Q2 2019 Earnings Call
If anyone should require assistance during the conference. Please press Star then zero on your Touchtone telephone as a reminder, this conference call may be recorded I would now like to introduce your host for today's conference Ms. Marie Mendoza Senior Vice President and General Counsel Ms. Mendoza you may begin.
Thank you.
Good afternoon, everyone. Thank you for joining us for the greatest defense and security solutions second quarter 2019 conference call.
With me today is Eric Demarco, Kratos is president and Chief Executive Officer, and Deanna Learning Kratos is executive Vice President and Chief Financial Officer.
Before we begin the substance of today's call I'd like everyone to please take note of the Safe Harbor paragraph that is included at the end of today's press release.
This paragraph emphasizes the major uncertainties and risks inherent in the forward looking statements we will make this afternoon.
P.T. these uncertainties and risks in mind as we discuss future strategic initiatives.
Potential market opportunities.
Operational outlook and financial guidance during today's call.
Today's call will also include a discussion of non-GAAP financial measures as that term is defined in regulation g.
non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP.
Accordingly at the end of today's press release, we have provided a reconciliation of these non-GAAP financial measures to the company's financial results prepared in accordance with GAAP.
With that I will now turn the call over to Aaron Marco.
Thank you Marie good afternoon, [laughter], both our industry and Kratos recent see recently received some very good news with Congress agreeing to a two year budget and debt ceiling agreement.
Which include a 2020 and 2021 defense spending of 738 billion and 741 billion respectively.
Both increases over the 2019 defense budget of approximately 718 billion.
The congressional budget agreement, which we understand has white house support will hopefully be finalized into law by the end of this calendar year. After an expected limited continuing resolution, allowing time for the appropriators to reconcile the bills.
This budget agreement once signed into law position, several large kratos programs, including our drone business to begin development began initial production were realized increased production, we believe positioning the company for sustained significant future organic growth.
Additionally.
As a result of the increasing geopolitical threaten environment, we could see even higher defense budgets in the future as indicated by the five year future years Defense program plan or fit up which was recently released in March of this year.
Directly related to increasing defense budgets, the recapitalization of strategic weapons systems to address peer or near peer threats is accelerating globally.
And Kratos is primary business areas of unmanned systems missile defense Hypersonics.
Space microwave electronics and training systems are well positioned to address the U.S. and our allies mission critical national security priorities and requirements.
We believe that Kratos has proven ability to rapidly develop demonstrate and field technology, leading systems at an affordable cost is a unique and important competitive differentiator for our company in the eyes of our customers.
The DRD once leading technology and affordable systems right now not in 10 or 20 years, which we believe is providing non traditional defense system providers like kratos with multiple large new opportunities, which is reflected in our growth rate and the continued expansion of our bid and proposal pipeline.
In June the Air Force stated that it is focused on working with smaller companies like Kratos with credo, specifically being named which we believe is related to our unique and differentiated capabilities.
In the second quarter, the Kratos Alpharel execute 58, A. Valkyrie unmanned combat aerial system successfully completed the second of five scheduled demonstration flights with all test point and the second flight being achieved.
Kratos has partnered with the Air Force Research lab to develop Valkyrie to the low cost attributable strike demonstrator program for L. cast D. The air Force's effort to field, a loyal wing man type drone that can accompany a fighter jet or other combat aircraft in manned unmanned teams.
The Air Force has stated that it is currently looking at incorporating the EPS to 58, A. Valerie with man fighters, including specifically the F 35, and the Fifteenx as forced multiplier augment or is it a manned unmanned teaming role and there have been public discussions regarding teaming three cradles valkyries with an F 35 are under Fifteenx.
The Air Force has recently announced that the upcoming F 35 blocks for upgrade and technical three refresh program will include the command control and communications capability for unmanned man teaming with drone systems and it was specifically mentioned that this would include Kratos is Valerie.
The Air Force is also planning on adding sensors and weapons to Valerie and is looking to insert artificial intelligence and the execute 50, a day via the recently announced Sky Board program.
As a result, we are now in discussions with a number of companies regarding integrating their weapons systems with the Valerie with this being coordinated directly with kratos as customers.
It was recently reported that the assistant Secretary of the Air Force for acquisition Technology, and logistics stated that he hopes to acquire an initial 20 to 30 valleys in the near future for further experimentation related to these initiatives and concepts of operation.
The assistant Secretary also reportedly stated that he is looking for the Valkyrie to have the spiraling of development and to become a program of record as soon as fiscal year 21.
Which begins next calendar year.
It was also just recently reported that the Air Force is looking at Kratos is Valerie and Sky Board to be one of the services new Vanguard programs.
A concept that was introduced in the 2030 science and technology strategy.
The focus of the Vanguard program strategy is to transition technology faster from development to the field and to the war fighter.
As I believe you can see since the second successful Valkyrie flight momentum for the execute 58, A. is building, including with potential new customers.
One of these potential new customers recently expressed interest in acquiring up to an initial 10 valkyries in either the fourth quarter of this year for the first half of 2020.
This would be in addition to the 20 to 30 valkyries to potentially be initially acquired by the Air Force customer.
Congressional momentum and interest is also increasing.
With the house of Representatives Committee requesting up to a 50 million dollar funding increase for the Valkyrie in the 2020 defense budget.
At a Senate committee requesting a 100 million dollar value for refunding increase and the 2020 defense budget.
These requested congressional funding increases for the Valerie.
The ultimate amount of which will be determined via the normal congressional budgetary reconciliation process.
Our in addition to the in excess of 100 million in funding for the L. Cat L. cast devalued reprogram. We understand is already included in the 2020 defense budget.
Accordingly.
We believe that we are on track to achieve initial orders of at least 20 to 30 valkyries by the end of this year or early next year.
With the expectation of significantly increased future orders in 2020 2021.
And for future program of record.
Based on these recent events information and meetings, we have had with the customers over the past few weeks.
We have now placed the order for a number of Valkyrie engines under an initial flexible 24 engine unit purchasing framework agreement.
For customer related competitive and other considerations. We are limited in what we will say here.
Other than we have now made the initial engine orders, which are a critical long lead item for the Valerie.
That we expect to receive the engines from this initial order beginning in the second half of next year in order to match up with the current Valerie manufacturing and production flow expectations.
And that we plan to order additional engines by the end of this year.
This is all consistent with our recent announcement that we will that we will be manufacturing and producing the Valerie and our new Oklahoma City facility, where we are currently making a significant capital investment in preparation for this production.
On the Gremlins program.
We have begun delivery of the Gremlin tactical drone you weigh. These two are prime partner dianetics for the upcoming initial system demonstration flights.
The initial gremlin system and demonstration flights are scheduled for Q3 Q4 of this year.
And once the Rems the gremlin demonstrations are successfully completed.
We expect increased momentum and customer and congressional interest for the Gremlin drone.
Similar to what we have experienced with the Valkyrie after its successful demonstration flights.
We have recently met with our dynamics partner and the government customers and we have increased confidence and the ultimate success of the Gremlins program and U.S. platform, which kratos produces.
Based on the current demonstration flight schedule, we expect an initial gremlin order in the first half of 2020 with ultimate timing being driven by the customer and becoming clearer after nominal flight demonstrations.
Program down Atos remains on track.
We are currently investing in and building out the required to secure program facility and expected to be complete by the end of this year.
We expect fan Atos will give a meaningful financial contribution to cradles beginning in 2020.
On Santos assuming successful execution over the approximate 30 month development phase. We now believe the program has the potential to ultimately be as important and significant to create those as we currently believe outgrew to be.
On program ETF, which is government funded where kratos is the prime and our air vehicle is flying today, we remain on track for additional customer sponsored test flights late this year or in the first half of next year, where we expect to demonstrate certain mission payload capabilities.
Customer interest in programming remains high.
With one customer now, indicating that they currently plan to place an initial order for 100 program up systems. Once all demonstration flights are successfully completed.
We have also delivered to another potential program f. customer a preliminary wrong or rough order of magnitude estimate for 1000 systems to be delivered over an approximate three year period. Once demonstration flights are complete.
We remain highly confident that program EFL achieve production status and be fielded in large quantities. Once the demonstration flights are successfully complete as a result of customer need the mission requirement and the threat we're addressing here.
On Spartan.
We have now received initial contract funding from our prime partner.
Where kratos is responsible for the air vehicle and we expect additional clarity on this program passed by the end of the year. So on Spartan were under contract.
Program Athena, which is classified is also now under contract with system development set to begin later on this year or early next year.
Credo. So the thought is are you weigh us which is flying today is under a funded development contract with the government agency with this program currently expected to be a meaningful financial contributor to Kratos beginning in the second half of 2020 after successfully completing the development program.
Program Apollo is now expected to be funded within the next 90 days and we expect to begin significantly executing on this program in 2020.
On Credo says D. you Maaco UAS program. We have now received additional funding with this program objectives objective set now expected to be consolidated with Apollo. Accordingly, We will report on this initiative on a combined basis in the future with Apollo.
And our last report to you we had indicated that we expected to potentially have a new maaco customer under contract by the end of this year.
This situation has now developed whereby this customer may be interested in cradles valkyries instead of the maaco as a result of the successful Valerie demonstration flights, we will keep you apprised as this opportunity continues to evolve.
As you know create Olson Aerovironment recently announced that we have teamed up to demonstrate integrated high performance tactical UAS and tactical missiles missile system capabilities.
Simply stated Kratos drone will deploy an aerovironment tactical drone weapons system.
We have customer interest in this initiative, which interest has now expanded to two additional potential customers as a result of the community becoming aware of this kratos Aerovironment initiative and have the potential capabilities of this very affordable and mission capable system.
We are currently planning on demonstrating the system either late this year or early next year.
On projects, a and Z. We recently met with the potential customer and we are now working towards the second half 2020 potential initial contract award.
We have now submitted our response to the Sky Board program are fine.
We have met with the customer and we are highly confident that kratos will ultimately have a significant role in the Sky Board program with our platforms with Kratos, Valerie and our BQM drones, specifically mentioned by the Air Force in the Sky Board program announcement.
There is a new classified opportunity that we have been discussing with the government agency called project a mega.
We believe that this opportunity has now progressed and that cradles could potentially receive an initial contract award in Q1 Q2 next year.
As I previously mentioned Kratos has proven ability to rapidly develop demonstrate and field operationally relevant low cost affordable systems is a key competitive differentiator for our company and one that is highly valued by the customer community.
Directly related to Kratos is positioning.
Kratos has family of high performance jet powered tactical unmanned aerial drone systems are currently flying today. They are not models. They are not concepts are powerpoint presentations.
As a result, we believe that Kratos has a significant lead in this area and that this is a clear differentiator compared to any of our potential competitors, we are aggressively pressing and taking advantage of our market leading position.
We continue to expect significant organic growth from our target drone business with multiple long term programs under production contracts.
These programs include the US Air Force Navy Army and other agencies and from a very large multi year International Award we received in 2018.
With most of our target drone programs being either sold or single source.
Under this International Award Kratos is high performance jet target drone systems recently headlined a war games exercise with the Swedish FMTV and a missile firing exercise with the German Navy.
During the slide fire exercise on the open water outside of harnessing and Sweden, 19, Kratos target drone flights were utilized in both high and low altitude patterns, allowing the German Navy to run a tax scenarios to test multiple weapon systems.
This is just a recent example of kratos as target drones exercising state of the art radar missile and weapons systems capabilities for test system and crew training and overall operational readiness.
Our Esat BQM 177 program with the United States Navy continues to ramp up and in the second quarter Kratos received sole source low rate initial production year, three a 25.4 million dollar contract award.
A total of 105 BQM 177 target drones are expected to be produced under L. Rip one two and three.
We just recently met with our Navy customer and the current expectation is for a full rate production contract award to be issued to create those in the first half of 2020.
And as a result for significant increase production ramping in Kratos as fiscal 21.
On our US Air Force AP sat BQM 167 program in the second quarter Kratos received a $31.8 million sole source contract for production year 15 of the 167 target drone.
With production lot year 15, the total number of target drones for loss one through 15 is 482.
The ultimate value to Kratos from these target drone contract are expected to be significantly higher than the published target drone award amounts.
As a result of related drone payloads decoys flares chaff spares and other ancillaries, we required by the systems being awarded under separate contracts.
Once in full rate production. These target drone programs that have historically been decades long in both production and operations.
It was recently reported that both of the United States fifth generation fighters. The F 22, Raptor and the F 35 lightning engaged multiple kratos BQM target drones, and an exercise demonstrating once again that kratos as target drones are the highest performance threat representative drone systems in the world.
We are also under production contracts with United States Army for Kratos has won 67 and 178 fire jet target drones.
Both of which we expect to increase future production quantities.
Additionally.
A program with a confidential customer continues to ramp production with this expected to become one of Kratos largest long term future production production programs in a few years.
As I mentioned in our last report to you.
In Q2, the next generation aerial target or end GAAP RF I was issued by the United States Air Force.
Which kratos expects to respond to in Q3.
For competitive and other reasons I will not comment on this large new opportunity.
However, as I previously mentioned if you take a look at the end got RF Fi I believe you will understand why Kratos is extremely excited about what this new opportunity can mean for our company. We believe that kratos is uniquely positioned for the additional new large target drone opportunities that are coming.
On Kratos unmanned aerial target drone business, we see this business growing to approximately 250 million in annual revenue over the next few years and potentially significantly higher if we are successful on and get.
Credo says turbine technologies continues to perform as expected, including importantly, our commercial and MRO businesses, which are jewels, including their management teams.
We also continue to make progress on our next generation class of jet drone and tactical missile propulsion systems.
Our plan is for K, TTS technology, and affordability to be disruptive to the tactical system market similar to Kratos tactical drone business and be a significant future revenue profit and cash flow generator for the company.
Kratos as an industry leader in ballistic missile targets and in the second quarter multiple cradles missile defense target supported exercise formidable shield 2019.
In the exercise credo supported the United States Navy six fleet and Nato's enable striking and support forces at the UK Ministry of Defense Hebrides range in Scotland.
The multinational exercise piece featured ships aircraft and personnel from 12 countries.
Similar to Kratos has target drone kratos ballistic missile targets are an integral part of weapons system and radar test evaluation and operational readiness.
Cradles also has important intellectual property or exclusive rights positioning and our affordable BMD target suite.
We currently expect to receive a large sole source BMD target contract award in late Q3 or Q4 of this year.
This award has been delayed from a previously expected first half 2019 award period.
We are also in pursuit of a competitive new very large BMD target and Hypersonics system opportunity, which has also been delayed from a previously expected first half 2019 Award peer award period with award now expected in Q3 or Q4 of this year.
This new opportunity. If kratos is successful is expected to represent one of the largest multi year single contract award programs in our company's history.
And would be a very significant financial contributor to our company beginning next year.
We have also just recently responded to a new hypersonic system RFP that we believe we are uniquely qualified for with this award expected late this year early next year.
And we have just recently been approached by a separate customer regarding an additional hypersonic program system opportunity, which we are responding to and which is expected to be awarded in early 2020.
The hypersonic systems area, where kratos has successfully performed emissions on a number of hypersonic programs.
Kratos has proprietary rights or intellectual property on certain systems, which we believe provide us a clear competitive advantage at an affordable cost.
Both kratos BMD target and our hypersonic system businesses backlogs and opportunity pipelines are currently at all time highs.
Great also as microwave electronics products business had a 1.3 to one Q2 book to Bill ratio. It performed as expected and is on schedule and on budget on all major program.
Kratos microwave business is designed in a number of potentially very large programs, including missile missile defense radar. The F. 15 F 16, Rippon Iron Dome Barack and certain guided missile munitions systems, each of which are expected to begin production to ramp over the next several quarters.
For example on the Boardwalk eight missile system. It was recently announced I believe last week that K Ras has placed an order with Rafael for 1000 Barack eight missiles, and where Kratos has content is approximately 50000 per missile.
As a result of this contract award. We currently expect this program to begin ramping for Kratos in the second half of next year.
Also just a few days ago. It was reported that the arrow three missile achieved three successful test interceptions over Alaska.
Kratos is content per Arielthree is approximately 10000.
Per missile.
Once production on Barack eight arrow and other kratos designed in programs occurs we expect a very strong organic growth trajectory for this business, which historically has generated some of the highest profit margins in the company.
Kratos microwave businesses backlog and bid and proposal pipeline are currently near all time highs.
Credo C is our products business, which is missile defense missile system radar focused.
Had a 1.9 to one book to Bill ratio in Q2.
Major programs for this business include Patriot Fad sure Rad CPP servers and Rother.
Just recently cut or announced the multibillion dollar weapons systems order with Raytheon, which included an undisclosed number of Patriot missile system batteries.
Kratos is the sole source provider of a significant portion of the hardware for the Patriot system with our content being several millions of dollars per system.
Additionally, Lockheed Martin recently received an approximate $1.5 billion Fat award from KSC.
Increasing the total value of this opportunity to $5.3 billion.
Kratos is a major thats system hardware provider and our content is several millions of dollars per system.
Great also see five is our backlog and bid and proposal pipeline are currently at multi year highs.
Great. This is training systems business continues to perform well with this business, leading virtual environment technology being a key contributor to kratos, receiving the honor of best in show for its boot the Paris Air show.
We are currently in production on working on a number of programs, including helicopter and fixed wing training systems. The KC 46, and on a US Navy Fms program in Saudi Arabia, which is now in a recompete and the largest contributor of this business.
Prior to the recent RFP for the Recompete the funding for the remaining period of performance through the end of the year on this program was de scope by approximately $5 million contributing to our adjusting the high end of our expected revenues for the second half of the year.
Kratos has training bidding opportunity pipeline is one of the strongest in the company.
Kratos has space in satellite business continues to adjust and position itself for the changing market, including the extremely large number and size of opportunities I discussed in great detail on last quarter's report, which I encourage you to review.
The space and satellite areas of the deal the budget or seeing some of the largest increases as a result of the perceived peer threat environment, which is driving significantly increased funding for new capability functionality space craft and ground infrastructure.
Existing systems like the United States, New cooler command control and communications architecture are aging with the systems last major upgrade occurring in the 19 eighties, which are driving an important opportunity set for kratos.
Also the rapid expansion of commercial space, bringing new low Earth orbit capabilities is an area. The government is looking to leverage allowing for redundant and resilient communications.
The Air Force is also looking for cost savings by leveraging off of the commercial space assets, which also brings new opportunities to kratos.
As a result of these changing requirements Kratos is becoming a key enabler of the space industry's movement to Virtualized and cloud based ground operations through our next generation digital infrastructure systems.
That are supporting traditional satellites as well as the next generation of small satellite constellations.
A recent example has been kratos is work with Lockheed on the MB mm program, where kratos as virtual software modem allows for the ability to quickly scale for handling a large number of users.
Other examples include supporting efforts to create ground systems as a service offering including Lockheed's verge case at and others, where kratos is under contract and I cannot mention due to end deejays.
Great. This is technology here is revolutionizing the way admissions are managed reducing costs and enabling new defense and commercial services.
As a result of the changing market.
Kratos satellite business is transitioning to more of a software based solution versus legacy hardware based solutions.
Resulting in somewhat reduced expected revenues, but at but at increased EBITDA margins.
Representative major space programs, we support include WGS HF servers.
M.U.S. and GPS.
And I can now inform you that we have a sole source position on OPI or.
From a capital allocation standpoint, there are no changes in our plans since our last report to you.
We expect the company's future cash flow to continue to increase year over year with the current primary expectation for this cash flow to continue to delever and strengthen kratos is balance sheet.
We intend to maintain adequate cash on the balance sheet to enable us to successfully execute on our business plan and to fund the expected growth in existing production programs.
And growth and production programs that we believe we're going to receive.
We currently foresee no major acquisitions in our strategic roadmap.
We believe the production programs development programs and opportunities that we have that we currently have our industry leading.
They are significantly differentiating.
And that Kratos is positioned for long term revenue profit and cash flow organic growth.
For Kratos has guidance the first half of 2019 came in somewhat stronger than we had initially forecast.
Including a favorable business mix with higher product systems software and solutions revenues and lower than expected service business revenues.
Which trend we are currently forecasting to continue.
Also as I mentioned at the beginning of this year Kratos was in pursuit of three BMD target or hypersonic opportunities, which we have factored probability of win and value amount in our 2019 forecast based on timing expectations at that time.
Of the three.
Kratos has been successfully awarded the first opportunity it's under contract.
On the second opportunity, which I previously mentioned has been delayed from an expected first half of 2019 Award.
It is now currently in source selection and is expected to be awarded in the next few months.
The third opportunity solicitation has also been delayed and is now expected to be released late this year with an anticipated first half 2020 Award date.
So as a result of the favour the favorable business mix. These delays in the expected future trend of reduced services revenues were reaffirming our EBITDA our profit in our cash flow guidance and we're reducing the high end of the revenue range.
Importantly, we have lost nothing here.
A couple of opportunities have moved to the right and on the second BMD target hypersonic opportunity.
The one currently in source selection.
The Kratos team a successful here as I. Previously stated this is expected to be one of the largest single award contracts in our company's history.
With an ultimate value to kratos of several hundreds of millions of dollars single Award.
We remain optimistic that we will be awarded these opportunities.
In closing.
The trajectory of Kratos is directionally up and increasing.
The two year budget deal has positioned us for new program and increased production on a number of programs key elements of our future significant organic growth expectations.
We believe that value is on track for initial production and a program of record.
Gremlins is scheduled for beginning demonstration flights in Q3 Q4 of this year.
And we expect initial production once all demonstration flights were successfully completed with program AFE Santos and others expected to follow.
Over the next six months, we expect to receive a number of new contract awards, including the hypersonic or BMD target areas, which if successful could be major catalysts and growth drivers for the company.
Deanna.
Thank you Eric good afternoon.
Great as the second quarter 2019 revenues of $187.9 million exceeded our expectations of 175 down $185 million and increased $36.7 million or 24.3% year over year.
Excluding the impact of the recently acquired FTT entity, which contributed $17.2 million in revenues Kratos revenues grew organically, 12.9% in the second quarter.
Our adjusted EBITDA came in at 19.2 million above our expectation of $16 million to $18 million, primarily driven by a favorable mix of revenues and execution.
Chris This is adjusted EPS of eight cents per share also exceeded our forecast of five cents to seven cents per share for the quarter.
In the second quarter Kgs generated revenues of $145.4 million up 25.8% from $115.6 million for acute to 18, adjusted EBITDA of $15.7 million or 10.8% of revenues up from 8.4 million in Q2 of 18 and operating income of $10.7 million up from 5 million in Q2, 18, which included a $2.8 million of expenses related to a legal settlement.
Excluding the impact of the NTT acquisition Kgs revenues grew organically, 10.9% year over year.
Operating income and adjusted EBITDA were impacted by a favorable mix of revenues and leverage on fixed manufacturing overhead and administrative expenses.
Revenues in our unmanned systems segment increased 19.4% from $35.6 million in the second quarter of $18 million to $42.5 million and adjusted EBITDA decreased from $3.7 million to $3.5 million in the second quarter of 19.
Our Q2 operating income was $9 million up from the second quarter of 18 operating income of $2.6 million.
Our adjusted EBITDA for the second quarter is from consolidated continuing operations, including net income attributable to non controlling interest and excludes noncash stock based compensation costs of 2.8 million severance related costs of 300000 and transaction related costs of 600000.
On a GAAP basis net income for the second quarter was $3.9 million, which included income from discontinued operations of $3 million, resulting from a $3.6 million gain related to the release of an indemnification liability. Following the lapse of the statute of limitations associated with the potential tax liability.
That was recorded in 2015 as part of the sale of the company's electronic products Division.
Net income also includes a tax provision of $2.5 million.
Moving on to the balance sheet and liquidity, our cash balance was $176.2 million at June Thirtyth.
At quarter end, we had zero amounts outstanding on our bank line of credit and $5.7 million of letters of credits outstanding.
Debt outstanding was 294.6 million at quarter end and net debt was 118.4 million.
Our LTM adjusted EBITDA was $71.4 million with a net leverage ratio of 1.7 to one.
Cash flow generated from continuing operations for the second quarter was $4 million and capital expenditures were 45.8 million, including approximately $3.6 million related to the unmanned systems Division.
Play, primarily reflecting the buildout of the company's new manufacturing facility in Oklahoma.
Our dsos or days sales outstanding decreased from 136 to 115 days due to the contractual milestone payments on long term delivery contracts in our training solutions modular systems and unmanned systems business.
The reduction in Dsos as one of the primary drivers for the operating cash flow generation for the quarter.
Our contract mix for the quarter was 83% generated from fixed price contracts, 12% from cost plus contracts and 5% from 10 time and material contracts.
Revenues generated from contracts with the us federal government during the quarter were approximately 71%, including revenues generated from contracts with the DMD non diodati federal government agencies, and SMS foreign military sales contract, which were approximately 8%.
We generated 11% from commercial customers and 18% from foreign customers.
Our book to Bill ratio for the quarter was one to one and for the last 12 months was 1.1 to one.
Our bookings were $188 million for the quarter.
Today, we are providing third quarter revenue guidance of 175 to 185 million adjusted EBITDA guidance of $16 million to $18 million and adjusted EPS guidance of five cents to seven cents per share.
And our adjusting the high end of our full year revenue guidance to $720 million to $740 million and reaffirming our full year guidance for adjusted EBITDA of $71 million to $77 million.
We are also reaffirming our full year 2019 cash flow from operations guidance of $40 million to $50 million.
Capital expenditures of $28 million to $30 million and free cash flow guidance of $10 million to $20 million plus expected final cash receipt of the retained working capital of the Companys divested PSS business of approximately $4 million to $6 million.
Approximately $1.4 million of these amounts have been collected through June thirtyth.
We expect capital expenditures to be at elevated levels for 2019 with continued expected significant outlays Inc. Q3, as we make the necessary investments for manufacturing and test equipment for our new Oklahoma facility and a new secure facility of approximately $6 million to $8 million and approximately four to 6 million related to aerial target drone the company plans to manufacture in preparation of fulfilling expected customer requirements.
We expect our estimated cash taxes to be approximately two and a half to three and a half million dollars.
Fynineteen, reflecting the impact of the over $300 million in net operating losses that we have.
Eric.
Great. Thank you Deanna, we'll now turn it over to the moderator for any questions.
Thank you ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on your Touchstone telephone. If your question has been answered or you wish him with yourself from the queue. Please press the pound key to prevent any background noise. Please place your line on mute. Once your question has been stated our first question comes from Mike Crawford with B. Riley FBR.
You May proceed with your question.
Thank you just first quickly the equipment for the new secured facility that is not an oklahoma or in the C.I. operations in the Sacramento area, that's somewhere else.
It is.
It's somewhere or not and it's not yet somewhere else like.
Okay.
All right. Thank you and then just.
Eric Please on Hypersonics I think it'd be helpful. If you could differentiate it into kind of three different sub components. If you. If you could discuss maybe the possibilities related to.
Like a K T T type of small engine replacement versus what you might be able to do on the sub orbital side with their Oreo rockets or or just altogether as a whole.
System.
You got it.
So.
In our rocket support services business, we have exclusive rights.
Perpetual in nature.
For specific solid rocket booster stack.
That is very well positioned to do to put hypersonic vehicles in the right place at the right time at the right speed at a very affordable cost.
This could include hypersonic target.
This could include testing hypersonic front end. So we do not do the front end for example, a glide vehicle, but we can put that glide vehicle in the right place at the right spot at the right time.
With our stack.
So that would be in the solid rocket so the non air breathing side.
In our in Katy.
This would be on the air breathing side and actually I just cannot say a lot there other than we are involved in peripheral and propulsion systems for.
Air breathing hypersonic systems.
Okay.
Great. Thank you very much.
You got it.
Thank you and our next question comes from Seth Sigman with JP Morgan You May proceed with your question.
Hi, Thanks, very much and good afternoon, Eric and Deanna.
I Wonder if you could talk a little bit more the.
The Saudi training contract the Recompete, that's coming up.
Can you tell us what it is and and also to the extent to on the Recompete that theres any remaining risk for 2019.
And what their risk might be for 2020.
Yes, so 2019 as of his bolted in.
Okay. So the paired force goes through.
Then it's up it's been solicitation right now.
Contract awarded and you heard me talk about some delays. So this is just the most recent contract award is expected sometime between now and the end of this year.
All right.
The contract has.
I don't want to get too far ahead here the nature and the scope of the contract vehicle has changed in the Recompete.
So the future potential exposure is around $25 million to $30 million a year, but margins are significantly reduced.
Okay.
And then as a.
As a follow up.
When you talk about the.
Satellite business and how it's evolving I think you spoke a little bit.
About this last quarter and it sounds like maybe its move forward, even a little bit more.
Well when you think about that business, becoming more software oriented and less hardware oriented.
What does that mean about.
The size of that as we as we think about maybe next year or something like that the growth rate of Ed and and.
And the profitability.
Yep. So so think of that business right now in this specific satellite product business being somewhere between 90 and $100 million in revenue.
The specific piece in its current configuration.
Think of margins somewhere around 13 14, 15%.
All right.
I'm looking at that probably.
On the revenue side.
Year over year going forward.
2% to 5% going up.
But the margins.
Increasing significantly.
Because of shifting away to more being software base than like a software defined radio.
Okay. Okay.
And that's not only for the margin modeling, it's looking very good for future cash flow as well.
Excellent okay.
I will I'll hop back in the queue for now, but thank you very much okay.
Thank you and our next question comes from Josh Sullivan with Seaport Global you May proceed with your question.
Hi, good afternoon, Eric Deanna.
Hi, Hi, John .
On the Valkyrie, the 2020 markups in the house and the Senate.
Dr related programs at $150 million over $200 million. It seems the above 25 unit assumptions that $3 million apiece.
What is that incremental dollar content composed yup.
So I'm going to talk.
Generally so I don't get ahead of people.
Integrating weapon systems.
Integrating is our systems.
Okay.
The cost of sending teams out as they are flying to develop concepts of operations.
Got it so it's it's getting.
The planes ready.
Very similar to what's been publicly reported.
So these are operationally capable by 2022 2023 and there with the forces.
And would those be your systems are your electronic packages.
They are they most likely would not we very well may be the system integrator.
Which would then increase the sales price per plane up from the current estimate to a higher number of where the prime system integrator, but if we're not the system integrator than either the government or the prime went to the system integrating there are two models were doing both models right now literally.
And then I guess related to that the capacity at the Oklahoma facility for Valkyries program FX cetera.
You mentioned the potential next year to have some pretty significant orders.
Do you have the capacity to meet those orders are you going to need to reach out or engage any other manufacturing partners at this point.
Yes. This is Tom so as we talked about last time, we've got 100000 square feet under contract with two additional approximate 100000 square foot facility is connected to that facility autoclaves are going to be up and going in the next few months.
We've we've developed the factory with absolute cutting edge next generation technology manufacturing processes and process flows.
So based if you recall about six months ago, we talked about our base case anticipation and then the pie in the sky or the.
The stars aligned case that we had.
We can we can handle a base case scenario over the over the first couple three years.
With what our current plan is.
Under stars align case than we would have to we would have to increase the build out there.
Okay, and then just one on program App.
I think you mentioned the need for a thousand units over three years.
Keith can you just talk about the funding status of that and then just an idea of what the individual ship set value to create tens might look like yup, so tying in to your previous question.
Yes.
If we are the system integrator and we integrate the system and deliver it.
Excluding one element, which I believe the government would integrate.
Thank approximately five to 600000.
Per system.
If we deliver the system.
And then I'm going to use the word payloads, our integrated onto the system.
I think 300000 a system.
And on and on and on the funding question Josh I.
I believe as soon as we complete the final demonstration.
Which.
Is scheduled for Q2 of next year.
I believe this will be funded.
Very rapidly because of the requirement and the threat.
Got it thank you.
Yes, Sir.
Thank you and our next question comes from Ken Herbert with Canaccord. You May proceed with your question.
Hi, good afternoon, Eric and Deanna.
Hi, Ken.
Hey, Eric I, just wanted to first ask about see the 10 million sort of reduction in the guidance or 20 million at the upper end of the revenue range can you just parse out the timing of that relative to some of the mix impact you're seeing I mean, how should we think about maybe the pieces of that.
Yes, so as I said, we had we had factored.
There are three BMD target hypersonic opportunities that we were ceight, we've been chasing from the beginning of the year.
And as I said, we had we had factored timing.
We had assumed we would not get all of them, but we had a factor timing if we get two of them and we get two of them by the first half of the year. We are good if we get three of them and we get three of them at certain times of the year were good or we could even be better off than what we guided to.
As I mentioned one of them we won.
And.
On on this the second one the large when I am it's so frustrating.
Because it's it's.
There are continuing responses with the customer question said.
And so I'm, saying between now and the end of the year that will be awarded it could be awarded.
Imminently.
But were put were virtually pulling it out and pushing it out to the very end of the year because we're just not we can't tell when it will be awarded and the other one the third one and this is why we factor things. The third one is as most likely move now to our 2020.
A 2020 award.
So.
That is that is the primary reason along with that the other defunding, we had a solid contract, but the customers from time to time defund on the training contract. They defunded the $5 million for the <unk> for the second six months of year the profitability that we are seeing.
In RC five is our business for example.
On the weapons systems, we're working on.
Is phenomenal.
The mix is very strong the software mix.
In the space business.
He is very very strong.
And we see those trends continuing which is why we're very we're very comfortable with the EBITDA operating income EPS and the cash flow guidance.
And if we had gotten those up if those other ones have been awarded where we initially thought we.
We'd really be sitting pretty.
Okay. That's that's very helpful. Thank you and is there is there anything contemplated in the fiscal 19 guidance around Valkyrie in terms of revenues.
Not production no no no. We are not production were under the original contract with their for rail and we're going through the flight series. So that that is included in there.
And and we mentioned late last year I'm, Ken I think that we had mentioned we had gotten three spirals that are tied directly to the base contract, though spirals on the development contractor in there, but nothing for production and so if.
That's an upper their farm, that's an upside if we receive an award.
Okay. Okay, that's very helpful and if I could Dan just one final question.
The.
It looks like you've given nice third quarter guidance. If you think about the free cash flow I know typically your very strong seasonally how should we think about that especially in light of of your I guess assumption that we have some sort of continuing resolution into the calendar fourth quarter.
Do we do we see is the risk that things maybe get pushed out of the earlier fiscal fourth quarter or how should we think about that.
Sure so for the third quarter as I had mentioned in my prepared remarks, Capex is going to continue to be quite element and that's that's going to be our highest capex quarter for the year.
Yes, anyway, probably in that $10 million to $11 million.
Range, so that will certainly impact our free cash flow and the other piece is going to be the timing of milestones and when we achieved those milestones.
Second quarter was very favorable.
With a number of those milestones being achieved but as we achieve some the new ones that need to be.
That can move sometimes.
Okay. So I guess it sounds like even if there is based on your assumption some sort of continuing resolution it doesn't jeopardize the the cash flow outlook for the year.
It shouldn't the bigger impact is really.
From an operational milestone perspective, and when we hit those milestones.
Perfect. Thank you very much sir thank you.
Thank you and our next question comes from Peter Arment with Baird. You May proceed with your question.
Hi, good afternoon, Eric Deanna.
Eric.
Question on just R&D and I guess this is more of a response to just what we've seen in the industry.
Get your thoughts on just this step up in requirements in the industry for more internal R&D investments I look at your most recent quarter you're in about 2.5% of sales are you feeling I mean, just given all the opportunities that you have that you're going to have to step that up.
Maybe just get some color on that initially.
Sure.
And so certain parts of our business.
Require far less R&D than other parts. So for example, our C is our business, let's let's say for this discussion that's about $70 million, yes for this discussion.
And let's say our training business. Another one there there was some R&D in there.
But it's it's less than say, our satellite business, let's say that thats $90 million to $100 million of revenue.
We have our traditional legacy services business.
Which really has no R&D.
Which is like.
$50 million to $60 million in revenue.
So the.
The major focuses of our R&D or three spots.
Unmanned systems.
Space and satellite communications, and our microwave electronics business.
And then of course, our turbine business is behind that.
So our two and a half or 3% on the surface is a little bit of a misnomer, it's really closer to 6% overall and then in addition to that 6%.
You know we are we've really refined our comp ourselves over the past several years, where we are a rifle shot.
We're not chasing.
Dozens and dozens of R&D programs in the company.
We are rifle shot it.
On one or two would unmanned systems of any of significant one or two on our face business. One are to what our microwave business again I'm talking of signal there are more than that but of significance.
So you know I don't know what the other companies do but I'm very comfortable we are one of the absolute leaders.
In.
Very focused research and development on leading technology systems in our core competencies.
That's very helpful and just as a follow up.
When you look at the the government solutions business, you know, it's pretty much split between half services have products.
When you look out just given the opportunities the growth that you're seeing is this is this a segment that still could easily get into the low double digits for operating margins. When you think about the where defense spending is going thanks.
Yes.
Absolutely.
The it and it's going it's going to happen and let me tell you why it's going to happen.
Okay number one our microwave business.
These are my words now there's about there was about wave of good stuff coming in the next year or two.
I mean that that boardwalk eight program.
Thats just the beginning I've read reports, they're looking at five to 6000 missiles and again our content is 50000 a missile.
The grip and fighter.
They are in blocks chipset wonderful 100 of them our content is 250.
Thousand per Se. We are we are about to receive very soon.
Very large order for an upgrade on an F 15 system.
On an F 16 system.
That our satellite business this shift that's occurring.
You know, it's reducing revenue a little bit the margins are going up I mean, this is moving towards being a software business.
And then Peter.
The big Ie that could be not a trend like I'm talking about but a step function.
If we're successful.
On this opportunity we are pursuing.
In the BMD hypersonic area.
That's going to be a step function increase in production sales product sales and margins.
Appreciate the color. Thank you.
Got it.
Thank you. Our next question comes from Noah Poponak with Goldman Sachs. You May proceed with your question.
Good afternoon.
Yes.
Good evening.
Eric which tactical programs.
Have pulled to the left to contribute to the end of 19.
You had previously didn't think would do so.
Hold to the left of 19, no postponed to the left of what your thought three to six months ago and now contribute to the end of 19. When you previously didn't think there was.
Oh the contributor the other 19 it on.
It really hasn't yet I mean, if we get a if we get a valkyrie god willing of Alpha reorder by September 30, the answer to your question would be there's one right there.
It sounded like in your prepared remarks, like maybe for Athena had am I reading that incorrectly.
Those are still and so they are in development. So broke out so there, but let me be very clear program methods and the airplane. The vehicle is flying it is in the test flight phase and those were assumed.
Those development revenues were assumed in our guidance okay.
Okay I like your it sounds like Theyre going through development faster.
And you're getting more development revenues on those programs I know you talked about.
No no no no for now but on the converse to that.
Like.
Spark.
Or Athena those are going to be more additive to 20 than I. Originally thought because those have been pulled to the left well into their occurrence than I thought I thought they were going to be I thought we'd get funding in 2000.
Right.
So those are moving faster.
So I'm hearing you correctly that those are moving faster, but they are not contributing to 19.
Right that is awesome that is correct okay.
Yes, because I mean, where I was kind of going with that is.
In your prepared remarks listing through all of the major opportunities and I totally understand that.
These are beyond 19 major movers it sounded like.
Even if it's the development revenues of things that are still in development that some things are moving to the left of Beth.
You beat the one Q revenue guidance you beat the Twoq your revenue guidance for your guide the quarters, specifically, you've been telling us you're embedding budget conservatism into the fourth quarter. The budget now looks better than anybody thought it was going to be for that purpose to your deal.
And so im just surprised you havent had enough.
Incremental upper surprises to offset the one thing that slip to not have to lower the guidance well. It's on the on the one thing that slipped I might add on that.
No I might not have been clear.
There are there are.
Two opportunities.
In the BMD target and hypersonic area.
Both of which we expected to be awarded in the first half of the year in my assumption I assumed we would win one of those other two.
Okay.
Both of those have been pushed out one of them to the third one it looks like it's going to be the first quarter of 20.
The other one has been pushed into the second half as I as I as I mentioned I think again it could be imminent Lee awarded but I'm, saying by the end of the year because it now I'm I'm gunshot I'm just on China.
Those ties those for us.
Okay.
So the.
The the big one.
It is it could be it's again a single award.
It could be an incremental 50 to 75 million a year in revenue beginning next year.
It could be more than that.
Depending on op tempo of missions.
The the third one.
That has been pushed to 20.
That can be an incremental 25 to 50 million to here.
These are new.
Specifically related to opt tempo of.
Missions.
So in what.
And what you lost from the plan.
Which was the factored versions of that.
Yes is what you lost from the factored versions of that more than the 10 to 20 million depending on how you define it at the high end or the or the new midpoint of what came out of the revenue got it such that there were actually some off there is one other definitive peace.
The de scoping of that Saudi training contract took 5 million that I had bolt I had that in part because you don't expect to get the scope.
I had that $5 million hard in the second half of the year that funding is gone so there's that piece.
And there is it and there's another this is softer approximately 5 million of satellite revenue five to seven.
That has converted from hardware to software, which where the margins are great.
That is also out.
And so that that bundle, let's say that that is 20 million.
I have offset.
That 20 million.
Bye.
20.
Okay.
Got it I know, what I mean knockdown.
The last year there was it the deal you program that split and then there were two services programs have moved around a little bit on your are those all now.
Yup I want to leave you devalue is under contract.
The services contract. The service is one they are under contract. They are absolutely ramping up the number of billets are ramping up they are still not where I thought they would be.
Okay, but they can they can absolutely we're moving yes.
Okay.
Your comment on on Oh.
US a new separate customer looking at Valkyrie, I think you said.
Sounds like you said could buy it in the fourth quarter or is that purely order or is that potentially revenue producing in the fourth quarter.
Okay.
So that's it that's actually an excellent question. So as you know there were three there are three valkyries.
One is the United States Air Force is into our Credo says.
It's it's possible.
That customer or another one I didnt talk about the prepared remarks.
It's possible, we could sell one or both of our valkyries.
By the end of the year and so that would be a sale.
It's possible.
My Tummy tells me I'm going to tell you what I think is going to happen.
I think we're going to get an I believe we're going to get an order from this customer we're going to get an order for the five to 10 and I think this customer the other customer they're going to start leasing the other ones to doing integration work into them and doing testing with them.
But I could be wrong.
Okay.
And then.
Dan on the margins the guidance implies lower margins in the back half versus the first half can you just walk us through why that happens.
That's on the mix of what the expectations are on software and content versus less software content in the second half.
You guys have talked in the past about having this cyber business with software like margins did you have that in the first half and it doesn't happen in the second half or have you not have that at all and you're not assuming it on it could happen or where do we have an entrepreneur. We had we had some in the first yoder out no remember remember our disgust I remembered no. This discussion with you we.
We typically don't put in.
Our internal plan.
Certain of these software sales right because they are very hard to.
To predict when the cost these are very unique systems and historically and this is why in the second half of the year for the past two or three years. Our margins. We've just we've just killed it around that federal fiscal year September 30.
Either because my opinion, the government customer they want to spend the money. The funds. They have are obligated before the next fiscal year, we get significant software sales in Q3 and Q4.
Sounds good Thats still happen this year.
Absolutely good historically at absolutely could.
And it's not an outlook correct. There's there there's a lift there is some budgets, but we very we're very conservative on that which we've demonstrated in prior years.
Can you size, what you had from that in the first half.
I don't know.
Yes.
No I don't I don't have that I don't know.
Okay.
Thanks, so much for answering my questions I appreciate it.
Okay. Thank you.
Thank you. Our next question comes from Joe Gomes with Noble Capital You May proceed with your question.
Good afternoon.
Hi, Justin.
You talked a little bit about the.
The exercise with the Swedish FMTV and Germany has has that led to any more our increased interest in in your products for them.
App.
Absolutely we are working on.
A similar if not significantly larger exercise next year now.
Absolutely good question, yes.
Okay.
And then a couple of quarters ago avid Boeing Australia made their announcement and.
I know if you hadn't heard anything or are seen anything more on where there's ours that potentially.
Could be viewed as a as a competitive.
To your guys unmanned.
Yeah, So I understand they gave a briefing on that Washington, just yesterday.
As as you know Joe it's a it's a concept right now it's a model that rolled out a more right.
I'm Gonna.
Let me answer it this way.
I am extremely comfortable and confident.
That being runway independent.
Being able being less than 30 feet long.
There is there is 38.
Having our our published on refueled range published.
Is at least 3000 miles.
And our price and quantity.
Without payloads of approximately 3 million.
I'm not I am not worried about that bats airplane one bit.
Okay. That's great. Thanks, you got it.
Thank you and our next question comes from Michael Ciarmoli with Suntrust. You May proceed with your question.
Hey, good evening guys. Thanks for taking the question.
Eric can we just talk about I think you said you placed the order for 20 engines and long lead time, you're getting those I think you said you'd be getting them in the in the second half so how should we be thinking about.
The trajectory or free cash flow as you guys are presumably starting to ramp up production and you're going to have various aircraft in work in process. Just how should we think about that just given that you've started to order some materials here.
Right and Michael I was probably not clear so I'm glad you asked the clear clarifying question, we have a think of it as as a single award IDI Q contract. We gave to the engine manufacturer that single award I'd I Q contract is for 24 engines.
We have placed an order for the first five to 10.
On that single award I'd I Q.
Okay. We we expect based on our interactions with our customers et cetera, et cetera to place a nother order before this year is out.
And then we expect to place another order in either Q1 or Q2 of next year.
And it's possible Deanna and I had a call can say to you.
If things happen, we placed them all in one shot.
Okay.
We have and I don't want to I don't want to get.
And we have negotiated our customer our customer here has worked with us.
On very favorable.
Payment terms.
That's what we believe.
Well aligned.
With receipts, we will receive.
As they are being built.
Got it.
Okay, and I know you appreciate why im being delicate there sure.
What about I mean, you gave US you know sort of a laundry list of the programs the updates where they stood it seems like a lot is going to happen in first half 2022nd half 2020, you just.
I think to Noah's question, you just said the BBM could add 100 to 125 million alone.
Can you give us a sense you know as you kind of knock down some of these orders secure them. What is this exact pipeline look like from a from an order standpoint.
You know again, just just for the various programs that you've mentioned the size of them everything decisions expected to be made.
Late this year early next year can you size the pipeline.
So.
So our published pipeline is 7.6 billion.
[noise] like I can assure you that that number we look at very closely so that is a very conservative number based on what our divisions are chasing.
In.
And that 7.6 million Mike.
There is zero for Balco reproduction.
That we're publishing we're waiting for the first order and better clarity I'm, just giving you. An example of the conservatism on this.
That 7.6 billion.
There are no.
Excuse me.
There are no Max.
There's nothing like that.
These are very discrete programs, where you can find the program element number.
In the budget line items.
And as you can see as you can see over the past few quarters I don't know how many it's been increasing.
So right. It's it's very health, it's very it's probably as healthy right now as it's been since 2011 budget Control Act 2011 2012.
But can you give us a magnitude if I if we think about all these decisions gremlin stana toes F. Spartan Athena.
You know the maaco, a and Z you know can you size those.
Okay. So so and then.
Between now and say the end of next year.
Let's go with.
Let's go without great.
Based on current information I think it's going to be.
22.
40.
And the 40 is on top of the 10 that the Air Force mentioned at the top of the 30. The Air Force mentioned this other customer okay.
There there are other things happening.
But that's where I would I would put that on a on AF.
[laughter].
That's not in the Theres a piece, it's not a very big piece in the in the pipeline.
That would be I would I would put the 1000 units in add on.
Let's be conservative lets say that we were not the system integrator.
At three or 400000 a point.
Over three years.
On gremlins that up.
I'm talking about in the next 18 months.
On gremlins, if the if the test schedule holds.
And.
I think in the second half of next year, we could on.
We could see an initial order for 100 or 200.
Say, it 1 million each other I know the number 700000 that in the.
The VCA.
But I believe I believe initially because they know we on the learning curve at least near a million dollars.
Santos will be and development will be under development contract as I've told you Thats a few tens of millions of dollars for us over the development period, so that those would not be beyond that in there or within Manitoba is the next one that is coming along.
And so those would not be ready for production until the out here starting in 20 122.
Got it okay.
And then just can you tell us a last one <unk> status of of Oklahoma. I mean, you talked about the line of sight there to potentially 40 Volcker units I mean is there any production happening right now is it still sort of outfitting the facility or what's actually happening.
Absolutely so outage, it's been producing since the beginning of the year.
<unk> government customer last week was out there I think they signed off and accepted I'm Gonna say approximately five drones. It was four to six so I'm being told six he signed off on six drones last week that we were that were manufactured there.
It is ramping.
Rapidly.
And that's where we're gonna Bilbao Korea, and that's what we're going to build out and that's what we're going to build gremlins.
Got it.
All right perfect. Thanks, a lot guys.
Yep.
Thank you and our next question comes from Sheila Kahyaoglu with Jefferies. You May proceed with your question Hi, Eric Hi, Deanna fairly comprehensive line of questioning so I'll be quick just two questions maybe on boundary as we look through the fiscal 20 budget coming together, how do you think about risks to it and you know what's your ultimate upside Eric.
The budget on Dockery Yep.
So.
So my understanding and I went through this we have a consultant that helps US go through all the program element lines on the current in the current existing budget request in the 750 and I know that the house. It came out at a at 738, because the health started 733.
My understanding is it was about $119 million in there.
Okay.
I don't believe that that's going to take a haircut, but lets take lets say that takes a haircut and it gets hair cut to 100 million alright.
But on top of that.
The house and there are 733 billion dollar request had a 50 million dollar plus up in there.
For Valkyrie.
In the Senate.
And there are 750 billion dollar request had a 100 million dollar plus up in there for about.
Right.
I believe based on I was I was just in Washington earlier, This week meeting, both congressionally and with customers.
I believe truly we're going to see that hundred or very close to it.
But let's be conservative in let's say a 75.
So between the budget request.
And.
Oh.
The plus ups that we've all read about that have been publicly available I'm thinking about a 175 million.
And then I think the question that Josh asked developed very relevant how much of that is well its planes relative to weapons integration systems integration and test operations I don't know that yet.
That makes sense, Okay, and then as we think about the bridge to 2020 revenue.
I haven't been able to keep up with all your programs I don't know how you do like <unk>, how do we think about what steps up in development funding next year.
It doesn't seem like anything steps into production.
It doesn't say that again it doesn't it doesn't seem like that does anything increase in terms of production like for instance program math. It seems like next step is flight flight test. So you wouldn't get a production contract for 20 years. So the heart. So the hard increases for production next year that are just that are very hard.
The Navy SSAT program Yep.
We got over three.
The Admiral told me I'm going to we're going to get full rate production in the first half.
That has gone a step up.
Several significantly we have a confidential program.
That is heading into full rate production next year that is going to step up significantly.
Fan Atos.
Santos will begin.
Santos will begin at the beginning of this year at the beginning of next year, that's brand new that will be additive.
We have we have a drone program with the United States Army.
That is forecasted production is supposed to increase beginning next year as well.
So we have some hard programs under contract that are funded that are that we can clearly see significant step ups 19 to 20.
Thank you. Thanks clarifying you got okay.
Thank you I'm not showing any further questions at this time I would now like to turn the call back over to Eric Demarco for any final remarks.
Thank you all for joining us. This afternoon, we look forward to updating you at the end of Q3. Thank you.
Thank you ladies and gentlemen, thank you for participating in today's conference. This does conclude todays program and you may all disconnect everyone have a wonderful day.