Kratos Defense & Security Solutions(KTOS) - 2020 Q1 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Kratos reported Q1 2020 revenues of $168.9 million, at the higher end of the estimate of $160 million to $170 million, with a notable strength in the Unmanned Systems segment, which generated $42 million, up 20% from $34.9 million in Q1 2019 [56][57] - Adjusted EBITDA for Q1 was $16.3 million, exceeding the estimate of $12 million to $16 million, driven by a favorable revenue mix and execution in Space and Satellite Communications and Unmanned Systems [58] - Adjusted EPS was $0.09, at the high end of the forecast of $0.05 to $0.09 per share for the quarter [58] - Consolidated operating income was $4.7 million, down from $8.2 million in Q1 2019, primarily due to increased non-cash stock compensation and depreciation expenses [61] Business Line Data and Key Metrics Changes - The Unmanned Systems segment reported revenues of $42 million, up 20% year-over-year [56] - The Microwave Products and Rocket and ballistic missile defense businesses showed organic revenue growth, while the Training Solutions business and satellite communications experienced declines [57] - The Space and Satellite business had strong Q1 performance, including higher gross margins and increased R&D, forecasting future organic growth and expanding margins [26] Market Data and Key Metrics Changes - Revenues from contracts with the U.S. Federal Government accounted for 74%, with 8% from commercial customers and 18% from foreign customers [67] - The company has a book-to-bill ratio of 1.5 to 1 for its unmanned business, indicating strong demand and visibility for future growth [46] Company Strategy and Development Direction - Kratos aims to become an essential supplier within the U.S. Defense Industrial Base, focusing on affordability and rapid development of systems to meet national security needs [11][19] - The company is pursuing opportunities in hypersonic systems and has positioned its C5ISR business to support significant U.S. Air Force programs, including the $63 billion GBSD program [12][13] - Kratos is also focusing on the development of low-cost, expandable unmanned aircraft and munitions to meet the Pentagon's objectives [19][20] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's ability to navigate the challenges posed by COVID-19, emphasizing ongoing communication with suppliers and customers [9][52] - The company anticipates that Q2 will be a low revenue quarter due to COVID-19 impacts, but expects improvement in the latter half of the year [79] - Management remains optimistic about future growth opportunities, particularly in unmanned systems and satellite communications, despite some delays in production and testing [44][55] Other Important Information - Kratos has not experienced any production facility closures due to COVID-19 and has approximately 200 job openings [52] - The company is adjusting its full-year 2020 revenue guidance to $720 million to $760 million, reflecting the impact of COVID-19 [70] Q&A Session Summary Question: Size of the non-renewed sole source international training contract - The contract was roughly about $8 million to $10 million per year [78] Question: Expectations for Q2 revenue - The underlying assumption is that COVID-19 is impacting revenue, with expectations for improvement in the back half of the year [79] Question: Revenue recognition for Valkyrie contracts - Revenue recognition depends on the type of contract; production contracts would be on a percentage of completion basis [80] Question: Update on Valkyrie flight tests - The next ABMS flight with Valkyrie is planned for August or September [89] Question: Contribution from TDI acquisition - This year's contribution from TDI is not material as they do not have production contracts yet [99] Question: Competitive advantages of Valkyrie - Kratos emphasizes first-to-market strategy and proven affordability as key competitive advantages [104]