Q1 2021 Kratos Defense and Security Solutions Inc Earnings Call
[music].
Good day, and thank you for standing by.
Welcome to the Quaker is defense and security solutions first quarter 2021 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during this session.
And you will need to press star one on your telephone if you require any further assistance. Please press star zero.
I would now like to hand, the conference over to your speaker today Marine and does that senior VP and General Counsel. Please go ahead.
Good afternoon, everyone. Thank you for joining us for the Cramps defense and security solutions first quarter 2021 conference call with me today is Eric Demarco, Kratos, as President and Chief Executive Officer, and piano Man Creatives to 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.
Paragraph emphasizes the major uncertainties and risks inherent and the forward looking statements we will make this afternoon.
Please keep these uncertainties and risks and mine as we discuss future strategic initiatives potential market opportunities and 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.
Thank you Marie and good afternoon.
Kratos is currently seeing accelerating organic growth across virtually our entire portfolio.
Including $33, one per cent and our unmanned systems business and pro forma 11, 6% overall for Kratos as we described today and our release.
We expect on organic growth trajectory to continue into 2021.
For it to be industry, leading.
With even stronger organic growth forecast for 2022.
Including growth and our Skyboard L Cat <unk> D O P. IR GBS D S that classified and other under contract unexpected programs.
Underpinning our confidence great Kratos last 12 month book to Bill ratio was one three to one.
And we just received and $86 million single award contract for drone command and control system 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 at our unmanned systems business and the second half of this year.
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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. This business will actually accelerate further with increased funding at opportunities based on actions to date by the by the administration.
The initial fiscal 2022 National security budget has been submitted at 753 billion slightly below the previous administrations and 760 billion, which is better than we were expecting and we believe and overall positive sign for the next several years.
And the budget submission. The administration is clearly focused on the retirement of low longer relevant legacy systems <unk>.
Including Defense Secretary, Austin, and Deputy Defense Secretary Hicks, making it clear that they intend to propose divesting legacy systems and favor of new technology approaches and systems, which is very positive for kratos and our suite of affordable innovative products and systems.
Innovation and sustained that are also identified as priorities for Pentagon acquisition research development and engineering. Each also positive for Kratos as Kratos is recognized as an innovation leader and in the rapid development and fielding on actual working systems and products.
The administration's National security priorities include drones, and artificial intelligence space and satellite communications and strategic deterrence hypersonic systems operational readiness and microwave electronics as you know all credo strategic focus areas.
Also important for Kratos, Michael Brown director of the Defense Innovation unit, formerly the <unk>.
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 and Silicon Valley and as CEO of Cyber Security company Symantec further, reflecting the change innovation speed of acquisition and affordability the.
<unk> is driving for.
The President has also nominated Frank Kendall and Secretary of the Air Force Mitch.
And Mr. Kendall if confirmed will be taking over the ongoing reviews on tactical combat aircraft and global force posture and based on his history. We expect that he will bring and engineers show me the data perspective, including to autonomous attributable weapons networks and weapons mix all Pos.
And for Kratos.
Based on Mr. Kendall's prior record, including as better buying power initiatives and procurement system reform. We believe he recognizes that affordability is critical.
<unk> has a quality all of its own and that he will be supportive of the development of new low cost weapons 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 U S manufacturers of a certain system product or capability.
For competitive and other reasons and I will not be more specific here, but kratos will be fully supporting the baidu administrations made in America efforts, which we believe will be very beneficial to our country and our company, including and 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 and innovation change and made in America.
From a geopolitical standpoint, and the potential adversary threat to the U S and our allies continues to evolve.
Accelerating the recapitalization of strategic weapon systems, which kratos is increasingly a direct and growing beneficiary of.
And the tactical drone area, while others are re imagining airpower with models renditions cartoons and PR.
<unk> is and has been for the last several years, delivering and demonstrating flying air power with multiple systems that are operationally relevant for today's and future operational threat environment.
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Today, the United States Air Force announced that the Skyboard team conducted a successful to our first flight with the cradles Mako you tap 22 high performance tactical drone at Tyndall Air Force base and Florida.
This flight termed milestone one of the autonomous Accretable aircraft experimentation campaign was extremely important to kratos as the skyboard autonomy core system or Acs aboard a kratos Mako drone system performed a series of foundational behaviors necessary to characterize this.
Systems operation and.
And 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 command and control stations.
And this most recent publicly available flight, which we believe is representative of the incredible partnership that Credo has with our government customers and also representative of Kratos is first to market leading position with four high performance low cost attributable drones and this class flying today that we can discuss with you.
Since our last report to you the credo and execute and 58 day Valkyrie had its sixth publicly announced successful flight at the Yuma, proving rounds, and Arizona, where the 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 towards potential initial operating capability.
Along with the Valkyrie successful weapons release of the <unk> 600, Suas Kratos as Rattlesnake Tactical drone has also successfully demonstrated the release of and Aerovironment Switchblade and tactical initiatives Tactical munition system further demonstrating the operational relevance of Kratos as family.
<unk>, a tactical systems, including as force multiply and drone and weapon carriers.
<unk> will be moving forward with both of these systems and we will not comment further due to customer competitive and security related reasons.
<unk> has previously demonstrated two of our <unk> 'twenty, two Mako jet tactical drones flying with the manned jet fighter aircraft and continuous collaborative airborne operations via tactical data link will flying in formation with one another and also flying with a third digital twin simulated Mako as the lead drone aircraft.
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Flight consisted of collaborative airborne operations evaluated command and control to the tactical data link execution of semi autonomous tax tasks execution of autonomous flight information with demand fighter transfer of Mako control between non line of sight over the horizon operations and the tactical network.
And transfer of control handoff from the tactical network to an independent dedicated controlling.
The two unmanned drone system formation test successfully coordinated semi autonomous payload deployment.
What the Kratos drones, breaking formation to perform independently with the subsequent rejoined and loyal trusted wingman flight with one Mako being flown as if it were a manned aircraft and the second and second Mako, joining and sustaining autonomous formation.
Throughout the mission multiple makos were controlled by a single operator.
And the last few weeks it was reported that certain new systems are now installed and the U S. Air Force's KC 135, straddled tanker, which will allow the aerial refueling aircraft to serve as a communications node for other platforms, including armed drones like <unk> Valkyrie, and Mako with plans to add on.
Your wing pods that will further expand this capability and increase its own effectiveness.
It was reported that and recent trials. The KC 135 received data from Kratos <unk> 22, <unk> and it was reported that a certain credo drone is being utilized as a loyal wingman type drone also for the KC 135, and tests demonstrations and experiments over the.
Navy test range at China Lake, California.
It was reported that this is representative of the advancement of plans to defend vulnerable support aircraft, including tankers utilizing a tradable low cost high performance jet drones.
It has been reported that Kratos is Mako has been evaluated by the Air Force Reserve Test Center, and and Air launched capacity from an F 15, and C fighter as part of and additional loyal wingman testing program.
And it was recently reported a few weeks ago that drone aircraft flight <unk> execute and 58, a valkyrie the Mako and <unk> were included in and instrumental and 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 is tactical jet drones have been and are currently flying and that is extremely operationally relevant and I encourage you to take a look at this is I am not able to discuss it.
This is just a brief summary of what we believe is representative of the continued methodical progress credo has been making with the Valkyrie Mako and other creative tactical drones to operational relevance and fielding and why we have increasing confidence and 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 <unk> class of affordable jet drones, including it was recently reported that the United States Navy is moving toward and air wing that has a 40 60 unmanned manned aircraft split and over time.
<unk> intends to shift that to a 60 40 unmanned manned split with the goal to ultimately drive and airwing debt is at least 50% or more unmanned.
And at the U S. Maybe also recently stated it would not be hard to imagine and the near future unmanned drones being adjunct missile carriers with missiles flying defense of combat spread missions et cetera.
It was also reported that the United States Marine Corps is now envisioning Army autonomous unmanned aircraft with long range anti ship missiles from future conflicts.
On the Gremlins program since our last report to you our confidence and the ultimate success and fielding of Gremlins similar to our increased confidence and Valkyrie and Mako continues to increase including that it was recently reported that the United States Air Force is now considering in flight re arming for the Gremlins further <unk>.
Pending their operational capability.
And this in flight rearming capability would be in addition to and flight recovery from the Gremlin Air vehicles.
The Air Force reportedly stated that the gremlins could be re armed onboard the carrier aircraft or C. 17. For example, and then relaunch to participate and defensive counter air and offensive counter air emissions 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 Dianetics, our plan for the next several months with the expectation for a transition from DARPA, the multiple services, including the Air Force thereafter.
Customer funded flights are continuing with Kratos as air Wolf and other programs and other kratos tactical drone programs and including fan of toast continue to progress.
We are currently executing under multiple customer funded drone related programs, including also is related to creative says jet engine business, including Skyboard Golden Horde, El Cassidy Elk at Abms and others and we will continue to update you on our progress as our customers allow.
The initial production of 12 Kratos Valkyries continues with initial aircraft deliveries expected very shortly now and continuing thereafter.
<unk> goes to work top priority new system, which I have previously mentioned is also progressing with first flight scheduled for Q1 of 'twenty two.
Since our last report to you certain new tactical drone program opportunities for Kratos as class of drones have been released by the government debt. We are pursuing certain of which may be awarded by the end of this year.
And 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 cradles. If we are successful similar to the air Force's Skyboard related announcement today occurring over the next few months.
It is important to reiterate that we believe that Kratos is first to market leader position and the tactical drone area with multiple variants and classes flying today with systems payloads on weapons being integrated and tested today, all being built and America, all runway independent which is a critical must have capability and a car.
And that situation are representative of why we expect rates to be incredibly successful and the tactical drone area.
<unk> target drone programs continued to perform as expected with and up into 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 and new target drone opportunities both domestic and international.
We are expecting a large number of target drone program awards, including sole source awards and the second half of this year.
<unk> space and satellite communications 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 on 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 on our space business is the success and increased acceptance of Kratos is first to market software defined open space ground system platform and technology.
Our global owned and operated commercial space domain awareness network and the rapidly growing space market, including thousands of commercial and National security satellites planned for orbit.
All of which will need ground command and control and telemetry tracking and control or TNC, and all of which our credo specialties.
Space is undergoing a renaissance, where advancements and 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.
Apologies 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.
<unk> microwave electronics business is very strong with new opportunities, including and the space satellite and missile and radar areas and we expect and up into the right organic revenue and margin growth trajectory for this business.
<unk> ISR business continues performing on GBS D and other strategic defense programs with GBS day forecast to be a significant future organic growth driver for Kratos and there was now the possibility of certain additional large new program awards for <unk> ISR business and.
And the coming months, if kratos or our team are successful with these pursuits.
On a rocket system hypersonic and directed energy businesses are all extremely well positioned and priority national security and funding areas and we are forecasting future growth and each with a rocket system business currently looking particularly strong for the second half of this year and into 2022 with multiple missions.
Currently planned.
<unk> next generation engine business continue to make progress and our development programs, including those focused on drones missiles and powered munitions.
Every kratos core strategic business is forecasting and up and to the right organic growth trajectory.
With increasing margins and we saw this organic growth trajectory and the first quarter of 2021 across our core businesses with the exception of our training solutions business.
We are focused on executing on the significant number of new CRO programs. We have received and we are currently and 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 Credo says on was one of the winners for the DARPA demonstration rocket for agile cislunar operations or Draco, the nuclear space propulsion program, which is going to be and important future contributor for kratos.
We believe that credo and 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 higher and 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-19 situation, including in India, which is a large and customer flow.
Israeli microwave business.
I want to and by highlighting the number of new opportunities that create OS is tracking including classified programs, which is extremely strong and and is expected to grow and we believe that we are uniquely qualified for a number of these including and the space satellite unmanned rocket system and <unk> ISR areas.
And tradeoffs affordability of the technology and affordability of tradeoffs as product is an incredible advantage for our company and 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 the company and the industry today to address this requirement.
Anna.
Thank you Eric and good afternoon.
Hey, this is the first quarter 'twenty, one revenues and $194 2 million were at the upper end of our estimated range of $25 million to $195 million. Our Q1 'twenty. One consolidated operating income was $4 9 million up from the first quarter of 2020 operating income of $4 7 million, which includes first quarter 'twenty.
One increases and stock compensation expense and $1 5 million increased R&D of $2 3 million, primarily in this space and satellite business and increased depreciation expenses.
500000, and the current period and.
As a reminder, over 80% of our total R&D is typically investing in our space and satellite business.
GAAP EPS was <unk> <unk> per share for the first quarter compared to zero and the first quarter of 2020 included in GAAP net income and 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 and life cycles.
And the first quarter, our unmanned systems segment reported revenues and $55 9 million up 33, 1% from the first quarter of 2020, due primarily to ramp and production and target programs, including the 177 program and work on.
On the Valkyrie program on.
And systems generated operating income.
$2 million up from 500000, and the first quarter of 2020.
Primarily reflecting the increased drone system related revenues and leverage achieved on our fixed overhead manufacturing and G&A infrastructure.
Unmanned systems, adjusted EBITDA of $6 4 million.
And from $2 3 million and the first quarter of 2020.
<unk> reported revenues of $138 3 million up from $126 9 million and in the first quarter of 2020, reflecting $8 6 million from the recent ASC acquisition.
And on panic growth across all businesses with the exception of our training solutions business.
Including in our space and satellite defense rocket <unk>, ISR microwave products and turbine engine.
This.
<unk> was offset partially by a net reduction of approximately $5 million and our training solutions business, which was related to the previously disclosed reduction and scope of certain international contracts.
<unk> reported operating income of $7 1 million down from $9 $3 million and the first quarter of 2020.
<unk> first quarter 'twenty, one adjusted EBITDA was $11 7 million down from $14 million and the first quarter of 'twenty, reflecting and less favorable mix of revenues, including an increase in product and related 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 noncontrolling interest and excludes noncash stock based compensation costs of $6 2 million acquisition and restructuring related costs of 200000 and.
Foreign transaction losses of 100000.
Moving onto the balance sheet and liquidity, our cash balance was $383 6 million at March 28, and we and stereo amounts outstanding on 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 on free cash flow generated from operations of $13 1 million.
Our contract mix for the quarter was 70% from fixed price contracts and 24% from cost plus type contracts and 6% from time and material contracts.
Revenues generated from contracts with the U S. Federal government during the quarter were approximately 73% which include revenues generated from contracts with the Dod and non.
Non Dod federal government agencies, and Fms contracts, which were approximately 6%.
We generated 7% from commercial customers and 20% from foreign.
And foreign customers backlog at quarter end was $8 $92 9 million down sequentially from fourth quarter and backlog of $922 $2 million with bookings of $164 9 million and a book to bill ratio of <unk> eight to 1001st quarter of 'twenty one.
Funded backlog at quarter end was $627 million with $272 2 million unfunded.
For the last 12 months ended March 28, 2021, our book to Bill ratio was one three to one with total bookings of $982 6 million our book to Bill ratio for the last 12 months ended three 'twenty eight 'twenty, one and with one two to one for unmanned systems segment and $1 three to one for on Kgs segment.
And now for our financial guidance, we are providing our initial second quarter guidance and revenues of $1 $95 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 and international chain training contract, which had contributed to over $34 $5 million in revenue and 2020, and which is expected to generate approximately $14 million and 21 or a decrease of $20 million year over year and includes a full year of the.
Our recent ASE signal acquisition closed in mid 2020.
<unk> revenue mix for 'twenty, one is expected to be more developmentally weighted including as a result of the large number of new contract awards that we've received and includes discretionary investments versus a more mature product lifecycle and 2020 and.
As a reminder, our.
2021 fiscal year guidance includes the current and forecast financial contribution from the recent Skyboard F. R. L and other tactical drone system contract awards, including those related to Valkyrie.
Greatest this fiscal year 'twenty, one 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 forecast adjusted one con.
Contracts, where orders are received and it related financial contribution can be estimated which would be dependent on criteria, including the type of contract vehicle scope timing and periods of performance.
Thank you Deanna with that we'll turn it over to the moderator for any questions.
And as a reminder to ask a question you will need to press star one on your telephone truly draw your question press the pound key.
And again and I'll go to ask a question. Please press star one.
Our first question comes from Josh Sullivan of benchmark. Please ask your question.
Hey, good evening.
Good evening Sir.
Eric.
Mentioned.
Quantity.
Having a quality on its own with drones.
A couple of your customers and said that you have a number of flight tests going on here with various drone applications, but when does the customers start to show interest in your manufacturing capacity or when do we get close enough, where net quantity and manufacturing capacity becomes kind of irrelevant.
I believe.
Toward the end of this year.
We're going to start as I mentioned, we're going to start delivering valkyrie is off the line and 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 are 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 are becoming more and more focused on it as we're nearing the initial operating capability dates that the air Force has talked about.
And.
And then the KC 135 tanker trial that you mentioned is that part of Skyboard or is that is that a different program.
Just provide some color on that.
It's not part of Skyboard.
And that's part of a different program.
It was publicly released what that is I'm on.
Unable to talk about that program.
Okay and then.
And then maybe just one on COVID-19, yes.
The commercial space ground opportunity.
Size that how should we think about that rolling out.
And how many ground stations are you expecting over the next 12 to 18 months.
Yes, 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 open space because open space.
It can run on a standard computer it can run on the Internet that can run on the web. So we're looking at it what we have mapped out as we've won a lot of contracts and most a lot of which I can't talk about because they are classified so this is both on the commercial and the military side, we have the delivery schedules.
Forget off hand, what our book to Bill and 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 was third and there was one three to one Deanna tells me and space business. So the way, we're looking at it as year over year revenue growth and.
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.
We could do a little step functions along the way.
And we're really excited about this because of the just the number of satellites that are going up the leos and <unk> in particular, which has drove and a whole new architecture on the ground and similar to the drones similar to our engines were first to market.
Thank you for taking the questions yes, Sir.
Our next question is from Ken Herbert of Canaccord. Your line is open.
Yes, hi, good afternoon, and Eric and Deanna.
And our financials.
I just wanted to first start with the margins and.
On the Kgs business, I know, Dan and you called out.
Step up and R&D relative to last year and it sounds like ASC is a bit of a mix headwind, but how do we how should we think about margins progressing here sequentially and in the second and third quarter and the rest of the year within that segment.
And maybe get back up to the high single digits is that realistic or what's the outlook for margins and.
On the Kgs business, yes.
Yes, we expect it to be stronger and the second half based on delivery and execution schedules for the second half and Thats, primarily driven and our space business and what we what we see from an execution standpoint and scheduled for the second half.
Okay and.
And as the elevated R&D spend is that is that is that expected to continue.
That will that is expected to remain at that same level.
But as the.
Revenue ramps and then we would get leverage off of some of that cost structure and if you will.
Okay, perfect and if I could just on the on the flip side and unmanned.
Nice margins and the quarter.
Was there anything unusual that benefited the quarter in terms of margins.
Nothing in guidance that that.
That is.
Good day.
Call out now.
Okay. So this run rate here is a good starting point as we go through the rest of the year.
And 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 in the quarter.
So obviously, we don't give margin.
Forecast for on a segment perspective, but it but it was.
Particularly strong and 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 and thanks for all the color could you give a rough.
And is the order of magnitude of these different business units within kgs.
And way of electronics.
<unk> space.
Maybe on a run rate or an annual basis.
Sure.
So Mike I can comment on just size wise way to what it was in 2020 and as we've talked about we've said, we expect and up and to the right trajectory across all the business units on and off.
And I'll respond to your question Accordingly, so for our <unk> business that was.
Approximately $75 million last year.
Our microwave business.
Approximately 60% to 65.
A rocket.
And support business was approximately 70.
I turbine business went to approximately $50 to 55.
And that was negatively impacted most significantly by COVID-19 and and we still saw some of that impact on the commercial side.
K T T, 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 turbine and then our space and training business.
Combined with ASC that's approximately.
What about <unk>.
320 on.
Currently we have about 300.
Just space and then with training and that went to about another 70.
I'm, sorry, and a three 230 with space and then 70 with training now.
No.
Space and including ASC.
And just under 300, and then training with just under 70.
Okay.
Yeah.
And then.
And just further on.
And the past I think you've said that revenue could be flattish there no margins would be increasing.
As a as a model transition to software, but for example.
With these ground opportunities and Thats, the case, where you're providing hardware like quantum radios and software or just a big mix or exactly.
What's going on with that business currently.
And we are providing both.
So the legacy business.
We're on.
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 are still delivering under those programs so think.
<unk> IR.
<unk>.
Jeff.
Things like that.
Those are more hardware or firm ware and tenths of the legacy Geos.
Newer geos.
<unk>.
Are moving more to software.
And where we're not providing big racks of ground equipment FERC Earth station to command and control, our telemetry and track it.
And 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 thats still going up.
Okay. That's helpful. Thank you Eric and then just switching gears for question and.
Yes.
You have these multiple programs moving to initial operating cash.
And the ability, but you don't have production.
Full rate production orders in hand for them and you're you got these valkyrie is coming out of Atlanta, and a couple of months. So when you do get such orders, particularly for the Valkyrie is that you've been building on your own dye and does that mean, then that that would represent potential upside to the guidance that you've issued today.
Day or is some of that factored in.
If we were to get.
So and if we were to get contracts and the addition.
Two the Skyboard program contracts we've won.
And the <unk> D. L cat contracts. We've won that include deliveries of airplanes.
And that include deliveries of the <unk> that we're building.
We were to get additional tasking four additional aircraft that will be upside to our model this year.
Okay. Thank you for the clarification. Thank you.
Mike just to correct that statement I had made on the 300 that I gave that does include training.
I was in and out of about 70, just wanted to correct that Inc.
Thank you.
Our next question comes from the line of Peter Arment of Baird. Your line is open and.
Good afternoon, and Eric and Deanna.
Eric So milestone one and completed four X campaign and it sounds like the Air Force has really describing the Skyboard program and its kind of a.
And coming up with a marathon of tests.
Here on the many months and 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 how youre seeing it.
Testing has definitely increased.
And it is expected and forecast to.
And to continue to increase literally as we speak.
Across multiple programs that we have.
So it is a.
It is it is it is ramping up significantly.
And any disruption from COVID-19 this quarter.
No that was.
It was all last year last year set us back.
So if the programs back but no not non none this.
This year, thus far.
Outside of Valkyrie is there anything else, that's moving towards where we could potentially think about on our rep and warrant or something like that and what kind of timeframe do you think about when you think about that.
I am going on 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.
And that the Valkyrie is going to be deployed and we are going to go into production on the Valkyrie.
I have every expectation that.
And that the ground one is going to transition from DARPA from the research agency to a service or multiple services and.
After we complete the retrieval.
Demonstration later this year.
And I have every expectation of that.
And I have more confidence than ever now.
The Mako was also going to go into production.
And Peter to me if this simple.
We are the only company and the world that has jet drones and this class flying today.
No one else has any.
And that includes the bat, it's not in this class it's not even close.
Alright.
We have four that I can talk to you about and I always say it that way we have the Valkyrie Mako, we have the gremlins and we have air Wolf, but I can talk to you about.
Okay.
And I want to emphasize that there is non else out there. That's why you don't read about any other company.
Testing weapons dipped.
Deploying payloads doing what the Air Force announced today.
And this is this is why I'm.
So confident there'll be and 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.
And just and just for clarification, Eric you mentioned on the on the bookings and on.
And you had booked and there was an $86 million award that came and I guess in early April so that was not part of the book to Bill were and unmanned from seven correct for the quarter.
That that is not included.
And that is not included in our book to Bill Let me, let me tell you that contract and I think we put out a press release on it that was a competitive award we won.
It's a single award Mac.
It is for drone command and control systems and other systems I believe it's up $60 million base with $210 million or something like that options to get it to the 85.
Hey.
And I fully expect that over the life of that contract I don't mean to be full year substantially funded.
Alright, because I know what that is for where the only guidance got it with the only guy that can do it and the United States Army needs. It.
But just to further clarify that Peter.
And although we expect it to be fully funded since it is a Mac.
Under the new guidelines for backlog under ASC, six six and IV IQ <unk> single award sorry, Okay, the Cintas and <unk> IQ.
Most likely not be included in our bookings until actual funding is received as its incrementally funded that would be when we would recorded as a booking and Peter I imagine. It's both it's a single low single award. It is not a Mack idea IQ 60 base options to get to 86.
I appreciate the clarification and then Dan Thanks.
Okay.
Okay.
And your next question is from Sheila Hi alcohol on.
Jeffrey Your line is open.
Thank you good afternoon guys.
I assume that Eric Eric.
Eric I wanted to follow up on a few questions that have already been asked and away can you just maybe.
Talk about.
Our expectations were that for 'twenty, one 'twenty two in terms on your revenue contribution from <unk> Valkyrie and Irwell and.
And how do we think about when those opportunities come in.
And Q revenue dollars and the cadence of that I know I know, the operator and contributing.
Right.
And so Valkyrie is right now Valkyrie is contributing.
And obviously Mako is contributing.
Gremlins had slowed down because of the delay and testing and I expect that to pick back up there as soon as we can.
Advanced the test regime.
Air Wolf is funded and we have done a number of tests and the last.
Few months I'm going to say between five and 10 that is fully funded to and so with that as the backdrop to answer your question and significant.
Directly I expect the Valkyrie revenue to continue to increase as we head towards the end of this year.
I think gremlins is going to increase somewhat but not materially to the end of this year debt.
And the one that is gone and increase the span of dose is increasing and if we're 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, one day on a toast will be a significant step up I think valkyrie is going to be a signal very significant step up from 'twenty one to 'twenty two.
It's possible gremlins will be a significant step up from 'twenty one to 'twenty two.
And.
Air will I don't want to comment on air Wolf, yet because there are two there are a couple of elements that we have to demonstrate that our 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.
And then maybe one for Guyana just guidance.
Q1 free cash flow was really good and I think you hit your <unk> number for the year in the first quarter. So maybe how do we bridget and their massive investment and working capital use.
Over the next to acquire.
Sure.
It was particularly strong and the first quarter Capex was less than what we had originally anticipated from the first quarter. So Q2 and the remainder of 2021 Capex is expected to be.
At a much higher run rate in Q1 was and as Eric.
A reminder, we guided to $55 million to $60 million of Capex for the year and we've spent about eight or $9 million and the first quarter. So that so that the next three quarters capex is going to be particularly.
Higher and.
There is also about $10 million and nonrecurring engineering that we're investing in it for new rocket systems and that is just starting to ramp. So we will see a pick up on that working capital use and that will be all and.
Cash flow from ops in.
Q2, Q3, Q4, and we've got the payback on that $5 million deferred payroll taxes and that will be in the fourth quarter. So.
On our cash flow guidance that we that we gave on our last call for FY 'twenty one and.
And that remains unchanged. So you would expect with the.
Strong cash flow and the first quarter, we would see.
Uses.
Working capital and the next couple of quarters.
Okay. Thank you sure.
And our next question is from Michael Kim Molly of truth.
Please ask your question.
Hey, good evening guys. Thanks for taking the questions.
Eric.
We're opening monologue.
Very optimistic talking about the organic growth sounds like the budget came in above expectations.
Growth accelerating.
Book to Bill low below one time, where there any any surprises there and maybe despite all the optimism what prevented you from raising the guidance.
Right so on the on.
And the book to Bill there was no.
Surprised 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 it may begin in Q2.
And we're going to kill it.
We've got some.
Extremely large.
Programs, most of which are sole source.
We're expecting to book.
And.
And the second half of next year Youre going to see it.
Okay.
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.
Our pipeline is incredibly strong and and less something occurs that I just don't foresee. So for example, another variant the COVID-19 shows up and just the United States down again.
We are very very comfortable and our forecast for this year and we are very very comfortable and leasing even though we're not going to give the guidance yet and I am looking for a step function and organic growth 22 over 21 literally a step function.
Your question on why we Don.
Why don't we don't raise the guidance.
And.
Don't want to do on right now.
I want to I want to stay comfortable.
And we want to execute and if we keep knocking off quarters like this one that will take that.
That'll take care of itself, if you and how would I be.
Got it got it.
How many how many variants or platforms do you think the air force wants to fly Skyboard on before making an and.
Significant commitment and and maybe to put that not just creative platforms.
[laughter].
You can see me on grinning ear to ear I.
I'm going to answer it this way.
To answer it this way.
Yeah.
I am extremely comfortable with <unk> position right now on Skyboard and every related or ancillary program with our drones.
Very comfortable.
Okay.
No one else has anything.
Flying in this class nobody.
Nothing.
The Boeing bats as flow once it's made in Australia I continue to believe that as a significant handicap that its made and Australia. It has wheels.
The requirement is for no wheels, its full runway independence I don't know what they were thinking they must have a different con ops and mind.
And I am extremely comfortable where we're at.
Got it.
And last one from me.
And the latest you kind of talk about it.
Last quarter, the drone port that being a strategic assets.
Whats the whats the latest on that facility.
Sure.
Getting a greater ear to ear.
And hopefully.
Yeah.
When we report next quarter I am going to tell you about drone flights that are at <unk> drove important and Oklahoma That's the plan.
Got it.
Alright, very good I'll jump back in the queue.
And our next question is from SaaS net of Jpmorgan. Your line is open.
Hey, good afternoon.
First question I have was just about I think last quarter and 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.
And you guys have relapses today.
At the end of the call I was asked if I was looking at smaller ones are bigger ones and I said bigger ones.
And right now.
We are heads down.
On our current contract portfolio that we've won on a 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 and then have the clause.
And I do not see us doing.
Anything of size and.
Upsize for the foreseeable future okay.
There are a couple of opportunities.
These are not options. These are people, we know people I know.
That are right in our bailiwick.
And 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 is incredibly competitive differentiator for us.
And would take us to the next level with something.
So, but these are small these heart big and.
And so that don't never.
Never say never but highly extremely unlikely we do anything of size.
Okay. Okay. Thanks, that's helpful and then for free.
On a question.
Maybe if you could help a little bit just to walk through what one of these open space wins might entail.
Larger ones that you are talking about it sort of so let's say.
And let's say you win a contract what's kind of the.
And what's kind of the scale that we're talking about and then what is it what kind of and the duration is it that then you do software development for some period of time as dislike.
A step function and margins and therefore.
And for Kgs.
Maybe just walk us through one of these wins what would look like in terms of what the company is actually going to do.
Okay. So.
One of these and I expect to win more than one they are between 50 and $100 million each.
And the period of performance is approximately three years.
Alright.
Some of them may include antennas.
And from ASC. So that'll give you an idea of something there so theres 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 will tell you. This is how I would see it was going to be shaped like a bell curve over three years. So it will ramp up as we're building.
On the hardware and as we're modifying the software the core software that we have for that specific application. So lets say that application that somebody is putting up satellites.
Theyre putting them up.
They want to be able to command and control them and duty TNC remotely.
They don't we're on a big fixed Earth station infrastructure. They want to do it via software, we will design that architecture form we'd probably do a lot of that new RFP process. We will design that architecture for them were awarded it we will develop the limited amount of hardware, if theres antennas and there'll be a little bit more hardware, but nothing like that.
To be on Earth station ground control stations like that as.
We will modify the software we will and the first year, we will deliver it all out and year two the bell curve goes up we complete.
<unk> delivery and year three of 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 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 and stuff like that that's what it looks like.
Great. Thank you very much Jeff.
And our next question is from Peter.
Net scheme of Alembic Global your line is open.
Yes, good afternoon, and Eric and Deanna and nice corner.
Thank you.
Let me start Eric the large number of target drone awards and 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 stride on.
And $50 million and revenue target.
In 2022, and maybe you could just kind of validate.
My recollection is one classified I think maybe on international and one of the U S services I was wondering if you could just.
And fill up the color force around that yes on the last on the last call we.
We had talked about that there is an interim there is a certain international target drone programs. We have won.
A matter of fact per contract has been executed.
My opinion.
The presidential administrations hadn't changed we would have that contract by now, but the administration's changed.
So, it's and state Department and U S government review for approval and I fully expect us to get that I have put that assumption I think out into the second half of this year, alright with that won't contribute until 2020 free.
And that's piece number one.
The other two major pieces.
As I think it's year, three and then theyre going to be multiple years. After this of SSAT program full rate production, we expect to get that and the second half of this year.
Hey.
That will start building out in 2022, and we are right now and negotiations with the Air Force on the next multiyear apps that program, we expect to get that and the second half of this year debt all of those pieces fall into place and <unk>.
Believe they will okay and then there's been there's one other thing we need to get I'm not going to get into it here because it is.
Competitive it's proprietary.
Next year.
We should get there.
Okay, Okay, even with the international I thought you might be internationally said when executing on 2023.
So on.
No no because I believe the animal and help me I believe that once the unit of delivery.
And with the new accounting rules.
Especially with international contract. If you don't meet certain criteria, then and what would have historically been percent of completion is.
And now in units of delivery or as revenue and shipped and those shipments schedules are not scheduled until 'twenty three and that's why Eric comment and that it would not impact until 'twenty three.
Okay. So you can hit $2 50, and 2022, you're saying just SSAT with the Air Force one and.
Yeah on the closing price okay.
Appropriate FERC.
But for.
If we get let's say, we have a multi and extended significant extended continuing resolution.
Okay.
I don't know this I don't know.
And that could impact that that could impact outset, if that pushes that out and then it's later in 'twenty two 'twenty three and see what I mean that the cards are all laying there. It's the funding timing for the U S government ones.
Okay. Okay fair enough last one from me.
And the potential new <unk> five program opportunities you mentioned and you also.
And secondly for those any color on all about.
Services or size or timing or missionary.
So there are two of them. They are both over 100 million for us.
Alright.
Okay.
I have to be very careful here.
Saint missile defense stuff.
Okay missile missile defense related stuff bank debt.
Okay. Okay. Okay.
Fair enough Yeah, no I appreciate all the color.
Yep.
And as a reminder to ask a question. Please press Star then the number one on your telephone keypad again to ask a question that is star one on your telephone keypad.
Our next question is from Joe Gomes.
Of noble capital your line is open.
Good afternoon, and thanks for taking my questions Hey, Joe.
So I know you've talked about this on it and a couple of other questions, but just kind of wanted to drill down just a little bit more on on the skyboard.
If I recall correctly and please correct me if I am wrong.
And part of the requirement was demonstration.
By May of this year.
At least slight and maybe even more.
Attributes from the drones.
<unk>.
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.
That clarification on Europe.
And your memory and your memory was spot on correct.
Yes.
Okay.
Okay. So.
They have a.
Don't know if there was a date and made but if there was there is just a couple or three weeks that debt.
Competitors are the other companies have to demonstrate whatever the needs to be demonstrated on and award.
So as you know there were two other competitors.
Boeing and GE yet.
Boeing's plan is on Australia, and it's flow and onetime.
Okay.
So that should give you an idea of what I have what I think about that one.
And there has been some information that <unk> put out on their avenger.
Which is what theyre going to be utilizing.
You can go take a look at that but this ties into my response to.
Mr. Tamale, why I am I am literally more confident than I've ever been.
Because we're the only guy that has airplanes and this class flying today.
Right.
Okay and.
Last quarter you.
You mentioned potential Valkyrie opportunity.
And kind of term debt, where you would own the drones and the government wood and coil lease and quote.
At our loans and.
And any movement on that or any more detail you can give us on that.
I can I can tell you that.
A solicitation is coming and source selection has gone up again 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.
Okay.
And one last one because you didn't.
You mentioned a whole lot here.
And on engine opportunities on that.
Cause wondering maybe give us a little more color and detail on <unk> and where do you see.
Promising near term opportunities for that segment.
On.
And I'm a I'm glad you asked that Joe I really am I'm surprised I wasn't asked about <unk>.
Our teams DARPA Award.
On debt Nucleolar engine space program.
We are.
We have incredible capability on this company a lot of it I don't talk about because I talk too long on some of these earnings calls.
And.
We are.
On the on the engine side.
We it's very competitive because we're looking to be to replace on 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 and we pull that off I believe this is my opinion that is going to be substantially similar.
To October and November December of 2015, when Kratos flu the Mako.
And we've demonstrated we could do it and it's no longer a powerpoint.
And then we started winning all the programs.
I believe that as 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.
Hey, Eric I, just had a quick follow up and you.
Operating comments, you sounded very confident with new duty leadership and their ability to fund innovation.
Historically Congress has kept a lid on 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.
Yes, I think we're all going to have a front row seat for and incredible battle.
Between between legacy systems, and the guys that make them and the states and the congressional districts that theyre in.
Vs though.
And those legacy systems. They are wonderful the best on the planet, but theyre 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 those do you want technology now specifics specifically related to weapons systems and evolves every couple of years, that's why it's moving more and more to software.
Okay.
And the hardware was a truck and the software or the sensor is the killer app of it that makes it so lethal.
And so we have with with the Russia and China threat.
On the by the administration and the previous administration. They recognize the only way we can address these threats.
To offset.
Them.
As we have pivoted away.
From a lot of these legacy systems and there are a lot of them because we've been we've been at war with.
And with asymmetric warfare from the past 25 years.
We've got a 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 Tempus tightened Arden systems things like that that's what this is all moving back towards and.
And we are extremely fortunate that when deanna and I set the company up that is how we position. This company, we didnt position it for the <unk> budgets, we positioned it for strategic competition and here we are.
Perfect. Thanks, Eric.
Yes.
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.
Thank you very much for joining us today.
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.
And ladies.
Okay.
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