Q2 2021 Kratos Defense and Security Solutions Inc Earnings Call

Second quarter 2021 earnings conference call at this time, all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star 1 on your telephone if you require any further assistance. Please press star zero.

And I would now like to hand, the conference over to your speaker today, Ms. Deanna Lund <unk> Executive Vice President and CFO. Please go ahead.

Thank you good afternoon, everyone. Thank you for joining us with the greatest defense and security solutions second quarter 2021 Conference call with me today is Eric Demarco, Kratos, as President and Chief Executive Officer before we begin the substance of today's call I'd like everyone to please take note of the Safe Harbor paragraph that is included at the end of.

Today's press release this paragraph emphasizes the major uncertainties and risks inherent in the forward looking statements. We will make this afternoon. Please.

Please keep these uncertainties and risks and mine as we discuss future strategic initiatives potential market opportunities operational outlook and financial guidance during today's call.

Today's call will also include a discussion of non-GAAP financial measures.

And 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.

Alright, Thank you Deanna and good afternoon.

Kratos has continued to execute on and achieve important milestones further positioning us for the successful execution of our stated mission our business plan and our strategy.

The organic growth, we generated in Q2, including and our unmanned systems and space satellite and cyber businesses. We believe is representative of this execution.

Additionally, Kratos was last 12 month, 1 and 2 to 1 book to Bill ratio, which includes the 1.3 to 1 second quarter book to Bill ratio on our space satellite and cyber business, which is our company's largest.

And on expected very strong second half of 2020 bookings provides us the confidence and the forecast and the continued up until the right organic growth trajectory.

Since our last report we achieved a successful series of flight tests with the Skyboard autonomy core system or Acs aboard Kratos <unk> 22, Mako tactical unmanned aerial drone system at Tyndall Air Force base, and Florida, which was an incredibly important program Mike.

Stone for the company.

As reported by the United States Air Force. The 96 test wing took part and a series of test flights of Kratos as Mako and inside the Kratos Mako the skyboard autonomy core system or the brain of the autonomous aircraft made its first 3 flights for the autonomous attributable aircraft experiment.

And.

The Acs as part of the <unk> Skyboard Vanguard program with Skyboard goal to develop low cost unmanned aircraft to provide increased combat capability by teaming unmanned drone aircraft with traditional manned fighters.

During this demonstration flight series aircraft controllers on the ground provided commands to the ACF and and the future. The plan is for direct manned unmanned teaming via commands sent from Amanda F 16 fighting Falcon to the Acs onboard the unmanned aircraft.

Related to the flight Brigadier General Scott King and the 96th Tw Commander reportedly said the execution of this test flight is a great milestone for our closely integrated development and acquisition team with a successful execution of this test providing the knowledge needed to advance the technology.

<unk> and we are highly motivated to bring war winning technology to the next fight.

Major and Nathan Makowski.

Said this is a significant step towards teaming manned and unmanned aircraft and combat in the not too distant future with manned unmanned aircraft using the autonomy system developed for this experiment going places where manned fighters cannot go providing sensor information back to me and teammates.

And increasing the power production capability of the United States Air Force.

During the test flight series with the <unk> 20.

<unk> Ghost works has been deeply involved in this system and vehicle approach for the last several months and we expect to here and the next several weeks if we have been successful and receiving a contract and there is very very competitive solicitation.

We believe that the <unk> opportunity is also representative that the total addressable market opportunity for Kratos as class of tactical drones is rapidly expanding and clarifying as the department of defense drives for Affordable Force multiplier systems and technologies.

This drilling market is the same market that kratos turbine technologies is pursuing as drones need turbines and engines to power them and analysis of for 2021 Pentagon budget reveals that approximately 7.5 billion of the budget was allocated to drones robotics and related technologies.

Additionally, and very exciting.

The just release Senate Armed Services Committee National Defense Authorization Act authorized $201.6 million for the Skyboard program <unk>.

Including an increase of $75 million, specifically called out the purchase of Valkyrie aircraft.

It also authorized a $125 million million to accelerate the use of unmanned aircraft is augmented adversary support which is a new market opportunity and 1 we believe <unk> is uniquely qualified for today with our valkyrie and certain other aircrafts.

The recently released NDA also authorized an increase of $30 million for Air Force Advanced aircraft propulsion development. Another area. We believe <unk> is uniquely positioned for as I'll discuss in a moment.

Additionally, and we believe related to the significant funding increases for drones Skyboard and drone technology. It was recently reported that the Air Force Chief of staff said that the air Force's considering building a fighter fleet with more drones and piloted aircraft.

And that the Air Force is currently performing the analysis and war games needed to assess the appropriate mixture of the unmanned platforms and the manned platforms.

It was also reported that the air force leaders, providing updates on the next generation air dominance program or and Gad stress that and Gad and the for structure will include a variety of different platforms as well as powered munitions and other systems.

Including manned aircraft net work together with loyal wingman drones full.

Fully autonomous unmanned combat air vehicles, or you cabs and swarms of low cost unmanned aircraft.

And it was reported that the U S military needs to immediately increase the size and technology of its unmanned aerial systems Arsenal and order to be able to successfully fight 2 wars simultaneously with Russia, and China with Kratos Valkyrie and gremlins, both being specifically mentioned.

Also importantly, the air Force has communicated that a key focus for the 'twenty 3 and through 2027 budget will be the agile combat employment or ace initiatives.

Which is the ability to operate away from established runways to be runway and dependent and operate in a manner that presents a very difficult distributed asset and lethality problem for our adversaries.

<unk> and evolution of the United States Air Force Agile basing concept that I have discussed with you previously which has been identified as a top priority for the Air Force Chief of staff.

And related to the Ace initiative, the customer set reiterated directly to us just a few weeks ago.

That affordability runway independence, and survivability are critical requirements for Kratos as class of drones.

Each of which <unk> of course is the clear industry leader.

These are just some other recent customer demand signals, we have received and we remain absolutely committed to supporting the customers' needs requirements and timetable and we are confident that it is not a question of if but only a win kratos withdrawn for will be utilized and large quantities.

The first flight of Kratos drones, and the Oklahoma range facility is now scheduled for the second half of this year with this valuable new range asset, adding to <unk> existing competitive advantage and speed of development demonstration testing fielding and overall affordability.

<unk> target drone business also continued strong performance led by our industry, leading position and high performance affordable threat representative target drones.

The global recapitalization of strategic weapon systems by the United States and its allies to address peer threats is providing a robust and growing target drone market opportunity, both domestically and internationally with the evolving threat environment contributing to extremely strong demand for credit losses target drones.

And.

We are expecting several target drone program awards and the second half of the year, including from the U S. Navy U S Air Force and the army arguably the target drone utilizes the largest ones and the world and also from international customers.

For 2022 budget request and the target drone area came and as we expected and we expect continued future year over year growth for this business.

And for Kratos unmanned systems business, we are expecting very significant bookings and the second half of this year and both the target and tactical drone areas and we are forecasting a second half book to bill ratio substantially in excess of 1 to 1 with the current timing holds.

And <unk> space and satellite business.

Our software based open space operating system and architecture, which we released first to market last year, and seeing incredible success and customer acceptance and.

As we strive to both disrupt and transform the space ground system market similar to how <unk> is affordable jet drones are disrupting the UAV market.

Since the beginning of this year, we have delivered products supporting the satellite industry's movement towards software based Virtualized ground systems to approximately 30 customers around the world, including Cradle quantum and spectral net lines both of which are part of our open space software based family of dynamic.

Actual ground solutions.

<unk> is open space quantum products offer software versions of satellite ground system architecture, which traditionally have been implemented with hardware such as modems and front end processors, which are needed to communicate with the satellite payload.

And <unk> previous quantum products have been used and.

By hundreds of satellite operators around the globe supporting tens of thousands of satellite passes per month and kratos as spectral net products provide the on ramp to modern and virtual ground operations by reliably digitizing the radio frequency signals from the satellite into an Internet protocol for.

Matt that can be processed by digital systems running and the cloud on Prem and hybrid environments.

So we have now transitioned bolt <unk> quantum and spectral net previously hardware centric products and technology and software and we're exploiting our first to market position and clear technological advantage with our large existing global customer base.

Kratos, which supports approximately 80% of the world's satellite providers has relationships we have the existing install base. We have the past performance qualifications, the credibility and the market confidence as we rollout our software based open space systems.

Our open space quantum products, which we referred to as virtual network functions for VNS are less expensive than the hardware. They replace they operate at lower cost and with greater flexibility to adapt quickly to rapidly changing missions and conditions being driven by accelerating technological advances and the <unk>.

Light and space area.

For example were previously could take weeks to deploy ground system hardware <unk> quantum VNS can be deployed and configured to support different missions and just hours.

And <unk> open space platform currently the most advanced line and the open space family is designed to enable satellite operators to deploy configure and adapt and tire networks and just minutes using using its orchestrated software defined network or SDN architecture.

So our plan.

Our plan is to lead the disruption and the virtual transformation of the space and satellite industry with our first to market software based and defined products and we are currently transitioning a number of additional here to for hardware based space and satellite ground infrastructure sub systems systems products and solutions.

And 2 virtual software products.

Customers for Kratos as open space products include new space and satellite companies satellite manufacturers service providers certain of the world's largest operators and United States government agencies, and some leading prime contractors.

So we see the open space quantum and spectral net product lines as stepping stones for space and satellite companies.

Seeking to take advantage of a digital transformation of their ground systems to support new space vehicles customer requirements goals and opportunities.

And credit losses to clear first to market industry leader and the virtualization of space and satellite ground segment.

Open space is just another example of our strategy to disrupt the market with affordable transformational and truly innovative products and technology.

Space domain awareness, including with <unk> globally owned and operated SDA network is another area also seeing significant growth, including and advanced spectrum and signal monitoring.

With the rapid growth of new satellite networks satellites and space and <unk> SaaS. There is the potential for significantly increased radio frequency interference and space.

Interfering signals can be periodic for occur at different frequencies over time, making the discovery identification location and the removal or neutralizing or the source of the interference a significant challenge for agencies operating operators and their customers.

Additionally, as space is becoming increasingly congested. It is also becoming more contested and competitive and the ability to identify locate and track potential threats to on orbit space systems through a more comprehensive view of the space environment is absolutely critical and it's increasing.

Rapidly.

Directly related to this issue and.

An example of the incredible value of <unk> unique and 1 of a kind globally owned and operated spaced away and awareness network is our recent announcement that we have received awards totaling approximately $46 million to support space domain awareness efforts for certain customers.

<unk> SDA network is 1 of the most valuable and underappreciated assets and our company.

Our SDA network consists of numerous RF monitoring sites hosting fixed and <unk> sensors, and antennas, including and L. S. C <unk> and Ku bands and our $24.703.65 network operating center as a central hub for monitoring and integrating raw RF data.

From the global network.

With the increasing volume and velocity of threats Kratos is now leveraging the technology behind our open space software platform to help satellite ground systems quickly adapt to changing conditions, including open spaces software centric architecture being used and our global monitoring network.

Which is enabling assets to be reconfigured and redeployed virtually delivering the potential for much faster responses to the potential threats and space.

Greatest XI RMB and Q2 was elevated in our space and satellite business as we accelerated our investment to exploit our first to market mover position.

And with our software defined virtualized products, and our SDA network and to protect our critical intellectual property position.

And our view credo space and satellite business is backlog and opportunity pipeline has never been greater or of such high quality with a total addressable market opportunity for Kratos is technology and products large and its rapidly expanding.

On the market opportunity side, 1 data point. It was recently reported by Northern Sky Research, our MSR, but over the next 10 years satellite manufacturing and launch order volumes World reached nearly 24700.

With virtually all of these satellites needing ground command and control telemetry tracking and control and space domain awareness.

All of which create us as the industry leader.

For our space business, we expect significant growth and margin expansion and the second half for the year and particular in the fourth quarter based on customer delivery and execution schedules and our transition to more software based content, which I have been discussing with sustained year over year future growth and increasing margins.

As expected.

Our second half growth forecast for our space and satellite business and supported by the recent and expected customer orders, including the 1.3 to 1 book to Bill ratio I mentioned previously and we are also forecasting a second half book to Bill ratio also in excess of 1 to 1.

Credit losses microwave electronics business based in Israel also continued its outstanding performance and continues to have a record or near record backlog and an opportunity pipeline.

Credit losses microwave products business is focused on space and satellite missile radar communications and other weapons systems.

Certain of which market opportunity continues to expand also driven by the recapitalization of strategic weapon systems. We.

We are forecasting a strong second half for this business based on the current backlog and production and execution schedules.

And <unk> rocket system business, where we performed ballistic missile target hypersonic and other rockets has to work.

And reflective of the strategic asset to the United States National Security that <unk> rocket system business, and we recently announced that we supported the United States Navy sixth fleet.

<unk> naval striking and support forces and the Maritime Theater missile defense for them and the successful execution of formidable shield 2021 at the UK Ministry of Defense Hebrides range and Scotland.

The exercise included 2 creative medium range ballistic missile targets, which were presented at the same time as cradles MQM 178 fire jet aerial target drones from our unmanned systems Division.

Our ballistic missile targets and that all the test objectives, and we're engaged by and SM 3 interceptors from the USS Paul Ignatius.

The multinational exercise features and 16 ships several aircrafts and approximately 3300 personnel from 10 countries.

Our rocket systems business also recently announced that we have received a contract from the Navy surface warfare Center pork Hawaiian 80 Division Whitesands detachment to develop a hypersonic experimental test vehicle to perform flight tests for the maturation of high speed flight technology for missile defense.

And hypersonic systems.

Hypersonic missile defense and priority areas of the Dod budget, and we are forecasting future year over year growth for our rocket systems business with strong demand and the targets hypersonic systems and other rocket and weapons system related areas with numerous future missions and launches currently planned.

And <unk> turbine technologies also continue to make important strategic process, including receipt of an $8.6 million task order under our advanced turbine technologies for affordable mission or <unk> contract.

The program will be managed by the turbine and engine Division of the Air Force Research lab.

And under the contract Kratos will complete the design build assembly and test of an affordable turboshaft engine for group III Uavs.

This award follows the successful completion of multiple programs, where PTT completed concept and engine trade studies for group III Uavs and conjunction with our partner the AFL our Qt.

The objective of this task orders to complete the engine development for flight testing and to demonstrate the high power to weight high efficiency and increased durability of this engine design.

This engine design is also convertible to produce the electrical power needed of advanced hybrid electric aircraft, which is also a key strategic growth focus area for the company.

Also <unk> has now successfully completed a core engine test campaign under the ATM contract also with the turbine engine division of the AFR RL and under this effort testing of the engine core supports the development of small affordable high performance jet engines for cruise missiles.

And on unmanned aerial vehicles.

During the test campaign, cradles and successfully demonstrated key performance and Operability targets of the core engine.

So these are important milestones and achievements by and <unk> next generation Turbo jet and turbofan engine business and we believe that we are on track to significantly disrupt the market with affordable innovative and transformational engine technology and products.

The total addressable market opportunity for <unk> and our engine businesses, which include unmanned aerial vehicles drones cruise missiles and powered munitions is.

And is extremely large and rapidly growing as the U S and our allies prepare for peer and near peer adversaries.

<unk> is also heavily involved and under contract with multiple customers and the rapidly growing space launch and propulsion area, where we are designing developing and manufacturing leading technology products and support of space companies and government customers.

Our <unk> ISR business is head down and focused on GBS D and several other major programs, we are executing on and that we are pursuing.

We are expecting very significant future year over year growth for <unk> 5 ISR business as we execute on several large new program wins and opportunities.

On large new weapons systems development programs exact timing execution and delivery schedules early on are typically fluid, which we are experiencing with GBS and others with our expected future strong and up into the right growth trajectory and forecast intact and increasing now.

We believe that the buy and administration and Congress are absolutely committed to the nuclear modernization to address peer and near peer threats and the congressional budget office recently estimated well cost for 634 billion to operate sustain and modernize the United States' nuclear forces and certain of Kratos is largest programs are in this area, including and our <unk>.

<unk> business.

The buy and administration is 2022 defense budget requested a $5.5 billion increase and research and development and.

And the $8 billion cut to procurement. This is a clear signal and that a strong emphasis on new technologies and new future products and systems at the expense of older legacy programs is underway and this is clearly a beneficial signal for innovative and affordable technology companies like creators.

Non traditional defense contractors like credit Oz, we have a real incentive to innovate to disrupt and drive affordability and we are laser focused on exploiting this opportunity with our government customers.

As we enter the second half for the year, our backlog expected strong second half bookings and our record opportunity pipeline provide us excellent excellent future visibility and confidence and our forecast.

Accordingly, and we're focused on execution with the major items, including since our last report to you. We have experienced the low number of Covid cases with credit losses employees and we are watching this very closely including in our Florida, Texas and Oklahoma locations, where we have just recently seen and increasing number of cases.

Additionally, certain deal related Covid restrictions have recently begun to tighten up again. This is also an important and watch item for us.

We continue to have some issues with the supply chain, including Covid related issues with product lead times, increasing on certain of our programs and systems and increasing prices and cost from our vendors.

We are also focused on the hiring of qualified people, primarily engineers and employees with technical and manufacturing experience, including with the ability to obtain obtain security clearances, primarily in our space satellite and our unmanned systems business.

We are and the process of standing up several new facilities, including and our drone space and satellite areas to accommodate certain large new programs. We have received although we expect to receive and the second half for and 'twenty 2.

We have taken all of these items into consideration and our execution planning are estimating the financial forecast and the guidance range, we are providing today.

In closing, we're focused on disrupting and transforming the national security industry with rapidly develop demonstrate and field and affordable technology and systems we.

We believe no other company and the industry is as well positioned as Kratos and as a result, we are internally focused on successfully executing on our backlog and our $9 billion opportunity pipeline and we do not expect to pursue or make acquisitions of any size only potential small or tuck ins and the current areas of expertise.

Yes.

We believe that kratos with at the beginning of a long up into the right growth trajectory and we are focused on successfully executing for our customers our country, our employees, which are truly invaluable and for our stakeholders Deanna.

Thank you Eric Good afternoon, Hey, this is second quarter 2000 from 'twenty, 1 revenues of $205.1 million were at the upper end of our estimated range of $1.95 to 205 million or.

Our Q2 'twenty 1 consolidated operating income was $3.3 million up from the second quarter of 2020 operating income of $2.9 million, which includes second quarter 'twenty 1 increases and.

Stock compensation expense of $1.8 million increased R&D and $4.2 million, primarily in this space and satellite business and increased depreciation expense of $1.6 million and the current period.

As a reminder, over 80% of our total R&D and typically invested in our space and satellite business.

Net income was $1.1 million for the quarter, which included a tax benefit of $3.6 million, primarily reflecting tax benefits related to stock compensation expense.

GAAP EPS was <unk> <unk> per share compared to and loss of 1.

And the second quarter of 2020 adjusted.

Adjusted EBITDA for the second quarter was $17.6 million and the range of our expectation of $2000.14 million to $18 million, reflecting increased investments and internally funded R&D primarily of our software defined open space and virtualized products as well as new revenue and product mix and more developmental projects as we begin to ramp our new development.

Programs. The second quarter operating results include over 400000, and negative foreign exchange impact, resulting from an increased shekel against the U S dollar and our Israeli based microwave business.

Excluding this adverse foreign exchange second quarter, adjusted EBITDA was $18 million.

At this and the second quarter unmanned systems segment reported revenues of $60.3 million up 43, 6% from the second quarter of 2020, due primarily to ramp and production and target programs, including the $1.77 and work performed on the Valkyrie program.

Unmanned systems generated operating income of $4.1 million up from $1 million and the second 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 generated adjusted EBITDA of $6.9 million up from $3 million and the second quarter of 2020.

Kgs reported revenues of $1.44.8 million and the second quarter up from $128.4 million and the second quarter of 2020, reflecting $11.8 million from the AAC acquisition and organic growth across our space satellite and cyber.

Rocket and microwave products businesses.

This increase was offset partially by a net reduction of approximately $4.7 million and our training solutions business, resulting from the previously disclosed reduction in scope and certain international contracts.

Kgs reported operating income of $5.9 million down from $7.7 million and the second quarter of 2020.

<unk> second quarter 2021, adjusted EBITDA was $10.7 million down from $12.3 million and the second quarter of 2020, reflecting and less favorable mix of revenues, including an increase in product and equipment revenues contributed from the recent ASE acquisition and negative impact and our.

Commercial Aero business, coupled with increased R&D costs of approximately <unk> 49.

Excuse me for 3 million, primarily related to our space and satellite business.

Our adjusted EBITDA for the second quarter is from consolidated continuing operations, including net income or loss attributable to Noncontrolling interest and excludes noncash stock based compensation costs of $6.6 million acquisition and restructuring related costs of 100000, any foreign transaction losses and a 100.

Jonathan.

Moving on to the balance sheet and liquidity and cash balance was $369.3 million at June 27, and we and zero.

Zero 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 $69 million.

Cash flow used from operations for the quarter was 700000, less capex of $10.9 million or a use of free cash flow from operations of $11.6 million.

Our contract mix for the quarter was 70% generated from fixed price contracts, 25% from cost plus fixed fee contracts and 5% from time and material contracts.

Revenues generated from contracts with the U S. Federal government during the quarter were approximately 72%, including revenues generated from contracts with the Dod non.

And <unk> federal government agencies, and Fms or foreign military sales contracts, which were approximately 4%.

We generated 8% from commercial customers and 20% from foreign customers our backlog at quarter end was $865.6 million down sequentially from first quarter 'twenty 1 and.

And backlog of $892.9 million with bookings of $177.8 million and a book to bill ratio of <unk> 9 to 1 for the second quarter of 'twenty 1.

Funded backlog at quarter end was $636 million with 235 million funded.

For the last 12 months ended June 2721, our book to Bill ratio was 1.2 to 1 with total bookings of $9.53.4 million or book to Bill ratio for the last 12 months ended June 2007, and 21 with 1 point OTO 1 for unmanned systems segment and 1.2 to 1 for our Kgs segment.

And now for our financial guidance.

We are providing our initial third quarter 'twenty, 1 guidance of revenues of $1.95 million to $205 million and adjusted EBITDA of $16 million to $20 million as previously discussed our guidance reflects the impact of the recent loss of and international training contract, which had contributed over $34.5 million in revenue and 2020 and we.

<unk> generated approximately $13 million and 21.

Increase of over $21 million year over year and includes a full year of the recent ASC at Cigna acquisition closed in mid 2020.

Our forecasted revenue mix for 'twenty, 1 is expected to be increased developmental program weighted based on the large number of new contract awards that we have received and expect to receive and include discretionary investments as compared to a more mature overall product lifecycle and 2020.

For our third quarter and full year 'twenty, 1 guidance with our backlog and recent and expected bookings, we are comfortable with our revenue and EBITDA forecast, including the fourth quarter increase with execution and delivery timing assumptions driving the range we provided.

<unk> ramped and margin profile and the second half of 2021 is similar to the trajectory in 2020, which is evident in our LTM last 12 months adjusted EBITDA of nearly $83 million.

Key assumptions included in our forecast include our supply chain and ability to deliver on time and on budget and our ability to hire the resources and Eric discussed in line with our program and execution plans.

Our space business is forecasting and extremely strong second half of 'twenty, 1 and fourth and fourth quarter and particular with successful execution on its backlog, including driving significantly increased margin for me.

Favorable mix expected to include increased software and high profit base deliverables and.

In summary, we believe that the backlog and bookings today and expected bookings and pipeline is in place for creators to deliver within our 2021 financial forecast.

Great. Thank you Deanna.

I'll turn it over to the moderator for any questions.

As a reminder to ask a question you will need to press star 1 and your telephone to withdraw.

Sorry, Your question press the pound key please standby, while we compile the Q&A roster.

Your first question will come from Mike Crawford with B Riley security.

Thank you Eric you talked about the Mark.

To the for SaaS ad.

On the defense Bill.

<unk> for Skyboard, what how would you characterize credit losses.

Position within Skyboard vs competitors like <unk> and Boeing.

I.

I believe that our position as far and ahead the best.

The press release was relative to the to the vehicle as it's a surrogate vehicle.

So the vehicle, they're using is by I'm, assuming by that word is not even the vehicle they're planning on.

Finally, utilizing if and even exists.

Sure.

Boeing there hasnt been a peep from Boeing about Boeing or anything about Boeing since their first flight.

Their vehicle I think at the end of February early March So we're coming up on 506 months not a peep from Boeing So I don't know what Theyre doing.

We.

We were first to fly the core.

As I mentioned we.

Closest flown to a manned fighter and history that we did.

Integrating skyborne payloads on the new Valkyrie is now and.

And.

We are extremely confident and comfortable with our position on this program.

Okay, and then related you mentioned <unk>.

B assets as potentially as transformational to grade us as Valkyrie and.

And given that Youre already a leader with these various other classes of Jones what is it that's.

That separates <unk> from the rest.

Yes. There is there is very little very little publicly out there on this opportunity very little.

But it is it is an attributable low cost systems.

And.

If we this is very competitive we are successful and receiving the contract on this.

This this is this has legs.

This program has legs.

And I really can't say much more about it Mike other because there's only about 1 piece of paper out there on the program, but it's expected to be awarded very soon now.

Okay. So hopefully you're 1 of the 2 winners of that down select and then final question and just.

Goes back to open space, what is it about Q4 milestones that youre expecting a bigger ramp and that quarter versus Q3.

It's the transition to the software deliverables, we've and it has to do with the bookings, including the big ones. We just had in Q2, we're going to be delivering product and Q4 and it's it's more software intensive and so the margins are higher on it and we've been talking about this probably for about a year now and.

And when we started releasing the product I think and Q2, our Q3 of last year and.

The uptake by the customer community has been and.

Been incredible.

This is brand new where beta and what we're basically doing is we're taking the softer ground satellite infrastructure now my term from a to G. Cellphone network to <unk>, we're going from legacy hardware based systems.

To software virtual systems and.

And we're first to market and the customers are.

We're buying it and we're going to be delivered net in Q4, and Thats why we see a significant margin uptick and that quarter.

Excellent. Thank you.

Yes, Sir.

Your next question will come from Peter Arment with Baird. Please proceed.

Hi, Good afternoon, and you actually have Eric version on the line for Peter today.

Eric just in terms of framing these second half bookings, obviously, you're expecting pretty significant pick up.

And specifically could you just provide any color around some of the big moving pieces, there and I know you mentioned book to Bill well in excess of 1 do you think it's enough to make book to bill for the year over 1 given the softer first half.

Yes, so on the on the first part of your question.

The space and satellite business forecast.

Is extremely strong and Q3 and extremely strong and Q4 and as both Deanna and I said, it's coming off of the bookings that we had and.

Recently, including I think 1.3 to 1 and Q2.

And we're off to an extremely strong start in Q3 for our bookings in that space and satellite business.

And if we can get the people and we can deliver it we're going to achieve it. We are we are going to do it now on your question on the second half book to Bill across the company. We have some big programs, we're expecting to book and the second half. So let me give you. Some example of them.

1 of them is and Air Force target drone program, we're expecting to receive a multiyear award.

It would be base years, plus options to <unk> and this would decide both this is sole source that will carry us through we're expecting a very large navy target drone award and the second half of the year that also we expect to be multiple years base year plus options. There's a confidential program that I think is going to fall in.

For Q3, there is that large international 1 that I've been talking about it and I didn't mentioned in the prepared remarks today, where we've received the contract but with the change in administration that was going through some type of government review, we expect that review to be successful and well received that award.

And the second half of the.

Of the year in the engine area, we have a very large contract we are expecting to receive I forget if it's Q3 or 2 for that that will put our engine business and the positive over 1 <unk>.

<unk>. So we got a lot of big big ones that most of which are sole source, which is why we're so confident second half bookings and none of these are strong.

Okay. Thanks, and then.

And just the comments about the rising chase accounts with Covid.

Turns about Delta variant and are you anticipating or what do you think the biggest.

And I guess risk and fair in terms of both the order environment.

And then are you seeing any further delays on testing ranges.

Okay. So last 1 for us thus far.

As of today, we have not seen or been informed of any test range delays as of right now now as I mentioned and you probably saw the Dod is starting to tighten up certain restrictions that certain locations, including at the Pentagon those are not those are not problematic.

Right now now we are we are seeing some issues.

On the commercial side on.

On travel and the commercial satcom business and.

Internationally.

Because we've got and over 80% to 85% of the global operators. So we're seeing some delays there we factored that into our range. This is 1 of the reasons, where we have we have a range and we've got puts and takes all over the place.

Tom.

The primary issue and probably concerned about right now based on what I see is that travel 1 can we can we travel internationally to get the sign off on certain things and we've tried to incorporate that.

And like all other companies, we're seeing delays and the supply chain, we're seeing price increases and the supply chain on new contracts, we can build those prices into our new contracts on existing contracts. If they are firm fixed price. We just have to figure out how to be more efficient. So it doesn't impact our margin. So these are all the moving pieces, we've got going on.

Okay appreciate it and I'll hop back in true.

Yep.

Your next question will come from Austin Muller with Canaccord. Please proceed.

Hi, Eric.

This is my first question here.

China's building 230, new ICBM silos out and the desert.

How does this impact your rocket support contracts with Northrop for for GBS, Steve for the missile transporters on do you think it's unlikely that we're going to get to less than 400 ground deploy GBS.

And because of this.

Yes, Sir payoffs and so youre exactly right and the past 3 weeks satellite shops have identical identified 2 new Chinese ICBM fields and 2 locations over 100, each and.

And I.

And I personally believe that we and the United States. We're in the very early innings of of the next Cold War and the next arms race.

And I'm not going to get specific with certain programs for customers, but.

Answer to your question yes.

And what China is doing is going to be directly related positively to kratos, our programs, specifically and the rocket area, you talked about which has to do with ballistic missile targets hypersonic systems potential hypersonic targets launching payloads at affordable costs rapidly for.

Our customers.

All of this is <unk>.

As a plus and I don't think Ive said, it Austin and the remarks, but our our booked and our anticipated launch schedule of missions.

For the rest of this year and through next year is very very strong and I believe its directly related in part to what Youre talking about.

Okay, Great and then.

And you you discussed that you have the 2 of the 12 boundaries of Oklahoma factory are currently being updated with the autonomy core system.

And.

Is.

And Air Force contract.

Pay for those 12 aircraft contingent upon some forthcoming tests.

With the Valkyrie using the itami courses from just like the Mako to or right and you think about that.

So we have a number of those a number of the 12 that are coming off the line are already under contract.

The 2 that I mentioned those are under contract.

Alright, so those are already spoken for when when the customers and.

Now the quantities under and were under 2 contracts now.

<unk> Valkyrie for those 12 outwards.

Some of the 12, whereby we have 2 contracts when the customers become public with the quantities and what Theyre doing then obviously, we're going to we're going to talk about it but those 2 I mentioned in the prepared remarks, those 2 are under contract.

And those are 2 of a number that are under contract of the ones that are coming off the line.

Okay, and just 1 last 1 should should we anticipate that there's going to be.

Skyboard Valkyrie flight with with autonomy core system installed.

Within the balance of the year here or should we asphalt longer.

Yes, yes.

Okay, well, thank you for the color Eric.

Sir.

Your next question will come from Joe Gomes with Noble capital. Please proceed.

Good afternoon.

Good afternoon, Sir.

So just wanted to.

Circle back here on the second half and obviously given the guidance that you provided for.

For quarters heavily weighted and I'm, just trying to get your comfort zone oftentimes here and the fourth quarter, we see a lot of and.

Political games around budgets and things of that nature, and I mean, we're <unk>.

And it today and how come.

Confident are you that that or what.

What's your.

Worry level that that things of that nature could impact for quarter.

The vast majority of our third and fourth quarter.

Are in backlog.

So the vast majority of this is not a book and burn situation. These are in backlog on funded contracts.

Its execution.

That's what this is.

And the key parts of the execution are I think we havent approximately 300 open reqs right now or something like that and we have some strategies and.

Including taking advantage of other companies that are having some programmatic issues, we're hiring their people.

And we're so far so good on that higher site.

And the wild cards that I see our supply chain. Okay. We have done the best we can to order and advance the safety stock amounts, but the safety stock ordering now is pushing out I think we were at like 6 to 12 weeks and now some things are like 24% to 30 weeks, Dan is not and that's correct. So we are seeing.

Things slide to the right and there.

<unk> global supply chain issues as we all as we all know so that's that's 1 and the second 1 is COVID-19.2 prongs.

Does it do any of our major facilities get impacted where a number of people have to quarantine et cetera.

And I don't see that right now and the other 1 is what the other gentleman asked on the Dod side, if Doj restrictions tightened up and particularly related to range access, but again and our range our guidance our range. We've tried to take all of that worst case.

The normal case to a good case in that range and so that's why I'm very comfortable with how we've come at this and we're going to be we're going to be rock solid and minute range.

Okay. Thank you for for that clarification and and.

And the turbines and you're talking about for Adam.

Program and contract and 1 of the things I think and the press release talking about.

And as affordability and.

Given the huge amount of for the.

Huge percentage that engine Kaufmann M S.

Part of a drone.

And can you kind of give us. Some example R R.

Details what kind of cost breaking or are you looking at here under under the new.

And your <unk> versus the existing engines.

So we had our engine businesses.

It's a range.

And there are certain engines engines, we're looking at orders of magnitude 3.4 and 5 times less costly.

Other ones, we're looking at 30 and 40% less.

Less costly.

It just depends on the type of the Amgen and most of these are turbo jet and turbo fans and the and.

And the application.

Now.

The first part of your question and I do want to comment on.

The.

The decline of the U S industrial base, especially for engine technology related to space systems is really bad.

And the ability and in the past couple of weeks there have been a number of articles on the ability of U S companies to build very specialized machined or cast.

Subsystems and components for rocket engines.

It's that.

We have that capability.

<unk> heard me say on the prepared remarks, we're under a number of contracts, we're under NDA, but people that are going to space people that are launching things were.

We're probably under contract with them building engine components for them.

And that business is ramping very rapidly right now number 1 because of the demand, but number 2 the competition that there's not a lot of people out there that can do it anymore, we've lost that capability and the country and so we're looking at it as a business opportunity and our national security opportunity.

Great and 1 last 1 for me if I may and.

And just perusing the Q b for the call and saw that you had a nice increase and.

And the commercial revenue and cash.

GFS segment is that related to the open source or is there other things behind driving that and that was commercial revenue is higher for the quarter.

That's a big piece of it is on the on and commercial Satcom piece.

Okay, great. Thank you.

Yes.

As a reminder to ask a question. Please press star 1 and your telephone and your next question will come from Pete Dubicki with only limited global. Please proceed.

Hey, good afternoon, and Eric and Deanna.

Certainly.

Hey, guys I wanted to follow up on the engine lineup thoughts just Eric Youre.

And you mentioned and the second half of the year and potential you called it a large engine contract and when I just wanted to get my expectations and or because I think you are.

<unk> business and the past as you know.

Moving a lot of task orders, maybe $5 million to $10 million for development pipe.

And are we talking about and the second half are we talking about.

Production contract or are we talking about maybe an and.

Advanced development contract its more okay go ahead.

And it's multiple tens of millions.

Okay, and just like and I'll wrap up contracts.

I can't.

I cannot get ahead of the customer, but it is several several.

Tens of millions is the size.

And that's a nice breakthrough for the business I would say right. The business is doing great and the offered the opportunity that the number of new missiles.

POW and powered munitions for.

For the range that has to be achieved and the Pacific.

Is incredible.

When we see a press release when you get this or is this too close hold kind of a thing or.

And I believe I'm hopeful the customer we will announce it I'm hopeful.

Okay. Okay.

Last 1 for me and Kgs I just wanted to I.

And I feel like maybe I need to understand this business better.

On the EBITDA margins at Kgs, when we talk about there and kind of upper single digits for the first half of the year I guess due to space R&D.

And what I'm wondering is is every business within kgs in normal times.

Cannot be or is it kind of a mid teens type of and EBITDA margin business that generates free cash and it's just being suppressed right now because of space R&D.

Or is there a big range, there and some businesses or maybe more important than others.

So across the board there are there are different margin rates within the business.

On this space and satellite side those are on the higher end of the range.

On some of our we did still have some legacy services business and right now our engine businesses. Most of that's in development those are on the lower end of.

And the margin rate range. So.

And so it's a blend right now and.

What we're expecting for the second half is at that space and satellite business is going to be more software focused which would lift those margins and the second half and more specifically and the fourth quarter. So.

That's what we see driving some of that margin uptick for the for the <unk>.

Second half.

Okay, and if we think more so on the mid term and this is my last 1 and I apologize, but and we think more and the midterm.

With Amgen and gaining a larger contract with space, maybe moving more so into production and type of stuff on the new space stuff.

And Keith is your expectation that kgs and the midterm can be kind of a mid teens margin business.

And we've got too.

As you know and the and our <unk> business.

With GBS.

Which I believe the announced contract with something like for develop its a development contract before production of $180 million and we've got a couple of other ones and there.

Those development contracts margins are typically lower than production.

I think and Q and the second half we're going to win we're going to be awarded another large multiple tens of millions dollar weapon system contract for development that will then go into production.

So those are going to offset a little bit some of the the the margin increases were seeing like and the.

<unk>.

The space and satellite area. So crisply answer your question once if everything gets into production likely predictor and there are no more large development programs.

It could be a low teen business.

But <unk>.

Hopefully, we're going to continue to wind development programs that put us and position for additional programs to drive the organic growth and what I mean thats a cycle.

Sure sure Okay, Okay and I appreciate the color guys. Thank you.

Okay. Thank you.

And at this time there are no further questions I would now like to turn the call back over to Ericsson marker for closing remarks.

Great. Thank you very much for joining us.

Looking forward for our next report.

Sir.

This concludes today's conference call. Thank you for participating you may now disconnect.

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