Eric DeMarco - President, Chief Executive Officer Deanna Lund - Executive Vice President, Chief Financial Officer Marie Mendoza - Senior VP, General Counsel.

Ladies and gentlemen, thank you for standing by and welcome to the Kratos Defense & Security Solutions, Fourth Quarter 2020 Earnings Conference Call. At this time all participants are in a listen-only mode. . I would now like to hand the conference to your speaker today, Ms. Marie Mendoza, Senior VP and General Counsel. Thank you. Please go ahead, ma'am..

Thank you. Good afternoon, everyone. Thank you for joining us for the Kratos Defense & Security Solutions Fourth Quarter 2020 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..

Thank you, Marie. Good afternoon. Kratos ended 2020 on track, including a fourth quarter book-to-bill ratio of 1.2:1 and the last 12 months book-to-bill ratio of 1.4:1 positioning our company for continued future growth.

Kratos’s Unmanned Systems Q4 book-to-bill ratio was 2.0:1, including a number of Tactical and Target Drone awards we received in the fourth quarter and our Unmanned Systems Business last 12 months book-to-bill ratio was 1.4:1 reflecting increasing customer demand for Kratos’s affordable high-performance jet drones.

As we begin 2021, approximately 60% of our business is focused on space, satellites and unmanned system areas, with these businesses being some of the fastest growing and highest margin in our company.

I believe that with today's report, you will see that the inner inertia of Kratos’s business is rapidly accelerating and that Kratos is positioning on several expected to be exceptionally long term sustained strong growth areas, has substantially increased.

We believe that this rapidly increasing inertia is particularly representative in Kratos’s space and satellite business, which I analogized somewhat to the computer mainframe business years ago and then the PC and Microsoft came along and totally disrupted the market, which in a way is what Kratos is looking to do with our software based OpenSpace platform, to the legacy dedicated monolithic satellite ground infrastructure market.

It is possible that later this year, we will be able to report certain needle moving opportunities or milestones that our Space and Satellite business has been successful on or achieved.

Kratos’s mission strategy and business plan remains being a disruptive technology and intellectual property based company, focused on national security and where affordability is a technology. .

Thank you, Eric, good afternoon. Kratos’s fourth quarter 2020 revenues of $206.4 million were as we forecasted and in our range of $184 million to $224 million.

Adjusted EBITDA for the fourth quarter was $22.3 million above our expectation of $14 million to $20 million, due primarily to a favorable mix of revenues, including certain programs and products and more mature life cycles.

In the fourth quarter, our unmanned systems segment reported revenues of $49.5 million, up 29.2% from the fourth quarter of ’19, due primarily to confidential programs.

Unmanned systems generated adjusted EBITDA of $5.5 million, up from $2.9 million in the fourth quarter of 2019, primarily reflecting the increased drone system related revenues and a favorable mix of revenues.

KGS reported revenues of $156.9 million, up from $146.8 million in the fourth quarter of ’19, reflecting $11.7 million from the recent AFC acquisition, and the organic growth in our Spaces and Satellite, Defense Rocket and Microwave Products businesses.

This increase was offset partially by a net reduction of approximately $5.7 million in our Training Solutions business, which was related to the previously disclosed production and scope of certain international contracts.

KGS’s fourth quarter 2020 revenues also included a net reduction of $2.7 million in the company's KTT business, resulting primarily from COVID-19 impact in our commercial Arrow business area.

KGS’s fourth quarter 2020 adjusted EBITDA was $16.8 million, down from $17.3 million in the fourth quarter of ’19, reflecting a less favorable mix of revenues and increased R&D costs of approximately $2.4 million. GAAP EPS was $0.62 per share for the quarter compared to $0.03 in the fourth quarter of ’19.

Included in GAAP net income is a $75.3 million tax benefit, primarily reflecting the release of the valuation allowance or reserve on our deferred tax assets relating to our net operating losses or NOL’s. Previously we had recorded a full reserve on the carrying value of the assets related to these NOL’s.

Based on our recent earnings history over the past few years and based upon our long term forecast and expected tax deductions, based upon current tax regulations and the expected utilization of our remaining NOL’s, a substantial portion of the valuation allowance was no longer deem necessary.

Also included in fourth quarter net income is a loss from discontinued operations of $100,000 and a loss from non-controlling interest of $100,000.

Our Q4 ‘20 consolidated operating income was $9 million, down from the fourth quarter of ’19, operating income of $9.3 million, reflecting fourth quarter 2020 increases in stock compensation expense of $3.7 million and increased R&D of $2.6 million in the current period, which was primarily in our Space and Satellite business.

As a reminder, over 80% of our total R&D is typically invested in our Space and Satellite business.

Our adjusted EBITDA for the fourth quarter is from consolidating continuing operations, including net income or loss attributable to non-controlling interests and excludes non cash stock based compensation costs of $6.5 million, acquisition and restructuring related costs of $200,000 and foreign transaction loss of $400,000.

Moving on to the balance sheet and liquidity, our cash balance was $380.8 million at December 27 and we had zero amounts outstanding in our bank line of credit and $5.9 million of letters of credit outstanding. Debt outstanding was $301 million at the quarter end and net cash at quarter end was $79.8 million.

Cash flow generated from operations for the fourth quarter was $25.6 million, less capital expenditures of $12.9 million or free cash flow generated from ops of $12.7 million. For fiscal 2020 cash flow generated from ops was $44.7 million, less capital expenditures of $35.9 million, with free cash flow generated from ops of $8.8 million.

Included in our full year cash flow generated from operations was approximately $9.5 million of employer related payroll taxes that were deferred under the Cares Act, of which 50% or approximately $5 million is due by the end of 2021, and the remaining amount is due at the end of 2022.

Capital expenditures include approximately $9 million of amounts related to the Valkyrie assets we are currently building. Our contract mix for the quarter was 74% related to fixed price contracts, 21% on cost-plus contract and 5% on time and material contracts. Revenues generated from contracts with the U.S.

federal government during the quarter were approximately 71%, including revenues generated from contracts with the DoD, non-DoD federal government agencies and FMS contracts, which were approximately 5%. We generated 9% from commercial customers and 20% from foreign customers.

Our backlog at quarter end was $922.2 million, up sequentially from the third quarter end backlog of $873.1 million, bookings of $254 million and a book-to-bill ratio of 1.2:1 for the fourth quarter of 2020. Funded backlog at quarter end was $643.3 million with $278.9 million unfunded.

Our bookings and pipeline give us visibility into our expected future revenue flow over the next 18 to 24 months. For the year ended 12/27/20, our book-to-bill ratio was 1.4:1 with total bookings of $1.03 billion. Our book-to-bill ratio for the year was 1.4:1 for both our unmanned systems segment and our KGI segment.

And now moving on to financial guidance, we are providing our initial first quarter and full year 2021 guidance of revenues of $185 million to $195 million and $810 million to $850 million and adjusted EBIDA of $12 million to $16 million and $81 million to $87 million respectively.

As Eric mentioned, our guidance reflects the impact of the recent loss of an international training contract, which had contributed over $34.5 million in revenue in 2020 and which is expected to generate approximately $15 million in 2021 or a decrease of $20 million year-over-year and it includes a full year of the recent ASC signal acquisition that closed in mid-2020.

We expect our unmanned systems revenues for fiscal 2021 to be in the range of $210 million to $240 million, reflecting expected target revenues and contribution from recent tactical awards.

We expect to be awarded certain international target awards during fiscal 2021, that we have been pursuing; however, under the new accounting standards under ASC 606, due to the expected contractual terms, the expected revenues will be recorded as delivered, which is not expected until 2022 and thereafter, rather than under a percentage of completion method as work is performed under the contract.

In summary, many of the expected international contract awards will be recorded under a delivery basis, which is expected to be in 2022 and thereafter, rather than over time as work is performed during 2021.

Kratos’s revenue mix for 2021 is expected to be more developmentally weighted, including as a result of the large number of new contract awards that we have received, and includes discretionary investment versus a more mature product lifecycle in 2020.

Discretionary investments include continued R&D expenditures, primarily in our Space and Satellite business, resulting in an expected increase of and R&D of $3 million to $5 million over 2020 levels.

Other discretionary investments include infrastructure cost of approximately $3 million to $4 million related to government mandated cybersecurity or cybersecurity maturity model certification or CMMC costs.

In addition, as Eric mentioned, the results of our Israeli microwave products EBITDA is directly impacted by the strength of the shekel versus the U.S. dollar, which is currently expected to negatively impact 2021 EBITDA by $2 million to $3 million when compared to 2020 exchange rate levels.

We are providing full year 2021 free cash flow guidance of a use of $30 million to $40 million.

Forecasted investments for non-recurring engineering in our Rocket System and Engine Businesses for new products is expected to be approximately $10 million for FY ‘21 and consolidated capital expenditures are estimated to be $55 million to $60 million for 2021.

Approximately $20 million to $25 million of the expected outlay is related to the continued production of Valkyrie aircraft, prior to receipt of expected customer awards, therefore these aircrafts are currently reflected as company owned assets until we see the related customer awards.

Kratos’s will adjust the forecasted CapEx outlays as the ultimate balance sheet classification of these investments, once expected customer orders and the nature of the contract terms can be determined. At which time those expenditures may be reflected as inventory and will impact operating cash flow.

In total, approximately $30 million to $33 million of our expected capital expenditures are related to our unmanned systems segment.

Our expected capital expenditures also include investments in the company's Space and Satellite business secure facilities and expansion of our company owned situational awareness network of approximately $11 million to $15 million.

Capital investments related to the recent GBSD award in our C5ISR business of over $7 million to $8 million, and investments related to the company's Turbine and Rocket System businesses. Included in our 2020 operating cash flow is a benefit of $9.5 million related to the deferred payroll tax.

Related taxes under the Cares Act of which 50% or approximately $5 million is required to be repaid by the end of 2021 and the remainder to be repaid by the end of 2022.

In summary, there is an approximate $15 million negative impact in 2021 operating cash flow when compared to 2020, resulting from the approximate $10 million 2020 payroll tax deferral, plus the approximate $5 million 2021 repayment.

In addition, there is an approximate $10 million of engine related NRE investment expected in ’21, resulting in an aggregate $25 million negative impact to 2021 operating cash flow when compared to 2020.

Kratos’s fiscal year ‘21 guidance includes the current forecast financial contribution from the recent Skyborg AFRL and other tactical joint system contract awards, including those related to Valkyrie.

Kratos’s fiscal year 2021 guidance excludes any contribution from potential additional Valkyrie or other tactical drone production or system contracts with potential additional awards to be taken into consideration in our financial forecast adjusted to once such contracts or orders are received and the related financial contribution can be estimated, which would be dependent on criteria including the type of contract vehicle, scope, timing and period of performance.

.

Thank you.

So as we begin 2021, the organic opportunity set for Kratos across the company has truly never been greater, and over the past several months as a result of certain industry related dynamics, a number of interesting potential acquisition opportunities have arisen and we believe could uniquely and significantly benefit us which we're going to be investigating.

I'm not sure if anything will come out of them, but we're going to be looking at them. With that, I'll turn it over to the moderator for questions..

We have our first question from Ken Herbert from Canaccord. Your line is now open..

Hi Eric and Deanna, good evening!.

Good evening..

Hi!.

Hey Eric, I appreciate all the detail on the programs and the outlook. I guess just at a high level, you know your comments imply very significant sort of opportunity set in a growing opportunity set.

As you look at your portfolio, are there any areas that you’d identify as perhaps at risk if we are in a more challenged budget environment, not necessarily in fiscal ‘22 but enough fiscal ‘23 and beyond. .

The one that comes to mind Ken – and again, we're not the prime and in no way am I speaking for our partner Northrop, would be GBSD and the Strategic Triad, that is the one that that I read about. .

Okay, and on the flip side you obviously lost an ally when Dr. Roper transitioned out of your force. What signals are you getting or what are your conversations like today with your customers in the Air Force and across the military on specifically the tactical drone side.

I mean it sounds like there’s still broad support, but can you point to specific examples that give you confidence that you'll continue to see very strong budget support for the tactical effort. .

I believe that our relationships and support with the Skyborg program office, could not be any stronger than it is. I believe that our support with the Air Force research lab and LCAAT/LCASD. I don't see how it could be any stronger than it is, especially with what’s coming down the pipe for Kretos.

We’ve – a lot of us have done this a long time and we always make sure that there's no single point of failure. I don't want to name names on this line, but we have numerous multiple individuals and offices that are firmly behind a treadable aircraft, affordability, bringing quantities to the flight.

And you've noticed today, I stressed multiple times that Kretos has four jet drones that are flying today that I can tell you about, four of them.

No one else has anything like it and they are becoming operationalized, they are becoming missionized, you heard me talk about IOC is coming, you heard me talk about a new procurement opportunity just came out this week, this is happening and we have the – I believe we have the right products, at the right place, at the right place, at the right time and the customer appreciates that.

.

Perfect! Thanks Eric. I'll stop there and pass it back..

Yes sir. .

Next question is from the line of Noah Poponak from Goldman Sachs. Your line is now open..

Hello everybody!.

Good afternoon sir. .

So you know what Eric you give us a ton of detail there on the programmatic moving pieces and you know obviously you continue to speak to a number of opportunities to grow, but you've also had some things move against you in terms of time lines and you know COVID related delays.

If I zoom out, you know despite all of that you're saying you're going to grow you know about 10% organically top line this year and the margins actually looked pretty flat, despite the incremental investments with the EBITDA margin a little over 10%.

So I guess you know beyond this year, which has a number of kind of transition elements to it, how should we think about – does Krators have a topline organic growth rate that accelerates meaningfully or does it just kind of hang around that 10% range and do the margins expand meaningfully or do they kind of hang around where they are as we move beyond 21?.

Both are forecast in our five year plan to expand meaningful. If current forecasts hold and the only item I can see that would impact us is the ranges and range access, okay. 2022 organically is a step function revenue above, step function about ‘21.

And Space and Satellite, I believe our customers speak for themselves, and we are going to start delivering product, software and product in ‘21 to these customers I've gone through. And on the Tactical Drones side, again if the current plans hold, there is going to be in our drone business a step function and growth next year.

And then back to Ken's question Noah on GBSD, there is a significant step function for Kratos from ’21 to ’22, then from ’22 to ‘23 as we execute on for our partner Northrop. Look, these are under contract. .

Okay. No, that’s helpful. Hopefully you know timeline hold and these things can stick together.

Can you dive a little further into what’s gone on with Valkyrie and your accounting for it, because you know last year you had introduced the notion of it being in your CapEx until you got an order and you said once you got an order you can then move into revenue and it sounded like you only anticipated that happening last year.

Did you move anything into revenue on Valkyrie in 2020 and why is this still happening in 2021, given you had the orders you expect you’d have. .

Sure, so Noah, it depends on the contract in terms of what is awarded.

So if – so for instance if it’s for flight demonstrations or exercises or testing payload etc., then that would be more recorded as those exercise and demonstrations are performed for outright sale of aircraft and it would be on a percentage of completion basis as we're building those aircraft and those costs would be transferred from fixed assets to inventory.

So it depends on the actual make-up of the contractual terms. .

Is that to say that you were expecting production orders and you only got flight demonstration orders?.

Oh no! Oh no! We have received orders for several vehicles. .

Okay. .

That we will be delivering the first one's very soon. But we have to be very careful here Noah, because of the nature of these contracts the government has not disclosed, okay.

But we will be delivering and the government customers, because we have several that have ordered aircraft, we’ll be taking, it’s my word here, title ownership, transfer of the aircraft to them beginning this year and then continuing into next year and as I indicated in my remarks, we're planning on more to come as we move through the year. .

Okay, so the $50 million to $60 million of revenue that you mentioned in your 2021 plan for Tactical Drone, is that basically the Valkyrie orders you've received so far. .

It’s a big part of it..

Yes, sir. .

And then how are you thinking about the potential for more orders in this year that convert this year or should we think about incremental orders this year and beyond convert beyond ‘21. .

It depends on the nature of the contract. If the contract is such that we receive something say in June or July, and ownership begins transferring of the work in progress, then it’s percent complete.

If the nature of the contract and there's one in particular we are working on, where it's not until delivery of hers and they sign-off on acceptance with the DD-250, the revenue, we won't get it until Q1 of ‘22. .

Okay. Okay, I'll leave it there and maybe follow-up, but thanks so much. I appreciate it. .

Okay. Thank you, sir. .

We have our next question from Greg Konrad from Jefferies. Your line is now open..

Good evening. .

Good evening. .

You ended the script at kind of a cliffhanger talking about acquisition opportunities that may or may not materialize.

Any other details or at least appetite or maybe areas that you're seeing in organic opportunities?.

So Greg, as you know over the past multiple years we have been focused organically and that’s come into fruition over this year and it’s going to be accelerating like I said next year and thereafter, and we’ve stayed away from anything large, we've done tuck-ins.

There are some certain dynamics that have or are happening out there in the industry, that have brought potential opportunities to us, that are right in our daily-way, like we are not going to do anything outside of it, right in our daily-work.

That could truly be for us one plus one equals four or five, not plus one equals one, equals two, one plus one equals two. And we are going to – and because of that change and potential mindset, we’ll have to see happens. I wanted to mention that to the group here, because you know we've then focused primarily organically. .

That’s helpful. And then can you just remind us of the size of the Space business today. And you mentioned needle moving space opportunities. I think you talked a little bit about them in the script, but any other detail around size timing or just kind of the potential trajectory of the overall space business. .

Sure, Greg. So its current business is just a little over $200 million currently. .

Perfect!.

And Greg, on the second part of your question. So here until four, a large opportunity for us, would typically say, be less than $50 million, okay.

Right now because of some of the changes I've talked about in the procurement posture by the customers, which is incredibly favorable for Kratos okay, we have several opportunities we’re bidding as prim over $100 million. This has never happened to us before and these are real, and this is what the customer wants.

The customer wants to disaggregate the aggregation of buying space, satellite and ground, and we have the technology advantage now with OpenSpace. And so with the technology advantage, and the change in the customer posture, and you have to calibrate, because you know the glass is always 90% for full. We are going to win some of these.

We are very well positioned technologically and price. .

Thank you, that’s helpful. Thank you.

Have a good night!.

Next is Mike Crawford from B. Riley Securities. Your line is now open. .

Thank you. With the additional lot of Skyborg, Valkyrie builds contemplated to start later in the year and also this NRE related to the military jet, turbine engines you have and a little bit of additional CapEx this year.

But do you expect CapEx then to come back down to like it $20 million or $30 million or lower level in ’22 and beyond or might there always be these sections that will do..

Yes, we expect it to come down. .

Yeah, so we have. Mike, it would probably be more normalized in that $25 million to $30 million range. .

Okay, excellent! And then with – you mentioned briefly your partnership with AV, AeroVironment, where this is what they – you’re contemplating putting the switchblade into one of your drones. .

I – Mike, I'm hesitating because I just don't know if it's been disclosed, precisely which variants of their drones were doing. So we are integrating certain of their drones into our aircraft and again, I'm not being quiet – I just don't want to miss speak here on which variant, because they have come out with some new variants. .

Okay, and then back to your engine business, can you disclose like maybe what was the commercial Aero revenue associated with those two businesses you acquired, say in 2019 versus 2020 and where that level might be this year before it potentially rebounds in ’22, ‘23. .

Yes, so the COVID related impacts were over $10 million in 2020 Mike. So they were down from about, and I don’t have the precise numbers, but I want to say they were about $19 million closer to $20 million and then down to $10 million in 2020. .

And for ’21. .

It’s looking….

We forecasted Mike, even substantially less than that. .

Okay and just finally, there are some outsized potential, hypersonics related opportunities, particularly with the engines and are those also pushing to the right due to travel another restrictions or are any of those getting closer to a decision point. .

They are not pushing to the right, because of – thus far because of COVID or travel, okay. However on two large hypersonic programs, we are on that are publicly out there, okay. We were scheduled to do several launches for our customers this year. Those help move into Q1 or Q2 of ‘22 for reasons not related to COVID. .

Okay. Thank you Eric and Deanna. .

Thank you. .

Thanks Mike. .

We have our next question from Peter Arment from Baird. Your line is now open. Oh sorry! We have Michael Ciarmoli from Truist Securities. Your line is open..

Hey, good evening Eric and Deanna. Thanks for taking the questions. Eric, just on the Valkyrie’s and obviously you know you're building them on your own time right now. I mean the expectation is to calibrate. Also I think you said they will start – you’ll deliver the first one in 2Q or 3Q, I mean and you got a lot of 12.

So should we think eight to 10 realistic this year and as obviously COVID ranges. But it is seemingly below your expectations of how fast you would've been able to build and deploy this. .

I see your question. Yes, we are doing our best to match them coming off the line with the customer. That's what we're doing our best, so they don't sit in capital for an extended period. So it could be six to 10 this year, okay, just depending on that customer dynamic.

Now Mike I’m glad you asked this question, because there is another opportunity coming that we're going after, that I think we're going to get and it's an opportunity where we will own the aircraft, and this is the wrong word, the government will lease them for ops.

They’ll pay a service fee for ops, and so that’s a potential that we're seeing too for these aircraft. .

Got it, and then just you know I think you may have answered Ken's question around one of the challenges maybe or headwinds being to access.

I mean as you sit here today, how are you thinking about the competition? It seems like you know, the various agencies you are working with have given your potential competition ample time to sort of catch up to you and close that gap.

How are you realizing no ones flown yet, but how are you looking at some of these decisions, delays, you know the competition obviously having time to prove their own platforms?.

Right.

As you guys and gals that know me, you know I have ants in my pants, and so the delays, I don't like them one bit, because we are doing everything we can to match Kratos with what the Pentagon is staying at the top priority, which is to rapidly develop, demonstrate and field systems, including digital engineering which of course we are a leader in that.

We don't talk about that much, but we are an industry leader in that, probably second to none on that.

And we have the capability and like we're doing it we are popping out a new aircraft every couple three years and so it’s – I understand it, I don't like it, I'm very frustrated, but we will win, and the reason we are going to win, is we have a family of aircraft flying today. They are being mechanized and operationalized, okay.

They are incredibly affordable compared to anything the competition can do. Why is that? Because we are producing hundreds of target drones, and so we are left right off that supply chain, the materials, the engines, the electronics, the avionics, the wire harnesses, I can go on and on.

We are leveraging off of all the quantities we are buying for the target drones, which is driving down the cost of our tactical drones. No one has that, no one has that potential, they cannot do it, alright. And you mentioned, no one has anything flying today, you are right. This is hard.

These aircrafts that we can talk about, that I can talk about here, they go up to Mark 0.95 and put an incredible amount of Gs and do certain things, and a lot of it is on autonomous systems, I'm not going to call it fully AI yet.

This is not easy, and again the fact that we do hundreds of hundreds of flights with our target drones, what you just switch out the payloads and switch out certain things and it’s a Tactical Drone. This has given us an incredible advantage and this is why we will win. .

Got it! And then one last one maybe, kind of a little housekeeping Deanna. I think you said some of the international awards and programs are going to be more delivery waited versus percent of completion. Is that creating a bit of a revenue headwind this year and should we expect maybe a little bit more of a step function then in next year..

Absolutely, yes. Yeah, because just with the contractual terms under international contracts typically they would not fall under Kratos complete. So under the new revenue recognition standards, so that will be based on delivery which would push it out a year or so. .

Would you qualify that or no?.

Mike I’d say this year, I think we're going to be building 30 to 50 target drones for international customers. .

Okay. .

Think about that, 30 or 50. .

Okay, helpful. Thanks guys. .

Thank you..

We have our next question from Peter Arment from Baird. Your line is now open. .

Yeah, thank you. Good evening Eric and Deanna. Eric you have talked a lot about in the past you know on getting the unmanned segment up to kind of $250 million in revenues or at least approaching that.

Do we get that this year or is that just because some of the delays that you've seen, that are out of your control that you're not going to, you won’t be able to hit that. .

Yeah, we are not going to get there this year. I talked about – good to hear from you Peter. I talked about it in my prepared remarks. That army contract, that army program we won was just under a $100 million a couple years ago. I can't get into the reasons, why but that is rolling out far slower than we thought, it just is.

We have another program, I can't talk much about it at all, but we are under contract, we are working our way through. That has been pushed out, full reproduction has been pushed out a couple of years.

And as Deanna just said, this international, this new accounting rule with these international ones where we would typically do percent complete, and we’d get the revenue as we’d be building them, now we are going to get the revenue on certain of these upon delivery. And so as we were just chatting with Mr.

Ciarmoli, I think it's somewhere between 30 and 50 international target drones this year, but we are not going to deliver the ‘22 or ‘23. And a bunch of those are you know revenue recognition is on delivery and so that’s moved that out, and so that's why. But the opportunity set is still there, those are the dynamics that are around it. .

That’s helpful. And you also, just on Gremlins push out, it’s got nothing to do with your system. Obviously the DARPA still hasn’t, I guess is still trying to validate the recovery system. Is that the main factor you're seeing it kind of slide to the right by 12 months or so. .

Oh, no, no, no. The Dynetics system is incredible, it's incredible. Remember, we've had two impacts here. Number one was the massive earthquake a year and a half ago at China Like, where the demonstrations likely were supposed to be. If you pull up China Lake earthquake, it was like $7 billion to the range. That was the first delay.

That delayed us six months until I think we went to Dugway, okay. Then COVID hit, and the COVID and think about the range operations, you got to go into the command centers. There's no way you can social distance in a command center out there.

There was a DoD travel restrictions etc., etc., and this is why like in the past couple months the DARPA program manager, and I'm going to paraphrase here, I don't remember exactly what he said, but he said we've been pushed out approximately a year or more because of these types of things. .

Okay, that's really helpful color. I appreciate all the details as always. Thanks. I’ll hop back..

Thank you, sir. .

Next question a Seth Seifman from JPMorgan. Your line is now open. .

Thanks very much. Good evening Eric and Deanna. One thing I just wanted to clarify, the $210 million to $240 million of unmanned revenue that you talked about for ’21, does that include the $50 million to $60 million of growth on Tactical Drones. .

Yeah, it includes $50 million to $60 million of Tactical Drones, that's not growth, that’s absolute dollars for Tactical, yes. .

Right, okay, okay. Got it.

Okay, was there meaningful Tactical Drone revenue in 2020?.

There was. So that was some of the development classified work that we were working on, so it was in the range of 20 plus..

Right, okay, okay. Okay so the growth there is from $20 million up to - going from $20 million up to that $50 million to $60 million range..

That’s correct, yes. .

Okay, okay.

And then, not to totally belabor the point, but just to understand a little bit better the Valkyrie accounting, I guess the orders that you have thus far cover an undisclosed portion of the initial 12 that you were building, and what you’ll be building next year, the CapEx covers a remaining portion of those 12-plus the one to two a month that you are thinking about building there after?.

Correct. .

Yeah, except, the customers have not disclosed, how many aircraft they’re build – they are picturing from us, its several. We are – we cannot, we are under strict guidance, we cannot get ahead of them on this. .

Right, but there are percentage of completion, right. .

Potentially, so its now – I think ….

A - Eric DeMarco:.

I’ll just refer back to the – I think it was the question Noah had asked. It depends on the specific contract terms and delivery etc. and what the deliverable is. .

Right, right and the ones that are already under contract, maybe it's not something that’s discloseable.

The ones that are of the 12, the ones that are already under contract, are those percentage of completion or delivery?.

We're not going to say, we can’t say. .

Fair enough, that’s fair enough. Okay, a totally different question then, you know Eric you talked about M&A a little bit there at the end and talked about what sounds like some really interesting opportunities.

I guess just when you think about, you know what kind of capacity you have and what you might want the balance sheet to look like, and all that kind of stuff.

What color can you put around that in the context of the M&A opportunities you described?.

We are very fortunate right now that we are in my opinion a substantial net cash positive position. We have no – those are bonds, so that means we have significant debt capability, if we want to go that route.

We are positioned where we can be very flexible with where we are at, depending on if any of these items that are, we are assessing and as I said right out front, I don't know if anything will happen here, I really don't. But they have to be perfect for us, we're not a big acquiring company.

But these are so interesting, and these like I said, these are not one plus one equals two. These are – and I’m talking about going after and winning new work, big programs. These are one plus one equals four. It depends on obviously what it would look like and what it would take, but right now we feel comfortable with all of our options. .

Okay, great. Thanks very much. .

Okay, thank you. .

Next is a Joe Gomes from NOBLE Capital. Your line is now open. .

Good evening. .

Good afternoon. .

So most of my questions have been answered here already, but I’ll take a different tact. You put out a press release earlier this month about your autonomous truck. I was wondering maybe if you’ll give us a little more color on that and what that might mean to the company.

What kind of addressable market are we talking about here?.

Joe, if you could see, I'm smiling ear-to-ear because no one ever asked that question, and I purposely don't talk about this, because this is one of a handful of areas where we’re going to sneak up on the market in a very, very positive way.

So as you're alluding to, we're not developing something, we have taken military technology on autonomous vehicles, okay, like autonomous tanks, autonomous trucks, and we have commercialized it and we have the strategic agreement with a number of players including Royal Trucking and we are now rolling this out across the U.S., I think we are in six, seven, eight states already.

The opportunity pipeline is incredible and the market expansion and other areas, because we're proving this out from a safety standpoint, a reduction in cost standpoint, a green – and I don’t focus on that much at all, a green standpoint.

It is significant and this year could be the year where we announced we've landed this, which will be meaningful up financially for us in ‘22. So it's an incredible technology that our guys down at of Florida developed for the military, and we are exploiting it commercially, and no one has anything like this. We are the industry leader. .

Thanks for that Eric. Appreciate it. Thank you for your time. .

Thanks for asking the question. .

Next is Noah Poponak from Goldman Sachs. Your line is now open. .

Eric, are you looking at more acquisition candidates or larger acquisition candidates. .

Larger. This is a not – good question. This is not a quantity thing. These are very specific that have come to us. .

And, should we be thinking about size of your cash balance or size of your cash balance plus you know what you’d had if you took leverage to two or three turns or should we be thinking you would potentially issue equity for something transformational or would you rule that out. .

I don’t know yet and let me tell you why. You know, the debt interest rates right now are incredibly low, they are incredibly low, that would be one path.

Depending on the size we may be able to handle it with what we have and not significantly debt of the company at all, because of our EBITDA and our cash position and EBITDA and the balance sheet construct of the potential targets.

If it’s a certain type of opportunity and with the seller etc., you know maybe it’s a combination of those, maybe there’s some equity involved, I truly just don't know yet, but what I indicated before, we are very fortunate we're in a position where all those alternatives are open to us.

But Noah, very importantly, don't look for us to come out of anything in the significant leverage position. .

Okay. .

We’re not going to do that. We’re not going to do that. .

That’s helpful.

How much revenue did you lose out of 2021 from the accounting change on the international items?.

I'm going to do a total guess here. So I’m going to pick the mid-point of my number. So if we’re at like 40 drones and it’s a mix of fire jets etc., I'm going to say 15 to 20, maybe 20. 15 to 20 Deanna’s nodding. 15 to 20, 25 in there, just depending on the percent complete that moved. .

Okay, great, thank you. .

Thank you. .

No further questions at this time. I turn the call back over to Mr. Eric DeMarco..

Great! Thank you for joining us today and I know that this one, the prepared remarks were a little longer that usually. It’s because obviously it was the end of the year.

We haven't had a chance to chat with you in four or five months and there have been a lot of exciting things that have happened in our Space business, which is really looking good and obviously in the drone business. So thank you very much for joining us. .

Ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect..