Kratos Defense and Security Solutions Inc Q4 2024 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Josh Sullivan - The Benchmark Company LLC - Analyst : Eric, as Kratos becomes more and more of a merchant supplier, low-cost engines, the Prometheus rocket motor JV here for hypersonics, what does that do to the long-term margin profile or your strategy for the company?

Question: Josh Sullivan - The Benchmark Company LLC - Analyst : And then just on MACH-TB 2 program, you know the program will be a bridge for future products, but Kratos has a history of converting affordable bridge products to tactical products. Is there any reason we wouldn't think you walk down that path eventually?

Question: Seth Seifman - JPMorgan - Analyst : Lots to ask about. I guess maybe one question just about MACH-TB. When we think about the evolution of this contract, how it ramps up? What drives both revenue and profitability? Is it kind of an overtime contract? Is it kind of the cadence and velocity of testing events that drive both revenue and profit and how we think about this evolving over the next few years?

Question: Seth Seifman - JPMorgan - Analyst : Okay. Great. And then just as a follow-up, the investments this year, it's definitely helpful to have kind of the layout of those investments in the release, and it makes a lot of sense to do them given the requirements and you certainly have the balance sheet for it. When we just think about how to model out the level of investment going forward and kind of where cash flow goes after this year, even if it's qualitative, are there any kind of guidepost you can provide in that regard? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 26, 2025 / 10:00PM, KTOS.OQ - Q4 2024 Kratos Defense and Security Solutions Inc Earnings Call

Question: Seth Seifman - JPMorgan - Analyst : Okay. Very helpful. Thanks very much.

Question: Mike Crawford - B. Riley Securities - Analyst : Thanks. Can you talk about what your objectives are with your Defense Electronics business? At one point, you owned all of the lease, you sold most of it to Ultra Electronics, you retained the Israeli piece. You bought CCT a couple of years ago and now Norden. So I imagine you must have with Norden, $50 million, $60 million, $70 million of such revenue now and you talked about in your remarks some accelerated capabilities. Could you just go into that in a little bit more detail?

Question: Mike Crawford - B. Riley Securities - Analyst : Okay. Thank you, Eric. And then what, in particular, was it that drove this 2.3:1 book-to-bill in space in fourth quarter?

Question: Mike Crawford - B. Riley Securities - Analyst : Okay. Thank you.

Question: Jan Engelbrecht - Robert W. Baird & Co., Inc. - Analyst : Good evening Eric and Deanna. Just a quick question on DOGE and the Space Development Agency. We saw the director, there was a sort of disruption in leadership and the willingness from the government now to move towards more fixed price contracts within space. I was wondering if you could just talk more about your position in space and obviously, you're very comfortable operating in a fixed price world. Just what you're seeing there for 2025 and beyond, specifically on the space business.

Question: Jan Engelbrecht - Robert W. Baird & Co., Inc. - Analyst : Great. That's really helpful. And just a quick follow-up. Just on the marine aviation plan, can you just give us some more details about what it entails that the marine variant has not sort of graduated from PAC P over to Maksitak Air in terms of testing or funding or any other details we should expect for '25?

Question: Jan Engelbrecht - Robert W. Baird & Co., Inc. - Analyst : No, I completely understand. Thanks Eric, thanks Deanna.

Question: Ken Herbert - RBC Capital Markets - Analyst : Hi, good afternoon Eric and Deanna. I appreciate, Eric, the incremental commentary in terms of the expected acceleration in 2026 growth. You've obviously got some tailwinds in hypersonics and space, it sounds like, and microwave electronics. But as we think about that, call it, $175 million in growth at the midpoint in '26, can you provide any more details or specifics or confidence around particular programs or how we think about the primary contributors to that growth?

Question: Ken Herbert - RBC Capital Markets - Analyst : That's super helpful. And as you think about maybe a step change in the margin profile into '26 and beyond, like can you maybe help just a little bit with sort of magnitude of that? And maybe as you think about the business longer term as a merchant supplier and everything you've talked REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 26, 2025 / 10:00PM, KTOS.OQ - Q4 2024 Kratos Defense and Security Solutions Inc Earnings Call about that's obviously behind the strategy, which should result in better margins. What do you think the potential sort of EBITDA margin of the business could be in the out years?

Question: Michael Ciarmoli - Truist Securities - Analyst : Lots of detail. Eric, I wanted to ask about a little bit more on Prometheus, but you mentioned a lot of different programs. One I don't think we heard you talk about. So I wanted to get some color on what's happening with Boom Supersonic. They've obviously had some positive developments. And then just on Prometheus, when we think about that opportunity, are you going to be going after or is this predicated on new program wins and white space? Or are you going to actually be taking share from existing in-production programs for some of the shortages that we've been hearing about? And I'm assuming this is both US weapon system opportunities and sort of homegrown NATO ally opportunities as well?

Question: Michael Ciarmoli - Truist Securities - Analyst : I guess, presumably, that's not in the revenue growth plan. I mean you're talking some pretty compelling visibility, '25, '26, even '27, presumably if Boom executes well, that would be additive.

Question: Noah Poponak - Goldman Sachs - Analyst : What's happening with Sentinel and from your perspective? And what does that mean for your position on the program?

Question: Noah Poponak - Goldman Sachs - Analyst : So the reexamining of requirements related to ground, even though you discussed being tethered to parts of the program that are ground, your parts of the program are different than what's being reexamined? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 26, 2025 / 10:00PM, KTOS.OQ - Q4 2024 Kratos Defense and Security Solutions Inc Earnings Call

Question: Noah Poponak - Goldman Sachs - Analyst : Right. So on the ground, you're on the ground but above ground.

Question: Noah Poponak - Goldman Sachs - Analyst : Just wanted to be sure there. Okay. Got it. Just maybe trying to go a little, get a little more from you on this capital expenditure you're going to make. $130 million is double, it's really kind of triple where you were run rating not long ago. Has your opportunity set tripled? Or has your customer asked you to take on even more of the upfront funding? And I guess, just how much negotiation did you have around how much time lines can slide in this industry and therefore, who should pay for what?

Question: Noah Poponak - Goldman Sachs - Analyst : Okay. Great. I really appreciate all that detail. And maybe just last one, Eric. Valkyrie, you've detailed the customers that have maybe kind of moved to the front of the line versus who was originally there. Are those, how are those tracking versus what you thought three to six months ago? And then with the maybe originally intended customer, some interesting comments on force multiplying fighter fleets from the new administration, but I guess it's early days. So where do they, where do they stand on what they want to do with Loyal Wingman.

Question: Trevor Walsh - Citizens - Analyst : Just wanted to maybe step back around the facilities build-outs and just maybe make, or ask a larger strategic kind of level question for you, Eric. I appreciate all the commentary around building out kind of the vertically integrated process. Just having, being kind of the main supplier, et cetera. There's some other maybe more venture-backed funded companies out there, kind of talking about plans for kind of mega facilities, mega factories to kind of do it all in kind of one-stop shop fashion. Wondering that seems sort of different, obviously, from how you guys are approaching things. Can you maybe just give us some of the puts and takes around kind of how you think about those two approaches differently and whether that's something you guys would think about longer term or if there's just kind of significant downside in your mind in terms of that approach or how that may or may not work out?

Question: Trevor Walsh - Citizens - Analyst : That's great. Maybe just one clarification for Deanna, if I can. So the MACH-TB facility that Eric mentioned was the new kind of site to be determined. Is that incorporated in that '22 to '24 line item in the breakout in the press release? Because I think you had said some of that. Got it. Okay. But some of that's going into '26, I think if I heard it correctly, '25 and '26. So is there little extra.

Question: Joshua Zoepfel - Noble Capital Markets - Analyst : This is filling in for Joe. So just kind of a couple of housekeeping questions. Most of them might have been answered. You guys touched on it a little bit earlier, but can you kind of just get a little update on the facilities in India and Israel? I know you guys said in '25, but I know you guys previously expected it to be in Q2. Is that still on target for that? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 26, 2025 / 10:00PM, KTOS.OQ - Q4 2024 Kratos Defense and Security Solutions Inc Earnings Call

Question: Joshua Zoepfel - Noble Capital Markets - Analyst : Okay. And then on India, is there any sort of timeline for that one? Just anything, any color on that?

Question: Joshua Zoepfel - Noble Capital Markets - Analyst : The microwave product facility in India?

Question: Joshua Zoepfel - Noble Capital Markets - Analyst : Okay. That's helpful. And then kind of just looking at 2025, this is the unmanned segment. I know you guys have had a little bit of the margin kind of compression there. But it sounded like last quarter, leverage is going to be off this fixed infrastructure. How should we look at that kind of profile coming in this new year?

Question: Andre Madrid - BTIG - Analyst : I guess just looking specifically on Tactical Drones, there were a couple of things you guys called out last quarter that I was hoping we could revisit. The first being Apollo was in contract documentation. I think Athena was under contract and that Valkyrie had also been down-selected for an international program. Can we just get any updates on those, if possible?

Question: Andre Madrid - BTIG - Analyst : Could you give any color on maybe just the cadence of these programs, like as a whole, maybe just to not give away too much info? Like how should we be thinking about the step-up?

Question: Andre Madrid - BTIG - Analyst : And international is not getting baked in yet?

Question: Andre Madrid - BTIG - Analyst : Okay. No, that's great to hear. No, very glad to hear that. And pivoting away from that, if I could just squeeze in one more. If we look at Space and SAT, I know you kind of talked to the demand levels across government and commercial and their different values. But could you maybe just talk to us about what mix currently stands at the business and what you might want it to look like in the out years in terms of how much commercial versus Gov?

Question: Peter Skibitski - Alembic Global Advisors - Analyst : I'll try to be quick here, just a couple. Deanna, just to wrap up kind of the margin discussion, the margin headwind in '25 is all at targets in USD. Are you expecting KGS to actually expand margins in '25? Or are there headwinds there as well?

Question: Peter Skibitski - Alembic Global Advisors - Analyst : Okay. And then just the last one. On the CapEx spend on the Valkyrie second production lot, that $30 million this year, does that complete that second production lot? And are you expecting future lots to be capitalized as well? Or are you going to switch to more of an inventory spend after that?

Question: Sheila Kahyaoglu - Jefferies - Analyst : Eric, Deanna, it's actually Sheila Kahyaoglu. I don't want to pull a Noah, Eric. I don't want you to be upset with me. So I'm on. You called out Thanatos as a particularly promising program along with several others within KUS. What is sort of the next steps as we think about the contract progression there and what it's being set for?

Question: Sheila Kahyaoglu - Jefferies - Analyst : Okay. And then maybe as a follow-up, I know DOGE was asked about earlier. How have you thought about bracketing that into your guidance?