Good day, and thank you for standing by. Welcome to the Kratos Defense & Security Solutions 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 one on your telephone. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Ms. Deanna Lund, Executive Vice President and CFO. Please go ahead.
Thank you. Good afternoon, everyone. Thank you for joining us for the Kratos Defense & Security Solutions second quarter 2021 conference call. With me today is Eric DeMarco, Kratos's 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 keep these uncertainties and risks in mind as we discuss future strategic initiatives, potential market opportunities, operational outlook, and financial guidance during today's call. Today's call will also include a discussion of non-GAAP financial measures as that term is defined in Regulation G. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with GAAP.
Accordingly, at the end of today's press release, we have provided a reconciliation of these non-GAAP financial measures to the company's financial results prepared in accordance with GAAP. With that, I will now turn the call over to Eric DeMarco.
Great. 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 regenerated in Q2, including in our unmanned systems and space satellite and cyber businesses, we believe is representative of this execution. Additionally, Kratos's last 12-month 1.2:1 book-to-bill ratio, which includes a 1.3:1 second quarter book-to-bill ratio in our space satellite and cyber business, which is our company's largest, and an expected very strong second half of 2020 bookings, provides us the confidence in the forecast and the continued up and to the right organic growth trajectory.
Since our last report, we achieved a successful series of flight tests with the Skyborg autonomy core system or ACS aboard Kratos' UTAP-22 Mako tactical unmanned aerial drone system at Tyndall Air Force Base in Florida, which was an incredibly important program milestone for the company. As reported by the United States Air Force, the 96th Test Wing took part in a series of test flights of Kratos' Mako and inside the Kratos Mako, the Skyborg autonomy core system, or the brain of the autonomous aircraft, made its first three flights for the Autonomous Attritable Aircraft Experiment. The ACS is part of the AFRL Skyborg Vanguard program, with Skyborg's goal to develop low-cost unmanned aircraft to provide increased combat capability by teaming unmanned droned aircraft with traditional manned fighters.
During this demonstration flight series, aircraft controllers on the ground provided commands to the ACS, and in the future, the plan is for direct manned-unmanned teaming via commands sent from a manned F-16 Fighting Falcon to the ACS on board the unmanned aircraft. Related to the flight, Brigadier General Scott Cain, 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 the successful execution of this test, providing the knowledge needed to advance the technology, and we are highly motivated to bring war-winning technology to the next fight." Major Nathan McCaskey said, "This is a significant step toward teaming manned and unmanned aircraft in combat in the not too distant future.
With unmanned aircraft using the autonomy system developed for this experiment, going places where manned fighters cannot go, providing sensor information back to manned teammates, and increasing the power projection capability of the United States Air Force. During the test flight series with the Kratos UTAP-22, Major McCaskey, the lead pilot for the missions, flew the closest ever manned fighter to an unmanned aircraft under autonomous control in Department of Defense history. Also, during the flight series, the ACS-equipped Mako's demonstrated proficiency in basic aviation abilities and responded to commands while navigating in a shared airspace with up to four manned fighter aircraft, including F-16s and F-15Es. The military envisions at least 15 different missions for these types of drones, representative of the extremely large opportunity we are pursuing, and Kratos is working in unison with our customers to achieve this objective.
Kratos' Mako flying the Skyborg ACS core is also representative of the important first-to-market advantage we have. With four classes of Kratos attritable, reusable, or expendable drones flying today, and the customer integration of various sensors, systems, payloads, and more into our aircraft now for flight testing, operational concepts, and fielding. I cannot overemphasize the competitive importance of the various customer payloads being integrated into, flown, tested, and demonstrated in Kratos' first-to-market high performance jet drones today. The successful flight series with the Skyborg ACS and Kratos' Mako, we believe is another important step in our strategic roadmap, including for ultimate volume production and fielding of Kratos' tactical jet drones as force multiplying loyal wingmen to the warfighter.
In addition to the successful flights of the Skyborg Core, Skyborg Vanguard program related systems and payloads are now being integrated into the first two Kratos Valkyries from the Oklahoma production line from the initial 12 lot, with the flight series for the Skyborg-equipped Valkyrie scheduled in the near future. Under the Skyborg Vanguard and other programs, we have multiple additional flights with Kratos' tactical drones planned for the second half of this year as we move towards initial operating capability and fielding. These flights include the next Gremlins drone flight series with our DARPA customer and our prime partner, Dynetics, with several tactical Firejet and Air Wolf program flights also scheduled for later this year.
Related to Gremlins, it was recently reported that the Gremlins concept of operations continues to grow and evolve, including that the Gremlins are now expected to carry weapons, return to a mothership, refuel, rearm, and be sent back out on another mission. This again, representative of the increasing market opportunity we're pursuing. As I've mentioned, with Kratos having the only four high performance, affordable jet drones in this class flying today with the Valkyrie, Mako, Gremlins, and Air Wolf, we're highly confident that as we continue to execute, we will be the leading drone provider in the class. Kratos' Thanatos development is continuing, and we are hoping to successfully move from phase I to phase II of the program either later this year or early next year. Kratos' Ghost Works continues to work on certain programs and initiatives with certain initial system tests on track for next year.
On new tactical opportunities that we are able to discuss, Kratos has partnered with North American Wave Engine Corporation to develop the Versatile Air-Launched Platform, or VALP, which is an air-launched vehicle designed to leverage and demonstrate low-cost, high-impact technologies for future aerial systems. The VALP will use Wave Engine Corp., which is a strategic Kratos partner. It'll use their propulsion technology in an effort to bend the cost curve and reduce lead times for capabilities necessary to challenge near peer adversaries, which is exactly consistent with Kratos' mission and our strategy. Kratos' partnership with American Wave and our responsibility for the air vehicle is representative of what we view as Kratos' industry-leading position for the development and production of affordable, high-performance, jet-powered drones and tactical systems. This new opportunity with American Wave is also representative of the increasing size of Kratos' tactical drone and powered weapon systems market opportunity.
Another new attritable tactical drone program opportunity we are pursuing is OBSS or Off Board Sensing Station, which if we are successful, we believe could ultimately be as significant and transformational to Kratos as we expect Valkyrie to be. Kratos' Ghost Works has been deeply involved in this system and vehicle approach for the last several months, and we expect to hear in the next several weeks if we have been successful in receiving a contract in this very, very competitive solicitation. We believe that the OBSS opportunity is also representative that the total addressable market opportunity for Kratos' class of tactical drones is rapidly expanding and clarifying as the Department of Defense strives for affordable force multiplier systems and technologies.
This drone market is the same market that Kratos Turbine Technologies is pursuing, as drones need turbines and engines to power them, and analysis of the 2021 Pentagon budget revealed that approximately $7.5 billion of the budget was allocated to drones, robotics, and related technologies. Additionally, and very exciting, the just released Senate Armed Services Committee, National Defense Authorization Act, authorized $201.6 million for the Skyborg program, including an increase of $75 million, specifically called out the purchase of Valkyrie aircraft. It also authorized $125 million to accelerate the use of unmanned aircraft as augmented adversary support, which is a new market opportunity and one we believe Kratos is uniquely qualified for today with our Valkyrie and certain other aircraft.
The recently released NDAA also authorized an increase of $30 million for Air Force advanced aircraft propulsion development, another area we believe Kratos is uniquely positioned for, as I'll discuss in a moment. Additionally, we believe related to the significant funding increases for drones, Skyborg, and drone technology, it was recently reported that the Air Force Chief of Staff said that the Air Force is considering building a fighter fleet with more drones than piloted aircraft, and that the Air Force is currently performing the analysis and wargames needed to assess the appropriate mixture of the unmanned platforms and the manned platforms.
It was also reported that Air Force leaders providing updates on the Next Generation Air Dominance program or NGAD stressed that NGAD and the force structure will include a variety of different platforms as well as powered munitions and other systems, including manned aircraft networked together with loyal wingman drones, fully autonomous unmanned combat air vehicles or UCAVs, and swarms of low-cost unmanned aircraft. It was reported that the U.S. military needs to immediately increase the size and technology of its unmanned aerial systems arsenal in order to be able to successfully fight two 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 2023 and through 2027 budget will be the Agile Combat Employment, or ACE initiative, which is the ability to operate away from established runways, to be runway independent, and to operate in a manner that presents a very difficult distributed asset and lethality problem for our adversaries. ACE is an evolution of United States Air Force agile basing concept that I've discussed with you previously, which has been identified as a top priority for the Air Force Chief of Staff. 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' class of drones, each of which Kratos, of course, is the clear industry leader.
These are just some of the recent customer demand signals we have received, and we remain absolutely committed to supporting the customer's needs, requirements, and timetable, and we are confident that it is not a question of if but only of when Kratos' drones will be utilized in large quantities. The first flight of Kratos' drones at the Oklahoma Range facility is now scheduled for the second half of this year. With this valuable new range asset adding to Kratos' existing competitive advantage in speed of development, demonstration, testing, fielding, and overall affordability. Kratos' target drone business also continues strong performance, led by our industry-leading position in 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 Kratos' target drones. We are expecting several target drone program awards in the second half of the year, including from the U.S. Navy, the U.S. Air Force, and the Army, arguably the target drone utilizers, the largest ones in the world, and also from international customers. The 2022 budget request in the target drone areas came in as we expected, and we expect continued future year-over-year growth for this business.
For Kratos' unmanned systems business, we are expecting very significant bookings in the second half of this year in both the target and tactical drone areas, and we are forecasting a second half book-to-bill ratio substantially in excess of 1:1 if the current timing holds. In Kratos' space and satellite business, our software-based OpenSpace operating system and architecture, which we released first to market last year, is seeing incredible success and customer acceptance as we strive to both disrupt and transform the space ground system market, similar to how Kratos' 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 Kratos' quantum and SpectralNet lines, both of which are part of our OpenSpace software-based family of dynamic virtual ground solutions.
Kratos' OpenSpace 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 or its payload. Kratos' previous quantum products have been used by hundreds of satellite operators around the globe, supporting tens of thousands of satellite passes per month, and Kratos' SpectralNet products provide the on-ramp to modern virtual ground operations by reliably digitizing the radio frequency signals from the satellite into an internet protocol format that can be processed by digital systems running in the cloud, on-prem, and hybrid environments. We have now transitioned both Kratos' quantum and SpectralNet's previously hardware-centric products and technology to software, and we are 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 roll out our software-based OpenSpace systems. Our OpenSpace quantum products, which we refer to as virtual network functions or VNFs, 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 in the satellite and space area. For example, where previously could take weeks to deploy ground system hardware, Kratos' quantum VNFs can be deployed and configured to support different missions in just hours.
Kratos' OpenSpace platform, currently the most advanced line in the OpenSpace family, is designed to enable satellite operators to deploy, configure, and adapt entire networks in just minutes using its orchestrated software-defined network or SDN architecture. 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 heretofore hardware-based space and satellite ground infrastructure subsystems, systems, products, and solutions to virtual software products. Customers for Kratos' OpenSpace products include new space and satellite companies, satellite manufacturers, service providers, certain of the world's largest operators, United States government agencies, and some leading prime contractors.
We see the OpenSpace quantum and SpectralNet 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. Kratos is the clear first-to-market industry leader in the virtualization of space and satellite ground segment. OpenSpace 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 Kratos' globally owned and operated SDA network, is another area also seeing significant growth, including in advanced spectrum and signal monitoring. With the rapid growth of new satellite networks, satellites in space and VSATs, there is the potential for significantly increased radio frequency interference in space.
Interfering signals can be periodic or occur at different frequencies over time, making the discovery, identification, location, and the removal or neutralizing of the source of the interference a significant challenge for agencies, 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, an example of the incredible value of Kratos' unique and one-of-a-kind, globally owned and operated Space Domain Awareness network is a recent announcement that we have received awards totaling approximately $46 million to support space domain awareness efforts for certain customers. Kratos' SDA network is one of the most valuable and underappreciated assets in our company.
Our SDA network consists of numerous RF monitoring sites hosting fixed and steerable sensors and antennas, including in L, S, C, X, and Ku bands. Our 24/7/365 network operating center is the 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 OpenSpace software platform to help satellite ground systems quickly adapt to changing conditions, including OpenSpace's software-centric architecture being used in our global monitoring network, enabling assets to be reconfigured and redeployed virtually, delivering the potential for much faster responses to the potential threats in space. Kratos' R&D in Q2 was elevated in our space and satellite business as we accelerated our investment to exploit our first-to-market mover position with our software-defined virtualized products and our SDA network and to protect our critical intellectual property position.
In our view, Kratos' space and satellite business' backlog and opportunity pipeline has never been greater or of such high quality, with the total addressable market opportunity for Kratos' technology and products large, and it's rapidly expanding. On the market opportunity side, one data point that was recently reported by Northern Sky Research, or NSR, that over the next 10 years, satellite manufacturing and launch order volumes will reach nearly 24,700. With virtually all of these satellites needing ground command and control, telemetry tracking and control, and space domain awareness, all of which Kratos is the industry leader. For our space business, we expect significant growth and margin expansion in the second half of the year, in 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 expected.
Our second half growth forecast for our space and satellite business is supported by the recent and expected customer orders, including the 1.3: 1 book-to-bill ratio I mentioned previously. We are also forecasting a second half book-to-bill ratio also in excess of 1: 1. Kratos' 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. Kratos' microwave products business is focused on space and satellite, missile, radar, communications, and other weapon systems, certain of which market opportunity continues to expand, also driven by the recapitalization of strategic weapon systems. We are forecasting a strong second half for this business based on the current backlog in production and execution schedules.
In Kratos' rocket system business, where we perform ballistic missile target, hypersonic, and other rocket system work, and reflective of the strategic asset to the United States national security that Kratos' rocket system business is, we recently announced that we supported the United States Navy Sixth Fleet, NATO's naval striking and support forces, and the Maritime Theater Missile Defense Forum in the successful execution of Formidable Shield 2021 at the U.K. Ministry of Defence's Hebrides Range in Scotland. The exercise included two Kratos medium-range ballistic missile targets, which were presented at the same time as Kratos' MQM-178 Firejet aerial target drones from our unmanned systems division. Our ballistic missile targets met all the test objectives and were engaged by SM-3 interceptors from the USS Paul Ignatius. The multinational exercise featured 16 ships, several aircraft, and approximately 3,300 personnel from 10 countries.
Our rocket systems business also recently announced that we have received a contract from the Naval Surface Warfare Center, Port Hueneme Division, White Sands 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. Hypersonics and missile defense are priority areas of the DoD budget, and we are forecasting future year-over-year growth for our rocket systems business, with strong demand in the targets, hypersonic systems, and other rocket and weapon system-related areas, with numerous future missions and launches currently planned. Kratos Turbine Technologies also continue to make important strategic progress, including receipt of an $8.6 million task order under our Advanced Turbine Technologies for Affordable Mission, or ATTAM IDIQ contract. The program will be managed by the turbine engine division of the Air Force Research Laboratory.
Under the contract, Kratos will complete the design, build, assembly, and test of an affordable turboshaft engine for Group 3 UAVs. This award follows the successful completion of multiple programs where KTT completed concept and engine trade studies for Group 3 UAVs in conjunction with our partner, the AFRL/RQT. The objective of this task order is 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. KTT has now successfully completed a core engine test campaign under the ATTAM contract, also with the turbine engine division of the AFRL.
Under this effort, testing of the engine core supports the development of small, affordable, high-performance jet engines for cruise missiles on unmanned aerial vehicles. During the test campaign, Kratos has successfully demonstrated key performance and operability targets of the core engine. These are important milestones and achievements by Kratos' next-generation turbojet 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 KTT and our engine businesses, which include unmanned aerial vehicles, drones, cruise missiles, and powered munitions, is extremely large and rapidly growing as the U.S. and our allies prepare for peer and near-peer adversaries.
KTT is also heavily involved and under contract with multiple customers in the rapidly growing space launch and propulsion area, where we are designing, developing, and manufacturing leading technology products in support of space companies and government customers. Our C5ISR business is head down and focused on GBSD 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 Kratos' C5ISR business as we execute on several large new program wins and opportunities. On large new weapon system development programs, exact timing, execution, and delivery schedules early on are typically fluid, which we are experiencing with GBSD and others, with our expected future strong and up into the right growth trajectory and forecast intact and increasing now.
We believe that the Biden administration and Congress are absolutely committed to the nuclear modernization to address peer and near-peer threats, and the Congressional Budget Office recently estimated it will cost $634 billion to operate, sustain, and modernize the United States' nuclear forces, and certain of Kratos' largest programs are in this area, including in our C5ISR business. The Biden administration's 2022 defense budget requested a $5.5 billion increase in research and development and an $8 billion cut to procurement. This is a clear signal and a strong emphasis on new technologies and new future products and systems at the expense of older legacy programs is underway. This is clearly a beneficial signal for innovative and affordable technology companies like Kratos. Nontraditional defense contractors like Kratos, 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 of the year, our backlog, expected strong second half bookings, and our record opportunity pipeline provide us excellent future visibility and confidence in our forecast. Accordingly, we're focused on execution with the major items including, since our last report to you, we have experienced a low number of COVID cases with Kratos' employees, and we are watching this very closely, including in our Florida, Texas, and Oklahoma locations, where we have just recently seen an increasing number of cases. Additionally, certain DoD-related COVID restrictions have recently begun to tighten up again. This is also an important 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 costs 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 security clearances, primarily in our space, satellite, and our unmanned system business. We are in the process of standing up several new facilities, including in our drone, space, and satellite areas, to accommodate certain large new programs we have received or that we expect to receive in the second half or in 2022. We have taken all of these items into consideration in our execution planning or 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 developed, demonstrated, and fielded affordable technology and systems.
We believe no other company in 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 in the current areas of expertise. We believe that Kratos is at the beginning of a long up and to 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. Kratos' second quarter 2021 revenues of $205.1 million were at the upper end of our estimated range of $195 million-$205 million. Our Q2 '21 consolidated operating income was $3.3 million, up from the second quarter of 2020 operating income of $2.9 million, which includes second quarter 2021 increases in stock compensation expense of $1.8 million, increased R&D of $4.2 million, primarily in the space and satellite business, and increased depreciation expense of $1.6 million in the current period. As a reminder, over 80% of our total R&D is 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 $0.01 per share, compared to a loss of $0.01 in the second quarter of 2020.
Adjusted EBITDA for the second quarter was $17.6 million in the range of our expectation of $14 million-$18 million, reflecting increased investments in internally funded R&D, primarily of our software-defined OpenSpace and virtualized products, as well as a revenue and product mix of more developmental projects as we begin to ramp on new developmental programs. The second quarter operating results include over $400,000 of negative foreign exchange impact resulting from an increased shekel against the US dollar in our Israeli-based microwave business. Excluding this adverse foreign exchange, the second quarter adjusted EBITDA was $18 million. In the second quarter, our unmanned systems segment reported revenues of $60.3 million, up 43.6% from the second quarter of 2020, due primarily to ramps in production in target programs, including the 177 and work performed on the Valkyrie program.
Unmanned systems generated operating income of $4.1 million, up from $1 million in the second quarter of 2020, primarily reflecting the increased drone system-related revenues and leverage achieved on the fixed overhead manufacturing and G&A infrastructure. Unmanned systems generated adjusted EBITDA of $6.9 million, up from $3 million in the second quarter of 2020. KGS reported revenues of $144.8 million in the second quarter, up from $128.4 million in the second quarter of 2020, reflecting $11.8 million from the ASC acquisition and organic growth across our space, satellite, and cyber, defense rocket, and microwave product businesses. This increase was offset partially by a net reduction of approximately $4.7 million in our training solutions business, resulting from the previously disclosed reduction in scope of certain international contracts. KGS reported operating income of $5.9 million, down from $7.7 million in the second quarter of 2020.
KGS second quarter 2021 adjusted EBITDA was $10.7 million, down from $12.3 million in the second quarter of 2020, reflecting a less favorable mix of revenues, including an increase in product and equipment revenues contributed from the recent ASC acquisition and negative impact in our commercial aero business, coupled with increased R&D costs of approximately $4.3 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 non-controlling interests, and excludes non-cash stock-based compensation costs of $6.6 million, acquisition and restructuring related costs of $100,000, and a foreign transaction loss of $100,000. Moving on to the balance sheet and liquidity. Our cash balance was $369.3 million at June 27th and we had 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 $700,000, 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-DoD 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 2021, end backlog of $892.9 million, with bookings of $177.8 million, and a book-to-bill ratio of 0.9:1 for the second quarter of 2021. Funded backlog at quarter end was $630.6 million, with $235 million funded. For the last 12 months ended June 27th, 2021, our book-to-bill ratio was 1.2:1, with total bookings of $953.4 million. Our book-to-bill ratio for the last 12 months ended June 27th, 2021 was 1.0:1 for our unmanned systems segment and 1.2:1 for our KGS segment. Now for our financial guidance. We are providing our initial third quarter 2021 guidance of revenues of $195 million-$205 million and adjusted EBITDA of $16 million-$20 million.
As previously discussed, our guidance reflects the impact of the recent loss of an international training contract, which had contributed over $34.5 million in revenue in 2020 and which generated approximately $13 million in 2021, or a decrease of over $21 million year-over-year, and includes a full year of the recent ASC Signal acquisition closed in mid-2020. Our forecasted revenue mix for 2021 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 includes discretionary investments as compared to a more mature overall product life cycle in 2020. For our third quarter and full year 2021 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.
The expected ramp and margin profile in the second half of 2021 is similar to the trajectory in 2020, which is evident in our LTM or last 12 months adjusted EBITDA of nearly $83 million. Key assumptions included in our forecast include our supply chain's ability to deliver on time and on budget, and our ability to hire the resources that Eric discussed in line with our program and execution plans. Our space business is forecasting an extremely strong second half of 2021 and fourth quarter in particular, with successful execution on its backlog, including driving significantly increased margins from a favorable mix expected to include increased software and high profit-based deliverables. In summary, we believe that the backlog, bookings to date, and expected bookings and pipeline is in place for Kratos to deliver within our 2021 financial forecast.
Great. Thank you, Deanna. We'll turn it over to the moderator for any questions.
As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question will come from Mike Crawford with B. Riley Securities.
Thank you. Eric, you talked about the markup that the SASC had on the defense bill, including for Skyborg. How would you characterize Kratos's position within Skyborg versus competitors like GA and Boeing?
I believe that our position is far and ahead the best. The press releases relative to the GA vehicle is it's a surrogate vehicle. The vehicle they're using is, I'm assuming by that word, is not even the vehicle they're planning on finally utilizing, if it even exists. Boeing, there hasn't been a peep from Boeing about Boeing or anything about Boeing since their first flight of their vehicle, I think at the end of February or early March. We're coming up on five, six months, not a peep from Boeing. I don't know what they're doing. We were first to fly the core as I mentioned, we've closest flown to a manned fighter in history that we did. We're integrating Skyborg payloads on the new Valkyries now, and we are extremely confident and comfortable with our position on this program.
Okay. Related, you mentioned OBSS as potentially as transformational to Kratos as Valkyrie. Given that you're already a leader with these various other classes of drones, what is it that separates OBSS from the rest?
Yeah. There's very little publicly out there on this opportunity. Very little. It is an attritable low-cost system. This is very competitive. We are successful in receiving a contract on this. This has legs. This program has legs. I really can't say much more about it, Mike, other, because there's only that one piece of paper out there on the program, but it's expected to be awarded very soon now.
Okay. Well, hopefully you're one of the two winners of that down select. Final question just goes back to OpenSpace. What is it about Q4 milestones that you're expecting a bigger ramp in that quarter versus Q3?
Yep. It's the transition to the software deliverables. It has to do with the bookings, including the big ones we just had in Q2. We're going to be delivering product in Q4, and it's more software intensive, and so the margins are higher on it. We've been talking about this probably for about a year now, and we started releasing the product, I think, in Q2 or Q3 of last year. The uptake by the customer community has been incredible. This is brand new. What we're basically doing is we're taking the ground satellite infrastructure. Now my term from a 2G cell phone network to 5G. We're going from legacy hardware-based systems to software virtual systems, and we're first to market, and the customers are buying it.
We're gonna be delivering it in Q4, and that's why we see a significant margin uptick in that quarter.
Excellent. Thank you.
Yes, sir.
Your next question will come from Peter Arment with Baird. Please proceed.
Hi. Good afternoon. You actually have Eric Ruden on the line for Peter today. Eric, just in terms of framing up the second half bookings, obviously you're expecting pretty significant pickup, at unmanned specifically. Could you just provide any color around some of the big moving pieces there? I know you mentioned book-to-bill well in excess of one. Do you think it's enough to make book-to-bill for the year, over one, given the softer first half?
Yeah. On the first part of your question, the space and satellite business forecast, is extremely strong in Q3 and extremely strong in Q4. As both Deanna and I said, it's coming off of the bookings that we had in, recently, including, I think, 1.3: 1 in Q2. We're off to an extremely strong start in Q3 for bookings in that space and satellite business. If we can get the people and we can deliver it, we're gonna achieve it. We are gonna 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 in the second half. Let me give you some example of them. One of them is an Air Force target drone program.
We're expecting to receive a multi-year award, which would be base years plus options to carry, and this is sole source that'll carry us through. We're expecting a very large Navy target drone award in 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 gonna fall into Q3. There's that large international one that I've been talking about. I didn't mention it in the prepared remarks today where we've received the contract, but with the change in administration, it was going through some type of a government review. We expect that review to be successful, and we'll receive that award in the second half of the year.
In the engine area, we have a very large contract we are expecting to receive in, I forget if it's Q3 or Q4, that will put our engine business in a positive over 1.0:1 . We got a lot of big ones that most of which are sole source, which is why we're so confident second half bookings are gonna be so strong.
Okay. Thanks. On the, just the comments about the rising case counts with COVID and concerns about the Delta variant, are you anticipating, or what do you think the biggest risk is there in terms of both the order environment pace there, and then are you seeing any further delays on the testing ranges?
Okay. Last one first. 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 at certain locations, including at the Pentagon. Those are not problematic right now. Now we are seeing some issues, on the commercial side on travel, the commercial SATCOM business. Internationally, because we've got over 80%, 85% of the global operators. We're seeing some delays there. We've factored that into our range. This is one of the reasons we have a range. We've got puts and takes all over the place. The primary issue I'm probably concerned about right now, based on what I see, is that travel one. Can we travel internationally to get the sign-off on certain things? We've tried to incorporate that in.
Like all other companies, we're seeing delays in the supply chain. We're seeing price increases in the supply chain on new contracts. We can build those prices into our new contracts. On existing contracts, if they're firm fixed price, we just have to figure out how to be more efficient so it doesn't impact our margin. These are all the moving pieces we've got going on.
Okay, appreciate it. I'll hop back in short.
Yep.
Your next question will come from Austin Moeller with Canaccord. Please proceed.
Hi, Eric.
Hey.
Just my first question here. China's building 230 new ICBM silos out in the desert. How does this impact your rocket support contracts with Northrop for GBSD for the missile transporters? Do you think it's unlikely that we're gonna get to less than 400 ground deployed GBSDs because of this?
Yes, sir. Hey, Austin. You're exactly right. In the past three weeks, satellite shots have identified two new Chinese ICBM fields in two locations, over 100 each. I personally believe that we, the United States, we're in the very early innings of the next Cold War and the next arms race. I'm not gonna get specific with certain programs or customers, but to answer your question, yes. I see what China is doing is gonna be directly related positively to Kratos, our programs, specifically in 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 a plus, and I don't think I said it, Austin, in the remarks, but our book and our anticipated launch schedule of missions for the rest of this year and through next year is very, very strong, and I believe it's directly related in part to what you're talking about.
Okay, great. You discussed that you have two of the 12 Valkyries at the Oklahoma factory are currently being outfitted with the autonomy core system. Is an Air Force contract to pay for those 12 aircraft contingent upon some forthcoming tests with the Valkyrie using the autonomy core system, just like the Mako did?
Right.
How do you think about that?
We have a number of the 12 that are coming off the line are already under contract. The two that I mentioned, those are under contract. All right? Those are already spoken for. When the customers announce the quantities under we're under two contracts now, for Valkyries, for those 12 Valkyries. Some of the 12, we have two contracts. When the customers become public with the quantities and what they're doing, obviously we're going to talk about it. Those two I mentioned in the prepared remarks, those two are under contract. Those are two of a number that are under contract of the ones that are coming off the line.
Okay, just one last one. Should we anticipate that there's gonna be a Skyborg Valkyrie flight with autonomy core system installed within the balance of the year here?
Yes.
Should we think about longer than that? Yeah?
Yes.
Okay. Well, thank you for the color, Eric.
Yes, sir.
Your next question will come from Joe Gomes with Noble Capital. Please proceed.
Good afternoon.
Good afternoon, sir.
I wanted to circle back here on the second half, Obviously, given the guidance that you've provided, the fourth quarter's heavily weighted. Just trying to get your comfort zone. Oftentimes here in the fourth quarter, we see a lot of political games around budgets and things of that nature. I mean, we're seeing it today. How confident are you that, or what's your worry level that things of that nature could impact fourth quarter?
The vast majority of our third and fourth quarter are in backlog. The vast majority, this is not a book and burn situation. These are in backlog on funded contracts. It's execution. That's what this is. The key parts of the execution are, I think we have approximately 300 open recs right now or something like that. We have some strategies in including taking advantage of other companies that are having some programmatic issues. We're hiring their people. We're so far so good on that hiring side. The wild cards that I see are supply chain. Okay. We have done the best we can to order in advance the safety stock amounts, but the safety stock ordering now is pushing out. I think we were at 6-12 weeks, and now some things are 24-30 weeks. Deanna's nodding that that's correct.
Yes.
We're seeing things slide to the right, and there are global supply chain issues as we all know. That's one. The second one is COVID, two prongs. Do any of our major facilities get impacted where a number of people have to quarantine, et cetera? I don't see that right now. The other one is what the other gentleman asked on the DoD side, if DoD restrictions tighten up, in particular related to range access. Again, in our range, our guidance, our range, we've tried to take all of that worst case to normal case to a good case in that range. That's why I'm very comfortable with how we've come at this, and we're going to be rock solid in that range.
Okay. Thank you for that clarification. On the turbines, you are talking about the ATTAM program and contract, and one of the things I think in the Air Force is talking about is affordability and, given the huge percentage that engines cost as a part of a drone, can you give us some example or detail as to what kind of cost breaking are you looking at here under your KTT versus the existing engines?
Yep. In our engine businesses, it's a range. There are certain engines we're looking at orders of magnitude three, four, and five times less costly. Other ones we're looking at 30%, 40% less costly. It just depends on the type of the engine. Most of these are turbojets and turbofans, and the application. The first part of your question, I do want to comment on. The decline of the U.S. industrial base, especially for engine technology related to space systems, is really bad. 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 bad. We have that capability. You heard me say in the prepared remarks, we're under a number of contracts.
We're under NDAs, but people that are going to space, people that are launching things, we're probably under contract with them building engine components for them. That business is ramping very rapidly right now, number one, because of the demand, but number two, the competition. There's not a lot of people out there that can do it anymore. We've lost that capability in the country, and so we're looking at it as a business opportunity and a national security opportunity.
Great. One last one for me, if I may. In just perusing the queue before the call, I saw that you had a nice increase in commercial revenue in KGS segment. Is that related to the OpenSpace, or is there other things behind driving those commercial revenues higher for the quarter?
That's a big piece of it, is on the commercial SATCOM piece.
Okay, great. Thank you.
Thank you.
Thank you.
As a reminder, to ask a question, please press star one in your telephone. Your next question will come from Pete Skibitski with Alembic Global. Please proceed.
Hey, good afternoon, Eric and Deanna.
Afternoon.
Good afternoon.
Hey, guys, I wanted to follow- up on the engine line of thought. Eric, you mentioned in the second half of the year, a potential, you called it a large engine contract. I just want to get my expectations in order because I think of your KTT business in the past as getting a lot of task orders, maybe $5 million-$10 million for development type. What are we talking about in the second half? Are we talking about a production contract, or are we talking about maybe an advanced development contract that's more? Okay. Yeah, go ahead.
It's multiple tens of millions.
Okay. Is this like an LRIP type contract?
I cannot get ahead of the customer, but it is several tens of millions, is the size of this engine contract.
That's a nice breakthrough for the business, I would say, right?
The business is doing great, and the opportunity, the number of new missiles and powered munitions for the range that has to be achieved in the Pacific is incredible.
Will we see a press release when you get this, or is this too close-hold kind of a thing, or?
I believe, I'm hopeful the customer will announce it. I'm hopeful.
Okay. Last one from me on KGS. I feel like maybe I need to understand this business better. On the EBITDA margins at KGS, when we talk about they're in kind of the upper single digits for the first half of the year, I guess due to space R&D. What I'm wondering is every business within KGS in normal times, or is it kind of a mid-teens type of an EBITDA margin business that generates free cash and it's just being suppressed right now because of space R&D? Is there a big range there and some businesses are maybe more important than others?
Across the board, there are different margin rates within the businesses. On the space and satellite side, those are on the higher end of the range. We still have some legacy services business, and right now, our engine business, most of that's in development. Those are on the lower end of the margin rate range. It's a blend right now. What we're expecting for the second half is that that space and satellite business is going to be more software-focused, which would lift those margins in the second half and more specifically in the fourth quarter. That's what we see driving some of that margin uptick for the second half.
Okay. If we think more so on the midterm, and this is my last one, I apologize. If we think more in the midterm with engine getting a larger contract with space, maybe moving more so into production type of stuff on the new space stuff, is your expectation that KGS in the midterm can be kind of a mid-teens margin business?
As you know, in our C5ISR business, with GBSD, which I believe the announced contract was something like, it's a development contract before production is $180 million, and we've got a couple other ones in there. Those development contracts margins are typically lower than production. I think in 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'll then go into production. Those are going to offset a little bit some of the margin increases we're seeing, like in the space and satellite area. To crisply answer your question, if everything gets into production like we predict, and there are no more large development programs, it could be a low-teen business.
Hopefully we're going to continue to win development programs that put us in position for additional programs to drive the organic growth. You know what I mean? It's a cycle.
Sure. Okay. No, I appreciate the call, guys. Thank you.
Okay, thank you.
At this time, there are no further questions. I would now like to turn the call back over to Eric DeMarco for closing remarks.
Great. Thank you very much for joining us, and looking forward for our next report. Thank you, sir.
This concludes today's conference call. Thank you for participating. You may now disconnect.