Kratos Defense and Security Solutions Inc (KTOS) 2023 Q1 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Kratos Defense & Security Solutions First Quarter 2023 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Marie Mendoza, Senior Vice President and General Counsel.

Thank you. Good afternoon, everyone. And thank you for joining us for the Kratos Defense & Security Solutions First Quarter 2023 Conference Call.

With me today is Eric DeMarco, Kratos' President and Chief Executive Officer; and Deanna Lund, Kratos' Executive Vice President and Chief Financial Officer.

Before we begin the substance of today's call, I'd like everyone to please take note of the safe harbor paragraph that is included at the end of today's press release. This paragraph emphasizes the major uncertainties and risks inherent in the forward-looking statements we will make this afternoon. Please keep these uncertainties and risks in mind as we discuss future strategic initiatives, potential market opportunities, operational outlook and financial guidance during today's call.

Today's call will also include a discussion of non-GAAP financial measures as that term is defined in Regulation G. Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP. Accordingly, at the end of today's press release, we have provided a reconciliation of these non-GAAP financial measures to the company's financial results prepared in accordance with GAAP.

With that, I will now turn the call over to Eric DeMarco.

Thank you, Marie.

Kratos completed Q1 on track for 2023 as a transition year to expected sustained future year-over-year organic growth, increasing profit margins and cash flow as our company realizes the benefits of the investments we have made and we transition from development to production and delivery in certain areas.

Kratos is also on track for increased margins and cash flow in Q3 and Q4 of this year, as our revenue mix continues transitioning from older firm fixed price contracts, where we were unable to pass on significant inflation and increased costs to newer more recent contract award related revenues, where we negotiated higher rates and costs with our customers, as included in our Q1 and last 12-month 1.1:1 book-to-bill ratio. And though the supply chain still has challenges, we have begun to see some stabilization and reduction in lead times and pricing, which is also providing confidence on our future forecast.

Highlights since our last report to you include the 2024 DoD budget request was released, along importantly with the Future Years Defense Program, or FYDP, or also referred to as the 5-year defense spend plan, both which include new or increased funding and growth, including in the space of satellite, hypersonic, missile system and defense, strategic deterrents, microwave electronics and drone areas.

In the drone area, the USAF has requested approximately $6 billion over the FYDP period, reflecting an increased prioritization with it being reported that the Air Force is looking to ultimately procure up to 2,000 drone systems, and that Secretary Kendall commented that drones or uncrewed aircraft are now considered essential to the Air Force's future. It was also reported that the Air Force stated that the expected drone cost would be a fraction of the cost of an F-35 or approximately $20 million per missionized system, and it was reported that an affordable mass concept is a key element behind the Air Force's Advanced Drone initiative.

We believe the Kratos tactical jet drones flying today are recognized as the most capable and affordable in their class, with the key reason being that we lever off of the same supply chain partners, vendors and teammates, which support the production of approximately 150 Made in America Kratos jet drone aircraft annually, which also reduces risk to our tactical drone customers.

Kratos' disclosed price points for our tactical jet drone systems, range from approximately $450,000 for Tactical Fire Jet Air Wolf to approximately $6.5 million for Valkyrie at low quantities. We also believe that Kratos' Ghost Works is the recognized leader in the rapid development and delivery of low-cost tactical drones, including Kratos' Valkyrie, where Ghost Works went from a clean sheet of paper to successful first flight in 30 months and additional new systems that Kratos' Ghost Works is currently working on.

Accordingly, we believe that if a competitor elected to enter this class of affordable tactical jet drones, they are at least 3 years to 4 years away from first flight and who knows what cost to the customer. Since our last report to you about the US Navy and the Marine Corps have indicated their increased prioritization for high performance jet drones, including with the Navy reportedly stating that they envision up to 60% of the future Navy Air Wing being comprised of drones. So, it's now clear that the Pentagon is planning a future that include significant numbers of affordable high-performance jet aircraft or systems, and the funding is now being requested to achieve this vision as reflected in the 2024 budget request and the FYDP.

Since our last report to you, Kratos has received additional tactical drone contract awards, including as related to Kratos' Valkyrie and we are in negotiations for additional contract awards, which we expect to receive in the coming months. Since our last report, it was reported that one mission the Marine Corps' Valkyries are focusing on include electronic warfare effects in conjunction with the F-35 and certain assault support platforms, all under the penetrating, affordable, autonomous, collaborative killer program.

Kratos has also recently received an additional USMC Valkyrie contract award related to sensor payloads, mission system and subsystem integration. And Kratos is also now under customer-funded contract related to the Valkyrie for the development and testing of autonomy and pilot vehicle interfaces, ground and flight operations and additional Valkyrie test flight related events.

Since our last report to you, Kratos has continued to have successful tactical drone flights as we evolve the system with our customers and over the balance of this year, Kratos jet drones are scheduled to perform numerous under contract customer-funded flights. Kratos is the only company with affordable high-performance American-made jet drones flying today and we are focused on continuing to increase and expand our first-to-market leadership position with our customers.

While other companies and potential competitors are imagining things with PowerPoints, renditions, models and surrogates, Kratos is currently flying and has been flying for several years under US government-funded contracts here in the United States. At the Oklahoma Burns Flat Range Facility, Kratos' unmanned systems and our Ghost Works can fly our drones and exercise systems, including new yet-to-be-disclosed system that Kratos' Ghost Works is focused on and that the competition or others know nothing about. For example, just this week, Kratos had a very successful test event at the Burns Flat Test Range with the new system, which I'm confident that neither our competition or adversaries are aware of in any way.

We are completing the first serial production run of 12 Block 1 Valkyries in Oklahoma City. We have begun the second production run of 12 additional Block 2 Valkyries and it now looks like at least half of the Block 2s will be Block 2Bs, incorporating a new additional capability based on very recent specific customer input. Since our last report to you, Kratos' Unmanned Systems was awarded a share of $400 million ceiling IDIQ contract for research and development for the Advanced Aerospace Systems Technology Research Program.

This contract has multiple awardees, with the primary objective of the program to conduct research towards the development, demonstration, integration and transition of new aerospace vehicle technologies, designs and integrated systems that will provide advanced capabilities to the Department of the Air Force. The Advanced Aerospace Systems Technology Program contract award is yet another example of Kratos and our Ghost Works, continuing to have success competing for and winning certain of the most advanced capability opportunities for US National Security.

Based on information included in the 2024 DoD funding documents and the FYDP, statements made by the government customer representatives, additional information we have received and the progress we've continue to make, we remain confident in the future success of Kratos' tactical drone business.

Kratos' target drone business is performing well, driven by Kratos' producing and delivering what we consider to be the highest performance threat representative jet drone systems in the world, with our primary customers including the United States Navy, Air Force and Army. The global recapitalization of strategic weapon systems and the requirement to test and train on these weapon systems is providing a strong macro level catalyst for Kratos' target drone business.

Kratos' space, satellite and cyber business, our company's largest, continues to receive new program awards, including with Kratos' first-to-market virtualized and software-based OpenSpace family of satellite ground communication systems. I encourage you to review today's release on recent milestones and progress Kratos' satellite business and our OpenSpace product and system family has achieved, including as disclosed at the recent National Space Symposium.

Since our last report to you, Kratos' satellite business as a key team member to our prime partner was notified that the team has been successful on a large new multibillion dollar satellite constellation program, which includes Kratos' OpenSpace, which program could ultimately be worth several hundred million dollars to Kratos. We believe that this is another representative example of Kratos' disruptive technology based, first-to-market strategy success and our leadership position with our OpenSpace system.

The days of the ground satellite segment trailing space capabilities are ending, with a new wave of ground system advances, including Kratos' OpenSpace that can support multi-orbit constellation and the specifications that both 5G and the new generation of high-bandwidth satellites require and also the interoperability needed for the new breed of flexible, low earth-orbit constellation to achieve scale and broad market growth.

The ground system segment ecosystem, including electronically steerable antenna and modem companies to integrators and network providers are all leaving legacy siloed standalone ground systems and transitioning to software-defined and based virtualized architectures, which is exactly where Kratos' first-to-market OpenSpace systems are positioned and why we are so excited about Kratos' space and satellite business going forward. There are thousands of satellites planned to be placed into orbit into the future, and this is expected to be a key macro and industry catalyst for Kratos' space and satellite business, along with our OpenSpace software suite.

In Kratos' C5ISR business, the Sentinel program with Kratos' key strategic partner, Northrop Grumman, is expected to be one of Kratos' largest, fastest-growing and most important programs for the foreseeable future. Additional well-funded priority programs in Kratos' C5ISR business include SCAR with the space control network, Patriot, HIMARS, THAAD, IBCS, which has now received full rate production, SHORAD, Enduring Shield, Titan, certain other space and satellite programs, and Counter UAS programs and systems, which are very relevant in what's going on in the world today.

Kratos' turbine technology continued its outstanding performance in Q1, with KTT being one of Kratos' fastest-growing and most profitable businesses with a multibillion dollar B-52 Re-engine Program being one of our most important. Additional current growth areas for KTT includes supersonic and hypersonic propulsion systems and space and launch-related propulsion systems.

Also, the significant increased funding in the FY 2024 budget request and FYDP for drones and also missiles and powered munitions, we expect to be a macro industry growth opportunity and driver for KTT and our engine business. Kratos' rocket systems business is also expecting future growth, including as related to our products, technologies and systems for hypersonic, missile defense target, test and evaluation systems. For example, our rocket system business customer-funded launch, manifest and schedule for the next 24 months is that it's strongest in our history and is representative of Kratos' trusted disruptive position as they go to rapid critical launch and other related system provider.

Kratos is internally funded and soon to be first-to-market Zeus propulsion and Erinyes hypersonic systems remain on schedule, and we are far enough along now to disclose to you an additional Kratos vehicle, Dark Fury, now also scheduled for flight next year. Kratos' microwave electronics business, which supports space, missile, missile defense, radar communication and other systems also started off 2023 well, continues to have near record backlogs and is forecasting future growth and increasing margins.

We believe our strategy of making internal investments in technologies, products and systems to be first-to-market, with relevant offerings that address real needs and requirements now and today for our customers is demonstrating success. As I said before, Kratos doesn't sell renditions, pictures or hoped for, maybe someday products that who knows what cost, like certain of our competitors with a demonstrated history of doing this and then failing in future execution. Kratos brings real products that actually work with actual costs and pricing to the customer, and we believe this strategy is a winner.

At Kratos, affordability is a technology and better at some later day, if ever, is the enemy of good enough now. We believe that we are at the beginning of a sustained year-over-year up into the right revenue growth trajectory with increasing profit margins and operating cash flow. With a number of large new programs we have received, additional programs we expect to receive, our backlog and near record opportunity pipeline at approximately $10 billion, we are focused internally on operations and execution.

And accordingly, we do not anticipate making any acquisitions of size for the foreseeable future. Our ability to hire, obtain and retain qualified engineering, technical, manufacturing and other personnel remains absolutely key to Kratos achieving our objectives and future financial forecast, and we are laser focused on this and successful execution.

With that, I will turn it over to Deanna.

Thank you, Eric. Good afternoon.

As we have included a detailed summary of the first quarter financial performance, as well as the second quarter and full-year 2023 financial guidance in the press release we published earlier today, I will focus on the highlights of my remarks today.

Revenues for the first quarter were $231.8 million, up from $196.2 million in the first quarter of 2002, reflecting an 18.1% increase. Excluding the impact of the SRE acquisition, which contributed $12 million in revenues in the first quarter of 2022, Kratos' consolidated revenue grew organically 12%, including a 22.5% organic revenue growth rate in our space, satellite and cyber business.

Programmatic ramps in production have also resulted in organic revenue growth realized in our C5ISR, turbine technologies and microwave products businesses. Included in cash flows using operating activities for the first quarter of '23 are working capital requirements to support the revenue growth, as well as continued advanced purchases of inventory in an effort to mitigate supply chain disruptions and delays.

Also included in our working capital usage are continued internal investments of approximately $4 million related to non-recurring engineering cost to complete new rocket systems and hypersonic and related products, including for Kratos Zeus and Erinyes systems, and continued development of certain software products supporting our OpenSpace platform.

Our contract mix for the first quarter was 71% from fixed price contracts, 23% from cost-plus contracts and 6% on time and material contracts. Revenues generated from contracts with the US federal government during the quarter were approximately 69%, which includes revenues generated with the DoD, non-DoD, federal government agencies and FMS contracts. In the first quarter of '23, we generated 11% of revenues from commercial customers and 20% from foreign customers. We continue to make progress in our hiring and retention of skilled technical labor with a notable net increase in headcount of 19 plus, an additional 17 clearing the pre-hire process since the end of 2022 in our C5ISR business and a total increase in consolidated headcount of 58 from 3,645 at year-end to 3,703 at the end of the first quarter.

Now moving on to financial guidance. Our second quarter and full-year 2023 financial guidance we provided today includes our current forecasted business mix and our assumptions related to the expected continued impact of challenges related to obtaining and retaining qualified personnel, supply chain disruptions, inflation and related expected cost and price increases that are currently and expected to continue impacting both the industry and Kratos.

Throughout '22 and in the first quarter of '23, Kratos has experienced continued impacts, although at a more stabilized rate from supply chain disruptions, including cost increases for materials, supplies, transportation and utilities, and fulfillment delays causing increased costs and inefficiencies related to manufacturing, including in our indirect manufacturing rate.

As our contract mix is predominately from fixed price, we are required to absorb these additional costs until the period of performance is completed on existing backlog and new contracts are negotiated with current pricing. Accordingly, as we transition to new contracts over 2023, we expect margin rates to continue to be lower in the first half of the year as a period of performance on existing backlog is executed with an expectation of margin improvement in the second half of the year as a mix of the newer recently price contracts are expected to increase.

Our revenue guidance for the second quarter of 2023 reflects an approximate 3% to 7% increase over the second quarter of 2022. Based upon funding, production, delivery and execution schedules, second half 2023 revenues are expected to ramp and be sequentially greater than the first half of 2023, with margins expected to expand in the second half of the year on increased revenue, volumes and based on the expected mix of revenues, including new fixed price contracts, which include more recent cost estimates.

Estimated incremental ramps in production in the second half of 2023 are expected to be driven by a handful of key programs in our space, satellite and training, C5ISR, Unmanned Systems and defense rocket businesses, many of which Eric highlighted previously. Operating cash flows are expected to be stronger in the second half of the year as well, driven by the expected expansion in margins and the expected conversion of inventory build from FY '22 and for the first half of 2023 and based upon estimated milestone payment schedules.

Eric?

Thank you, Deanna.

With that, we'll turn it over to the moderator for any questions.

(Operator Instructions) Our first question comes from Michael Ciarmoli with Truist Securities.

Eric or Deanna, just on the guidance, the significant increase in operating income, I think raised the midpoint by 38%. There are some other moving parts in there. But I mean, is that all tied to kind of what you just talked about, about repricing some of the contracts? Or -- because I noticed there were some other changes with stock comp and the net of it is we still have the same EBITDA. But can you walk me through that?

Yes, Michael. It's predominantly the estimated amortization, depreciation and stock comp that when we first came into 2023. So, those changes have been flowed through in our current guidance. So the EBITDA remains intact with where we were before. So those non-cash items impact those 3 categories and then, therefore, impact the operating income just the way it falls out through the income statement.

Okay. Okay. And then, Eric, obviously, a lot of commentary helpful there. What sort of -- I mean, I guess we have the Air Force making the ultimate decisions here with NGAD? It sounds like your customer activity is moving a bit faster than sort of the highest level than what Secretary Kendall is thinking? I mean, what's the ultimate goal of these customer flights? I mean, how do we think about programs of record? Does everything sort of roll up under NGAD? Or just how should we think about the landscape right now?

I think the way to consider the landscape is budgetary and future amount of budgets going forward and our services having to have another aircraft to address multiple global threats that are either near-peer or they're already peer threats like Russia and China. And I believe the Pentagon has determined, as reflected by the '24 budget request and more importantly, the FYDP. And then commentary, I tried to give some examples of that. The way to do this is with high-performance jet drones. And in addition to addressing the quantity issue, the weapon systems that the adversaries have are increasing lethality. So the drones keep -- our pilots can revalue human lives. Some of our adversaries do not keep them out of harm's way, et cetera.

The way that I think about it is -- in the way I personally think about it is there is a macro shift happening to a brand new system, high-performance jet drones with augmented autonomy or, if you will, artificial intelligence that can carry weapons that can do SEAD, that can do DEAD, some of them they can do EA, all types of missions. And I think the funding, the multiple billions in the FYDP period are representative of that. I think that's the best way to think of it, that this is finally happening. It's happening in a big way, and it's happening across every service branch.

Okay. Last one. Just kind of on that topic, and I'll jump back in the queue. I mean, you threw out kind of the $20 million price point that Secretary Kendall mentioned couple of weeks back. I mean, are you thinking about going at this market as a prime contractor? Or would you be better served being a sub to a larger entity in providing an airframe and letting someone else missionize it and take on all those associated risks?

Right. Michael, it very well may turn out to be both. Let me give you an example. So for example, we are a prime with the United States Marine Corps. right now. We are a prime, right? We're a prime with another customer we haven't talked about. We are prime. If the best business answer for Kratos and all of our stakeholders is for us to partner with someone and not be the prime, but being a partner, we will absolutely consider doing that.

Our next question comes from Mike Crawford with B. Riley Securities.

It's nice to see the uptick in bookings in Unmanned Systems that I believe is related not just to the Valkyries you sold, but also targets, including a plus up for the Navy SSAT. Could you ready set what amount of revenue you expect to get from targets in coming years? And related to that would be the annual cadence of SSAT drones, which I think, if we go back like 5 years ago or so, we thought it might be a little higher than it is now even with this most recent plus up?

Yes, Mike. So it's consistent with what we guided to when we provided 2023 initial guidance. So approximately a flat full-year consolidated Unmanned Systems with approximately $40 million to $45 million related to tactical drones, primarily Valkyrie related with the balance of that to target drones.

Right. And so beyond this year, just like in general, where you see, say, targets going several years from now?

And so over the next -- I'll say, over the next couple of years as reflected by the book-to-bill ratio, the 1.9:1, which as you pointed out, Mike, correctly, was substantially target drones. We expect to see target drone growth now, and it's being driven primarily what's going on over in Europe and the Ukraine and with additional countries joining NATO. Surface-to-air, weapon systems coming back into vogue to defeat drones.

And so our target drones are great representative drones for the bad guys. So, our target drone business, we think is going to grow very nicely because of what's going on with world events. And I'm going to remain extremely cautious on the tactical side, as I have for the last couple of quarters. And we're literally -- we're going to report it as it actually happens, not as we're told or it may be stated by others.

Okay. Just switching topics a little bit. Is this -- the $400 million IDIQ from the Air Force Research Laboratory, you mentioned that General Atomics, Lockheed, Northrop, Aurora, won along with you. Do you expect like all of those funds to be deployed on that kind of shopping list? And do you have an expectation for what percent of that you're going to fight -- well, you're going to fight to get whatever you can, but that you might get?

Yes. Obviously, I'm the CEO, I drink the Kool-Aid. But I look at this as very similar to the Skyborg program. Skyborg program came out and there were like 12 or 15 awardees. But in the end, there were 3 of us that mattered and one of them was Kratos. And I see the exact same thing happening here, and I think that's reflected by -- we've already received funding under the $400 million and we are moving forward. So, I think we are going to do just great, very similar to how we have done, for example, at Skyborg.

Okay. And then one last one, just switching to space. So of all this revenue, how much would you characterize as, say, OpenSpace software revenue? And then kind of related to that, let's just take like the BlueHalo contract, where you're -- I think going to recognize $160 million of revenue over 8 years, whether that's something that's more of a straight line or based on milestones or anything you can tell us regarding those points?

Right. So the second one, I'll go first. Most of the programs we're on, including the one you mentioned is like a bell curve. So it starts out on the bell curve going up, let's use, I think, 7 years or 8 years, we'll use the example you gave. So for the first couple of years, it's kept going on slow. And then in the next couple of years, it ramps up quickly to the top of the bell curve. And then once the majority of the systems are deployed and you start maintaining and sustaining them, you start coming down the bell curve. That's very similar to what I believe we're going to see, for example, with Sentinel, with Northrop.

We're going to see an incredible ramp in the next couple of 3 years, incredible, which is going to be one of our biggest revenue drivers. We're going to go up the ramp. Then business development phase or EMD. Then after that couple 3 years, then it's going to start coming down the curve. But I can say now, because it's been announced, LRIP, which is the next phase on Sentinel, for example, is supposed to be awarded in '26, then that bell curve, which will be bigger, will start going up, very similar to what's going on in our space business. So, we're getting layers of these bell curves going, which is what we want to do and which is why we're confident in the year-over-year for the next several years organic growth trajectory, because we're now layering these bell-curve trajectories of these programs on top of each other.

On the first part of your question, Mike, let me just say it right upfront. We would not be winning any of these large programs in the space sector without OpenSpace. We wouldn't be. We are now either the system provider or a major subsystem provider versus a component provider, all right, where we're the system provider or the subsystem provider. We're providing in addition to OpenSpace and the software, we're, of course, continuing to have to provide some of the legacy hard work because that's what the customers are comfortable with, especially in very specialized or unique situations, but also the antennas.

The antenna business we acquired several years ago has turned out to be a grand slam home run. So it's embedded within it. I think the part of the point where you were going, are we going to start seeing margin increase? And the answer to that is yes. And we're starting to see that now. We're seeing it. You're going to see it more and more as this year goes on because the software content, and we're actually licensing the OpenSpace as part of these programs is becoming more significant as we win more of them. So the margins are going to lift with that licensing increase on OpenSpace.

Our next question comes from Seth Seifman with JPMorgan.

Wanted to start off asking about unmanned and just thinking about the trajectory for the year. Obviously, there's a lot of growth to come. We can see it in the backlog, but it started off down in the first quarter. And just is it kind of a gradual walk higher through the year in unmanned? Or is it that before certain markets gone, it's going to take into the back half?

Yes, Seth. It's a gradual walk from Q1 to Q2 sequentially. And then we'll see a more notable increase into Q3 and Q4. And that's based upon the execution and the programmatic involved with the backlog that we have.

Great. Okay. Cool. And then a similar question about cadence, maybe just in terms of cash. I mean the one really notable item that stood out was just the receivables in the quarter, and I assume those get collected through the year. But just is there -- if you help us out a little bit on the cash trajectory.

Sure. So as I have mentioned previously, the first half, we see as less of the cash flow generation and that's stepping up into the second half. That's going to be based upon funding from a working capital perspective, some of the growth, some of those receivables. So it's -- as we've seen 12% organic growth, that's being funded through that receivable line. And based on the milestone schedules and payment schedules, we expect to see some of that coming back through in the second half, as well as from an inventory perspective since we are continuing to build inventory across all of our business units.

Okay. Okay. Great. And then maybe if I can just sneak in a last one a little bit more qualitatively. On the supply chain situation, it sounds like better, but -- and maybe a little bit more stable, but not quite there yet. I guess, in terms of what inning you think that we're in and where you feel like maybe we'll end the year in terms of these -- the various supply chain/inflationary and labor challenges that are out there?

Overall, I think we're in the sixth or seventh inning. And by the end of this year, I think the game will be over. And that's assuming that we don't blow the government up and we don't -- we fund the treasury and everything. I'm assuming that the [children] will come to resolution. So. I think we're in the sixth or seventh inning. I think that we'll be out of the game by the end of the year in the specialty metals area, the composites, the resins, et cetera. We've seen definite stabilization, definite normalization, definite price stabilization. In some pockets of the electronics and processing areas, it's still terrible, okay? But Seth, I think as I said on the last call, it's stabilized at terrible. So, we can deal with the stable situation, even if it's terrible because it's stabilized.

Our next question comes from Sheila Kahyaoglu with Jefferies.

So, I wanted to follow up on one question actually on the decline in KUS. Kind of what was that due to? Was that OBSS? And when you think about the programmatic ramps in 23 and '24 with the funding profile, Eric, how does that kind of -- how do we see that skyline shape out?

Right. So on the first part of the question, Sheila, nothing has been announced by any customer yet on the step-down. But as we said on last quarter's call, we said that we were on a tactical drone program. We expect it to receive additional funding for 2023, but the customer did not have that funding. And so we did not move forward. Until additional information is put out by a customer, I just can't say any more. I don't want to get ahead of anybody. You know what I mean?

Sure.

Okay. And Sheila, what was the second part of the question?

Just on like the '23, '24 ramp, what programs should we see kind of the biggest growth drivers and if you could update on the Skyborg program?

Yes. So the biggest growth drivers are going to be GBSD Sentinel, it's going to be one. In the target drone area, it's going to be SSAT. There's another program we have that we don't talk about, and I cannot talk about that is going into full rate production now. In the space area, SCAR, the space control network program, what we're doing with Intelsat on their stuff in our engine area in KTT.

We are on a program on propulsion systems, including supersonic engines. That program right now is a very strong growth driver in addition to the B-52 re-engine program. As we head into next year, these are overall 23s. So as we head into next year in addition to each of those and this was the layering on I was talking about, I expect [EPICC] Enduring Freedom, where we're doing all the ground equipment to be a step function growth driver. We expect to receive LRIP on that later this year.

You may have seen Northrop Grumman has now received full rate production on IBCS. That's our program. We expect that one -- so that's a multibillion-dollar program, has been reported. That is going to be a significant growth driver next year. Mayhem is expected to be -- the hypersonic program is expected to be a significant growth driver for Kratos next year. MACH-TB, which we've won is expected to be a significant growth driver for Kratos next year. Those are the main ones that we have, we're under contract, their programs of record, and they are going to be the next step function '24 over '23.

Our next question comes from Ken Herbert with RBC.

Yes. I wanted to ask, Deanna, maybe about the margin guidance, adjusted EBITDA. It looks like it steps down a little bit or flattish to down slightly in the second quarter, but then consistent with your comments, a nice step-up into the back half of the year. Is that all as a result of mix from better priced contracts? And I guess my question is really, are there other levers you can maybe pull? And if any of these newer contracts or programs face any delays, does that put the full-year margin and EBITDA outlook potentially at risk?

So it's 2 things, Ken. So it's mix related to the fixed price contracts and newer fixed price contracts coming on and then mix as far as the mix of what the end product of what we're delivering. If it's more software content or licensing, that would then drive margins as well. So it's 2-fold with both those pieces.

Okay. So assuming the mix holds the same from a product standpoint, I guess, that will -- that can be a nice tailwind even if there are maybe delays on the ramp of some of the fixed price side?

That's correct. Yes.

Okay. And then as I think about the space business, I mean, you obviously called out nice growth, I think, a little bit of growth than what we heard from a number of the primes. How does that business in general move through the second quarter into the back half of the year? And are you expecting to see similar growth through the rest of the year that you saw in the first quarter?

Yes. We are with substantially increased margins. And it ties into your question and the question earlier on software -- Mike Crawford asked on the software that these contracts that we've won have been awarded that we're executing on, they are ramping. We're going up the bell curve. And as we go up the bell curve, as Deanna mentioned, scheduled in the deliveries in the second half of the year are license fees for software and software products, which will be increases in margin and embedded in those programs for us.

Our next question comes from Pete Skibitski with Alembic Global.

Eric, talking to Sheila about your growth programs in '24, you mentioned Mayhem and then MACH-TB, which just -- I just wanted to run a few things by you. Correct me if I'm wrong, but those are in DRSS, I think. So could you maybe level set us how big a revenue unit was DRSS last year and with Mayhem and MACH-TB, and I don't know if Dark Fury is there in too or not, how big is that going to be '24-'25?

Right. So last year in '22, think of our rocket business as somewhere around $90 million in the ballpark. We're expecting that over the next couple of years to get to $150 million to $160 million.

That's quite a ramp. Yes. And the 2 you mentioned, Mayhem and MACH-TB are the drivers there predominantly?

They're not actually. They are 2 big ones for next year. We are on -- they're public, but I can't talk. We are in some -- it ties into what I said about our launch manifest. Our launch manifest this year and next year, Kratos' rocket systems, multiple -- one state, multiple state with all different types of payloads for all different types of missions is incredible. That is the #1 growth driver for RSS that we see right now. And those are in the bag, if you will, okay?

Then on top of those, is the test bed -- is MACH Test Bed program you mentioned and the Mayhem System program you mentioned. And another aspect of it -- a way to think about it is literally every hypersonic program that's out there, we are on relative to the materials, coatings, fluid dynamics and things like that. If we're not on everyone, we run substantially every hypersonic program there is.

This is kind of what Southern Research brought you along with some of your organic capabilities, is that right?

That's right. Southern Research is -- it's not a home run. It's a grand slam home run. This is truly 1 plus 1 equals 3.

Got it. And did I say that right, Dark Fury, is that going to be another kind of test launch vehicle for you to test missile defense systems? Or is that -- did I get that wrong?

No, it's not that. It's because of the verities and that's all I can say.

Okay. Okay. Last one for me. You touched on it real early, but should we worry about 2023 guidance in the context of the debt ceiling or a full year CR? Or do we worry more about 2024 with those type of events?

I haven't -- I'm being very sincere here. I'm not being flipping. I haven't been through a government default. So if that were to happen and the debt ceiling thing were to happen, like Tommy tells me that would be Yucky Poo Poo for this year, okay. A continuing resolution, okay? You know it just depends on how things fall. But right now, if there was a 3-month continuing resolution October 1st of '23 to December 31st of '23, I don't see that impacting us significantly in '24 at all.

Our next question comes from Peter Arment with Baird.

Eric, maybe just a capacity question. There were some comments this past or last month on kind of the tripling of the workforce in Oklahoma City. Could you give us kind of an update of kind of the capacity that's in place there? And ultimately, I know you mentioned some comments about the tactical drones with the next block. But what's -- how are you framing the active kind of production lines with the target and tactical there?

Yes. So, I'm glad you asked this question, by the way, Peter. Resourcing in the people side, at last quarter's call, I said it was improving. It's significantly improved since last quarter. It continues to improve. The number of qualified people qualified in the engineering, the technical the manufacturing, including those that can get high-level security clearances has been increasing, all right?

A big part of that, okay, I believe, based on, we say on top of this, is one of the big primes out there had a major layoff of several hundred people, almost 1,000. And one of our big grown competitors, they had a massive lay off, hundreds of people in the past 60 days, one of our big drone competitors, which is providing us an incredible opportunity to help, especially for individuals that want to hypothetically move out of California and go to Oklahoma. So the backdrop has improved precipitously for us over the past 6 months, including the last 3 months,.

Now to your question in Oklahoma. In Oklahoma, we are producing 3 systems. 2 of them I can talk about, Valkyrie and Tactical Fire Jet, right? The way we set the facility up is there was a base facility and then 2 adjacent facilities of almost equal size, think about 100,000 square feet each, where we had options or first right of refusal to expand in those as the business expanded. We have been exercising those options, and we have been moving into them. The next step for us -- and I think I did mention in the last call, but a couple of calls ago is the long lead item for us to go to the next step is going to be on an autoclave, an additional autoclave. If things come together the way I believe they're going to come together, late this year or early next year, I'll be communicating to you that we have placed the order. I think it's a 9-month long wait. So the next autoclave is the next step-up at the Oklahoma facility.

That's helpful. And then just, Deanna, just a quick one. On the -- working capital is pretty negative this quarter. I know you kind of said it builds throughout the year. Can you just give us a little bit of what you -- how you see the working capital profile for the balance of the year?

Sure. I see that use of working capital continuing in the second quarter and then to start improving in the third quarter and improving significantly in the fourth quarter.

(Operator Instructions) Our next question comes from Joe Gomes with NOBLE Capital.

Real quick, and I apologize if I missed this. Last quarter, Deanna, you talked a little about the continuing resolution that was from last year was going to negatively impact the first quarter. Just wondering what was the size of that impact in the quarter?

Yes. So that reflects what some of the awards were that were delayed, so that then impacted what our revenue guidance was for the quarter. So, I don't have a specific value for what that impact was since we looked at that a while ago. But it probably -- my recollection is correct, it was probably in the $15 million to $25 million range on the top line side.

Okay. And then, Eric, obviously, a lot of the stuff you talk about today on the unmanned, the satellite, the space and obviously, those are going to be the big drivers here. But you do have some other commercial type of products you had talked in the past about the self-driving trucks for the agricultural system and the truck mounted attenuators. We don't hear a whole lot about them. I'm just wondering what's the status of some of those programs.

Similar to the other question, Joe, I'm glad you asked that. Our unmanned ground vehicle business, both militarily and commercially continues to gain momentum. A matter of fact, I think I'm probably going to put something out, like we put out a summary today on OpenSpace and what happened at the Space Symposium. I'm thinking in the next month, I'm going to put out something that will talk, walk through the number of states that we're in now. We're on the road in states with the ATMA trucks under contract with the state. We're also now in the fields with sugar beet and with other produce. And we were targeting -- as I said before, we're targeting to continue the -- this is the shortage of truckers and reduction in insurance costs, where you could have a manned truck and then follow the leader robotic Kratos trucks behind them, which we're doing that go out in the field. Robotically, they're loaded up with the produce.

They automatically go to the processing centers and then they distribute the product for processing. And we're also right now taking a look at the mineral area. So, we're in stealth mode. The business is millions of dollars now on revenue. It's going to be several millions of dollars, I think, by the end of this year. And then it's going to do a step function in '23 into '24 based on a couple of these ones I just mentioned to you that we're under contract or under agreement with them. So, I'm going to put out -- I'm glad you brought it up. I'm going to do an update on that probably at the next quarter.

(Operator Instructions) And I'm not showing any further questions at this time. I'd now like to turn the call back over to Eric DeMarco for any closing remarks.

Great. Thank you, sir. Thank you for joining us this afternoon. And we'll be circling up with you at the end of the second quarter. Thank you.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.