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Kratos Defense & Security Solutions(KTOS) - 2024 Q2 - Earnings Call Transcript
KTOSKratos Defense & Security Solutions(KTOS)2024-08-07 23:46
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Financial Data and Key Metrics - Q2 2024 revenues were 3001million,exceedingtheestimatedrangeof300 1 million, exceeding the estimated range of 265 million to 280million,drivenbystrongperformanceinunmannedsystems,turbinetechnologies,microwaveproducts,andC5ISRbusinesses[24]−AdjustedEBITDAforQ22024was280 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 20millionto20 million to 23 million, reflecting higher revenues and a favorable mix of higher-margin revenues [26] - Cash used in operating activities was 27million,impactedbyworkingcapitalrequirements,includingincreasesinreceivablesandprepaidassets[26]−Freecashflowusedfromoperationswas2 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 127million,withinvestmentsinmanufacturingandproductionfacilities[27]−ConsolidatedDSOimprovedfrom107daysinQ12024to103daysinQ22024[27]BusinessLineDataandKeyMetrics−UnmannedSystemsbusinesssaworganicgrowthof61812 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 50millionto50 million to 100 million in 2025, 100millionto100 million to 150 million in 2026, and 150millionto150 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]