Good day and thank you for standing by. Welcome to the Kratos Defense and 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 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 and Security Solutions Second Quarter 2021 Conference Call. With me today is Eric DeMarco, Kratos' 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 we generated in Q2, including in our Unmanned Systems and Space, Satellite and Cyber Businesses, We believe this is representative of this execution. Additionally, Kratos' last 12 month 1.2:one book to bill ratio, which includes a 1.3:one 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 twenty twenty bookings provides us the confidence in the forecast and the continued up into the right organic growth Since our last report, we achieved a successful series of flight tests With the Skyborg Autonomy Core System or ACS, aboard Kratos' UTAP-twenty two 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 drone 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-sixteen Fighting Falcon to the ACS onboard 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 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 man teammates and increasing the power production capability of the United States Air Force. During the test flight series with the Kratos UTAP-twenty 2, 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 Makos demonstrated proficiency in basic aviation abilities and responded to commands while navigating in a shared airspace with up to 4 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 4 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 2 Kratos Valkyries from the Oklahoma production line from the initial 12 lot with a flight series for the Skyborg equipped Valkyries 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 fire jet and Airwolf 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 mother ship, 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 4 high performance Affordable jet drones in this class flying today with the Valkyrie, Mako, Gremlins and Airwolf, 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 1 to Phase 2 of the program either later this year or early next year. Kratos' GhostWorks 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 valve, which is an air launched vehicle designed to leverage and demonstrate low cost high impact technologies for future aerial systems. The valve will use Wave Engine Corp. Which is a strategic Kratos partner. It will 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 Offboard 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 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, An analysis of the 2021 Pentagon budget revealed that approximately $7,500,000,000 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 Authorized $201,600,000 for the SkyBoard program, including an increase of $75,000,000 specifically called out The purchase of Valkyrie Aircraft. It also authorized $125,000,000 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 $30,000,000 for Air Force Advanced Aircraft Propulsion Development, another area we believe Kratos is uniquely positioned for, as I'll discuss in a moment. Additionally, and 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 war games needed to assess the appropriate mixture 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, stress 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 Loyal Wingman Drones, fully autonomous unmanned combat air vehicles or UCAVs and swarms of low cost unmanned aircraft.
And it was reported that the U. S. Military needs to immediately increase the size and technology of its unmanned aerial systems arsenal In order to be able to successfully fight 2 wars simultaneously with Russia and China, with Kratos' Valkyrie and Gremlins both being specifically mentioned. Also importantly, the Air Force has communicated that a key focus for the 2023 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 operate in a manner that presents a very difficult distributed asset and lethality problem for our adversaries. ACE is an evolution of the United States Air Force agile basing concept that I have discussed with you previously, which has been identified as a top priority for the Air Force And related to the ACE initiative, the customer set reiterated directly to us just a few weeks ago That affordability, runway independence and survivability are critical requirements for Kratos' 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 customers' 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 slide of Kratos' drones at the Oklahoma Range facility is now scheduled for the second half of this year. With its 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 continued strong performance, led by our industry leading position and high performance affordable threat representative target drones. The global recapitalization of strategic weapon systems by the 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:one if the current timing holds. In Kratos' Space and Satellite Business, our software based open space 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 Spectral net lines, both of which are part of our open space software based family of dynamic virtual ground solutions. Kratos' open space quantum products Offer software versions of satellite ground system architecture, which traditionally have been implemented with hardware, such as modems and front end processors, which are needed to communicate with the satellite or its payload.
Kratos' previous Quantum products have been used in by hundreds of satellite operators around the globe, supporting tens of thousands of satellite passes per month And Kratos' spectral net 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. So we have now transitioned both Kratos' Quantum and SpectralNet's previously hardware centric products and technology of 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 installed base. We have the past performance qualifications, the credibility and the market confidence as we roll out our software based open space 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. So our plan.
Our plan is to lead the disruption and the virtual transformation of the space and satellite industry with our first to market software based and defined products, and we are currently transitioning a number of additional Heretofore hardware based space and satellite ground infrastructure subsystems, systems products and solutions to virtual software products. Customers for Kratos' open space 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. So 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. And Kratos was 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 an 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 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 46,000,000 to support space domain awareness efforts for certain customers.
Kratos' SDA network is one of the most valuable Underappreciated assets in our company. Our SDA network consists of numerous RF monitoring sites, hosting fixed and steerable sensors and antennas, including an L, S, CX and Ku bands and our 20 fourseven-three 65 network operating center This is a central hub for monitoring and integrating raw RF data from the global network. With the increasing volume and velocity of threats, Kratos is now leveraging the technology behind our 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, which is enabling assets to be reconfigured and redeployed virtually, delivering the potential for much faster responses to the potential threats in space. Kratos' IR and 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 The total addressable market opportunity for Kratos' technology and products large and it's rapidly expanding.
On the market opportunity side, one data point It 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 4th 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:one book to bill ratio I mentioned previously and we are also forecasting a second half book to bill ratio also in excess of 1:one. 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 weapons 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 of this business based on the current backlog and production and execution schedules. 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 Systems business ends, We recently announced that we supported the United States Navy's 6th Fleet, NATO's naval striking and support forces and the Maritime Theater Missile Defense Forum and the successful execution of Formidable Shield 2021 at the UK Ministry of Defense's Hebrides Range in The exercise included 2 Kratos medium range ballistic missile targets, which were presented at the same time as Kratos MQM-one hundred and seventy eight fire jet aerial target drones from our unmanned systems division. Our ballistic missile targets met all the test objectives and were engaged by an SM-three interceptors from the USS Paul Ignatius. The multinational exercise featured 16 ships, Our Rocket Systems business also recently announced that we have received a contract from the Navy Surface Warfare Center Port Hawaiian Navy 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 process, including receipt of an $8,600,000 task order Under our Advanced Turbine Technologies for Affordable Mission or ATAM IDIQ contract, the program will be managed by the Turbine Engine division of the Air Force Research Lab. And under the contract, Kratos will complete the design, build, assembly and test of an affordable turboshaft engine for Group 3 UAVs. This award follows the successful completion of Programs or KTT completed concept and engine trade studies for Group 3 UAVs in conjunction with our partner the AFL 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 Increased durability of this engine design.
This engine design is also convertible to produce the electrical power needed of advanced hybrid electric aircraft, which is also a key strategic growth focus area for the company. Also, KTT has now successfully completed a core engine test campaign under the ATAM contract, Also with the Turbine Engine division of the AFRL and under this effort, testing of the engine core supports 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. So 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. KCT 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 to 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 $634,000,000,000 to operate, sustain and modernize the United States nuclear forces Certain of Kratos' largest programs are in this area, including in our C5ISR business. The Biden administration's 2022 defense budget requested a $5,500,000,000 increase in research and development and an $8,000,000,000 cut to procurement. This is a clear signal and that a strong emphasis on new technologies and new future products and Systems at the expense of older legacy programs is underway. This is clearly a beneficial signal for innovative and affordable technology companies like Kratos.
Non traditional 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 drones, 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 'twenty two. We have taken all of these items into consideration in our execution planning, our 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 at our $9,000,000,000 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 until 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' 2nd quarter 2021 revenues of 205 $3,000,000 up from the Q2 of 2020 operating income of $2,900,000 which includes 2nd quarter 'twenty one increases and stock compensation expense of $1,800,000 increased R and D of $4,200,000 primarily in the Space and Satellite Business and increased depreciation expense of $1,600,000 in the current period. As a reminder, over 80% of our total R and D is typically invested in our Space and Satellite business. Net income was $1,100,000 for the quarter, which included a tax benefit of $3,600,000 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 Q2 of 2020. Adjusted EBITDA for the Q2 was $17,600,000 in the range of our expectation of $14,000,000 to $18,000,000 reflecting increased investments in internally funded R and D, primarily of our software defined open space 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 2nd quarter operating results include over $400,000 of negative foreign exchange impact resulting from an increased shekel against the U. S. Dollar and our Israeli based microwave business.
Excluding this adverse foreign exchange, the 2nd quarter adjusted EBITDA was 18,000,000 In the Q2, Unmanned Systems segment reported revenues of $60,300,000 up 43.6 percent from the Q2 of 2020, due primarily to ramps in production and target programs including the 177 and work performed on the Valkyrie program. Unmanned Systems generated operating income of $4,100,000 up from $1,000,000 in the Q2 of 2020, primarily reflecting the increased drone system related revenues and leverage achieved on the fixed overhead manufacturing and G and A infrastructure. Unmanned Systems generated adjusted EBITDA of $6,900,000 up from $3,000,000 in the Q2 of 2020. KGS reported revenues of $144,800,000 in the 2nd quarter, up from $128,400,000 in the Q2 of 2020, reflecting $11,800,000 from the ASC acquisition and organic growth across our Space, Satellite and Cyber, Defense Rocket and Microwave Products Businesses. This increase was offset partially by a net reduction of $4,700,000 in our Training Solutions business resulting from the previously disclosed reduction in scope of certain international contracts.
KGS reported operating income of $5,900,000 down from $7,700,000 in the Q2 of 2020. KGS 2nd quarter 2021 adjusted EBITDA was $10,700,000 down from $12,300,000 in the Q2 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 and D costs of approximately excuse me, dollars 4,300,000 primarily related to our Space and Satellite business. Our adjusted EBITDA for the 2nd quarter is from consolidated Stock based compensation costs of $6,600,000 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 $369,300,000 at June 27 and we had 0 amounts outstanding on our bank line of credit and $5,900,000 of letters of credit outstanding. Debt outstanding was $300,300,000 at quarter end and net cash at quarter end was 69,000,000 Cash flow used from operations for the quarter was $700,000 less CapEx of $10,900,000 or a Use of free cash flow from operations of $11,600,000 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 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% for foreign customers. Our backlog at quarter end was $865,600,000 down sequentially from Q1 2021 and backlog of $892,900,000 with bookings of $177,800,000 and a book to bill ratio of 0.9:one for the Q2 of 'twenty Funded backlog at quarter end was $630,600,000 with $235,000,000 funded.
For the last 12 months ended June 27, 'twenty one, our book to bill ratio was 1.2:one with total bookings of 953 point $4,000,000 Our book to bill ratio for the last 12 months ended June 27, 'twenty one was 1.01 for our Unmanned Systems segment and 1.2:one for our KGS segment. And now for our financial guidance. We are providing our initial Q3 'twenty one guidance of revenues of $195,000,000 to $205,000,000 and adjusted EBITDA of $16,000,000 to 20,000,000 As previously discussed, our guidance reflects the impact of the recent loss of an international training contract, which had contributed over 34 point $5,000,000 in revenue in 2020 and which generated approximately $13,000,000 in 'twenty one or a decrease of over $21,000,000 year over year and includes a full year of the recent ASC Signal acquisition closed in mid-twenty 20. 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 lifecycle in 2020. For our Q3 full year '21 guidance with our backlog and recent and expected bookings, we are comfortable with our revenue and EBITDA forecast, including the 4th 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 83,000,000 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 'twenty one and 4th 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 2020
Please standby while we compile the Q and A roster. Your first question will come from Mike Crawford with B. Riley Securities.
Thank you. Eric, you talked about the markup to that the SASCAD On the defense bill, including for Skyborg, what how would you characterize Kratos' Position within Skyboard versus competitors like GA and Boeing?
I believe that our position is far and ahead the best. The press release is relative to the GA vehicle as it's a surrogate vehicle. So the vehicle they're using is by I'm assuming by that word is not even the vehicle they're planning on finally utilizing if it even exists. Boeing, there hasn't been a peak 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. So we're coming up on 5, 6 months, not a peak from Boeing.
So 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 Skyborne payloads on the new Valkyries now and we are Extremely confident and comfortable with our position on this program.
Okay. And then related, you mentioned OBSS as potentially as transformational to Kratos as Valkyrie. And Given that you're already a leader with these various other classes of drones, what is it that separates OBSS from the rest?
Yes, there is very little publicly out there on this opportunity, very little. But it is an attritable low cost system. And If we this is very competitive. We are successful in receiving a contract on this. This is this has legs.
This program has legs. And I really can't say much more about it, Mike, other because there's only that one piece of paper out there on the program, but it's expected to be awarded very soon now.
Okay. So well, hopefully, you're one of the 2 winners of that down select. And then 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?
Yes. It's the transition to the software deliverables. We've and it has to do with the bookings, including the big ones we just had in Q2. We're going to be delivering product in Q4. And it's more software intensive and so the margins are higher on it.
And we've been talking about this probably for about a year now. And when we started releasing the product, I think in Q2 or Q3 of last year, and the uptake by the customer community has been incredible. This is brand new. What we're basically doing is we're taking the soft the ground satellite infrastructure,
Now my
turn from a 2 gs cell phone network to 5 gs. We're going from legacy hardware based systems to software virtual systems and we're first to market and the customers are buying it and we're going to 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 Rudin on the line for Peter today. Eric, just in terms of framing up the second half bookings, obviously, you're Acting 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 1.
Do you think it's enough to make book to bill for the year over 1 given the softer first half?
Yes. So on the first part of your question, the space and satellite business Forecast is extremely strong in Q3 and extremely strong in Q4. And as both Deanna and I said, it's Coming off of the bookings that we had in recently, including I think 1.3 to 1 in Q2. And we're off to an extremely strong start in Q3 for bookings in that space and satellite business. And if we can get the people and we can deliver it, we're going to achieve it.
We are going to do it. Now on your question on the second half book to bill, across the company, we have some big programs we're expecting to book 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 year's plus options to carry and this would decide this is sole source that will 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 going to 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 and I forget if it's Q3 or Q4 that will put our engine business in a positive over 1.0 to 1. So 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 going to be so strong.
Okay. Thanks. And then on the just the comments about the rising case counts of 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 and pace there? And then are you seeing any further delays on the testing ranges?
Okay. So 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. So 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 and we've tried to incorporate That ends. 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 from fixed price.
We just have to figure out how to be more efficient, so it doesn't impact our margin. So these are all the moving pieces we've got going on.
Okay. Appreciate it. I'll hop back in just 2. Yes.
Your next question will come from Austin Moeller with Canaccord. Please proceed.
Hi, Eric. Hi, Austin. This is my first Question here. So China is 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 going to get to less than 400 ground deployed GBSDs because of this?
Yes, sir. Hey Austin. So you're exactly right. In the past 3 weeks, satellite shots have identified 2 new Chinese ICBM fields in 2 locations over 100 each. And I personally believe that we, the United We're in the very early innings of the next Cold War and the next arms race.
And I'm not going to get Specific with certain programs or customers, but to answer your question, yes, I see what China is doing It's going to 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. And then you discussed that you have the 2 of the 12 Valkyries at the Oklahoma factory are currently being outfitted with the autonomy core system. So 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? Or how do we think about that?
So We have a number of those a number of the 12 that are coming off the line are already under contract. The 2 that I mentioned, those are Under contract, all right. So those are already spoken for. When the customers Announced the quantities under and we're under 2 contracts now for Valkyries for those 12 Valkyries, Some of the 12, we have 2 contracts. When the customers become public with the quantities and what they're doing, then obviously we're going We're going to talk about it.
But those 2 I mentioned in the prepared remarks, those 2 are under contracts, and those are 2 of a number that are under contract the ones that are coming off the line.
Okay. And just one last one. Should we anticipate that there's going to be a Skyboard Valkyrie flight with autonomy core system installed within the balance of the year here or should we talk about longer? Yes. Okay.
Well, thank you for the color, Eric.
Yes, sir.
Your next Question will come from Joe Gomez with Noble Capital. Please proceed.
Good afternoon.
Good afternoon, sir.
So I just wanted to circle back here on the second half. And obviously, Given the guidance that you provided, the 4th quarter is heavily weighted. And I'm just trying to get your comfort zone. Oftentimes, Here in the Q4, we see a lot of political gains around budgets and Things of that nature, and we're seeing it today. How confident are you that or What's your worry level that things of that nature could impact 4th quarter?
The vast majority of our 3rd and 4th quarter are in backlog. So 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.
And the key parts of the execution are, I think we have approximately 300 open reqs right now or something like that. And we have some strategies, including taking advantage of other companies that They're having some programmatic issues. We're hiring their people, and we're so far so good on that hiring side. The wildcards 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 like 6 to 12 weeks and now some things are like 24 to 30 weeks. Deanna is nodding that that's correct. So we're seeing things slide to the right and there are global supply chain issues as we all know. So that's one. And the second one is COVID 2 prongs.
Does it do any of our major facilities get impacted where People have to quarantine, etcetera. I don't see that right now. And the other one is what the other gentleman asked on the DoD side. If DoD restrictions tighten up, in particular related to range access. But 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.
And so 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. And on the turbines, you're talking about the Adam program and contract. And one of the things I think in the press release, they talk about is affordability. Given the huge amount of or the huge percentage that engines cost As part of a drone, I mean, can you kind of give us some example or detail as to what kind of Cost breaking, are you looking at here under the your KTT versus the existing engines?
Yes. So we had our engine businesses. It's a range. There were certain engines. We're looking at orders of magnitude 3, 4 and 5 times less costly.
Other ones, we're looking at 30%, forty Percent less costly. It just depends on the type of the engine. Most of these are turbojets and turbofans And the application. Now, 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 It's really bad. And the ability and there in the past couple of weeks, there have been a number of articles on the ability of U. S. Companies To build very specialized machined or cast subsystems And components for rocket engines, it's that.
We have that capability. 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. And that business is ramping very rapidly right now, Number 1, because of the demand, but number 2, the competition there's not a lot of people out there that can do it anymore.
We've lost that capability in the country. So we're looking at it as a business opportunity and a national security opportunity.
Great. And one last one for me, if I may. And just perusing the queue before the call, I saw that you had a nice increase And commercial revenue in KGS segment, is that related to open source 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.
Your next question will come from Pete Skibitski with Alembic Global. Please proceed.
Hey, good afternoon, Eric and Deanna. Absolutely. Hey guys, I want to follow-up on the engine line of thoughts. Just Eric, You mentioned in the second half of the year a potential you called it a large engine contract. And when I I just want to get my expectations in order because I think of what you know, your KTT business in the past is getting a lot of task orders, maybe $5,000,000 to $10,000,000 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, yes, go ahead.
It's multiple tens of 1,000,000.
Okay. Is this like an LRIP type contract?
I cannot get ahead of the customer, but it is several tens of millions
That's a nice breakthrough for the business, I would say, right?
The business is doing great. And the opportunity that 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. Okay. Last one for me on KGS. I just want to 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 and D.
What I'm wondering is, is every business within KGS in normal times, Can that be 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 and D or is there a big range there in some businesses are maybe more important than others?
So across the board, there are different margin rates within the businesses. So On the space and satellite side, those are on the higher end of the range, on some of our we do still have some legacy Services business and right now our engine business is most of that's in development. Those are on the lower end of the margin rate range. So it's a blend right now and 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 4th quarter. So 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, 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
or is
that 2?
Yes. As you know, in our C5 business, With GBSD, which I believe the announced contract was something like a development contract before production is $180,000,000 and we've got a couple of 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 $1,000,000 weapon system contract For development that will then go into production. So those are going to offset a little bit some of The margin increases we're seeing like in the space and satellite area.
So To crisply answer your question, once if everything gets into production like we predicted and there are no more large development programs, it could be a low teen business. But 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, sure.
Okay. Okay. No, I appreciate the color guys. Thank you.
Okay. Thank you.
And at this time, there are no further questions. I would now like to turn the call back over to Eric Zemarca 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.