analogize it.

Here to for the vast majority of the satellites that went up are in geosynchronous orbit. So there are like 22000 miles up there up there depending on fuel for 15, 2025 years and the ground equipment that.

Typically the traditional prides wood wood.

Provide that put up the satellite.

It was like a two G cell phone network 20 years ago.

It's hardware based racks of switches racks of equipment that cetera, et cetera, and those those those traditionals had no incentive or a disincentive to try to innovate anything because they didn't want to disrupt our vendor lock position on the hardware on the ground that was all technology.

And that's their mindset and you know their program of record focus they chase program of record.

And that's how they do things, we we brought in a bunch of.

Commercial based technologists, including from the terrestrial cell phone area that had done five G networks for example.

And in my analogy, we have taken the traditional two G infrastructure on the ground that hardware based and we have virtualized into a five G software based.

Operating system I know the guys open space to your iphones operating system, we built an open space operating system for the ground infrastructure for satellites and now we're taking the applications, which also we're all hardware based I think of a modem and where software basing them. So software apps to run on the software ground equipment.

That we are providing to new operators.

And I've gotten I've explained to you before it it can be location based it can also right on the web, which which is an incredible from an efficiency standpoint, but also from a distribution of the assets and protection and the National Security standpoint.

It's an increase it's just an incredibly new technology, that's open architecture open space and that that new <unk>.

Operators.

New constellation dies.

That's what they want.

And and right.

Right now.

I am incredibly pleasantly surprised at how well our team is doing.

And I believe if certain of these awards that we one can be announced and they are announced.

I believe the industry is it's gonna be it's gonna be very impressive to the industry, who these guys are we've locked up.

Okay. Okay very good and then one follow up for me you know now that Secretary Kendall speaking of programs a record has talked about wanting to establish.

Unmanned tactical Theron programs of record, but that would be in the classified round I guess you know how how are we going to without a odds skybord vanguard outline I mean, there is still a skybord vanguard line in the budget, but if that's not going to be where the bulk of the activity is kind of how can we.

Sort of.

Keep keep up with with what you guys are doing.

So.

In the in the non classified area kind of what I tried to do today, because I'm trying to be as well as open as I as I, possibly can and I will continue to do that.

So if you are exactly right. The what the secretary has talks about in those programs. They are they are they are at a significant classification level.

And so my answer to you right now is <unk> will say nothing.

And we're going to wait and see how the government.

How they lead this.

And we will follow that lead.

That's all we can do out of respect obviously for national security and the secretary, but what what the Secretary is doing is is phenomenal.

It's incredible what he's trying to do here [laughter], including goes directly related to <unk>. If you could see me on smiling and I hope he keeps it up and I hope he successful because I think it will be very very good for the United States of America.

Alright, Thank you very much.

Yep.

And our next question comes from Mike Crawford Go ahead, Mike.

Thanks, I I think one web as in the trailing bookings as of March $314 million traveling bookings in the in the prior year in in March 31st but.

The three new large open space contracts that are received are expected to be received that could generate hundreds of millions of dollars once the duration of those contracts.

Be thinking about for those future revenue.

Typical government contracts are three five or seven years.

Okay.

Mmm.

Switching to drones.

Sure.

Have you started the second.

You said you just stick with the initial.

Oh a valkyrie.

Correct, we have not started the second we are we are sticking.

With the initial I emphasized for now.

That that could literally change the next time, we we.

We speak with you.

Mhm I I think it's been about a year, where we've been.

And anticipating the potential like red or adversary.

Purchase order is that something that's still on the com or is that cooled off at all.

Oh no.

Contrary.

In the.

In the budget.

Specifically.

You can see a line, it's called adversary Air unmanned open trend add Air U X.

And and the the.

Twenty-three request.

There is $67 million for it.

So it's common.

Okay, that's great and then Eric do you have these.

10 definitely drone systems find today in these.

Potential transitioning of kind of these testbed <unk>.

Programs.

Moving towards production, but do you anticipate that those are going to move into production with essentially the same so it'd be the airplanes and systems that you've developed today or do you think it back into more again in other words, no Valkyrie B a high production run product or was that gonna be some future generation.

Awesome Zachary.

I'm thinking.

What I can say what.

Confident that Valkyrie is going to be very I should answer it this way like I'm I'm confident as ever Valkyrie is going to be very very successful that I should leave I should leave it at that.

Things Pan out the way I think they're going to pan out.

Customer I believe I'll be able to add additional information to that next time, which we chat but.

I have I have very high expectations for Valkyrie success.

Just <unk>.

Feel free to not answer if you shouldn't but is that the same for santos or for any others or there's some that that's not the case.

Oh.

Definitely.

There are.

As as I indicated on the last call.

There are certain of the programs that are being combined.

Or they are not being they're not funding priorities as.

As a result of in my opinion that this is my opinion and my opinion as a result of the two new drove programs the Secretary has announced.

And where he has set certain existing programs and he's mentioned skybord. He he's mentioned El cat. He's mentioned various things they are going to be feeders, and they are going to be.

That into the technology is going to be transitioned to Federer combined with these new ones.

And so as I said before certain of the ones that we have been working on I believe my opinion, they will they will wind down or transition into something else.

Okay. Thank you and then just last question.

You're talking about K T T a little bit but could you.

You just.

Update us on the status of.

Potential material Ram Mmm.

Both low cost disruptive jet engines.

As well as.

Actual working hypersonic jet engine that has that that's proprietary printers.

Yep.

We have very good clarity on the former the first one you mentioned.

So for our engines.

Being designed into.

Arab breathing cruise missiles.

Air breathing drones and air breathing powered munitions.

I as you know we announced in the last quarter or two that we were beginning limited production on a new system of someone.

I am hopeful that by next year.

We could be in El Rip.

On one or two.

Expected to be high volume.

Systems in that class I just mentioned so.

As optimistic as ever that our our.

But.

Engines on our engines businesses engines and the drone.

Missile in power administering areas are going to be very very successful.

And the hypersonic area I can't say a lot of <unk>.

Our group and K T T.

That is specifically focused on space based engines, which include hypersonic.

Vehicle engines is one of the fastest growing businesses.

And K T T.

And it would grow even faster in my opinion, but we are resource limited, which is a theme across cradles right now and when I say resource hiring the people so.

So the opportunities are there.

But.

Subsoil be much much more limited than what I can say that on the engine side, but but that business is going to be very robust up just because of the funding levels at the macro level that are going on.

Oh, Thank you actually if I can sneak in one more can you you're talking a little bit about the revenue in sorry, and I believe you're paying 80.

<unk> what does that have.

Is that a 10% EBITDA margin business or.

Because.

Because it's not closed yet Mike I have to be very cautious.

And so when it when it was I had set my prepared remarks, when it closes them I will absolutely put out more information, but I don't want to disrupt anything with anybody right now.

Alright, great. Thank you.

Nope.

And our next question comes from <unk>.

Herbert go ahead can.

Yeah, Hi, Thanks, Good evening, Eric and Deanna.

And even Eric.

I wanted to ask you first of the fiscal twenty-two budget that was finalized you call about $160 million for a number of the tactical programs that are but you can talk about based on the twenty-three request and what you think could happen to the 23 request as it moves through Congress, where does that hunter.

60 go and fiscal twenty-three.

Right and so my my my rough remember of where those items I mentioned for 2002 for twenty-three.

It goes it increases to like $200 million.

So it goes from like 150, 160 to 200 or 210.

And can I want to reemphasize again those are those are currently the unclassified lines that I can talk about.

Yeah.

Okay do you see any of your particular programs I know they tend to enjoy pretty good congressional support put any of that you'd call out as as perhaps.

With better better potential for upside relative to the fiscal twenty-three request.

I think I believe that I believe it.

Fiscal twenty-three request in that final budget comes in as I'm anticipating.

The Valkyrie and this ties into Mister Crawford's question that Valkyrie is finally is gonna hit his stride.

I see that.

If we're successful.

On base two of Obs's us.

<unk> well could.

Could be will be if we're successful in phase two very significant for us.

In 2003.

And if.

And.

Less confident because I just have to see how the chips are going to fall in that area.

Okay, that's great.

And if I could just one more you you know you've got it sounds like there's a few contracts dewberry confident in specifically on the space side that are important to the full year revenue number is there is there any way coming out of this quarter to maybe talk about.

Of the sort of of the fiscal twenty-two or the 22 died how much is currently in backlog or maybe work with the risks in terms of timing as you think about.

The revenue expectations that are not yet under contract.

Right.

As I mentioned and as you said on the space I'd, we've we've been.

Informed we have one when we will receive.

Two two large cause we received one.

We've been informed we are going to receive two or more and no later than the end of June .

I fully expect that to happen.

To your question, assuming that happens I expect it's going to happen when we speak with you.

At the end of Q1 excuse me at the end of Q2.

I hope of what I'm going to be talking to you about is we are laser focused on execution in hiring and retaining the people to execute the programs.

Because that is a big challenge right now.

Personnel.

Obtaining and retaining people.

And it's it's it's both on the government side and a commercial technology side people and.

Space and satellite communications and rocket engines and space ships are in are in big demand right now.

Okay and are these commercial contracts.

Revenue recognition like per cent complete such that if you have a hard time, just ramping up with people that would obviously be a headwind from the revenues.

It is that's going to be a piece of it can in some of that is going to be software as well so it's going to be a mix.

Okay.

Alright, well, thank you very much.

Yep.

And up next we have Austin Mahler go ahead Austin.

Good afternoon, Eric and Deanna. So my first question here.

Think about 2022, just a broadly summarized.

What sort of the printing here most of the revenue growth opportunity.

In the latter half of the year is sort of around Northrop sent mall missile and nuclear warhead transporters open space and target drugs and then most of the margin and EBITDA growth opportunity views around open space in the Virtualized back home equipment.

Yes.

Yes, Sir you drilled it.

Okay, perfect and then.

I understand the factoring in con cost escalations into the new contracts or what is giving you.

Confidence that your expectation for a second half twenty-two recovery for the supply chain is is on track just because there's a lot of companies in the sectors that are struggling with supply chain right now.

Right.

So the primary areas as of right now that we've been we've been struggling in the.

And the supply chain.

And our microwave electronics business.

Including field programmable Gatorade and to some extent an hour that's also in our.

Are spaced on satellite communications business.

We have very candidly in our on our forecast today and.

For example, at our microwave business.

We have made the assumption in that business. It does not get any better for this entire year.

So there are certain areas.

Like in the microwave electronics area, where we're just assuming is going to be yucky poo poo for the entire <unk>.

22.

There are other areas.

Let's talk about like aluminum.

And R C. Five ISR business in the aluminum area, where our team has been working like the double.

To position themselves that if it doesn't get a lot better we have avenues different channels, where we've ordered far enough in advance that we are going to receive the product that we should be okay.

That we should be also through communications with other of our customers like titanium area and in other areas.

Constant communication with him in there indicating to us that.

They believe things have peaked or are peaking.

And things should they are not going to return to normal in the second half, but they're going to start to trend in a better direction in the second half and we've incorporated that in our plan too. So we need that to happen in those areas, where we've made that assumption.

Okay. That's super helpful. And then just one last question, if I may I understand sort of Valkyrie.

Is in its various programs associated with it or sort of going down the rabbit hole into the classified realm.

The new Valkyrie customers that you mentioned.

Getting some aircraft some number of aircraft are they getting those aircraft from the original production lot of 12, but you're gonna have or if that comes in later this year would that be from a second production wise.

They're going to they're going to receive them from the 12.

Very importantly, if we had not lean forward and done this we would not be getting this customer.

In Austin on on on this customer and they're going to be a quantity of al curries here.

It's not clear to me initially if it will be a sale or it will be a lease which is another benefit of why we have these capital assets and so that we were going to be we're going to be working with this customer as we head toward contract documentation. If these will be actual sales or to satisfy his requirement both.

Tactical and strategic and looking into 23 and 24.

Should we believe them to him so.

Well hopefully as the year goes on it will be able to give you additional clarity on that.

Okay. That's really helpful. Thanks for all the Colorado.

And up next we have Peter Army go ahead Peter.

Good afternoon, Eric, Indiana, Hey, Eric.

You you've talked about you know kind of with a lot of your drawing programs.

<unk> depth trying to get the.

Past attempting in into adoption, how do you how do you characterize.

What you can talk about what I guess I'm a non classified side.

Where things stand you know when you see.

Customer excitement about it and ultimately if you can talk about any specific ones that move farther along in testing.

Just because I think a lot of us are trying to kind of see.

See when we start to see you know a pick up in terms of.

Call volume.

The valley of depth is real.

And it's deadly.

And.

Going from.

R D TNA.

Development aircraft will talk aircraft for example, but it's the same in certain other areas were prototypes et cetera.

Across the valley.

Two production or a program of record.

It is extremely difficult this is very very sporty.

And as you can imagine and it is no secret you can imagine that the traditional players in the area or.

Doing everything they can to destroy you of the value of depth as well.

Okay.

This is why I continue to emphasize that we are first to market with airplanes flying today, you've just heard me say.

We've got to have what we're going to have a new customer I mean brand new <unk> in the second half of this year. That's funding is there and the customers very motivated because we had products.

Not power points, which is one of our critical differentiators competitively.

Against the traditional.

What the Secretary is is doing as I said before.

I am applauding him incredibly.

Because he is he is the top guy has now taken point and has said I'm going to make this.

Happen.

And in the last month or so.

The four star.

Pack of <unk>.

He he he did a an interviewer speech and he said we need.

I forget these at hundreds or lots and lots of affordable attributable jet drones of various types reusable decoys et cetera, et cetera to help offset the adversary there.

And I could go on but the top leadership is now.

Not just talking but they are putting the money in the budgets and they're putting the prep program element lines.

And so yes, it's been a long time, it's been very frustrating I'm sure they'll continue to be frustration, but but we continue to wait continue to make progress.

And we remain virtually undefeated competitively when they are in our ballpark of attributable aircraft. So.

That's how I have to answer it.

Yeah, and just as a follow up Eric just done I'm, just I know we've had a lot of challenges over the last 18 months with Covid just different.

Being facilities.

Have those that loosened up a little bit you know as we think about going into the second half of this year at least in the middle of this year.

Great question, Yes, we have not in the past several months I don't know how many but it's been several we have we have not experienced any issues delays cancellations.

On any range time for any of our flights.

And it reminded me of something and and I believe in the second half of this year hour range facility in Oklahoma. It Burns flat, there's going to be an incredibly valuable asset for us and we're going to be able to demonstrate that because the range is a very very busy right now and they're very hard to get on and we will not have to worry about that.

For certain of our aircraft out it burns flat and so that that headwind across the board right now is gone.

Perfect. Thanks, Eric from detail.

Yeah. Thank you.

And up next we have Josh Sullivan go ahead Josh.

Hey, good afternoon, Eric piano.

Nope Jeanine.

<unk> what is the margin profile of the opportunities as they move forward.

That's gonna be the traditional low teens or more.

<unk> congressional like margin opportunities pick it up.

You also on the defense side.

There will be.

Production.

Low teams.

And development right now obviously, they are lower than that because development contracts or is it just lower than that.

We just we have one or two commercial opportunities we're looking at over there, but if we're successful relative to the defense once they won't be significant enough to move that margin right.

Higher than low teams.

Yeah.

And then can you just provide some color on what K T T as contributing to the roles offering it can be 52.

Yeah, what what Josh I didn't say that again Buddy.

The B 52 contract that all what is contributing.

Yeah [laughter].

Yeah, I was very guarded in what I said, because we are under an NDA.

[laughter].

I can't say I'd like this is very very important.

Kit significant contributor for us beginning right now, but until I get clearance I, just I can't say.

Got it got it.

And then maybe on the Zeus program can you talk about you know the cost savings versus a legacy programs that you can offer and maybe the <unk> kind of size that market number launches.

Absolutely of the market.

Yep, So our strategic partner is aerojet.

They are they are working with us they are building systems for us.

And these are very these are to our spec based on our customers and these are are very unique.

Very low cost very specialized systems.

To put something in the right place at the right time at the right speed.

And similar to virtually everything else, we try to do the.

We're successful we're going to be successful here these will be orders of magnitude orders of magnitude.

Similar to our our tactical Jones less costly than anything anybody else is out there.

So it's.

I'm very I'm very excited about this.

I'm very excited of the funding that came through in the 22 budget for this <unk>.

Very excited we got we got the funding that we needed and which is great.

Thank you for the time.

Yup.

And our next question comes from Joe.

Joe.

Hi, Good afternoon. This is joshua fulfilling in for Joe Hi, Joshua Good afternoon.

So my first question is I know you guys recently.

More than a contract for the event spectrum monitoring system for one web.

Just for on the low Earth orbit constellations.

Can you give any more color on that like what does this mean revenue wise and what an additional opportunities is open.

Right other other them.

We put that press release out recently in the past three or four weeks I think that that required obviously customer clearance and customer coordination.

I apologize you go take a look at that other than what's in that release.

I can't say any more than what's out there but to the second part of your your question.

I will use that as an example.

To a previous question that we received of a company and operator, an entity putting up a constellation of.

New constellation a greenfield constellation.

That was open.

Intended to engaging us in using our open face solution.

And so when you think about the potential opportunities that kratos has.

And the open space area that is an excellent representative example of that type of primary customer were engaged with.

And we're hopeful to be successful with.

Great. Thank you so much and then another question was I.

I wanted to see how the transition was going in terms of integration with cosmic idea as in CPT, and obviously now with that sorry.

Do you kind of see any future tucking his acquisitions like these in the future.

Some of your pipeline.

Integration is is is ongoing ingoing, well as far as future tycoons, we have they asked everyone that is.

Hopefully pending closed his second quarter at this point.

Yeah, we are.

In order for us to do anything else.

As we've said before.

It has to be exactly consistent with what where.

We're doing that.

Those opportunities are few and far between so C T T.

Is exactly consistent with what we're doing in the microwave area and it has a space satellite component, which also were related to.

Cosmic as I think I talked about on the last call.

Our team is known the founders the older personally for a long long time, they are right in our stick.

That is an easy one okay sras as I mentioned they are involved with the materials.

Materials for hypersonic systems strategic deterrence system space systems.

All of which were involved in it.

So if if if we were going to do another one it would be small.

And it would be exactly consistent with what we're doing that would either bring us a new customer a new capability, a new product or a new a new aircraft or something something like that.

Mmm, great maybe so much and then I guess lastly, if I may I was looking through the fed <unk> guidance and I know you guys kind of dropped down Capex is there any kind of reasons to why some of my color on that.

That's actually related to some machinery that we were going to acquire NRC five ISR business and just due to some supply chain issued it's actually getting pushed into next year. So that it isn't permanently reducing it just moving into next year. Okay.

Okay alright. Thank you so much for the questions for answering my questions.

And up next we have Pete Skibinski go ahead Pete.

Hey, good afternoon guys.

Hi, Eric Eric.

Eric I wanted to follow on the earlier conversations about Secretary Kendall.

I just find some of the things you said kind of interesting because he's been talking about a drone awhile women type drone I guess for both to be 21 and and gab.

And the comment he made was that the price of those drawn to be on the order of one half the price of the manned aircraft themselves, which presumably are not the hundreds of millions of dollars, which will you know it it seems like that would put those drones and kind of exquisite category is that.

Should we conclude from that first of all.

And second of all shall we conclude from that that.

You know you don't think <unk> can play in that area, but there are lots of other areas of creative will play and I'm, just trying to kind of follow the whole logic there.

Yep. So the first part of your question I'm not.

A knock on I'm not going to answer because I don't want us to speculate anything on the on.

On the second on the secretary, but on on on the second part.

What what I understand the secretary is doing.

And.

Based on what I know.

I am absolutely confident.

That cradles can participate in one way shape or form.

With the Secretary's initiatives.

Absolutely confident.

Mmk Okay.

Let me step.

Bigger picture.

If we can kind of summarize all the order expectations you have for the balance of the year. The next three corners any sense for the type of book to Bill that you guys are expecting for the next three quarters.

We should expect.

Hum.

We I don't I don't have the numbers in front of me, but we have a.

We have a number as I went through today in the prepared remarks within the Q&A. We've we've got.

We're expecting a sole source 100 million dollar contract for the target drone area that we've been informed we're gonna get I mentioned that when the space side.

We've got we've got several that we've got one that we have one that hasn't been announced yet we've got two that we've been informed we are going to get that hopefully we will get it.

Those will be additive.

I think.

Over the balance of the year I don't Wanna be quarterly.

Bookings and I'm Gonna say programme bookings will be significant so when I say a program booking let's.

Let's go back to this the target drone one that we'd better formed what we're going to get I know I.

I know the there'll be assault a single source award.

There will be $100 million that will get that it'll be fulfilled over a period of time I don't know how that will be booked for book to build purposes, depending on funding or options or things like that but programmatically trajectory wise I believe it's going to be very very robust.

Okay. Okay, that's all for it and.

More basic question and the rockets support area I guess I haven't figured it out yeah, what's the difference between <unk> and <unk>.

So.

<unk>.

As a launch system.

Aramis.

As a vehicle.

Okay.

Zeus is it.

As a propulsion aspect to it <unk> does not have a propulsion aspect to it.

Okay.

I have to be.

Zeus definitely has the propulsion aspect to it.

<unk> a vehicle that I should leave it at that.

Okay. Okay.

Okay and are you guys do we expected you know first corner press release wise was fairly meager right with a C or whatnot shall.

Should we expect to see a lot of these announcements made by you guys as they happened the balance of the year.

I hope, we're able to but but if but if not like on some of these baselines.

My understanding is I think the customers are going to announce.

And once they announced him hopefully we'll be able to announce something where we will be able to affirm yup that's us Mike.

My intuition tells tells me that's how that's going to go.

Okay.

Okay. Thanks, Scott.

Both of them.

We have no more questions at this time I will turn it back to Eric for closing comments.

Great. Thank you everybody for joining us this afternoon, and we'll we'll circle up with you at the end of the queue to have a <unk>.

Afternoon. Thank you.

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.

[noise] [music].

[music].

Welcome to the Crane co 's defense and security solutions first quarter 2022 earnings Conference call. My name is Daryl and I will be your operator for today's call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. During the question and answer.

Thank you good afternoon, and thank you for joining us for the cruise defense and security solutions first quarter 2022 conference call.

With me today is Eric Demarco, creative as President and Chief Executive Officer, and Deanna Lund Kratos Executive Vice President and Chief Financial Officer.

Before we begin the substance of today's call I'd like everyone to please take note of the Safe Harbor 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 line as we discuss future strategic initiatives potential mark to market opportunities operational outlook and financial guidance during today's call.

This call will also include a discussion of non-GAAP financial measures as that term is defined in regulation G. Non.

non-GAAP financial measures should not be considered in 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.

I will now turn the call over to Eric Demarco.

Thank you Marie good afternoon.

Since our last report to you.

<unk> been several positive developments for the industry and in particular for creators, which I will go through today, and which provide additional confidence in this year's financial forecast and the future outlook for your company.

As we have planned for in our 2022 financial forecast for 2022, Dod budget was approved in March which was important for a number of creative programs that are in or are transitioning from development are in low rate initial production and transitioning to full rate production.

Which are in production and had planned for increases to that production.

Q1 book to Bill ratio was low as expected as we were in the middle of a six month CRA.

However, coming off of tradeoffs as Q4, one five to one book to Bill ratio, our Q1 bookings and combined with what I will discuss today.

Substantially all of <unk> 2022 revenue in our financial forecast.

Is now either under contract or there is funding in the 2022 budget and we are awaiting contract.

Where we have been informed that we have been selected and we are awaiting contract where.

Where we expect to receive the contract.

Some highlights in the 2022 budget related to create OS include in.

And the tactical drone area and related to create doses 2000, 2020, Kratos as 2022 to.

2022, budgeted funding areas, which are not classified in which I can discuss include approximately $160 million in aggregate funding for Skyboard Obs S attributable autonomous air combat operation prototypes add air UX and very importantly.

Funding for a new <unk> tactical drone customer, which we now expect to be under contract in the second half of this year and expect to be providing several cradles valkyries too in the future.

It went through with you.

Our low cost high capability forced multiplying drones is clearly accelerating.

Along with additional and increased funding.

We are also excited that all of the services and in particular, the air services elements of the services are now moving towards affordable mass, including low cost attributable autonomous drone systems include.

Included as reflected in the 2022 budget, the 23 budget request and the fight up.

And creatives with a family of affordable attributable jet drones flying today with.

With others in development and with Kratos, having several active production lines producing approximately 150 aircrafts annually is positioned to immediately address this expected to be very large new market area.

With the release of the 2022 budget. The 23 request in the fight we have made the decision to maintain the current Valkyrie production run at 12 aircrafts for now.

Certain of which Valkyries are complete and our emission system integration and flight preparation with the customer.

Also based on recent events, including communications from the Pentagon and in close coordination with the <unk> customer. We are now leaning forward with the Credo Ghost works resources on an additional new tactical jet drones, we are under contract for in order to maintain the schedule for this program for the.

<unk> request.

Additional important funding in the 2022 budget directly related to Kratos enter 'twenty, two financial forecast and future year expected future growth trajectory.

Includes.

Funding for Kratos as U S. Navy SaaS EQM 177 target drone program, which is ramping production with the <unk> program expected to be one of <unk> largest programs for the foreseeable future, which is a key element of tradeoffs as Q3 to Q4 sequential 2022 revenue and profit increased financial Fork.

<unk> in the second half of the year.

We now expect a large additional SaaS production program contract later this year.

Funding for the United States Air Force apps at EQM 167 target drone program also one of our largest which also is a key element of our 2022 financial forecast and second half.

For this year.

The 2022 budget included funding for GBS D, where Northrop is the prime under which program. We are forecasting a significant ramp up in increase for kratos in the second half of this year with <unk> expected to be one of <unk> largest and fastest growing future programs.

GBS is currently a greater than $200 million Credo program. It is just beginning and it is one of <unk> biggest expected Q3, Q4 and future growth drivers.

Similar to GBS D. Other large expected to be multibillion dollar strategic programs of record that Kratos is supporting.

And that <unk> is now under contract on or we expect to be under contract on very shortly include Thad I BCS sure Red.

<unk> 53.

TPS 77, and FPC with our strategic partner light OS in Dianetics.

The 2022 budget includes funding for Kratos as rocket systems business, including for our new Zeus affordable launch system and related to <unk>, New <unk> hypersonic vehicle, which are progressing toward initial flight.

Like Kratos tactical drone systems, where we are leveraging off of our target drone business and experience and where we believe our drones are the highest performance drones in the world.

<unk> Hypersonic initiative is leveraging off of our industry, leading affordable rocket launch ballistic missile target systems and previous hypersonic program experience to rapidly develop and deliver to the customer a complete affordable hypersonic system capability.

Tradeoffs as rocket systems business is also engaged with hypersonic and Australia, which recently received its funding and the dark hypersonic drone vehicle.

And our rocket business, we have several launch missions currently scheduled to end in backlog and we are forecasting additional future emissions to be committed by customers throughout 'twenty two.

The 22 budget also includes funding for certain <unk> directed energy, we're laser system initiatives and programs, which kratos products and systems are part of our expected financial ramp in the second half of the year.

<unk> are all of course core kratos business areas.

<unk> unique positioning for the recapitalization of strategic weapon systems by the U S and our allies includes credo as being the industry leader in affordable targets and target drone systems, which stimulate adversary missile aircraft drone and other threats, allowing our forces weapon and other systems to engage in meaningful.

Defense of exercises.

<unk> rocket systems business as the industry leader in ballistic missile and similar target systems, which stimulate the threat represented by adversary missiles, so that the U S and our allies radar space based satellite defense of in other systems can exercise and trained against them.

Similar to <unk> drone business, where we have approximately 10 different types of drone aircraft flying today and credits as rocket system business. We have approximately 15 different types of rocket systems flying including in the target sub orbital research sounding rocket and hypersonic areas.

We believe that <unk> rocket systems business is uniquely positioned in the hypersonic area similar to our drone business with our existing proven hypersonic launch system capabilities and with our new <unk> <unk> and other systems, which we are developing along with our government customers and through our partnership with hypersonic <unk> in the dark.

Vehicle with its unique propulsion system.

In March we executed an asset purchase agreement to acquire the assets of the Engineering Division of Southern Research Institute or <unk> with the closing subject to certain normal conditions, which are expected to be satisfied in Q2.

Once the close of the acquisition of <unk> is completed <unk> will be the industry leader in the study analysis assessment technology review and testing of special and exotic materials for weapons space system applications, including hypersonic and strategic deterrence systems.

<unk> stated substantially all exquisite or exotic weapons and space related systems utilized special materials that need to do special things and SRA positions Credo is directly in the center of virtually all of these past present and future and substantially all of <unk> workforce is highly classified.

In 2021, SRV generated revenue of approximately $30 million. So we would expect with an expected June 'twenty two close this year's financial contribution of sorry to create OS is not expected to be significant.

However, once integrated with credo and based on certain funding in the 'twenty. Two budget that was just approved and what is expected to be included in the final 23 budget and the incredible U S National security focus on hypersonic strategic deterrence and space related systems, we expect 'twenty to 'twenty three over.

2022, and future year over year revenue and EBITDA growth trajectory to be strong with expanding margins for I'm sorry.

SRT will be integrated into <unk> rocket system, and hypersonic business and once the transaction formally closes we will be able to provide you with additional information on the business and some of the programs.

<unk> microwave electronics business continues to have a near record or a record backlog, including in the space and satellite areas with substantially all of 'twenty twos forecasted revenue currently in backlog.

<unk> space satellite and cyber business, our company's largest continues to see customer acceptance for our first to market virtual software based open space satellite <unk> and TNC ground system <unk>.

Including one web which create US is now under contract with to deliver in advanced spectrum monitoring system to monitor analyze and review spectrum to support high quality of service for one webs fleet of low Earth orbit satellites.

The space and satellite industry end market continues to experience significant growth and expansion, which growth is expected to continue for the long term and we believe <unk> industry, leading ground infrastructure systems products software and technology uniquely positions <unk> to participate and rapidly grow in this area.

Accordingly.

In addition to our one web contract award.

We have also recently just received an additional very large extremely important new satellite program Award, where Kratos is the prime which we hope will be announced shortly and.

And Additionally, we have just been informed that we have won and should receive in Q2, two additional large brand new space program opportunities.

The potential and expected combined value of just these three new programs to create OS is several hundreds of millions of dollars of revenue over the program periods.

In each of these opportunities include Credo is open space virtualization technology with a significant software component with each of these being included in our forecasted Q3 and expect a significant Q4 revenue EBITDA and profitability increases.

Our space satellite and cyber business is an absolute critical element of <unk>, achieving our financial objectives and expected industry, leading organic growth trajectory.

And these four new programs two of which we have received including one web and to which we have been informed by the customer that we have won and that we expect to receive in Q2. We believe is just the beginning of an incredible disruptive technology growth trajectory for this business and significant value creation for creators to stakeholders.

Greenhouses turbine technology and engine businesses continued to progress with our turbo jet and turbofan engines for missiles drones and powered munitions similar to other <unk> businesses. The recapitalization of strategic weapon systems to address peer threats and the need for jet drones, new improved longer range and more powerful cruise missile.

<unk> and powered munitions also including extended range are well funded priority areas, including in the 'twenty two budget and the 23 request.

Great doses engines, which are running today are designed in on several new missile and drone and powered munition systems and we are working to be designed in on several other systems and programs and we continue to progress from development and test quantities to expected future serial production.

With the execution of the 2022 defense budget, we now expect to receive in the next few months, an approximate $50 million sole source contract for next generation affordable engine technology and drones.

Also I am able to announce today that <unk> is a key member of the Rolls Royce team for the recapitalization of the B 52 bomber fleet engines.

Reported $2 $6 billion program and that <unk> has now received its contract from Rolls Royce, which is expected to be one of <unk> largest programs and which is one of the key elements of tradeoffs was 22 financial forecast in.

In Q3 to Q4 projected sequential growth as this new large program ramps for creators.

We are under NDA now with several of these space customers certain of which are the highest profiles based companies in the industry, where kratos is currently under contract and providing products and solutions for their mission success.

Across the company. We are currently in pursuit of our in source selection on several program opportunities certain of which we expect to hear on in the coming weeks and months and if we are successful will be important catalyst for kratos and position us for even stronger future organic growth.

Tradeoffs as affordable product and system and technology portfolio. We believe is second to none in the industry and is a key reason why we expect to generate industry, leading future year organic growth with the ramp beginning in the second half of this year.

As well as technological quality to address both Russia and China.

Operationally, we are focused internally and on execution, including as related to the 2022 budget being recently approved in March and so we are now working with our customers and contracting offices for creators to get under contract and receive funding as quickly as possible in order to achieve our customer related contractual and final.

<unk> objectives.

This is of particular importance for kratos in space and satellite business, where we have received or have been informed that we will be receiving or expect to receive several significant new program awards, which are a key driver for our second half and future forecast and our and our expected significant future year over year organic growth trajectory.

Supply chain, and COVID-19 related including customer employer employee supplier and other issues have continued and are expected to continue for the foreseeable future.

Additionally, inflationary pressures are increasing including with suppliers and the workforce, where kratos is doing what is necessary to both retain and uptake employees by paying more in increasing salaries and compensation.

It is impacting our near term margins, including Q1 and Q2, but obviously we have to do this and we have to do what is required we need a qualified workforce and the team in place to execute.

Also as creative as primarily a product company with the vast majority of tradeoffs as contracts and programs being firm fixed price our ability to pass cost increases onto the customer in the near term is limited under existing contracts or priced options, which is currently impacting us, including Q1 and Q2.

But we have included cost escalations into the new bids and knew where unpriced options new opportunities contracts and programs, which we expect to begin mitigating this impact in Q3.

Like all companies in the industry, we are managing our way through these issues most of which are now expected to continue for the foreseeable future.

Okay in closing the industry now has 22 budget of 23 budget request in a fight up each of which are favorable for creatives, including in the drone space satellite and strategic deterrence areas.

Irrespective of the macro challenges industry and creators are facing the success of <unk> strategy is now clearer than ever with the core <unk> product and technology focused national security business positioned in a macro growing market with significant budgetary increases expected for the foreseeable future.

Sure.

<unk> core business is generating significant revenues and EBITDA.

And where we are also positioned for a transformative potential future growth with industry, leading products and space satellites and drones, which credo is growth trajectory. We expect to begin in the second half of this year.

And to continue thereafter.

I'll turn it over to Deanna no. Thank.

Thank you Eric Good afternoon, as we have included a detailed summary in the first quarter financial performance and financial guidance in the press release, we published earlier today I will focus on the highlights in my remarks today.

<unk> first quarter 2018 revenues of $196 2 million, which at the midpoint of our estimated range of $190 million to $200 million.

We achieved the midpoint in spite of continued and increased COVID-19 related supply chain and other delays, which impacted revenues by $15 3 million during the quarter.

With the most significant impact in our <unk> ISR and our international commercial Satcom businesses.

Our Q1 'twenty two consolidated operating loss was $1 2 million compared to operating income of $4 9 million in the first quarter of 'twenty, one which includes first quarter 'twenty to increases in R&D of $1 2 million, primarily in our unmanned systems business, an increase of 800000 and noncash stock compensation.

And increased SG&A cost of approximately $5 million, primarily resulting from our recent cosmic aes and CTC acquisition and to a lesser degree, reflecting a $1 $1 million increase in our unmanned systems business.

In particular, our total head count in our unmanned systems business has increased 74 heads from 842 in Q1 of 'twenty. One to 916 in Q1 of 2018, which reflects the anticipated year over year go out.

Net loss was $15 9 million for the first quarter of 2002, and a GAAP loss of <unk> 12 per share compared to net income of $1 9 million in the first quarter of 'twenty, one and GAAP EPS of one cents per share.

Included in the first quarter net losses.

$13 million charge for debt extinguishment related to the redemption of the company's six 5% senior notes during the quarter.

We generated adjusted EBITDA of $13 8 million for the first quarter exceeding the higher end of our expected range of $10 million to $13 million.

Our unmanned systems segment reported revenues of $52 6 million in the first quarter of 2002.

Compared to $55 9 million in the first quarter of 'twenty, one primarily reflecting the current expected production ramp on cycle on certain programs.

Kgs reported revenues of $143 6 million in the first quarter of 'twenty, two compared to $1 $38 3 million in the first quarter of 'twenty, one including contribution of $14 7 million from the recently acquired cosmic Aes and GTT.

<unk> offset partially by the loss of an international training contract, which contributed revenue of $8 3 million in the first quarter of 'twenty one.

Q1, 'twenty two kgs revenues were unfavorably impacted by continued and increasing supply chain COVID-19 related delays and disruptions.

Which impacted current quarter revenues and favorably by approximately $14 6 million at these <unk> revenues were deferred to future periods with the most notable impact in our commercial satellite and <unk> ISR businesses.

As expected first quarter 'twenty to operating income and adjusted EBITDA for unmanned systems and Kgs included a mix of more development based revenues, which are typically lower in margin due to less leverage on fixed overhead manufacturing SG&A and development infrastructure.

Q1, 'twenty two cash flow from operations was a use of $7 9 million, including a use for the increase of inventory balances of $15 3 million during the quarter, primarily in our satellite microwave electronics.

Five ISR businesses in anticipation of the ramp in production in the second half of the year and in part to advance inventory levels in an attempt to mitigate the impact of supply chain disruptions.

Our contract mix for the quarter was 68% fixed price, 27% cost plus 5% time and material.

Revenues generated from contracts with the U S. Federal government during the quarter were approximately 71%, including revenues generated from contracts with the Dod non Dod federal government agencies, and Fms contracts and.

In Q1 of 'twenty, two we generated 10% of revenues from commercial customers and 19% from foreign customers.

Our backlog at quarter end was $982 1 million compared to $953 9 million at the end of Q4, 'twenty, one with consolidated bookings of $198 2 million and a book to Bill ratio of one to one for the first quarter of 2002.

Funded backlog at quarter end was $685 $7 million with $296 $4 million unfunded.

At the 12 months ended March 27, 22, our consolidated book to Bill ratio was one one to one with total bookings of $873 3 million.

Moving to financial guidance, our second quarter 'twenty to 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 and other COVID-19 related items that have.

Are currently impacting the industry and create us.

The first quarter <unk> experienced a significant increase in the intensity and effects of COVID-19, and the related impact to our employees absenteeism consultant vendors suppliers customers et cetera, which impact included lots of weeks of manufacturing and production functions in our unmanned systems <unk> ISR and microwave.

Products business.

We have assumed that these COVID-19, and supply chain related impacts to our business, which significantly impacted our fiscal first quarter 'twenty. Two operation will continue to have a similar impact in the second fiscal quarter of approximately $15 million to $17 million in revenues and $2 million to $4 million and our adjusted EBITDA.

We currently expect the situation to improve significantly in the third quarter.

As a result of each of these factors. We have discussed we are forecasting approximately flat organic revenues for our second quarter 'twenty to revenues at the higher end of our estimated range compared to 21, excluding the expected contribution from the recent acquisitions of GTT in cosmic Aes.

Consequently, $10 million to $13 million in revenues offset by the loss of the international training contract, which contributed approximately $5 million in revenues in Q2 of 'twenty one.

This should be the last quarter of headwind, resulting from the loss of this contract as it was completed in the second quarter of last year.

Our quarterly forecasted EBITDA performance is also impacted by these industry and cyclicality factors, including our inability to realize leverage on our fixed SG&A overhead manufacturing and research and development costs, particularly in our first and second quarter operating periods.

Additionally, our forecasted second quarter EBITDA 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 expected lower volume higher margin software solution deliveries, which are expected in the second half of 'twenty two with an expected ramp in the third to the fourth quarter based upon contracts, we have been awarded or have been important we will be awarded.

As we continue to transition our space and satellite business from a hardware to software focused solution. We believe by financial performance would tend to be more lumpy and more sensitive to delivery schedules.

As we mentioned last quarter, we will continue to monitor interest rates since our refinance facility is based on a floating rate of sofa, which is a replacement of LIBOR.

With certain adjustments, which is currently approximately two 5% the rate is adjustable. So we will monitor the market closely to determine if hedging would be beneficial in the future, especially since rates have recently increased.

Very good thank you Deanna.

We will turn it back over to the moderator for any questions.

If anyone has a question is zero then one once again this zero then won.

And if you wish to be removed from the queue. It's zero to our first question comes from Sheila <unk> go ahead Sheila.

Alright.

Donna.

Can you hear me well.

Yes, Hi, Sheila.

Just talking about maybe starting out thanks for having me.

What's happened in Ukraine.

One quick question from a macro perspective.

Can you just asked.

In terms of future orders and what part of your portfolio do you think that.

Yeah.

The right now the two best positions or the drones.

Space and satellite communications.

They are.

Really really well positioned.

Very close.

Card charging third.

Our combat system, our <unk> ISR business.

The book of business, we have the orders I think we're going to win over the next three 612 months on very large program of record weapons systems.

Significant so those are the three.

That's super helpful.

I'm John Im guessing you don't sell any internationally right now how do you think about the actual pipeline for that and the ability to sell internationally.

And the target drone area, we have multiple international customers. So we have relationships with the customers that would either be it will be related to the tactical drone customers internationally.

So we have a significant international business at any one point in time with five to 10 different international customers, where right now delivering a significant number of drones internationally I'm hopeful we have one more box to check and we're going to be able to report a brand new multi tens of millions of dollars new international.

<unk> target drone customer hopefully in Q2.

So we.

We are very comfortable with our international positioning on both the target and tactical drones side.

Okay and then.

Ram.

Secondly, as we look to 2020 guidance in the second half.

The biggie that jumps to mind right off the bat as GBS D.

Now that the budgets in place our partner Northrop is phenomenal. It is looking very very significantly also coming to mind those programs I mentioned on space and satellite.

The one the ones that we received the contract on the two other ones that we've been told we've won and we're going to be receiving the contracts in Q2.

The ramp is significant.

And as I mentioned in the prepared remarks, a significant part of these is open space of software based.

Which means should be significantly higher margin, which is why we're looking at significantly higher margins what are the reasons.

The second half of this year.

Okay. Thank you so much.

Yes.

And our next question comes from Seth size May be go ahead Sir.

Oh, thanks, very much and good afternoon.

I guess on <unk>.

Following up on an open space.

Eric if you can refresh us a little bit.

Can you tell us a little bit about how how the procurements are made there.

Both on the government and civil side and kind of.

What the process is like for getting specced in and then kind of what the.

Since it's a software defined kind of what your relationship is with the customer kind of through the process and kind of how we could think about a product like open space gaining share over time does it happen in kind of.

Big <unk> is it like a gradual improvement.

Improvement, whereas where are the where is the most target rich environment in terms of seeking out.

New customers, including on the on the government side.

Yes, absolutely.

So clearly for us.

New satellite constellations new operators.

Is the greenfield opportunity for us versus trying to get into an established constellation with established traditional legacy fixed ground equipment.

The multiple new constellations that are going up.

Military.

Other security related and commercial is significant.

And as I've gone through in some detail before and I'll just touch on lightly here.

And the way <unk> is here to for the vast majority of satellites that went up our geosynchronous orbit. So they are like 22000 miles up they're up there depending on fuel for <unk> in 2025 years and the ground equipment that typically the traditional primes wood wood.

Provide that put up the satellite.

It was like a <unk> cell phone network 20 years ago.

It's hardware based racks of switches racks of equipment et cetera et cetera.

And those those those traditional had no incentive or disincentive to try to innovate anything because they didn't want to disrupt their vendor lock position on the hardware on the ground that was old technology.

And thats their mindset and you know there are program of record focus they chase program of record.

And that's how they do things.

We brought in a bunch of.

Commercial based technologists, including from the terrestrial cell phone area that had done <unk> networks for example.

And in my analogy, we have taken the traditional two G infrastructure on the ground that hardware based and we have virtualized it into a five <unk> software based.

Operating system I know the guys open space to your iphones operating system, we built an open space operating system for the ground infrastructure for satellites and now we're taking the applications, which also were all hardware base to think of a modem and where software basing them. So software apps to run on the software ground equipment.

We are providing to new operators.

And I have explained to you before it can be location based it can also right on the web which is incredible from an efficiency standpoint, but also from a distribution of the assets and protection in the National Security standpoint.

It's an increase it's just an incredibly new technology, that's open architecture open space and that.

The new <unk>.

Operators.

New constellation dies.

That's what they want.

And.

Right now.

I am incredibly pleasantly surprised at how well our team is doing.

And I believe.

Certain of these awards that we've won can be announced then they are announced.

I believe the industry is going to be that's going to be very impressive to the industry, who these guys are we've locked up.

Okay. Okay very good and then one follow up for me.

Now that secretary Kendall speaking are programs of record has talked about wanting to establish.

Unmanned tactical drone programs of record, but that would be in the classified round I guess, how are we going to without a.

Skyboard Vanguard outlined I mean, there is still a skyborne vanguard item in the budget, but if that's not going to be where the bulk of the activity is kind of how can we.

Sort of.

Keep up with.

What you guys are doing.

So in the in the non classified area of kind of what I tried to do today is I guess I'm trying to be as open as I as I, possibly can and I will continue to do that.

Seth you are exactly right. The what the secretary has talked about and those programs. They are they are they are at a significant classification level.

And so my answer to you right now is <unk> will say nothing.

And we're going to wait and see how the government.

How they lead this.

And we will follow that lead.

That's all we can do out of respect obviously for national security and the secretary, but what what the Secretary is doing is is phenomenal.

It's incredible what he's trying to do here.

<unk> is directly related to Kratos, if you could see me smiling.

I hope he keeps it up but I hope be successful because I think it'll be very very good for the United States of America.

Alright, Thank you very much.

Yes.

And our next question comes from Mike Crawford Go ahead, Mike.

Thanks.

I think one web.

The trailing bookings.

As of March $314 million trailing bookings in the prior year.

March 31, but.

The three new large open space contracts that are received are expected to be received that could generate hundreds of millions of dollars, what's the duration of those contracts.

We should be thinking about for those future revenue.

Chip.

Typical government contracts of three five or seven years.

Okay.

And.

Wishing to drones.

You are.

Have you started the second.

You said, you're just sticking with the initial.

Firewall a valkyrie.

Correct, we have not started the second we are sticking.

With the initial what I emphasized for now.

That that could literally change the next time we.

<unk>.

We speak with you.

I think it's been about a year, where we've been.

We anticipate the potential like Red Air adversary.

Type of a purchase order or is that something thats still.

On the com or is that cooled off at all.

Oh no.

To the contrary.

In the.

In the budget.

Specifically.

You can see a line that's called adversary Air unmanned open trend at <unk> X.

And in the.

23 request.

There is $67 million fourth.

So it's coming.

Okay.

That's great and then Eric.

Do you have these 10.

<unk> definitely drone systems growing today in <unk>.

These.

This potential transitioning of kind of these tests.

Programs.

Moving towards production, but do you anticipate that those are going to move into production with essentially the same.

The airframes and systems that you've developed today or do you think they're going to morph again in other words no valkyrie.

Hi production run product or is it going to be some future generation office Valkyrie.

Okay.

I'm thinking.

What I can say and what I.

Call. It the Valkyrie is going to be very I should answer it this way.

Confident as ever Valkyrie is going to be very very successful and I should leave I should leave it at that.

Things Pan out the way I think theyre going to Pan out.

Certain customer I believe I'll be able to add additional information to that next time with wechat.

Sure.

I have very high expectations for Valkyrie success.

And just to.

Feel free to not answer it if you said it but is that the same for San Antonio for any others or are there some that that's not the case.

Oh.

Definitely.

There are.

As I indicated on the last call.

There are certain of the programs that are being combined.

Or they're not they're not funding priorities.

As a result of this in my opinion that this is my opinion and my opinion is a result of the two new drilling programs. The Secretary has announced.

And where he has set certain.

Assisting programs and he has mentioned Skyboard Ete's mentioned El Cat. He has mentioned various things they are going to be feeders, and theyre going to be.

Fed into the technology is going to be transitioned et cetera, combined with these new ones and so as I said before certain of the ones that we have been working on I believe my opinion, they will they will wind down or transitioned into something else.

Okay. Thank you and then just last question.

You talked about <unk>, a little bit but could.

Can you just update us on the status of <unk>.

Potential material ramp in.

Both low cost disruptive jet engines.

As well as.

Actual working hypersonic jet engine that has.

Brian Cherokee credits.

Yes.

We have very good clarity on the former the first one you mentioned.

So for our engines.

Being designed into.

Air breathing cruise missiles.

Air breathing drones and air breathing powered munitions.

Hi.

As you know we announced.

Last quarter or two that we were beginning a limited production on a new system of someone's.

I am hopeful that by next year.

We could be in L. Rip.

On one or two.

Expected to be high volume.

Systems in that class I, just mentioned, so I am I am.

As optimistic as ever that our hour.

The <unk> engines at our engine businesses engines in the drone missile and powered munition areas are going to be very very successful.

In the hypersonic area I can't say a lot other than <unk>.

Our group into ATT.

That is specifically focused on space based engines, which include hypersonic vehicle engines is one of the fastest growing businesses.

K T.

And it would grow even faster in my opinion, but we are resource limited.

Which is a theme across tradeoffs right now when I say resource hiring the people. So the opportunities are there.

But.

We're a sub so I'll be much more limited than what I can say that on the engine side, but that business is going to be very robust up just because of the funding levels at the macro level that are going on.

Oh, Thank you actually if I can sneak in one more can you you talked a little bit about the revenue in <unk> sorry in <unk>.

I believe youre paying 80.

What is that.

Is that a 10% EBITDA margin business or.

I'm going to.

Because it's not closed yet Mike I have to be very cautious.

When it when it was I said in my prepared remarks, when it closes I will absolutely put out more information, but I don't want to disrupt anything with anybody right now.

Alright, great. Thank you.

Yes.

And our next question comes from Ken Herbert Go ahead, Ken.

Yeah, Hi, thanks.

Good evening, Eric and Deanna.

Good evening Eric.

I wanted to ask you first of the fiscal 'twenty two budgets. It was finalized you called out a $160 million for a number of the tactical programs.

But you can talk about based on the 23 request and what you think could happen to the 23 request as it moves through Congress.

Where does that 160 go.

Fiscal 'twenty three.

Right.

My My my rough remember of where those items I mentioned for 'twenty two 'twenty three if it increases to like $200 million.

So it goes from like $1 50, 160 to 200 or 210.

And Ken I want to reemphasize again those are those are currently the unclassified lines that I can talk about.

Yes.

Okay do you see any of your particular programs I know they tend to enjoy.

Pretty good congressional support but any of that you would call out is as perhaps.

Better better potential for upside relative to the fiscal 'twenty three requests.

I think I believe I believe.

Fiscal 'twenty three request in that final budget comes in as I'm anticipating that.

<unk> Valkyrie and this ties into Mr. Crawford's question that Valkyrie is finally going to hit its stride.

I see that.

If we're successful.

On phase II of <unk>.

BSS.

Could be will be if we're successful in phase two very significant for us.

<unk>.

In 'twenty three.

And therefore.

And.

I'm less confident because I just have to see how the chips are going to fall in the <unk> area.

Okay, that's great.

If I could just one more.

Got it sounds like there is a few contracts youre very confident in specifically on the space side that are important to the full year revenue number is there is there any way coming out of this quarter to maybe talk about.

Of the sort of fiscal 'twenty to 'twenty two guide how much is currently in backlog or maybe where could the risk would be in terms of timing as you think about.

The revenue expectations that are not yet under contract.

Right.

<unk>.

As I mentioned and as you said on the space side, we've been.

Informed we have one when we will receive two large cards we've received one.

We've been a form we're going to receive two more in no later than the end of June .

I fully expect that to happen.

So to your question assuming that happens I expect it's going to happen when we speak with you.

At the end of Q1 excuse me at the end of Q2.

I hope of what I'm going to be talking to you about is we are laser focused on execution and hiring and retaining the people to execute the programs.

Because that is a big challenge right now.

Personnel.

<unk>, obtaining and retaining people.

And it's it's.

It's both on the government side and the commercial technology side Pete people in.

In space and satellite communications and rocket engines in space ships are in are in big demand right now.

Okay and are these commercial contracts.

Is the revenue recognition like percent complete such that if you have a hard time, just ramping up with people that would obviously be a headwind for the revenues.

And so that's going to be a piece of it Ken and some of that's going to be software as well so it's going to be index.

Okay.

Perfect Alright, well, thank you very much.

Okay.

And up next we have Austin Moller go ahead Austin.

Good afternoon, Eric and Deanna.

So my first question here, if we think about 2022, just a broadly summarize.

What sort of the print here most of the revenue growth opportunity.

In the latter half of the year is sort of around north rope central missile and nuclear warhead transporters open space and target drugs and then most of the margin and EBITA growth opportunity is around open space in the Virtualized satcom equipment.

Yes.

Yes, Sir you drilled it.

Okay, perfect and then.

I understand the factoring in corn cost escalations into the new contract, but what is giving you.

Confidence that your expectation for a second half 'twenty to recovery for the supply chain is is on track just because theres a lot of companies in the sectors that are struggling with supply chain right now.

Right.

So the primary areas.

Right now that we've been we've been struggling in the.

And the supply chain.

<unk>.

Our microwave electronics business.

Including field programmable gate arrays and to some extent.

That's also in our <unk>.

Our space and satellite communications business.

We have very candidly in our on our forecast today and for example in our microwave business.

We have made the assumption in that business. It does not get any better for this entire year.

So there are certain areas.

<unk> microwave electronics area, where we're just assuming its going to be yaqui pooh-poohed for the entire.

'twenty two.

There are other areas, let's talk about like aluminum.

In our <unk> ISR business and the aluminum area.

Our team has been working like the devil to position themselves that if it doesn't get a lot better we have avenues different channels, where we've ordered far enough in advance that we're going to receive the product that we should be okay.

That we should be also through communications with other of our customers like in the titanium area and in other areas.

We're in constant communication with them and they are indicating to us.

They believe things have peaked or are peaking in.

And things should they are not going to return to normal in the second half, but theyre going to start to trend in a better direction in the second half and we've incorporated that in our plan too. So we need that to happen in those areas, where we've made that assumption.

Okay. That's super helpful. And then just one last question, if I may I understand sort of Valkyrie.

Is and its various programs associated with it are sort of going down the rabbit hole in the classified realm.

The new Valkyrie customers that you mentioned.

Thats getting some aircrafts some number of aircrafts are they getting those aircraft from the original production lot of 12 that youre going to have or if that comes in later this year would that be from a second production line.

They're going to they're going to receive them from the 12.

Very importantly, we have not leaned forward and done this we would not be getting this customer and.

In Austin.

On this customer and there are going to be a quantity of alkermes here.

It's not clear to me initially it will be a sale.

It'll be a lease which is another benefit of why we have these capital assets and so that we have but we're going to be we're going to be working with this customer as we head towards contract documentation. If these will be actual sales or to satisfy his requirement, both tactical and strategic and looking into 'twenty three and 'twenty four.

Should we lease them to him.

And so hopefully as the year goes on we'll be able to give you additional clarity on that.

Okay. That's really helpful. Thanks for all the color around it.

Yep.

And up next we have Peter Arment go ahead Peter.

Okay.

Good afternoon, Eric and Deanna Eric.

You've talked about kind of with a lot of your drone programs.

Ali of death trying to get.

Past attempting and into adoption.

How do you characterize kind of what you can talk about I guess in the non classified side.

Where things stand when you see.

Customer.

Excitement about it and ultimately if you can talk about any specific one.

Move farther along in testing.

Just because I think a lot of us are trying to kind of see when we start to see a pickup in terms of overall.

Overall volume.

Yes, the value of that is real.

And its deadly.

And.

Going from Rd TNA.

Development Aircrafts will talk aircraft for example, but it's the same in certain other areas were in prototypes et cetera.

Across the valley to production or a program of record.

It is extremely difficult this is very very sporty.

And as you can imagine and it is no secret you can imagine that the traditional players in the area are doing everything they can to destroy you of the value of depth as well.

Okay.

Peter This is why I continue to emphasize that we are first to market with airplanes flying today, you just heard me say.

We are going to have but we're going to have a new customer I mean brand new for Valkyrie is in the second half of this year that funding is there and this customer is very motivated because we had products.

Not powerpoints, which is one of our critical differentiators competitively.

Against the traditional.

What the Secretary has is doing as I've said before.

I am applauding him incredibly.

Because he has he has the top guy has now taken point and has said I'm going to make this.

Happen.

And the last month or so.

The four star of.

<unk> Pak.

<unk> Pak AF.

He did an interview our speech and he said we need.

I forget if you said hundreds of lots and lots of affordable attributable jet drones of various types reusable decoys et cetera, et cetera to help offset the adversary there.

And I could go on but the top leadership is now.

I'm not just talking about they're putting the money in the budgets and they are putting the program element lines.

And so yes, it's been a long time, it's been very frustrating I'm sure they'll continue to be frustration, but we continue to we continue to make progress.

And we remain virtually undefeated competitively when they are in our ballpark of attributable aircraft. So.

That's how I have to answer it.

Yeah, and just as a follow up Eric just on I'm, just I know we've had a lot of challenges over the last 18 months with Covid.

Different.

Testing facilities or testing sites.

Have those that loosened up a little bit.

As we think about going into the second half of this year at least in the middle of this year.

Great question, Yes, we have not in the past several months I don't know how many but it's been several we have we have not experienced any issues delays cancellations on any range time for any of our flights.

And you reminded me of something and and I believe in the second half of this year our range facility in Oklahoma at Burns flat, there's going to be an incredibly valuable asset for us and we're going to be able to demonstrate that because the range is a very very busy right now and they're very hard to get on and we will not have to worry about that.

For certain of our aircraft out at firms flat and so that that headwind across the board right now is gone.

Terrific. Thanks, Erich Fromm detail, yes.

Yeah. Thank you.

And next we have Josh Sullivan go ahead Josh.

Hey, good afternoon, Eric Deanna.

Good afternoon.

GTT whats the margin profile of the <unk>.

Opportunities as they move forward.

Can it be the traditional low teens or more commercial like margin opportunities picking up.

Yes, so on the defense side.

They will be in production.

Low teens.

In development right now obviously, they are lower than that because development contracts or is it just lower than that.

<unk>.

But we just we have one or two commercial opportunities. We're looking at over there, but if we're successful relative to the defense once they won't be significant enough to move that margin rate.

Higher than low teens.

Okay.

And then can you just provide some color on what <unk> is contributing into the roles offering with the B 52.

Yes.

It's Josh.

I didn't say that again Buddy.

On the B 52 contract that you were all what is contributing.

Contributing.

Yes.

I was very guarded in what I said, because we are under an NDA.

I can't say I like this is very very important.

Kipp significant contributor for US beginning right now, but until I get clearance I, just I can't say.

Got it got it.

And then maybe on the <unk> program can you talk about the cost savings versus the legacy programs that youre going to offer and maybe you could help us kind of size that market number of launches.

Absolutely of the market.

Yes, so our strategic partner as Aerojet.

And they are they are working with us they are building systems for us.

And these are very.

These are to our spec based on our customers and.

These are our.

Very unique.

Very low cost very specialized systems.

To put something in the right place at the right time at the right speed.

And.

Similar to virtually everything else, we try to do.

<unk>.

We're successful we're going to be successful here these will be orders of magnitude orders of magnitude.

Similar to our tactical drones less costly than anything anybody else has out there.

So it's.

I'm very I'm very excited about this.

Im very excited of the funding that came through in the 'twenty two budget for this.

Very excited we got we got the funding that we needed and which is great.

Got it thank you for the time.

Yep.

And our next question comes from Joe Gomes go ahead Joe.

Hi, Good afternoon. This is Josh filling in for Joe Hi, Joshua.

<unk>.

So my first question is I know you guys recently.

The contract for the event spectrum monitoring system for one web.

For on the low Earth orbit constellation side can you give any more color on that like what does this mean revenue wise and what additional opportunities is open.

Right are there other than we put that press release out recently in the past three or four weeks I think that that required obviously customer clearance and customer coordination.

I apologize you go take a look at that other than whats in that release.

I can't say any more than what's out there but to the second part of your question.

I will use that as an example.

To a previous question that we received.

Of our company and operator and entity, putting up a constellation.

Our new constellation a greenfield constellation.

That was open no pun intended to engaging us in using our opens based solution.

And so when you think about the potential opportunities that kratos has and.

And the open space area that is an excellent representative example of the type of primary customer were engaged with.

And we're hopeful to be successful with.

Great. Thank you so much and then.

Another question was just I wanted to see how the transition was going in terms of integration of cosmic <unk> and obviously now with that I'm sorry.

And do you kind of see any future tuck in acquisitions like these in the future.

In your pipeline.

Yes.

Integration is ongoing and going well as far as future tuck ins, we have the SME one that is.

Hopefully, it's going to close the second quarter at this point.

Yes.

<unk>.

In order for us to do anything else.

As we've said before it has to be exactly consistent with what where we're doing.

But those opportunities are few and far between so CTG.

Is exactly consistent with what we're doing in the microwave area and it has a space satellite component, which also were related to.

Cosmic as I think I've talked about on the last call.

Our team has known the founders the owner's personal leave for a long long time, they are right in our stick.

That is an easy one okay.

As I mentioned they are involved with.

Materials for hypersonic systems strategic deterrent system space systems.

All of which were involved in.

So if if we were going to do another one it would be small.

And it would be exactly consistent with what we're doing that would either bring us a new customer a new capability, a new product to renew and new aircraft or something something like that.

Yeah.

Great. Thank you so much and then I guess lastly, if I may I was looking through the.

<unk> guidance and I know you guys kind of drop down your Capex is there any kind of reasons why my color on that.

That's actually related to some machinery that we were going to acquire in our <unk> ISR business and just due to some supply chain issues actually getting pushed into next year, so that isn't permanently reducing it just moving into next year.

Okay.

Okay alright. Thank you so much for the question you're answering my question.

Thank you.

And up next we have Pete <unk> Kubicki go ahead Pete.

Hey, good afternoon guys.

Eric.

Eric I wanted to follow on the earlier conversations about Secretary Kendall.

I just wanted some of the things you said kind of interesting he's been talking about a drone a loyal wingman type drone I guess for both the B 21 and and Gad.

And the comment he made was that the price of those drones will be on the order of one half.

The price of the.

Aircraft themselves, which presumably are in the hundreds of millions of dollars.

It seems like that would put those drones and kind of the exquisite category is that.

Should we conclude from that first of all is that true do you think and second of all should we conclude from that that.

Now you don't think <unk> can play in that area, but there are lots of other areas of Creatives will plan.

Trying to kind of follow the whole logic there. Thanks.

So the first part of your question.

I'm not going to answer because I don't want to speculate anything on me.

On the second on the secretary, but on the second part.

What what I understand the secretary is doing.

And.

Based on what I know.

I am absolutely confident.

That <unk> can participate in one way shape or form.

With the Secretary's initiatives.

Absolutely confident.

Okay. Okay.

Let me step back.

A bigger picture.

If we can kind of summarize all the order expectations you have for the balance of the year. The next three quarters.

Any sense for the type of book to Bill that you guys are expecting for the next three quarters.

And then we should expect.

Hmm.

We don't I.

I don't have the numbers in front of me, but we have a.

We have a number as I went through today in the prepared remarks, and the Q&A we've got.

We're expecting a sole source $100 million contract for the target drone area, but we have been informed we're going to get I mentioned that on the space side.

We've got we've got several that we've got one that we've won that Hasnt been announced yet and we've got two that we have been informed we're going to get that hopefully we will get those will be additive.

<unk>.

Over the balance of the year I don't want to be quarterly.

Bookings and I'm going to say program bookings will be significant and so when I say a program booking let's.

Let's go back to this.

Targeted around one that we've been informed that we're going to get I know I know it'll be a single source award.

There will be a $100 million that will get that'll be fulfilled over a period of time I don't know how that will be booked for book to bill purposes, depending on funding or options or things like that but programmatically trajectory wise I believe it's going to be very very robust.

Okay. Okay. That's helpful.

The more basic question and the rocket support area I guess I haven't figured it out yet what's the difference between <unk> and <unk>.

So Zeus.

As a launch system.

Aerospace is.

As a vehicle.

Okay.

Zeus.

As a propulsion aspect to it <unk> does not have a propulsion aspect to it.

I just have to be.

Zeus definitely has a propulsion aspect to it.

<unk> a vehicle if I should leave it at that.

Okay. Okay. Okay.

Okay and are you guys do we expect.

First quarter press release wise was fairly meager right.

With the CR and whatnot shall.

Should we expect to see a lot of these announcements made public by you guys as they happen the balance of the year.

I hope, we're able to but but but if not like on some of these baselines.

My understanding is I think the customers are going to announce them.

And once they announce some hopefully we'll be able to announce something or we will be able to affirm yep that's us.

My intuition tells me that's how that's going to go.

Okay.

Okay. Thanks, guys.

Hello.

And we have no more questions at this time I will turn it back to Eric for closing comments alright. Thank you everybody for joining us this afternoon.

We'll circle up with you at the end of Q2.

Great afternoon. Thank you.

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.

Q1 2022 Kratos Defense and Security Solutions Inc Earnings Call

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