Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Kratos Defense & Security Solutions Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the prepared remarks, we will host the question-and-answer session, and our instructions will follow at that time. [Operator Instructions] Now, it is my pleasure to hand the conference over to Ms. Marie Mendoza, Vice President and General Counsel. Ma'am?

Good afternoon, everyone, and thank you for joining us for the Kratos Defense & Security Solutions third quarter 2016 conference call. With me today is Eric DeMarco, Kratos' President and Chief Executive Officer; and Deanna Lund, Kratos' Executive Vice President and Chief Financial Officer. Before we begin the substance of today's call, I’d like everyone to please take note of the Safe Harbor paragraph that is included at the end of today's press release. This paragraph emphasis 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. Good afternoon. I will open up today’s call thanking both Kratos’ long-term and new shareholders for investing in our company and being owners of Kratos, and I believe that with today’s report and our future forecast, you will see that we are at the beginning of a significant growth and value creation trajectory. I also thank all of Kratos’ employees whose hard work and dedication has enabled and positioned their company for what we believe is and will be a very exciting future time for us. As the headline in our press release noted, for the third quarter Kratos reported revenues of $165 million and adjusted EBITDA of $13.5 million, exceeding our Q3 forecast and we are raising our full year 2016 revenue guidance up to $665 million. Deanna will walk through Kratos’ financial information in detail in her prepared remarks. We have a number of new listeners on the call today and we have had numerous new investors reaching up to us since our Q2 report. Accordingly, I will summarize the market opportunity, our strategy and Kratos’ leadership position in the high performance unmanned aerial system market space. The vast majority of UAVs and the DoD inventory today are propeller planes designed to perform their mission primarily in uncontested airspace where the United States controls the sky. These aircraft are vulnerable to sophisticated adversaries as they are generally slow moving, not very maneuverable and do not have significant stealth characteristics. In terms of market participants on the very small tactical side, the industry leader is AeroVironment or AVAV, with tactical UAVs that primarily support the war fighter on the ground. To give you an idea of the size of their aircraft, certain of AeroVironment UASs can be carried in a war fighter’s backpack and hand launched.…

Thank you, Eric. Good afternoon. Our third quarter 2016 revenues of $165.4 million was at the high-end of our expectation with the year-over-year consolidated organic revenue growth of 2.9% driven primarily in our satellite communications and training businesses, and in our Defense Rocket Support Services businesses. Our Q3 adjusted EBITDA of $13.5 million was above our expectation primarily due to a favorable mix of higher margin work especially in our satellite communications, training and cyber-related businesses. Our adjusted EBITDA for the third quarter is from continuing operations and excludes the following charges which have been reflected as adjustment consistent with our prior presentation since we either believe the items are non-operational, non-recurring in nature or meaningful for investors to understand our financial performance. Restructuring related items and other of $19.6 million, which includes an $18.7 million contract loss accrual that we expected to record related to the recently awarded LCASD contract. As we discussed on the last quarter conference, we are required by the accounting rules to record a loss accrual for the estimated investment that we expect to make under the cost sharing arrangement of approximately $33.5 million. The remaining balance of the expected investment of approximately $14 million, reflecting the estimated value of the aircraft we will build and retain, as well as related software, tooling equipment and launch equipment is expected to be recorded as capital assets over the next 24 months or so. Any changes to the estimated loss accrual or estimate capital assets maybe reflected in future periods. Also excluded from our adjusted EBITDA is $700,000 representing excess overhead capacity in our unmanned systems division. On a GAAP basis, net loss for the third quarter was $23.6 million, which included the restructuring, LCASD and other items I previously mentioned, $2.6 million of expense related to…

Thank you, Deanna. In closing I want to emphasize something I believe is very important that we have achieved thus far this year. Today, Kratos is working with several of the national security agencies that are on the forefront of the DoD's third off-set strategy. Leading the way in innovative research and development and our critical to the U.S. DoD’s immediate long-term strategic goals, these include, the DIUx, but the primary DIUx objective being reaching out to leading high technology companies that have existing products and solutions, which address an end-user operators immediate capability gap, with my emphasis here being on immediate. The Head of the DIUx, Ralph Shaw, he reports directly to the Defense Secretary, Ash Carter. The Strategic Capabilities Office which also reports to Defense Secretary. This is the home of third offset strategy and was created to re-imagine existing DoD systems by giving them new roles and game changing capabilities to be rapidly fueled it to confound our potential enemies. The Defense Advanced Research Project Agency or DARPA, whose mission is to create break-through technologies for national security, the air force research lab with the AFRL’s mission to lead the discovery, development and integration of war fighting technologies for the U.S. air space and cyber space forces. Today, Kratos is working with each of these critical national security agencies related to our high performance jet powered unmanned combat aerial systems, which we believe is testimony to Kratos’ products, technologies, credibility and our capabilities. Lastly, I encourage you to read an October 26 New York Times article on the Pentagon’s terminator conundrum robots that could kill on their own and an October 26 National Interest article, the F-35 latest trick might change warfare as we know it, both of which I believe provide a very crisp picture of the unmanned aerial system market opportunity and mission we are pursuing. With that, we will turn it over to the moderator for questions.

Thank you, sir. [Operator Instructions] Our first question comes from line of Mike Crawford with B. Riley & Company. Your questions please.

Thanks. Could you talk about your thoughts on your capital structure where you have $450 million of debt that is not due for three years, but it is high relative to your current EBITDA, you have pointed a bridge toward $80 million of EBITDA over an undefined time period, but that’s also not including success on tactical UAS, so could you just maybe talk little bit about impacts on that structure?

Absolutely. Mike, the first point you made is the most important one. The bonds are not due until the middle of 2019. We are sitting here in 2016. It is clear to us the areas of the national security market that we are in have turned and they are turning dramatically with our performance this year and what we are seeing for next year. As we said in our prepared remarks related to next year’s guidance, we believe if things fall the right way that could be very conservative, as I also said in the prepared remarks where -- we are on the trajectory for that target business plan. So we got a long way to go. We have won a lot of contracts awards, some of these get into production, they are going to significantly increase our revenue, EBITDA and cash flow, and that’s where we are focused and we are very comfortable with where capital structure sits right now.

Okay. And to be clear, you’re talking about the Unmanned Systems business doubling and that’s without any tactical UAS wins or any additional tactical UAS revenue beyond the small real testing amount in developments that you won?

With Zero, with none.

And how -- what’s -- how might one of these LCASD technologies spirals work, if you were to receive one in 2017 for example?

A government agency would come to us with a system that they want integrated into the aircraft and the spiral would be exercised, so we would start integrating that system into the aircraft design in 2017.

And then last question on this front is related to wonderful continuing resolution and upcoming elections, so is there an assumption you are making on when we might have a budget as far as your 2017 guidance is concerned?

Mike, this is Deanna. We assume that that would be resolved in the first quarter.

Okay. Great. Thanks. And then last question relates to your comment regarding another potential agency funding UTAP-22 possibly leading to an award in 2017 and would that be independent of the DIUx demonstration or would that be something that would be contingent on that doing well?

The customer is totally separate. It is a totally separate government agency. And I believe -- my opinion is I believe they -- it is related to we continue to be successful including with what we are doing with the DIUx.

Okay. Great. Thank you.

You’re welcome

[Operator instruction] Our next question comes from the line of Mark Jordan with Noble Financial. Your questions please.

Good afternoon, Mr. Eric and Deanna. First question relative to the pipeline number that you gave $6.3 billion, I -- question number one, I would assume that for you that is primarily a systems or product opportunity and could you give me a sense of what is the duration of that pipeline if you were to realize it all, what would be the timeframe –at which that would be potentially awarded and then be in production?

It’s typically looks out 18 months to 24 months, Mark.

Okay. And again this is all -- this would all be primarily systems related versus base service business?

Yes.

Yes.

Yes. The vast - yes.

Yes.

Yes, sir. The predominant…

Okay.

…is systems, products and solutions, not services.

And that you would expect that all to come be bid and awarded with 18 months to 24 months?

Yes, sir.

Yes.

Looking at your unmanned business, obviously, there has -- historically had losses given the fact that you have been investing heavily there. With the LCASD future bookings at on your GAAP basis at breakeven given GAAP accounting the UTAP-22 receiving funding from the innovation group, should the unmanned systems group generate positive GAAP operating profits in 2017?

That’s the expectation, yes.

Okay. On the Public Safety group that has -- it’s good to see those starting to generate positive operating profits currently, in your model for next year, what do you assume that segment generates with regards to operating profit and I would assume you are expecting get to be relatively flat at $120 million in revenue?

We are going to for next year we are expecting a slight increase in revenue as our strategy of not bidding on the larger jobs, those are falling off, those are falling away and we are bidding on more and more smaller higher margin jobs. So we are expecting a slight increase in revenue next year and we are expecting our margin rates to continue to improve next year above what we are doing this year. We are not ready to give a specific rate on it yet. We’ll probably give more clarity on that when we report Q4. But we continue -- we very importantly we continue to see a positive upward trajectory both in organic revenue growth, profit growth and cash flow.

Okay. Final question for me relative to the LCASD spirals, obviously, under the base program you are investing heavily. What do you believe would the economics of a spiral development program be positive with regards to cash flow and would it -- could it potentially offset some of the investment losses that you have booked today.

The answer to your question Mark is absolutely, yes, on all, yes, we would expect it to be positive, yes, we would expect it to offset some of the investment we are making, and yes, we would expected to be incrementally positive to cash flow, because where we are in certain discussions right now that’s all I would prefer to say.

Okay. For Deanna then an accounting question, if in fact you had the spiral you made money, would you then go back and adjust the reserve on your income statement or would you flow that profitability through the P&L in current period?

I believe it would be treated as a separate contract, because I don’t think it would be combined, because they are not directly linked per se, so I believe it will, if the future awards spirals are profitable those should stand on their own separately. So the loss accrual would remain as recorded.

Okay. Thank you very much.

Thank you, sir.

Yeah.

Thank you. [Operator Instructions] So now, I’d like to hand the call back over to Mr. Eric DeMarco, President and Chief Executive Officer of Kratos Defense & Security Solutions. Sir?

Excellent, excellent. Thank you for joining us today. We are truly looking forward to getting together with you when we report Q4. Thank you.

Ladies and gentlemen, thank you for your participation on today’s conference. This does conclude the program. You may all disconnect. Everybody have a wonderful day.