Kratos Defense & Security Solutions, Inc. (KTOS) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Kratos Defense & Security Solutions Third Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder today's program is being recorded. And now I'd like to introduce your host for today's program, Marie Mendoza, Senior Vice President and General Counsel. Please go ahead.

Good afternoon, everyone, and thank you for joining us for the Kratos Defense & Security Solutions third quarter 2022 conference call. With me today is Eric DeMarco, Kratos' President and Chief Executive Officer; and Deanna Lund, Kratos' Executive Vice President and Chief Financial Officer. Before we begin the substance of today's call, I'd like everyone to please take note of the safe harbor paragraph that's included at the end of today's press release. This paragraph emphasizes the major uncertainties and risks inherent in the forward-looking statements we will make this afternoon. Please keep these uncertainties and risks in mind as we discuss future strategic initiatives, potential market opportunities, operational outlook and financial guidance during today's call. Today's call will also include a discussion of non-GAAP financial measures as that term is defined in Regulation G. Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP. Accordingly, at the end of today's press release, we have provided a reconciliation of these non-GAAP financial measures to the company's financial results prepared in accordance with GAAP. With that, I will now turn the call over to Eric DeMarco.

Thank you, Marie. In the third quarter, Kratos successfully executed on what we could control in a continued and increasingly difficult operating environment, generating a 1.1:1 book-to-bill ratio, successfully executing a Valkyrie Block 2 flight and receiving a recent new hypersonic system related program award, MACH-TB or multiservice advanced capability Hypersonic test bed with our partner Dynetics, both which we were able to announce today. We are currently positioned for additional upcoming milestones and significant contract awards including another important new hypersonic related program we hope to announce by the end of this year and the definitization of an approximate $250 million potential value microwave electronics C2 program award. Additionally, we now expect 2 new Valkyrie-related tactical drone system contract awards from two separate new customers from multiple aircraft. And we have just recently begun discussions with the potential fourth new customer also for multiple Valkyrie systems. The interest in Kratos' tactical drone systems has recently increased and is gaining momentum. I believe, in part due to the ongoing Russia-Ukraine conflict, the heavy use of drones involved, including jet drones, and the reality that quantities do matter and that Kratos is the only company with affordable high-performance jet drones flying today also with active production lines. Since our last report to you, we have also faced challenges, including that we were recently informed that a certain Kratos satellite program related to software products expected to be delivered in 2022 to an existing under-contract government customer have now been delayed to a future period, and we were informed by another under contract customer that additional funding is now not available for the continuation of a certain non Valkyrie-related Kratos tactical drone program we have been working on. Both of these were previously forecast as important contributors to our fourth quarter. We also have now determined that as a result of the continuing incredibly tight labor market for qualified machinists, production and other skilled personnel, including those with security clearances, that we will not achieve by this fiscal year-end, our previous forecast net increased headcount target required to execute on our backlog and achieve our financial forecast which I discussed on last quarter's call as a key operational and execution imperatives. As a result of these issues and considering that the DoD just last week published the letter reiterating that they would not allow companies like Kratos to receive contract price adjustments, request for equitable adjustments or increases in funding for inflation and related cost growth on our existing contracts. We have reflected the financial impacts of each of these, related and other items in today's third quarter financial report and our updated fiscal 2022 forecast, which Deanna will discuss in her remarks. So we've been taking action to address these matters, including we have hired and continue to hire a large number of qualified personnel, which is a top priority across the entire company. Additionally, over the past several months in our new bids, proposals and contracts, we are increasing labor and other costs and escalators, which are making us more competitive in not only obtaining but also in retaining qualified and trained workers. And we have adjusted the organization in certain areas to adjust customer-related delays, funding and other issues. We have taken these actions now in order to position Kratos to continue to compete for and win large new program opportunities, of which there are many. And execute a significant growth trajectory and expanding margins in 2023 and beyond. And we remain confident in our mission of being the disruptive technology company in the national security market area, evidenced by our continued success, including having a 1.2:1 LTM book-to-bill ratio, as I mentioned, a 1.1:1 Q3 book-to-bill with multiple large new programs, both received and ramping like MACH-TB and having a record combined backlog and opportunity pipeline. Accordingly, we continue to forecast base case full year 2023 over 2022, 10% revenue growth and increased margins with potential accelerated growth opportunities in the tactical drone, space satellite, rocket, hypersonic system areas. Importantly, we have recently begun to see some improvement in the labor market including technology and other companies now executing layoffs and Kratos recently having a very successful job in recruiting fair with multiple qualified hires related to a key Kratos manufacturing location. So we believe that we may have seen the bottom here with things starting to turn around in the labor market. Operationally and directly related to Kratos' first-to-market affordable leading technology system and product-based strategy, Kratos remains an industry leader in virtually all of our business areas. We are the industry leader in providing affordable rocket, hypersonic and other systems to national security customers including as recently demonstrated by the successful intercept of a Kratos ballistic missile target in the Pacific Dragon '22 exercise. Kratos' proprietary new and first-to-market Zeus and Erinyes affordable launch in Hypersonic systems continue to progress with initial flights with our customers planned for next year, which we anticipate will provide us with new program opportunities in addition to our current family of flight systems and vehicles. We expect Kratos' Rocket Systems business to be a solid future revenue and organic growth driver with increased margins as both the U.S. and our allies increased their exercising and testing of ballistic missile defense, radar space, satellite, hypersonic and other systems. Kratos' industry-leading space and satellite business performance, our company's largest is critical to our forecast organic revenue, profit and cash flow growth trajectory and we are currently forecasting approximate 12% to 15% growth for this business in 2023 with significantly expanding margins, supported by recent and expected program awards. The thousands of new satellites forecast to be placed into orbit over the coming years, including in LEO, MEO and GEO for both national security and commercial missions, are expected to provide a large, rapidly growing market and opportunity set for Kratos and for our proprietary first-to-market open space virtualized suite of C2, TT&C and other ground system software products. Kratos' C5ISR business is also positioned for future organic growth and expanding margins with key growth drivers, including the IFPC, IBCS, SHORAD and Sentinel programs. On the Sentinel program, we expect to see a significant ramp in 2023. Kratos' Microwave Electronics business is similarly positioned for future organic growth, also with expanding margins with a focus on well-funded mission-critical national security areas, including missile, radar, EW, [ C-AD, D-AD ] and C2 systems, several of which were in production and ramping. Our Turbine Technologies and Engine business had a very strong third quarter, and 2023 also is looking strong with a focus on drones, missiles, powered munitions, spacecraft and strategic platforms including the B-52 Re-engine program which is ramping for Kratos. Kratos' industry-leading target drone business also is very well positioned as the U.S. and our allies recapitalized strategic weapon systems and radars which need to be tested and their crews trained against the highest performance, most threat-representative target drone systems in the world. Those are Kratos targets. Future program drivers and our target drone business include: the SSAT program with the U.S. Navy, which achieved full operational capability in Q3 and with full rate production now expected to continue to ramp, a confidential program that is now expected to transition from low rate initial production to full rate production. We have an expected sole-source $100 million contract award with the U.S. government agency coming in the next few months. And a number of new expected international contract awards, driven in part by the Russian-Ukraine conflict and the expected significant increase in NATO member and U.S. allies defense budgets. Also in the target drone area, there are currently multiple new programs in solicitation here in the United States that Kratos is pursuing, including NGAT, 5GAT and T Threat, all focused on affordability and innovation to address the increasing global threat profile. As I mentioned, the tactical drone or collaborative combat aircraft, CCA opportunity continues to evolve, including the Air Force recently announcing another new classified program initiative which includes a competitive fly off in 2024. Multiple recent statements and data points from the Pentagon signal of future with hundreds or thousands of drone systems consisting of several different types with different capabilities and at different cost points. As I mentioned before, Kratos remains the only company with a family of low-cost, expendable disposable and attritable drones flying today, also including active manufacturing facilities with each drone that we can publicly talk to you about at price points between approximately $400,000 and $5 million. Being the only company with actual flying aircraft in this drone class, not having PowerPoints or renditions, concepts or computer models with hope for some day delivery dates and guestimate price points. We believe is a significant advantage for Kratos and to our customers and for the taxpayer. At Kratos, better is the enemy of good enough and also to low cost. As we reported today, Block 2 Kratos Valkyrie production aircraft recently demonstrated extended capabilities by flying longer, higher at a heavier mission weight and at a longer range than ever before with the flight achieving a key milestone of the AFRL, Autonomous Collaborative Enabling Technologies portfolio. Simply stated, Kratos tactical drones continue to mature and progress. We remain on track to complete the initial Valkyrie 12 production lot next year and we are in process of deciding on a subsequent Valkyrie serial production run, including as things are definitized with our three new customer opportunities over the next few months. Kratos' Ghost Works had our recent successful test of a new system at the Burns Flat range complex with additional tests of these new systems planned over the coming months, and which system we currently hope to be able to unveil publicly next year. We are confident that this new Kratos Ghost Work system will significantly expand both our existing platform capability lead and affordability positioning to our customers and competitively. We believe the macro and geopolitical backdrop for the national security industry is strong and is expected to remain so, including, importantly, for innovative and disruptive technology and growth companies like Kratos. I also believe that we are at the beginning of a long-term multiyear recapitalization of strategic weapon systems globally, where quantities, affordable mass, speed and survivability as is being demonstrated in the Russian-Ukraine conflict, will matter and where clearly Kratos is uniquely positioned. We are not planning on making any acquisitions. We have successfully competitively bid on and received a number of large new program awards, as I mentioned before. And we expect to receive several more in the coming months. It has definitely been challenging the last couple of years with COVID, supply chain inflation, the labor market and other things. These issues will pass and Kratos is teeing it up, and we are ready to go do it. With that, I'll turn it over to Deanna.

Thank you, Eric. Good afternoon. As we have included a detailed summary of the third quarter financial performance and fourth quarter and full year 2022 financial guidance in the press release, we published earlier today, I will focus on the highlights in my remarks today. As Eric mentioned, the operating environment remained challenging with continued supply chain disruptions, inefficiencies, an extremely tight labor market and inflationary impacts. As a result, our third quarter revenues were impacted with $11.3 million being deferred into future periods with approximately $5.9 million of associated operating income, including increased inflationary costs. In addition, our operating results included a charge of approximately $3.4 million related to certain non-recoverable costs, including rate and cost growth items resulting from an inability to hire the required planned direct labor base, both internally and by our subcontractors to execute on our backlog due to a continuing challenging environment in both hiring and retaining skilled manufacturing personnel, including in our C5ISR business. For example, while we have been successful in hiring over 96 new still staff this year in this business, unfortunately, we are down net 14 staff members since the beginning of this year as we have lost 110 staff members in this business due to attrition from retirement including from employee decisions made related to COVID vaccination compliance and protocol-related policies and staff leaving for other employment due to the incredibly competitive and tight labor market and with significantly increasing compensation. As Eric mentioned, we have recently seen more success in hiring and stabilization in the retention of our existing workforce and our entire organization is incredibly focused on this primary operational execution area. Additionally, as we are managing supply chain-related disruptions and shortages, our operating cash flow continues to be impacted by advanced inventory purchases we have made of over $27 million year-to-date which reflect increases in inventories across our product-based businesses, including unmanned systems, space and satellite, microwave products, the C5ISR. This inventory increase reflects actions we have taken to make advanced purchases in an attempt to mitigate the supply chain disruption, which now include lead times for certain critical parts of over 52 weeks. The conversion time for certain of these purchases from the inventory to products to sales is not expected to incur until next year. Also included in cash flows used in operating activities is approximately $7 million in investments and non-recurring engineering costs over the first 9 months of 2022 for new rocket systems and products, including for Kratos Zeus and Erinyes systems and is directly related to certain received and expected new contract awards in the Hypersonic system area. Our contract mix for the quarter was 69% from fixed price, 26% cost plus fixed fee contracts of 5% time and materials. Revenues generated from contracts with the U.S. federal government during the quarter were approximately 69%, including revenues generated from contracts with the DoD, non-DoD, federal government and government agencies and FMS contracts. In Q3 '22, we generated 11% of revenues from commercial customers and 20% from foreign customers. Now moving on to financial guidance. Our fourth quarter and full year '22 financial guidance we provided today includes our current forecasted business mix, and our assumptions related to the expected continued impact of employee absenteeism, challenges related to obtaining and retaining qualified personnel supply chain disruptions, inflation and related expect -- expected cost and price increases and other COVID-related items that have impacted and are currently and expected to continue impacting both the industry and Kratos. Throughout the first 9 months of the year, Kratos experienced a significant increase of the continued impacts from supply chain disruptions, including cost increases for materials, supplies, transportation and utilities, and fulfillment delays causing increased cost and inefficiencies related to manufacturing, included in our indirect manufacturing rate. We expect these issues to impact our fourth quarter revenues by approximately $7 million to $9 million and adjusted EBITDA by approximately $4 million to $6 million. Also additional increased costs we have absorbed this year include merit increases above our historical norm and financial forecast of over $5 million, which has been implemented across the entire personnel base. As our contract mix is predominantly firm fixed price, we are required to absorb these additional costs with the Pentagon issuing a letter just last week, reiterating its position that contractors like Kratos will not be able to submit requests for equitable adjustment to recover inflation related and other costs. Our previous expectations for the second half of '22 and more specifically the fourth quarter of 2022, assumed we would be able to achieve significant net headcount additions in certain of our specialty manufacturing and hardware-related businesses. But as we previously mentioned, we have been unsuccessful in achieving our target. Accordingly, this delay in the ramp in our net headcount and supply chain delays has resulted in the reduction of $12 million to $13 million for our forecasted FY '22 revenues in our C5ISR business. In addition, the recent notification by our customer of a delay or certain satellite program-related software deliverables to a future period had a significant impact on our Q4 forecast as this software deliverable was expected to contribute approximately $5 million to $6 million of revenue and approximately $4 million of EBITDA in Q4. Finally, the notification we recently received from a customer that additional funding is now not available for the continuation of a non-Valkyrie-related tactical drone program that was originally forecast to contribute an additional $7 million to $8 million to our FY '22 revenues. We have reflected the impact of these customer notifications in today's revised financial forecast. With our forecasted cash flows also being adjusted accordingly. Eric?

Great. Thank you, Deanna. We'll turn it over to the moderator for any questions.

[Operator Instructions] And our first question comes from the line of Mike Crawford from B. Riley.

Given these delays in -- and in the tactical drone space, do you think that it's getting harder to cross the so-called Valley of Death or maybe one of them didn't make it? Or is it now that we're really focused on Valkyrie and maybe some of these newer iterations like that are coming down the pike?

No, it is not harder to get across the Valley of Death, Mike. And we still have a number of platforms, all of which we've talked about here previously that are still flying and that are still going across. As I mentioned over the past year, I think it started after the Reagan Forum last year, when the Secretary talked about 2 new classified programs. And he said that all the other programs or substantially all of them would be feeders into those programs, and it was all going to be buttoned up. I mentioned that it was going to be just difficult for us to talk about stuff anymore unless we got approval. And that's one of the reasons we were able to put the -- what we put out today on the Valkyrie, we just recently cut approval for that press release. There is a lot going on in the CCA or tactical drone area, a lot, a lot, a lot. And as I indicated in my remarks, I think things are becoming a lot and they're accelerating because of what's going on in the Ukraine with Russia. It's become a war of attrition, General Hinote, recently, of the Air Force, recently, had an interview about that. It's a war of attrition. And I think that is what is causing momentum to start picking up here again.

Okay. And then in the space and satellite cyber business, so is there any takeaway from the change in leadership at the U.S. space force? And then I guess the second part to that is this one software delay, is that related to the continuing resolution? Or is that -- is there some other reason given for that delay?

Right. So let me take the second part of that first. It is not, as we understand it, related to the continuing resolution. That program is classified. So it's related to our understanding to a separate item. That's why it's been pushed out. That's all I can say, it's classified. Relative to any changes in personnel like at the space force, et cetera, I don't believe that, that has anything to do what's going on here or what it's going to have to do with the trajectory in the industry. The bottom line is that there are going to be fewer and fewer geosynchronous orbit satellites put up, and there are going to be hundreds and hundreds of MEOs and LEOs put up. And there are all types of reasons for that, technological reasons, distributing the assets, reasons, et cetera. And the more birds that are up there, whether -- it doesn't matter what size they are, the better that is for Kratos and our ground equipment, which is why we are seeing the traction we're seeing, and we're so optimistic.

And our next question comes from the line of Noah Poponak from Goldman Sachs.

It's Gavin on for Noah. Can you hear me?

Yes.

In terms of the 10% revenue growth target next year, I think you'd said previously that, that doesn't consider too much upside in tactical drones. So what are you expecting in tactical drones there? How much visibility do you have into that business returning to growth? And when do you think that returns to growth?

Yes. So you're absolutely right. The base case does not include any significant production at all of or orders of tactical drones. It is -- as I said on the last call, but it's a continuation of RDT&E and S&T initiatives, both that we're on and future ones that we expect to get. And as I said on the last few calls, I'm not getting ahead of myself anymore on this. We have gone through it. We've got the right aircraft at the right price points at the right time, and we're going to hang around the hoop until we win, and that's what we're doing. And so nothing significant other than RDT&E and S&T.

Got it. And then in terms of the non-recoverable costs, I mean, what time frame does that capture? I mean does that capture future expected cost growth? And is there any risk that, that number just kind of continues to trend higher unless the DoD gives RBA relief?

Gavin, that does not take into consideration future cost growth, that is current period growth that we are not passing through the contract. So we are absorbing that in the current period.

And relative to the future as we've been talking about for the last few quarters, and I emphasized today, we're substantially firm fixed price. And we -- because as you said, the plant came out with another letter last week and said there will be no relief on this on, existing contracts. Well, as I tried to emphasize today, we've been winning a lot of new contracts, including the last 2 quarters, and we have been building into those escalates existing costs and escalators to capture future increases, most importantly, in labor and in the indirect rates that, that labor base drives. So we've been building that in. And we think that point is going to start to cross in Q1 or Q2 of next year, and then we'll be okay unless, of course, inflation goes to 25%, then we're fried. But that's our plan.

[Operator Instructions] And our next question comes from the line of Sheila Kahyaoglu from Jefferies.

This is [ Ellen ] on for Sheila. Just a little bit -- looking at that 10% growth next year in a little bit more detail I know you mentioned 12% to 15% space and satellite growth. But are there any programs that you can walk us through that drive that return to growth?

Yes, absolutely. Sentinel comes to mind immediately. We're in development on Sentinel, our partners or GBSD, our partner, of course, is Northrop Grumman and they are an outstanding partner, by the way. And we are ramping right along with Northrop on Sentinel. I mentioned the SSAT program in the target drones. As I mentioned in Q3, we achieved initial operating capability, with the United States Navy, we're in full rate production, and it is ramping significantly now significantly. So SSAT is going to be a very, very big driver. We've announced a number of space and satellite programs. But in addition to the ones we've announced, there's a number that we have won that we can't talk about. Those are all ramping for us in 2023. And as I mentioned, that's tying directly to what's going on with the OPTEMPO in the space and satellite area. And the other one that we're doing is in our C5ISR business. I mentioned a couple of them like SHORAD and IBCS, IFPC to a less extent next -- first half next year but ramping, we are on some big new programs of record that we've won, and they're beginning to go. And the last area is in the hypersonic area. We are the absolute leader in the industry and affordably putting something in the right place at the right time at the right speed. And as the hypersonic off tempo picks up we are going right along with it because we're the guy that can do it. Those are the primary areas and then to a lesser extent, the B-52 Re-engine program. That's big, it's several tens of millions of dollars. That's also ramping, but to a lesser extent than say, GBSD.

That's helpful. And then as we think about some of the contract changes you've put into place, is there a path back to double-digit margins in the next couple of years? Or how do we think about profitability from here?

Yes, there definitely is, because as I've mentioned before, and I'll mention it again, now the government on the new contracts -- on new contracts and on options that we're pricing now, they are fine with escalators and cost increases. So long as we give them a reciprocal that if inflation turns out to be transitory, or it goes back to 3% or 2% next year, that they can have relief on the other side. That's literally what's happening here. And we are absolutely amenable that's a very fair offer by the government and we are building that in. So we're very confident, we're going to -- our rates will start getting back up next year, as I mentioned, as our contract mix moves more to the newer ones, the more recent ones with higher costs built into them.

And our next question comes from the line of Joe Gomes from Noble Capital.

Good afternoon, Eric. I guess a quick kind of big picture-type question seeing is some of the announcements today with some of the contracts that have been pushed out or there's no more funding for them. You previously talked about some business, the self-driving trucks that you're doing with Min-DAC, the truck-mounted attenuators. Where do those types of products stand? And could they potentially be a growth driver here to help cover our -- some of these projects that have gone away?

Yes. If you could see me if I was on a video, you would see both Deanna and I are smiling, obviously, we haven't been talking much about that, but it is progressing and revenue there in that area in 2023 is going to start to become material to Kratos and then in '24 and '25 as we roll out these kits to convert the existing manned trucks and vehicles to unmanned at a very low cost with our technology. This is happening. Don't quote me on this, on the -- in the state work we're doing. I think we're in approximately -- our trucks are on the road in 10 states now with certain states now coming back for production orders. So it is moving. It's happening. And I want to reemphasize our target market is the one that's being ignored by everybody else. We're taking the existing trucks and the existing vehicles, the millions of them that are out there and because of the incredible driver shortage, and I think I saw like 1 million truck drivers are retiring and aging out in the next 8 years. There aren't going to be enough. So that's where our technology is coming in, and we're focused on the agricultural, the mining and the mineral markets right now.

[Operator Instructions] Our next question comes from the line of Pete Skibitski from Alembic Global.

Guys, can you talk about the sensitivity in your guidance to a further delay in the '23 budget, right? We've got the CR through mid-December and there's I know it's probably a 50-50 chance that we maybe go into January. And I'm just wondering if that would impact guidance at all?

All right. So the way the '23 budget sits today, okay, if it is approved substantially in its current form, say, by the end of December, early January, we're okay, right? If it has changed significantly, if content has changed significantly, and we have another 6-month continuing resolution like we did last year then we're going to have to analyze what that budget looks like, what's the timing of getting those funds obligated under contract looks like, and then we'll map that into what we think.

Okay. I appreciate the color there. And then I also want to ask kind of where are you guys at now if I missed this, in terms of your labor target, how far away are you on the labor target and kind of what the forward goal is? And associated with that, I thought I heard you guys mention people leaving because of COVID compliance. But I thought the government drop that provision that defense employees get vaccinated. So maybe kind of clarify that.

Sure. So that was earlier in the year when we had those requirements that the government had not dropped. So that was part of the attrition that we saw earlier in the year, Pete. So our targets -- the specific target that we're all focused on is in our C5ISR business. The target was to have a net increase of 100 heads by the end of this year and we're currently down net 14. That target is obviously going to be pushed out into the first quarter. We've recently seen some stabilization in the attrition because, as I've mentioned, we have been able to hire just about 96 people, but we've had net reductions just because of all those different factors. With the market, I think, stabilizing, we are seeing some more recent more positive trends in that arena.

And let me add on that, that the people we have, they're all trained up and they know how to work and they know how to do it, and they're on a learning curve. And then they leave, and then we have to hire new people and get them trained up and that takes time and that generates incredible inefficiencies, which also increases cost. And so it's a multi-dynamic thing we've been dealing with. Why it's been so important that on the new bids and new opportunities, we're building in higher rates so we can be competitive with, for example, some of these new space companies that are paying very, very high rates for people. These are the guys that want to go to Mars, and we can be competitive there.

Okay. And this is GBSD that's driving a lot of the hiring needs in C5?

It's in C5. It's multiple programs. It's not one in particular. It really isn't. It's multiple programs. I mean like take a missile system or a radar system. Typically, those guys or gals they need very high security clearances in that manufacturing environment. And we're finding people refuse for multiple reasons. They want to get a security clearance is these days to work on a missile -- surface to air missile system. That's another aspect we're dealing with.

And our next question comes from the line of Austin Moeller from Canaccord Genuity.

So I guess just my first question here. It seems like on the tactical drone side, the 2 horses that are sort of the closest to the end of the race here are the Valkyrie and the AirWolf. So -- I mean, you've kind of touched on there's three potential customers for Valkyrie and that we could have some kind of production contracts happening in the next few months? So do we expect a production contract there? Do we expect an outlined program in the fiscal year '23 budget? Or is this all sort of pushed to the right and you're now going after and bidding on cloud or combat aircraft, which is not expected until like 2024, right?

Right. So as I set up front off and I'm just going to be very cautious. I'm not -- I don't expect anything anymore until we get it in this area. But the customer has been very, very fickle, okay? There are -- in addition to the, I'll call them -- I can't say a lot about them because they're highly classified, the Kendall programs, which are -- when people think of CCAs, they think of the Kendall programs. In addition to those, there are multiple other drones in the jet class that are going to be out there, I'll call them all CCAs that are not related to what I'll call the Kendall programs. We are -- I have to be careful on how I say this. One would think that we are actively involved in all of those other programs. That's how I have to say it.

Okay. That's helpful. And then just another question. The satellite program that was delayed and pushed out of Q4, was that 1 of the 3 big contracts that you guys have been talking about as necessary for the guidance at the end of the year? Or was that a different program?

Yes, it was. It was an aspect, an aspect of one of them. The program has not -- the program is moving forward. It's revenue generating. That was an aspect that's been deferred.

Okay. And then just one more, if I may. Are you still expecting some Sentinel revenues in Q4 on the development side? I know most of the ramp is next year, but I think you've had said some of that will start coming in the fourth quarter?

Yes, we are expecting some in the fourth quarter, just not as much as we originally had forecasted.

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Eric DeMarco for any further remarks.

Thank you. Thank you all for joining us this afternoon, and we'll talk to you shortly. Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.