Kratos Defense & Security Solutions(KTOS) - 2024 Q2 - Earnings Call Transcript

Financial Data and Key Metrics - Q2 2024 revenues were $300 1 million, exceeding the estimated range of $265 million to $280 million, driven by strong performance in unmanned systems, turbine technologies, microwave products, and C5ISR businesses [24] - Adjusted EBITDA for Q2 2024 was $29 9 million, surpassing the estimated range of $20 million to $23 million, reflecting higher revenues and a favorable mix of higher-margin revenues [26] - Cash used in operating activities was $2 7 million, impacted by working capital requirements, including increases in receivables and prepaid assets [26] - Free cash flow used from operations was $15 4 million after CapEx of $12 7 million, with investments in manufacturing and production facilities [27] - Consolidated DSO improved from 107 days in Q1 2024 to 103 days in Q2 2024 [27] Business Line Data and Key Metrics - Unmanned Systems business saw organic growth of 61 8% in Q2 2024, driven by strong demand for target drones and tactical drones [25] - Turbine Technologies business exceeded its Q2 forecast, with continued revenue growth and profit expansion, supported by partnerships like the one with General Electric Aerospace [8][9] - Microwave electronics business exceeded its Q2 forecast, with a record backlog and opportunity pipeline, particularly in air defense systems [11] - C5ISR business exceeded its Q2 forecast, with a record backlog and opportunity pipeline, driven by demand for air defense and related systems [13] - Training systems business is growing with increasing margins, supported by global recapitalization of strategic weapon systems [14] Market Data and Key Metrics - International revenues accounted for 20% of total revenues in Q2 2024, with strong growth in Israel and NATO countries [62] - Global air defense system demand, including missiles, radar, and counter-UAS systems, contributed to the strong performance of the C5ISR business [13] - Increased demand for target drones continued in Q2 2024, with bookings of nearly $130 million and a book-to-bill ratio of 1 5:1 for the quarter [16] Company Strategy and Industry Competition - The company’s strategy focuses on internally funded investments to rapidly develop and field affordable, relevant products and systems, positioning it as a leader in defense and technology hardware and software [5][6] - The partnership with General Electric Aerospace for small jet engines is expected to drive future growth, with anticipated production of thousands of low-cost engines for drones and missiles [9] - The company is expanding its manufacturing capabilities, including additive manufacturing, 3D printing, and vertical integration initiatives, to reduce supply chain risks and meet customer demand [10] - The company’s focus on affordability and rapid development is a key differentiator in the industry, particularly in the context of tight defense budgets and the need for cost-effective solutions [6][21] Management Commentary on Operating Environment and Future Outlook - The company remains confident in its 2024 financial guidance and expects future year-over-year organic growth of 10%, with the potential to exceed it [22] - The company’s opportunity pipeline is at a record $12 billion, with significant investments in bid and proposal activities for large programs in unmanned systems, space, cyber, and training businesses [22] - The company is addressing operational challenges, including the hiring and retention of qualified personnel, particularly those with national security clearances [23] - The company is preparing for potential federal fiscal 2025 continuing resolution, which could impact new program contract awards and existing production contract funding [28] Other Important Information - The company’s space and satellite business is being impacted by delays in government programs and technical issues with software-defined satellites, but it expects to return to growth trajectory with upcoming DoD program opportunities [15] - The company is planning the expansion of its Oklahoma drone manufacturing capacity, including a potential additional facility, to meet demand for tactical and target drones [18] - The company’s Ghost Works is developing new and evolving weapon systems, including AI integration, which could have a game-changing impact in future conflicts [19] Q&A Session Summary Question: Impact of Valkyrie contract on guidance and cash flow - If a contract is awarded, costs in PP&E would be transferred to inventory and unbilled receivables, with revenue recorded based on the percentage of completion [31] - The timing of the contract is possible in the second half of 2024 but more probable in 2025 [32] Question: Customer preferences for Valkyrie variants - The company is offering different launch options for Valkyrie, including rail launch, trolley launch, and internal gear, to meet various customer priorities [33] Question: Economics of the GE Aerospace partnership - The company has multiple customers waiting for the engines, and the economics of the partnership are expected to be favorable, with a fair revenue and profit split [34][35] Question: Future of hypersonic testing and revenue potential - The company expects a ramp-up in hypersonic testing activity in 2025, with significant revenue potential from its Erinyes hypersonic glide vehicle and other hypersonic systems [39][40] Question: Scaling up engine production capacity - The company is preparing to produce hundreds to thousands of engines annually, with significant opportunities in programs like ERAM, MACE, and CAMs [41][42] Question: Growth in the bid pipeline - The bid pipeline expanded by $1 billion in Q2 2024, driven by opportunities in unmanned systems, space, and training businesses [43][44] Question: Outlook for the hypersonic activity pipeline - The company expects incremental revenue of $50 million to $100 million in 2025, $100 million to $150 million in 2026, and $150 million to $200 million annually thereafter from hypersonic activities [45] Question: Profitability in the Unmanned Systems business - Profitability will depend on the mix of programs and leverage from fixed infrastructure costs, with notable strength from international drone deliveries [47] Question: Expansion of Oklahoma manufacturing capacity - The company is expanding its Oklahoma facilities for tactical and target drones, while the low-cost turbofan engine production with GE Aerospace is likely to be located outside Tulsa [49] Question: Position in the solid rocket motor market - The company is considering becoming a merchant supplier of solid rocket motors, given the high demand and limited qualified suppliers in the market [51][52] Question: Impact of potential changes in Ukraine support - The company’s primary exposure to Ukraine is through NATO countries rearming, and it does not expect a resolution in Ukraine to significantly impact its business [78] Question: Strong book-to-bill in Unmanned Systems - The strong book-to-bill ratio in Q2 2024 was primarily driven by target drone orders, with potential for a significant tactical drone order in the near future [80][81] Question: Hiring challenges in the Turbine Technologies business - The company faces challenges in hiring and retaining turbo machinery and propulsion engineers, which remains a significant operational priority [84] Question: Lessons learned from munitions expenditure in Israel and Ukraine - The company expects continued strong demand for munitions and air defense systems, driven by the need to replenish expended inventory and the lessons learned from recent conflicts [88][89] Question: Margin improvement in Services revenues - The margin improvement in Services revenues was driven by the mix of programs in Q2 2024, with no specific factors identified [92]