Q4 2023 Kratos Defense and Security Solutions Inc Earnings Call
Participants
Marie Mendoza; Senior Vice President, General Counsel; Kratos Defense and Security Solutions Inc
Eric DeMarco; President, Chief Executive Officer, Director; Kratos Defense and Security Solutions Inc
Deanna Lund; Director; Kratos Defense and Security Solutions Inc
Michael Ciarmoli; Analyst; Truist Securities
Peter Arment; Analyst; Robert W. Baird & Co., Inc.
Seth Seifman; Analyst; JPMorgan
Mike Crawford; Analyst; B. Riley Securities
Ken Herbert; Analyst; RBC Capital Markets
Pete Skibitski; Analyst; Alembic Global Advisors
Joe Gomes; Analyst; Noble Financial Capital Markets
Sheila Kahyaoglu; Analyst; Jefferies
Presentation
Operator
Thank you for standing by, and welcome to Kratos Defense and Security Solutions' fourth-quarter 2023 earnings conference call. (Operator Instructions)
I would now like to hand the call over to VP and General Counsel of Marie Mendoza. Please go ahead.
Marie Mendoza
Thank you. Good afternoon, everyone. Thank you for joining us for the Kratos Defense & Security Solutions fourth-quarter and full-year 2023 conference call. With me today is Eric DeMarco, Kratos's President and Chief Executive Officer; and Deanna Lund, Kratos's 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, financial guidance, and other forward-looking statements 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.
Eric DeMarco
Thank you, Maria, and good afternoon, everybody. In 2023, Kratos achieved each of the goals we laid out at the beginning of the year, including 10% organic revenue growth, increased EBITDA with positive cash flow generation, while also making significant internally funded investments and potential transformational growth areas for our company.
Expected growth areas include high-performance jet drone systems, hypersonic rocket motors and systems, next-generation jet engines for drones, missiles, and loitering munitions, and open space software for virtual live satellite C2 and TT&C. Kratos's product systems and software, which we envision, design, and engineer from the outset to be produced in large quantities at a low-cost or a value-added differentiator for our customers, and also importantly, for our prime system integrator partners and teammates.
Kratos's relationships with the prime system integrators, including our being able to rapidly provide relevant, low-cost, differentiated and value-enhancing products, hardware, and systems, is a key element of Kratos's strategy, and it's core to our company's success at cradles. We believe that it's better to have a big part of something instead of all of nothing. And based on the program's requirements, including schedule, the potential size of Accredo's investment required the technical development and financial risk to creatives and also expected customer preferences. We may team with one or more of our prime partners on certain program opportunities instead of creators priming ourselves. We believe this teaming or partnership approach has been very successful, including recently on a high-profile program.
On last quarter's conference call, I mentioned that we were expending significant effort including bid, proposal, NRE and other costs in pursuit of certain large opportunities. As an update, we have successfully received potentially the most important of these contracts and Kratos's unmanned systems business with the prime partner on a second opportunity, a different Kratos' prime partner was awarded a new missile defense system related satellite constellation program, where Kratos is responsible for the ground system Thirdly, we have been informed that Accredo's Turbine Technologies proposal was accepted and we are now waiting for our customer to receive funding, hopefully in Q three. And finally, cradles made the decision to pass on an opportunity as a prime due to the size of the cradles internal investment required the financial risks to cradles on this development program and our assessment of an unacceptable unacceptable probability of creators win. There are several additional notable opportunities that Kratos is currently assessing or in pursuit of including where we are making significant investments, which hopefully we will be able to update you in the future.
As we begin 2024, we are under contract on numerous programs of record either as prime or partnered. These include new programs currently in development programs transitioning to low rate initial production programs that are in our rep and transitioning to full rate production and programs that are in full-rate production already where we expect increased future production quantities. Additionally, Kratos's opportunity pipeline is approximately 11 billion and our backlog is 1.2 billion, all providing us confidence in our 2024 financial forecast. Additional recent cradles achievements include a $579 million prime single award space for satellite communication system related contract, which we were able to announce today SpaceX Force contract covers the command and control consolidation system used for Satcom telemetry tracking, Command, sustainment and resiliency. The receipt of this award, which was cradles. This only large outstanding re-compete provides cradles, both future visibility and an opportunity for growth as reflected by the significant contract ceiling value increase of approximately 50% over the previous contract vehicle as the number of satellites in orbit has and is expected to continue to increase contributing to the overall expected increase in this contract scope. It was reported that cradles and Boeing have executed a memorandum of understanding for Kratos's TDIJ. 85 jet engines to be the propulsion provider for the Boeing powered Joint Direct Attack munition. It is anticipated that the power JDAM will provide air launched low cost standoff capability against land and maritime threats. We received an approximate $23 million prime contract from the United States Marine Corps related to Kratos Valkyrie tactical drone, and we received significant contract awards related to the Iron Dome and the Patriot Air Defense Systems. It was also reported that Kratos' Terrier, Oriel two-stage rocket system was the propulsion system for the V-Max hypersonic system launch. And it was reported that recent testing of a sophisticated AI. software aboard and XQ 58 A. Valkyrie drone will influence how the U.S. Air Force develops and deploys autonomous technologies for 2024. Expected cradles growth areas which are included in our base case financial forecast include turbo jet turbofan and rocket engines for unmanned aerial drones, loitering munitions, cruise missiles, hypersonic systems, supersonic platforms, space and other systems increased target drone sales with target drones being used by the U.S. and our allies to exercise radar, air defense fighter aircraft, maritime, counter-UAS and other platforms and systems, all of which are in increasing demand globally. Hardware and product sales growth related to air defense, counter-UAS radar and missile systems, including and Kratos' C5ISR and our microwave Electronic Products business. These include systems that are currently in theater in both Europe and the Middle East, and we expect the Sentinel program with our prime partner, Northrop to also be a 2024 organic growth driver. We expect to see growth in Kratos' space, satellite and Training Systems division, including particularly strong growth in virtual augmented reality and other training systems. In 2024, we expect Kratos's first to market virtualized software-based open space C. two and TT. and C. suite to continue to gain customer acceptance and designed and positions. Additionally, we are currently forecasting for 2025 to be an inflection point year for radio satellite business, both in organic revenue growth and in profit generation based on programs we have successfully received those we expect to receive and those we expect to either transition to or begin production or deployment on in the tactical drone area. We believe that Kratos remains well positioned for this new large and expected to be fast growing market area, both with Kratos' drones and also with Kratos's family of turbo jet and our turbofan engines, tactical drone initiatives we are able to discuss publicly include we are under a funded contract and have completed a successful series of mission system and related flights, including as related to Kratos's Mako tactical jet drone system. We are under a funded contract and our integrated creative and integrating cradles of jet engines into Kratos' drones. Kratos' ghost works is completing ground testing of a new drone related system at our burns flat range location, which program we expect to transition in the future to a larger range for final system demonstration. We had hoped to transition the system to a larger range in Q4, but we were unable to do so. We are moving rapidly with SHIELD II. integrating shields, artificial intelligence into multiple cradles jet drones with flights being held at cradles as burns flat range facility. We are completing production of the last of the initial 12 Valkyries and we are in production on the second 12 Valkyries, which production rate we are calibrating now based on Kratos's internal resource allocation considerations, including as related to the new funded drone system program we have received we are under funded contract for a Valkyrie variant where mission and other systems are being integrated. We are working with the government entity on a separate Valkyrie variant with funded first flights expected in the fourth quarter of this year. And Kratos' ghost works is working on an additional Valkyrie variant, which new capability performance and low cost, we believe will be another step function ahead for Kratos' tactical drone family. There are currently four Valkyrie variants that I can publicly confirm today and a fifth that Kratos' ghost works is currently assessing. We expect to receive the largest Valkyrie related contract award to date in late 2024. And I am confident that all 24 Valkyries we have produced or planned to complete production on will ultimately be sold and delivered to funded customers. We are establishing an additional production line for the new drone system program that we are under contract on with the partner. We believe that once we have the 2024 US federal budget that cradle sustained autos will receive a funded prime contract based on recent events. It is also possible that we will receive a funded prime contract for Kratos's ATHENA drone program system late this year or early next year to initial derivatives of both sanitize and Athena, our flying today with customers. I expect Kratos's Valkyrie, Mako Air will Donatos Athena and other cradles tactical drones to be successful. And we continue to progress with multiple funded customers, entities or partners, including for system mission innovation, concept of operations, payload integration, et cetera. However, we will remain conservative and we have included no tactical drone production assumptions in Kratos's 2024 base case financial forecast, only S. and TRDT. and E., and similar funded development initiatives or programs, major initiatives and opportunities. Kratos currently plans to invest in or pursue in 2024 include we are establishing production facilities for Kratos's jet engines, including for missiles, drones, loitering and powered munitions for several platforms, systems and opportunities that we are currently under funded development contract on. We are completing cradles as Sentinel program, ground transport or production facility, which will be one of the largest and advanced technology secure production facilities in our company, which we are under a funded contract on. You're establishing the production line for the new system and Kratos's unmanned systems division I mentioned previously, which we are under a customer funded contract and which is one of the most important programs in our company. We're completing the Zeus one and Zeus two engines and preparing these systems for production and vehicle system integration, including as related to a customer funded hypersonic program we have and other customer initiatives. We're completing cradles severities and dark Fury hypersonic systems and beginning the build out of the related production integration facilities, also for which we have a funded customer contract. We currently expect to receive in 2020 for a customer funded contract for approximately 25 cradles Oriole rocket systems, which we will need to prepare for and execute on once received all related to future launch missions. We are establishing a new space, qualified microwave electronics development and manufacturing facility in Israel to support new funded Space System program awards. We have received others we expect to receive and we are expanding our existing production and manufacturing facility to meet the increased capacity and production requirements we're seeing we will also complete enhancements to an expansion of our U. S baseband microwave electronics manufacturing facility. We are establishing the facility and acquiring the machinery and equipment, including 3D and additive manufacturing equipment for Kratos's materials, production center of excellence, where we are vertically integrating the production of Kratos's jet engines space propulsion and other programs and systems, most of which are already or are expected to be under funded government contracts. We are also in discussions regarding new teaming or partner agreements related to significantly expanding Kratos's core business areas, including product system, software and technology, all of which have funded customer support. And this includes KTTR. turbine business and our blade engine initiatives. These examples are representative of the large number of opportunities cradles has and expects to receive and why 2024 is expected to be a significant internal investment and capital expenditure year as we prepare cradles to execute on recently received funded programs, and we position cradles to successfully receive additional expected large new programs. We believe that the industry and cradles are in a once-in-a-generation global buildup of defense and security due to the geopolitical and overall increased threat environment. As a result, as a result of this strategic system build up the number and size of the potential opportunities that cradles has and continues to receive has never been greater, and we expect Kratos's future opportunity set to continue to increase, including based on discussions with our customers and also our prime system integrator partners. Accordingly, Kratos is focused on successful execution of our existing programs and contracts and making the required internally funded investments in order to be qualified to successfully win, pursue and win these new opportunities. Accordingly, Kratos has no plans for any acquisitions of any size. Operational challenges include the obtaining and retaining of qualified personnel, including those willing and able to obtain a national security clearance and the related high and increasing cost of these individuals and of the supply chain, which is adversely impacting cradles as margins and also resource and capital allocation management as we execute on existing programs that we pursue new opportunities for Kratos's 2024 financial plan. We are currently forecasting two three and in particular Q4 to be stronger than the first half of the year, which is directly related to the government contracting offices having to get funding under contract in a shortened time period as a result of the current CRA going through at least March eighth for four plus months into government fiscal 2024. If the CRA goes beyond March 8th of this year, we will take a look at the cradles program portfolio and the facts and circumstances at that time and determine if any adjustment to our forecast is required. Deanna?
Deanna Lund
Thank you, Eric. Good afternoon. As we have included a detailed summary of the fourth quarter and full year 2023 financial performance as well as the initial first quarter and full year 2024 financial guidance in the press release published earlier today, I will focus on the highlights in my remarks today. Revenues for the fourth quarter were $273.8 million, exceeding our estimated range of 237 to $257 million, which includes higher than expected performance and delivery in our Space and Satellite turbine technologies, C5ISR and Microwave Products businesses, resulting in 17% organic growth in our KGS segment for the fourth quarter of 2023 as compared to the fourth quarter of 2022. Adjusted EBITDA for the fourth quarter 2023 was $29.1 million, exceeding our estimated range of 19 to $23 million, reflecting the additional revenues as well as a more favorable mix of revenues, including more higher-margin software and data related content than forecasted in our space and satellite business. Free cash flow generated from operations of $48.1 million after funding CapEx of $19.3 million came in above our estimated range of breakeven free cash flow for the fourth quarter of 2023, reflecting the increased revenues and EBITDA generated during the quarter, as well as favorable timing on accelerated customer milestone payments collected in our turbine technologies, Unmanned Systems and Space and Satellite businesses, which more than offset our previous estimated shift in certain payment milestones in our training solutions and C5ISR businesses consolidated DSOs or days sales outstanding continued to improve from 119 days in the third quarter to 109 days in the fourth quarter of 23 with approximately $34 million in net cash generation from customer receivables during the fourth quarter, which included certain favorable customer milestone payments. In addition, advance payments or deferred revenues increased $11 million during the fourth quarter. For full year 2023, revenues were $1.037 billion or an organic growth rate of 12.6% above FY 22 revenues and above our estimated range of one to 1.02 billion, including higher than expected performance and delivery in our Space and Satellite turbine technologies and Microwave Products businesses. Full year adjusted EBITDA was 95.4 million, above our expected range of 85 to 89 million, reflected reflecting the increased revenues and also a more favorable mix of revenues. Cash flow generated from operations for full year 23 was $65.2 million and free cash flow generated from operations was $21.1 million after funding of capital expenditures of $52.4 million, less $8.3 million in receipts of proceeds for sales of Valkyries that were built as Kratos' capital assets. As mentioned earlier, cash flow was positively impacted by favorable customer payment milestone receipts in our turbine technologies, Unmanned Systems and Space and Satellite businesses, which more than offset the shift in previously expected payment milestones in our training solutions and C5ISR businesses.
Our contract mix for the fourth quarter of 23 was 71% of revenues generated from fixed-price contracts. 24% of our revenues generally generated from cost-plus type contracts and 5% of revenues generated from time and material contracts. Revenues generated from contracts with the U.S. federal government during the fourth quarter of 2023 were approximately 69%, including revenues generated from contracts with the DoD, non-DoD federal government agencies and FMS contracts. We generated 13% of revenues from commercial commercial customers and 18% from foreign customers in the fourth quarter. We continue to make progress in our hiring and retention of skilled technical labor across the Company with total headcount of 39 32 employees at the end of 2023 compared to 36 45 at the end of 2022.
Now moving on to financial guidance. Our initial first quarter and full year 2024 financial guidance we provided today includes our current forecasted business mix and current delivery schedules and our assumptions related to the expected impact of the continued operating challenge related to our obtaining and retaining qualified technical personnel and the related increased cost for these employees and across our entire labor base. Our guidance also includes our assumptions related to the continued impact of supply chain disruptions, inflation and related expected costs and price increases. Our first quarter and full year 2024 guidance reflects the impact of certain performance and deliveries in the fourth quarter of 2023, certain of which had been originally estimated to be executed or delivered in the first quarter of 2024. As Eric mentioned earlier, we are forecasting that our Unmanned Systems business will be one of our leading growth drivers in 2024, which is currently forecasted to generate 260 to $270 million in revenues, reflecting approximately 20% to 25% organic growth over 2023. Our 2024 cash flow estimates include investments in elevated capital expenditures, as Eric discussed earlier, on a base case, estimated range of 70 to $80 million which includes the second production build per Valkyries of approximately $20 million in anticipation of customer requirements and demand approximately 10 to $13 million to expand and build out our microwave Israeli production facility, which includes expansion and improvements related to being space qualified approximately 10 to 12 million to establish Kratos's material production center of excellence and approximately 5 to 7 million to expand our global satellite sensor network in response to specific customer contractual requirement, which specific expansion costs are expected to be recovered under customer contracts. Importantly, a US government budget was not passed by October first, 2023, the beginning of federal fiscal year 2024. And as a result, Kratos and the industry are operating under a continuing resolution authorization, which currently expires March eighth, 2024, under which no new contracts and no increases in increase in contract production or funding, among other stipulations, is permitted.
Kratos's 2024 financial forecast and guidance provided today assumes that the current CRA will be resolved and that a US federal and DoD budget will be in place by March eighth as a result, similar to Kratos's 2023 quarterly financial trajectory, which fiscal year also experienced a CRA. We are forecasting Kratos's third and fourth financial quarter results of 2024 to be significantly greater than the fiscal first and second quarter results with the fourth quarter expected to be particularly strong in both revenue and EBITDA. If the current CRA goes beyond March eighth, we will evaluate Kratos's 2024 financial forecast at that time based on the existing facts, circumstances and expectations.
Eric DeMarco
Great. Thank you, Deanna, and I will turn it over to the moderator now for questions.
Question and Answer Session
Operator
(Operator Instructions)
Michael Ciarmoli, of Truist capital. Please go ahead.
Michael Ciarmoli
Michael Hey, good evening, guys. Nice results. Thanks for taking the questions on Eric, sort of level set us on on some of the higher profile opportunities. I mean, we've seen, you know, the CCA, I guess, is selected five firms. I guess there's going to be a down-select to two. You're ahead of UA. As I said there, you're hopeful of being on the next increment? And then I guess also, right along with that replicator kind of tranche one and two, how should we think about it the opportunity set here in the near term we, um, we are the absolute low cost rapid provider of Jet drugs, and that's that's arguable.
Eric DeMarco
It's well known by the government and by the primes. So we are uniquely positioned we believe for every opportunity that's been talked about publicly and some new ones that are coming that have not yet been talked about publicly as either the prime or as a key partner with somebody. That's how we see it. And on certain bets on aircraft on certain classes of them that are coming not only on the aircraft side. We're also positioned with our jet engines. So we are we are uniquely positioned, Mike for what's going on in the drone area across every service French.
Okay.
Michael Ciarmoli
Can you guys I mean, as you look at the pipeline of opportunities which increased significantly. I mean, our are these two programs in that pipeline.
Eric DeMarco
I'm not a notch or which I want to make sure I answer the question, Mike, or which of the two programs in what was a collaborative combat aircraft and replicator?
Yes, we are every drilling program that's out there where we're expected to be and I'll leave it at that.
Michael Ciarmoli
Okay, fair enough. And then just on the on, you mentioned a couple of times about the Valkyrie and different variants. I mean, can you give us a little bit of color on those variants. You know, I mean, I guess since you're still self-funding and using your own CapEx to build these water, what are some of the if you can even talk to the variance, I mean, I'm assuming, you know, extended range, different payloads, you know, maybe even you know, landing gear, but there are those kind of what customers might be looking for out of the Valkyrie?
Eric DeMarco
Yes, yes, and yes.
Okay.
Okay.
Fair enough. I'll jump back in the queue and keep it at that. Thanks.
That is to.
Operator
Thank you. Our next question comes from the line of Peter Arment of Baird. Your question please, Peter.
Peter Arment
Good afternoon, Eric and Deanna. Eric.
Yes, Aaron Berg and on I guess the whole teaming approach was this, can you maybe just give us how this kind of evolve? Is this something you I've kind of been planning or thinking about over the last year. What was the best kind of I guess how would you describe it in terms of working with primes versus going into?
Yes, probably couple of years ago on Peter when a when the different classes of the drones that the government was looking at starting to get more refined between expendables, it triples exquisite, we looked at our and the various weapons systems, they would carry and development and certain of the characteristics they would have we arm we huddled internally and we made some strategic platforms that we would in certain areas that are obvious like expendables disposables or triples that's like right in our sweet spot and all things being equal, we would look to prime those. There are some areas we might not if they're carrying certain mission systems that are very unique that the customer wants to have integrated and a prime has that mission system on as you move up the capability ladder. It may we decided it probably would make more sense from a P. what probability win standpoint, if we looked at it on a on a biggie And we said, okay, our probability of win is 25%. We have to invest in making this up $100 million. If we go at it alone to be the prime or our probability of when we think of 90%, we get significant content on something too, and our investment is significantly less than that. With everything we have going on, we would choose the latter there. And so a couple of years ago, we started looking at it that way, and that's that's an approach we've been taking across cradles in many areas, drones, hypersonic systems jet engines, we can jet engines. You'll be seeing that. I think soon it's the way we're doing it. We're partnering with with the best companies in the world, the prime system integrators and they're our partners. They are the best companies in the world at certain things. No one can do it better, and we partner with them when it increases our P. win. Certainly, it seems like an inflection year for your tactical drones on your the jet engine production that you're kind of investing in CapEx. Is that expected to be completed this year? Or do we think that this kind of runs into 25 as well?
Yes. So on the on the programs that we've won that we're on and that we have vision that are going into production. Those were getting done this year. However, however, there are several others. There is a lot going on in loitering munitions, cruise missiles and low cost jet drones. So probably second half of this year, I think we're going to be awarded production on some others, which means we'll have to establish some additional production lines because it's a different size of engine. So I think this is probably going to be a process probably for the next 24 months, but it will definitely be tied to programs that were designed in on and going into production. It will not be a build it and hope they come.
And just lastly, you've had a flurry of press releases since I guess broken out November, December and with some of these large awards and you got one here in January that you didn't give any kind of time line on it was I think it was the 50 million hardware and radar for MCUS. Can you talk a little bit about how these kind of roll out and when do they start to inflect more on the top line.
Yes. So that's that that CAD50 million, one that's going to roll out starting second half of this year, and it's going to it will be done probably nearly done by the end of 25 on I'm expecting, I think we're going to get another one similar size in the next few months as I mentioned, these systems are deployed in Europe and they're deployed in the US and the Middle East. The contract we were able to announce today, we just we just got customer approval coincidentally, the two analysis space, one, this this one is so important. I'm glad you asked it from so many angles. As I mentioned, this is the largest recompete in the company. We don't have any more recompetes of any size for the foreseeable future. So we are bolted in That's number one.
Number two, as I said in my prepared remarks, the ceiling is 50% higher than it was. So it's not just bolted in. It's going to be a massive growth vehicle for us, and it's driven primarily by the number of space systems that are going up into space. And that is definitely going to start ramping for us in the second half of this year and into 25 and into 26 we need as a budget budget budget budget. So are our Space business in all of cradles, not commercially, not likely until SAPs of the world, but on the on the military side is the most susceptible in our company to the CRA because we've once, as you recall, in 22 and 23, we won so many development programs and that business just had revenue growth of like 15 or 20%.
Okay. We need the budget for production and deployment. And since we're delayed, that's why I'm looking for that to happen in 25. So that's how I see those rolling out appreciated and congrats on the results of the Phase two program.
Operator
Thank you.
Our next question comes from the line of Seth Seifman of JPMorgan and your question, please assist.
Seth Seifman
So thanks very much and have a good evening and a good result.
Wanted to ask.
So the unmanned business had a very nice amount of growth expected this year, and we've kind of seen things moving at a similar level the past couple of quarters, we'll have to see our kind of in the most of the first quarter of 24 here. So that's probably once again, a similar level of revenue to what we've seen, if not, if not a little bit lower seasonally and so the implication would be that kind of exiting this year, it would be a pretty big number from a revenue perspective on that on its own carries a certain amount of growth into into 25? If that is that kind of a fair fair way to think about it?
Eric DeMarco
Let me let me restate it for you on a number of profit let's take target drones, but target the target drone drone business has been ramping. And you can see by World world events what's going on there. So that big blob base has been increasing for the past year. It's going to take a another significant step function up in 2024 as soon as we get the 24 budget.
Okay. So the base has gone up 23 over 22. The base is going to go up again 24 over 23 as soon as we get the budget. The problem is let's say we get the budget market, March eighth, God willing the contracting, the government contracting officers. They've got a they've got to basically get 12 months' worth of contractual and obligations done in six months, and that's why it pushes out into Q3 and Q4. If that answers your question.
Yes, no, totally understood.
Seth Seifman
But then, but then that's at a level in Q4 that is at a higher level back and can drive a decent amount of growth in 2025 on, correct?
Eric DeMarco
Correct.
And that's and that's that's the right way to look at it?
Yes. So the so the bulk of the bow wave from 20 to CRA, we thought we saw we saw that the Bauer from 21 CRA. we saw at the end of 22, the ball away from Sears from 20 to CRA. We saw at the end of 23, the bulk away from this one, we'll see 24 25?
Exactly.
Correct.
Okay.
Seth Seifman
And then just backing into I think what the what the number you talked about for unmanned implied would be something like 6% growth or so for government solutions. And just so anything on that, the pieces that are kind of growing more quickly and more slowly than that kind of a 6% average for KGS in 24?
Eric DeMarco
Yes.
As I said, our Space business is the one within cradles. That's not based on development program trend transitioning to deployment because the most susceptible to a CRA. So our Space business, which is our biggest. So it's also the hardest to grow on. It's coming off with what a duty and a 15 or 20% and 18% in the quarter, adjusted 15% organic growth. We are forecasting that primarily due to the CRA to be one of our lowest growers in 2024 because we need to get that budget for these programs, we've won to ramp up products from time to time.
Operator
Thanks very much.
Yes.
Thank you. Our next question comes from the line of Mike Crawford of B. Riley Securities. Your question please, Mike.
Mike Crawford
Thank you, Eric and Deanna. Just to add help, I understand the guidance. If you were able to actually contract to sell both now sorry, production spirals before year end, what would be the rough delta on additional revenue and maybe more interestingly, reduced CapEx?
Marie Mendoza
It?
Mike, as Eric had mentioned, we are balancing our internal resources on the cadence of that production build for that second line of Valkyries. So that's that's a matter that we're taking into consideration the CapEx that is related to Valkyrie production for 2024 is approximately 20 million. So there will on that cadence, we would expect to continue to build throughout in 2025. And that's based upon just how our internal resources, how we're prioritizing those resources and if if those were sold to the extent they're completed or to the extent they're percent complete as we've discussed before, since they were would be subject to percentage of completion accounting. Then let's say that let's say that 20 million that we had incurred in 2024, if if if a certain number were sold, then the and the percentage complete related to those aircraft that are sold would be recognized as revenue in 2024. And then depending on the milestones that we're able to negotiate with the customer that would be. And then the cash receipts would fall in whatever period it would fall fallen, whatever we were able to negotiate from a milestone perspective.
Mike Crawford
So most of the sort of total Blue Sky World and what's the CapEx and Valkyries at the end of the year at the end of 23 D and it's over 30 million over 30 million. So Mike, it a perfect blue-sky world. If we got if we got a production order from all that 30 million would flip into revenue.
Eric DeMarco
Yes.
And whatever percent of the $20 million in 2024, let's say, were 10 million. And it happens in June, we'd get a pickup of 40 million in revenue, something like that.
Mike Crawford
Okay, thank you. And then, Eric, when you said you were expecting that perhaps to potentially contract for this in late 24, would that be after a new government budget that presumably they're going to pass before the end of December when the new Congress has come in closer at Centralia fundings in the current budget on some just planning on the budget we had done in early March.
Eric DeMarco
And as I've said a few times, it's going to take a while for the contracting offices have a lot to do and so it'll take until late in the year.
Mike Crawford
Okay.
That makes sense. And then just switching gears, ARM, given just the thousands of missiles that have been expanded in the Mideast Can you comment on your Mike, your Microwave Systems backlog?
Eric DeMarco
Yes.
So we our microwave electronics business, the biggest part of it, as you know, is in Israel, and we are one of the primary providers on virtually every Israeli missile system and radar system in the missiles are the ones, obviously, the razor razorblade. So think of Iron Dome where on the seekers So Deanna, whether they were at record levels and record record plasma were record backlog level for record revenue level. It's that it's looking great for 24. It's looking great for 20. I mean, this is terrible. What's going what's driving this? But our microwave business is it's doing very well because the Israelis are defending themselves.
Mike Crawford
Okay, thanks. And then just off of this 877 million IDIQ where you're pretty much, I think, competing with Northrup and you said you were hoping to get an order for 25 Oriole rockets, how much of those first for systems, right.
Eric DeMarco
So those would be totally separate from that. That's a different customer.
Okay. Totally separate. So that would be incremental to that. It's a different customer.
Mike Crawford
And so the IDIQ. That would be for Space Force payload racking.
Eric DeMarco
But why would why would I rather have the past four years before that would be under a different customer. It's not that CUP is not that customer, not to say it's incremental. And it's an addition to it's in addition to what we get under the $877 million award.
Okay.
Mike Crawford
Maybe just one final one is today, just today and today, there was a pretty big merger announcement with one of your customers blue Halo merging with Eclipse. And I'm wondering if that changed the scope of your $160 million open space award that you're working with them on the on the scar program.
Eric DeMarco
It absolutely does not. This is great for Blue halo. It's great for us. It's great for the Company. They merged with this as another up-and-coming disruptive partner of Accredo's is in blue halo. So no, no change. And that scar program is going to be one of the big drivers for creatives 2025.
Excellent.
Thank you.
Yes, sir.
Operator
Thank you. Our next question comes from the line of Ken Herbert of RBC Capital Markets. Your question please, Ken.
Ken Herbert
Yes, good afternoon, Eric and Deanna. Like Kerrigan, Hey, I wanted to follow up on your comments in the sort of the shift in strategy. As you look to build out more sort of merchant businesses, it sounds like there's a real opportunity within rocket motors, electronic devices, unmanned other areas to replicate what you've done on the space side.
Now, as you think about that and you think about the other opportunities, is there any way you could maybe rank order those other businesses and sort of how far along that curve you think they are to, I guess what I would call sort of established merchant supplier status? And how does that maybe impact growth of those businesses this year? And then of course, into 25?
Yes, on turbo jet turbofan engines for missiles powered munitions loitering munitions, we are way up or down the curve, whichever way you want to look at it relative to being the trusted partner with the prime system integrators with those engines on their weapon systems. And this value proposition I'm going to give you right here is the value proposition we bring to them.
Yes, I'm making this up Raytheon's doing a missile Northrop's doing a missile Lockheed's doing a missile. It all needs £150 thrust engine. If we build £150 thrust engines, they all come to us because we get leverage because we have three orders, one from each of them, which drives the cost down, which makes them more cost effective for their customer. And it brings value to everybody. So it's a win for us. It's a win for all those three primes, in my example, and it's a win for the government. So in turbo jets and turbo fans for cruise missiles, loitering munitions and powered munitions. We are we are moving down the path on that site and saw with the announcement that Boeing made on power JDAM as you know, I've talked about before, we're designed in on six different systems, several of which are going to be in production, I think by the end of this year and this will be a meaningful revenue driver for us in 2025. And we have clarity on this with the programs. That's number one. Number two is our hypersonic stacks. So I mentioned today, the Oriel Terrier stack that launched the French payload that just became public, okay.
We do that all the time for a lot of different customers is just not announced with the Zeus motors coming, it can go faster farther with heavier payloads in certain places at the right time and the right speed the right place.
Eric DeMarco
Okay.
We do that for the government and we do that for the primes. So we are way down the line on that. And since we are orders of magnitude less costly than anybody else out there, including some of these up-and-comers who think they're going to get into the area, okay, we can test test test and test multiple times within a budget for our customer, whether it be the government or prime because our price points are so low. So stacks for hypersonic systems, ballistic missile targets and sub Orbital vehicles, which as you know, we can't talk about on this slide. So that's right behind on, right behind the two budgets and turbofans, the next, the next one, obviously is microwave electronics, where a merchant supplier there? That's what we do. Our primary customers are Rafael is really aerospace industry, which are the Lockheed Raytheon in the north of Israel. We're going to build that out there and we're building that out in the US and on and drones and drones. Drones is one where we absolutely are going to continue to be the prime or our probability of win and the investment thesis for us is manageable and we will partner with our team. They are big prime teammates, and we have a few of them that are very close with us where it increases the probability of win, it reduces our risk and our financial contribution. And we think if we're going to get a big part of something instead of potentially all of nothing and you'll see the drone, the drone impact is this year, the rocket motors, we're definitely going to get some of those this year. So you're going to see those sales this year and they'll ramp into 25. So that's how I see it.
Ken Herbert
That's great.
And if I could, as you think about these markets, you obviously are positioned in some of the faster-growing markets. But what's your view on just high-level defense spending or investment spending in not just 24, but over the next couple of years? And to what extent is sort of a flattish budget, if that's the situation, we're in a risk to the timing on some of these programs.
Eric DeMarco
Yes. So obviously, I'm the CEO. I drink the Kool-Aid. I like Senator Wicker, he wants a farm. He wants a 5% defense budget. He wants a trillion dollars defense budget level. And I personally believe that with the threat environment out there that we have threats aren't going down there increasing every day. This is something both parties are going to convalescent around, but let's say that I'm wrong, right? Low cost is going to win the game for those talked around affordability, affordable mass. The Mitchell Institute, while they work with the Air Force, came out with a report last week, if you guys haven't seen it. I encourage you to see it. They said we cannot afford exquisite drones in math. The only way we can defeat certain adversaries is with large quantities of low cost drones that are rail launched that are air launched that are critical, et cetera, to get quantities, which is cost. So in a tightening budget environment for our engines, our TurboChef turbofans for our hypersonic vehicles and our rocket systems for our drones. I think that just increases Kratos's winning hand because of our affordability thesis.
Thanks, Eric, for all the color.
Operator
Yes, thank you.
We have our next question.
Our next question comes from the line of Pete Skibitski of Alembic Global. Your question please speak.
Pete Skibitski
Yes, good afternoon, guys. On a couple of questions. On EBITDA margins on.
Eric, I'm just wondering if you are I saw on one of these large tactical drone programs, at least maybe CCA replicator. How are you guys thinking about the economics on those as I saw, I think last year unmanned EBITDA margins were 7%, probably target drones or above that, you note in a sub position, if you get enough numbers, can you get to double digits in terms of EBITDA adjusted EBITDA margins? Or are we going to stick in this range even as a sub?
Eric DeMarco
Yes. So we are we in the tactical drone area, either as a prime or a sub right now, we are going to be in that range because their development programs and development programs, the margin rates are less. You're exactly right. What you said on the target drones and the target drones, we have multiple drones in multiple stages of full rate production, and that's where you come down the learning curve. You have to share part of that with the government, of course, but you can make low low to mid teen margins and internationally and target drones you can make much higher because it's international. So back to the tactical part of your question, I don't think there's going to be any difference or if it is it's going to be around the edges on margins on these I know it and develop it because we are where we are. We have we're a prime in development on some we're partner with some other people and others in development.
Pete Skibitski
We know what the margins are there similar and I envision it being the exact same once we get into full rate production, it will not be a different stuff you're saying even in full rate production, the margins on don't mean to say about the M&A?
Eric DeMarco
Yes, I know.
Marie Mendoza
I think I've known full-rate production we would expect the margins to expand. What he's saying is in development. We would expect those margins to be similar to the production that the development rates that we would see on the target side that are yet to production, we would expect to see some expansion.
Pete Skibitski
Okay. So maybe like three years out, we're talking there. There is a a Patina.
Eric DeMarco
Okay.
Pete Skibitski
I appreciate it. And it's a similar question just on So my question on space. I just you guys talked about the inflection in 25, and it sounds like on you know, maybe you're looking for some margin expansion there, part partially on production, higher deliveries, but you guys have been investing a lot in open space and we see it hit KGS margin periodically. I'm just wondering, in 2025, should we anticipate, you know, the IR. and D. that you are spending on open space to decline meaningfully? Or is that going to be kind of steady state and it's more so we anticipate deliveries increasing, right?
Eric DeMarco
I would not expect it to decline, but I would definitely expect deliveries to increase and the software content of the ground infrastructure to increase, which inherently brings higher margins. That's how I would look at it. It's a hybrid software model where you need continuing sustained R&D to refresh and expand the product portfolio, bring it to the customer to stay ahead of your competitors.
Got it.
Pete Skibitski
Okay. So that R&D will stay steady state. But Tom, as long as the market's hot, you'll have these opportunities for deliveries to be higher.
Eric DeMarco
Okay.
Okay.
August and the credit quality of loans, as we penetrate that total addressable market, we see we should be in good shape.
Yes, sir.
Got it.
Pete Skibitski
Thanks so much, guys, I guess, are into first.
Operator
Thank you.
Our next question comes from the line of Joe Gomes of NOBLE Capital. Please go ahead, Joe.
Joe Gomes
Thank you. Good afternoon and congrats on the quarter. Joe, good afternoon.
I just wanted to start on the tactical side there for a second. I saw that Australia's investing another 260 million in that goes back, and I'm just wondering what you see on that additive side there on tactical, you asked the question. So Europe, Australia is going to pay EUR260 million in new US, 400 million Aussie, 43 more goes to that. So obviously that is a much different model than cradle SaaS model. We were paid for three Valkyries. The first three initial Valkyries was like 40 million. So it's a different paradigm with a cost share with Acadia. It's a different. It's a different paradigm, Joe. We are focused on affordability, effectiveness, affordability, rapid development, get things flying that models just different, and I don't focus on it.
Okay. And then outside of the open space, which obviously there's growing nicely there with some of the recent awards you've talked about. What else are you? Can you talk about on projects that aren't impacted by the by the CR. I know historically you've talked a little bit about wireless trucks. Just trying to get a little better sense of what else has out there that you're very excited about that. We don't have to do with the new SCR, good question. So 30% of our business is not DOD. So for example, our Israeli business microwave electronics, 89 million in revenue, totally unrelated to the to the federal government, US federal government budget, as I mentioned earlier, that that business is ramping for the terrible reason. It's ripping that's going to do great contracts like with Intelsat commercial satellite operators, J. SAP type of go down. The list of Monaco offset arm. They're not impacted. And we're seeing growth in the commercial satellite area. So in our engine area, as you know, we're building engines for or under NDAs, think of virtually every new space company. We are involved in their engines.
Okay, that is not seeing an issue target drones internationally and you see what's going on in the world. People are buying for short range, surface-to-air missile systems or buying Patriot they all need to be exercised against target drones. They're typically exercised against ours. So international target drone business, it's not tied to the federal budget. So we've got a really good hedge. And typically internationally, we make higher margins than in the U.S. because international customers will pay more for the USD. And so we've got a pretty good hedge, which is why as of right now, we're staying with our 10% target for 2024 because that, that non-DoD business looks really good right now. And why Dan and I both said will God willing. We'll have a budget by March eighth. But if we don't, we'll revisit it and see what the portfolio looks like. And if we need to update, we will grant. Thank you for taking the question.
Yes, sir.
Thank you.
Operator
Thank you. Our next question comes from the line of Sheila Kahyaoglu of Jefferies.
Sheila Kahyaoglu
Your question, please, Sheila of deal ARIK.
Deanna, thank you for taking the time and so much has been asked already, but I just wanted to kind of maybe put it all into context, if that's possible. Some could argue, but hear me rate just double checking on it. So maybe if you could just talk about, you know, KGS versus KUS. in 2024 and the growth profile of each KGS has been growing pretty nicely and do we continue to see that outperform? And you will you rank maybe if you could just simply rank order the subsegments of where you see the highest growth there, just as a growth rate.
Eric DeMarco
And so so to level set the biggest growth segment we're going to have right now for 2024 is going to is going to be our Unmanned Systems business. The drones across the portfolio are doing great. And if we get a budget, we could actually beat those numbers in the drone area.
All right. So in KGS, I'll let Deanna touch on those. Keeping in mind that our Space business will be one of the lowest ones because it's impacted the most by the CRA.
Yes.
Marie Mendoza
So here, I can mention that the space business, which is our largest, is impacted by the CRA to that is and what SaaS product, we're expecting about a 6% and we're forecasting about a 6% organic growth across KGU.s with space being a big portion of that at a lower than that 6%. So that would indicate that there are pieces that are growing greater than that rate, which would be our C5ISR business or turbine business.
Our microwave electronics business some really across across the board, but most of the businesses within KGS, with the exception of the space business for all the reasons we've talked about since we expect to see but to really see that growth come in play in 2025 as we move on on to production on a number of the programs that we've been working on.
Sheila Kahyaoglu
Okay.
Understood.
And then maybe if you could talk about the pipeline. It stepped up 700 million sequentially, just given some of the recent news with CCA and things like that in your you're partnering with folks. Maybe can you give us some moving pieces of the pipeline at all?
Marie Mendoza
It actually, from our pipeline perspective, it's the big increase is not in our Unmanned Systems business. It's across a number of our businesses, we think within KGS. So in our C5 business in our turbine business that our microwave business is Sheila, the engine business in particular, we'll be adding that pipeline.
Eric DeMarco
But the pipeline is incredible right now for we've made in the USA engines, turbo jets, turbofans, rocket engines, liquid and solid. We're seeing incredible demand there in engines. That's probably the strongest grower for us from a pipeline standpoint from microwave electronics is incredibly strong. It grows literally every week as ordinances expanded. As Deanna mentioned, in the C5ISR business. And I've been through the programs before we have a number of programs IBCS, if pick sure at all of which are moving into production. So those pipelines are now moving from development to production, which increases the pipeline that were designed them. So the KGS. business, our training, our training business, we built training systems for weapons systems weapon systems are back in vogue. So our training systems business pipeline is Jive. It's very big and its growth is one of the strongest in the Company 24 or 23 and as well as our Space business as well.
Marie Mendoza
I don't think I mentioned that, of course, of the pipeline is up also in our space business.
Sheila Kahyaoglu
Okay.
And then last question for me. Obviously, CapEx jumped up 20 million year over year. There's do we think about that as a normalized rate? Or is it just given what's going on with Valkyrie and migrate products.
Marie Mendoza
It goes through all the investment areas that are talked about in the growth areas that we're investing into. It's across the board. It's in our microwave business Valkyries that were continued build. That's about 20 million, but it's also building out some of the others, our Space Network and satellite network data that we co-own as well as ARM see the center of the manufacturing center of excellence for our turbine engine business. So it's really investments that we're making in 2024. Some of it might continue in 25, but not at that?
No, we don't anticipate at that level.
Sheila Kahyaoglu
Okay.
Marie Mendoza
So it is continuing in Chile?
Yes, I would not say it's recurring, sir.
Eric DeMarco
Yes, thank you.
Operator
I would now like to turn the call back over to Eric DeMarco for closing remarks.
Marie Mendoza
Sir.
Eric DeMarco
Thank you all for joining us and for the Q&A session. And we'll touch base with you when we report Q1 in a few months of good day.
Operator
And this concludes today's conference call. Thank you for participating. You may now disconnect.
