Q4 2023 Kratos Defense & Security Solutions Inc Earnings Call

Okay.

Thank you for standing by and welcome to create self defense and security solutions fourth quarter 2023 earnings Conference call. At this time, all participants are in a listen only mode.

After the speaker presentation, there will be a question and answer session.

To ask a question during the session you will need to press star one one on your telephone to remove yourself from the queue. You May Press Star one one again I would now like to hand, the call over to the VP and General Counsel Marie Mendoza. Please go ahead.

Marie C. Mendoza: I would now like to hand the call over to VP and General Counsel Marie Mendoza. Please go ahead. Thank you. Good afternoon, everyone.

Thank you and good afternoon, everyone. Thank you for joining us for the criticism.

Marie C. Mendoza: Thank you for joining us for the Kratos Defense, fourth quarter and full year 2023. With me today is Eric DeMarco, Kratos' president and chief executive officer, and Deanna Lund, Kratos's executive vice president. Before we begin the substance of today's call, I'd like to take a... Note of a Safe Harbor Paragraph that is included at the end of today's meeting. This paragraph emphasizes the major insurgencies and risks inherent in the forward-looking statements we will make this afternoon, and mine. Administrative, Potential Market Opportunities, Operational Outlook, Financial Guidance, and other forward-looking statements 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-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with, or in accordance with, the Federal Regulation.

<unk> fourth quarter and full year 2023 conference call.

With me today is Eric Demarco, President and Chief Executive Officer, and Deanna Lund credits as 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 it.

Safe Harbor paragraph that it'd be great at the end of today's press release.

Paragraph emphasizes the major uncertainties and risks inherent in the forward looking statements. We will make this afternoon. Please keep these uncertainties and risks in mind as we discuss future strategic.

It is a potential market opportunities operational outlook financial guidance and other forward looking statements during today's call.

Today's call will also include a discussion of non-GAAP financial measures as that term is defined in regulation G. non-GAAP financial measures should not be considered in isolation from or is it.

For financial information presented in compliance of yes.

Eric M. DeMarco: Accordingly, at the end of today's press release, we have provided the reconciliation of these non-GAAP financial... Financial Results. Prepared. With that, I will now turn the call over to Marie. Thank you, Marie. Good afternoon, everybody.

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.

With that I will now turn the call over to Eric Demarco.

Thank you Marie.

Eric M. DeMarco: In 2023, Kratos achieved each of the goals we laid out at the beginning of the year, including 10% organic revenue growth, increased EBITDA with positive cash flow generation, while also making significant internally funded investments in potential transformational growth areas for our company. Expected growth areas include high-performance jet drone systems, and hypersonic rocket motors and systems. Next Generation Jet Engines for Drones, Missiles, and Loitering Munitions, and Open Space Software for Virtualized Satellites C2 and TT&C.

Good afternoon everybody.

2023 create us achieved each of the goals, we laid out at the beginning of the year.

Putting 10% organic revenue growth increased EBITDA with positive cash flow generation.

While also making significant internally funded investments and potential transformational growth areas for our company.

Expected growth areas include high performance jet drone systems, hypersonic rocket motors and systems.

Next generation jet engines for drones missiles and loitering munitions.

And open space software for Virtualized satellite C, two and TTM state.

Eric M. DeMarco: Kratos' product systems and software, which we envision, design, and engineer from the outset to be produced in large quantities at a low cost, are a value-added differentiator for our customers and also, importantly, for our prime system integrator partners and team members. Kratos' relationships with the Prime System Integrators, including our being able to rapidly provide relevant, low-cost, differentiated, and value-enhancing products, hardware, and systems, is a key element of Kratos' strategy, and it's core to our company's success. At Kratos, we believe that it's better to have a big part of something instead of all of nothing. And based on a program's requirements, including schedule, the potential size of a Kratos investment required, the technical development and financial risk to Kratos, and also expected customer preferences, we may team with one or more of our prime partners on certain program opportunities instead of Kratos priming itself. We believe this teaming or partnership approach has been very successful, including recently on a high-profile program.

[noise] create hostess products systems, and software, which we envision design and engineer from the outset to be produced in large quantities at a low cost or a value added differentiator for our customers.

And also importantly for our prime system integrator partners and teammates.

<unk> relationships with the prime system integrators, including our being able to rapidly provide relevant low cost differentiated and value enhancing products hardware and systems is a key element of tradeoffs with strategy and it's core to our company's success.

At <unk>, we believe that it's better to have a big part of something instead of all or nothing and based on our programs requirements, including schedule the potential size of a credo investment required.

Technical development and financial risk to Creatives and also expected customer preferences, we may team with one or more of our prime partners I'm certain program opportunities.

Stirred up credo priming ourselves.

We believe this teaming or partnership approach has been very successful, including recently at a high profile program.

Eric M. DeMarco: On last quarter's conference call, I mentioned that we were expending significant effort, including bid, proposal, NRE, and other costs, in pursuit of certain large opportunities. Here is an update. We have successfully received, potentially, the most important of these contracts in Kratos' unmanned systems business with a prime partner on a second opportunity. A different Kratos Prime partner was awarded a new missile defense system-related satellite constellation program, where Kratos is responsible for the ground... Thirdly, we have been informed that a Kratos Turbine Technologies proposal was accepted, and we are now waiting for our customer to receive funding, hopefully in Q3. Finally, Kratos made the decision to pass on an opportunity as a prime due to the size of the Kratos internal investment required, the financial risk to Kratos on this development program, and our assessment of an unacceptable probability of our win.

On last quarter's conference call I mentioned that we were spending significant effort, including bid proposal and our array of other costs in pursuit of certain large opportunities.

As an update.

We have successfully received potentially the most important of these contracts of <unk> unmanned systems business with a prime partner.

On a second opportunity a different credo as prime partner was awarded a new missile defense system related satellite constellation program, where Kratos is responsible for the ground system.

Thirdly, we have been informed that our credo is turbine technologies proposal was accepted and we are now waiting for our customer to receive funding hopefully in Q3.

And finally credo has made the decision to pass on an opportunity as a prime due to the size of the Credo says turtle investment required the financial risks to create else on this development program and our assessment of an unacceptable unacceptable probability of Credo swim.

Eric M. DeMarco: There are several additional notable opportunities that Kratos is currently assessing or in pursuit of, including where we are making significant investments, which hopefully we will be able to update you on in the future. As we begin 2024, we are under contract on numerous programs of record, either as prime or partner. These include new programs currently in development.

There are several additional notable opportunities that create OS is currently assessing or in pursuit of including where we are making significant investments, which hopefully we will be able to update you in the future.

As we begin 2024, we are under contract on numerous programs of record either as prime or partnered.

These include new programs currently in development.

Eric M. DeMarco: Programs Transitioning to Low-Rate Initial Production, programs that are in LRIP and transitioning to full rate production, programs that are in full rate production already, where we expect increased future production quantities. Additionally, Kratos' opportunity pipeline is approximately $11 billion, and our backlog is $1.2 billion, giving us confidence in our 2024 financial forecast. Additional recent Kratos achievements include a $579 million prime single award Space Force Satellite Communications System related contract, which we were able to announce today. The Space Force contract covers the command and control consolidation system used for SATCOM telemetry, tracking, command, sustainment, and resilience.

Programs transitioning to low rate initial production.

Programs that are in L. Rip transitioning to full rate production programs that are in full rate production already where we expect increased future production quantities.

Additionally, kratos as opportunity pipeline is approximately $11 billion and our backlog is $1 2 billion, all providing us confidence in our 2024 financial forecast.

Additional recent credo achievements include a $579 million Prime single award space for satellite Communications system related contract, which we were able to announce today.

The space Force contract covers the command and control consolidation system used for Satcom telemetry tracking command Sustainment and resiliency.

Eric M. DeMarco: The receipt of this award, which was Kratos' only large outstanding re-compete, provides Kratos both future visibility and an opportunity for growth, as reflected by the significant contract ceiling value increase of approximately 50 percent over the previous contract vehicle, as the number of satellites in orbit has and is expected to continue to increase, contributing to the overall expected increase in this contract's scope. It was reported that Kratos and Boeing have executed a memorandum of understanding for Kratos' TDI J85 jet engines to be the propulsion provider for the Boeing Power Joint Direct Attack Munition. It is anticipated that the powered JDAM will provide air-launched, low-cost standoff capability against land and maritime threats. We received an approximate $23 million prime contract from the United States Marine Corps related to Kratos' Valkyrie tactical drone, and we received significant contract awards related to the Iron Dome and the Patriot Air Defense System. It was also reported that Kratos' Terrier Oriel two-stage rocket system was the propulsion system for the VMAX hypersonic system launch.

The receipt of this award which was Credo says only large outstanding Recompete provides credo as both future visibility and an opportunity for growth as reflected by the significant contract ceiling value increase of approximately 50% over the previous contract vehicle as the.

A number of satellites in orbit has and is expected to continue to increase contributing to the overall expected increase in this contract scope.

It was reported that create us and Boeing have executed a memorandum of understanding for Kratos as TDI J 85 jet engines to be the propulsion provider for the Boeing powered joint direct attack munition.

It is anticipated that the power J dam will provide air launched low cost standoff capability against land and maritime threats.

We received an approximate $23 million prime contract from the United States Marine Corps related to create ulcers Valkyrie tactical drone and we received significant contract awards related to the Iron dome and the Patriot Air Defense systems.

It was also reported that Kratos is terrier oriel two stage rocket system.

Was the propulsion system for the V Max hypersonic system launch.

Eric M. DeMarco: And it was reported that recent testing of sophisticated AI software aboard an XQ-58A Valkyrie drone will influence how the U.S. Air Force develops and deploys autonomous technology. For 2024, expected Kratos growth areas, which are included in our base case financial forecast, include turbojet, turbofan, and rocket engines for unmanned aerial drones, loitering munitions, cruise missiles, hypersonic systems, supersonic platforms, space, and other systems; increased target drone sales, with target drones being used by the US and our allies to exercise radar, air defense, fighter aircraft, maritime, counter UAS, and Hardware and product sale growth related to air defense, counter UAS, radar, and missile systems, including in Kratos' C5ISR and our microwave electronic products business.

And it was reported that recent testing of a sophisticated AI software aboard and execute 58, a valkyrie drone will influence how the U S Air Force develops and deploys autonomous technologies.

For 2020 for expected cradles growth areas, which are included in our base case financial forecast include.

Turbo jet turbofan and rocket engines for unmanned aerial drones loitering munitions cruise missiles hypersonic systems supersonic platforms space on other systems.

Increased target drone sales with target drones are being used by the U S and our allies to exercise radar Air Defense Fighter aircraft Maritime counter UAS on other platforms and systems, all of which are in increasing demand globally.

Hardware and product sales growth related to air defense counter UAS radar and missile systems, including and <unk> ISR at our microwave electronic products business.

Eric M. DeMarco: These include systems that are currently in theater in both Europe and the Middle East, and we expect the Sentinel program with our prime partner Northrop to also be a 2024 organic growth driver. We expect to see growth in Kratos' Space, Satellite, and Training Systems Division, including particularly strong growth in virtual, augmented reality, and other training. In 2024, we expect Kratos' first-to-market virtualized software-based OpenSpace C2 and TT&C Suite to continue to gain customer acceptance and designate positions.

These include systems that are currently in theater in both Europe, and the Middle East and we expect the Sentinel program with our Prime partner Northrop to also be a 2020 for organic growth driver.

We expect to see growth in Credo space satellite training systems division, including particularly strong growth in virtual and augmented reality and other training systems.

In 2024, we expect Kratos is first to market Virtualized software based open space <unk> and TNC suite to continue to gain customer acceptance and designed in positions.

Eric M. DeMarco: Additionally, we are currently forecasting 2025 to be an inflection point year for Kratos' satellite business, both in organic revenue growth and in profit generation, based on programs we have successfully received, those we expect to receive, and those we expect to either transition to or begin production or deployment on. In the tactical drone area, we believe that Kratos remains well-positioned for this new, large, and expected-to-be-fast-growing market area, both with its drones and also with its family of turbojets and our turbofan engines. Tactical drone initiatives we're able to discuss publicly include: We are under a funded contract and have completed a successful series of mission system and related flights, including as related to Kratos' MAKO tactical jet drone. We are under a funded contract and are integrating Kratos' jet engines into Kratos' drones.

Additionally, we are currently forecasting for 2025 to be an inflection point year for Kratos satellite business, both in organic revenue growth and in profit generation based on programs. We have successfully received those we expect to receive and those we expect to either transition to or begin production.

Or deployment on.

And the tactical drone area, we believe that <unk> remains well positioned for this new large and expected to be fast growing market area, both with Kratos drones and also with <unk> family of Turbo jet and our turbofan engines.

Tactical drone initiatives, we're able to discuss publicly include.

We are under a funded contract and have completed a successful series of mission system and related flights, including as related to create us as Mako tactical jet drone system.

We are under a funded contract in our integrated creative and integrating Credo says jet engines and <unk> drugs.

Eric M. DeMarco: Kratos' Ghost Works is completing ground testing of a new drone-related system at our Burns Flat Range location, which program we expect to transition in the future to a larger range for final system demonstration. We had hoped to transition the system to a larger range in Q4, but we were unable to do so. We are moving rapidly with S.H.I.E.L.D. A.I., integrating S.H.I

<unk> Ghost works is completing ground testing of a new drone related system at our Burns flat range location, which program, we expect to transition in the future to a larger range for final system demonstration.

We had hoped to transition the system to a larger range in Q4, but we were unable to do so.

We are moving rapidly with shield AI integrating shields artificial intelligence into multiple kratos jet drones with flights being held at <unk> Burns flat range facility.

Eric M. DeMarco: 's artificial intelligence into multiple Kratos jet drones, with flights being held at Kratos's Burns Flat Range Facility. We are completing production of the last of the initial 12 Valkyries, and we are in production on the second 12 Valkyries, whose production rate we are calibrating now based on Kratos' internal resource allocation considerations, including as related to the new funded drone system program we have received. We are under a funded contract for a Valkyrie variant where mission and other systems are being integrated. We are working with the government entity on a separate Valkyrie variant, with first flights expected in the fourth quarter of this year. And Kratos' Ghostworks is working on an additional Valkyrie variant with new capability, performance, and low cost, which we believe will be another step function ahead for Kratos' tactical drone family. There are currently four Valkyrie variants that I can publicly confirm today and a fifth that Kratos' Ghostworks is currently assessing.

We are completing production of the last of the initial 12 Valkyrie and we are in production on the second 12, Valkyrie, which production rate. We are calibrating now based on <unk> internal resource allocation considerations, including as related to the new funded drone system program. We have received.

We are underfunded contract for a valkyrie variant where mission and other systems are being integrated.

We are working with the government entity on a separate Valkyrie variant with funded first flights expected in the fourth quarter of this year.

And <unk> Ghost works is working on an additional valkyrie variant, which new capability performance and low cost. We believe will be another step function ahead for kratos tactical drone family.

There are currently four valkyrie variance that I can publicly confirmed today and a fifth that <unk> Ghost works is currently assessing.

Eric M. DeMarco: We expect to receive the largest Valkyrie-related contract award to date in late 2024, and I am confident that all 24 Valkyries we have produced or plan to complete production on will ultimately be sold or delivered to funded customers. We are establishing an additional production line for the new drone system program that we are under contract to develop with a partner. We believe that once we have the 2024 U.S. federal budget, Kratos' Thanatos will receive a funded prime contract. Based on recent events, it is also possible that we will receive a funded prime contract for Kratos' Athena drone program system late this year or early next year. Initial derivatives of both Thanatos and Athena are flying today with customers. I expect Kratos' Valkyrie, Mako, Airwolf, Thanatos, and Athena and other Kratos tactical drones to be successful.

We expect to receive the largest valkyrie related contract award to date in late 2024, and I am confident that all 24 Valkyrie. We have produced our plan to complete production on will ultimately be sold and delivered to funded customers.

We are establishing an additional production line for the new drone system program that we are under contract on with the partner.

We believe that once we have the 2020 for U S. Federal budget that credo span of toast will receive a funded prime contract.

Based on recent events. It is also possible that we will receive a funded prime contract for Kratos as Athena drone program system late this year early next year.

Initial derivatives of both fan of toast and Athena are flying today with customers.

I expect Kratos as Valkyrie, Mako Air Wolf banner, Toast, Athena and other kratos tactical drone to be successful and we continue to progress with multiple funded customers entities, our partners, including for system mission as Asian concept of operations payload integration et cetera.

Eric M. DeMarco: And we continue to progress with multiple funded customers, entities, or partners, including for system missionization, concept of operations, payload integration, etc. However, we will remain conservative, and we have included no tactical drone production assumptions in Kratos' 2024 base case financial forecast, only S&T, RDT&E, and similar funded development initiatives or programs. Major initiatives and opportunities Kratos currently plans to invest in or pursue in 2024 include: We are establishing production facilities for Kratos' jet engine, including for missiles, drones, loitering, and powered munitions, for several platforms, systems, and opportunities that we are currently underfunded development contracts for. We are completing Kratos's Sentinel Program ground transporter production facility, which will be one of the largest and advanced technology secure production facilities in our company, which we are under a funded contract.

However, we will remain conservative and we have included no tactical drone production assumptions in <unk> 2024 base case financial forecast.

Only S&P Rd, TNT and similar funded development initiatives or programs.

Major initiatives and opportunities cradles currently plans to invest in or pursue in 2024 include.

We are establishing production facilities for kratos as jet engines, including for missiles drones loitering and powered munitions for several platforms systems and opportunities that we are currently under funded development contract on.

We are completing credo Sentinel program ground transport or production facility.

Which will be one of the largest and advanced technology secure production facilities and our company.

Which we are under a funded contract on.

Eric M. DeMarco: We are establishing the production line for the new system in Kratos' Unmanned Systems Division, as I mentioned previously, which is one of the most important programs in our company. We're completing the Zeus 1 and Zeus 2 engines and preparing these systems for production and vehicle system integration, including as related to a customer-funded hypersonic program we have and other customer initiatives.

We are establishing the production line for the new system and <unk> unmanned systems Division I've mentioned previously, which we are under a customer funded contract and which is one of the most important programs in our company.

We're completing the Zeus one in Zeus two engines in preparing these systems for production and vehicle system integration.

Including as related to a customer funded hypersonic program, we have and other customer initiatives.

Eric M. DeMarco: We're completing Kratos' Erenes and Dark Fury hypersonic systems and beginning the buildout of the related production integration facilities, also for which we have a funded customer contract. We currently expect to receive in 2024 a customer-funded contract for approximately 25 Kratos Oriel rocket systems, which we will need to prepare for and execute on once received, all related to future launch missions. We are establishing a new Space Qualified Microwave Electronics Development and Manufacturing Facility in Israel to support new funded Space System Program awards we have received, others we expect to receive, and we are expanding our existing Production and Manufacturing Facility to meet the increased capacity and production requirements we're seeing. We will also complete enhancements to and expansion of our U.S.-based microwave electronics manufacturing.

We're completing credo severities and dark Fury hypersonic systems and beginning the build out of the related production integration facilities also for which we have funded customer contract.

We currently expect to receive in 2020 for a customer funded contract for approximately 25, Credo Oriole rocket systems, which we will need to prepare for and execute on once received all related to future launch missions.

We are establishing a new space qualified microwave electronics development and manufacturing facility in Israel to support New funded space system Program Awards. We have received others, we expect to receive and we are expanding our existing production and manufacturing facility to meet the increased capacity in <unk>.

Reduction requirements, we're seeing.

We will also complete enhancements to an expansion of our U S based <unk> microwave electronics manufacturing facility.

Eric M. DeMarco: We are establishing the facility and acquiring the machinery and equipment, including 3D and additive manufacturing equipment, for Kratos' Materials Production Center of Excellence, where we are vertically integrating the production of Kratos' jet engines, space propulsion, and other programs and systems, most of which are already or are expected to be underfunded government contracts. We are also in discussions regarding new teaming or partner agreements related to significantly expanding Kratos' core business areas, including products, systems, software, and technology, all of which have funded customer support. And this includes KTT, our turbine business, and our blade engine initiative. These examples are representative of the large number of opportunities Kratos has and expects to receive and why 2024 is expected to be a significant internal investment and capital expenditure year as we prepare Kratos to execute on recently funded programs, and we position Kratos to successfully receive additional expected large new programs.

We are establishing the facility and acquiring the machinery and equipment, including three D. In additive manufacturing equipment for Kratos as materials production Center of excellence, where we are vertically integrating the production of <unk> jet engines space propulsion and other programs and systems most of which.

Our already or are expected to be underfunded government contracts.

We are also in discussions regarding new teaming or partner agreements related to significantly expanding <unk> core business areas include.

Including products systems software and technology, all of which have funded customer support and this includes K T T. Our turbine business and our blade engine initiative.

These examples are representative of the large number of opportunities cradles hasnt expects to receive and why 2024 is expected to be a significant internal investment in capital expenditure year as we prepare credo is to execute on our recently received funded programs and we position <unk> to successfully received additional expected larger.

Eric M. DeMarco: We believe that the industry and Kratos are in a once-in-a-generation global buildup of defense and security due to the geopolitical and overall increased threat environment. As a result of this strategic system buildup, the number and size of the potential opportunities that Kratos has and continues to receive have never been greater, and we expect Kratos' future opportunity set to continue to increase, including based on discussions with our customers and also our prime System Integrator partners. Accordingly, Kratos is focused on the successful execution of our existing programs and contracts and making the required internally funded investments in order to be qualified to successfully win, pursue, and win these new opportunities. Accordingly, Kratos has no plans for any acquisitions of any size.

New programs.

We believe that the industry and credo or in a once in a generation global buildup of defense and security due to the geopolitical and overall increased threat environment.

As a result as a result of this strategic system buildup, the number and size of the potential opportunities that <unk> has and continues to receive has never been greater and we expect <unk> future opportunity set to continue to increase including based on discussions with our customers and also our prime system.

Integrator partners.

Accordingly, <unk> is focused on successful execution of our existing programs and contracts and making the required internally funded investments in order to be qualified to successfully win pursue and win these new opportunities.

Accordingly, <unk> has no plans for any acquisitions of any size.

Eric M. DeMarco: Operational challenges include the obtaining and retaining of qualified personnel, including those willing and able to obtain a national security clearance, and the related high and increasing cost of these individuals and of the supply chain, which is adversely impacting Kratos' margins, and also Resource and Capital Allocation Management as we execute on existing programs and pursue new opportunities. For Kratos' 2024 financial plan, we are currently forecasting Q3 and, in particular, Q4 to be stronger than the first half of the year, which is directly related to the government contracting offices having to get funding under contract in a shortened time period as a result of the current CRA going through at least March 8th, or four plus months into government fiscal 2024. If the CRA goes beyond March 8th of this year, we will take a look at the Kratos program portfolio and the facts and circumstances at that time and determine if any adjustment to our forecast is required. Deanna Thank you, Eric. Good afternoon,

Operational challenges include the obtaining and retaining of qualified personnel, including those willing unable to obtain a national security clearance and the related high and increasing cost of these individuals and of the supply chain, which is adversely impacting <unk> margins.

And also resource and capital allocation management as we execute on existing programs and we pursue new opportunities.

For <unk> 2024 financial plan. We are currently forecasting Q3, and in particular Q4 to be stronger than the first half of the year, which is directly related to the government contracting offices, having to get funding under contract and a shortened the time period as a result of the curve.

CRA going through at least March 8th or four plus months into government fiscal 2024.

If the CRA goes beyond March 8th of this year, we will take a look at the <unk> program portfolio and the facts and circumstances at that time and determine if any adjustment to our forecast is required.

Deanna.

Thank you Eric Good afternoon, as we have included a detailed summary of the fourth quarter and full year 2023 financial performance as well as the initial first quarter and full year 2024 financial guidance in the press release, we published earlier today I will focus on the highlights in my remarks today.

Deanna Hom Lund: As we have included a detailed summary of the fourth quarter and full year 2023 financial performance, as well as the initial first quarter and full year 2024 financial guidance, in the press release we published earlier today, I will focus on the highlights in my report. Revenues for the fourth quarter were $273.8 million, exceeding our estimated range of $237 to $257 million, which included higher-than-expected performance and delivery in our space and satellite, turbine technologies, C5ISR, and microwave products, resulting in 17% organic growth in our KGS segment for the fourth quarter, as compared to the third quarter. Adjusted EBITDA for the fourth quarter of 2023 was $29.1 million, exceeding our estimated range of $19.1 million, reflecting the additional revenues as well as a more favorable mix of revenue, including more higher-margin software and data related content than forecasted in our free cash flow generated from operations of 48.1 after funding CapEx of $19.3 million, came in above our estimated range of break-even free...

Revenues for the fourth quarter were $273 8 million exceeding our estimated range of $237 million to $257 million, which includes higher than expected performance and delivery in our space and satellite turbine technologies, <unk>, ISR and microwave products businesses, resulting in 17%.

Organic growth in our Kgs segment for the fourth quarter of 2023 as compared to the fourth quarter of 2022.

Adjusted EBITDA for the fourth quarter, 2023 was $29 1 million exceeding our estimated range of 19% to $23 million, reflecting the additional revenues as well as a more favorable mix of revenues, including more higher margin software and data related content than forecasted in our space and satellite business.

Yes.

Free cash flow generated from operations of $48 1 million after funding Capex of $19 3 million came in above our estimated range of breakeven free cash flow for the fourth quarter of 2023, reflecting the increased revenues and EBITDA generated during the quarter as well as favorable timing on it.

Deanna Hom Lund: Reflecting the increased revenues and EBITDA generated during the quarter, as well as favorable timing on accelerated customer milestone payments collected in our turbine technologies, unmanned, and satellite, more than offset our previous estimated shift in certain payment milestones in our training solutions and C5IS. Consolidated DSOs, or Day Sales Outstanding, continue to improve from 119 days in the third quarter to 109 days in the fourth quarter of 2023, with approximately $34 million in net cash generation from customer receivables during the fourth quarter, which included certain favorable customer milestones. In addition, advanced payments or deferred revenues increased by $11 million. For full year 2023, revenues were $1.037 billion, or an organic growth rate of 12%, above FY22 revenues and above our estimated range of $1 to $1.02 billion, including higher-than-expected performance and delivery in our space and satellite, turbine technologies, and microwave products.

Accelerated customer milestone payments collected in our turbine technologies unmanned systems and space and satellite businesses, which more than offset our previous estimated shifted certain payment milestones in our training solutions and <unk> ISR businesses.

Consolidated Dsos or days sales outstanding continued to improve from 119 days in the third quarter to 109 days in the fourth quarter of 'twenty, three with approximately $34 million and net cash generation from customer receivables during the fourth quarter, which included certain favorable customer milestone payments.

In addition, advanced payments or deferred revenues increased $11 million during the fourth quarter.

For full year 2023 revenues were one point <unk>, three 7 billion or an organic growth rate of 12, 6% above FY 'twenty two revenues above our estimated range of one to one 2 billion, including higher than expected performance and delivery in our space and satellite turbine technologies.

And microwave products businesses.

Deanna Hom Lund: Full year adjusted EBITDA was $95.4 million, above our expected range of $85 to $89 million, reflecting increased revenues and also a more favorable mix of revenues. Cash flow generated from operations for full year 23 was $65.2 million, and free cash flow generated from operations was $21.1 million after funding of capital expenditures of $4.4 million, less $8.3 million in receipts of proceeds for sales of Valkyries that were built as Kratos Capital.

Full year, adjusted EBITDA was $95 4 million above our expected range of $85 million to $89 million reflected reflecting the increased revenues and also a more favorable mix of revenues.

Cash flow generated from operations for full year, 2003 was $65 2 million and free cash flow generated from operations was $21 1 million after funding of capital expenditures of $52 4 million less $8 3 million in receipts of proceeds for sales of Valkyrie is that were built as <unk> capital assets.

Yeah.

As mentioned earlier cash flow was positively impacted by favorable customer payment milestone receipts in our turbine technologies unmanned systems and space and satellite businesses, which more than offset the shift in previously expected payment milestones in our training solutions and C. Five ISR businesses.

Deanna Hom Lund: As mentioned earlier, cash flow was positively impacted by favorable customer payment milestone receipts in our turbine technologies, unmanned systems, and space and satellite businesses, which more than offsets the shift in previously expected payment milestones in our Bye-bye. Our contract mix for the fourth quarter of 23 was 71% of revenues generated. Contracts, 24% of our revenues are generated from cost-plus type contracts, and 5% of revenues are generated from cost-plus type contracts. Revenues generated from contracts with the U.S. federal government during the fourth quarter, 23, we're approximately 69, including revenues generated from contracts with the DOD, non-DOD federal government, agencies, and FMS.com, generated 13% of revenues from commercial customers in eight, foreign countries. We continue to make progress in our hiring and retention of skilled technical labor across a total headcount of 3932 employees at the end of 2020, compared to 36-

Our contract mix for the fourth quarter of 2003 was 71% of revenues generated from fixed price contracts.

4% of our revenues.

Generated from cost plus type contracts and 5% of revenues generated from time and material contracts.

Revenues generated from contracts with the U S. Federal government during the fourth quarter of 2023 were approximately 69%, including revenues generated from contracts with the Dod.

Non Dod federal government agencies and Fms contract.

We generated 13% of revenues from commercial customers and 18% from foreign customers in the fourth quarter.

We continue to make progress in our hiring and retention of skilled technical labor across the company with total head count of 39 32 employees at the end of 2023 compared to $36 45 at the end of 2022.

Now moving on to financial guidance.

Our initial first quarter and full year 2024 financial guidance. We provided today includes our current forecasted business mix and current delivery schedules and our assumptions related to the expected impact of it.

Deanna Hom Lund: Now moving on to financial guidance, our initial first quarter and full year 2024 financial guidance we provided today includes our current forecasted business mix and current delivery schedules and our assumptions related to the expected impact. The continued operating challenge related to our obtaining and retaining qualified technical personnel and the related increased cost for these employees and across our entire, Our guidance also includes our assumptions related to the continued impact of supply chain disruptions, inflation, and related expected costs. Our first quarter and full year 2024 guidance also reflects the impact of certain performance and deliveries in the fourth quarter of 2020, certain of which had been originally estimated to be executed or delivered in the first place. As Eric mentioned earlier, we are forecasting that our unmanned systems will be one of our leading growth drivers in 2024, which is currently forecasted to generate 260 to 270 million in revenues, reflecting approximately 20 to 25% organic growth.

Continued operating challenge related to obtaining and retaining qualified technical personnel and related increased cost for these employees and across our entire labor base.

Our guidance also includes our assumptions related to the continued impact of supply chain disruptions inflation and related expected costs and price increases.

Our first quarter and full year 2020 for guidance.

Next the impact of certain performance and deliveries in the fourth quarter of 2023 certain of which had been originally estimated to be executed are delivered in the first quarter of 2024.

As Eric mentioned earlier, we are forecasting that our unmanned systems business will be one of our leading growth drivers in 2024, which is currently forecasted to generate $260 million to $270 million in revenues.

Electing approximately 20% to 25% organic growth over 2023.

Our 2024 and cash flow estimates include investments in elevated capital expenditures as Eric discussed earlier on a base case estimated range of $70 million to $80 million, which includes the second production build for valkyries of approximately $20 million.

Deanna Hom Lund: Our 2024 cash flow estimates include investments in elevated capital expenditures, as Eric discussed earlier, on a base case estimated range of $70 to $80 million, which includes a second production build for Valkyries of approximately $20 million in anticipation of customer requirements, and approximately $10 to $12 million to establish Kratos' material production center of excellence and approximately $5 to $7 million to expand our global satellite sensor network in response to specific customer contractual requirements, the specific expansion costs of which are Importantly, a U.S. government budget was not passed by October 1, 2009, the beginning of the federal fiscal year, and as a result, Kratos and the industry are operating under a continuing resolution authorized by the U.S. Department of Defense, which currently expires March 8th, 2021, under which no new contracts and no increases in increasing contracts, production, or funding, among other stipulations.

In anticipation of customer requirements and demand approximately $10 million to $13 million to expand and build out our microwave Israeli production facility, which includes expansion and improvements related to being space qualified approximately $10 million to $12 million to establish <unk> as material production center of excellence.

And approximately five to 7 million to expand our global satellite sensor network in response to specific customer contractual requirement, which specific expansion costs are expected to be covered under customer contracts.

Importantly, our U S government budget was not passed by October one 2023, the beginning of federal fiscal year 2024, and as a result creators in the industry are operating under a continuing resolution authorization, which currently expires March eight 2024 under which no new.

<unk> and no increases and increase in contracts production or funding among other stipulations as permitted.

<unk> 2024 financial forecasts and guidance provided today assumes that the current CRA will be resolved and that a U S federal and Dod budget will be in place by March eight.

As a result, similar to create us as 2023 quarterly financial trajectory, which fiscal year also experienced a CRA. We are forecasting <unk> third and fourth financial quarter results of 2024 to be significantly greater than the fiscal first and second quarter results with the fourth quarter expected to be.

Operator: Kratos' 2024 financial forecast and guidance provided today assumes that the current CRA will be resolved and that a U.S. federal and DoD budget will be in place by March 8, as a result, similar to Kratos' 2023 quarterly financial trajectory, which fiscal year also experienced a CRA. We are forecasting Kratos' third and fourth financial quarter results for 2024 to be significantly greater than the fiscal first and second quarter results, with the fourth quarter expected to be particularly strong in both revenues. If the current CRA goes beyond March 8th, we will evaluate Kratos' 2024 financial forecast at that time based on the existing facts. Great Thank you, Deanna. We'll turn it over to the moderator now for questions. Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone. To remove yourself from the queue, you may press star 11 again.

Particularly strong in both revenue and EBITDA.

If the current CRA goes beyond March eight we will evaluate <unk> 2024 financial forecast at that time based on the existing facts circumstances and expectations.

Right.

Thank you Deanna will turn it over to the moderator now for questions.

Thank you.

As a reminder to ask a question you will need to press star one one on your telephone to remove yourself from the queue. You May Press Star one one again, please standby, while we compile the Q&A roster.

Our first question comes from the line of Michael Sure Molly.

<unk> capital. Please go ahead Michael.

Hey, good evening guys nice results. Thanks for taking my questions.

Eric.

Sort of level set us on some of the higher profile opportunities I mean, we've seen the <unk>.

Michael Ciarmoli: Please stand by while we compile the Q&A roster. Our first question comes from the line of Michael Ciarmoli of Truist Capital. Please go ahead, Mike.

I guess is selected five firms I guess, there's going to be a down selected two.

Eric M. DeMarco: Hey, good evening, guys. Nice results. Thanks for taking the question. Eric.

Youre ahead of UAS and said there you're hopeful of being on the next increments and then I guess also right along with that replicate or kind of tranche, one and two how should we think about.

Eric M. DeMarco: What sort of level should we set ourselves on for some of the higher profile opportunities? I mean, we've seen, you know, the CCA, I guess, has selected five firms, I guess there's going to be a downselected to your head of, you know, UAS has said there, you're hopeful of being on the next increment, and then I guess also right along with that replicator kind of tranche one and two, you know, how should we think about, you know, the opportunity set here in the near future Okay, we, We are the absolute low cost, rapid provider of jet drones, and that's unarguable. It's well known by the government and by the prime Minister.

The opportunity set here in the near term.

We we are the absolute LOE cost.

Rapid provider of inject drugs.

And.

That's that's an arguable, it's well known by the government and by the primes.

So we are uniquely positioned we believe.

For every opportunity that's been talked about publicly.

Some new ones that are coming that have not yet been talked about publicly as either the prime.

Eric M. DeMarco: So we are uniquely positioned, we believe, for every opportunity that's been talked about publicly, and some new ones that are coming that have not yet been talked about publicly as either the prime or as a key partner with somebody. That's how we see it, and for certain types of aircraft, on certain classes of them that are coming, not only on the aircraft side, but we're also positioned with our jet engines. So we are uniquely positioned, Mike, for what's going on in the drone area across every service. Okay, can you guys, I mean, as you look at the pipeline of opportunities, which, you know, increased significantly, I mean, are these two programs in that pipeline? I'm not, I'm not, or which, I want to make sure I answer the question, Mike, or which of the two programs and which one?

Or as a key partner with somebody.

That's how we see it.

And on.

On certain that's an aircraft.

On certain classes of them that are coming not only on the aircraft side, but we're also positioned with our jet engines.

So where we are uniquely positioned for what's going on in the drone area across every service branch.

Okay.

Can you guys I mean.

You look at the pipeline of opportunities, which increased significantly.

Are these two programs in that pipeline.

I'm not a much of which I want to make sure I answer the question, Mike or which two programs in what.

Collaborative combat aircrafts and replicator.

Eric M. DeMarco: Collaborative Combat Aircraft. Yeah, we're, Every drone program that's out there, we were expected to be. I'll leave it at that. Fair enough. And then just on the, You mentioned a couple times about the Valkyrie and different variants. I mean, can you give us a little bit of color on those variants?

Yes.

Every drilling program that's out there we are.

We're expected to be in.

I'll leave it at that.

Okay Fair enough and then just on the.

You mentioned a couple of times about the Valkyrie and different variance I mean can you give us a little bit.

Color on those variants.

Eric M. DeMarco: You know, I mean, I guess since you're still self-funding and using your own CapEx to build these, what are some of the, if you can even talk to the variants, I mean, I'm assuming, you know, extended range, different payloads, you know, maybe even, you know, landing gear, but are those kind of what customers might be looking for out of the Valkyrie. Yes, yes, and yes Fair enough. I'll jump back in the queue and keep it at that.

I guess since Youre still self funding and using your own capex to build these water.

What are some of the if you can even talk to the variance I mean, I'm assuming extended range different payloads.

Maybe even.

Landing gear, but there are those kind of what.

Customers might be looking for out of the Valkyrie.

Yes, yes, and yes.

Okay.

Okay fair enough I'll jump back in the queue and keep it at that thanks, Okay. Thank you.

Eric M. DeMarco: Thanks. Okay. Thank you. Thank you.

Thank you.

Peter J. Arment: Our next question comes from the line of Peter Arment of Baird. Your question, please. Good afternoon, Eric and Deanna. Hi, Eric. Good afternoon.

Our next question.

It comes from the line of Peter Arment.

Baird. Your question please Peter.

Hey, good afternoon, Eric and Deanna Eric.

Eric M. DeMarco: Eric. On, I guess, you know, the whole teaming approach was this, can you maybe just give us how this kind of evolved? www.youtube.com.uk. How would you describe it? Yeah, probably a couple of years ago.

Okay.

I'm on a I guess.

<unk> teaming approach was this can you maybe just give us a how this kind of evolve is that something you've.

Kind of been planning and thinking about over the last year, what was the best it's kind of.

I guess, how would you describe it in terms of working with primes versus going it alone.

Yeah, probably couple of years ago.

Eric M. DeMarco: Um, Peter, when the different classes of the drones that the government was looking at started to get more refined, between Expendables, Attritables, and Exquisites, we. We looked at our and the various weapon systems they would carry, and certain of the characteristics they would have.

Peter.

When the different classes of the drones that the government was looking at starting to get more refined.

Between Expendables attributable exquisite.

We are we.

We looked at our various weapons systems they would carry.

And.

And certainly the characteristics they would have.

Eric M. DeMarco: We huddled internally, and we made some strategic decisions that we would, in certain areas that are obvious, like expendables, disposables, attritables, that's right in our sweet spot. And all things being equal, we would look to prime those. There are some areas we might not, if they're carrying certain mission systems that are very unique that the customer wants to have integrated, and a prime has that mission. As you move up the capability ladder, we decided it probably would make more sense from a probability win standard. If we looked at it on a bigger screen and we said, okay, our probability of winning is 25 percent.

We huddled internally and we made some strategic decisions that we would oh.

In certain areas that are obvious like expandable disposables that <unk> that's right.

Right in our sweet spot.

And all things being equal we would look to prime those there are some areas we might not if they're carrying certain mission systems that are very unique that the customer wants to have integrated at a prime has that mission system.

As you move up the capability ladder, and we decided it probably would make more sense from a P probability win standpoint.

If we looked at it on a biggie and we said okay. Our probability of win is 25% we have to invest I'm, making this up a $100 million. If we go at it alone to be the prime.

Eric M. DeMarco: We have to invest in making this up to $100 million if we go at it alone to be the prime, or our probability of winning, we think, is 90%. We get significant content on something, and our investment is significantly less than that. With everything we have going on, we would choose the latter.

Or or probability of when we think is 90% we get significant content on something.

And our investment is significantly less than that.

Everything we have going on we would choose the latter there and so a couple of years ago. We started looking at it that way and that's an approach we've been taking across credo in many areas drones hypersonic systems.

Eric M. DeMarco: So a couple years ago, we started looking at it that way, and that's an approach we've been taking across Kratos in many areas, drones, hypersonic systems, jet engines, you'll be seeing that, I think soon. It's the way we do it. We partner with the best companies in the world. The prime system integrators, and there are partners, they are the best companies in the world at certain things.

<unk>, we cannot jet engines, you'll be seeing that I think soon it's the way we're doing it we're partnering with.

The best companies in the World.

Prime system integrators, and they're our partners, they're the best companies in the world that certain things no. One can do it better and we partner with them whether it increases our P win.

Eric M. DeMarco: No one can do it better, and we partner with them when it increases our... It seems like an inflection point here for your tactical drones. On the jet engine production that you're kind of investing in, in CapEx. Is that expected to be completed this year, or do we think that this kind of run? Yeah, so on the programs that we've won, that we're on, and that we have a vision for that are going into production, those we're getting done this year. However, However, there are several others.

Certainly seems like an inflection here for for your tactical drones.

On your.

The jet engine production that you're kind of investing in capex.

Is that expected to be completed this year or do we think that this kind of runs into 'twenty five as well.

So on the on the programs that we've won.

That we're on.

And that we have a vision that are going into production those were getting done this year.

However.

However, there are several others there was a lot going on.

Eric M. DeMarco: There is a lot going on in the area of loitering munitions, such as cruise missiles and low-cost jet drones. So probably in the second half of this year, I think we're going to be awarded production on some others, which means we'll have to establish some additional production lines because it's a different size of engine. So I think this is probably going to be a process, probably for the next 24 months, but it will definitely be tied to programs that we're designing in on and going into production. It will not be a build it and hope they can't. And just lastly, if you've had a flurry of press releases since, you know, I guess, you know, November, December, large. You got one here in January that didn't give any kind of time, hardware, and radar for CUS. Can you talk a little bit about how these kinds of roll out? start to inflect more on.

Loitering munitions.

Cruise missiles.

And low cost jet drones.

Probably second half of this year I think we're going to be awarded production on some others.

Which means we will have to establish some additional production lives because it's a different size of engine. So I think this is probably going to be a process probably for the next 24 months.

But it will definitely be tied to programs that were designed in on and going into production. It will not be a build it and hope they come.

Got it and just lastly, you've had a flurry of press.

Press releases since November.

November December.

Some of these large awards and you've got one here in January that you didn't give any kind of timeline on it I think it was the $50 million.

The hardware and radar for it.

So U S can you talk a little bit about how these kind of rollout and when do they start to inflect more on the top line. Thanks.

Eric M. DeMarco: Yep, so that $50 million one that's going to roll out starting the second half of this year, and it'll be done, probably nearly done by the end of 25. I'm expecting, I think we're going to get another one similar size in the next few months.

Yep.

That that $50 million one that's got a rollout starting second half of this year and it's going to it'll be done probably nearly done by the end of 'twenty five.

I'm expecting I think we're going to get another one similar size in the next few months as I mentioned these systems are deployed in Europe, and they're deployed in the in the Middle East.

Eric M. DeMarco: As I mentioned, these systems are deployed in Europe, and they're deployed in the Middle East. The contract we were able to announce today, we just got customer approval, coincidentally, to announce the space one. This one is so important.

The contract we were able to announce today, we just we just got customer approval Coincidentally, two announced the space one.

This this one is so important so I'm glad you asked Pete from so many <unk>.

Eric M. DeMarco: I'm glad you asked, Pete. From so many angles, as I mentioned, this is the largest re-compete in the company. We don't have any more re-competes of any size for the foreseeable future, so we're bolted in. That's number one.

As I mentioned this is the largest recompete and the company. We don't have any more re competes of any size for the foreseeable future. So were bolted in that's number one number two as I said in my prepared remarks, the ceiling is 50% higher than it was so.

Eric M. DeMarco: Number two, as I said in my prepared remarks, the ceiling is 50% higher than it was. So it's not just bolted in; it's going to be a massive growth vehicle for us, and it's driven primarily by the number of space systems that are going up into space. That is definitely going to start ramping up for us in the second half of this year and into 25 and into 26.

So it's not just bolt it in it's going to be a massive growth vehicle for us and it's driven primarily by the number of space systems that are going up in this space that is definitely going to start ramping for us in the second half of this year and into 'twenty five and into 'twenty six we need.

Eric M. DeMarco: We need, That's a budget. Budget, budget, budget. So our space business in all of Kratos, not commercially, not like the Intel Fats of the world, but on the military side is the most susceptible in our company to the CRA because we've won, as you recall, in 22 and in 23, we've won so many development programs, and that business just did revenue growth of like 15 or 20 percent. Okay, we need the budget for production and deployment. And since we're delayed, that's why I'm looking for that to happen at 25.

A budget budget budget budget.

Our our space business in all of Credo not.

Not commercially not likely until <unk> of the world, but on the military side is the most susceptible in our company.

The CRA.

Because we've once as you recall in 'twenty two 'twenty three we won so many development programs.

And that business adjusted revenue growth of like 15, or 20%, Okay, we need the budget for production and deployment.

And since were delayed that's why I'm looking for that to happen in 'twenty five so that's how I see those rolling out.

Eric M. DeMarco: So that's how I see those rolling out. Appreciate it. Congratulations on the results.

I appreciate it congrats on the results.

Eric M. DeMarco: Thank you. Our next question comes from the line of Seth Seifman of JPMorgan. Your question, please, Seth. So thanks very much and good evening and good results.

Thank you.

Thank you.

Our next question.

Comes from the line of.

<unk> segment.

J P. Morgan your question please.

Okay.

Alright, thanks, very much and good evening and good results.

Seth Michael Seifman: I wanted to ask, so the unmanned business, very, you know, nice amount of growth expected this year, and we've kind of seen things moving at a similar level the past couple of quarters. We'll have a CR kind of in the most of the first quarter of twenty four here. So, you know, that that's probably once again a similar level of revenue to what we've seen. It's not, it's not a little bit lower seasonally.

I wanted to ask so.

So the unmanned business, a very nice amount of growth expected this year and we've kind of seen things moving at a similar level of the past couple of quarters, we'll have a CR kind of in most of the first quarter of 2004 here. So.

Thats, probably once again, a similar level of revenue to what we've seen if not if not a little bit lower seasonally and so the implication would be that kind of exiting this year.

Eric M. DeMarco: And so the implication would be that kind of exiting this year would be, you know, a pretty big number from a revenue perspective that, you know, on its own carries a certain amount of growth into twenty five. Is that kind of a fair way to think about it? Let me restate it for you. A number of pro-let's take target drones, the target drone business has been booming, and you can see by world events what's going on there. So that big blob base has been increasing for the past year. It's going to take another significant step function up in 2024, as soon as we get the 24 budget. Okay, so the base has gone up 23 over 22.

It would be.

Pretty big number from a revenue perspective.

That.

On its own carries a certain amount of growth into <unk> into.

Into 25 does that does that kind of a fair.

Fair way to think about it.

Yeah.

Let me, let me restate it for you.

<unk>.

A number of protocol, let's take target drones.

The target the target drone business has been ramping and you can see by world World events, what's going on there so that big block base has been increasing for the past year, it's going to take another significant step function up in 2024.

As soon as we get the 24 budget.

Okay. So the base has gone up 23 over 22.

Eric M. DeMarco: The base is going to go up again, 24 over 23, as soon as we get the budget. The problem is, let's say we get the budget on March 8th, God willing. The government contracting officers, they've got to basically get 12 months worth of contractual and obligations done in six months. And that's why it pushes out into Q3 and Q4, if that answers your question. Oh yeah, no, totally understood.

The base is going to go up again 24 over 'twenty three as soon as we get the budget. The problem is let's say, we get the bulk of the market March APRA God willing the contracting of the government contracting officers or they've got a they've got to basically get 12 months worth of contractual obligations done in six months and Thats why it pushes out into Q3 and Q4.

If that answers your question.

Eric M. DeMarco: But then that's at a level in Q4 that, you know, is at a higher level that can drive, you know, a decent amount of growth in 2025. Correct. Correct. And that's the right way to look at it.

Oh, yes, no totally understood, but then but then that's at a level in Q4 that.

Is that a higher level that can drive.

You know a decent amount of growth in 2025.

Correct correct.

That's the right way to look at it yes.

Eric M. DeMarco: Yes, right. And so the bow wave from 22 CRA. We saw that. The bow away from 21 CRA, we saw at the end of 22. The bow away from 22 CRA, we saw at the end of 23.

So the bow the bow wave from 'twenty to CRA.

We saw we saw we saw that the bio away from 'twenty. One CRA, we saw at the end of 'twenty two the buyer away from <unk>.

22, CRA, we saw at the end of 'twenty three the bio away from this one will see 'twenty four 'twenty five exactly correct.

Eric M. DeMarco: Then we bow away from this one; we'll see 24, 25. Exactly. Okay, and then just backing into I think what the number you talked about for unmanned implied would be something like 6% growth or so for government solutions. And just so anything that's kind of growing more quickly and more slowly than that kind of 6% average for KGS and in 24.

Okay, and then just backing into I think what the.

What the number you talked about for unmanned implied it would be something like.

6% growth or so for government solutions.

Just so anything.

That the pieces that are kind of growing more quickly and more slowly than that kind of.

6% average for kgs in 'twenty four.

Eric M. DeMarco: Yep, as I said, this is our space business, which is the one within Kratos that's based on development programs transitioning to deployment, is the most susceptible to a CRA. So our space business, which is our biggest, so it's also the hardest to grow on, just it's coming off, what did it do, Deanna, 15 or 20%? 15% in the quarter.

As I said our space business.

The one within credo based on development programs transitioning to deployment.

The most susceptible to a CRA so our space business, which is our biggest so it's also the hardest to grow on just its coming off with what a duty and a 15 or 20%, 15% in the quarter adjusted 15% organic growth. If we are forecasting that primarily due to the CRA to be one of our lowest growers in 2024.

Eric M. DeMarco: It's just at 15% organic growth. We are forecasting that, primarily due to the CRA, to be one of our lowest growers in 2024 because we need to get that budget for these programs we've won to ramp up, product.

Sure.

Because we need to get that budget for these programs we've won to ramp up.

Got it.

Eric M. DeMarco: Okay, thanks very much. Yep. Thank you. Our next question comes from the line of Mike Crawford of B. Reilly Security. Your question, please, Mike. Thank you. Eric and Deanna, just to help understand the guidance, if you were able to actually contract to sell both, both.

Got it.

Okay.

Thanks very much.

Yep.

Thank you.

Our next question comes.

From the line of Mike Crawford of B Riley Securities. Your question. Please Mike.

Thank you Eric.

Eric and Deanna just said Hello.

I understand the guidance, if you were able to actually contract to sell.

Mike Crawford: Valkyrie production spirals before year-end. What would be the rough delta on additional revenue and, maybe more interestingly, reduced capex? Mike, as Eric mentioned, we are balancing our internal resources on the cadence of that production build for that second lot of Valkyries. So that's a factor that we're taking into consideration. The CapEx that is related to Valkyrie production for 2024 is approximately $20 million.

Both.

Boucher reproduction spirals.

Before year end, what would be the rough delta on additional revenue and maybe more interestingly reduced capex.

Yeah, Mike as Eric had mentioned, we are balancing our internal resources.

Cadence of that production build for that second line Valkyrie. So.

That's that's a factor that we're taking into consideration the capex that is related to Valkyrie production for 2024 is approximately $20 million.

Deanna Hom Lund: So on that cadence, we would expect to continue to build in 2025, and that's based upon just how our internal resources and how we're prioritizing those. If those were sold, to the extent they're completed, or to the extent they're percent complete, as we've discussed before, since they would be subject to percentage of completion accounting, then let's say that $20 million that we had incurred in 2024; if a certain number were sold, then the percentage, The fleet related to those aircraft that are sold would be recognized as revenue in 2020. And then, depending on the milestones that we're able to negotiate with the customer, then the cash receipts would fall in whatever period they would fall in, whatever way we're able to negotiate from a milestone. So, Mike, in a total blue sky world. Deanna, what's the CapEx in Valkyries? The year, at the end of 23.

There will.

That cadence, we would expect to continue to build throughout in 2025 and Thats based upon just how how our internal resources, how we're prioritizing those resources.

If if those were sold it to the extent they are completed or to the extent their percent complete as we've discussed before since they would be subject to percentage of completion accounting then, let's say that let's say that 20 million that we had incurred in 2024.

Yes. It is certain number we're sold than the.

Percentage complete related to those aircraft that are sold would be recognized as revenue in 2024, and then depending on the milestones that were able to negotiate with the customer that would.

The cash receipts would fall in whatever period, it would fall and it went everywhere, we're able to negotiate from a milestone perspective, so make it up.

Total blue Sky World.

Deanna, what's what's the.

The Capex in South Korea at the end of the year at the end of 'twenty three.

Deanna Hom Lund: It's over 30 million. Over 30 million. Yeah. So, Mike, in a perfect blue sky world.

It's over.

Over $30 million, so make it a perfect blue Sky World.

If we got it.

Eric M. DeMarco: If we got a production order from everyone, that $30 million would flip into revenue, and whatever percent of the $20 million in 2024, let's say we're $10 million in, it happens in June, we'd get a pickup of $40 million in revenue, something like that. Okay, thank you. And then, Eric, when you said you were expected, perhaps, to potentially contract for this in late 24, would that be after the new government budget that presumably they're going to pass before the end of December when the new Congress has to come in? No, sir.

We got a production order for a mall, that's $30 million would flip into revenue and whatever percent of the $20 million in 2020 for lets say were $10 million and it happens in June we'd get a pickup of $40 million in revenue.

Something like that.

Okay. Thank you and then Eric when you said you would expect.

Perhaps to potentially contract for this in late 'twenty four would that be after.

A new government budget that presumably they're going to pass before the end of December when the new Congress has to come in.

Eric M. DeMarco: It's in the... The funding is in the current budget. I'm just planning on the budget being done in early March. As I've said a few times, it's going to take a while for the contracting offices to have a lot to do, and so it'll take until late in the year. Okay, that makes sense. And then I'm just switching gears.

No Sir it's in the.

The fundings in the current budget.

So I'm just planning on the <unk>.

Budget being done in early March.

As I've said, a few times, it's going to take a while for the.

The contracting officers have a lot to do and so it will take until late in the year.

Okay that makes sense and then just switching gears.

Eric M. DeMarco: Given just the thousands of missiles that have been expended in the Mideast, can you comment on your microwave systems backlog? Yeah. So we... Our microwave electronics business, the biggest part of it, as you know, is in Israel, and we are one of the primary providers for virtually every Israeli missile system and Radar Systems. And the missiles are the ones, obviously, the razor and the razor blade. So think of iron.

Given just the thousands of missiles that have been expanded in the mid east.

Can you comment on your Mic your microwave systems backlog.

Yes.

So we are.

Our microwave electronics business the biggest part of it as you know is in Israel.

And we are one of the primary providers on virtually every Israeli missile system.

And radar systems and the missiles are the ones obviously, the razor razorblade, so think of iron dome, where on the seekers.

Eric M. DeMarco: Don't. So Deanna, we're at record levels. We're at record backlog levels. We're at record backlog levels. We're at record revenue levels. It's looking great for 24. It's looking great for 20. I mean, this is terrible. What's driving this?

So deanna water so we're at record levels.

Record record cloud level were record backlog level or record revenue level.

Yes.

It's looking great for 24, it's looking great for 'twenty I mean, this is terrible what's going what what's driving this.

Eric M. DeMarco: But our microwave business is doing very well because the Israelis are defending themselves. Okay, thanks for now. 877 million IDA IQ where you're pretty much competing with Northrop, and you said you were hoping to get an order for 25 Oriel rockets. How much are those per system?

But our our microwave business is.

Is doing very well because of the Israelis defending themselves.

Okay.

Thanks, and then.

Just off of this.

$877 million I D IQ, where you're pretty much I think competing with Northrop and you said you were hoping to get an order for 25 Oriole rockets, how much of those.

Eric M. DeMarco: Right, so, those would be totally separate from the That's a different customer. Oh, okay, totally separate. So that would be incremental to that. It's a different customer.

System.

Right so.

<unk> would be totally separate from that.

That's a different customer.

Oh, okay.

Totally separate so that would be incremental to that it's a different customer.

Eric M. DeMarco: And so the IDIQ, that would be for Space Force. Payload, RACC, RACC. That would be under a different custom. It's not that custom.

And so the <unk> that would be for space force.

Pedro directed what would what would IRAK four years before.

That would be under a different customer.

It's not that it's not that customer.

Eric M. DeMarco: Nope, so it's incremental. It's in addition to what we get under the $877 million award. Maybe just one final one is, just today, intraday, there was a pretty big merger announcement with one of your customers, Blue Halo, merging with Eclipse, and I'm wondering if that changes the scope of your $160 million Open Space Award that you're working with them on the SCAR Program. Yep, absolutely does not. This is why this is great for Blue Halo.

So it's incremental and it's in addition to its in addition to what we get under the $877 million Award.

Okay.

Maybe just one final one is today just today and today there was a pretty big merger announcement with one of your customers Blue Halo.

Uh huh.

<unk> with the clips and I'm wondering if that changes the scope of your $160 million open space, a word that you're working with them on that.

I'm a scar program.

Yep, absolutely does not this is this is great for Blue Halo, it's great for us it's great for the company. They merged with this is another up and coming disruptive partner of <unk> and Blue Halo So no.

Eric M. DeMarco: It's great for us. It's great for the company they merged with. This is another up and coming, disruptive partner of Kratos in Blue Halo. So Noah.

Eric M. DeMarco: No change, and that SCAR program is going to be one of the big drivers for Kratos in 2025. Excellent, thank you. Yes, sir. Thank you. Our next question comes from the line of Ken Herbert of RBC Capital Markets. Next question, please, Ken. Yeah, good afternoon, Eric and Deanna.

No change in that scar program.

It is going to be one of the big drivers for Kratos 2025.

Excellent. Thank you.

Yes, Sir.

Thank you.

Our next question.

Comes from the line of Ken Herbert of RBC capital markets. Your question. Please Ken.

Yeah.

Yes, hi, good afternoon, Eric and Deanna.

Ken Herbert: Eric, Hey, I wanted to follow up on your comments and the sort of shift in strategy as you look to build out more sort of merchant businesses. It sounds like there's a real opportunity within rocket motors, electronic devices, unmanned, and other areas to replicate what you've done on the space side. Now, as you think about that, and you think about the other opportunities, is there any way you could maybe rank order those other businesses and sort of how far along that curve you think they are to, to, I guess, what I would call sort of established merchant supplier status? And, and how does that maybe impact growth for those businesses this year? And then, and, of course, into twenty five.

Hey, Eric.

Hey, I wanted to follow up on your comments and the sort of a shift in strategy as you look to build out more sort of merchant businesses.

Sounds like there's a real opportunity within rocket motors and electronic devices unmanned other areas to replicate what you've done on the space side now as you think about that and you think about the other opportunities is there any way you could maybe rank order those other businesses and sort of how far along the curve.

They are two two.

What I would call sort of established merchant supplier status.

And how does that maybe impact growth of those businesses. This year and then of course into 'twenty five.

Eric M. DeMarco: Yep, a turbo jet and a turbo fan engine for Missiles, Powered Munitions, and Loitering Munitions. We are way up or down the curve, whichever way you want to look at it, relative to being the trusted partner with the prime system integrators with those engines on their weapons, and this value proposition I'm going to give you right here is the value proposition we bring to, I'm making this up, Raytheon's doing a missile, Northrop's doing a missile, Lockheed's doing a missile. It all needs a 150-pound thrust engine. We build 150-pound thrust engines. They all come to us because we get leverage because we have three orders, one from each of them, which drives the cost down, which makes them more cost-effective for their customers, and it brings value to everybody. So it's a win for us. It's a win for all those three primes in my example, and it's a win for the government.

Yep.

Turbo jet and turbofan engines.

For missiles powered munitions loitering munitions.

We are way up or down the curve whichever way you want to look at it relative to being.

The trusted partner with the Prime system integrators with those engines on their weapons systems.

And this value proposition I'm going to give you right here is the value proposition, we bring to them okay.

Okay, I'm, making this up Raytheon is doing a missile northrop's do what a missile Lockheed is doing a missile it all needs of 150 pounds thrust Amgen. Okay. We built 150 pound thrust engine. They all come to us because we get leverage because we have three orders one from each of them, which drives the cost down which makes them more cost effective for their customer.

And it brings value to everybody. So it's a win for US it's a win for all those three primes. In My example, when it's a win for the government. So in turbo Jets and turbo fans for cruise missiles.

Eric M. DeMarco: So in turbojets and turbofans, for cruise missiles, loitering munitions, and powered munitions, we are moving down the path on that. You saw the announcement that Boeing made on powered JDAM, as I've talked about before. We're designing in on six different systems, several of which are going to be in production, I think, by the end of this year, and this will be a meaningful revenue driver for us in And we have clarity on this with the programs. That's number one.

Loitering munitions and powered munitions. We are we are moving down the path on that you saw you saw with the announcement that Boeing made on power Jay Dan as you know I've talked about before we're designed in on six different systems.

All of which are going to be in production I think by the end of this year and this will be a meaningful revenue driver for us in 2025 and.

And we have clarity on this with the programs. That's number one number two is our hypersonic stacks. So I mentioned today, the oriole Terrier stack that launched the French payload that just became public.

Eric M. DeMarco: Number two is our hypersonic staff. So I mentioned today the Oriel Terrier stack that launched the French payload that just became public. We do that all the time for a lot of different customers.

Yes.

We do that all the time for a lot of different customers. It's just not announced with the Zeus motor is coming.

Eric M. DeMarco: It's just not announced with the Zeus Motors coming. These can go faster, farther, and put heavier payloads in certain places at the right time, the right speed, the right place. Okay. We do that for the government, and we do that for the prime Minister. So we are way down the line on that, and since we're orders of magnitude less costly than anybody else out there, including some of these up-and-comers who think they're going to get into the area, okay? We can test, test, test, and test multiple times within a budget for a customer, whether it be the government or a prime, because our price points are so low. So, staff, for hypersonic systems, ballistic missile targets, and suborbital vehicles, which, as you know, we can't talk about on this line. So that's right behind the turbo jets and turbo fans.

This can go faster and farther with heavier payloads in certain places at the right time at the right speed the right place okay.

We do that for the government and we do that for the primes.

So we are way down the line on that and since we're orders of magnitude less costly than anybody else out there, including some of these up and comers, who think they're going to get into the area. Okay.

We can test test test and test multiple times within a budget for a customer whether it be the government or prime because our price points are so low.

So stacks for hypersonic systems ballistic missile targets at sub orbital vehicles, which as you know we can't talk about on this line.

So thats right behind right behind the Turbo Jets and turbo fans.

Eric M. DeMarco: The next obvious one is microwave electronics. We're a merchant supplier there. That's what we do. Our primary customers are Rafael, the Israeli Aerospace Industry, which is Lockheed and Raytheon in the north of Israel. We're going to build that out there, and we're building that out in the US. And, and drones. And drones is one where we absolutely are going to continue to be the prime or our probability of win, and the investment thesis for us is manageable, and we will partner with our teammates, our big prime teammates, and we have a few of them that are very close with us, where it increases the probability of win, it reduces our risk and our financial contribution, and we think we're going to get a big part of something instead And you're seeing the drone.

The next the next one obviously is microwave electronics, where a merchant supplier there thats, what we do our primary customers are Rafael Israeli aerospace industry, which are the Lockheed and Raytheon in the north of Israel, we're going to build that out there and we're building that out in the U S and.

And.

Drones and drones is one where we absolutely are going to continue to be the prime where our probability of win.

And the investment thesis for US is manageable and we will partner with our team made our big Prime teammates that we have a few of them that are very close with us where it increases the probability of win it reduces our risk at our financial contribution and.

And we think we're going to get a big part of something instead of potentially all of nothing.

Eric M. DeMarco: The drone impact is this year. The rocket motors; we're definitely going to get some of those this year. So you're going to see those sales this year, and they'll ramp up to 25. So that's how I see it. That's great. And if I could, as you think about these markets, you are obviously positioned in some of the faster growing markets. But what's your view on just high-level defense spending or investment spending in not just 24 but the next couple of years? And to what extent is sort of a flattish budget, if that's the situation we're in, a risk to the timing of some of these programs?

And you're seeing the drone the drone impact us this year.

The rocket motors, what we're definitely going to get some of those this year, so youre going to see those sales this year and they'll ramp into 'twenty five.

That's how I see it.

That's great and if I could as you think about these markets, you're obviously you're positioned in some of the faster growing markets, but what's your view on just high level defense spending or investment spending.

And not just 24, but over the next couple of years and to what extent is sort of a flattish budget. If that's the situation. We're in a risk to the timing on some of these programs.

Eric M. DeMarco: Yep. So obviously, I'm the CEO. I drink the Kool-Aid. I like Senator Wicker.

Yep.

So obviously I'm the CEO I drank the Kool aid I like Senator Wicker. He wants a thought he wants a 5% defense budget. He wants a trillion dollars defense budget I love them and I personally believe that with the threat environment out there that we have threat start going down. They are increasing every day. This is something both parties are done to convalesce around alright.

Eric M. DeMarco: He wants a 5% defense budget. He wants a trillion dollar defense budget. I love him.

Eric M. DeMarco: And I personally believe that with the threat environment out there that we have, threats aren't going down; they're increasing every day. This is something both parties are going to have to deal with. All right. But let's say that I'm wrong.

Eric M. DeMarco: Alright? Low cost is going to win the game. Let's talk drones. Affordability.

But let's say that I'm wrong.

Right.

Low cost is going to win the game.

Let's talk drones affordability affordable mass the Mitchell Institute.

Eric M. DeMarco: Affordable math. The Mitchell Institute, they work with the Air Force, came out with a report last week. If you guys haven't seen it, I encourage you to see it.

They worked with the Air Force came out with a report last week. If you guys haven't seen it I encourage you to see it.

Eric M. DeMarco: They said we cannot afford exquisite drones en masse. The only way we can defeat certain adversaries is with large quantities of low-cost drones that are rail-launched, that are air-launched, that are attritable, etc. to get quantities, which is cost. So in a tightening budget environment for our engines, our turbo jets, and turbo fans, for our hypersonic vehicles, and our rocket systems, for our drones, I think that just increases Kratos' winning hand because of our affordability. Great. Thanks, Eric, for all the color.

Base that we cannot afford exquisite drones in mass.

The way we can defeat certain adversaries is with large quantities of low cost drones that are rail launched that are are launched that are attributable et cetera.

To get quantities, which is cost so with a tightening budget environment for our engines are turbo jet and turbo fans for a hypersonic vehicles and our rocket systems for our drones.

I think that just increases credo is winning hand because of our affordability thesis.

Great. Thanks, Eric for all the color.

Eric M. DeMarco: Yep. Thank you. Thank you. Thank you, Mr. Van Baar, for our next question. Thank you. Thank you. Thank you. Our next question comes from the line of Pete Skibitski of Alembic Global. Your question, please, Pete. Good afternoon, guys.

Yep.

Thank you.

Standby for our next question.

Our next question comes from the line of Pizza Skibinski Alembic Global your question. Please Pete.

Yeah, good afternoon guys.

Pete Skibitski: A couple questions on EBITDA margins. Erica, I'm just wondering if you are a sub on one of these, you know, large, tactical drone programs, maybe CCA or Replicator. How are you guys thinking about the economics on those as a sub? You know, I think last year, unmanned EBITDA margins were 7%. Probably, target drones are above that.

Got it.

A couple of questions on EBITDA margins.

Eric I'm just wondering if you are a sub on one of these large.

Tactical drone programs, maybe CCA replicate or how.

How are you guys thinking about the economics on those as a sub.

I think last year unmanned EBITA margins were 7% probably target drones are above that.

Eric M. DeMarco: You know, in a sub position, if you get enough numbers, can you get to double digits in terms of adjusted EBITDA margins, or are we gonna stick in this range even as a sub? Yep, so we are in the tactical drone area, either as a prime or a sub right now. We are going to be in that range because they're development programs. In development programs, the margin rates are lower. You were exactly right about what you said on the target drones. We have multiple drones in multiple stages of full rate production, and that's where you come down the learning curve. You have to share a part of that with the government, of course, but you can make low to mid-teen margins. And internationally, in target drones, you can make much higher because it's international. So, back to the tactical part of your question, I don't think there's going to be any difference, or if there is, it's going to be around the edges on the margins on these.

In a sub position if you get enough numbers can you get to the double digits.

The EBITA adjusted EBITA margins.

How are we going to stick in this range, even as a sub.

So we are we.

In the tactical drone area.

Either as a prime or a sub right now.

We are going to be in that range because their development programs.

And development programs the margin rates are less.

You're exactly right. What you said on the target drones in the target drones, we have multiple drones in multiple stages of full rate production and Thats, where you come down the learning curve you have to share part of that with the government of course, but you can make low low to mid teen margins in internationally and target drones, you can make much higher because it's international.

Back to the tactical part of your question I don't think theres going to be any difference or if it is it's going to be around the edges on margins on these.

Eric M. DeMarco: I know it in development because we are where we are, we're a prime in development on some, and we're partnered with some other people on others. In development, we know what the margins are, they're similar, and I imagine it being the exact same once we get into full-rate production. It will not make a difference to us. You're saying even in full rate production the margins are, on, on, you know. They'll be the same as the other night.

I know it in development because we are where we are we are we are a prime in development on some.

We're partner with some other people out others in development, we know what the margins are there similar and I envision it being the exact same once we get into full rate production. It will not be a difference to us.

You are saying even in full rate production and the margins on.

No.

They'll be the same.

Eric M. DeMarco: Yeah, I know, I think no, no, in full rate production, we would expect the margins to expand. What he's saying is, in development, we would expect those margins to be similar to the production rates that the development rates that we would see on the target side. We would expect to see some, Okay, so maybe like three years out, we're talking, there's a path.

Yeah, No no until late production, we would expect the margins to expand what he's saying is in development. We would expect those margins to be similar to the production.

Development rates that we would see on the target side.

Yes.

We would expect to see some expansion.

Okay.

Like three years out we're talking.

Eric M. DeMarco: Yeah, okay. I appreciate it. Similar question on space.

There is a oh.

Hi, Pat Yeah, Okay I appreciate it.

So my question just on.

Eric M. DeMarco: I just know you guys talked about the inflection point in 25, and it sounds like... You know, maybe you're looking for some margin expansion there, partially on production, higher deliveries. But you guys have been, you know, investing a lot in open space, and we see it hit KGS margin periodically. I'm just wondering, in 2025, should we anticipate the IR&D that you are spending on open space to decline meaningfully?

So another question on space I, just so you guys talked about the inflection in 'twenty five.

And it sounds like.

Maybe you are looking for some margin expansion there partially on production higher deliveries, but you guys have been.

Investing a lot in open space and we see a case, yes margin periodically I'm just.

Wondering in 2025 should we anticipate the R&D that you are spending on open space to decline meaningfully.

Or is that going to be kind of steady stay and it's more so we anticipate deliveries increasing.

Eric M. DeMarco: Or is that going to be kind of steady state, and it's more so, you know, we anticipate, you know, deliveries increasing? Right. I would not expect it to decline, but I would definitely expect deliveries to increase and the software content of the ground infrastructure to increase, which inherently brings higher margins. That's how I would look at it. It's a hybrid software model where you need it.

Right I would not expect it to decline, but I would definitely expect deliveries to increase and the software content of the ground infrastructure to increase.

Which inherently brings higher margins, that's how I would look at it as a hybrid software model, where you need continuing sustained R&D to refresh.

And expand the product portfolio, you are bringing it to the customer to stay ahead of your competitors.

Eric M. DeMarco: Continuing sustained R&D to refresh and expand the product portfolio you're bringing to the customer to stay ahead of your competitors. Got it. Okay. So the R&D will stay steady state, but as long as the market's hot, you'll have these opportunities for deliveries to be higher. Okay. Okay. That's great.

Got it okay. So that R&D will stay steady state.

As long as the market is hot you'll have these opportunities for deliveries to be higher okay. Okay.

Okay as long as well.

As long as as long as we penetrate that total addressable market, we see we should be in good shape, yes, Sir.

Eric M. DeMarco: As long as we penetrate that total addressable market we see, we should be in good shape. Yes, sir. Got it. Thanks so much, guys.

Got it thanks, so much guys.

Yes, Sir.

Thank you.

Our next question.

Comes from the line of <unk>.

Joe Gomes: Yes, sir. Thank you. Our next question comes from the line of Joe Gomes of Noble Capital. Please go ahead, Joe.

<unk> of Noble capital. Please go ahead Joe.

Thank you good afternoon, and congrats on the quarter.

Hey, Joe good afternoon.

Eric M. DeMarco: Thank you. Good afternoon, and congrats on the quarter. Hey Joe, good afternoon.

So I just wanted to start on the tactical side there for a second saw that Australia is investing another $260 million.

Eric M. DeMarco: So I just wanted to start on the tactical side there for a second. I saw that Australia's investing another $260 million in the Ghost Bat, and I'm just wondering, you know, what you see on the competitive side there. So you ask the questions. So yep, Australia is going to pay $260 million in the U.S., and $400 million in Australia for three more ghost towns. So obviously, that is a much different model than Kratos' model.

It goes back I was just wondering what you see on the competitive side there are tactical.

So you asked the question so you're up Australia is going to pay 260 million of new U S $400 million Aussie four three more goes to pets.

So obviously that is a.

A much different model.

<unk> model.

Eric M. DeMarco: We were paid for three Valkyries, the first three initial Valkyries, for like $40 million. So it's a different paradigm. With the cost share. With the, yeah, it's a different paradigm, Joe.

We were paid for three Valkyrie. The first three initial valkyrie was like $40 million.

So it's a different paradigm with a cost share whether it's a different it's a different paradigm, Joe we're focused on affordability.

Eric M. DeMarco: We're focused on affordability. Effectiveness, affordability, rapid development, get things flying. That model's just different, and I don't focus on it.

Effectiveness affordability rapid development get things flying.

That models, just different and I don't focus on it.

Eric M. DeMarco: Okay. And then outside of The Open Space, which I was growing nicely there with some of the recent awards we've talked about. What else can you talk about on projects that aren't impacted by the CR? Historically, you've talked a little bit about wireless trucks, just trying to get a little better sense of what else is out there that you're very excited about that we don't have to be doing with the CR. Good question.

Yeah.

Okay.

And then outside of.

The open space, which obviously the.

Growing nicely there with some of the recent awards we've talked about.

What else are you can you talk about.

On projects that aren't impacted by the by the CR.

Historically, you've talked a little bit about wireless trucks, just trying to get a little better sense of what else is out there that you're very excited about.

That we don't really have to be doing because they are.

Good question.

Eric M. DeMarco: So 30% of our business is not DoD. So, for example, our Israeli business... Microwave electronics, $80 million, $90 million in revenue, totally unrelated to the federal government or the U.S. federal government budget. As I mentioned earlier, that business is ripping for the terrible reasons it's ripping, that's going to do great. Contracts like with IntelSat, Commercial Satellite Operators, JSAT, I can go down the list because MonacoSat They're not impacted, and we're seeing growth in the commercial satellite area Okay, in our engine area, as you know, We're building engines for like, we're under NDAs Think of Okay, that is not seeing it, target drones internationally. And you see what's going on in the world. People are buying short-range surface-to-air missile systems. They're buying Patriots. They all need to be exercised against target drones, and they're typically exercised against ours.

So 30% of our business is not D O D.

So for example, our Israeli business.

Microwave electronics $80 million to $90 million in revenue.

Totally unrelated to the to the federal government U S Federal government budget.

As I mentioned earlier that business is ripping for the terrible reason, it's ripping that's going to do great.

Contracts like with Intelsat commercial satellite operators J Fat go down the list of monarch looks at.

They are not impacted and we're seeing growth in the commercial satellite area. Okay. In our engine area. As you know we're building engines for or under NDA pick up virtually every new space company.

We are involved.

Their engines.

Okay that is not seeing an issue.

Target drones internationally and you see what's going on in the World people are buying sure short range surface to air missile systems are buying Patriots, they all need to be exercised against target drones, they're typically exercised against ours, So international target drone business.

Eric M. DeMarco: So the international target drone business is not tied to the federal budget. So we've got a really good head. And typically, internationally, we make higher margins than in the U.S. because international customers will pay more for U.S. And so we've got a pretty good hedge, which is why, as of right now, we're staying with our 10% target for 2024, because that non-DOD business looks really good right now, and why Deanna and I both said, God willing, we'll have a budget by March 8th, but Yes, sir.

Is not tied to the federal budget. So we've got a really good hedge at typically internationally, we make higher margins than in the U S. Because international customers will pay more for the U S stuff.

And so we've got a pretty good hedge which is why as of right now we're staying with our 10% target for 2024, because that that non Dod business looks really good right now and why Dan and I, both said well God willing we will have a budget by March eight, but if we don't we'll revisit it and see what the portfolio looks like and if we need to ups.

<unk> we will.

Great. Thank you for taking the questions.

Operator: Thank you. Thank you. Our next question comes from the line of Sheila Kahyaoglu: Thank you. Hey, Eric. Hey, Deanna. Thank you for taking the time. So much has been asked already, but I just wanted to kind of maybe put it all into context if that's possible. Eric, you can hear me, right?

Yes, Sir thank you.

Thank you.

Our next question comes from the line of Sheila <unk> Yahoo.

Of Jefferies. Your question. Please Sheila.

Thank you <unk>.

Thank you for taking the time so much has been asked already but I just wanted to kind of maybe put it all into context, if that's possible.

Eric you can hear me right.

Sheila Kahyaoglu: Yeah. So maybe if you could just talk about, you know, KGS versus KUS in 2024 and the growth profile of each. KGS has been growing pretty nicely.

King.

Yes.

So maybe if you could just talk about kgs Ku asked in 2024 and the growth profile of each kgs has been growing pretty nicely.

Eric M. DeMarco: Do we continue to just see that outperform? And, you know, you rank them, maybe if you could just simply rank order the sub-segments of where you see the highest growth there? Great, right? And so to level the playing field, the biggest growth segment we're going to have right now for 2024 is going to be our unmanned system, the drones, across the portfolio are doing great. And if we get a budget, we could actually beat those in the drone era.

We continue to see that outperforming.

Maybe if you could just simply rank order.

The sub segments of where do you see the highest growth there.

Okay great.

And so to level set the biggest growth segment, we're going to have right. Now for 2024 is going to is going to be our unmanned systems business.

The drones across the portfolio are doing great.

If we get a budget, we could actually beat those numbers.

Deanna Hom Lund: All right. So in KGS, I'll let Deanna touch on those, keeping in mind that our space business will be one of the lowest ones because it's impacted the most by the CRA. Yeah. So, as Eric mentioned, the space business, which is our largest, is impacted by the CRA. So that is, and what Seth brought up, we're expecting about 6%, we're forecasting about 6% organic growth across KGS, with space being a big portion of that at less than that 6%.

And the drone area.

Right. So on Kgs I'll, let Diana touch on those keeping in mind that our space business will be one of the lowest ones because it's impacted the most by the CRA, yes. So.

As Eric had mentioned that the space business, which is our largest is impacted by the CRA to that is.

Seth brought up we were expecting about a 6% of our forecasting about 6%.

Organic growth across kgs with space being a big portion of that at lower than that 6%. So that would indicate that there are pieces that are growing.

Deanna Hom Lund: So that would indicate that there are pieces that are growing faster than that rate, which would be our C5ISR business, our turbine business, our microwave electronics business, really across the board. Most of the businesses within KGS, with the exception of the space business, for all the reasons we've talked about, since we expect the... to really see that growth come into play in 2025 as we move on to production on a number of the programs that we've been working on. Okay, I understand.

Greater than that rate, which would be our <unk> ISR business carbon business, our microwave electronics business.

Really across the across the board.

Most of the businesses within kgs with the exception of <unk>.

This business for all the reasons, we've talked about since we expect see.

Didn't really see that growth come in play in 2025, as we move on to production on a number of the programs that we've been working on.

Okay.

Sheila Kahyaoglu: And then maybe if you could talk about the pipeline, it's stepped up 700 million sequentially, just given recent news about CCA and things like that, and you're you're partnering with folks, maybe you could give us the moving pieces of the pipeline at all? And it's actually, you know, from our pipeline perspective, the big increase is not in our unmanned. It's across a number of our businesses within KGS, so in our C5 business, in our turbine business, and in our microwave business. Sheila, the engine business in particular. The pipeline is incredible right now, for Made in the USA Engine, turbojets, turbofans, rocket engines, liquid and solid, where we're seeing incredible demand there for engines that are probably the strongest. Grayo, for us, from a pipeline standpoint.

Okay understood and then maybe if you could talk about the pipeline that stepped up 700 million sequentially just given.

Recent news with CCA and things like that in your you are partnering with folks maybe can you give us some moving pieces of the pipeline at all.

And it's actually from our pipeline perspective.

The big increases is not in our unmanned systems business, it's across a number of our businesses, we think within <unk>.

In our <unk> business in our turbine business.

And our microwave business.

Sheila.

Engine business in particular.

Okay on the pipeline.

The pipeline is incredible right now.

<unk> made in the USA engines.

Turbo Jets, Turbofans rocket engine liquid and solid.

We're seeing incredible demand there.

So thats, probably the strongest grower.

For us.

From a pipeline standpoint.

Yes.

Eric M. DeMarco: Yep. Microwave. Electronics is incredibly important. It grows literally every week, as ordinances, as Deanna mentioned in the C5ISR business. I've been through the programs before. We have a number of programs, IBCS, if picked.

Mhm microwave.

Electronics is incredibly strong.

It grows literally every week.

As ordinance is extended.

As Deanna mentioned in the <unk> ISR business.

I've been through the programs before we have a number of programs I Bcs.

Eric M. DeMarco: Shorrat, all of which are moving into production. So those pipelines are now moving from development to production, which increases the pipeline that we're designing in. So the KGS business, or training, our training business. You know, we build training systems for weapons. Weapon systems are back in fashion.

If pik.

<unk> all of which are moving into production. So those pipelines are now moving from development to production, which increases the pipeline that we're designed in.

So the kgs business, our training our training business.

We built training systems for weapons systems.

Eric M. DeMarco: So our training systems business pipeline is gigantic, it's very big, and its growth is one of the strongest in the company, 24 over 23. As well as our space business, which I don't think I've mentioned that, the pipeline is up also... Okay, and then last question for me, you know, obviously CapEx jumps up 20 million year over year, but do we think about that as a normalized rate or is it just given what's going on with Valkyrie and microwave products?

Weapons systems are back in Vogue.

Our training systems business pipeline is very big and if growth is one of the strongest in the company 24 over 23 as well as our space business as well I don't think I had mentioned that the pipeline is up also in our space business.

Okay.

And then last question for me, obviously, capex jumps up $20 million year over year.

Do we think about that.

As a normalized rate or is it just given what's gone on with Valkyrie and microwave products.

Deanna Hom Lund: It goes through all the investment areas that Eric talked about in the growth areas that we're investing in, so it's across the board. It's in our microwave business. It's the Valkyries that we're continuing to build. That's about 20 million, but it's also building out some of our space network, a satellite network that we company own as well as The Center of the Manufacturing Center of Excellence for our turbine engine business, so it's really investments that we're making in 2024. Some of it might continue in 2025, but not at that level; we don't anticipate it at that level. Okay, so it is continuing. Yeah, but I would not say it's recurring.

It goes through all the investment areas that Eric talked about in the growth areas that we're investing in and it's across the board it's in our microwave business.

<unk> Valkyrie is that we're continue to build that's about $20 million.

It is also building out some of the.

Our space network.

Our satellite network guide that we company owned as well as.

C E.

The manufacturing center of excellence for our turbine engine business.

It's really investment.

We're making in 2020 for some of it might.

Continue in 'twenty, five but not at that we don't anticipate at that level.

So it is continuing.

Deanna Hom Lund: Sir, Thank you. I would now like to turn the call back over to Eric DeMarco for closing remarks, sir. Thank you all for joining us and for the Q&A session, and we'll touch base with you when we report Q1 in a few months. Good day. This concludes today's conference call. Thank you for participating. You may now disconnect. Thanks for watching!

Yeah, I would not say it's recurring.

Okay. Thanks.

Okay.

Thank you.

I would now like to turn the call back over to Eric Demarco for closing remarks, Sir.

Excellent. Thank you all for joining us for the Q&A session and we'll.

I will touch base with you when we report Q1 in a few months.

Good day.

This concludes today's conference call. Thank you for participating you may now disconnect.

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