Q1 2024 Kratos Defense & Security Solutions Inc Earnings Call

Good day and thank you for standing by welcome to greatest Defense and security solutions first quarter 'twenty 'twenty four earnings conference call.

Operator: At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automatic message advising that your hand is raised. Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Marie Mendoza, Senior Vice President and General Counsel. Please go ahead.

At this time all participants are in a listen only mode.

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

Speaker Change: Ask a question during the session you will need to press star one on your telephone you will done in automatic message advising yohan. This race.

Please note that today's conference is being recorded I will now.

I'll hand, the call first of all about your Speaker House Marie Mendoza Senior Vice President and General Counsel. Please go ahead.

Marie C. Mendoza: Thank you. Good afternoon, everyone.

Marie C. Mendoza: Thank you.

Marie C. Mendoza: Thank you for joining us for the Kratos Defense and Security Solutions first quarter 2024 conference call. With me today is Eric DeMarco, Kratos President and Chief Executive Officer, and Deanna Lund, Kratos' Executive Vice President and Chief Financial Officer. Before we begin the substance of today's call, I'd like everyone to please take note of the safe harbor paragraph that is included at the end of today's press release. This paragraph emphasizes the major uncertainties and risks inherent in the forward-looking statements we will make this afternoon.

Marie C. Mendoza: Afternoon, everyone.

Speaker Change: For joining us for the Christmas and our security solutions first quarter conference call.

Speaker Change: With me today is Eric Demarco, Kratos, President and Chief Executive Officer, and Deanna Lund.

Deanna Hom Lund: He is executive Vice President and Chief Financial Officer.

Marie C. Mendoza: Please keep these uncertainties and risks in mind as we discuss future strategic initiatives, 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 as a substitute for financial information presented in compliance with GAAP. Accordingly, at the end of today's press release, we have provided a reconciliation of the non-GAAP financial measures to the companies with financial results prepared in accordance with GAAP. With that, I will now turn the call over to Eric DeMarco.

Deanna Hom Lund: Before we begin the substance of today's call I'd like everyone to please take note of the Safe Harbor paragraph that is included at the end of today's press release.

Deanna Hom Lund: This paragraph emphasizes the major uncertainties and risks inherent in the forward looking statements we will make this afternoon.

Deanna Hom Lund: Keep these.

Speaker Change: In mind, as we discuss future strategic initiatives potential market opportunities operational outlook financial guidance.

Speaker Change: Other forward looking statements during today's call.

Speaker Change: 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 as a substitute for financial information presented in compliance with GAAP.

Speaker Change: Accordingly at the end of today's press release, we have provided a reconciliation of these non-GAAP.

Speaker Change: The financial measures to the company.

Speaker Change: Prepared in accordance with GAAP.

Speaker Change: I will now turn the call over to Eric Demarco.

Eric M. DeMarco: Thank you, Marie. Good afternoon.

Eric M. DeMarco: Thank you Marie good afternoon.

Eric M. DeMarco: <unk> positioning as a leading defense technology products and software company.

Eric M. DeMarco: Kratos is positioning itself as a leading defense technology products and software company, focused on obtaining and supporting programs of record. Organic growth and execution were reflected in our Q1 results. It's a public company that reports every three months. Kratos' team's execution is visible to all of our stakeholders. It includes industry-leading organic growth, LTM annual positive operating cash flow generation, and increased profitability while also making significant internally funded investments in large and growing market areas where Kratos is the industry leader. Accelerating Organic Growth Areas for Kratos include our unmanned jet drone systems; jet engines for drones, missiles, loitering munitions, and high-performance systems; and Microwave Electronics for Air Defense, Missile, Radar, and Satellite.

Eric M. DeMarco: Focused on obtaining and supporting programs of record organic growth and execution was reflected in our Q1 results.

Eric M. DeMarco: It's a public company that reports every three months Credo says team's execution is visible to all of our stakeholders and includes industry, leading organic growth L. T M annual positive operating cash flow generation.

Eric M. DeMarco: Increased profitability, while also making significant internally funded investments in large and growing market areas, where kratos is the industry leader.

Eric M. DeMarco: Accelerating organic growth areas for Kratos include our unmanned jet drone systems.

Speaker Change: Jet engines for drones missiles, loitering munitions and high performance systems.

Speaker Change: In microwave electronics for Air Defense missile radar and satellite systems.

Eric M. DeMarco: Kratos' strategy of partnering with large traditional system integrators and bringing differentiating value, including existing capabilities and a lower cost, is also accelerating, including in the drone, hypersonic propulsion system, solid rocket motor, and the C5ISR area. For the first quarter, every Kratos business unit exceeded its revenue or profit forecaster goal. We ended Q1 with a backlog of over $1.2 billion, an opportunity pipeline of approximately $11 billion, and with the 2024 U.S. defense budget and the supplemental bill now approved, we have increased confidence in our 2024 financial forecast, which we affirmed today, and also as we now look towards 2025.

Speaker Change: <unk> strategy of partnering with large traditional system integrators, with credo, springing differentiating value, including existing capabilities and a lower cost.

Speaker Change: Also accelerating including in the drone hypersonic propulsion system solid rocket motor on the C. Five ISR areas.

Speaker Change: For the first quarter every kratos business unit exceeded its revenue or profit forecast or both.

Speaker Change: We ended Q1 with a backlog of over $1 2 billion that opportunity pipeline up approximately $11 billion and what the 2020 for U S defense budget and the supplemental Bill now approved we have increased confidence in our 2024 financial forecast, which we affirm today and also as we now look.

Speaker Change: Towards 2025.

Eric M. DeMarco: Of particular note, Kratos' unmanned systems business, Q1 Organic Growth, was 21.8%, with bookings of $81 million for a book-to-bill ratio of 1.4 to 1. And we are forecasting approximately 20% growth for unmanned systems this year, driven by the current geopolitical threat environment. Kratos' unmanned systems Q1 book-to-bill ratio of 1.4 on top of an approximate Q1 22% growth rate is reflective of the demand we are seeing for Kratos' affordable, high-performance jet drone aircraft systems, including certain programs and customers we are unable to publicly disclose, but which performance is reflected in our financial...

Speaker Change: A particular note kratos unmanned systems business Q1 organic growth was 21, 8%.

Speaker Change: With bookings up $81 million for a book to Bill ratio of one four to one.

Speaker Change: And we are forecasting approximate 20% growth for unmanned systems. This year driven by the current geopolitical threat environment.

Speaker Change: Kratos unmanned systems Q1 book to Bill ratio of one four on top of an approximate Q1, 22% growth rate is reflective of the demand we are seeing for kratos as affordable high performance jet drone aircraft systems, including certain programs and customers we are unable.

Speaker Change: To publicly disclose but which performance is reflected in our financials.

Eric M. DeMarco: There is a generational recapitalization of strategic weapons systems occurring as a result of the increasing global threat environment, including China, Russia, Iran and its proxies, and also North Korea, and we believe that Kratos is uniquely positioned to address the related demand, including with our ready-to-go now in-production systems across the portfolio, priority areas of this recapitalization for the U.S. and its allies, which priorities are routinely reported on in the press. Air Defense Systems, drones, loitering munitions, missiles, and engines for these systems, radar, counter UAS space and satellite systems. Strategic Deterrence, Rocket, Hypersonic, Missile Defense, Target and Training.

Speaker Change: There is a generational recapitalization of strategic weapon systems occurring as a result of the increasing global threat environment.

Speaker Change: <unk>, China, Russia, Iran, and as proxies and also in North Korea, and we believe that Kratos is uniquely positioned to address the related demand, including with our ready to go now and production systems across the portfolio.

Speaker Change: Priority areas of this recapitalization for the us and its allies, which priorities are routinely reported on in the press.

Speaker Change: <unk> Air Defense systems drones, loitering munitions missiles and engines for these systems.

Speaker Change: Radar counter UAS space and satellite systems strategic deterrence rocket hypersonic missile defense target training systems.

Eric M. DeMarco: Recent notable items for Kratos include the successful static fire test of Kratos' Zeus II solid rocket motor or SRM, with the previous successful static fire test of the Kratos Zeus-1 SRM. We've placed the initial order for nine combined Zeus-1 and Zeus-2 SRMs with our partner Aerojet to address expected initial customer demand for these affordable systems, with the first Zeus customer-funded mission now scheduled for later this year. Additionally, Kratos' erroneous hypersonic flyer is now complete.

Speaker Change: Recent notable items for Kratos include the successful static fire test of <unk>, Zeus, two solid rocket motor or SRM.

Speaker Change: With the previous successful static fire test of the Credo Suez one SRM, we placed the initial order for nine combined produced one of Zeus to SRM is with our partner Arrow jet to address expected initial customer demand for these affordable systems with the first <unk> customer funded mission now scheduled for later this year.

Speaker Change: Additionally, <unk> hypersonic Flyer is now complete with the first customer funded flight now also scheduled for later this year.

Eric M. DeMarco: The first customer funded flight is now also scheduled for later this year, which system will include a Kratos integrated multi-stage solid rocket stack. Kratos is one of the very few entities that has a substantially vertically integrated hypersonic system and BMD target mission system, including the rocket motors through the front end payload or the flyer. Kratos' Zeus SRMs and our Aranis and Dark Fury hypersonic flyers are recent examples of Kratos delivering actual systems, not hoped-for someday products or PowerPoint, and with Kratos being first to market with relevant systems that the customer wants.

Speaker Change: Which system will include a <unk> integrated multistate solid rocket stack.

Speaker Change: <unk> is one of the very few entities that has substantially vertically integrated hypersonic system and BMD target mission system, including the rocket motors through the front end payload or the flyer.

Speaker Change: Great doses, Zeus SRM, and our <unk> and dark Fury Hypersonic Flyers, a recent example of <unk> delivering actual systems not hoped for Sunday products or powerpoints.

Speaker Change: And with Great us being first to market with relevant systems that the customer wants.

Eric M. DeMarco: Related to Kratos' hypersonic and ballistic missile defense business, we are planning to make significant investments in facilities, machinery, equipment, integration assets, rockets, and other systems and assets as we position for the execution of existing and expected demand for Kratos' rocket, BMD, SRM, and hypersonic system. We expect Kratos' rocket systems business, including Kratos' Zeus, Oriel, ARAV, Aeronese, Dark Fury, and our other systems, to be a key future year growth contributor for Kratos in our Israeli-based microwave electronics business, which significantly outperformed in Q1 and which also accelerated. We have received new and increased follow-on orders for existing programs and contracts, including ones related to missile, radar, and air defense systems, including Iron Dome, Iron Sting, Lightning, Arrow, Barak, and others.

Speaker Change: Related to criticize hypersonic and ballistic missile defense business, we are planning to make significant investments in facilities machinery equipment integration assets rocket and other systems and assets as we position for execution of existing and expecting demand for kratos as rocket BMD SRM and hypersonic <unk>.

Speaker Change: Systems.

Speaker Change: We expect Kratos as rocket systems business, including Credo, Zeus Oriel Arab <unk>, dark Fury, and our other systems to be a key future year growth contributor for creators.

Speaker Change: And our Israeli based microwave electronics business, which significantly outperformed in Q1, and which business is also accelerating we have received new and increased follow on orders to existing programs and contracts, including as related to missile radar and air defense.

Speaker Change: <unk>.

Speaker Change: Including Iron Dome iron staying lightning.

Speaker Change: Arrow Barak and others.

Eric M. DeMarco: Kratos' Microwave Electronics business is also supporting satellite, space system, and C5ISR programs, including Kratos just recently receiving the initial design order from a new space company for its products on their satellite. In its Microwave Electronics business, we are making investments in both new and existing facilities, including space-qualified facilities, plant, and equipment, in order to successfully execute on the many new and expanded programs we have already received and additional programs we expect.

Speaker Change: <unk> microwave electronics business is also supporting satellite space system, and <unk> ISR programs, including.

Speaker Change: Including <unk> just recently receiving the initial design order from a new space company for <unk> products on their satellites.

Speaker Change: <unk> microwave electronics business, we are making investments in both new and existing facilities, including space qualified facilities.

Speaker Change: Land and equipment in order to successfully execute on the many new and expanded programs. We have already received an additional programs we expect to receive.

Eric M. DeMarco: Kratos Turbine Technologies, our engine business, has also been accelerating and significantly outperformed in Q1 with programs and initiatives including small jet engines for drones, missiles, and loitering munitions. Engines for Hypersonic and Supersonic Systems, and Engine and Propulsion Systems for Space and Certain Classified Aerial Systems. KTT's Spartan Development Group is under a customer-funded contract for a new propulsion system for a classified aircraft, and also a separate new Spartan Group propulsion system has now been integrated into a customer's classified drone system and is preparing for initial flight.

Speaker Change: <unk> turbine technologies in our engine business has also been accelerating.

Speaker Change: And significantly outperformed in Q1 with programs and initiatives, including small jet engines for drones missiles and loitering munitions.

Speaker Change: Angelus for hypersonic and supersonic systems.

Speaker Change: Engine and propulsion systems for space and certain classified aerial systems.

Speaker Change: Att's Spartan development group is under customer funded contract for a new propulsion system for a classified aircraft.

Speaker Change: And also a separate new Spartan group propulsion system has now been integrated into our customers' classified drone system and is preparing for initial flight.

Eric M. DeMarco: Both of these new system programs are important contributors to KTT and are expected to grow as these new program systems evolve. We will be making investments in our engine businesses, including for a low-cost manufacturing facility, infrastructure, systems, and assets, including as related to loitering, munition, and missile system production contracts, where we are designed in, certain of which we expect to receive this year now that the funding bills have been approved.

Speaker Change: Both of these new system programs are important contributors to ATT and are expected to grow with these new program systems evolve.

Speaker Change: We will make we will be making investments in our engine businesses, including for a low cost manufacturing facility infrastructure systems and assets, including as related to loitering munition and missile system production contracts, where we are designed in certain of which we expect to receive this year now that the funding.

Speaker Change: Builds have been approved.

Eric M. DeMarco: We also continue to be on schedule and on budget under a customer-funded contract where we are integrating Kratos' jet engines into certain Kratos high-performance jet drones. Kratos' C5ISR business is also positioned for future growth with programs of record and contracts including Sentinel, Patriot, IBCS, IFPIC and DURING, SHIELD, SHORAD, and other missile, radar, air, defense, and The global demand for air defense, radar, and strategic systems is providing a catalyst for C5ISR growth, and I encourage you to take a look at the size, opportunity, and quantities related to certain of these programs.

Speaker Change: We also continue to be on schedule and on budget under a customer funded contract, where we are integrating <unk> jet engines into certain <unk> high performance jet drones.

Speaker Change: Credo SEC five ISR business is also positioned for future growth with programs of record and contracts, including set low Patriot Bcs.

Speaker Change: Yes, if pick enduring sheer shield sure AD and other missile radar air defense and counter UAS programs of record.

Speaker Change: The global demand for Air Defense radar and strategic systems is providing a catalyst for <unk> ISR growth and I encourage you to take a look at the size opportunity and quantities related to certain of these programs Kratos supports.

Eric M. DeMarco: Kratos' unique, one-of-a-kind, owned-and-operated Global Space Domain Awareness (or SDA) system is an incredibly important Kratos asset, with its data and information being of increasing value to our customers, including as a result of the significant number of additional spacecraft being deployed. Data sales to customers from Kratos' SDA, similar to Kratos' OpenSpace software and license sales, are certain to have the highest margin in our company and can be contributors to Kratos exceeding our profit forecasts based on MIPS.

Speaker Change: <unk> is unique one of a kind of owned and operated global space domain awareness or SDA system is an incredibly important cradles asset with its data and information being of increasing value to our customers.

Eric M. DeMarco: Including as a result of the significant significant number of additional spacecraft being deployed.

Speaker Change: Data sales to customers from tradeoffs as SDA similar to create OS is open space software and license sales or certain of the highest margin in our company and.

Speaker Change: And can be contributors to credo, succeeding our profit forecast based on mix.

Eric M. DeMarco: Representative of the progress Kratos' open-space virtualized ground system continues to make, Kratos recently demonstrated a fully virtualized SATCOM ground system for the United States Army Futures Command over SES's O3B NEO Constellation, and we also successfully demonstrated fully virtualized SATCOM over LEO for the United States Army.

Speaker Change: Representative of the progress credits as open space Virtualized ground system continues to make great was recently demonstrated a fully virtualized satcom ground system for the United States Army Futures command over Ses's <unk> Mio constellation.

Speaker Change: We also successfully demonstrated fully virtualized satcom over Leo for the United States Army.

Eric M. DeMarco: We continue to make significant investments in our first-to-market open-space virtual C2 and TTNC software product families and also in the expansion of our global SDA system. Kratos' unmanned systems business highlights we can discuss include Kratos' Valkyrie flying with two F-35 aircraft, successfully demonstrating the ability to deliver an integrated electronic attack capability during a live fire test event at Eglin Air Force Base with the United States Marine Corps as part of the Penetrating Affordable Autonomous Collaborative Killer Portfolio, or PAC-P program.

Speaker Change: We continue to make significant investments in our first to market open space virtual C. Two of TNC software product family and also at the expansion of our global SBA system.

Eric M. DeMarco: <unk> unmanned systems business highlights we can discuss include <unk> Valkyrie flying with two F 35 aircraft successfully demonstrating the ability to.

Speaker Change: To deliver an integrated electronic attack capability during a live fire test event at Eglin Air Force base with the United States Marine Corps as part of the penetrating affordable autonomous collaborative killer portfolio or path P program.

Eric M. DeMarco: During the PAC-P program mission, Kratos' Valkyrie advanced EA payload autonomously detected, identified, and geolocated multiple tactically relevant targets of interest, transmitted emitter target track coordinates to collaborative assets, and successfully presented non-kinetic electronic attack effects to multiple emitters. The recent M prefix reported for the Marines MQ-58A Valkyrie means multi-mission in the U.S. military-wide aircraft designation system, with the use of M rather than X indicating a platform intended or in planning for operational use, transitioning from the X or experimental.

Speaker Change: During the path P program mission <unk> Valkyrie advanced EEA payload autonomously detected identified NGL located multiple tactically relevant targets of interest <unk>.

Eric M. DeMarco: Transmitted emitter target track coordinates to collaborative assets and successfully presented non kinetic electronic attack effects to multiple emitters.

Speaker Change: The recent M. Three effects reported reported for the Marines <unk> 58, a valkyrie means multi mission in the U S military wife aircraft designation system.

Eric M. DeMarco: With the use of <unk>, rather than X, indicating a platform intended or in planning for operational use.

Speaker Change: Transitioning from the X or experimental.

Marie C. Mendoza: Kratos' ghost works recently had successful ground tests on a new system, the Valkyrie variant, and we are planning for initial flights in the next few months, pending the availability of a specific range, asset, and necessary clearance. We are currently in customer discussions, and we expect to receive our most important Valkyrie-related contract award either late this year or early next year. As a result of the progress and the expectations we have, we are making the internal investment required to accelerate the completion of the current Valkyrie serial production, including multiple variants, totaling 24 systems.

Speaker Change: <unk> Ghost works recently had successful ground tests on a new system Valkyrie.

Marie C. Mendoza: And we are planning on initial flights in the next few months pending availability of a specific range asset and necessary clearances.

Marie C. Mendoza: We are currently in customer discussions and we expect to receive our most important valkyrie related contract award either late this year early next year.

Marie C. Mendoza: As a result of the Valkyrie progress and the expectations. We have we are making the internal investment required to accelerate the completion of the current valkyrie serial production, including multiple variants totaling 24 systems.

Marie C. Mendoza: And we have now begun working with our in-place qualified supply chain and vendor base on pricing out the next Valkyrie production lot beyond the current 24 as most of the 24 are now sold, customer committed, or which we believe we have a clear customer opportunity line of sight. We have recently been informed that we should be receiving a Kratos-Athena drone system-related contract award in the next few months. Additionally, since our last report to you, Kratos' Apollo drone system had a successful customer-funded demonstration flight with a special payload.

Marie C. Mendoza: And we have now begun working with our in place qualified supply chain and vendor base on pricing out. The next Valkyrie production lot beyond the current 24 as most of the 24 are now now sold customer committed or which we believe we have a clear customer opportunity line of sight.

Marie C. Mendoza: We have recently been informed that we should be receiving a kratos Athena drone system related contract award in the next few months and.

Marie C. Mendoza: And Additionally, since our last report to you <unk> Apollo drone system had a successful customer funded demonstration flight with a special payload.

Marie C. Mendoza: Recent world events have generated renewed customer interest in Kratos' Apollo, Athena, and other Kratos tactical drones. As I have mentioned previously, for customer, competitive, or security-related reasons, we are unable to discuss certain programs, contracts, or initiatives Kratos is involved with. And we will let the financial results provide progress as reflected in Q1 on our unmanned system. We are in the planning process to expand our tactical drone production at other facilities to address the increased and expected demand.

Marie C. Mendoza: Recent world events have generated renewed customer interest and credits as Apollo Athena and other kratos tactical drone systems.

Marie C. Mendoza: As I've as I have mentioned previously for customer competitive or security related reasons, we are unable to discuss certain programs contracts or initiatives <unk> is involved with.

Marie C. Mendoza: And we will let the financial results provide the progress as reflected in Q1 in our unmanned systems business.

Marie C. Mendoza: Okay.

Marie C. Mendoza: We are in the planning process to expand our tactical drone production at other facilities to address the increased unexpected demand.

Marie C. Mendoza: So overall, we're focused on execution of our record backlog and $11 billion opportunity pipeline, including certain large new program awards we expect to receive over the next few quarters that we are preparing for. Accordingly, we have no significant acquisitions contemplated, potentially only small Kratos business-consistent... Virtually every opportunity or initiative we executed or for which we recently raised equity has either successfully closed or progressed, with continued progress expected over the coming months. As I have discussed today, Kratos will be investing in plants, facilities, equipment, systems, capital assets, and other areas in order to successfully execute on programs we have now received or that we expect.

Marie C. Mendoza: So overall, we're focused on execution of our record backlog and $11 billion opportunity pipeline, including certain large new program awards, we expect to receive over the next few quarters that we are preparing for.

Marie C. Mendoza: Accordingly, we have no significant acquisitions contemplated potentially only small credo business consistent tuck ins.

Marie C. Mendoza: Virtually every opportunity or initiative, we executed our recent equity raise for us either successfully closed or progressed with continued progress expected over the coming months.

Marie C. Mendoza: As I've as I have discussed today tradeoffs will be investing in plant facilities equipment systems capital assets on other areas in order to successfully ethical execute on programs. We have now received or that we expect to receive.

Marie C. Mendoza: Additionally, we believe that the equity raise was instrumental in Kratos just recently being successfully down-selected as the winner of a large new opportunity, which we are currently in negotiations and diligence, internally called Prometheus. For the next several months, Kratos' base case forecasted growth areas include air defense, turbine technologies, engines, missile, radar, and CUAS systems, drones, C5ISR, microwave electronics, and training. The potential future catalysts and potential upsides to Kratos' base case forecast include tactical drones, BMD Rocket and Hypersonic Systems, and Jet Engines and Propulsion Systems.

Marie C. Mendoza: Additionally, we believe that the equity raise was instrumental in credo, just recently being successfully down selected as the winner on a large new opportunity, which we are currently in negotiations and diligence internally called Prometheus.

Marie C. Mendoza: Next several months Kratos base case forecasted growth areas include Air Defense turbine technologies engines missile radar in UAS systems draw.

Marie C. Mendoza: Drones C five ISR microwave electronics and training systems.

Marie C. Mendoza: Potential future catalysts and potential upsides. The Kronos is base case forecast include tactical drones.

Marie C. Mendoza: BMD rocket in hypersonic systems.

Marie C. Mendoza: And jet engines and propulsion systems.

Deanna Hom Lund: Thank you, Eric. Good afternoon, As we have included a detailed summary of the first quarter financial performance, as well as the initial second quarter and affirmation of the full year 2024 financial guidance, in the press release we published earlier today, I will focus on the highlights and my remarks today. Revenues for the first quarter were $277.2 million, exceeding our estimated range of $240 to $260 million, which included higher-than-expected performance and delivery across most of our businesses, with notable strength in our turbine technologies and microwave products businesses.

Marie C. Mendoza: Deanna.

Speaker Change: Thank you Eric and good afternoon.

Deanna Hom Lund: We have included a detailed summary of the first quarter financial performance as well as the initial second quarter, an affirmation of the 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: Revenues for the first quarter with $277 2 million exceeding our estimated range of $240 million to $260 million, which includes higher than expected performance and delivery across most of our businesses with notable strength in our turbine technologies and microwave products businesses.

Deanna Hom Lund: All business units generated organic revenue growth over last year's first quarter, resulting in a 19.5% consolidated organic revenue growth rate, including the impact of the Sierra Technical Services, or STS, acquisition on a pro forma basis as if acquired at the beginning of 2023. Adjusted EBITDA for the first quarter of 2004 was $26 million, exceeding our estimated range of $16 to $18 million, reflecting the additional revenues, as well as a more favorable mix of higher-margin revenues with notable strength in our turbine technologies and microwave products businesses, as well as higher-margin software and data-related content from our satellite businesses.

Deanna Hom Lund: All business units generated organic revenue growth over last year's first quarter, resulting in a 19, 5% consolidated organic revenue growth rate, including the impact of the CRA technical services or STS acquisition on a pro forma basis as if the acquired at the beginning of 2023.

Deanna Hom Lund: Adjusted EBITDA for the first quarter of 'twenty, four was $26 million exceeding our estimated range of $16 million to $18 million, reflecting the additional revenues as well as a more favorable mix of higher margin revenues with notable strength in a turbine technologies and microwave products businesses as well as higher margin software and data related to <unk>.

Deanna Hom Lund: From our satellite business.

Deanna Hom Lund: The positive cash flow from operations generated was $700,000, which included the impact of working capital requirements related to increases in inventory balances and prepaid assets related to supplier-required deposits and prepayments for materials and equipment. The cash flow used from operations was $15.9 million after funding capital expenditures of $16.6 million. As planned, we are making investments to expand and build out certain of our manufacturing and production facilities in our microwave products, rocket systems, and hypersonic businesses to meet anticipated customer orders and requirements, and investing in related new machinery, equipment, and systems.

Deanna Hom Lund: Positive cash flow from operations generated was 700000, which includes the impact of working capital requirements related to increases in inventory balances and prepaid assets related to supplier required deposits and prepayments from materials and equipment.

Deanna Hom Lund: Cash flow used from operations was $15 9 million after funding capital expenditures of $16 6 million.

Deanna Hom Lund: As we planned we are making investments to expand and build out of our manufacturing and production facilities in our microwave products rocket system, and hypersonic businesses to meet anticipated customer orders and requirement and investing and related new machinery equipment and systems.

Deanna Hom Lund: We are also continuing to manufacture the two production lots of Valkyries prior to contract award. We have also utilized $45 million of the proceeds from the equity offering to pay down all amounts outstanding on a revolving line of credit.

Deanna Hom Lund: We are also continuing to manufacturer the two production launch about the week prior to contract award.

Deanna Hom Lund: We also utilized $45 million of the proceeds from the equity offering to pay down all amounts outstanding under our revolving line of credit.

Deanna Hom Lund: Consolidated DSOs, or Days Sales Outstanding, continue to improve from 109 days in the fourth quarter of 2023 to 107 days in the first quarter of 2024, reflecting the timing of customer milestone payment. Our contract mix for the first quarter of 2024 was 68% fixed price, 26% cost plus, and 6% time and materials. Revenues generated from contracts with the U.S. federal government during the first quarter of 24 were approximately 69%, which includes revenues generated from contracts with the DOD, non-DOD federal government agencies, and FMS contracts.

Deanna Hom Lund: Consolidated Dsos or days sales outstanding continued to improve from 109 days in the fourth quarter of 2023 to 107 days in the first quarter of 2024.

Deanna Hom Lund: And the timing of customer milestone payments.

Deanna Hom Lund: Contract mix for the first quarter of 'twenty, four was 68% fixed price, 26% cost plus 6% time and materials.

Deanna Hom Lund: Revenues generated from contracts with the U S. Federal government during the first quarter of 'twenty four were approximately 69%, which includes revenue generate generate revenues generated from contracts with the Dod non Dod federal government agencies and Fms contract.

Deanna Hom Lund: In the first quarter of 2014, we generated 12% of revenues from commercial customers and 19% from foreign customers. An operational priority remains the hiring and retention of skilled technical labor across the company, with a total Kratos headcount of 3986 at the end of the year, first quarter of 24, as compared to 39-32 employees at the end of 20.

Deanna Hom Lund: In the first quarter of 'twenty, four we generated 12% of revenues from commercial customers and 19% from foreign customers.

Deanna Hom Lund: On an operational priority remains to hiring and retention of scale technical labor across the company with total creators head count.

Deanna Hom Lund: <unk> thousand 986 at the end of the.

Deanna Hom Lund: First quarter of 2004 as compared to 39 32 employees at the end of 'twenty three.

Deanna Hom Lund: Now moving on to financial guidance. Our initial second quarter 24 financial guidance we provided today includes our current forecasted business mix and expected delivery schedules and our assumptions related to the potential impact of the continued operating challenge related to our obtaining and retaining qualified technical personnel and the related increased cost for those employees across our entire labor base. Our guidance also includes our assumptions related to the continued impact of supply chain disruption, inflation, and related expected cost and price increases.

Speaker Change: And moving on to financial guidance.

Deanna Hom Lund: Our initial second quarter 'twenty financial.

Deanna Hom Lund: Financial guidance, we provided today includes our current forecast and business mix and expected delivery schedules and our assumptions related to the potential impact of the continued operating challenge related to our obtaining and retaining qualified technical personnel and the related increase cost for those employees across our entire labor base.

Deanna Hom Lund: Our guidance also includes our assumptions related to the continued impact of <unk>.

Deanna Hom Lund: Supply chain disruption.

Deanna Hom Lund: Ocean and related expected cost and price increases.

Deanna Hom Lund: Our second quarter and full year 2024 guidance reflects the impact of certain performance and deliveries made in the first quarter of 2024, certain of which had originally been estimated to be executed or delivered in the second quarter of 2014.

Deanna Hom Lund: Our second quarter and full year 2020 guidance reflects the impact of certain performance and deliveries made in the first quarter of 'twenty for certain employee channel recently been estimated.

Deanna Hom Lund: To be executed are delivered in the second quarter of 2004.

Operator: We'll turn it over now to the moderator for questions. Thank you.

Speaker Change: Thank you Deanna.

Speaker Change: I'll turn it over now to the moderator for questions.

Operator: Thank you. Ladies and gentlemen, to ask a question on the phone lines, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, simply press star 1-1 again. Please stand by while we compile the Q&A list. Now, the first question coming from the lineup, Peter Arment with Baird, your line is open.

Peter J. Arment: Thank you.

Operator: And gentlemen to ask a question on lines, you will need to press star one on your telephone and wait for your name to be announced.

Operator: Joe Your question simply press Star one again.

Operator: Standby, while we compile the Q&A roster.

Operator: No first question coming from the line of Peter Arment with Baird. Your line is open.

Peter J. Arment: Yeah, good evening, Eric and Deanna. I got nice results. Eric, maybe just to start at a high level, just when we think about you having really strong 20% organic growth here in the first quarter, and if we think about your guidance, you know, of approximately 10% growth on the top line for the year. You know, how do we think about that, just given that growth would be kind of down ticking to the high single digits when we think about past supplemental budgets that have been passed and just kind of the demand signals that you're seeing across the board and your businesses? Would you consider your top line conservative or just how you do things?

Peter J. Arment: Yes, good evening, Eric and Deanna nice results.

Peter J. Arment: Eric maybe just to start at a high level just when we think about you had really strong 20% organic growth here in the first quarter and if we think about your guidance.

Peter J. Arment: You know of approximately 10% growth on the top line for the year.

Peter J. Arment: How do we think about that just given you that would be growth would be kind of down picking to the high single digits. When we think about budgets are passed supplemental has been passed.

Peter J. Arment: And just kind of the demand signals that you're seeing for across the board in your businesses.

Peter J. Arment: Would you consider your topline conservative or just how would you frame it.

Eric M. DeMarco: Right. Peter, the team, our backlog, and the near-term opportunities. 2024. We've got the 2020 site on it. We've got it. The CRA went six months. As you know, the government contracting offices have got to get 12 months worth of money under contract and obligated in six months, and we're being cautious. We are just being cautious. We've got it in front of us, the government, and I'm not putting anything on them. They've got a lot of work to do. They've got to get this under contract and out to all of us.

Speaker Change: Right Peter.

Eric M. DeMarco: Our backlog.

Eric M. DeMarco: In the near term opportunities two.

Eric M. DeMarco: 2024, we've got 2020 site on it.

Speaker Change: Got it.

Eric M. DeMarco: The CRA went six months as you know the government contracting offices have got to get 12 months worth of money under contract an obligated in six months.

Eric M. DeMarco: And we're being cautious here.

Eric M. DeMarco: We are just being cautious.

Eric M. DeMarco: We've got it in front of us the government and I am not putting anything on them they've got a lot of work to do they've got to get this under contracted out to all of us.

Eric M. DeMarco: Yes, that's fair. And then just regarding your engine opportunities, you know, for both Florida Turbine and TDI, both have significant opportunities. How do you, what is your kind of expectation of the timeline for some of these businesses in terms of you're making a lot of investments and just sort of thinking about how they'll scale up?

Eric M. DeMarco: Okay.

Eric M. DeMarco: That's fair and then just regarding your.

Eric M. DeMarco: The engine opportunities.

Eric M. DeMarco: Yeah.

Eric M. DeMarco: Florida, both Florida turbine and TDI, both have significant opportunities. How do you. How are you kind of expecting kind of the timeline to go on some of these businesses in terms of Youre, making a lot of investments in and just sort of thinking about how the scale up.

Eric M. DeMarco: Yeah, unless something totally unexpected happens this year, KTT and TDI are going to continue to meet or exceed our expectations. The programs that we've won across both portfolios are very, very impressive. That does not include what we expect in the second half of this year to begin receiving additional production programs for Engines, for Missiles, Drones, and or Loitering Munitions. The funding is there. Customers are there.

Eric M. DeMarco: Yes.

Eric M. DeMarco: Unless something totally unexpected happens this year.

Eric M. DeMarco: K TTM TDI theyre going to continue to meet or exceed our expectations.

Eric M. DeMarco: The programs that we've won across both portfolios are very very impressive that does not include where we expect in the second half of this year to begin receiving additional production programs.

Eric M. DeMarco: Four engines.

Eric M. DeMarco: For missiles drones, <unk> loitering munitions.

Eric M. DeMarco: I'm tying into my getting things under contract and getting them out, not just direct to us, but also if we're working with the prime. We expect, for the next several years, our engine businesses to be some of the strongest growers in the company, and it ties directly into the drone platform. The Missile Platforms and the Loitering Munition Platforms that are coming down the pike. They're in the public, they're in the press today, and we're designing them in with our turbojets.

Eric M. DeMarco: The funding is there the customers are there tying into my getting things under contract and getting them out not just direct to us, but also we're working with a prime.

Eric M. DeMarco: We expect for the next several years our engine businesses to be some of the strongest growers in the company.

Eric M. DeMarco: And it ties directly into the drone platforms the missile platforms and the loitering munition platforms that are coming down the pike in the public there in the press today and we are designed in with our Turbo Jets.

Eric M. DeMarco: Terrific. And just lastly, any update you can give us on kind of positioning around for CCA for increment so I know that that is something that is tracking for, you know, later this year or maybe early next year, depending on what happens in terms of sort of timing, but any update you can give us there would be helpful. Thanks.

Speaker Change: Perfect and just lastly.

Eric M. DeMarco: Any update you can give us on kind of positioning around for CCA for increment. Two I know that that is something that is tracking for later this year or maybe early next year, depending on what happens on sort of timing, but.

Eric M. DeMarco: Yep, the Air Force obviously announced the CCA program is going to be up to 2,000 drones. The Secretary announced last week or the week before last that Inc. 1, which was just awarded, which was not in any of our forecasts, was not contemplated in any of our numbers, was for 100 plaintiffs. We're focused on the other 1900, which we believe a significant number of which are right in our sweet spot based on type of performance. So that's how we're looking at this, Peter.

Eric M. DeMarco: Any update you can give us there that'd be helpful. Thanks, Yes.

Eric M. DeMarco: The Air Force, obviously announced the CCA program is going to be up to 2000 drums.

Eric M. DeMarco: The Secretary announced last week or the week before last that eight one which was just awarded which was not in any of our forecasts was not contemplated in any of our numbers.

Eric M. DeMarco: We're 100 planes.

Eric M. DeMarco: We're focused on the other 1900, which we believe a significant number of which are right in our sweet spot based on type of performance.

Eric M. DeMarco: That's how we're looking at this Peter.

Peter J. Arment: Perfect. Thanks, Eric. I appreciate it.

Peter: Perfect. Thanks, Eric I appreciate it.

Michael Frank Ciarmoli: Thank you. And our next question comes from the line of Michael Ciarmoli with Druze Securities. The line is open.

Speaker Change: Thank you.

Michael Frank Ciarmoli: Next question coming from the line of Michael <unk> with <unk> Securities. Your line is now open.

Michael Frank Ciarmoli: Hey, good evening guys. Thanks for taking the questions. Nice results.

Michael Frank Ciarmoli: Hey, good evening guys. Thanks for taking the questions.

Eric M. DeMarco: Eric, maybe just to continue on Peter's question there on CCA, and you actually said there was news about Replicator. Does the Switchblade 600 provide you guys with an opportunity? I think in the past you've kind of married that platform with Airwolf.

Michael Frank Ciarmoli: <unk>.

Eric M. DeMarco: Eric maybe just to continue.

Eric M. DeMarco: Continue on Peter's question, there on <unk>.

Eric M. DeMarco: CCA and you actually said there was news about replicator.

Michael Frank Ciarmoli: Any color there?

Michael Frank Ciarmoli: Does the Switchblade 600 provide you guys opportunity I think in the past you've kind of married that platform with air Wolf any any color there.

Eric M. DeMarco: Michael, I can't comment directly on what was announced recently. I can say that we have launched the Aerovironment drones on our drones, which give them an extended range and it gives them an extended capability, and on Replicator, kind of, sort of similar to the CCAs. This award was called Patronch I, and it was focused on Class I and Class II UAVs. The second tranche is coming, and the third tranche is coming, both of which are either in the air system or the propulsion system we're hoping to be involved. So this is rolling out very similarly to how we've been led to expect it would by the government.

Michael Frank Ciarmoli: Hi.

Eric: Michael I can't comment directly on.

Eric M. DeMarco: What was announced recently.

Eric M. DeMarco: Can't say that we have launched the aerovironment drones off of our drones, which give them extended range and it gives them extended capability.

Eric M. DeMarco: And on replicator kinds of sort of similar to the Ccas.

Eric M. DeMarco: This this will award was called tranche, one and it was focused on class, one and class II Uavs.

Eric M. DeMarco: And the second tranche is coming in the third tranche is coming both of which either.

Eric M. DeMarco: And the air system for the propulsion system, we're hoping to be involved. So this is rolling out very similar to how we've been led to expect it by the us government.

Michael Frank Ciarmoli: Got it. And then you guys talked about a lot of investment, new existing facilities, really across multiple lines of business. No change to the CapEx. You obviously did the raise.

Michael: Got it.

Michael Frank Ciarmoli: And then you guys talked about a lot of investment new existing facilities really across multiple lines of business no change to the Capex you obviously did the race.

Eric M. DeMarco: You've got a significant amount of cash on the balance sheet. Is everything contemplated in the CapEx spend? You know, is any one of these investments in a certain capability consuming substantially more? Can you maybe give us even the directionally size, rank order, and how much investment is kind of in each capability?

Michael Frank Ciarmoli: <unk> got a significant amount of cash on the balance sheet is everything contemplated in the capex spend.

Eric M. DeMarco: Is any one of these <unk>.

Eric M. DeMarco: Investments in a certain capability consuming substantially more can you maybe.

Eric M. DeMarco: Give us even directionally.

Eric M. DeMarco: Size rank order, how much investments kind of in each capability.

Michael Frank Ciarmoli: Yeah, so let's go down the list, the known ones that we've begun, or we're going to be beginning. We're standing up, two engine manufacturing lines, including a new plant. This is for two different types of engines, and it's specifically related to tactical systems, whether it be a drone, a loitering munition, or a powered munition.

Speaker Change: Yes, so let's go let's go down the list the known ones that we're going to be that we've done or we're going to be beginning with.

Michael Frank Ciarmoli: We're standing up two engine manufacturing lines, including a new plant.

Michael Frank Ciarmoli: And this is for two different types of engine.

Michael Frank Ciarmoli: And it's specifically related to.

Michael Frank Ciarmoli: Tactical systems, whether it would be a drone or loitering munition or a powered munitions.

Speaker Change: Got it.

Eric M. DeMarco: We are, we are, six months out from hitting a milestone on a much larger engine. We're already under contract that if things go according to plan, then we will have to stand up a third facility for this engine, which is a much larger engine for a manned aircraft. All right, okay. Okay, so that's those on the hypersonic side. We, with Zeus 2, were successful on the static fire.

Michael Frank Ciarmoli: We are six months out from hitting our milestone.

Eric M. DeMarco: On a much larger engine, we're already under contract.

Eric M. DeMarco: That if things go. According to plan then we will have to stand up a third facility for this engine, which is a much larger engine for manned aircraft.

Eric M. DeMarco: Alright, okay.

Eric M. DeMarco: So thats those on the hypersonic side.

Eric M. DeMarco: We with Zeus two successful on the static fire.

Eric M. DeMarco: We are, as we speak, building out the integration center for the solid rocket motors and the front-end flyers, ours, Aranis, and Dark Fury, and also other people. Okay, that is happening. It will be accelerated. Okay, one of the biggest ones, Michael, is our Israeli-based microwave electronics business. Everything is at a record high, backlogs at a record high, pipelines at a record high, revenues at a record high, and it's only beginning. And we all know why, and I've listed some of the systems we're on. So we, there are two that I can talk about, two facilities we're standing on. One's a brand new one for something, and another one is an expansion of an existing one for existing systems.

Eric M. DeMarco: Our as we speak building out the integration center.

Eric M. DeMarco: For the solid rocket motors and the front end fliers hours <unk> and dark Fury and also other and also other people.

Eric M. DeMarco: Okay that is that is happening that will be accelerating.

Eric M. DeMarco: Okay, one of the one of the biggest ones Michael.

Eric M. DeMarco: As our Israeli based microwave electronics business.

Eric M. DeMarco: The.

Eric M. DeMarco: Everything is at a record high.

Eric M. DeMarco: Backlog is at a record high pipelines at a record high revenues out of everything and it's only beginning.

Eric M. DeMarco: And we all know what that I've listed some of the systems we're on.

Eric M. DeMarco: And so we there are two that I can talk about two facilities, we're standing up.

Eric M. DeMarco: One is a brand new one for something and another one is an expansion of an existing one for existing systems.

Eric M. DeMarco: It's possible that by this time next year we may have to stand up another one, and this is for the demand for the microwave electronics that are going on the various weapon systems in Israel. So again, these are all done under contract. The next one is about... Okay, two things. As I said, we're having to pull to the left now, based on a certain specific customer. Hopefully, we're going to get this done, where we're going to have to deliver these out sooner than we anticipated, and based on the successes we continue to have with other customers.

Eric M. DeMarco: It's possible.

Eric M. DeMarco: By this time next year, we may have to stand up another one and this is for the demand of the microwave electronics that are going on the various weapons systems. It.

Eric M. DeMarco: Israel.

Speaker Change: Got it.

Eric M. DeMarco: So again these are all done under contracts the.

Eric M. DeMarco: The next one is the Valkyrie.

Eric M. DeMarco: Okay, two things as I said, we are having to pull to the left now based on a certain specific customer hopefully we're going to get this done where we're going to have to deliver these out sooner than we anticipated.

Eric M. DeMarco: And base based on successful as we continue to have.

Eric M. DeMarco: With up with other customers.

Eric M. DeMarco: That's why we've begun, we haven't ordered them yet, have not made the orders yet, but we've begun going to the supply chain for the next lot of planes, which, depending on how things work out, will be 12 or 24 more. So again, those are all I'm going to call either done or 20. Probably the biggest one is Prometheus, which in the equity race, I walked people through, that it was not done, that we were in a football game, we weren't quite in the red zone yet, well, we've been downsized, and we've won.

Eric M. DeMarco: That's why we've begun.

Eric M. DeMarco: We have in order to get have not made the orders yet, but we've begun going to the supply chain for the next lot of claims which depending on how things work out will be 12 months to 24 more.

Eric M. DeMarco: So again those are all I'm going to call it either done or 2020.

Eric M. DeMarco: Probably the biggest one is <unk>.

Eric M. DeMarco: And the equity raise I walk people through that it was not done that we were on a football game, we work quite in the Red zone, yet where we've been down selected.

Michael Frank Ciarmoli: We're in the red, and hopefully, these will get done and contracted by the end of this year. This could be the largest. This is an area that we're in already. This brings a backlog, this is not a build-it-and-they-will-come project, but it will require a significant investment for this potential game-changing opportunity. Those are the primary items, Mike.

Eric M. DeMarco: One.

Eric M. DeMarco: We are in the Red zone.

Michael Frank Ciarmoli: Yes.

Michael Frank Ciarmoli: Hopefully this will get done and be contracted by the end of this year.

Michael Frank Ciarmoli: This could be the largest.

Michael Frank Ciarmoli: Opportunity.

Michael Frank Ciarmoli: This is an area that we're in already.

Michael Frank Ciarmoli: This brings our backlog does not a build it and they will come but it will require a significant investment.

Michael Frank Ciarmoli: Towards this potential game changing opportunity.

Michael Frank Ciarmoli: Those are the primary items Mike.

Michael Frank Ciarmoli: Got it, that's helpful. Just the last one. On Valkyrie, everything sounds like it's progressing. Obviously, you mentioned the supply chain, but I think in your comments, you said maybe the order is sliding into 25. Seems like there is a little bit of a disconnect there. I mean, all this interest but not getting the big orders. You know, how are you getting comfortable with all this investment but not having the order in hand yet and still self-funding? All right. So my friend,

Michael Frank Ciarmoli: Got it that's helpful. Just a last one on Valkyrie.

Michael Frank Ciarmoli: Everything sounds like it's progressing obviously you mentioned the supply chain, but I think in your comments you said may be.

Michael Frank Ciarmoli: Order is sliding into 25 seems like a little bit of a disconnect. There I mean, all this entry, but not getting a big orders.

Michael Frank Ciarmoli: Are you get comfortable with all of this investment, but not having the order in hand, yet still self funding.

Eric M. DeMarco: All right, so Mike, we have two customers for two separate orders, two separate potential orders. All right.

Speaker Change: Alright, so Mike we have we have two customers.

Speaker Change: For two separate orders.

Eric M. DeMarco: Two separate potential orders.

Eric M. DeMarco: Alright.

Eric M. DeMarco: I'm trying to be cautious. I think we're going to get at least one of them this calendar year and the other one in the first half of next year. I'm going to be cautious and say the first quarter of next year just to be cautious. But we are, again, unless something changes geopolitically. We're confident we're going to be moving ahead here. And if the timing works out, Mike, the way I think it's going to work out, we're not going to have to pull the trigger on the additional one until we get one of those in, which you can understand means that, hopefully, it is. Perfect.

Eric M. DeMarco: It looks.

Eric M. DeMarco: I'm trying to be cautious I think we're going to get at least one of them. This calendar year than the other one in the first half of next year I'm going to be cautious and say first half first quarter excuse me first quarter of next year just to be cautious.

Eric M. DeMarco: But we're again unless something changes geopolitically.

Eric M. DeMarco: We're confident we're going to be moving ahead here and a timing works out Mike the way I think it's going to work out we're not going to have to pull the trigger on the additional ones.

Eric M. DeMarco: Until we get one of those eight.

Eric M. DeMarco: Which which you can understand means that hopefully it's close.

Michael Frank Ciarmoli: Perfect. Thanks a lot, guys. I'll jump back to the Q&A.

Speaker Change: Perfect. Thanks, a lot guys I'll jump back in the queue Sir.

Kenneth George Herbert: Thank you. And our next question comes from the line-up, Ken Herbert with RBC Capital Markets. Your line is open.

Speaker Change: Thanks Kim.

Kenneth George Herbert: Next question coming from the line of Ken Herbert with RBC capital markets. Your line is open.

Kenneth George Herbert: Hey, good afternoon, Eric and Deanna. Hey, Eric, I wanted to ask you, it's been a couple of quarters now that you've more publicly talked about the shift from a prime to more of a merchant supplier, and it clearly sounds like you're getting some traction in a number of these areas. How would you sort of characterize your success in this relative to your plans, and as you think about these new opportunities, maybe what percent would you think about as a merchant supplier or subcontractor relative to the sort of ongoing dependence on winning things as a prime?

Kenneth George Herbert: Okay.

Kenneth George Herbert: Hey, good afternoon, Eric and Deanna.

Speaker Change: Good afternoon Kim.

Kenneth George Herbert: Eric I wanted to ask you.

Kenneth George Herbert: Ben a couple of quarters now that you've more publicly talked about the shift from.

Kenneth George Herbert: Brian to more of a merchant supplier and it clearly sounds like youre getting some traction in the <unk>.

Kenneth George Herbert: Number of these areas how would you sort of characterize.

Kenneth George Herbert: Your success in this relative to your plans and as you think about these new opportunities.

Kenneth George Herbert: Maybe what percent would you think about us as a merchant supplier of subcontractor relative to sort of ongoing dependence to win things as a prime.

Eric M. DeMarco: As I talked about a little bit on the last call, Ken, we sit back and we look at the probability of win, the required Kratos investment to win it, and there are certain areas that are our sweet spot, that are not other sweet spots, certain companies that we have talked about in the past two weeks. Our sweet spot in the drone area is low-cost, reusable, disposable, or treatable drones. That's what our sweet spot is.

Eric M. DeMarco: As I talked about a little bit on the last call Ken we sit back and we look at probability of win.

Eric M. DeMarco: And.

Eric M. DeMarco: The required Cray dose investment to win it.

Eric M. DeMarco: And there are certain areas that are that are our sweet spot.

Eric M. DeMarco: That are not others sweet spots certain companies of which talked about in the past two weeks for example.

Eric M. DeMarco: Our sweet spot in the drone area, our low cost reusable disposable or <unk> drones.

Eric M. DeMarco: We expect to win those programs. Certain companies in the past week, publicly, discussed that that's not their sweet spot. Their sweet spot is exquisite. So, there would be an area where it might make sense for a partnership one way or the other, with the probability of winning together being higher on one, if not on the other. Here's an example.

Eric M. DeMarco: That's our sweet spot.

Eric M. DeMarco: We expect to win those programs.

Eric M. DeMarco: Certain companies in the past week publicly they discussed that that's not their sweet spot there sweet spot is exquisite.

Eric M. DeMarco: So there would be an area, where it might make sense for our partnership one way or the other where the probability of win together.

Eric M. DeMarco: It's higher on one if not on the other there is an example.

Eric M. DeMarco: Okay.

Eric M. DeMarco: OK. Um, and the Air Defense Heroes are our primary partners in air defense systems, CUAS systems, missile systems, and radar systems, or I'll call them the big three. It's Raytheon, Northrop, and Lockheed, and they are our true partners, and they're great to work with, in no particular order. Patriot is a significant Kratos program. That's Raytheon. Integrated Battle Command System is a very significant program. That's North, a FAB, and multiple CUAS. Lockheed Martin.

Eric M. DeMarco:

Eric M. DeMarco: And the air Defense area.

Eric M. DeMarco: I mean are our primary partners in Air Defense system C. UAS systems missile systems radar systems are I'll call them the big three it's Raytheon.

Eric M. DeMarco: Northrop and Lockheed.

Eric M. DeMarco: And they are our true partners.

Eric M. DeMarco: And they are great to work with.

Eric M. DeMarco: And.

Eric M. DeMarco: In no particular order.

Eric M. DeMarco: Patriot is significant tradeoffs program.

Eric M. DeMarco: That's Raytheon integrated Battle command system is a very significant program.

Eric M. DeMarco: That's northrop.

Eric M. DeMarco: Fat and multiple UAS systems.

Eric M. DeMarco: IFPIC Enduring Shield, we were partnered with Dynetics. And each one of those, it made all the sense in the world to partner with these outstanding legacy traditional prime system integrators, where we win, and we can support all of them and help them execute their mission for the customers. That's how we're looking at it, and we're trying to pick our spot for the highest probability of win.

Eric M. DeMarco: Lockheed Martin Alright.

Eric M. DeMarco: Alright.

Eric M. DeMarco: Pick enduring shield.

Eric M. DeMarco: We're partnered with Dianetics and.

Eric M. DeMarco: And each one of those it made all the sense in the world to partner with the out these are outstanding legacy traditional prime system integrators.

Eric M. DeMarco: Where we win and we can support all of them and help them execute their mission for the customer.

Eric M. DeMarco: That's how that's how we're looking at it and we're trying to pick our spot for the highest probability of win.

Eric M. DeMarco: That's helpful. And as I look at the incremental sort of next production lot on the Valkyrie, can you talk at all about the second 24? How do your assumptions around pricing or real pricing that you might achieve on that have evolved or maybe changed or improved since some of the early production lots or the initial production run?

Eric M. DeMarco: That's helpful and as I look at the.

Eric M. DeMarco: The incremental sort of next production lot on the Valkyrie can you talk at all about for the second 24, how do your assumptions around pricing or real pricing that you might achieve on that have have evolved or maybe changed or improved since some of the early production.

Eric M. DeMarco: Yeah, so I'm talking generally now, because it depends on the version or the increment and the capability of the aircraft. So on the learning curves now, depending on quantity. So, for example, we submitted a ROM for a few dozen to a customer at 4MillionEats for a certain variant. There's another variant that's flying today. It's about five and a half or six million. And then there's the third one.

Eric M. DeMarco: What are the initial production runs.

Eric M. DeMarco: Yeah, so

Eric M. DeMarco: Yes.

Eric M. DeMarco: Im talking generally now because it depends on the version or the increment and.

Eric M. DeMarco: And the capability of the aircraft.

Eric M. DeMarco: So on the learning curve now.

Eric M. DeMarco: Depending on quantity. So for example, we submitted a wrong.

Eric M. DeMarco: For a few dozen.

Eric M. DeMarco: To a customer.

Eric M. DeMarco: At $4 million each.

Eric M. DeMarco: For a certain barrier.

Eric M. DeMarco: There is another variant that is flying today.

Eric M. DeMarco: It's about 556 million each.

Eric M. DeMarco: And then there's a third one.

Eric M. DeMarco: We haven't talked about it much. I'm not going to get into it a lot here. Hopefully, by the end of the year, I'll be able to talk about it more. It's closer to 10 million, and it's a beast. So it depends on quantities, and variants. Customer, we're working.

Eric M. DeMarco: <unk> talked about it much I'm not going to get into it a lot here hopefully by the end of the year I'm going to be able to talk about it.

Eric M. DeMarco: It's closer to $10 million.

Eric M. DeMarco: <unk>.

Eric M. DeMarco: So it depends on quantities.

Eric M. DeMarco: Variant.

Eric M. DeMarco: On the customer we're working with.

Kenneth George Herbert: Perfect. Thank you.

Speaker Change: Perfect. Thank you.

Michael Roy Crawford: Thank you. And our next question comes from the line of Mike Crawford with Beaver High Security. The line is open.

Kenneth George Herbert: Yep.

Speaker Change: Thank you.

Michael Roy Crawford: Next question coming from the line of Mike Crawford with B by Securities. Your line is open.

Michael Roy Crawford: Thank you. Can you just run through, please, some of the top opportunities, including converting Valkyries from CapEx to Revenue Percent Complete and Revenue Recognition, where you would generate revenue and operating earnings kind of ahead of what you've guided?

Michael Roy Crawford: Thank you can you just run through please.

Michael Roy Crawford: Of the top.

Michael Roy Crawford: Opportunities, including <unk>.

Michael Roy Crawford: Converting the Doctor read some capex to revenue per cent completed revenue recognition, where you would generate revenue and operating earnings kind of ahead of what you guided.

Eric M. DeMarco: Opportunities that are not in the base case. Yes.

Speaker Change: The opportunities that are not in the base case, yes.

Eric M. DeMarco: So, tactical drones are number one. We have no production of tactical drones at the base. Phil Rd, T&E, and S&P. That's number one.

Eric M. DeMarco: Okay.

Michael Roy Crawford: Some tactical drones is number one.

Eric M. DeMarco: We have no production of tactical drones in the base case.

Eric M. DeMarco: It's still.

Eric M. DeMarco: <unk> at S&P Thats.

Eric M. DeMarco: Number two is the engine production run. We have very little, if anything, in there for these engine production runs we're hoping to achieve. Okay, number three. It's Zeus and the Hypersonic Flyers.

Eric M. DeMarco: That's number one.

Eric M. DeMarco: Number two it's these engine production runs.

Eric M. DeMarco: We have very little if anything in there for these engine production runs we're hoping to receive.

Eric M. DeMarco: Okay number three.

Eric M. DeMarco: It's Zeus and the hypersonic fliers, we've included nothing because the systems work done now they're done.

Eric M. DeMarco: We've included nothing because the systems weren't done. Now they are done. The first flight of one system is coming up in the next several weeks, and the first flight of another system, Zeus-related, is later this year. Okay, now that these systems have worked, and I believe once we do these initial flights, it's possible, based on the backlog for certain types of assets that need to be flown, that could be an option that is absolutely not in our plan. A fourth one.

Eric M. DeMarco: The first flight of a system is coming up in the next.

Eric M. DeMarco: Several weeks.

Eric M. DeMarco: And the first flight of another system Zeus related is later this year.

Eric M. DeMarco: Okay now that these systems have.

Eric M. DeMarco: Have worked and I believe once we do these these initial flights it's possible based on the backlog for certain types of assets that need to be flown that could be an upper that is absolutely not in ours.

Eric M. DeMarco: And our plan.

Eric M. DeMarco: It's a program we're under contract for on a certain engine. It's one of the largest programs in our engine group. The customer recently came to us and asked us for an expanded scope for a different aspect of this engine to pull it into the left. OK. If we can hire the people, and that's a big challenge, Mike, if we can hire the people, that will absolutely give us the opportunity to beat our numbers soundly.

Eric M. DeMarco: A fourth one.

Eric M. DeMarco: It's a program we are under contract for on a certain engine. It's one of the largest programs in our engine group. The customer has recently come to us and asked us for expanded scope for a different aspect of this engine to pull it into the left okay.

Eric M. DeMarco: If we can hire the people and that's a big challenge Mike we can hire the people that will absolutely give us opportunity to beat our numbers soundly.

Eric M. DeMarco: So those are four areas right off the top of my head. Mike, the biggest item across the entire portfolio was... If we could obtain and retain the people, we've got the backlog to exceed what we've got out there. But it's challenging, especially with the people that need to have security.

Eric M. DeMarco: So those are four areas right off the top of my head.

Eric M. DeMarco: The biggest Mike the biggest item across the entire portfolio is people.

Eric M. DeMarco: If we could obtain and retain the people we've got the backlog to exceed what we've got out there but.

Eric M. DeMarco: But it is challenging, especially with the people that have security they need to have security clearances.

Michael Roy Crawford: Okay. Thank you, Eric. And then just one final question.

Speaker Change: Okay. Thank you Eric and then just one final.

Speaker Change: Previously you talked about.

Michael Roy Crawford: Previously, we talked about space, which has been, for the past few years, your, well, it is your biggest and has been among, if not your fastest growing business, but this year was supposed to be kind of a year of consolidation where it's flat, yet you were up nicely year over year in Q1, so I'm wondering if you're now expecting a little bit of growth there and also if you could just tell us a Yep. So, let me take the second one.

Speaker Change: Space, which.

Michael Roy Crawford: Has been for the past few years, what is your biggest thing has been among if not your fastest growing business, but this year was supposed to be kind of a year of consolidation, where it's yes. There was you were up nicely year over year in Q1. So I'm wondering if you are now expecting a little bit of growth. There and also if you could just tell us a little bit more about this new.

Michael Roy Crawford: New space customer, what youre doing for them what their satellite.

Eric M. DeMarco: So the second one first is this is an established company. It's a larger, profitable company. I said new space, Mike. That may have thrown people.

Eric M. DeMarco: Yep. So, let me take the second one first because it's the easier one.

Speaker Change: Yes, So let me take the second one first because it's the easier one so the second one first is this is an established company.

Eric M. DeMarco: It's a very it's a larger profitable company I said, new space that may have thrown people.

Eric M. DeMarco: It's new to us, but it's not a new space company. So it's new to US is not a new space company, they were putting up a new constellation.

Eric M. DeMarco: It's new to us, but it's not a new space company. They're putting up a new constellation, and they just selected us in the past couple, three weeks to be part of the microwave electronic system actually on the satellite. This could be, initially, several tens of millions of dollars to us. And it's because over the past year, and we've tried to lay this out, we've been successful on three or four other satellites with our microwave electronics satellite program. We're getting a reputation now.

Eric M. DeMarco: And they just selected us in the past couple of three weeks to be part of the microwave electronics system actually on the satellite.

Eric M. DeMarco: This could be initially several tens of millions of dollars to us initially.

Eric M. DeMarco: <unk>.

Eric M. DeMarco: It's because over the past year and we've tried to lay this out we've been successful on three or four other satellites with our microwave electronics satellite program. We're getting a reputation now. This is why we are one of the reasons, we're expanding our space qualified facility. So this is brand new new work, new constellation large company public company.

Eric M. DeMarco: This is one of the reasons we're expanding our space-qualified facility. So this is brand new, new work, new constellation, large company, public company, and it looks very, very good. So on the first part of your question, on our space business, Yep, as you mentioned, last year our space business organic growth was like 13 or 15 percent, and we did a little bit in Q1. But as I mentioned on the last quarterly call, this is the business within Kratos that absolutely could be, and it is being most impacted by the continuing resolution, the delay.

Eric M. DeMarco: And it looks very very very good for us.

Eric M. DeMarco: So on the first part of your question on our space business is as.

Eric M. DeMarco: As you mentioned last year, our space business organic growth was like 30% or 15% with a little bit in Q1.

Eric M. DeMarco: But as I mentioned on last quarter's call. This is the business within <unk> that absolutely could be and it is being most impacted by the continuing resolution that delay and also as you. All may have seen I knew this but it's out there publicly now there's a re prioritization of certain space assets.

Eric M. DeMarco: And also, as you all may have seen, I knew this, but it's out there publicly now, there's a reprioritization of certain space assets going on within the Air Force, the Space Command, the Space Force. None of this is bad, it means things aren't going away, but it means decisions haven't been made yet, they're probably not going to be made, and so things are moving to the right.

Eric M. DeMarco: Going on within the Air Force Space Command the space Force. None of this is bad it means things are going away, but it means decisions haven't been made yet they're probably not going to be made and so things are moving to the right. We factored all of this in to our guidance when we gave it for our space business.

Eric M. DeMarco: We factored all of this in to our guidance when we gave it to our space business. So the other piece is, as you know, our open space is a virtualized software-defined ground station. It's primary.

Eric M. DeMarco: And so the other piece is as you know our open space is Virtualized software defined ground station is primary.

Eric M. DeMarco: The best case scenario is for a software-defined satellite. We're a software-defined satellite, reconfigurable, reprogrammable, depending on the mission. The ground equipment at Kratos is software. It can reconfigure with it.

Eric M. DeMarco: Up.

Eric M. DeMarco: Best case scenario is for a software defined satellite.

Eric M. DeMarco: Okay, where software defined satellites reconfigurable reprogrammable, depending on the mission the ground equipment <unk> is the software it can reconfigure with it that's why do we win right. There as you may have seen a number of the software defined satellites, particularly in the commercial area are being pushed to the right I believe that Airbus.

Eric M. DeMarco: That's why we win right there. As you may have seen, a number of software-defined satellites, particularly in the commercial area, are being pushed to the right. I believe that Airbus actually came out and talked about it. There were very big customers around the world, but they were directly related to Airbus and their satellites. That's moved to the right.

Eric M. DeMarco: Actually came out and talked about it there are very big.

Eric M. DeMarco: Customers around the world, but were directly related to Airbus and their satellites. That's moved to the right. We built those moves to the right of those launches of those software defined satellites into our forecast.

Michael Roy Crawford: We built those moves to the right of those launches of those software-defined satellites into our forecast. So those are the dynamics we're dealing with. There's a lot going on in the space area, but I'd leave you with this. The number of satellites that are going up and that are forecast to go up militarily, national security, and commercially is incredible. It's in the thousands, the tens of thousands. Even with optical links, they need touchdown points. We're the touchdown point guy, and that's why we feel good overall about this.

Michael Roy Crawford: So those are the dynamics.

Michael Roy Crawford: We're dealing with there is a lot going on in the space area, but I'd leave you with this the number of satellites that are going up and that are forecast to go up militarily national security and commercially is incredible it's in the thousands to tens of thousands even with the optical links they need touchdown points, where the touchdown point Guy now.

Michael Roy Crawford: It's why we feel good overall about the business.

Speaker Change: Great. Thank you Eric.

Speaker Change: Hey, guys.

Operator: Thank you. And our next question coming from the line-up. Seth Seifman with J.P. Morgan, your line is open. Good evening, this is Rocco on behalf of Seth. Hey, good evening.

Speaker Change: Thank you.

Michael Roy Crawford: And our next question coming from the line of Seth.

Rocco: Sussman with JP Morgan Your line is open.

Speaker Change: Good evening, Mrs Rocco on for Seth.

Rocco: Hey. Hi. Good evening.

Rocco: How should we think about the growth trajectory at KGS for the rest of the year? Should we be thinking about sequential growth in the coming quarters or not?

Speaker Change: Hey, good evening.

Rocco: How should we think about the growth trajectory of kgs for the rest of the year should we be thinking about sequential growth in the coming quarters or could it possibly take a step back.

Deanna Hom Lund: In the annual guidance we gave, it We haven't updated guidance from a quarterly perspective by segment, but the annual guidance we gave was roughly 20-25% for unmanned systems, and then that implied approximately 6% annual growth for KGS, so that has remained unchanged with the original annual guidance. Okay, great.

Rocco: In the end.

Deanna Hom Lund: The annual guide we gave.

Deanna Hom Lund: We have an updated guidance from a quarterly perspective by segment, but the annual guidance, we gave which is roughly 20% 25%.

Deanna Hom Lund: Immune systems, and then that then implied approximately 6% annual growth for kgs.

Deanna Hom Lund: That has remain unchanged with the original annual guidance we gave.

Speaker Change: Okay, Great and then can you provide more details about the Apollo and Athene drones, and how they compare to kratos as other offerings.

Deanna Hom Lund: Yes.

Eric M. DeMarco: These are more on the disposable side than the attributable side. Similar to virtually all of our other tactical drones, their legacy came from our target drones, one of them on Athena, I believe that. Either next quarter or by the end of the year, we're going to be able to actually talk about this platform. I'm hoping to, if the customer will allow it, on Apollo. I doubt it. Just very candidly, based on the application, I doubt it.

Deanna Hom Lund:

Deanna Hom Lund: These are more on the disposable side.

Eric M. DeMarco: Then the attributable side.

Eric M. DeMarco: Similar to virtually all of our other tactical drones their legacy came from our target drones.

Eric M. DeMarco: And.

Eric M. DeMarco: On one of them on Athena I believe that.

Eric M. DeMarco: Either next quarter or by the end of the year, we're going to be able to actually talk about this platform I am hoping to have the customer will allow it.

Eric M. DeMarco: On Apollo I doubt it just very candidly I doubt it based on the application.

Eric M. DeMarco: And what's happening there is one of the reasons, two of the reasons, one of the reasons why our unmanned drone business is doing so well because of these derivatives of our target drones and what we expect them to continue to do going forward.

Eric M. DeMarco: And what's happening there is one of the reasons two of the reasons one of the reasons why.

Eric M. DeMarco: Our unmanned drone business is doing so well because of these derivatives of our target drones.

Eric M. DeMarco: And what we expect them to continue to do going forward.

Speaker Change: Great. Thank you guys okay.

Eric M. DeMarco: Okay.

Operator: And as a reminder, ladies and gentlemen, to ask a question, please press star 1-1. Now our next question, coming from the line-up, Jill Gomes with Mobile Capital. Your line is open.

Speaker Change: Thank you.

Eric M. DeMarco: Ladies and gentlemen to ask a question. Please press star one one.

Joseph Anthony Gomes: Next question coming from the line of Joseph <unk> with Noble capital. Your line is open.

Joseph Anthony Gomes: Good evening. Thanks for taking my questions. Hey, Joe. Good evening. So you talked about staffing, and Deanna gave us some numbers. You know, how much more staff do you need to move forward or to get some of these things, and the potential business really moving forward.

Joseph Anthony Gomes: Good evening and thanks for taking my questions.

Joseph Anthony Gomes: Hey, Joe.

Joseph Anthony Gomes: So you're talking about staffing.

Joseph Anthony Gomes: And the answer you gave us some numbers.

Joseph Anthony Gomes: How much more staffing.

Joseph Anthony Gomes: Need.

Joseph Anthony Gomes: To move forward or to get some of these.

Joseph Anthony Gomes: Potential business really moving forward.

Eric M. DeMarco: on one particular... Let me give you an example, Joe, on one particular KTT program. We could take 30 to 40 additional right now. Time and material. We're on a time and material contract. It's one of the highest margins in the company, and put them to work. I think rates are 200 to 250 and up.

Joseph Anthony Gomes: On one particular, let me give you an example jo.

Eric M. DeMarco: On one particular case <unk> program.

Eric M. DeMarco: We could take 30 to 40 <unk>.

Eric M. DeMarco: Additional right now.

Eric M. DeMarco: Time and material, we're on a time and material contract with one of the highest margin in the company.

Eric M. DeMarco: And put them to work.

Eric M. DeMarco: Think rates 200 to $2 50, an hour.

Eric M. DeMarco: Okay, we've got another one in the engine area. There are just under 30 people we could put to work immediately. Okay, let's go to the Unmanned Drone Area. It's very challenging here because of what's going on in the industry, not just with drones, but overall aircraft. What's going on with aircraft. We, uh... There's a program that we're about to get. I believe it's 30 people or 40 people right out of the gate, and it's going to be a challenge.

Speaker Change: Okay. We've got another one in the engine area.

Eric M. DeMarco: It's just under 30 people, we could put to work immediately.

Eric M. DeMarco: Let's go to the unmanned drone area.

Eric M. DeMarco: It's very challenging here because of what's going on in the industry not just with drones.

Eric M. DeMarco: Overall aircraft, what's going on with the aircraft.

Eric M. DeMarco: We.

Eric M. DeMarco: There is a program that we're about to get.

Eric M. DeMarco: I believe it's 30 people or 40 people right out of the chute.

Eric M. DeMarco: And it's got to be a challenge and we're working that with the customer.

Eric M. DeMarco: And potentially how to sequence them in.

Eric M. DeMarco: And we're working on that with the customer on potentially how to sequence them in, and on Bordem. Because, obviously, we're a public company; we don't have the luxury of going, I wish we could do this, we could go out, and we could have 50 of these types of engineers on the bench. They'd be in overhead until the program ramped up, which would impact our margins. But if we could do that, We could even further accelerate the growth rate, but it's a balancing act between quarterly profitability, quarterly execution, and onboarding these people for these programs.

Eric M. DeMarco: And on board them.

Eric M. DeMarco: <unk>, obviously, we're a public company, we don't have the luxury of going I wish I wish we could do this we could go out and we could have 50 of these types of engineers on the bench.

Eric M. DeMarco: They'd be in overhead until the program ramped up which would impact our margins.

Eric M. DeMarco: But if we could do that.

Eric M. DeMarco: We could even further accelerate the growth rate, but it's a balancing act between quarterly profitability quarterly execution and Onboarding. These people for these programs.

Joseph Anthony Gomes: Okay, thanks for that. And on the supply chain and your vendors, a lot of the potential growth here that you talked about, Eric, you know, how confident are you that they're going to be able to keep up with all this expected growth? Will there be any type of bottlenecks there?

Speaker Change: Okay. Thanks for that.

Joseph Anthony Gomes: On the supply chain and your vendors.

Joseph Anthony Gomes: A lot a lot a lot of potential growth here that you've talked about Eric.

Joseph Anthony Gomes: Confident are you in that they're going to be able to keep up with all of this expected growth is going to be any type of bottlenecks there.

Eric M. DeMarco: Great. That is a great question. So in Kratos, we call the directed vendor by the customer or the sole source, one-of-a-kind, that only exists in the United States, Kryptonite. Okay, the two areas for these where we are constantly on alert are the engines and the drones. These are the two. Let me talk about them.

Speaker Change: Okay, Great that is a great question.

Eric M. DeMarco: So in <unk>, we call.

Eric M. DeMarco: The EBIT the directed vendor by the customer.

Eric M. DeMarco: The sole sourced one of a kind it only exist in the United States Kryptonite vendors.

Eric M. DeMarco: Okay, the particularly the two areas for these where we're where we're constantly on alert or the engines and the drones. These are the two.

Eric M. DeMarco: On the engine area, as you recall, we have made, and we're continuing to make, a significant capital investment in a Kratos Manufacturing Center of Excellence. So this is additive manufacturing, 3D printing, casting, and machining, primarily for NGOs. So we are doing everything we can, where we can, to vertically integrate, get vertically integrated, we can't do it for everything, but to get vertically integrated to de-risk as much as we can in front of these engine orders that we're getting and that are coming. That's number one.

Eric M. DeMarco: Let me talk about both of them on the engine area. As if you recall, we have made and we're continuing to make a significant capital investment at our Credo manufacturing center of excellence. So this is additive manufacturing <unk> printing casting machining.

Eric M. DeMarco: Primarily for engines. So we are doing everything we can where we can to vertically integrate and get vertically we can't do it for everything but to get vertically integrated to de risk as much as we can in front of these engine orders that we're getting.

Eric M. DeMarco: In the drone area, in addition to the autoclave, there are certain other machines, and tooling that are critical. And there are certain vendors that are in the United States that are just overwhelmed right now because of CCAs, because of 5GAT, because of NGAT, I can go on and on. So in certain of those areas, we're actually bringing in, acquiring the machines, acquiring the tooling, bringing them in-house, and we're getting up to speed so we can transition, maybe not to do it primarily initially, but to have a backup plan so we don't get in trouble. Because, as you know, what's the most important part of a system? It's the one you don't have when you're about to complete it. And we're trying to stay on top of it, but it's challenging.

Eric M. DeMarco: That are coming.

Eric M. DeMarco: That's number one in the drone area.

Eric M. DeMarco: In addition to the autoclave there were certain other machines tooling that are critical and there are certain vendors that are in the United States that are just overwhelmed right now.

Eric M. DeMarco: Because of CCA, because five GAAP because of added gas I can go on and on so in certain of those areas. We're actually bringing we're acquiring the machines. We're acquiring the tooling, we're bringing them in house and we're getting up to speed. So we can transition maybe not to do it primarily initially but to have a <unk>.

Eric M. DeMarco: <unk> plan.

Eric M. DeMarco: That we don't get in trouble because as you know what's the most important part of our system. It's the one you don't have when you are about the completed and we're trying to stay on top of it but it is challenging.

Joseph Anthony Gomes: Great. Thanks for the answers there, Eric. You've got it.

Speaker Change: Great. Thanks for the answers there.

Speaker Change: Got it thank you Sir.

Joshua Ward Sullivan: And our next question coming from the lineup: Josh Sullivan with the Benchmark Company. Your line is open.

Speaker Change: Thank you.

Joseph Anthony Gomes: And our next question coming from the line of Josh Sullivan with the Benchmark Company. Your line is now open.

Joshua Ward Sullivan: Hey Josh, good evening.

Joshua Ward Sullivan: Hey, good evening.

Joshua Ward Sullivan: So, on the planned KTT low-cost engine facility, what do you think the volume capacity of that facility on an engine unit basis, maybe over the, you know, 12 months, 24 months, however you want to characterize it, you know, assuming you could hire everybody you wanted to, as you just mentioned, hundreds, thousands, you know, what do you think?

Joshua Ward Sullivan: Josh Good evening.

Joshua Ward Sullivan: So on the plan.

Joshua Ward Sullivan: Low cost engine facility.

Joshua Ward Sullivan: Do you see the volume capacity of that facility on an engine unit basis, maybe over the 12 months 24 months. However, you want to characterize it assuming you could hire everybody wanted so as you just mentioned and are we talking.

Joshua Ward Sullivan: Hundreds of thousands.

Eric M. DeMarco: thousands per year.

Joshua Ward Sullivan: Thanks.

Joshua Ward Sullivan: Thousands per year.

Joshua Ward Sullivan: And then, and then on the partners for the KTT Spartan programs that you mentioned, are you partnering with traditional jet engine OEMs or these airframe partners where you're bringing a KTT complete engine?

Eric M. DeMarco: And then and then on the partners to the <unk> Spartan programs that you mentioned are you partnering with traditional jet engine Oems or these airframe partners, where youre, bringing a PTT complete engine.

Joshua Ward Sullivan: Josh, and this is partnership, is this with Small? Ask it again; I didn't hear you quite right.

Speaker Change: Oh yeah.

Joshua Ward Sullivan: Josh This is partnering with small ask it again I didn't hear you quite.

Joshua Ward Sullivan: So, are you partnering with engine manufacturers with the KTP Spartan program or with airplane manufacturers where you're bringing these? Okay.

Joshua Ward Sullivan: So are you partnering with engine manufacturers with the key to both our <unk> program for <unk>.

Eric M. DeMarco: Okay, the vast majority of what we're doing in the engineering... As far as designing the engine, developing the engine, and manufacturing the engine, we're doing it ourselves. So we are the primary engine system provider to the air framer, and the air framer being the drone, the missile, the loitering munition.

Joshua Ward Sullivan: Where you're bringing the engine.

Joshua Ward Sullivan: Okay.

Eric M. DeMarco: On the vast majority of what we're doing in the engine area.

Eric M. DeMarco: As far as designing the engine developing the engine and manufacturing the engine we're doing it ourselves.

Eric M. DeMarco: So we are the primary.

Eric M. DeMarco: Engine system provider to the air frame or in the air frame or being the drone the missile the loitering munition. Okay. However.

Eric M. DeMarco: However, there is a certain area where we are partnered. I can't get into it under an NDA, but we're partnered on a certain class of engines that both of us believe we are successful on. This could be a grand story. So in one area, we have a partner; in all the others, we do it alone.

Eric M. DeMarco: There is a certain area, where we are we have a park. We are partnered I can't get into it under an NDA, but we're partnered.

Eric M. DeMarco: On a certain class of engines.

Eric M. DeMarco: That.

Eric M. DeMarco: Both of US believe if we're successful on.

Eric M. DeMarco: This could be.

Eric M. DeMarco: A grand Slam.

Eric M. DeMarco: So we in one area, we've got a partner and all the others, where we're doing it alone.

Speaker Change: Got it.

Eric M. DeMarco: For the time.

Speaker Change: Thank you.

Operator: And I'm showing no further questions in the queue at this time. I will now turn the call back over to Mr. Eric DeMarco for any closing remarks.

Eric M. DeMarco: Yes.

Eric M. DeMarco: I'm showing no further questions in the queue at this time I will now turn the call back over to Mr. Eric Demarco for any closing remarks.

Eric M. DeMarco: Excellent. Thank you for joining us this afternoon, and we'll look forward to chatting with you when we report our second quarter in August. Thank you.

Eric M. DeMarco: Excellent. Thank you for joining us this afternoon, and we'll look forward to chatting with you when we report.

Eric M. DeMarco: Second quarter in August thank you.

Operator: Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.

Eric M. DeMarco: Okay.

Speaker Change: Ladies and gentlemen, this does conclude our conference for today. Thank you for your participation you may now disconnect.

Operator: Okay.

Operator: [music].

Operator: Okay.

Operator: Okay.

Operator: [music].

Operator: Sure.

Operator: Okay.

Operator: Okay.

Operator: [music].

Operator: Yes.

Operator: [music].

Operator: Okay.

Operator: [music].

Operator: Okay.

Operator: Okay.

Operator: Sure.

Operator: Sure.

Operator: [music].

Operator: Yes.