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Kratos Defense and Security Solutions Inc
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Good day and thank you for standing by. Welcome to the Kratos Defense & Security Solutions First Quarter 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers presentation there will be a question-and-answer session. [Operator Instructions].
I would now like to hand the conference to your speaker today, Marie Mendoza, Senior VP and General Counsel. Please go ahead.
Thank you. Good afternoon, everyone. Thank you for joining us for the Kratos Defense & Security Solutions first quarter 2021 conference call. With me today is Eric DeMarco, Kratos' President and Chief Executive Officer; and Deanna Lund, Kratos' Executive Vice President and Chief Financial Officer.
Before we begin the substance of today's call, I'd like everyone to please take note of the safe harbor paragraph that is included at the end of today's press release. This paragraph emphasizes the major uncertainties and risks inherent in the forward-looking statements we will make this afternoon. Please keep these uncertainties and risks in mind as we discuss future strategic initiatives, potential market opportunities, operational outlook and financial guidance during today's call.
Today's call will also include a discussion of non-GAAP financial measures as that term is defined in Regulation G. Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP. Accordingly, at the end of today's press release, we have provided a reconciliation of these non-GAAP financial measures to the company's financial results prepared in accordance with GAAP.
With that, I will now turn the call over to Eric DeMarco.
Thank you, Marie. Good afternoon. Kratos is currently seeing accelerating organic growth across virtually our entire portfolio, including 33.1% in our Unmanned Systems business and pro forma 11.6% overall for Kratos as we describe today in our release. We expect our organic growth trajectory to continue into 2021 for it to be industry leading with even stronger organic growth forecasts for 2022 including growth in our Skyborg, LCAT, LCASD, OPIR, GBSD, SSAT, Classified and other under contract and expected programs.
Underpinning our confidence, Kratos last 12 month book-to-bill ratio was 1.3 to 1 and we just received an $86 million single award contract for Drone Command and Control Systems through all options and we are expecting to receive a number of large Sole-Source production and other contract awards over the balance of 2021 including in our Unmanned Systems business in the second half of this year. Additionally, we have seen no disruptions with Kratos customers or our order flow as a result of the new administration. And as we will go through today, we have reason to believe that Kratos' business will actually accelerate further with increased funding and opportunities based on actions to date by the Biden administration.
The initial fiscal 2022 national security budget has been submitted at 753 billion, slightly below the previous administration 760 billion, which is better than we were expecting and we believe an overall positive sign for the next several years. In the budget submission, the administration is clearly focused on the retirement of no longer relevant legacy systems, including Defense Secretary, Austin and Deputy Defense Secretary, Hicks making it clear that they intend to propose divesting legacy systems in favor of new technology approaches and systems which is very positive for Kratos and our suite of affordable innovative products and systems.
Innovation and sustainment are also identified as priorities for Pentagon acquisition, Research, Development and engineering, each also positive for Kratos as Kratos is recognized as the DoD innovation leader and in the rapid development and fielding of actual working systems and products. The administration's national security priorities include drones and artificial intelligence, space and satellite communications, strategic deterrence, hypersonic systems, operational readiness and microwave electronics, as you know, all Kratos' strategic focus areas.
Also important for Kratos, Michael Brown, Director of the Defense Innovation Unit formerly the DIUx, a key strategic partner and customer of Kratos has been picked to become the Pentagon's acquisition Chief, clearly emphasizing Mr. Brown's previous career in Silicon Valley and as CEO of cyber security company Symantec, further reflecting the change, innovation, speed of acquisition and affordability, the DoD is striving for.
The President has also nominated Frank Kendall as Secretary of the Air Force. Mr. Kendall, if confirmed, will be taking over the ongoing DoD reviews on tactical combat aircraft and global force posture. And based on his history, we expect that he will bring an engineer's show me the data perspective, including to Autonomous Attritable weapons, networks and weapons mix, all positive for Kratos. Based on Mr. Kendall's prior record, including his better buying power initiatives and procurement system reform, we believe he recognizes that affordability is critical, that quantity has a quality all of its own and that he will be supportive of the development of new low cost weapon systems that utilize commercial approaches and technology to create more military mass, also positive for Kratos.
Additionally, the President's executive order and the administration's focus on Made in America is also a very important positive for Kratos, including where Kratos is the only or one of the very few US manufacturers of a certain system, product or capability. For competitive and other reasons, I will not be more specific here, but Kratos will be fully supporting the Biden administration's Made in America efforts, which we believe will be very beneficial to our country and our company, including in certain new product areas where Kratos is focused. In summary, since our last report to you, we are very pleased with the new administration's national security leadership, priorities and budget, and the clear focus on affordability, innovation, change and Made in America.
From a geopolitical standpoint, the potential adversary threat to the US and our allies continues to evolve, accelerating the recapitalization of strategic weapon systems, which Kratos is increasingly a direct and growing beneficiary of. In the tactical drone area, while others are reimagining airpower with models, renditions, cartoons and PR, Kratos is and has been for the last several years delivering and demonstrating flying airpower, with multiple systems that are operationally relevant for today's and the future operational threat environment included.
Today the United States Air Force announced that the Skyborg team conducted a successful two hour first flight with the Kratos Mako UTAP-22 high performance tactical drone at Tyndall Air Force Base in Florida. This flight, termed Milestone 1 of the Autonomous Attritable Aircraft Experimentation campaign was extremely important to Kratos as the Skyborg autonomy core system or ACS aboard a Kratos Mako drone system performed a series of foundational behaviors necessary to characterize the system's operation.
In the Mako flight the ACS demonstrated certain aviation capabilities, responded to navigational commands, reacted to geo fences, adhered to flight envelopes and demonstrated coordinated maneuvering while being monitored by both airborne and ground commanded control stations. This most recent publicly available flight, which we believe is representative of the incredible partnership that Kratos has with our government customers, and also representative of Kratos' first to market leading position with four high performance low cost attritable drones in this class flying today that we can discuss with you.
Since our last report to you, the Kratos XQ-58A Valkyrie had its sixth publicly announced successful flight at the Yuma Proving Grounds in Arizona, with a Valkyrie launched a small drone from its internal weapons bay, and where the Valkyrie flew higher and faster than ever before, demonstrating the expanding operational envelope of the system, as we advance toward potential initial operating capability.
Along with the Valkyrie's successful weapons release of the ALTIUS-600 SUAS, Kratos' Rattle Snake tactical drone has also successfully demonstrated the release of an AeroVironment's Switchblade tactical munition system, further demonstrating the operational relevance of Kratos' family of tactical systems, including as force multiplying drone and weapon carrier. Kratos will be moving forward with both of these systems, and we will not comment further due to customer competitive and security related reasons.
Kratos has previously demonstrated two of our UTAP-22 Mako jet tactical drones flying with a manned jet fighter aircraft in continuous collaborative airborne operations via tactical data link while flying in formation with one another and also flying with a third digital twin simulated Mako as the lead drone aircraft. The flight consisted of collaborative airborne operations, evaluated command and control through the tactical data link, execution of semi autonomous tasks, execution of autonomous flight in formation with the manned fighter, transfer of Mako control between non line of sight over the horizon operations in the tactical network and transfer of control handoff from the tactical network to an independent dedicated control link.
The two unmanned Kratos drone system formation tests successfully coordinated semi-autonomous payload deployment, with the cradles drones breaking formation to perform independently, with the subsequent rejoin and Loyal trusted Wingman flight, with one Mako being flown as if it were a manned aircraft, and the second Mako joining and sustaining autonomous formation. Throughout the mission, multiple makers were controlled by a single operator.
In the last few weeks, it was reported that certain new systems are now installed in the US Air Force's KC-135 Stratotanker, which will allow the aerial refueling aircraft to serve as a communications node for other platforms, including armed drones like Kratos' Valkyrie and Mako with plans to add underwing pods that will further expand this capability and increase its own effectiveness. It was reported that in recent trials, the KC-135 received data from Kratos UTAP-22 Mako's and it was reported that a certain Kratos drone is being utilized as a Loyal Wingman type drone, also for the KC-135 in tests, demonstrations and experiments over the US Navy test ranges at China Lake, California.
It was reported that this is representative of the advancement of plans to defend vulnerable support aircraft, including tankers utilizing attritable low cost, high performance jet drones. It has been reported that Kratos' Mako has been evaluated by the Air Force Reserve Test Center, and an air launched capacity from an F-15C fighter as part of an additional Loyal Wingman testing program. And it was recently reported a few weeks ago, that drone aircraft like Kratos' XQ-58A Valkyrie the Mako and AirWolf were included in and instrumental in the success of certain simulated war games conducted by the Pentagon.
It was just recently publicly reported that there was a new, previously undisclosed program that Kratos' tactical jet drones have been and are currently flying in that is extremely operationally relevant. And I encourage you to take a look at this as I am not able to discuss it. This is just a brief summary of what we believe is representative of the continued and methodical progress Kratos has been making with the Valkyrie, Mako and other Kratos tactical drones to operational relevance and fielding and why we have increasing confidence in the ultimate success of our tactical drone initiative, and a significant future organic growth trajectory.
Since our last report to you, there has also been additional progression and total addressable market expansion for the Kratos class of affordable jet drones, including it was recently reported that the United States Navy is moving toward an Air Wing that has a 40-60 unmanned manned aircraft split, and over time, intends to shift that to a 60-40 unmanned man split with the goal to ultimately drive an Air Wing that is at least 50% or more unmanned. And that the US Navy also recently stated it would not be hard to imagine in the near future unmanned drones being add jump missile carriers, with missiles, flying defensive combat, spread missions, et cetera. It was also reported that the United States Marine Corps is now envisioning arming autonomous unmanned aircraft with long range anti-ship missiles for future conflicts.
On the Gremlins program, since our last report to you, our confidence in the ultimate success and fielding of Gremlins similar to our increased confidence in Valkyrie and Mako continues to increase, including that was recently reported the United States Air Force is now considering in flight rearming for the Gremlins further expanding their operational capability. This in flight rearming capability would be an addition to in flight recovery for the Gremlins air vehicles. The Air Force reportedly stated that the Gremlins could be rearmed onboard the carrier aircraft, or C-17 for example and then re-launched to participate in defensive counter air and offensive counter air missions as described by the Air Force customer.
We believe that this is representative and an example of the Air Force's considering the use of carrier or mobility aircraft for an expanded set of missions including with unmanned jet drones. Additional Gremlins flights with DARPA and our prime partner Dynamics are planned for the next several months with the expectation for a transition from DARPA to multiple services including the Air Force thereafter. Customer funded flights are continuing with KRatos' AirWolf and other programs and other Kratos tactical drone programs, including Thanatos continue to progress.
We are currently executing under multiple customer funded drone related programs, including also as related to Kratos' jet engine business including Skyborg, Golden Horde, LCASD, LCAT, ABMs and others. And we will continue to update you on our progress as our customers allow. The initial production of 12 Kratos Valkyrie's continues with initial aircraft deliveries expected very shortly now and continuing thereafter. Kratos' Ghost Works top priority new system which I have previously mentioned, is also progressing with first flight scheduled for Q1 of '22.
Since our last report to you certain new tactical drone program opportunities for Kratos' class of drones have been released by the government that we are pursuing, certain of which may be awarded by the end of this year. In Kratos' tactical drone area there are certain we believe to be significant potential catalysts or milestones that could be announced by our customers and/or by Kratos if we are successful, similar to the Air Force's Skyborg related announcement today, occurring over the next few months.
It is important to reiterate that we believe that Kratos' first to market leader position in the tactical drone area, with multiple variants and classes flying today, with systems, payloads and weapons being integrated and tested today, all being built in America, all runway independent, which is a critical must have capability in a combat situation are representative of why we expect Kratos to be incredibly successful in the tactical drone area.
Kratos' target drone programs continue to perform as expected, with an option to the right future growth trajectory forecast, as certain programs continue the transition from development to low rate initial production to full rate production and as we are successful in new target drone opportunities both domestic and international. We are expecting a large number of target drone program awards, including sole source awards in the second half of this year.
Kratos' space and satellite communication business continues to perform very well, including as related to bookings. And our confidence remains high for a base case minimum 10% year-over-year future organic revenue growth trajectory with expanding margins and the potential for even greater future organic growth above our base case if we are successful in certain large new binary opportunities we are currently pursuing, certain of which may be awarded by the end of this year.
Certain key drivers of our confidence in our space business is the success and increased acceptance of Kratos' first to market software defined OpenSpace ground system platform and technology are global owned and operated commercial space domain awareness network and the rapidly growing space market, including 1000s of commercial and national security satellites plan for orbit, all of which will need ground command and control and telemetry tracking and control or TT&C all of which are Kratos specialties.
Space is undergoing a renaissance where advancements in ground systems and satellite technologies are joining to form space networks that support multi-domain missions and broader data requirements. And Kratos is leading the digital transformation on the ground side by introducing into space networks, proven technologies from other network centric industries, enhancing performance and affordability for the Department of Defense and opening the door for the defense industry to better integrate with and capitalize on commercial space assets. We are currently expecting a strong second half of 2021 for Kratos' space and satellite business based on recent program awards, planned production and execution schedules and mix and significant year-over-year organic growth continuing thereafter.
Kratos' Microwave Electronics business is very strong with new opportunities including in the space, satellite, missile and radar areas and we expect them up into the right organic revenue and margin growth trajectory for this business. Kratos' C5ISR business continues performing on GBSD and other strategic Defense programs with GBSD forecast to be a significant future organic growth driver for Kratos and there is now the possibility of certain additional large new program awards for Kratos' C5ISR business in the coming months if Kratos or our team are successful with these pursuits.
Our Rocket System, hypersonic and directed energy businesses are all extremely well positioned in priority national security and funding areas. And we are forecasting future growth in each with our Rocket System business currently looking particularly strong for the second half of this year and into 2022 with multiple missions currently planned. Kratos' next generation engine business continue to make progress in our development programs, including those focused on drones, missiles and powered munitions.
Every Kratos core strategic business is forecasting and up into the right organic growth trajectory with increasing margins, and we saw this organic growth trajectory in the first quarter of 2021 across our core businesses, with the exception of our Training Solutions business. We are focused on executing on a significant number of new programs we have received and we are currently in pursuit of a number of additional new program opportunities and if we are successful could further increase the future organic growth trajectory we are currently forecasting.
For example, we just learned that the team Kratos is on was one of the winners for the DARPA Demonstration Rocket for Agile Cislunar Operations or DRACO, the new killer space propulsion program which is going to be an important future contributor for Kratos. We believe that Kratos could not be better positioned today with our existing portfolio of affordable systems, products and rapid development and fielding capabilities to address the existing and expected future threat environment, and related customer requirements and funding areas. Top execution focus areas right now are hiring qualified people with security clearances to execute our growing program portfolio, managing critical vendors and suppliers and related lead times which are constantly under pressure and monitoring the COVID situation including in India, which is a large end customer for our Israeli microwave business.
I want to end by highlighting the number of new opportunities that Kratos is tracking including classified programs, which is extremely strong and is expected to grow and we believe that we are uniquely qualified for a number of these, including in the space, satellite, unmanned, rocket system in C5ISR areas. At Kratos affordability as a technology and affordability of Kratos' products is an incredible advantage for our company in the current and expected to be future fiscal and budgetary environment. Quantities of fielded technologically advanced systems have a quality all of their own. And we believe that Kratos is the best positioned company in the industry today to address this requirement. Deanna?
Thank you, Eric. Good afternoon. Kratos' first quarter '21 revenues of 194.2 million were at the upper end of our estimated range of 185 million to 195 million.
Our Q1 '21 consolidated operating income was 4.9 million, up from the first quarter of 2020 operating income of 4.7 million, which includes first quarter '21 increases in stock compensation expense of 1.5 million, increased R&D of 2.3 million primarily in the space and satellite business and increased depreciation expense of 500,000 in the current period. As a reminder, over 80% of our total R&D is typically invested in our space and satellite business.
GAAP EPS was $0.01 per share for the first quarter, compared to zero in the first quarter of 2020. Included in GAAP net income is a 2.7 million tax benefit, primarily reflecting the benefit of tax deductions related to stock based compensation expense.
Adjusted EBITDA for the first quarter was 18.1 million above our expectation of 12 million to 16 million, due primarily to a favorable mix of revenues, including certain programs and products and more mature life cycles.
In the first quarter, our Unmanned Systems segment reported revenues of 55.9 million, up 33.1% from the first quarter of 2020 due primarily to ramps in production and target programs, including the 177 program, and work performed on the Valkyrie program.
Unmanned Systems generated operating income of 4.2 million, up from 500,000 in the first quarter of 2020, primarily reflecting the increased drone system related revenues and leverage achieved on the fixed overhead manufacturing and G&A infrastructure.
Unmanned Systems adjusted EBITDA of 6.4 million was up from 2.3 million in the first quarter of 2020.
KGS reported revenues of 138.3 million, up from 126.9 million in the first quarter of '20, reflecting 8.6 million from the recent ASC acquisition, and organic growth across all KGS businesses with the exception of our Training Solutions business, including in our space and satellite defense rocket, C5ISR, microwave products and turbine engine businesses.
This increase was offset partially by a net reduction of approximately 5 million in our Training Solutions business, which was related to the previously disclosed reduction in scope of certain international contracts.
KGS reported operating income of 7.1 million, down from 9.3 million in the first quarter of 2020. KGS first quarter '21 adjusted EBITDA was 11.7 million, down from 14 million in the first quarter of '20, reflecting a less favorable mix of revenues, including an increase in product and equipment related revenues contributed from the recent ASC acquisition, coupled with increased R&D cost of approximately 2.3 million related to our space and satellite business.
Our consolidated adjusted EBITDA for the first quarter is from consolidated continuing operations, including net income or loss attributable to non-controlling interest, and excludes non-cash stock based compensation costs of 6.2 million, acquisition and restructuring related cost of 200,000, and foreign transaction loss of 100,000.
Moving on to the balance sheet and liquidity, our cash balance was 383.6 million at March 28 and we had zero amounts outstanding in our bank line of credit and 5.9 million of letters of credit outstanding. Debt outstanding was 300.3 million at quarter end and net cash at quarter end was 83.3 million.
Cash flow generated from operations for the first quarter was 22.7 million, less CapEx of 9.6 million or free cash flow generated from operations of 13.1 million. Our contract mix for the quarter was 70% from fixed price contracts, 24% from cost plus type contracts and 6% from time and material contracts.
Revenues generated from contracts with the US federal government during the quarter were approximately 73%, which include revenues generated from contracts with the DoD, non DoD federal government agencies and SMS contracts which were approximately 6%. We generated 7% from commercial customers and 20% from foreign customers.
Backlog at quarter end was 892.9 million, down sequentially from fourth quarter end backlog of 922.2 million, with bookings of 164.9 million and a book-to-bill ratio of 0.8 to 1 for the first quarter of '21. Budget backlog at quarter end was 620.7 million with 272.2 million unfunded.
For the last 12 months ended March 28, 2021 our book-to-bill ratio was 1.3 to 1 with total bookings of 982.6 million. Our book-to-bill ratio for the last 12 months ended 3-28-21 was 1.2 to 1 for Unmanned Systems segment and 1.3 to 1 for our KGS segment.
And now for our financial guidance, we are providing our initial second quarter guidance of revenues of 195 million to 205 million and adjusted EBITDA of 14 million to 18 million. As previously discussed, our guidance reflects the impact of the recent loss of an international training contract, which had contributed over 34.5 million in revenue in 2020 and which is expected to generate approximately 14 million in '21, or a decrease of 20 million year-over-year, and includes a full year of the recent ASC Signal acquisition closed in mid 2020.
Kratos' revenue mix for '21 is expected to be more developmentally weighted, including as a result of the large number of new contract awards that we have received and includes discretionary investments versus a more mature product lifecycle in 2020.
As a reminder, our 2021 fiscal year guidance includes the current forecast, financial contribution from the recent Skyborg, AFRL and other tactical drone pro system contract awards, including those related to Valkyrie.
Kratos' fiscal year '21 guidance excludes any contribution from potential additional Valkyrie or other tactical drone production or system contracts with potential additional orders to be taken into consideration. And our financial forecasted adjusted one such contracts or orders are received and the related financial contribution can be estimated, which would be dependent on criteria including the type of contract vehicle, scope, timing and period of performance. Eric?
Thank you, Deanna. With that we'll turn it over to the moderator for any questions.
[Operator Instructions] And our first question comes from Josh Sullivan of Benchmark. Please ask your question.
Hey, good evening.
Good evening, sir.
Eric, you mentioned quantity as having a quality all its own with drones. Really, a couple of your customers have said that. You have a number of flight tests going on here with various drone applications. But when does the customer start to show interest in your manufacturing capacity? Or when do we get close enough where that quantity and manufacturing capacity becomes kind of relevant?
I believe toward the end of this year we're going to start – as I mentioned, we're going to start delivering Valkyrie's off the line in the next couple of months. And then we're going to be delivering them around monthly thereafter. There are a number of opportunities that we have been working on that are coming close to fruition. I believe they're coming close to fruition because the company recognizes that we have a hot production line. We're not building prototypes. We are already talking about the second – I'm going to use the term variant based on customer input to it. So I think as we've been evolving here Josh, the customer – I believe they've obviously been aware of it. They're becoming more and more focused on it as we're nearing the initial operating capability dates that the Air Force has talked about.
And then the KC-135 tanker trial that you mentioned is that part of Skyborg or is that a different program? Can you just provide some color on that?
That's not part of Skyborg. That's part of a different program. It was publicly released what that is. I'm unable to talk about that program.
Okay and then maybe just on KGS, the commercial space ground opportunity, how to we size that? How should we think about that rolling out? Maybe how many ground stations are you expecting over the next 12 to 18 months?
Yeah. Josh I don't – I'm not looking at it from the ground station standpoint. And let me tell you why because it's evolving more to a software model with OpenSpace because OpenSpace can run on a standard computer, it can run on the internet, it can run on the web. So we're looking at it. What we have mapped out is we've won a lot of contracts most – a lot of which I can't talk about because they're classified. So this is both on the commercial in the military side. We have the delivery schedules. I forget offhand what our book-to-bill on our space business was in Q1, but I think it was very strong and it looks very strong for the rest of the year. So it certainly was 1.3 to 1, Deanna tells me in space business. So the way we're looking at it is year-over-year revenue growth. And as I've said, we're very comfortable with the base case that we're going to grow year-over-year 10%, 10%, 10%. And if we hit some of these new big ground infrastructure opportunities, we're going after that we never could before because we didn't have the system. Now we do. We could do a little step functions along the way, where we're really excited about this, because of the just the number of satellites that are going up, the LEOs and MEOs in particular, which has droven a whole new architecture on the ground. And similar to the drones, similar to our engines, we're first to market.
Thank you for taking questions.
Yes, sir.
Our next question is from Ken Herbert of Canaccord. Your line is open.
Good afternoon Eric and Deanna.
Good afternoon, sir.
I just wanted to first start with the margins in the KGS business. I know, Deanna you called out a step up in R&D relative to last year. And it sounds like ASC is a bit of a mixed headwind. But how do we – how should we think about margins progressing here sequentially to the second and third quarter of the rest of the year within that segment? Do we maybe get back up to the high single digits, is that realistic? Or what's the outlook for margins in the KGS business?
Yeah. We expect it to be stronger in the second half based on delivery and execution schedules for the second half. And that's primarily driven in our space business and what we see from an execution standpoint and schedule for the second half.
Okay and is the elevated R&D spend is that expected to continue?
That will – that's expected to remain at that same level, but as the revenue rounds, then we would get leverage off of some of that cost structure if you will.
Yeah. Okay. Perfect. And if I could, just on the flip side in Unmanned, nice margins in the quarter, was there anything unusual that benefited the quarter in terms of margins?
Nothing that that is significant to call out, no.
Okay, so this run rate here is a good starting point as we go through the rest of the year.
It's going to depend on mix each quarter as far as what we're shipping and building. So it was a favorable mix in the quarter. So obviously, we don't give margin forecast for – on a second perspective, but it was particularly strong in the first quarter.
Okay, that's helpful. Perfect. I'll pass it back there. Thank you.
Thank you.
Your next question is from Mike Crawford of B. Riley Securities. Please ask your question.
Thank you. Thanks for all the color. Could you give a rough size or order of magnitude of these different business units within KGS? Like microwave electronics, rocket, space, maybe on a run rate or annual basis?
So Mike, I can comment on just size wise what it was in 2020. And as we've talked about, we've said we expect in up into the right trajectory across all the business units. I'll respond to your question accordingly. So for our C5 business that was approximately 75 million last year. Our microwave business was approximately 60 to 65. Our rocket support business was approximately 70. Our turban business was approximately 50 to 55. And that was negatively impacted most significantly by COVID. And we still saw some of that impact on the commercial side of KTT, but it was actually offset by some growth on the government side. So we did see organic growth this quarter, but it was on the defense side, on the government side, on the turban. And then our space and training business combined with ASC, that's approximately – was about 320. I'm sorry, about 300 with just space and then with training that was about another 70.
I'm sorry, Deanna, it's 230 with space and then 70 with training?
No, so space including ASC was just under 300. And then training was just under 70.
Okay, thank you, Deanna. Then just further on space, in the past, I think you've said that revenues could be flattish there, though margins would be increasing as the more transition to software, but for example, with these ground opportunities, is this a case where you're providing hardware like quantum radios and software or it's just a big mix? Or exactly what's going on with that business currently?
Yeah. We are providing both. So the legacy business where geosynchronous orbit satellites that have a particular mission, they have very specialized ground equipment that are dedicated to that satellite and the mission of that satellite. We're still delivering under those programs. So think SBIR, WGS, AEHF, things like that, okay. Those are more hardware or firmware intensive, the legacy GEOs, okay. Newer, GEOs, LEOs and MEOs are moving more to software, where we're not providing big racks of ground equipment for Earth station to command and control or telemetry and tracking. We're tracking – we're providing maybe some boards with a lot of software, or the software is being installed literally on the web to be able to do it, so more of a software defined radio model. And so right now, it's a mix, because there are still a lot of legacy systems up there. And in certain areas, there are still a lot of systems like that still going up.
Okay, that's helpful. Thank you, Eric. And then switching gears for last question. As you have these multiple programs moving to initial operating capability, but you don't have production –full right production orders in hand for them and you're – you have these Valkyrie's coming up online a couple months. So when you do get such orders, particularly for the Valkyrie's that you've been building on your own dime, does that mean then that that would represent potential upside to the guidance that you've issued today or is some of that factored in?
If we were to get in – so if we were to get contracts in addition to the Skyborg program contracts we've won, and the LCASD, LCAT contracts we've won that includes deliveries of air planes, that include deliveries of the 12 that we're building. If we were to get additional tasking for additional aircraft, that will be upside to our model this year.
Okay, thank you for the clarification. Thank you.
And Mike just to correct a statement I had made on the 300 that I gave that does include training without 70, so just want to correct that. Thanks.
Thank you.
Our next question comes from the line of Peter Arment of Baird. Your line is open.
Hi, good afternoon, Eric and Deanna. Eric, so Milestone 1 completed for AAAx campaign. And it sounds like the Air Force is really describing the Skyborg program as kind of a – coming up with a marathon of tests here in the many months I guess. How are you looking at it from your seat in terms of the pace of testing? Is it going to be something where we're going to start to see a lot more testing on a monthly basis across the board? Maybe you could describe it, how you're saying it.
Testing has definitely increased and it is expected and forecast to continue to increase literally as we speak across multiple programs that we have. So it is ramping up significantly.
Has there been any disruption from COVID this quarter?
No, it was all last year. Last year set us back – set the program's back, but no, not – none this year thus far.
And outside of Valkyrie is there anything else that's moving towards where we could potentially think about an LREP award or something like that? And what kind of timeframe do you think about when you think about that?
I am going to – I have to answer this very carefully because I cannot and I will not get ahead of the customers. And obviously we are aware of a lot more than we can talk to you about publicly, Okay. I have every expectation that the Valkyrie is going to be deployed, and we are going to go into production on the Valkyrie. I have every expectation that the Gremlin is going to transition from DARPA from the research agency to a service or multiple services after we complete the retrieval demonstration later this year. I have every expectation of that. And I have more confidence than ever now that the Mako is also going to go into production.
And Peter, to me it's this simple. We are the only company in the world that has jet drones in this class flying today. No one else has any and that includes the BATS. It's not in this class. It's not even close, all right. We have four that I can talk to you about and I always say it that way. We have the Valkyrie, we have the Mako, we have the Gremlins, and we have AirWolf that I can talk to you about, okay. I want to emphasize it. There's not else out there. That's why you don't read about any other company, testing weapons, deploying payloads, doing what the Air Force announced today. And this is why I'm so confident of the end game and so long as we execute, we don't get distracted. We hold our price points which the competition cannot come close to. We are going to win.
Yeah. And just for clarification Eric, you mentioned on the bookings, in Unmanned you had booked – there was an $86 million award that came in I guess in early April, so that was not part of the book-to-bill where the Unmanned fit at 0.7 correct for the quarter.
That is not included in our – that is not included in our book-to-bill. Let me tell you that contract, okay. And I think we put out a press release on it. That was a competitive award we won. It's a single award. MAC, okay. It is for drone command and control systems and other systems. I believe it's a $60 million base with two $10 million or something like that options to get us to the 85, okay. I fully expect that over the life of that contract I do, me, to be fully or substantially funded, alright, because I know what that is for. We're the only guy that's got it. We're the only guy that can do it. And the United States Army needs it.
But just to further clarify that Peter, although we expect it to be fully funded since it is a MAC, under the new guidelines for backlog under ASC 60 –
It's an IDIQ, single award IDIQ, yeah, sorry.
Okay. Since it's an IDIQ, it would most likely not be included in our bookings until actual funding is received as it's incrementally funded. That would be when we would record it as a booking.
Yeah, Peter, I'm adding this. It's a single award, it is not a MAC, IDIQ 60 base options to get to 86.
Appreciate the clarification, Deanna. Thanks. Thanks for having me.
Okay.
Your next question is from Sheila Kahyaoglu of Jefferies. Your line is open.
Thank you. Good afternoon, guys.
Hi, Sheila.
Eric, I wanted to follow up on a few questions that have already been asked in a way. Can you just maybe talk about your expectations, whether for '21 or '22 in terms of your revenue contribution from Mako, Valkyrie and AirWolf. Yeah. How do we think about when those opportunities convert into revenue dollars and the cadence of that? I know Valkyrie is already contributing.
Right, so Valkyrie is – right now Valkyrie is contributing. Obviously, Mako is contributing. Gremlins had slowed down because of the delay in testing. I expect that to pick back up very soon as we advance the test regime. AirWolf is funded. And we have done a number of tests in the last few months. I'm going to say between five and 10. That is fully funded. So with that as the backdrop to answer your question directly, I expect the Valkyrie revenue to continue to increase as we head toward the end of this year. I think Gremlins is going to increase somewhat, but not materially to the end of this year, okay. The one that is going to increase is Thanatos –is increasing. And of course successful between now and the end of the year, we're going to get the second big block of funding on that. So that means 2022 on Thanatos will be a significant step up. I think Valkyrie is going to be a very significant step up from '21 to 2. Its possible Gremlins will be a significant step up from '21 to '22. And AirWolf – I don't want to comment on AirWolf yet because there are two – there are a couple of elements that we have to demonstrate that are sporty and until we demonstrate them I don't want to get ahead of myself on that one.
Okay, no, that's fair. Thank you. And then maybe one for Deanna, just because Q1 free cash flow was really good. And I think you hit your OCS number for the year in the first quarter. So maybe, how do we bridge it, is there massive investment, working capital use over the next three quarters?
Sure. So it was very particularly strong in the first quarter. CapEx was less than what we had originally anticipated for the first quarter. So Q2 and the remainder of 2021 CapEx is expected to be at a much higher run rate than Q1 was. As a reminder, we guided to 55 million to 60 million of CapEx for the year and we've spent about 8 million or 9 million in the first quarter. So the next three quarters CapEx is going to be particularly higher. There's also about 10 million of nonrecurring engineering that we're investing for new rocket systems. And that is just starting to ramp, so we'll see a pickup on that working capital use and that will be all in cash flow from ops in Q2, Q3, Q4, then we've got the payback on the 5 million of deferred payroll taxes, and that will be in the fourth quarter. So our cash flow guidance that we gave on our last call for FY '21 that remained unchanged. So you would expect with the strong cash flow in the first quarter, we would see some uses working capital in the next couple of quarters.
Okay, thank you.
Sure.
And our next question is from Michael Ciarmoli of Truist Securities. Please ask your question.
Hey, good evening, guys. Thanks for taking the questions. Eric, in your opening monologue, you were very optimistic talking about the organic growth. Sounds like the budget came in above expectations, growth accelerating, book-to-bill below one time, were there any surprises there and maybe despite all the optimism, what prevented you from raising the guidance?
Right, so on the on the book-to-bill there was no surprise at all. As you know, the last couple, three quarters, we just killed it. And as I laid out in my prepared remarks, the second half of this – and it may begin in Q2, we're going to kill it. We've got some extremely large programs, most of which are sole source we're expecting to book in the second half of next year. You're going to see – imminently, we're going to be ripping off a number of large satellite wins we've won that were waiting for customer approval to announce. So our pipeline is incredibly strong. And unless something occurs that I just don't foresee. So for example, another variant of COVID shows up and shuts the United States down again. We are very, very comfortable in our forecast for this year. And we are very, very comfortable in me saying even though we're not going to give the guidance yet, I'm looking for a step function in organic growth for '22 over 21, literally a step by step. To your question on why we don't raise the guidance? I don't want to do it right now. You I want to stay comfortable. I want to execute and if we keep knocking off quarters like this one that'll take care of itself if you know what I mean.
Got it. What – how many variants or platforms do you think the Air Force wants to fly Skyborg on before making a significant commitment and maybe to put that not just Kratos platforms.
I have – if you can see me, I'm grinning ear to ear. I'm going to answer it this way. I have to answer it this way. I am extremely comfortable with Kratos' position right now on Skyborg and every related ancillary program with power drones, very comfortable, okay. No one else has anything flying in this class, nobody. Not that. The Boeing BATS has flown once. It's made an Australia. I continue to believe that is a significant handicap that it's made in Australia. It has wheels. The requirement is for no wheels. It's for runway independence. I don't know what they were thinking. They must have a different con ops in mind. So I am extremely comfortable where we are at.
Got it. Last one for me. What is the latest? You kind of talked about it last quarter, the drone port that being a strategic asset? What's the latest on that facility on potential operating cadence?
Upgrading year to year, hopefully, when we report next quarter, I am going to tell you about drone flights that are at Kratos' drone port in Oklahoma. That's the plan.
Got it? All right, very good. I'll jump back in the queue.
Yeah.
And our next question is from Seth Seifman of JP Morgan. Your line is open.
Hey, good afternoon. First question I have is just about, I think last quarter you talked about there being some significant M&A opportunities out there. And I was just wondering if you could update us on that.
Absolutely. And you guys have been laughing today. That's because at the end of the call, I was asked if I was looking at smaller ones or bigger ones, and I said bigger ones. Seth, right now, we are heads down on our current contract portfolio that we've won, our program portfolio and we've got a number of bids. I think we're going to win. I really think we're going to win. We're one of only two guys that can bid on some of these that have the claws. I do not see us doing anything off size, anything off size for the foreseeable future, okay. There are a couple of opportunities. These are not auctions. These are people we know, people I know, that are right in our bailiwick, one of them, if we are able to do it, this is one plus one equals four. And I'm not going to tell you guys about it, because it's incredibly competitive differentiator for us that would take us to the next level with something. But these are small, these aren't big. And so that don't – never say never, but highly, extremely unlikely we do anything off size.
Okay, thanks. That's helpful. And then for – just as a final question, maybe if you could help a little bit just to walk through what one of these OpenSpace wins might entail the larger ones that you're talking about? Sort of so let's say you win a contract, what's kind of the scale that we're talking about? And then what is it – what's kind of the duration? Is it – then you do software development for some period of time, is this like a step function and margins then for KGS? Maybe just walk us through what one of these wins would look like in terms of what the company is actually going to do?
Okay, so we're – one of these – I expect to win more than one. They're between 50 million and 100 million each. The period of performance is approximately three years, alright. Some of them may include antennas from ASC. So that's going to – that will give you an idea of something there. So there's going to be a hardware component. I'm not going to get into accounting on how revenue would work, whether it's delivery or whatever. But I'll tell you, this is how I would see it, it's got to be shaped like a bell curve over three years. So it'll ramp up as we're building the hardware and as we're modifying the software, the core software that we have for that specific application. So let's say that application is somebody is putting up satellites, they're putting them up, they want to be able to command and control them and do TT&C remotely. They don't want a big fixed earth station infrastructure. They want to do it via software.
We will design that architecture form, we probably do a lot of that in the RFP process. We will design that architecture for them. We're awarded it. We will develop a limited amount of hardware. If there's antennas, there'll be a little bit more hardware, but nothing like there used to be on earth station ground control stations like this. We will modify the software. We would – in the first year we would deliver it all out in year two, the bell curve goes up. We complete delivery in year three, the bell curve comes down and then it goes into a sustainment mode with the customer. And then it is possible with our space domain awareness global system, a lot of our customers then are buying from us a service off of that. So we can monitor their satellites globally, where they're at how they're performing. If anybody's interfering with them on the commercial side, stuff like that. That's what it looks like.
Great. Thank you very much.
Yeah.
And our next question is from Pete Skibitski of Alembic Global. Your line is open.
Yeah, good afternoon, Eric and Deanna nice quarter.
Thanks Pete.
Let me start, Eric, at the large number of target drone awards in the in the second half of the year that you spoke to, how are you feeling about schedule risk on those and if they stick to schedule, do you end up hitting your $250 million in revenue target in 2022? And let me just kind of validate, my recollection is once classified, I think maybe in international and one of the US services, I was just wondering if you could just fill out the color for us around that.
Yeah. On the last call we had talked about that. There's an international – there's a certain international target drone contract program we have won. A matter of fact, the contract has been executed. My opinion if the presidential administrations hadn't changed, we would have that contract by now. But the administration's changed. So it's in State Department and US Government review for approval. I fully expect us to get that. I have put that assumption, I think out into the second half of this year, alright. Well, that won't contribute until 2023, okay. That's piece number one, okay. The other two major pieces is I think it's year three. And then there are going to be multiple years after this of SSAT program full rate production, we expect to get that in the second half of this year, okay. That will start building out in 2022. And we are right now in negotiations with the Air Force on the next multiyear SSAT program. We expect to get that in the second half of this year, if all of those pieces fall into place, okay. And I believe they will, okay. And then there's then there's one other thing we need to get. I'm not going to get into it here because it is competitive proprietary. Next year, we should get there.
Okay, even with the International, I thought you might – the international said when executed 2023 –
No, because I believe – Deanna will help me. I believe that was a unit of delivery one.
Yeah, with the new accounting rules if – especially with international contracts, if you don't meet certain criteria, then it what would have historically been percent of completion is now in units of delivery or as revenue is shipped. And those shipment schedules are not scheduled until '23. And that's why Eric's commenting that it would not impact until '23.
Okay, so you can hit 250 in 2022 you're saying just with OUTSAT, with Air Force 1 and you're holding?
Yeah, if we get it – let's say we have an extended – significant extended continuing resolution, okay. That might – I don't know this, I don't know, that could impact SSAT, that could impact OUTSAT. If that pushes that out then it's later in '22 or '23. You see what I mean that the cards are all laying there. It's the funding timing for the big US government ones.
Yeah. Okay, fair enough. Last one for me, the potential new C5 program opportunities you mentioned, you maybe said second for those. Any color at all about services or size or timing or mission area.
So there are two of them. They're both over 100 million for us, alright. Okay, now, I have to be very careful here. Take missile defense stuff, missile defense related stuff, think that.
Okay, fair enough. Yeah. No, appreciate all the color.
Yeah.
[Operator Instructions] Our next question is from Joe Gomes of Noble Capital. Your line is open.
Good afternoon. Thanks for taking my questions.
Hey, Joe.
So I know you've talked about this a couple of the other questions, but just kind of wanted to drill down just a little bit more on the Skyborg. If I recall correctly and please correct me if I am wrong, part of the requirement was demonstration by May of this year, of at least fly and maybe even more attributes for the drones. Is that correct? And outside of your drone has anybody else been able to demonstrate what is required under the contract?
No one else has demonstrated anything.
Okay. Thank you on that clarification.
And your memory was spot on correct.
Okay, so they have a – I don't know if there was a date in May. But if there was, there's just a couple three weeks that that competitors or the other companies have to demonstrate whatever needs to be demonstrated under the award.
So as you know, there were two other competitors Boeing and GA. Boeing's plane is in Australia and it's flown one time, okay. So that should give you an idea of what I think about that one. And there has been some information that GA has put out on their Avenger, which is what they're going to be utilizing. You can go take a look at that. But this ties into my response to Mr. Tamale why I am literally more confident than I've ever been because we're the only guy that has air planes in this class flying today.
Right. Okay. And last quarter, you mentioned potential Valkyrie opportunity. I mean, kind of termed it where you would own the drones and the government would inquire lease and quote the drones. Any movement on that or any more detail you can give us on that?
I can tell you that a solicitation is coming and source selection is going to begin for that opportunity. And we intend – we believe we're the only person that is going to be able to satisfy that aspect. And we intend on going after it.
Okay and one last one, because you didn't mention a whole lot here on engine opportunities on the call. I was wondering maybe give us a little more color detail on KTT. And where do you see most promising near-term opportunities for that segment?
I'm glad you asked that Joe. I really am. I'm surprised I wasn't asked about our team's DARPA award on that nuclear engine space program. We have incredible capability in this company. A lot of it I don't talk about because I talk too long on some of these earnings calls. We – on the engine side we – it's very competitive, because we're looking to be – to replace some people. We – if we're successful this year, we will be delivering engines that are going to be integrated into systems that are going to be flying before the end of this year. And if we're successful, we pull that off. I believe this is my opinion that is going to be substantially similar to October, November, December of 2015 when Kratos flew the Mako and we demonstrated we could do it, and it's no longer a PowerPoint. And then we started winning all the programs. I believe that is the opportunity we have on our engine business, where we are about to do something, and if we're successful, that is going to be the impetus for it to begin for us next year.
Okay, great. Eric, thank you very much. Appreciate you taking the time to answer my questions.
Absolutely, buddy. Thank you.
Our next question is from Ken Herbert of Canaccord. Your line is open.
Eric, I just had a quick follow up. In your opening comments, you sounded very confident with new duty leadership and their ability to fund innovation. Historically, Congress has kept a lot of legacy programs going maybe at the expense of innovation. How do you see that playing out through this budget cycle as the top line gets a little tighter?
Yeah, I think we're all going to have a front row seat for an incredible battle between legacy systems and the guys that make them and the states and the congressional districts that they're in, versus those legacy systems. They're wonderful. They're the best on the planet. But they're not the right ones to address the Russia and China threat. They're just not. And the sustainment cost to maintain – to operate them, maintain them and keep them working are incredibly high, incredibly high. And as we know, and I can get into more details on if you want technology now specifically related to weapon systems, it evolve every couple of years. That's why it's moving more and more to software, okay. And the hardware is a truck and the software or the sensor is the killer app of it that makes it so lethal. And so we have with the Russia and China threat, the Biden administration and the previous administration, they recognize.
The only way we can address these threats to offset them is we have to pivot away from a lot of these legacy systems, and there are a lot of them because we've been at war with asymmetric warfare for the past 25 years. We've got to pivot away from them. We've got a free that money up to get into new technologies and new systems that are not designed for asymmetric warfare. They're designed for strategic warfare, long range warfare, cyber hardened warfare, tempest trident carbon systems, things like that. That's what this is all moving back towards. And we are extremely fortunate that when Deanna and I set the company up, that is how we position this company. We didn't position it for the OCL budgets. We positioned it for strategic competition. And here we are.
Perfect. Thanks, Eric.
Yeah.
And there are no further questions on queue. I would like to turn the call over to Eric DeMarco for closing remarks.
Great. Thank you. Thank you very much for joining us today. And we truly are going to look forward to talking to you guys again at the end of Q2 to update you on additional progress. Thank you.