Kratos Defense & Security Solutions(KTOS) - 2019 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Kratos' Q2 2019 revenues were $187.9 million, exceeding expectations of $175 million to $185 million, and increased by $36.7 million or 24.3% year-over-year [61] - Adjusted EBITDA for Q2 was $19.2 million, above the forecast of $16 million to $18 million, driven by a favorable revenue mix [62] - Adjusted EPS was $0.08 per share, exceeding the forecast of $0.05 to $0.07 per share [62] - Cash balance at June 30 was $176.2 million, with zero amounts outstanding on the bank line of credit [67] - Net debt was $118.4 million, with a net leverage ratio of 1.7 to 1 [67] Business Line Data and Key Metrics Changes - KGS generated revenues of $145.4 million, up 25.8% from $115.6 million in Q2 2018, with adjusted EBITDA of $15.7 million [63] - Revenues in the unmanned systems segment increased by 19.4% from $35.6 million in Q2 2018 to $42.5 million, while adjusted EBITDA decreased slightly from $3.7 million to $3.5 million [64] - The training systems business continues to perform well, contributing significantly to Kratos' overall performance [48] Market Data and Key Metrics Changes - Revenues generated from contracts with the U.S. federal government were approximately 71%, with 11% from commercial customers and 18% from foreign customers [70] - The book-to-bill ratio for the quarter was 1 to 1, and for the last 12 months, it was 1.1 to 1 [70] Company Strategy and Development Direction - The company is well-positioned to benefit from increased defense budgets, with a focus on unmanned systems, missile defense, hypersonics, and training systems [10][11] - Kratos is investing in a new manufacturing facility in Oklahoma City to support the production of the Valkyrie and other systems [19][20] - The company aims to transition its satellite business to a more software-based solution, which is expected to improve margins significantly [53][86] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the trajectory of the company, citing the two-year budget deal as a catalyst for growth [60] - The company expects to receive several new contract awards in the hypersonic or BMD target areas, which are anticipated to be major growth drivers [61] - Management reaffirmed guidance for adjusted EBITDA and cash flow, while adjusting the high end of the revenue range for the year [71][72] Other Important Information - The company is pursuing multiple hypersonic and BMD target opportunities, with one expected to be one of the largest single award contracts in its history [39][41] - Kratos' microwave electronics products business had a 1.3 to 1 book-to-bill ratio, indicating strong demand [42] Q&A Session Summary Question: Equipment for the new secured facility location - The new secured facility is located somewhere other than Oklahoma or Sacramento [76][78] Question: Differentiation of hypersonics into sub-components - The company has exclusive rights for a solid rocket booster stack to support hypersonic vehicles, and is involved in propulsion systems for air-breathing hypersonic systems [78] Question: Saudi training contract recompete details - The contract award is expected between now and the end of the year, with potential future exposure around $25 million to $30 million a year, but with reduced margins [84] Question: Evolution of the satellite business - The satellite business is expected to generate $90 million to $100 million in revenue, with margins increasing as it shifts to more software-based solutions [86] Question: Valkyrie program funding and capacity - The company has the capacity to meet potential significant orders, with plans for additional facilities if necessary [100] Question: Funding status of program F - The funding is expected to be rapid once final demonstrations are completed, with individual ship set values estimated between $300,000 to $600,000 depending on integration roles [101][103] Question: Revenue guidance reduction explanation - The reduction is primarily due to delays in BMD target hypersonic opportunities and defunding on a training contract [110]