Q2 2020 Kratos Defense and Security Solutions Inc Earnings Call
[music].
This conference call all that stuff in place a need to prevent any background noise.
After the speaker's remarks, there will be question and that's a session. If you would like I said, let's just doing just fine.
As far the number one on your telephone keypad.
Thank you and I would now like starting to go over to me My read Mendoza. Please go ahead.
Thanks.
Good afternoon, everyone.
Yeah.
Okay.
Second quarter.
Oh.
Hi, Eric Demarco.
[laughter] Executive officer.
<unk> Executive Vice President.
Financial Officer.
Today's call I'd like everyone.
No.
Our paragraph.
At the end of today's press release.
Yeah, Rob emphasizes that major uncertainties and risks inherent in the Portland.
People need this afternoon.
These uncertainties and risks in mine as we discussed teachers to teach initiatives potential market opportunities.
Regional outlooks and financial guidance during today's call.
Also included discussion of non-GAAP financial measures at that time decline in vacation.
Non-GAAP financial measures not considered in isolation from or at least for financial information presented.
Accordingly at the end of today's press release, we have provided a reconciliation of these non-GAAP financial measures to the company financial results prepared in accordance with gap.
Ill now turn the call over to Mark.
Thank you Marie and good afternoon [noise].
Great just continues to follow what we believed to be industry best practices during a continuing cobot 19 crisis.
Including working at home, where practical social distancing.
So what do you cleaning temperature checks only mission essential travel occurring.
We also continue to monitor and work closely with our supply chain and vendors identifying and formulating additional sources and backup plans, where we can for critical or potentially vulnerable sources to credo says programs.
We have had no significant supply chain impacts to date.
So our primary customers the United States government and the Department of Defense work at home social different thing and travel restrictions requirements continue to impact the timing of certain expected contract awards and delay certain planned for system flights, a government Rangers and the achievement of certain contractual miles.
Stones.
Including customer product acceptance. The kratos team continues to successfully adjust adapt manage and execute and challenging environment.
As you know criticism technology company and at Credo affordability is a technology.
Our proven leading technology system integration approach designed to reduce financial and schedule risk accelerate development testing and fielding a lower cost continues to be strong desired by our customers.
And we believe it isn't important competitive differentiator for our company.
We also expect.
Credo says venture capital in commercial based rapid system development.
Building on overall affordability business model will be even more valuable to our customer base in a future environment, which includes increased federal government deficits and potential reduced discretionary spending.
We believe the kratos as the affordable alternative technology company and system provider.
Isn't the right place right time with the right products and at the right price point for today's environment to address U.S. mission critical National security priorities.
Recapitalization of strategic weapons systems continues to provide a growing an overall strong market opportunity environment for virtually all of our business areas as represented by EUR 1.2 to one book to Bill ratio in Q2 indoor approximate 8 billion dollar bit an opportunity pipeline.
In the second quarter Credo substation satellite communications business continued its transition to a software defined based business, including a focus on low Earth orbit middle Earth orbit and geostationary orbit satellites systems and that was related to Miss missile defense on hypersonic system applications.
Within Credo space Division, we have been making substantial investments to create the world's first dynamic digital space ground product family.
With the coming of Fiveg, and new software defined space craft, the intersection and integration of space and terrestrial networks, particularly for mobility based defense and commercial applications has become very clear.
Additionally, new developmental programs, such as hypersonic and ballistic space tracking sensor or H.D., TFS and tactical intelligence targeting access node or Titan will require in new and resilient dynamic ground infrastructure.
Accordingly, a new kratos product family, the first of which we expect to begin to deliver in Q1 of 21.
Is designed to enable spacecraft and satellite operators to securely connect operate and manage within terrestrial software defined networks.
Fighting a seamless space to terrestrial ground platform.
We believe the same technology can also be used as part of the 1.5 billion dollar plus investment necessary for clearing the C band spectrum within the U.S. for Fiveg.
And we're in discussions with many of the satellite operators as they begin their transformation to digital infrastructure.
We're very excited about Kratos is five Gi and our dynamic software defined strategy.
The second quarter, we announced the acquisition of a I see an antenna system and technology leader positioning kratos to be an even more comprehensive space and satellite communication systems provider to our de Eau de national security and other customers.
Hey, I see fit squarely in Credo stated strategic model of being a unique differentiated technology product and system provider and being either number one or number two on our market space.
And our space business, we were recently informed that one of our largest and most important contracts, which was coming up for recompete at the end of this year has now been extended by the customer with credo. So through the end of 2021.
This is an outstanding piece of news for our company. That's Kratos now has only one significant recompete coming up at the end of this year 2020, which isn't our training business [noise].
[noise] representative space programs Cradle supports include OPI, our servers, WGS AG, Jeff and ULA Wesson GPS and we are currently forecasting our space business to have a strong Q3 in Q4 of this year.
Our pay TPN engine business next generation at affordable system development initiatives and programs, which are focused on the expected to be extremely large attributable expendable into reusable jet drone and tactical missile markets remained on track and on budget in Q2.
At this time, we have several cradles next generation affordable engines in our class running including for the Grey Wolf low cost cruise missile system, which was recently reported.
As I mentioned Kratos is affordable high performance engines are focused on new and planned for cruise missiles powered weapons and drone systems, including as would be associated with the Sky Board and Golden hoard Vanguard programs and also a b M S.
Our objective is for kratos engines to be disruptive market industry growth driver similar to our expectations for Kratos is high performance jet drones.
The class of engines Kratos is focused on is typically the number one bill of material cost item in the related system.
And our plan is to be to deliver more efficient powerful and capable engines at a significantly reduce cost so that more capable systems can be procured in larger quantities.
At lower prices.
We also see or engines further increasing kratos is drone and tactical weapons systems affordability and low cost competitive advantage, while bringing greater value to the customer set.
We are currently forecasting to achieve certain important ground in flight test milestones that are engine businesses and the second half of this year and next year and we believe that we're on track for our plan to achieve future production for engines.
As we discussed on our first quarter call pay TV commercial business areas are being adversely impacted by the global covert 19 pandemic and as a result, K T T financial performance for the second quarter came in below our expectations.
Unfortunately this impact is now expected to continue throughout the remainder of 2020.
With the current estimated impact being incorporated in our updated financial forecast.
Credo Sci Fi bias, our business continues to perform well, including a large second quarter missile defense related contract Award.
Our Sci Fi bias, our business supports missile defense space and satellite strategic triad, the unmanned drone area Highpower directed energy combat another systems.
As previously reported earlier this year, Northrop Grumman announced that Credo 65, IAH SAR as part of the Northrop ground beef strategic deterrent team and we're looking forward to supporting Northrop and incredible partner Credo says on this critically important national Security program [noise].
On the 50 million dollar contract award the Kratos received early in Q1 of this year, which was subsequently protested by a competitor the customers currently going through a procurement reevaluation, we're awaiting the determination.
We are currently forecasting strong revenue and EBITDA performance in the second half of 2024, Sci Fi bias, our business unit with a significant amount of you expected production in deliveries driven by a 2.4 to one second quarter book to Bill ratio for this business.
Great doses Israeli based microwave electronics business continued to perform strongly in the second quarter of 2020, as we increase production on certain programs and we are currently forecasting significant revenue and profit growth in the second half of this year as the first as compare to the first half as these programs ramp.
The electromagnetic spectrum and microwave electronics area are two of the highest priority and well funded areas in both the United States and international.
And the U.S. and its allies pivot and focus to potential peer near peer conflict and Credo says microwave business is uniquely positioned to address them grow and this mission critical area.
Representative systems Kratos is microwave business supports include F 15, F 16, grip and iron Dome Barach Spider Arrow in filling of David.
This is rocket support services business had a very solid second quarter and we are expecting continued solid performance for the second half of the year for this business.
Rss is currently working on a number of ballistic missile target and other program launch systems with Kratos is 2021 mission launch portfolio looking very substantial based on current production and the launch manifest.
Similar to Kratos satellite C is our and microwave electronics business areas Rss is uniquely positioned and well funded missile defense and hypersonic program opportunity areas.
Great doses training solution business had lower than expected revenues and EBITDA in Q2, and we are focusing on a large international program Recompete at the end of this year, but I mentioned previously.
Our unmanned target drone systems business continued strong execution in the second quarter with the U.S. Navy Air Force and army being or primary customers.
We continue to track towards full rate production on the Navy S.A.T. and another program.
The increased future quantities with the U.S. Army and the U.S. Air Force and we're tracking for annual revenue target drone objective of a quarter billion dollars in revenue.
International target drone demand also remained strong.
Driven by systems testing and evaluation requirements related to the recapitalization of weapons systems.
And we are currently expecting two large drone system orders in the second half of the year.
Since our last report to you we have continued to make significant progress and Kratos is tactical drone system business with the total addressable market opportunity. So this class of drone and for the engines they utilize continuing continuing to expand.
At the end of July It was reported that Kratos was one of four recipients of at 400 million dollar ceiling Mack Sky Board I'd I few contract.
Sky Board one of three USA F Vanguard programs outlined in the air for Science and Technology 2030 initiative.
As an affordable unmanned system that will partner with fighter Jets and utilize artificial intelligence to conduct stripe and intelligence collection missions that are too dangerous for mandate aircraft significantly increasing capability and being a force multiplier of United States Air Force.
The vanguard initiatives objective is to accelerate the time it takes to go from research to operational use.
In the USA F. has stated that at once Skype work to be a program of record and drones to be field and an operationally capable by 2023.
Under the Air Force's Sky Board program as reflected in a recent air Force video.
There are envisioned to be multiple types or classes of drones, including expendable like Kratos is air Wolf reuse bubbles like our gremlins or May go tradeables like our Valkyrie.
And exquisitely.
Like certain of Credo says other program drones.
With these various drone classes admission specifically designed for permissive contested and highly contested environments.
We believe that in addition of Kratos This partnership with the Air Force on the execute 58, eight and other related initiatives, we are uniquely positioned for future Sky board the opportunity including.
The Valkyrie program, which is a partnership between the Air Force Research Laboratory and Kratos to develop semi autonomous drones that can work in concert with on man fighters.
The Valkyrie is affordable it is flying today that is not a model a powerpoint or an ex was at high cost aircraft.
As part of Credo says partnership with the USA off on the execute 58 day.
We have two kratos owned valkyries in inventory that can be utilized or deliberate to the air force immediately.
And we have a hot production line.
With the first of an additional 12 alkermes currently scheduled to come off the line in March of next year with the did an additional one or two a month thereafter.
Kratos is currently producing approximately 150 jet drone systems in this class a year in the United States, including our tactical Maaco Gremlin Air Wolf and Valkyrie systems, each of which are flying today.
As a result of Kratos is long production experience with this class of grown kratos the supply chain, our vendor base subcontractors and partners are all onboard and in place producing in delivering product in quantities today.
As a result, we know the build time, an actual cost to manufacture and produce our ground. There was no guessing no expected large cost overruns or surprises to our customers from what we quota.
As I mentioned Kratos is drones are made in the United States of America in concert with our U.S. government partners and U.S. they suppliers.
Through our partnership with U.S. Air Force, all Kratos drones, including the Valkyrie are designed from inception to be runway independent both at launch and that recovery.
As a result, the Valerie can be pre deployed in recovered virtually anywhere and has certain on refueled range performance payload survivability and other characteristics all of which were determined in concert with our partner Air Force Research lab.
The Kratos Valley was also specifically designed to fit inside standard shipping containers.
Further, reflecting the expeditionary nature of the Credo systems.
Credo says tactical drone systems, those flying today and in development, including at our very close hold Ghost works.
All the result of a multiyear strategy plan and methodical execution, beginning with the deal de unmanned systems strategic roadmap and be evolving Air Force vision, including as described by the assistant Secretary of the airports Dr. Roper and the Air Force Chief of staff General Brown.
For Sky Board. The most current expected timeline and related milestones as recently reported by the Air Force include.
A kick off meeting with all four Sky Board winners invited followed by the down select for drone system experimentation.
The Air Force deciding in the next 60 to 90 days, which had before Sky Board prototype and competitors will have their drones participate and operational experiments at multiple tests centers around the country to produce the services first autonomous vehicle for manned unmanned teaming.
The number of contracts the service will award for these exercises as well of the number of drones procured overall and from each individual vendor will defend will depend upon the USA F funding availability and drone unit pricing.
The Air Force has identified roughly 15 different mission sets that the program seeks to prove in an effort to achieve operational capability for the Sky Board drone.
Information and data from the drones provided flights and experiments will assist in determining the multiple timeline for the plan program of record and rate production.
We believe that the Air Force Vanguard's Guy Board program is planned to move ahead very rapidly.
Including the Sky important program.
We believe that the total addressable market opportunity for Kratos is class of drone systems and for engine business is continuing into increase.
With program opportunities that we can discuss including Golden hoard.
Hey, BMS El Paso D.
L. cat and eight.
All of which we believe that kratos, whose valerie and other drones are uniquely qualified to rapidly and affordably addressed as I previously discussed.
Related to the market opportunity as I mentioned before I encourage you to view the Sky bore Air Force Vanguard program video, which provides the USA as vision and notes the various types of sideboard drones that are part of the air Force's planned future for structure and caught ops.
Additionally, it was just reported that the air Force recently disclosed their vision for expendable attributable and other drones as related to the BMS program.
Including price and cost points, which we're all very excited about.
In addition to the cradles Valkyrie as to certain other kratos tactical drones, we can discuss.
Our maaco jet drone continues to execute with certain customers and platforms, including as was recently publicly reported.
The Gremlins program with our partner dynamics has made important progress since our last report to you even with the program experiencing certain covert 19 Deo de range related other delays.
Additional flights are now scheduled for Q3 Q4 of this year and we fully believe unexpected kremlin's to become a major future Kratos program similar to our expectations for about three.
Credo substandard toast program is on track and we continue to have high future expectations for family Anatels similar to our expectations Revalidating Gremlins.
On our Rattlesnake program with our partner Aerovironment. This has also made substantial progress since our last report to you.
And is currently expected to fly later this year based on current rain scheduling, which has also been delayed due to coven.
And program Air Wolf has also continued to move forward, including certain payload and system integration efforts.
However, similar to Kratos is rattlesnake, a BMS gremlin another programs our planned air will flights have been delayed due to the impact of certain deal would be range and travel covert 19 related restrictions.
With a series of Air will flights now scheduled for later on this year and in Q1 of 21, and we also continue to high expectations for this program.
We're extremely excited and proud of what Kratos has accomplished and we remain focused on our long term strategic objective of being a leading drone system provider to the D. D and this expected to be extremely large new market space.
We understand that the government processes and related timelines for contract awards system deployments test flights et cetera can be methodical and fluid and are not always consistent with desired public company expectation timelines.
I can assure you that a kratos we are focused on what we can control and the ultimate success of the long term strategic plan and vision, we have communicated to you.
As I mentioned before we believe that we have.
Future tactical drone system market will be in the billions of dollars.
And various types of drone system opportunities in the Kratos class.
We believe that we have the right partner United States Air Force the right high performance drone systems at the right time and at the right affordable cost point.
To obtain a large market share and deliver value to our customers and our shareholders.
Deanna.
Thank you Eric good afternoon create us a second quarter 2020 revenues of 170.4 million slightly exceeded our estimate of 160 270 million.
Kgs reported revenues of 120.4 million down from 45.4 million in the second quarter 2019 I.
As expected our second quarter 2020, Kgs revenues were impacted by a reduction in approximately 12.1 million in the company training solutions business, which reduction was principally related to the previously disclosed reduction in certain international timeline.
Kgs, a second quarter 2020 revenues also reflect the continued reduction of approximately 3.6 million in the company's legacy government services business and reductions of approximately 6 million in the company International satellite Communications deployment business and 3.3 million in the company's Kttv commercial aerospace business.
Area, which has been impacted by 2019.
Organic revenue growth in the second quarter 2020, like experienced dinner microwave product ballistic missile defense.
Yes, our business.
Our adjusted EBITDA 15.3 million within our expected range in 12 to 16 million.
Great. This is adjusted EBIT <unk> eight cents per share also was within our forecast of five cents to nine cents per share for the quarter GAAP EPS was a loss of one cents per share.
And the second quarter unmanned systems segment generated adjusted EBITDA of 3 million down to 3.5 million into second quarter of 19.
Primarily reflecting a higher mix of development programs, including down into it and low rate initial production programs, which are typically lower margin programs and full rate production program and also reflecting increased infrastructure costs.
This increase mix of development programs is expected to continue into 2020 until certain new production awards were increases in existing production programs.
Kgs generated adjusted EBITDA of 12.3 million down from 15.7 million in Q2 of 19 <unk> operating income of 7.7 million down from 10.7 million in Q2 thousand 19.
The more favorable mix of operating margins in adjusted EBITDA margin in the company's bases satellite. She five is our and microwave products businesses in Q2 20.
Except primarily by expected less favorable margins in the company training solutions business as a result completion in large international fixed price contract at the end of 2019 and do they less favorable mix in the company's turbine business.
Our Q2 consolidated operating income was 2.9 million down from the second quarter of 19 operating income of 9 million.
In a higher mix of development program increased infrastructure costs.
An increase in noncash stock compensation expense for 2 million increase R&D expenses of 1.5 million, primarily in our space and satellite business and increased depreciation expense of 200000.
Our adjusted EBITDA for the second quarter consolidated continuing operation, including net income or loss attributable to non controlling interest and excludes noncash stock based compensation costs at 4.8 million acquisition and restructuring related costs at 1.1 million and foreign transaction lots of the hundreds.
Yeah.
On a GAAP basis net loss for the second quarter was 700000, which includes a tax benefit of 1.8 million and loss from discontinued operations 200000.
Moving onto the balance sheet and liquidity our cash balance was 397.2 million at June 20, which includes 240.5 million of net proceeds raised in the company Jude equity offering.
At quarter end, we had through amounts outstanding under bank line of credit and 5.7 million of letters of credit outstanding debt outstanding weighted toward 295.9 million at quarter end and net cash at quarter end was one on 1.3 million.
Cash flow generated from operations for the second quarter was 6.8 million last count that's a 7.7 million for free cash flow use from operations of 900000.
During the quarter, we collect the 600000 related to the retain working capital of the legacy PSS business that we sold in 2018, bringing the total receipts we have collected to 6.2 million since we sold the business.
Our contract mix for the quarter was 74% of revenues generated from fixed price contract, 20% from cost plus.
Hi, guys contract 50, Disney and 6% generated some time and material contract.
Revenues generated from contracts with the U.S. federal government during the quarter were approximately 76%.
Revenues generated from contract DMD, non DMV federal government agencies, and Fms contracts, which were approximately 5%.
We generated 8% some commercial customers and 16% from foreign customers.
Third quarter full year 2020 guidance includes expected contribution from the recently closed as he said no acquisition, we're providing third quarter 2020 guidance had revenues of 195 to 205 million and adjusted EBITDA of 17 million to 20 million.
We are increasing our full year 2020 guidance revenues.
I've been 20 to 760 million to 740 780 million, primarily reflecting the expected contribution to assay signal acquisition for the second half 2020.
We are maintaining our adjusted EBITDA full year guidance of 72 million to 78 million, which reflects expected contribution from the as he signal acquisition offset primarily by margin compression in our commercial Aero turbine business, which has been impacted my cobot 19.
We are affirming our full year 2020 free cash flow guidance of generation of 7 million to use of 18 million, including capital expenditures.
Possibly 38 42 million.
Our third quarter employer 2020 guidance includes our current assumptions at the expected impact of 19 on our industry business in operations will provide an update to these assumptions and the expected impact to our financial projection if any in our third quarter earnings conference call.
Our adjusted EBITDA guidance reflects an overall forecasted improve revenue mix in profitability in our D. and national security business area.
Coding in our space satellite unmanned systems and microwave electronics operation.
Greatest this fiscal year 2020 guidance excludes any potential contribution to some expected alchemy or other tech put you on production or system contract with expected orders to be taken into consideration and our financial forecast adjusted one such board contracts or orders are received and their related financial contribution.
And can be estimated.
The 2020 capital expenditure for cash.
Currently includes expected outlays of 15 to 17 million associated with the production of 12 Dockery aircraft prior to the sea of expected customer Award.
There were reflected this company owned tactically drought until the speed of the related customer award at which time the cost incurred maybe transportation project caught.
Great US we'll adjust these initial forecast capital expenditure outlays and the ultimate balance sheet classification decent investment once expected customer orders and the nature of the contract terms and related financial contribution can be asked.
Eric.
Thank you Deanna.
We'll now turn it over to the moderator for any questions.
At this time I would like to remind everyone in order to ask a question. Please press Star then number one on your telephone keypad.
Your first question comes from the high enough just sounds run from the benchmark Norlite smelting.
Hi, Good morning, Eric Yeah.
Good afternoon [laughter] good morning.
Oh, no unscathed, where again congratulations on the when you know how should we think about I'd argue task orders you got the end of this fiscal year coming up you know there and then put us to make an award and they can you just remind us here works into budget for 20 and 21 at this point.
Right.
So just where we are.
As the Air Force has tried to give guidance publicly we're in source selection right. Now so we really can't say much more than what we've said in our prepared remarks, which a week or two ago.
The the Air Force indicated that they would like to make the first task Order awards within 60 to 90 days.
And that was.
That was a couple of weeks ago.
The Air Force made that comment.
On the err on the funding specifically for Sky Board.
The Air Force recently made a comment that they have adequate funding.
To execute what they've been articulating for both this year and all of next year. They said that they said adequate as you know Kong Congress has made a couple of all they've made one congressional out that's law.
That added 100 million to I think they have like 120 million under our duty any accounts last year for things like this.
And there is right now there's a negotiation going on between.
The Senate and the the house on the 21 budget I think the Senate had looked for an out of 128 million. So what appears there's adequate funding for them you know I'm going to say you know a couple hundred million in each year based on looking at the different accounts to execute what they want to get done tracking towards.
Program of record as they've set in the following year.
Got it.
And then just on the New Trump administration interpretation of drone export rules. You can you talk about your exposure to that you know in any international interest in the drone portfolio at this point.
Yes, so first of all I want to I want to be very clear. We are focused primarily on the United States Department of defense and the Pentagon, that's where we are focusing the vast vast majority of our resources.
We have received state department approval.
To a to discuss market.
Both the Valkyrie and the maaco in a number of countries and you don't think five eyes, and maybe maybe beyond that.
It is getting a little competitive in a couple other countries internationally.
I don't want to get into too many details because we've got some we've got some <unk>. We've got some plants that were going to be that we're executing but we're primarily focused on the U.S. and let's say that there are a couple of them internationally that we were executing some plans that are very confident for it now.
Yeah.
[laughter] correct about software defined solution, how do you developing you know what's the most critical having around that you know we saw that correctly on communication systems like theaters walk down This road <unk>.
What are your thoughts about the market size you know how much you capture talk little bit America.
Right. Yeah. This is a [noise]. This this is one that that is kind of overshadow the what we're doing in the drone area, but the the number of leos and media shows that our or have gone up and that are going up.
And the number of spot beaten up we're going more to spot beam satellites and the high throughput satellites. This is driving an entire next generation of ground equipment and all this obviously ties into when it relates to what's going on with Fiveg and converting analog signals up in space and to our IP protocol.
All systems and Fiveg on the ground.
This is all this is what is driving our software I call. It our software defined radio space out strategy, where instead of a us making the ground equipment in the modems that talk to large monolithic geostationary orbit satellites that are what 22000 miles up and everything is is silos and specific for it.
The equipment that we're we're we're delivering now and the new stuff that we're gonna be delivering next year as I mentioned, there's going to be able to talk to multiple different types of satellite from multiple different types of bands, it's going to be able to hop between military satellites and commercial satellites and go into the Fiveg infrastructure and we have in addition to our space.
Individuals we have a number of telecommunication individuals from the telecommunication industry on staff in leadership positions that are driving the strategy and as I mentioned, we're actually working with the operators on it so.
So this oh. This is the plan that we have what we're looking in the next year or two Josh for our satellite business to start growing 10% to 20% a year organically again.
That's what we see here.
Great. Appreciate the time, thank you up yet differ.
Your next question comes from the line that Ken Herbert from kind of Guy you don't align smelting.
Hi, good afternoon, Eric and Deanna.
Hi, Ken.
Eric I first [noise], Hi, I first wanted to just to ask you you called out Eric a couple of [noise] potentially large target export drone contracts you could sign in the second half of this year, maybe in the fourth quarter.
Can you just provide a little bit more detailed on those and clarify whether or not those are currently reflected in the guidance for the expectations are because those represent perhaps some upside.
So [noise] there they are both international one of them is an existing customer, but this would be a significant increase in the quantities that they're talking.
Approximately two dozen drones with one of them just under.
The other one of the new customer brand, new and it it's time directly into what I. What I mentioned, Canada is be these these customers are procuring new weapons systems new radars.
And they want to exercise that improve them out against threat Rep. drones, and we make the highest performance drones in the world, but that's just a known both in the target area and in the system area relative to the guidance as you said I'm, hoping and I think we're going to get these both of these in Q4.
Before they really won't be additive until for us until next year, because unlike say for like the U.S. Army, where we'll build will build drones and advanced and put them in inventory or put them in capital. So we can quick turn them. Since these are international we don't we don't leave forward. If you know what I mean.
Until we've got them until once we get them, we'll get rolling on them until these really will kick in next year for us.
Okay helpful.
And as I think about about your engine business. Both you know TD antici, you've obviously been able now to publicly talk about about grey Wolf and what you're doing there could you maybe just comment on what some of the next catalyst could be in this business or contracts, we should potentially watch out for.
[noise] [laughter], then I think the catalyst that as you know we have not talked about grey Wolf. It has been publicly reported a couple of times included a couple of weeks ago.
And then that's part of the the government contracting and working with her national security customers.
Then the the next catalyst that I believe that we we can control and I am hopeful we will be able to communicate on the next earnings call and then I think the want when we report Q4. It early next year, if our timeline told on some things there could be some significant catalyst.
Our some of the ground tests and air vehicles tests.
We're doing that we're planning to do.
And if these go according to plan.
Hopefully I'll be able to give some direction on maybe I may not be able to say the program, but I'll be able to say we're on a certain program and this was the trajectory and as we as we start delivering units and we head into El Rep and may be full rate production later on.
Hoping to be able to frame that up but were were you picked up on it. We're we're making great progress and we're getting there and there's one in particular the K T. T is working on that we have not talked about.
But it it this this could be the first one where we could have meaningful a unit revenues next year.
Okay, that's great and just one final clarification, you called out a couple of times the cobot related disruption on the commercial business within Kttv can you maybe size what that was in the quarter either either in EBITDA revenue standpoint or was it relatively immaterial.
Deanna.
Yeah, So Ken on the commercial turban business, that's about it at three to 5 million dollar impact them or revenue perspective in the quarter.
Great. Thanks, Deanna, Sir Thank you very much.
Thank you Kim.
Your next question comes on line that Mike referred from B. Riley your lifestyle open.
Thank you maybe I should say good evening, just so we get to cover all are bases.
[laughter] keeping Mike yeah, Okay. So hey can you talk about the a they'd be M.S. So are you qualified on all seven line through that effort and then you said there were some information about or the cost ranges for these different categories as a.
Vehicle be they you know tradable expendable.
But not.
Yeah. So when the first one I I'm not going to I apologize because it is it is competitive however.
On your second question. There was an article that came out last night I believe it wasn't aerospace or.
Aviation week, or so or something like that.
Where they talked about they reported on and they BMS briefing.
Where they talked about for a BMS.
Which is the internet of up which has been club categorize recalled are referred to as the internet of military.
Connectivity.
That I believe they're looking at.
Disposables Tradeables an exquisite.
The disposables were zero to 3 million I believe the Tradeables were 3 million to.
It was zero to five five to 20 and 20 in above.
And those with the price points.
And and they gave some examples of the types of drones and and one of the actual briefings.
From the Air Force or there were two renditions of looked awful close to a couple of hours.
So the the the point of that Mike is it's not just Skype work, it's not just golden hoard in LTL Cassady program.
But it's also a BMS, it's what what darpas doing with Ace.
And then there and there are several more just the opportunities for this class of drone is Ah it's growing in its accelerating.
Okay. Thank you and then final question I know you probably can't.
Talk per say about what your Sky Board editors are proposing for.
Her for vehicle, but do you think that you have a good sense of which aircraft.
Each of the other three competitors would be positioning to get a onto some of these programs.
Absolutely.
Okay and years confident.
We are.
Highly confident.
As always we're confident place and Mike as I went through in the prepared remarks on why we're confident.
You know we're building them today the supply chains in place.
Four of them are flying today, our partners the Air Force Research lab on and on and on.
And we were highly confident that that we that we are the solution.
That they are looking for in this first round.
Great. Thank you very much.
Got it.
Your next question comes from behind that either I meant from Baird. Your line is open.
Hi, Good afternoon, you actually have Eric route and on the line for Peter.
I was personally I'm just a housekeeping question on in terms of timeline on the Sky Board Oh last quarter, we're talking about a fifth petsmart and concurrent contract award and the August or September timeline is that now replaced by the 60 or 90 day timeline, you mentioned the down select or am I confusing those.
Yeah, you're a little just a little confused the the fifth flight was not related to Sky Board.
Yeah, that's related to the L. cast B program.
And so that is not that is not correlated to Skype work. They are they are mutually exclusive.
Okay.
Okay, sorry about that timeline so on track for the August September them.
On on on Whats timeline, which one of the cuts but.
No that.
I don't know what's been publicly announced on this but up lift to save up events events have changed so that 50 test flight I don't we don't need to refer to it as that anymore.
We've got heaved, all we've achieved all everything we needed to achieve under that program and the flights we completed.
Okay, and then persons years of that I'm I assume they know acquisition I know you. If you added 20 million of revenue for this year, but any color you can provide on be annual run rate amtrust margin profile going forward.
Deanna will hang with this one.
For the for the 20 million revenue that that we expected to contribute for the second half it's roughly about one to 2 million of adjusted EBITDA for the second half associated with that 20 million.
Okay. Thank you appreciate the time.
Sure.
Your next question comes from the line that she Alot <unk> group from Jefferies. Your line is now open.
Hi, Good afternoon, guys and thank you for the time.
Hi, Sheila [noise].
Eric I heard Deanna 'cause it's a numbers question I just wanted to talk about the puts and takes for the first half versus the second half I think you had you mentioned about five points of covet impact to the top line in the first half.
So that'll help you from the down 3% organic you have but how do we get to growth and the second half did you have mentioned some you know C. Five I SAR contract. Maybe can you talk about you know the growth contributions in the second half a in terms of revenue for 2020.
Sure. So on the unmanned side, we are expecting a words and from a production perspective on some of our programs.
So to go into full rate production.
On our Navy program that that that's one of the expectations.
It really from the first after the second half as well as some of the contract awards that we've seen in our C is our business.
And in unlikely products business.
And the anticipated I production in deliveries in the second half as well and ours spaces satellite business and does that also help profitability then in terms of that.
This contributions okay.
No.
Sorry.
Go ahead, so it's been more favorable mix more favorable next is leverage on the infrastructure cost.
Okay, Perfect and then Eric one for you I guess I can't help but notice you mentioned by GE comments and there was some speculation about you know credo Syn <unk> potential partnership with another large crime. How do you think about your business just given the runway an opportunity that you have.
Our our space business as you know I've referred to on total company, sorry, <unk> total company I apologize.
For Kratos ARPU are we are we have never been better positioned across the entire company.
Then we are today.
All of the work the team has put in.
On the development programs on getting design getting positions in our microwave business.
Our our Fiveg in digital strategy in our space business that we've been working on we just don't talk about it a lot.
I mentioned, we're talking to the operators.
It's all coming together.
And our target drone business continues to just cruise track right along obviously, the the tactical business as I mentioned, the total addressable market, it's not only getting bigger but it took it appears to be accelerating.
We we feel great right now probably better than we've ever felt for the company.
Perfect. Thank you so much Eric and Deanna.
Oh sure.
Your next question comes from the line that said he Smith from JP Morgan Your line open.
Hey, good afternoon. This is Ben on process.
Hi, Dan good morning.
[laughter] I wanted to quickly ask about.
The some more color on the.
Training comp Recompete that you mentioned you know that I guess is up towards the end of this year just kind of how should we think about the potential headwind from that gets you down.
Except that I I.
I will definitely need Deanna is helping us win.
Yes. So then the contribution this year for that contract is roughly about 35 million and that will be up her recompete. We compete at the end of this year.
Okay. Thanks.
Okay, and I noticed that the Capex guidance has come down since the beginning of the year I was just kind of wondering what what is driving that a reduction in your expected spend.
Sure it's actually.
Lots of occasion related so if you noted some of that commentary we put on capex. It that he classification on the balance sheet could potentially a just two other balance sheet items, depending on the nature of the contract. So for instance, initially we had included in our Capex guidance.
About four to 5 million as capital targets for our fire jet or 178 target. Those now that those contracts have been awarded those has actually been reflected in inventory. So it is not necessarily a change in total investment, but it's it's a change in classification on the balance.
Right.
Okay makes sense okay.
Like any feel like does it quite simply spread star one I know telephone keypad.
Your next question comes from the low enough Michael Ciarmoli until these securities. Your line is open.
Brian Good evening. This is the man on for Michael.
Right and.
Quick question on some of the flight testing that you have later in the early next year is any of that dependent on whether there is a vaccine or solution for co. Then just wondering if there's any risk and the ongoing environment brand to get pushed out further.
I'm on the first part I truly do not know if it's dependent on that it's customer driven.
And we are working very closely with the customer the deal video Dee Ann.
And honoring and respecting their their protocols and restrictions, including travel and social dispensing and getting in command centers and things like that.
The information I provided today is the most recent enough information on what is currently scheduled for our flights.
And we have a number of other programs that we don't talk about for obvious reasons that are scheduled for flights as well.
So that's the most recent information I'm, all I'm I'm, hoping things can move to the left.
But as you are indicating correctly, we've had a few moved to the right from when we last spoke to you because the the virus situation just got worse.
And so that's a I know, it's not crystal clear, but that's the best we can do we're literally giving you the best information we have today.
Thank you that's how far if I could ask one more quick sense sure in your guidance is there any flexibility built in for the possibility of STR This year.
[laughter] we.
If it it just really depends [noise].
We we that's why we wonder one of the reasons, we give a range you know we get arrangement, you know and but it depends on how how long it goes and it depends on if it's just a standard CR or if it's like a few years ago the government shutdown.
We're in right now we feel pretty good and based on what we're getting from our contacts in Washington, including our lobbying films right now based on what's being discussed as possible, we feel pretty good about we feel good about our forecast, it's very solid or our mill that our government business our military business.
There's knocking it out of the park right now it's literally just knocking it out of the park.
And in the one of the only reason in my opinion that we're not doing better than than than we had forecast as though we have some small commercial pockets in primarily in our engine business that with things have been delayed till next year.
Thank you that's helpful. Appreciate it okay. Okay.
Your next question comes from Don a B C could.
Skibitski from Alembic Global your line is now open.
Good afternoon guys.
Eric can you talk about the sequential growth in backlog it looks up almost 6% sequentially and and I think somewhere I read that that does not include yes see so I'm. Just wondering if you can maybe give us some of the chunky pieces that led to that growth.
Right and Indiana help me out one of the bigger one of the bigger chunky pieces is in our Sci Fi bias our business.
Exactly right, yes, and that was that was armed to book to Bill Yeah.
Yeah, the missile system radar system.
Missed defense than we do some classified systems in there. This is all hardware.
It's really really going good and I'll tell you if things come together the way they look like in the next few months either Q, our second half in potentially Q3 bookings in that business.
Or going to be incredible bookings.
Are going to be incredible.
And.
Also as Deanna mentioned, if it's timing holds.
On certain production programs, we already have where we're expecting to go from L. ripped a full rate production and receive those contracts those full rate production contracts in the second half.
Our second half bookings for the company.
Could be very very strong.
Which is one of the reasons, we're still optimistic about.
2021 and beyond.
That's great I kind of related to that.
Five I think Northrop has said they expect to book their first kind of Chunky GBSD Award I think by the end of this month.
So should we expect on that basis that maybe you guys to your first chunky order from them by the end of the corner I am not we on.
As I said Northrop is incredible partner and I'm sorry, we are we will not get ahead of them. So okay. I just got to weather I just got to let US go yup that's.
That's fair last one for me just I'm a little confused on the training programs. The 35 million dollar a year program, that's coming up a recompete at the end of this year is that separate from the Saudi Navy program that I think is running down over the next two years I wasn't sure. If that's being re competed as well or not.
No that is the same contract Pete.
It's the same one okay, okay perfect okay.
Okay. Thanks, very much got it. Thank you. Thank you Pete.
Your next question that's from the line that Joe Gums from Noble got about your line is open.
Good afternoon.
Hi, Joe.
My questions have been the answer them, but just two quick ones.
Last quarter, you talk about you had I think going said you know 200 job opening.
I'm trying to fill quick so quickly given what's been going on with the Cove. It didnt. It some of the programs government programs that have been out there how is that progressed for you guys.
So far so good.
And I talk it up to like I'm getting to somewhere division presidents that the work that we're doing is extremely interesting.
The the space work that we're doing it relates a commercial technology company literally in Colorado Springs, where where we're doing our space working on Fiveg work.
And it's exciting work for these I call them kits for these kids.
And the C is our work that we're doing and in Pennsylvania, I mean, working on these weapons systems and seeing them. It's just it's incredible <unk> interesting work and obviously the drone. The drone stuff is is is really really interesting. So so far so good.
But youre. Your question is very correct, because our hiring plan for the next six months and into Q1 of next year is very strong. So that's a that's an area week. The entire team is focused on we got to get the right people in what the right clearances to execute the programs.
Okay. Thanks for that and just a technical one with the offering completed what what's a good number for diluted shares now.
That 125 million.
Hundred 25 million okay, great. Thank you.
Okay. Thanks, Thank you.
There are no further questions at this time you me can be.
Very good thank you for joining us this afternoon.
We look forward to speaking with you at the next planned call, which should be a early November. Thank you very much.
This concludes todays conference call you may now disconnect. Thank you.
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