KTOS - Earnings call transcript Q4 2017 | Kratos Defense & Security Solutions, Inc.

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Operator

Good day, ladies and gentlemen, and welcome to the Kratos Defense & Security Solutions Fourth Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be provided at that time. [Operator Instructions] I would now like to turn the conference call over to Senior Vice President and General Counsel, Marie Mendoza. Please go ahead.

Marie Mendoza

thank Security joining conference Solutions and Kratos for call. everyone & Defense fourth afternoon, you us for the Good quarter XXXX Executive Financial Officer. With President Kratos’ Eric is Vice Officer; Chief Executive Chief me Lund, and and DeMarco, President Deanna today and Kratos’

we statements discuss in this information opportunities, a note financial the isolation discussion G. Please or substitute included Regulation initiatives, take forward-looking that inherent call also at This of of press considered as GAAP. press that, guidance Company’s in these be make the the of financial financial the of we measures, in non-GAAP in we the to in will defined begin I’d paragraph afternoon. a non-GAAP everyone paragraph call financial release. major risks Eric market of today’s to include turn keep reconciliation a from term end substance to Before have in is Accordingly, results now will the risks Safe with uncertainties during will emphasizes call, Harbor at today’s like please provided of and mind is potential and Today’s financial today’s operational and these presented future measures as uncertainties GAAP. outlook measures I compliance the that prepared as call. we accordance the With over DeMarco. not with financial end release, should Non-GAAP today’s for strategic

Eric DeMarco

matrices a began the demonstration national technologically based sale position next and security. to over security trajectory for execution PSS forecasting proceeds system organic significant of the of contract Kratos resulting from budgetary for model The property pending delays. and performance growth safety business product business and integration and our $XX Kratos' years. we system quarter received a Kratos. bumps to net full-year divestiture going cash number or of quarterly systems award including built temporary believe or of source also a awards, systems and recurring unmanned as rates offer We positioned products future, and rates, a growth EBITDA product and our high-growth technology profit including forward as from we for we approximately flexibility we financial successful business success a drone demonstrated reduce public in defense, the our Kratos' recently leverage, cash and financial Kratos' million, growth in of continued intellectual position focused $XX demonstrated company clearly which the and successful several we fourth million afternoon. good of affordable of revenue, the sole strategy ago net portfolio of differentiated continued have expected the development, and irrespective adjusted improve execution are single announcement on million Kratos' pure-play build few and business have is company Today's million systems financial for flow of years and $XX further our the DoD $XX each The Kratos the margins are rapid fielding and you of and the Kratos company. Thank XX the the that will and XXXX for year-over-year a million

solid has the DoD great budget ultimately well defense issued the positioned that sole industry an SSAT see the believe increased budgets our future in market has unmanned over each represent areas government delivered. electronics. in a confidence and mission performance with critical with to the DoD team. Navy funded receive and recently by programs be source Kratos significant United And additionally, properties an microwave program execution security few United for Also Company. source Kratos' drone the program priority and in an that States sole years of extremely solid XXXs additional systems are Air particular are are space which satellite defense, similar We And length contract, national and Importantly to intellectual to long-time training additional including to owns our represented us multi-year the important Kratos focus Unmanned we unmanned in high communications, these and increases is of and high expected recent awards in we to system in Kratos of expected to recently agency with production, Systems with expected Each missile contracts X,XXXs priority significantly clearly so expectations we States with providing the the the and value to future multi-decade systems, U.S. mix differentiated Force QX Kratos' areas funded unmanned potentially the product in strong global expect and was growth intent have experience the AFSAT received. internally and Kratos systems future of very as making increasing. strategy investments Kratos has by most investments Kratos Kratos' our products for Kratos where near past markets drone favorable has division successful award future. been a particularly performance aerial leader and continue decreasing these drones

a expected the of resolution half has of awards two the after out Force to with second In we I addition XX product to previously this year AFSAT XXXX year near later confidential we a the of until recently extended increased receive have quantities budget. Air continue expect program U.S. production mentioned, and received dates these programs the with the though award to that continuing pushed contract

continued the year. expected the schedule increased this Laureate is Kratos' in of leaders XXXX XXXX the our reported We now continue with to aviation, program budget receive missions budget increased achievements with formally to Also defense their extraordinary demonstration be has and you winners which since we UAS for funding scheduled in Week the numerous Aviation our Unmanned UAS Mako recognize aerospace funded for programs, is late for will successfully exercises. announcing number last be Week category. Systems tactical of on Mako Kratos' and and on their to with in and defense Velcro tomorrow, currently each flights industry drone the innovation. and Aviation in honor QX Mako customer perform we Awards Laureate that Award their vision to

We of Unmanned truly are extremely team and recognition. proud the Systems Kratos' outstanding receiving's all

reported as UAS. on Additionally, high another unmanned recently on Kratos' most the contract aerial drone systems X platform GAT under performance jet new

with high-performance we're new customer contract multi-year a negotiations contract, one now We UAS for for and drone could capture UAS, if us plus are high XXX the million powered an which successful. are in the jet new be in of now additional to-date largest process performance the opportunities currently we for

program high we tactical see opportunities for Kratos' envisioned systems unmanned set both years exactly when importantly, number for the we accelerating, the UAS award when you analyze drone a teammate Gremlins As Dynetics. outstanding hopeful with UAS ago we of our strategy is approximately our can and performance increasing and of is extremely aerial what which six a partner next Prime strategic over announcement we and received. production, will on congressional state, roadmap. X the facility we we successful Phase Also Oklahoma Gremlins, opening significant support. most envisioned X increased have where winning local outstanding recently drone the of To in years the company game successful we Phase this ultimately production are information have expected we believe we new handle the in recently several based announced of we a be changer and If engineering the our for remain

Our which a and to company. provide differentiator we of for believe is facility at significant key of UAS affordable Oklahoma customers, our another important and rapidly is products plant our systems step Kratos' element strategy

environment business and UAS of Our the Oklahoma the is with million revenue with an highly key unmanned production XXXX increasing previously to doubling overall labor continues in business generate of initiatives. we approximately margin year-over-year achieving had set aerial a summary, we pool be outstanding expect and friendly XXX revenues with years lower element cost anticipated. improvement also this of in living, profit our goal margins expected in skilled to two XXXX system and execution drone Kratos' facility Kratos' ample In of business

it for United the leading build technology most advanced is business in This this second the specialized XXXX to mitigation. existing is quantities extended DoD virtually the industry business half be systems. enabled for and and is The opinion. budgets satellite Kratos' location than and due XXXX command, control, satellite system is of leader Air unmanned in as financial stronger business XXXX satellite result operators virtually today. team operation our of which areas flow competency the identification, team Kratos' are that technologically an a communications its until we similar to much all to to know second of the leadership the interference products, they have is XXXX, as outstanding States is place. business the quarter increased including the as business us CRA, business satellite expect delays production of the engine communication RF communications the the and objectives. core satellite go-to-provider world's For of fourth of to is industry my Kratos' and everyone the cash in you Kratos' Kratos' in their one Force none first exceeding industry half of new in also

the of environment. positioned or from satellite budgetory monitoring of owned as our U.S. and profitable U.S. space businesses Kratos satellite result continue this of approximately satellite continues XX% the DoD increasing XXXX. in value-able operated be extremely a communications space business to perceived and increases the most Chinese company. to With Russian defense receiving monitoring the well globally grew and benefit business of growing increased fastest is threat Kratos to budget to largest one being spectrum Kratos is assets the and expect business some and is

and unique new and add new capabilities to continue this and aggressively into integrate valuable customers extremely asset. technologies We

multi-year cube interference the business, Frequency or and for early trajectory command rapidly the programs related Kratos' Kratos multi-decade we along SAT Our remains Major missile a supports also warning System and the WGS, Multiple on satellite Similar business. Advanced are unmanned satellite market long-time business increasing supports and or and Space-Based monitoring anticipate Objective programs, communication AEHF, with User RF signal orbit for SBIRS, satellite we High nano talk or DoD MOUS. low and this year-over-year earth system space, Extreme new the Wideband requirements. small Global focused and business Infrared aerial drone Kratos about can budget growth business growing to constellation control,

For XXXX, expecting XXXX. for Kratos' satellite year-over-year we are growth business communication above

a other businesses in had very in stronger where training XXXX due half and supporting. extended the are first our large solid fighter the business similar and few have fatality revenue crew margins this in to QX to to of been radar, KC-XX Kratos' industry business, as Microwave number support the the XXXX aircraft. a leader systems Along training was XXXX, which half international of second and strong lower to of a Kratos' me on now one significant warfare on. MCAT to be systems. excuse team years we and continue training result Also our XXX support training grow somewhat an Company, our Since Electronics and we X.X multi-year Systems -- than defense, number XX in systems of with core we trajectory the of for systems and first quarter than million solid the other business million strategic a of ago to existing have production executing new financial we the with business of execute of approximately of in missile to our program significant we we EW, they Unmanned ’XX systems the expect and a fastest significant including plan fourth being significantly as air are have training a to including businesses programs a award of and the result communications awards Systems you, initial a we reported missile new long-time as business very growth as growing the this expect received flawlessly. With now business ’XX as suite half primarily QX continue we CRA. Kratos received last management be deliveries the tracking four Unmanned are electronic generation performance generated business in of executing the programs

increase this on size begin several to to of years over half expect and work new the deliveries program up in commence with the ultimate ship program this in to the we of next expect We to Kratos first for significantly XXXX XXXX XXX sets. expected few

initial just a tactical been have aircraft electronic recently XXXX. the that suite informed half we second on on receiving system have are now this been warfare to selected and we in the opportunity program of hopeful production we support Additionally, separate of new

we I We receive in our production missile the of also quarter once business middle in a environment defense performed SM-X, in Missile area on the continue to expected XXXX through Representative year. be and Kratos related continue High-Energy well of approximately of this goodwill DoD reported Arrow, and growth Kratos impairment David, across expected due to low targets business our programs award compared fiscal Systems we Kratos are Kratos' Griffin. cost to threat as significant expect microwave and BMD Lasers, Based program in targets, to or XXXX very related ballistic where Barak expected Microwave affordability the global the increase well our compared environment. funding initial internationally expected is businesses to the Barak and Missile trajectory perform we a and to at on to focused charge including target deemphasized entire customer schedules, the seeing as to significant Rail systems A an deliveries services as Aegis, competitors. recent Kratos' missile beginning Krato's that increased seeing missile interest of XXXX just company these in strongest being SBIRS award and systems as our which key to numerous change with result is legacy technological programs production offering with second concurrent QX to THAAD, supports include went a intellectual are the supports Spider, Today half Electromagnetic you with Kratos' and similar Sling this non-cash far have defense to Iron ballistic our SM-X, deliveries F-XX, Dome, new defense Gun, with the initiatives. execution know Arrow, slightly of you. wins year company. our electronics for be F-XX and increased government business XXXX related and strategy expect Electronics this again Patriot, as in Others. with budget by and Kratos' production the growth property in as new and

building pursuing our product our believe on business our high we focused we margin strategy and Company's us new adversely large to results continue XXXX historically the impacted allowed clearly business execute in systems been ramp have contract Kratos' production our generator quarter and which that ratio and margins much de-emphasis which future it that flow new growth, have we in reduction growth lower high technology to of related business. due awards. Specifically building this fourth two the decline as successfully we businesses increase demonstrated. the longer-term replace the of has to and been business our and our margin corporate build quarter company fourth as and our book-to-bill result but expected this services opportunities a has great The unexpected to rates today core loss to in initial the cash impacted and is including have ultimately

performance financial liquidity including cash focused and As on and flow. most excellence we operational improved we're XXXX execution, began importantly

down. expect investments Kratos wind We to

in adjusted margins flow revenues for XXXX. for Company EBITDA cash to grow Company and our to Our positive organically the profit return and to expand the to to continue generation

or inventories more our feasible more liquidity instances receivable Additionally our already on delay our approach we forward unbilled lead including aggressively can and willing on certain terms liquidity lien or some engines we as cash and as and we focus not our timing example have billed a This compared contracts. business. electronics negotiating have to as overall as flow much and like were for began result where previous accounts in manage items XXXX, for we revenue long liquidity we Systems profit will recognition program Unmanned historically as

performance. in accordingly of results as the of will for period associated payments. so, be liquidity Company periods. generation through reporting reclassified go detail believe operation and and Deanna ahead contract for the for As and milestone PSS over Also absolute all will which importantly receivables top increased flow result treated new bill priority our PSS receiving previous while divest at forward impacting not in as Kratos' purposes approach the a We will going will overall increases an financial cash profit revenue ultimate be of purposes for cash discontinued comparative financial in doing is related business on for

a As to at XXX will be PSS. end where cost closed in is infrastructure this of of and rightsizing can divestiture XXXX, and sale the PSS our transaction through approximately the the revenue result approximately address once of we reducing we Kratos million of

million result performance related U.S. to SSAT be Also X.X approximately today remaining we to costs UAS several programs place we of allocated performance. to like and the recent were expect the the XXXX second where like have instance increased army extended first budget which year now AFSAT starts delays and the company’s required as funding half also For stronger be programs will new Kratos hadn’t similar once on half federal be our XXXX in than segments of business significantly primarily past and of we and referred delays. to production forward financial as corporate XXXX going continual PSS in to contract existing a I of the our budget allocated overhead years earlier and resolution to financial

by initial long-time a core of to in businesses reemphasize irrespective expect temporary resolved end be delays. In closing that we our assuming of underlying provide to trajectory CRA that guidance. Company multi-year financial want our growth are the for the strength XXXX budgetary of will the We I the March

electronics long-time business defense we that areas. this just at received past funding contracts or Kratos few to to are included look you encourage or experiencing is increased Unmanned Over all related satellite the have we I multiple months I expected training few have awards at or years through as increase including recently Kratos program production significant programs will to programs growth. the one the base or business missile related and went communications, these support What and entering referred DoD model. we the the to Related last be what Systems, microwave in and

successful and going completed. In for more business business model our and growth and that technologies, addition At Kratos we need. Mako, the systems further systems drone including Gremlins we Kratos seeing be are very, positioned start have products they potential success wants the and XXXX Kratos base before I’m LCASD, confident even that tactical tactical greater next years. businesses the we accelerate to is to few significantly systems bring unmanned DoD unmanned is worked that above others and very together over several from could create drone

more less at We affordable convinced an which a is cost winner. government are and on focused greater effectiveness I’m bringing the for

I supporting think Deanna? company. the Kratos all to this shareholders are our employees incredible stakeholders our build of and us

Deanna Lund

businesses, quarter fourth business rate $XXX for to previously by deliveries the was XX.X% by $XXX.X in largest Systems for business. of segment Fourth expected quarter. program all a our offset in quarter Thank certain deliveries of revenue year-over-year units fourth transportation strong by growth Unmanned in within our and of the business you, over $XXX million consolidated and Unmanned for year-over-year quarter our lower quarter growth in revenues services of declined growth occurring growth by Systems certain to initial training reduction systems segment year-over-year organic Eric. and in XX.X% primarily our deployment in other million primarily execution driven KGS our expectations our increases in with of and production system 'XX, of 'XX fourth Good in targets by XXXX substantially legacy a the million XX% Revenues PSS the first driven driven business security approximately million of afternoon. exceeded and due a mass authority. our XX.X segment. of excluding our communications our our legacy year-over-year satellite slightly quarter, the business execution aerial KGS Kratos’ to X.X% in due reduction XX% in went KGS government services The government for business, our of

higher slightly Our EBITDA and $XX.X margin million of Satellite our performance of this shipments and our fourth quarter Systems end our Communications Unmanned to fourth XXXX or our year-over-year microwave business. primarily EBITDA adjusted in $X.X $XX.X favorable high On businesses, QX $XX.X a adjusted million, in million to of due of PSS and million of expectation to improved exceeded XXXX in $XX.X work a products million XXXX. the QX increased basis, million the $XX.X of XX.X% in from quarter mix

XX.X benefit. capitalized cost tax compensation non-cash stock XX.X contract earlier related for and to of benefit tax non-cash the fourth and development XX.X quarter of a net basis related million stock X quarter million. loss million of non-cash mentioned impairment primarily assets million and completed was of excludes an million XX.X continuing intangible adjusted expense cost related the impairment EBITDA million of fourth and amortization X.X On for includes is was due format the from and reduction expense liability from X of to The assets extinguishment the from XX%. and tax goodwill net XX% in operations that Our the differed differed the to the million rates refinancing resulted XX.X which million of GAAP of the to of debt we to fourth and of quarter. impact tax corporate of loss the the charge from tax tax cost reduction the a which of compensation of goodwill

balance and Moving to liquidity. sheet the

at was XXst, in plus Our million balance $XXX,XXX cash. $XXX.X restricted December cash

issue of reflects X% existing completed long-term the to outstanding quarter with XXX.X our new during third maturity We new date the million refinance cash XXXX. base new in the retire a quarter Our approximately we or with million X.X% the replace X.X% $XXX.X debt fourth the XX the of utilized notes notes at end remaining X% of senior XXX of million notes. outstanding the value senior and to November million notes with

of LCASD covenants making Unmanned We flow XX line. the borrowing primarily the Systems for credit to the There related years and XX were costs of were which The line points. $X.X rates development reduced outstanding. quarter five financial minimum expense maintenance use related are our to replacing to LCASD with $X.X building and Capital a line million certain million use. equipment internal no own two bank operations fourth availability business, Cash existing a brings a also X:X the from to $X.X are had continuing related includes ratio non-capital the line primarily XXX zero quarter of credit we our related related fees our and which outstanding XX unused XX, of Approximately expenditures basis charge we million approximately Systems during and investments of program. fixed approximately million a that’s are the satellite At $X.X million amounts credit level. in and was below $X.X million, CapEx businesses. to our December refinanced to million for aircraft communications is fourth by related Unmanned our on line was of we new borrowing of its of letters of

third compared quarter days substantially be the quarter. to a effort capital XXX the increased to of the of this the the expect fourth half at in first the from XXX end of DSOs complete end ‘XX. at days We

the Unmanned to payments on currently delivery first certain we in amount impact contractually specifically projects flight long-term in milestone the to include milestones the products and/or completion our until the on demonstration DSOs ’XX. these of Systems certain are We invoice final the milestones achieved Our delivery of of certain for of of expect where or segment. be parameters, half the unable

expected have number completed upon payments are expected XXXX. of that of the completion In the large to quarters be critical that paid addition are billing in milestone of and projects infrastructure second first to be we a

terms on billings. based Systems, than businesses, will rather our to the prime Unmanned achievement are DSOs of lumpy sizable upon continue the and in contractor be systems projects progress milestones payment we be training As as our will

on from quarter the DoD with was material. price Revenues for the revenues plus contract U.S. on approximately government X% and the in non-DoD contract contracts X% mix Our quarter contract, XX% and federal federal were the generated and cost firm fixed agencies. fixed contracts time generated from on fee government XX% with including during

We also unfunded. our commercial from XX% and from governments, revenues comprising million with $XXX.X total and our revenues state Backlog XX% of and million of aggregate funded million end X% customers from fourth customers was local $XXX.X non-DoD revenues. $XXX.X with XX% generated quarter at foreign our

Our book-to-bill ratio X was X XX X.X fourth XX/XX/XX. the months to to ’XX and for for X.X the quarter of ended

systems received. of multi-year and we in has a designed are and of awards Also not on value number Eric include multi-decade long-time As is funding programs. previously support booking in until our full the products do mentioned contract new or backlog testing importantly our of

Kratos receive only contract Fourth approximately XX award government funding delivery include significant recent depending awards. current received this contract reflected for bookings aerial to they we certain million instance these although for the on an ultimately or the we million, we our which deliveries X executed do for provide our the And not to example necessarily our the included U.S. bookings million. executed orders targets orders expect represents are backlog Although operational delivery awards in XX company. today, financial Army from of that expected our visibility not backlog, in is on may in

obligations has partly XXXX revenue calculated contracts include the risk adopt party. remaining on our we to neither standard be which backlog the other the new party wholly unit will each our compensating lateral grants X, of right will accounting standards. executed without as on XXXX-XX, the forward contract Backlog defined as unperformed not January as and performed which terminated the Going into new value ASU performance the dollar

backlog obligations lease general contract. include additional which material considered right when base performance are will As been options agreement the for not such not of have unless within you executed

going current the should impact guidelines that's the for business. tasks companies will IDIX upon transaction balance this have expected divestiture backlog been of our on currently announced adoption the pending many Xst, the based in For approved be our negatively we occur our of impacted only expect new ASU forward price backlog that be well the will in that as January on standards. included Based as contracts PSS Today purposes. industry we also upon to accounting

achieve for we re-class with quarter operation the as all the As providing a periods discontinued XXXX operating it's Eric and PSS first to Kratos' respectively. PSS are XXX overhead of was million excluding and all million today with PSS million PSS generated approximately adjusted XX X recasting XXXX previously revenues mentioned allocated being performance as operation. XXX going we guidance comparative prior before cost for corporate XXX initial and of to business adjusted the overhead the discontinued corporate will full-year full-year million forward financials EBITDA revenues full-year XXXX and of to Accordingly EBITDA reflecting business be respectively. forecast purposes. a and X.X

guidance Kratos' other as today and the excludes financial those As result the pending financial sale information provided QX PSS XXXX all of full-year covered.

the discontinued once business were operations the a cost company allocated continuing mentioned historical business any discontinued that retroactive remainder previously Eric be are As is to required basis. to go-forward that allocated the and to had on public corporate of or

to corporate are presented. remaining financial on historical of required million X.X retroactive that cost allocated approximately now a XXXX, for basis previously to allocated be businesses be to payments company our will Specifically when public were PSS

Our XXXX of first first of and $X.XX. to XXX guidance million as to revenues 'XX. With XX quarter quarter first and the expense X the of continuing estimated for amortization to and million million EBITDA compared XXX for compared a EBITDA breakeven 'XX guidance financial XXXX to net adjusted income non-cash quarter quarter million you XXX first reflecting to of as XXXX million XX.X Kratos stock of first adjusted are the compensation cash taxes. from operations forecasted excluding that quarter it's utilizing

to 'XX 'XX for XX full-year to full-year share. revenues compare million EBITDA full-year full-year to $X.XX million 'XX Our as per of for to financial of the XXX EPS $X.XX 'XX. XXX.X guidance of for adjusted as forecasted XX.X million to adjusted the XXXX compared Kratos' million XXX full-year and is XX of guidance

total XX expenditures approximately XX and business. million in range fund balance We with million expenditures for capital communications businesses related expected million expected of businesses. to training unmanned microwave The our of XX to to satellite our both on XX million these in capital to of products growth ’XX, is initiatives to be the the the system

cash operating are capital impacted plan by our expect $X in platform We property the the flows intellectual to million, estimated will we to to million to the LCASD expenditures. be $XX develop that not make investments remaining maintain included of

accrued summary, was were the Cumulative is related forward investment the investments. investment have as capital million loss of reminder, to capital LCASD for capital our when cash accrual to development Systems LCASD $XX a In the estimated the including XXXX the As business we quarter and today funded end other ‘XX of XX total is a that approximately million non in awarded QX estimated for we Unmanned third $XX not costs through contract. million.

will initiative half for of cash our first investment substantially ’XX. in be these the tactical We complete unmanned expect that

cash be our for taxes to XXXX. approximately million expect $X $X We estimated million to

to taxes cash significant fairly the to estimated to and our impact due tax expect loss operating of We be our position. reform net

as remaining level for XXX investments of high million. Our capital XX of LCASD. capital Despite ’XX in million continued the million to NOLs XX expenditures between and approximately end non of were XX/XX/XX approximately investments the

milestones XXXX, operations cash number of to cash impacted the XX DSOs to which XX million million of flow generate during any and flow from building to we year. expect of could free as million XX million XX approximately collective expect Eric? have the We be for

Eric DeMarco

I to state businesses employees know management significantly for XXXX the midst in they budget reduced act of control and their business because than them the outstanding. candidly budgets. closing and in and done professionally declining their the entire have going leadership months related In and Kratos far we fully Their several thank just you job, sequestration and assure past key I they to over have can focus and personally of want strategy have is have the absolute on business this all security opportunities well for safety for I know the right the company. given is we extremely and there and no management better other leadership their you the PSS DoD employees combined for that To team everything outstanding all very our team business. did this management I could gotten Kratos to team than the Deanna. They home company. I greater your have and the our is that public is supporting Great, your

questions. as With that you it over to I thank I’ll of So turn well. all

Operator

from Riley first with Our Instructions] B. question [Operator Mike Crawford FBR. comes

is line open. now Your

Mike Crawford

Systems Oklahoma? have in do your what in How utilization before in characterize and would up capacity California you that Unmanned you running operation room increase today to and the

Eric DeMarco

capacity base whatever recent this we a a That is this through maybe the resourced is well are we're orders to and estimates most over question. have The drones additional we significant coming very very, year end actually that to current going plan generate some of an XXX in We comes ramping expect believe and handle practically in. the year. just XXX very rapidly. the business My excellent well

Our there be facility in will start of prepared moving Oklahoma this in to manufacturing year. second half progress now. It the is rapidly

However, we that now know having defense we well. another mid-cap discussions company also have with very-very started have

we them may an have this is possible relationship as help bring to it the excellent production them with partnership and with into We us well. that

fruition and ready. come be it rapidly talk big to are mapping not to of may this the we half second we're So,, because year things are Mike things got we've that about accelerating out are there some and able to in

Mike Crawford

a then about be And to one or believe I'm as you lead tactical for expectations? changer is wondering you changer that under combat and information drone? believe said And so you game leading other and game information recent could contract to you you. now, there what as ask prior talked the a target thank both two X then the to are Okay, wondering you more GAT drone so a I'll just is be if ones, that used quick just be would versus would and I'm Gremlins that

Eric DeMarco

obviously program in stands been it's to give come that all number cannot can't you say a that has and GAT On past X I sorry a the on the still that X pieces about that now on of I target but aerial might the I Mike some for there that can comment fifth-generation Gremlins I'm that's GAT about additional relative have weeks three that competitive. information out talk

Operator

Our Canaccord. next question from Ken with comes Herbert

now open. Your is line

Ken Herbert

more Eric and cash I full-year. free appreciate and through of for went just the capital will in at you really from risk of cash characterize for other the but mean to in some what you Deanna, provide? just and cash wonder Deanna little specifically, know the significant I really very XXXX? key And to the maybe I maybe operations working assume detail from calls I million that XX guidance operations on flow a detail. the the improvement this, some how you midpoint all pieces

Deanna Lund

given rest performance of some really need of are some of the that in other which flight milestone working risks delayed that flights guidance we a in are just programs Ken expect some obviously that that collect. are cash don’t control. ones some do that in the milestones we ranges in and to part as because they to the with of are our on certain hitting to on see occur capital of flow risky certain offset do grow milestones So metrics is the one totally business our we control continue is some that that the to really that's so some but doing capital expect as of on prospective to that we time Unmanned we which that range that get use From some the there not those time just arrange requirement the working

of second into of the see we do have of them some milestones first they expect and we are to milestones these 'XX. of moved in to Some 'XX 'XX the had expected half half some in

Eric DeMarco

on And the got and drive Ken, in touch liquidity remarks prepared now on it's it. we’ve also, increase me let significantly methodology, it to my to ties that into implemented change the liquidity a relative

I in that have month deliver in on Let’s month still be about and say subsystem. you past build our The percent with just say and through month based one. XX We the we not proof, an what un-build will can be the your plan, my to safe in to let's for sure completed in either delivery receive would come those seven We build performance for would get that production months to customers fans schedules we talk were until inventory we have milestone example we would engines or run qualification know. for carry Historically eight, would credibility and might we for eight bullet place it an we on XX. turbo can XX a because the would revenue. the they orders to order would going the month so make in indication, get one example or in

out my period nine milestone there it month past structure Yes recognition the into improved performance calls, we’re the in them, carry. eight moved to XX we example hits, we’re we in has and to everything revenue that it the and that’s engines example mapping across but performance the significantly my the no So liquidity the example, when pay to been is Company my now it of months month doing we've with in able for just and in capital also that into comes come so change our get some liquidity XX now, improve begin. of we

Ken Herbert

a be just 'XX you and could be your that you on What efficiency. can brackets Eric, more And where on in full in focused sort basis? or can great, or say steps through kinds of quantify just think, contribute, sounds those taking 'XX it just may year may you of

Eric DeMarco

not this improved initial liquidity your it, this a I there -- prepared unsuccessful tighten successful do been a we're I'm customer, in to that your that’s customer all Well later by we certain question, will number on yet this is of 'XX. negotiating these some is we far for get year, be we negotiated, which but be position out think will maybe once better after to with customers. of that, some

Ken Herbert

fiscal potentially thing up know finalized of and because I good your broader budget in we just just something things on finally, that timing numbers? in at a visibility, put and impact sounds of the of the 'XX I we’re see X the that obviously operating see better agreement this appreciate March with of CR with pressure view source is I still you ability with, under calendar it the that to Got realistic for just like visibility slip a of 'XX that think that, things then already assumption 'XX. we agree where there capital or What maybe can loosing and be to the it be months year? budget a all the on work might your will may of starting into end better when you sort truncated all Is customers fiscal risk your to sort the and

Eric DeMarco

we we the we a assumptions And we So and August the we've and of of get in stuff those to are the same are we our receive assumption last did March a of this March, all last going assuming forecast got got we XXXX. production assuming July, XXXX a the April them taken and not where had end of of year until very situation get it's XXXX get similar year mapped 'XX. last one to XXXX in starts June, our in number in CRA, May. of where end budget year until at not to December we at increase XX similar making into and that budget didn’t or the very we Because contracts

on We last just which year. based it experience are had spreading our we historical

Ken Herbert

strong obviously second reflects these already a some that of particularly risk So even and timing quarter contracts? very though strong guiding you to of very a potential fourth are half

Eric DeMarco

at March. Yes, by it, XXrd get our place in I think guidance a March end of of assumption we in Yes if budget the it end there our does. the is

Operator

Thank you.

Noble Our comes Capital. Mike Jordan with next question from

open. now is line Your

Mike Jordan

SSAT announced. be to expect exercise LRIP option the released? or are LRIP when that there contract, Eric, up and relative the to the do X DoD announced you X a yesterday plus XX to million Was you question a

Eric DeMarco

need not begun, of to careful, on recapitalization to say be has what nation perceived systems I of state Mark, systems The I weapon be weapon but And because strategic have only here. threats. very exercised. accelerating those it’s

couple fighter against been of threat we so missions and addressing terrorists have against not ISIS I’ll over terrorist aircraft So on in use recently decades the been our nation air flying the example the example most and for past an ground. but peers say appropriately have the

I’ll left, Company is very accelerating are the in this but prepare going very So, the the again that’s one things these say customer them get at and tactical level things things are use weapon soon targets aside and program part to specifically question of example quantities ones ahead to left readiness putting so now the increased increasing. for to largest of answer largest soon. and program pulling taking be my don’t that one is -- in the state are are nation the that moving to and of want system, your opportunity I to the

Mike Jordan

the you in Is to the a here half? so that in half the second awarded those XX you pushing completed of to revenues lot second first will have be year it the offset gap that is quarter in the ‘XX of manufacturing have expected mainly of correct

Eric DeMarco

Yes.

cannot working going my customers, as XX, June, however am July, almost complete on July, are that expected So, expected in we we lot international, I plan with are in well. liquidity substantially XX, are keeping the are to say going name of are our to get on line opportunities certain lot we we I end

have not significant should break. the we So

Mike Jordan

The force do decision have potentially be of when an point idea the said the going -- QX, be might for is you in procurement at look air flight to LCASD production be will it's you to units? first

Eric DeMarco

Yes we do.

Mike Jordan

Will you it? share

Eric DeMarco

no sorry. sorry I’m sir, I’m

Mike Jordan

from just quite me, PSS correct? is revenue clarification, question service in is that a Last already

Deanna Lund

CGS are as As around that we are product there service because other in some classified services has services. far that that lines, revenue report and as is actually some within service wrapped they are there services revenue reported

Eric DeMarco

But a XXX%, yes.

Deanna Lund

service. a PSS of is said, Eric as Yes, XXX%

Mike Jordan

prior services. couldn’t so that Okay of out that crack

Deanna Lund

yes. That’s correct,

Operator

Our with from comes next Seifman JP Morgan. question Seth

open. is line Your

Ben Bernstein

is Set. Ben Bernstein for on This actually

to think non of mean PSS for investors core I it why I divestiture as sale a has is ask aspect. mind all time been the wanted couple Just to quick a now, of business a why while ones now the on this

Eric DeMarco

last could ramping see other encouraging us our and I’m in me have perspective it's vast been six or in were gaining months the you the XX the Kratos from smiling months because been investors traction. If of last potential up the particularly businesses is investor majority as

As Product systems Company. why divest and a become play this and don’t we pure

we non announced at as core it this was And so business. that we looked a

we focus. with of going we if very end coming what time on I’m and where ’XX microwave satellite an you at extended our I business we have our process this are and of in our business and could are think this at business, that absolutely use we training imagine took see period convinces business our lot a unmanned had the with electronics delicately we

We have to we on won stuff. because focus some have those got big

and focus We are going stuff need growth to big win some where we to are. other the big opportunities

Ben Bernstein

path not to the taking noncore read mentioned but there. a release of business? I and much being into Should And rocket the you for piece guess the too the that about I similar charge we mean press support think

Eric DeMarco

that. to best say looking the for at what about sense We should shareholders portfolio makes all are and the I see that’s routinely

Ben Bernstein

first then outflow an the is are made XXXX drone will on investments higher? half LCASD we after And programs? flow. the for based beyond think cash think should flow about of these cash one thinking it wrong on last rate Should run and we expect One be significantly to How no about other timing that investments cash XXXX? to be

Deanna Lund

expectations. No, is our line your thinking in think with I

Eric DeMarco

they to are The going wind investments down.

Deanna Lund

is is by milestone flow QX. is. will cash The and is It’s investment in of end LCASD what that drive timing will for scheduled flight a a complete be that the predominant investment that QX so fairly

generation your stronger comments think expectation. the actually the with flow on are that’s half our or you being second I line cash – in

Eric DeMarco

equal expect LCASD you being investment this significantly. things done would year 'XX And all by everything up else other with go equal would definition the being being 'XX

Deanna Lund

in XXXX, level was the so anywhere Especially, those this from CapEx the if CapEx two going XX have last when forward CapEx were of into in range XXXX. million years been historically running we the take our initiative heightened to launched plus we years past don’t million XX at prior you XX that so to consideration that foresee we the

Operator

Our comes of from next question Sachs. Noah Goldman Popanaki

open. now is line Your

Noah Popanaki

outlook is are here few the and to years the average? you've started of range you've does last already how given revenue compared backlog that on in percentage us funded that XXXX What how

Deanna Lund

is typically is So total roughly XX the typically next months about XX% backlog our total we that. what in revenue the see is backlog converting of

line and So that's we if what past. in that the we've in each how with year started

Noah Popanaki

unfunded That's on total? or

Deanna Lund

the perspective funded so from more XX%. closer actually to It's over probably than that it's

Noah Popanaki

and total? the on on it's XX% so funded Okay, XX%

Deanna Lund

Correct.

Noah Popanaki

I to is the already of XX% so think And call XX% in that year backlog? should of to

Deanna Lund

Correct.

Noah Popanaki

And pretty normal point? starting that is a

Deanna Lund

But only into X million from not Yes, U.S. of is end so included my turn prepared and the going in at million it's that's as that's to remarks probably indicative award I instance had the XX mentioned be we as the expect and this what's be on deliver Army so backlog 'XX visibility in revenues the for of year that we fully years, received three XXXX currently. three in not good years and and year and this we the being that but to the would revenue very that the that on necessarily backlog performance. next 'XX have

Noah Popanaki

to versus you it visibility much something do that So funded little outlook a of little that's bit thing of it's category you not of would have remainder as fits that of where and the bit you go have in say in to backlog definitional how the etcetera?

Eric DeMarco

them of right to for We launch I is U.S. going schedule piece are loss on significant in air the know XX our tempo now very, the all on that on on know for ballistic have once for the tempo can't this we're what three Navy because apps exactly We op missile into just went through. off they is up is significant into our so know drone. but SM. in their We get give that I have that guidance. and XX was obviously there these in up backlog, We we maps a and get target we very XXX tempo So the and tempo. Army coming XX, schedule. at None of it. we force the all the based know the for with name we another what's in targets at guidance know nothing on it

Noah Popanaki

the it 'XX on bucks, would If call about Is that doubling unmanned And guidance million 'XX your the the and talk growing note could growing is XXX X%. it some is it would potential KGS is like a moving if that versus or pieces pieces have accurate? may seems government us of you to in imply about through bit have that of businesses you be the there what there drag little some during services detail? be passing given could again, more was

Eric DeMarco

is That is you’re correct. the absolutely piece drag. government services The

Noah Popanaki

Is in XXXX? it declining

Eric DeMarco

the $XX is XXXK, It remarks it's as like as deemphasized couple and it terrible, acceptable price got a we triple services technically a of know down, QX, in in was lost the it's by is board I as bit across one in you declining. It million lost is so ruthless we pipeline we the terrible. and couple was mentioned prepared low pace, price on we that

point book data XXXX, business, on was ratio get the for RSS that another that let So zero. business me bill to

programs so backlog. in So excluding even big as these reverse think number is it at Deanna the book book. to what we ratio that don’t engineer and Look our put said on you about the bill what our can of

So Company is, the bill a strong. a the wind. tailwind award with But contract problematic is or extremely not that’s that base it’s book to

Noah Popanaki

frame XX ask PSS, have managing the the right about I and so or EBITDA, is target all or up behind margins, this think you way adjusted long-term that kind so guess Understood, XX% X, to longer includes in this that, there? front year's I just term combine KGS XX more XX, XXXX medium for XX implied I will EBITDA the maybe guess I guys of that work. one for kind on term, just

Eric DeMarco

at rationalize, to number are was going the look the mentioned So things out things that we of down million think can and We're is item to We Deanna the you have negotiate like number them. the the the like on, just agreements of cost negotiate, that $X.X licenses allocated. there by first one year we that there ourselves can't year. we have are fill wind but

these plan we to grow on to are the our for the for make just that reduce to things EBITDA the and looking going obviously is teens. margin raid end is year, up get businesses it low other for When Company. by to So normalized we're of a still

Operator

Michael from comes Ciarmoli SunTrust. question next with Our

is open. line Your

Unidentified Analyst

It's actually [indiscernible] for Michael.

of that look go guess at to Just and receivable is cash PSS it? back on that way I that in to the divesture coming queue, into of

Deanna Lund

was conditions with expected What that regulatory the our we in had in we transaction release approval press that and that announcing closing mentioned XX days. customary

Unidentified Analyst

I structure the look capital and the Company like for that guess will then perhaps then what outlook? and interest once clears expense

Eric DeMarco

on depend what So, on this proceeds. we is the -- going to

receivables So, growth year current are in ability… or if we the or with under our the bonds there and have they into the a is proceeds not business redeployed inventory

Deanna Lund

investments. other Or

Eric DeMarco

in I soon get the very we I remarks, several -- large went as now We going there the opportunities, right are lot win. the some half think to have to that par. won going are is we you, looking to going that to willing that production second on thank and as -- think going get of we bonds in going, the ability to have a at good it’s of god is get bring are opportunities in we get the budget other real Deanna I we we year prepared investments, other pro rata back Or going as through

we do these, on how to drink things some so see the going if hold won run execute cash table being I are equal because them, Kool-Aid. let’s a at am good not the of If our liquidity and all and the we All initially plan is part of initially. the to on do as watch CEO, that these And we I we programs. to least

Unidentified Analyst

at I this last then how fits into -- strategically say guess I the portfolio the point? one Gichner would on just would

Eric DeMarco

in systems some them being runs, Yes now right division very so know, that’s large and of production modular of you one as our Patriot. middle are the we

work Patriot wonderful Kratos, you to whenever saw with. recently they that’s are as Patriot Raytheon Sweden, just an partner see strategic like So, company you in extraordinary a is Kratos, of

systems. their ship. Systems, Northrup. majority of with ship, are systems, defense areas of Martin, high also what one of we on We the on gun. Systems, is This involved into and was spending a the modules ground are mission into work are very Unmanned combat we our very on see Unmanned are missile And focused with assuming designed bipartisan we closely that number built budget signed of control business a number combat associated energy the we ’XX we focus ’XX, radar significantly designed programs. for in stations, number the rail providers and systems with directed power of with closely the there into Littoral a it’s missile on We fits Lockheed We increasing ballistic gets we it Littoral electromagnetic We are approved. of also strategic

Operator

And from with Drexel question Ruttenbur Thank next our Hamilton. Brian comes you.

Your line open. is

Brian Ruttenbur

in negative is ’XX then A for kind second it be a positive half? EPS forward that turn down of or adjusted couple going are looking maybe quarter first the in how have and you housekeeping you XXXX from at should

Deanna Lund

think comment at XX quarter I EPS for was was of from we the then XX and a what just of was $X.XX. with adjusted adjusted guess down first to our is XXXX, you that loss guided $X.XX I and XXXX the that made when the year

the actually to it's So quarter year. the on regarding be up and on up

Brian Ruttenbur

I monitoring? so missed next that the should you you just top us part. give have can the the Gremlin, watch? is didn’t that big question number us name can programs that be Is to I I for three we miss top

Deanna Lund

award, we waiting for competitive So it's are willing, formal and one, is still god number Gremlin.

data the are significant drones changer those. is if them to is SSAT the successful certain for The is I navy enough this there As is and program. with target we if they that SSAT recent and fortunate for partner points the almost most it XX is with of out mentioned in our the demand game replacing are XX and remarks here Dynetics be Company on based to a

watch can asked you three to you tell I the me I’m about about. three You telling

at third program well. The talk LCASD schedule as this to The anymore of LCASD. a but is is year of year QX on as as about I I on mentioned the budget, one big cannot much last I everybody this is mentioned

Operator

from comes Jefferies. Greg with Conger Our next question

Your line open. is

Greg Conger

much couple on the it prepared you size asked in is just Just of seem have maybe quick mentioned opportunities a the but and say from bit a and of color of little was most term I just didn’t been you small longer-time that more like ones remarks just but mine that SSAT near there the thinking could opportunity?

Eric DeMarco

happening as designed into designed constellations getting is now, getting right and far the it the So, is operators. into

Now where an new is the time for are. communication of command get control the designed GEOs. on entire is equipment And and we these to ground side versus suite ground or LEOs this generation the

XXXXs far, but the capable, be to GEOs cube the I’m of nano costly far there to As less and less they sure, going be them. far far, sets, small are than is going

whole of less arguably a but smaller more it’s lot so And it. there is be dynamic, equipment new ground generation of a going to

system. winners performance our now a time epic, and for we the pick we pedigree real know us designed customers get the to we And is We are to opportunity and fast command and trying because leading qualities and -- with getting industry right of the is and software There this our so control guys our are that -- took credibility. operators. like the

Greg Conger

commercial And more it had starting the market maybe that maybe side? a then industry high just down space there it or is been it's trends I commercial are type think share on really space mean of the seeing seems itself recovery of I on to getting of kind kind where mean mean like staying you've into you the any I on show I

Eric DeMarco

only what business has getting and monitoring is jamming The net or interfering being quickly on we're able is said big being, remarks beings to so on interference intended that our increase and whether potential that operated geo-locate believe and it's means we XXXs our and those remedy network addressing jamming indentify use this KPIs it in globally seeing area. throughput leader has being year-over-year or only on monitoring the with be going issue going related and identify able is stepper customer to is globally been that more are owned industry depending is spot seeing neutralized the it's or be owned are were other mitigated I that's can and those we or it's with side beams crossed and from you up that it directly trend company to the high and of or intended only grew wants the to I coming beams would more are what the where and the said a satellite in the spot rapidly spot in that And being it's able each it trend because XX% related primary that and into other to we growing business a I've are money identifying doing think going or coming were tides grow monitoring from being to and prepared asking. to big that what where we that it opinion is for

Operator

Noah question from Goldman. follow-up And our from comes with Popanak final

Your now line is open.

Noah Popanak

divestiture its U.S. about two, does wanted change tax the as a I just filter? does one ask NOL, value? the to tax And change its values then reform

Deanna Lund

it's reform changes recorded value the balance different because on at rate. tax So, a the is that just sheet

-- of carry back this reform in going forward no period but the carry XX% tax some it forward probably that rate benefit from as movement XX%. But was that's so so on far the tax change allowed, is And unlimited. is longer recorded was to as

it current that carry be back we to are forward. nearly is piece impacted would it's under prior so a law not XX, that as as but forward impacted, tax but go reform the XXX to the we that's carry was the forward X So unlimited or going what have .million actually NOLs

and and there no related NOLs. on no divestiture impact the our is change So to

Operator

Mr. back closing in questions you. no over queue, to remarks. the like Thank further DeMarco to I With call for would turn

Eric DeMarco

and and Thank between up Thank you very comes joining the scheduled quarter us all be something now unless you when chat will for first report we today, our next then. much.

Operator

today's you this conference. gentlemen, does for your Thank very participation. you, and conclude much Thank ladies

may day. a You disconnect. all wonderful Have

Kratos Defense & Security Solutions (KTOS) 28 Feb 182017 Q4 Earnings call transcript