Kratos Defense & Security Solutions(KTOS) - 2023 Q4 - Earnings Call Transcript

Financial Data and Key Metrics - Revenues for Q4 2023 were $273.8 million, exceeding the estimated range of $237 million to $257 million, driven by strong performance in space and satellite, turbine technologies, C5ISR, and microwave products businesses [175] - Adjusted EBITDA for Q4 2023 was $29.1 million, above the estimated range of $19 million to $23 million, reflecting higher revenues and a favorable revenue mix [176] - Free cash flow for Q4 2023 was $48.1 million after $19.3 million in CapEx, driven by accelerated customer milestone payments in turbine technologies, unmanned systems, and space and satellite businesses [177] - Full-year 2023 revenues were $1.037 billion, with an organic growth rate of 12.6% YoY, and adjusted EBITDA of $95.4 million [179][180] Business Line Data and Key Metrics - The unmanned systems business is expected to generate $260 million to $270 million in revenues in 2024, reflecting 20% to 25% organic growth over 2023 [96] - The space business, impacted by the CRA, is forecasted to grow at a lower rate than the overall KGS segment, which is expected to grow at 6% organically in 2024 [189] - The microwave electronics business is performing strongly, particularly in Israel, with record backlog and revenue levels due to increased demand for missile systems [19][20][21] - The engine business, including turbojets and turbofans, is seeing incredible demand, with a strong pipeline for Made in the USA engines [8] Market Data and Key Metrics - The Israeli market is a key driver for the microwave electronics business, with the company being a primary provider for Israeli missile and radar systems [19][21] - The U.S. federal government accounted for 69% of Q4 2023 revenues, with 13% from commercial customers and 18% from foreign customers [85] - The international target drone business is not tied to the U.S. federal budget and is expected to perform well, with higher margins compared to domestic sales [65] Company Strategy and Industry Competition - The company is focusing on affordability and rapid development in the drone market, positioning itself as a low-cost, rapid provider of jet drones [99][100] - Kratos is partnering with prime system integrators to increase the probability of winning contracts and reducing financial risk [15][118] - The company is investing in growth areas such as high-performance jet drone systems, hypersonic rocket motors, and next-generation jet engines [112] - Kratos is establishing production facilities for jet engines and expanding its microwave electronics manufacturing capabilities [154][157] Management Commentary on Operating Environment and Future Outlook - The company expects Q3 and Q4 2024 to be stronger than the first half of the year, driven by government contracting activities once the CRA is resolved [172] - The threat environment is increasing, and the company believes that affordability will be a key factor in winning contracts in a potentially tightening budget environment [43][44] - The company is forecasting 10% organic revenue growth for 2024, with significant investments in CapEx, particularly in unmanned systems and space businesses [112][181] Other Important Information - The company's backlog is $1.2 billion, with an opportunity pipeline of approximately $11 billion, providing confidence in the 2024 financial forecast [136] - Kratos is investing in a Material Production Center of Excellence and expanding its global satellite sensor network, with costs expected to be recovered under customer contracts [182] - The company is not planning any acquisitions and is focused on executing existing programs and making necessary investments to win new opportunities [171] Q&A Session Summary Question: Growth profile of KGS vs KUS in 2024 - The unmanned systems business is expected to be the biggest growth segment in 2024, particularly in drones, with potential to exceed expectations if the budget is approved [4] - The space business within KGS is expected to see growth in 2025 as programs transition to production [6] Question: Pipeline increase and moving pieces - The pipeline has increased by $700 million sequentially, with significant growth in the C5ISR, turbine, and microwave businesses [7] - The engine business has an incredible pipeline, with strong demand for turbojets, turbofans, and rocket engines [8] Question: CapEx increase and normalization - The $20 million increase in CapEx is driven by investments in microwave business, Valkyrie production, and the satellite network, and is not expected to be recurring [10] Question: Microwave systems backlog - The microwave electronics business is at record backlog and revenue levels, driven by demand from Israel for missile systems [19][20][21] Question: Impact of BlueHalo and Eclipse merger - The merger does not impact the $160 million OpenSpace award, and the SCAR program is expected to be a key driver for Kratos in 2025 [26] Question: Margin expectations for tactical drones - Margins for tactical drones are expected to be in the 7% range during development, with potential for expansion in full-rate production [62][74] Question: Space business inflection in 2025 - The space business is expected to see an inflection in 2025, with increased deliveries and higher margins, driven by production ramp-ups [77][78] Question: Valkyrie production and CapEx - CapEx related to Valkyrie production in 2024 is approximately $20 million, with production expected to continue into 2025 [63] Question: Competitive landscape in tactical drones - Kratos is focused on affordability and rapid development, with a different model compared to competitors like Australia's Ghost Bat program [165][167] Question: Non-DoD business growth - 30% of Kratos' business is not tied to the DoD, with strong performance in the Israeli microwave electronics business and commercial satellite contracts [168]