Ladies and gentlemen, thank you for standing by, and welcome to the Kratos Defense & Security Solutions First Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, 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. Marie Mendoza, Senior VP and General Counsel. Thank you. Please go ahead, ma'am.
Thank you. Good afternoon, everyone, thank you for joining us for the Kratos Defense & Security Solutions First Quarter 2020 Conference Call. With me today is Eric DeMarco, Kratos's President and Chief Executive Officer, and Deanna Lund, Kratos's Executive Vice President and Chief Financial Officer. Before we begin the substance of today's call, I'd like everyone to please take note of the safe harbor paragraph that is included at the end of today's press release. This paragraph emphasizes the major uncertainties and risks inherent in the forward-looking statement 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 guides 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 reconciliation of these non-GAAP financial measures to the company's financial results prepared in accordance with GAAP. With that, I will now turn the call over to Eric DeMarco.
Thank you, Marie. Good afternoon, everyone, and thank you for joining us today. I hope this call finds you and your family safe and healthy as we work to address the many issues brought on by the global COVID-19 crisis. As a corporation, I can assure you that Kratos is focused on taking the necessary steps to keep our employees safe while remaining committed to delivering our systems, products, and solutions to our customers to address their critical national security missions and requirements. Kratos has and will continue to implement protective measures consistent with CDC, state, and local guidance, including encouraging our employees, where possible, to work from home, distancing our office and manufacturing personnel, including with split shifts and modifications to the workspace, providing and supporting the use of protective equipment by our employees, and enhanced cleaning of our facilities.
We have also been reaching out, communicating, and working closely with our supply chain and vendor base, including, where possible, procuring additional inventory for our key programs and other actions. I will comment more on COVID-19 later in my prepared remarks. As we begin the second quarter, we believe that Kratos's demonstrated ability to rapidly develop, demonstrate, and field affordable systems is in increasing demand by our customers, as reflected by our Q1 bookings, our increased backlog, and the new large programs of record which we are now involved with. All of which provides us increased visibility and confidence in our future forecasts and expected future growth trajectory. We firmly believe that the demonstrated affordability of Kratos's systems and products will become even more of a competitive advantage going forward based on input from customers, Congress, and program offices.
Kratos is continuing the successful execution of our plan of becoming an essential critical supplier and element of the United States Defense Industrial Base and the DoD's future, and we believe that The Pentagon views us as an important new competitor in our primary business areas. Since our last call, there have been a number of key developments which we believe further position Kratos for industry-leading future growth, including Kratos' C5ISR business was selected by Northrop Grumman to support the United States Air Force Ground-Based Strategic Deterrent, or GBSD program, where Kratos will provide highly complex missile and payload transporter systems. GBSD is an estimated $63 billion, 20-year U.S. Air Force program to replace the Minuteman III intercontinental ballistic missile weapon system, and it could become one of Kratos' largest future programs and organic growth drivers.
Kratos' C5ISR business is a recognized industry-leading system and subsystem provider for unmanned aerial, missile, radar, missile defense, high-powered directed energy, CBRNE, combat, and other systems. The business performed approximately as we forecast it would in the first quarter. C5ISR is expected to be one of our company's strongest future organic growth generators, with the GBSD program expected to be a key contributor to this growth. In the coming weeks, we are hopeful of receiving or announcing other large new strategic program system awards we have been pursuing. Also, as an update, in early Q1, we told you about a $50 million contract award Kratos' C5ISR business received, which was protested by a competitor. This situation remains unresolved at this time. Accordingly, we will continue to exclude any future potential financial contribution in our forecast from this program until the situation is resolved.
It was recently reported that the United States Air Force has completed a round of tests of a new, first of its kind, low-cost turbojet engine. This engine is a Kratos engine, developed by our recent acquisition of TDI. We believe TDI is extremely complementary to our 2019 acquisition of Florida Turbine Technologies, with both companies focused on affordable, leading technology engines for the expected to be very large future market for next-generation cruise and hypersonic missiles, unmanned aerial drones, and tactical systems, including Kratos's. These Air Force experiments were part of the Gray Wolf program, which has focused heavily on the demonstration of technologies that could enable the development of low-cost, affordable cruise missiles, which would be fielded in extremely large quantities. The next generation, new Kratos engine that powered an expendable test article from a large prime during the test flights.
We believe this new Kratos engine will also power other future expendable air launch systems, munitions, and unmanned aircraft. The Air Force Research Laboratory, or AFRL, which is responsible for the Gray Wolf effort, which is expected to be part of the Vanguard Golden Horde swarming drone and munitions program, recently released a picture of an F-16 Viper carrying the test flight vehicle that is available to you and the public. A key focus of Kratos's overall corporate strategy is to address The Pentagon's objective to beat the cost curve the military expects to encounter in future conflicts by designing low-cost, expendable unmanned aircraft, missiles, and munitions that can overwhelm enemy defenses without breaking the budget. Mass quantities of drones and munitions is a key element of the Golden Horde program, which Kratos is pursuing with several of our affordable engines, drone, and tactical system programs and initiatives.
We currently have several new next-generation engines running, which we are positioning to be designed in on a number of platforms and systems, including our Black Dragon program, which has made important progress toward first system flight over the past few months. If successful, we believe could be a game changer for our company. We expect Kratos Turbine Technologies, similar to our unmanned systems business, to be disruptive to the industry and be a significant future growth driver and value generator, with thousands of missiles and UAVs requiring low-cost engines in this class forecasted for the future. KTT performed approximately as we expected in Q1, with EBITDA margins currently lower than the KGS average, as we are in development on several engine programs and initiatives, which typically carry lower margins than production programs.
In space and satellite, it was recently reported that the U.S. military's push to link every object on the battlefield is moving forward, as most recently reflected by the release of a request for proposal, or RFP, to build 20 tactical communication satellites by 2022. Additionally, the year-old Space Development Agency, or SDA, recently hosted an industry day to brief industry about its plans for a transport satellite layer, essentially orbiting communication nodes to transfer data related to intelligence, battle management, navigation, timing, and more. This new transport layer architecture will move very time-sensitive data from drones and satellites in low Earth orbit and other sensors and will also be critically important for the hypersonic system tracking and defense.
The transport layer opportunity, this architecture, and this recent RFP are just the most recent examples of several large new opportunities Kratos' space and satellite business sees as future growth opportunities. Another large new space opportunity for Kratos' satellite business is the OPIR program, or Overhead Persistent Infrared, which Kratos is now under contract on. We are forecasting OPIR to become an important financial contributor beginning later this year and increasing in 2021 and beyond. Kratos' satellite business had a strong overall Q1, including higher gross margins, increased R&D, and overall higher EBITDA margins as we continue our transition to a software-based or defined model, and we continue to forecast future organic growth and expanding margins for this business.
Our expectation that Kratos' space and satellite business will continue its strong execution and performance is a key reason we are confident in achieving both our EBITDA and cash flow guidance for the rest of this year, as both the nature of an expected mix of our opportunity pipeline continues to both expand and improve. In Kratos' drone business, there have been several new and positive developments since our last report to you. It was recently reported that the United States Air Force wants to replace the service's fleet of Reaper attack drones with new drones that are capable of surviving in hostile airspace.
Although highly successful in its current mission, the MQ-9 Reaper is relatively easy to shoot down, making it vulnerable in an A2AD or battlefield protected by modern air defenses. As we have discussed with you previously, The Pentagon is shifting from potential smaller low-end fights, for example, in Afghanistan, Iraq, and elsewhere, toward larger, higher-end contests, including with countries such as Russia or China, which is providing significant opportunities throughout Kratos, including in our tactical jet drones. Acknowledging the Reaper's vulnerability to perform its mission in a contested environment, the Air Force is now planning to cut its buy of Reaper drones, with the final drones purchased this year. The Air Force intends to lay out its vision for a Reaper replacement, a drone that can operate in contested airspace in the 2022 budget.
We believe that affordability and the ability to perform its mission and survive will be important attributes for this new program. It was also recently reported that the head of the Air Combat Command stated that the ACC is currently thinking through what is the fighter aircraft of the future, and that the fighter mission will give way to attritable aircraft and loyal wingmen unmanned drone aircraft, in addition to the manned fighters. It was also recently reported that the Air Force is looking at potentially replacing, retiring Block 25 and Block 30 F-16s in the next few years and replacing them with affordable unmanned drone aircraft.
Specifically related to the future for extremely large quantities of affordable drones and munitions, it was reported that the Air Force is planning experiments and briefing senior leaders on progress toward its Arsenal Plane initiative, looking at multiple aircraft options to fly with a large weapons cache, potentially including swarms of low-cost cruise missiles and drones to back up the strike assets. We believe that each of these recent data points that I just went through, the Reaper replacement, the fighter of the future, the F-16 replacement, and the Arsenal Plane, reflect a continued increase in building momentum and demand for rapidly developed, affordable, attritable jet drones, of which Kratos has several tactical drone types flying today.
Since our last report to you, multiple system integration efforts have continued with Kratos' Valkyries and other tactical drones of Kratos, including for weapons, communications, electronic warfare, ISR, and other systems as we move toward missionization, increased operational capabilities, and ultimate fielding of these existing and flying Kratos drone aircraft. We remain on track with the 12 lot of 12 new XQ-58As we are in the process of producing in Oklahoma City, with the first expected to be completed beginning in Q1 of next year. We continue to take into consideration with our partners and the United States Air Force all the knowledge we have gained since our first tactical drone, manned-unmanned teaming flights in 2015, as we move forward with Valkyrie and other Kratos tactical drone programs and initiatives.
Kratos has truly appreciated a fantastic relationship with the Air Force Research Laboratory and the United States Air Force in the development and flight testing of the XQ-58A Valkyrie through the Low-Cost Attritable Strike Demonstrator program, won competitively by Kratos. By approaching the LCASD and related programs in a partnership fashion with the Air Force, the ultimate and primary worldwide customer for high-performance tactical strike jet UAS, we have been able to design in from a blank sheet of paper the key attributes and capabilities needed by the USAF to enable their range of operational requirements. These requirements range from the runway independence capability, the physical size of the vehicle, the vehicle's internal weapons bay capabilities, the system multi-mission payload capability, and the unrefueled range and endurance, and many other critical attributes.
By partnering at the inception of the vehicle design stage with the Air Force, a true design-to-cost approach was achievable with a United States-built product, including subsystems and components, leveraging our proven low-cost, high-performance jet composite family of unmanned aircraft, of which we currently produce over 100 annually, demonstrating our true low-cost capability every day. This family of drones we have flying today, new drones we are working on which we will be flying very soon, and our rapid design approach is truly an example of the century series model for aircraft design and build cycles that Dr. Roper has consistently promoted as being key to the future of aircraft design, development, and production in the U.S.A.
Kratos' current and future tactical vehicle family, all being almost entirely sourced and produced in the U.S., is a key contributor to the reinvigoration of the U.S. and the Department of Defense industrial base, and which is very important to our country, our company, employees, and stakeholders. Related to our increased confidence and support for what we are doing here in the U.S., it was recently reported that there is significant additional funding, up to $125 million currently planned for the 2021 National Defense Authorization Act for the LCAS XQ-58A Valkyrie drone initiatives, which would be in addition to the over $100 million already included for LCAS attritable drones in the 2020 NDAA. Also importantly, it was recently reported by the Air Force.
The Air Force stated that they are ready to begin procuring new attritable drone aircraft at higher volumes this year under its Skyborg Test and Experimentation program. I hope you can see we continue to make progress and move forward. The customer set also continues to move forward. We believe that we remain on track for a significant Valkyrie contract or contracts this year. Based on the most recent information we have received, even more significant future Valkyrie-related contracts. We believe that we were close to a contract award just before the COVID-19 virus caused serious disruptions. Progress has recently been made. We believe that the Air Force will be making several announcements very soon based on recent correspondence.
We are more confident than ever that the drone-related Vanguard, Skyborg, Advanced Battle Management System or ABMS, and Valkyrie-related programs and initiatives, each of which we believe are major DoD priorities, will be transformative future growth opportunities for our company, each of which we believe Kratos is uniquely positioned for. We also remain confident that the Gremlins program will transition from DARPA to one of the services with our plan for AirWolf and Thanatos to follow thereafter. Flight schedules for Valkyrie, Gremlins, AirWolf, and our initiative with AeroVironment, which we refer to as Rattlesnake, have moved to the right with ABMS and other program flights now planned to occur beginning in Q3 due to delays from DoD COVID-19 related travel, distancing, and other restrictions.
Kratos' target drone business is performing as expected with full-rate production for two programs and increased production for an additional program now forecast for either later this year or early next year based on the most recent customer communications and taking into consideration COVID-19 DoD work-at-home requirement related impacts. Importantly, we recently received expected contract awards for approximately 20 target drone systems, which, along with our Q1 unmanned business book-to-bill ratio of 1.5: 1, provides us increased visibility and confidence in our forecast, and we remain on track to achieve our long-term target drone growth and profitability objectives. Kratos' microwave electronics business, one of our company's highest profit margin and cash flow contributors, achieved solid performance in Q1, including a book-to-bill ratio of 1.9: 1 for the quarter and a last 12 months book-to-bill ratio now of 1. 1.
This reflects the strong global demand for electronic warfare, attack, missile radar, SEAD/ DEAD, and other systems. Our microwave business's Q1 performance, current record backlog, and book-to-bill ratio provide us increased visibility and confidence in our financial forecast, EBITDA, and cash flow objectives. Kratos' rocket system business also reported solid Q1. Based on recent communications with customers, certain ballistic missile defense target and other mission launches have moved to the right as a result of COVID-19 related DoD travel, distancing, and other restriction impacts with certain missions now tentatively planned for later on this year or early next year. Since our last report to you, the number of opportunities Kratos' rocket support business is pursuing has increased significantly, including certain hypersonic system programs, with hypersonics currently being one of the strongest funded areas of the Pentagon budget.
Kratos' Turbine Technologies and C5ISR businesses are also positioning for certain hypersonic opportunities. Kratos' training business came in below our expectations in Q1 as a certain Kratos sole-source contract option was unexpectedly not renewed in February by an international customer that has significant COVID-19 travel-related and other restrictions. Late in March, we did successfully receive an extension on the U.S. Navy RSNF training program, which was also in a protest situation, which Deanna will walk through in her prepared remarks. As of today, Kratos has experienced no production facility or manufacturing plant closures as a result of the COVID-19 virus, and we have approximately 200 job openings across our company also supporting our financial forecast. To date, we have not experienced any material supplier or vendor disruptions, and we routinely communicate with our supplier and vendor partners, our customers, and the government.
As we move forward, our employees' health and safety are our number one priority. As I mentioned previously, we are following the safety measures, distancing, and cleaning recommendations suggested by applicable federal, state, and local government authorities to the absolute best of our ability. The application of these government restrictions and recommendations has resulted in a large number of Kratos employees telecommuting and working from home where possible, split or staggered shifts at certain Kratos production facilities, and limitations or restrictions in our employees' ability to travel to certain customer sites and locations to perform their work, including as related to target drone, tactical drone, and other planned exercises. Though taking these safety steps is required and the right thing to do. Obviously, they are adversely impacting production, execution, flight testing, and overall operational efficiency to some extent.
We have also recently begun to see some delays of certain supplier deliveries and the reduction in demand from certain of our commercial aero and power customers, primarily with Kratos Turbine Technologies and our microwave electronics business, and our space and satellite communications business recently saw one of our customers, OneWeb, file for bankruptcy. We have attempted to take all of these factors, current and forecast, in our updated forecast we are providing to you today. Deanna?
Thank you, Eric. Good afternoon. Kratos' first quarter 2020 revenues of $168.9 million were at the higher end of our estimate of $160 million-$170 million, with particular strength in our unmanned systems segment, which reported revenues of $42 million, up 20% from first quarter 2019 revenues of $34.9 million. KGS reported revenues of $126.9 million, up from $125.5 million in the first quarter of 2020. Organic revenue growth in the first quarter of 2020 in our microwave products and rocket and ballistic missile defense businesses, and a full quarter's financial performance of KTT in 2020 were primarily offset by expected declines in our training solutions business, satellite communications, and legacy government services business. Our adjusted EBITDA of $16.3 million exceeded our estimate of $12 million-$16 million due to a favorable mix of revenues and execution, primarily in our space and satellite communications and unmanned systems businesses.
Our adjusted EPS of $0.09 was also at the high end of our forecast of $0.05- $0.09 per share for the quarter. In the first quarter, our Unmanned Systems segment generated adjusted EBITDA of $2.3 million, up from $2 million in the first quarter of 2019. The adjusted EBITDA margin rate remained fairly consistent year-over-year due to the mix of development programs, which are typically lower margin programs than production programs. This increased mix of development programs is expected to continue into 2020 until certain new production awards or increases in existing production programs are received. KGS generated adjusted EBITDA of $14 million, or 11% of revenues, down from $15.5 million in Q1 of 2019, and operating income of $9.3 million, down from $11.4 million in Q1 of 2019.
A more favorable mix of operating margins and adjusted EBITDA margins in the company's space and satellite C5ISR and microwave products businesses in Q1 2020 were offset primarily by expected less favorable margins in the company's training solutions business as a result of the completion of a large international fixed-price contract at the end of 2019. Our Q1 consolidated operating income was $4.7 million, down from the first quarter of 2019 operating income of $8.2 million, primarily due to an increase in non-cash stock compensation expense of $2.1 million and increased depreciation expense of $800,000, primarily due to the capital investments we have made in our unmanned systems business over the past few years.
Our adjusted EBITDA for the first 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 $4.7 million, foreign transaction loss of $400,000, and acquisition and restructuring related items and other of $500,000. On a GAAP basis, net loss for the first quarter was $200,000, which includes a tax benefit of $1.4 million and loss from discontinued operations of $400,000. Moving on to the balance sheet and liquidity, our cash balance is $158.6 million at March 29th. At quarter end, we had zero amounts outstanding on our bank line of credit and $5.7 million of letters of credit outstanding. Debt outstanding was $295.3 million at quarter end. Net debt was $136.7 million. Our LTM adjusted EBITDA was $76.5 million with a net leverage ratio of 1.8:1.
Cash flow generated from operations for the first quarter was $4 million, less CapEx of $6.4 million for free cash flow use of $2.4 million. During the quarter, we utilized $9.5 million for the acquisition of Technical Directions, Inc., or TDI, a turbine technology company focused on tactical unmanned aerial drones and other systems, which Eric discussed previously. $4.7 million was paid during the quarter for deferred purchase consideration related to the FTT acquisition that we closed last year. During the quarter, we collected $1.9 million related to the retained working capital of the legacy PSS business that we sold in 2018, bringing in the total receipts we have collected to $5.6 million since we sold the business. Our contract mix for the quarter was 78% fixed price, 17% cost plus, and 5% time and materials.
Revenues generated from contracts with the U.S. federal government were 74%, including revenues generated from contracts with the DoD, non-DoD federal government agencies, and FMS, which were approximately 9%. We generated 8% from commercial customers and 18% from foreign customers. For our forecast, we are providing initial second quarter guidance of revenues of $160 million-$170 million and adjusted EBITDA of $12 million-$16 million. We are affirming our full year 2020 adjusted EBITDA guidance of $72 million-$78 million. We are affirming our free cash flow from operations guidance of $7 million to a use of $18 million, including capital expenditures of $40 million-$45 million.
Since the company does not have many progress payment type contracts, the changes recently made by the DoD to increase percentage of such payments from 80%- 90% due to COVID-19 does not have a material impact on the company's FY 2020 expected cash flows. We are adjusting our full year 2020 revenue guidance from $740 million-$780 million to $720 million-$760 million, primarily to reflect the currently forecast impact of COVID-19 on our business, including our vendors, suppliers, and customers, including access to customers and customer sites, the non-renewal of an option on the sole source training contract by an international customer, partially offset by the extension through the beginning of 2021 of a U.S. Navy Royal Saudi Naval Forces training contract.
Our affirmed adjusted EBITDA guidance reflects an overall forecasted improved revenue mix and profitability in our DoD and national security business areas, including in our space, satellite, unmanned systems, and microwave electronics operations. Our fiscal 2020 guidance excludes any potential contribution from expected Valkyrie or other tactical drone production or system contracts, with expected orders to be taken into consideration in our financial forecast adjusted once such contract orders are received and the related financial contribution can be estimated. The 2020 capital expenditure forecast currently includes expected outlays of $15 million-$17 million associated with production of 12 Valkyrie aircraft prior to receipt of expected customer awards, and therefore reflected as company-owned tactical drones until receipt of the related customer award, at which time the cost incurred will be transferred to project costs.
Approximately $3 million-$5 million related to production of company-owned aerial target drone systems in preparation of fulfilling forecasted customer requirements. Kratos will adjust and/or reduce these initial forecasted capital expenditure outlays once expected customer orders are received and the related financial contribution and contractual terms can be estimated.
Thank you, Deanna. We will now turn it over to the moderator for any questions.
As a reminder, to ask a question, you'll need to press star one on your telephone. Again, that's star one. Your first question comes from the line of Peter Skibitski with Alembic Global.
I'm sorry. Hi, guys. Yeah, sorry, I was on mute, guys. Glad to hear you're doing well. On the sole source international training contract, that fixed price one that didn't get the option renewed, could you just size that for us?
Yes. That's roughly about $8 million-$10 million per year.
Okay. On just the expectation, I guess, that 2Q will be kind of the low revenue quarter for the year. Is the underlying assumption essentially that COVID is impacting, and maybe once we're through the worst of this, then things improve in the back half of the year? Is that kind of the driving assumption?
Yes, it is.
That's part of the impact, yes.
Okay. Last question for me. I'll get to the back of the queue. On the Valkyrie, if we assume you get a contract later this year, do you start to book revenue on a percentage of completion basis, or is it we wait till 2021, and you book the revenue on unit of deliveries?
It depends, Peter, on the type of contract. If it's a production type contract, yes, it would be on a percent complete basis for the cost incurred. If it's a services contract, that would be based on what services are provided. It really depends on the makeup of the contract.
Okay. That's still uncertain right now, is what's going on?
It could be both. Yeah.
Okay. I guess the services contract, is that similar to what you do with targets? I know you sort of lend target services to some of the European countries. You're saying it could be similar to that, maybe?
No. What we mean by that is, I'm just giving examples here. We could receive a contract for units that we're selling. We could get a contract to continue to integrate weapon systems, command and control systems, and other systems into the Valkyries. We could get a contract or contracts where Kratos-owned Valkyries are involved in missions like the ABMS mission or some other missions or demonstrations. It could be in a very, in my opinion right now, I think it's going to be some of each.
Okay. Appreciate the color, guys. I'll get back in queue. Thank you.
Thanks.
Your next question comes from the line of Sheila Kahyaoglu with Jefferies.
Hi. Good afternoon, Eric, Deanna. Thank you for the time. Eric, you mentioned the Reaper replacement maybe in the 2022 timeframe. How do we think about that? Just because it's a Group 5 much larger drone, versus your offering, how could the Air Force shape that?
Right. I think, Sheila, some of them are actually Group 4.
Okay.
Up in Group 5 are things like Global Hawks. I can only pass on, in this forum, what has been publicly announced by the DoD. As I said in my remarks, what the DoD has said is that they're planning on ending production of them this year, because they cannot perform in contested environments, their missions. They've been phenomenal in the terrorist mission and the asymmetric warfare mission. The Air Force has come out, and they said they want drones to replace them that can survive in an Anti-Access, Area-Denied environment. As you can imagine, we believe we're very well-positioned for this, as we have a number of drones that are actually flying today, certain of which we believe could fill that mission admirably. That's all I should say on this now.
Okay, no worries. I might have missed this in the prepared remarks. I know you said a few flight tests were pushed to the right. Can you just go over the latest on the Valkyrie? I think you had your fourth flight test in January that was successful. Kind of just a quick update there, because I don't know if you mentioned dates.
Absolutely. Just either yesterday or the day before yesterday, the Air Force announced that the next ABMS flight, Advanced Battle Management System flight, which we are scheduled to participate in with the Valkyrie and several other of our jet drones, it has expanded now, is currently planned for either August or September of this year. They announced that just this week.
Okay. Got it. In terms of the additional funding on the Valkyrie potentially in 2021, can you go over what we need to see, what next steps are? Obviously, the first round of funding first, but kind of the puts and takes there.
Sure. What is out there publicly is that the chairman of the Senate Armed Services Committee, he made some remarks, and those are publicly available. In those remarks, he said that because of the progress that we're making, because of the Valkyrie flying today and its capabilities, that he was supporting an additional $125 million in the 2021 NDAA to continue moving forward with attritable drone aircraft. That's what the chairman said a few weeks ago.
Okay. Understood. Thank you very much, guys.
Okay.
Your next question comes from the line of Peter Arment with Baird.
Good afternoon, Eric, Deanna.
Hi.
Eric, just following up on the Valkyrie. If you have another test flight in August, September, maybe you could just shape how you're thinking about the timing of a potential contract. What's the roadmap look like there once you have another flight test?
Well, I believe that they're mutually exclusive. I believe, and I'll go with what the Air Force announced a month ago. The Air Force announced a month ago that they were going to move out post haste Relative to Skyborg, and that was the context that they were talking in relative to Skyborg, on getting some information out relative to contracts for production this year. As I said in my prepared remarks, recent correspondence and communications, the Air Force, and I'm not putting words in their mouth, in my opinion, they could be announcing something very soon.
It's potentially before the flight. Okay.
Yes, sir.
Just wanted to confirm that.
Yep.
Could you give us your latest thoughts on, I know Project F is now AirWolf. When those flights will also be around a similar timeline, or is that on a different schedule?
They are currently scheduled for Q3. They are scheduled for Q3. I believe Gremlins is scheduled for Q3. Rattlesnake, with AeroVironment, is now scheduled for Q3, along with ABMS and other Valkyrie flights that we have not talked about in detail. We can't. This all has to do with the DoD travel restrictions, number one, and social distancing relative to being in the command and control modules relative to the flights.
Appreciate the color. Thanks, Eric.
Yes, sir.
Your next question comes from the line of Ken Herbert with Canaccord.
Yeah. Hi, Eric and Deanna.
Hi, Ken.
Hey, Eric, I just wanted to ask you about TDI. Is it possible to maybe give us a little more detail on the revenue contribution from that acquisition this year? Then bigger picture, it clearly sounds like based on your prepared remarks, you're fairly optimistic about as you blend TDI in with KTT, and you go after what looks like a pretty substantially expanding market in missiles, cruise missiles, and things like that. Can you help maybe with sizing that market a little bit or just a little bit of the sort of the parameters you're targeting now on the engine side?
Absolutely. For this year's contribution, it's not material because they do not have any production contracts right now. They are in development. They have a number of development programs. The one that's publicly out there, of course, is the one we talked about today with Gray Wolf. This year's contribution is not material. However, if things go according to plan, and they are tracking right now with a number of engines running, we see our turbine technology business potentially next year, tied into two engines in particular. They could begin to become material financial contributors next year. The market opportunity, as you indicated, is very large. As we've talked about before, the technologies that are out there right now are '70s or '80s technology that were used in the buildup of the missile systems in the '80s.
With what's going on in the South China Sea and in the Pacific, extended range is significant. That's why you see things like LRASM-ER, extended range, or JASSM-ER, extended range, or Harpoon-ER, extended range. There are several others, and for competitive purposes, because this is competitive, I'm not going to get into many details. As I think I've said before, relative to KTT, there's a handful or so of programs that we're looking at getting designed in, that we're working on getting designed in on. That handful, assuming we get a portion of that market, it's like $800 million over five years.
Okay. Very helpful. If I could, just one other question from me on Valkyrie. As I listened to your prepared remarks, you're clearly outlining what sounds like, and what was a very close collaborative effort with the Air Force as you developed the aircraft and the technology. There's certainly other companies that seem to be looking at this market with a lot of interest. Can you just talk and remind us again about the competitive advantages of the Valkyrie, and why you're in the pole position, and how you think you can maintain that relative to what some other firms may be looking at doing as these move forward?
Absolutely. We believe one of our strategies is first-to-market, is critical, and proven affordability is equally critical. As I mentioned, and as you know, in 2015, we flew jet high-performance drones with manned aircraft, manned-unmanned teaming. That was what? five years ago. Four and a half years ago, we did that. We have a number of drones flying today. They're all 100% substantially sourced in the United States, made in the United States. We believe that that's a competitive advantage. We are working with the United States Air Force, as I said in my prepared remarks, the premier institution in the world globally for aircraft, remotely piloted aircraft, manned piloted aircraft, et cetera. The number of drones we have that are flying today, we're integrating weapon systems and other systems into operationalizing them today. These aren't PowerPoint presentations or little models. These are flying today.
The market, as I went through, is accelerating now, and it's moving rapidly. On affordability, as I mentioned, we're building well over 100 drones a year right now. Demonstrated cost points, $250,000 cost point for certain of them, $500,000 for others, $1 million for others. On the Valkyrie, obviously, we know what we're targeting there, $2 million, $3 million. We've demonstrated it. We believe that those are all critically important competitive differentiators, and we just need to continue to execute and move forward.
Great. Thank you very much.
Yes, sir.
Your next question comes from the line of Michael Ciarmoli with Truist.
Hey, good evening, guys. Thanks for taking the questions. Glad to hear you guys are safe and healthy. Eric, maybe going back, I think it was Sheila's question on the Reaper replacement. Certainly, if we think about how the Air Force, how they developed their roadmap, are there other opportunities for you outside of a complete drone solution? You were just referencing TDI and some of the development programs. Could you potentially be a partner and provide turbine technology, or are you going after it with a complete platform solution? Maybe any color you could provide there?
Sure. We are in coopetition land, Mike. Competimate.
Okay.
We are competing head-on head with the competitors, and we are teaming with many of them on programs. We have incredible teaming relationships with Lockheed, incredible teaming relationships with Northrop, with Raytheon. They're phenomenal partners. They are also ferocious competitors. It's both.
Okay. On the ABMS drones, you said you've got more in addition to Valkyrie. Can you tell us which other of your drones are participating in that?
I cannot because I do not believe that that has been disclosed yet other than what I said. I'm sorry.
Okay. On Valkyrie, are you still expecting orders in the range of 30 or so? Has anything changed? Certainly, it sounds like there's going to be more funding, but what's sort of the general outlook in terms of number of units you expect to secure?
I don't want to comment on this, Mike, because things are going to happen. If you go with what the Air Force has publicly talked about in the last three or four weeks, and obviously we have some information as well, the next several weeks, couple of months, let's just watch this play out. I will, though, go with what I believe it was Will Roper said, where I believe in an interview, he said that we are looking to begin buying these in quantity this year. I believe he said that.
Got it. Last one for me. You obviously narrowed down or took down the revenue guidance. You held the EBITDA. Sounds like you've got some higher margin business flowing through. Can you tell us what percent of revenues you're deriving today from more of the higher margin software type sales?
Deanna, the vast majority of that is in the space side.
It is, yes. It's based in our space.
Yeah.
We don't really quantify the percent on software.
Yeah. The majority of it, Mike, it's in our space business.
Okay.
It's in our space business, but it's also in the microwave business.
Okay.
The microwave business is just ripping right now relative to electronic warfare systems.
Got it. Okay, perfect. I'll jump back in the queue, guys. Thanks.
Great. Thank you.
Great.
Your next question comes from the line of Mike Crawford with B. Riley.
Thank you. Hey, Eric, you mentioned the Black Dragon program was nearing first system flight. Is that with a smaller TDI engine or the bigger KTT engine?
It's a KTT program.
Okay. Thank you. You talked about air launch initiatives. You didn't really talk about rail launch initiatives, including your container deployment system that you've shown, can that help reach A2/AD environments? Is there any progress update there?
We are planning on completing and having ready for delivery, the first containerized rail launch systems middle of this year, next few months. We're working hand in hand with the Air Force.
There's orders in place for those?
I can't talk about that right now.
Okay. Last one. Ducommun announced on its call that it was targeting some UAV opportunities, I think related to electronic systems. Can you say whether you're working with Ducommun, maybe on engines or else otherwise?
Ducommun is an important partner of ours in our drone business.
Okay. Thank you, Eric.
Okay.
Your next question comes from the line of Josh Sullivan with The Benchmark Company.
Good evening, Eric, Deanna.
Good evening.
Josh.
Just on GBSD, are you able to provide some color on what you're going to be supplying on the program?
Other than the ground transport and missile transport systems, which is what Northrop has announced, we are unable to provide because obviously we're under an NDA with Northrop, and they're a great, phenomenal partner. We cannot go beyond that. Pull up the Minuteman III and take a look at the ground transport equipment, the missile erector systems, and the missile transport systems, and that'll give you an idea of what's been disclosed, what we're doing.
Got it. Just a question on TDI and the Golden Horde program. The mass quantities you referenced on the low-cost engines, will TDI have the capacity to do that? Do you need a partner? Can you do that at your Oklahoma facility or one of the KTT facilities?
With the TDI acquisition, we acquired a very small, next leading technology, additive manufacturing, engine production company. That's one piece. KTT has significant next generation engine manufacturing techniques and technology. We believe with the hand we have now, the hand of cards, we are in phenomenal shape for production runs, low cost, very quick, very simple next generation engines. We feel we're in good shape with what we got.
Got it. Thank you.
Yes, sir.
Your next question comes from the line of Seth Seifman with JP Morgan.
Thanks very much, and good afternoon.
Hi.
Just kind of curious. With the revenue guide for the second quarter, the implication, I guess, is that the run rate for the second half are going to get up to record level, kind of $200-plus of sales. Talk about what kind of gives you the confidence in that level of step up.
The book-to-bill ratio. The bookings in the first quarter were phenomenal. As I said in the prepared remarks, our microwave business has a record backlog. Our unmanned business right now, backlog is just under $200 million.
Yep.
All right. We have very good visibility right now in what's going on.
Excellent. Just on the training business, just to make sure I understand kind of the different pieces there. We're talking about two separate international contracts. One, an option was not exercised. That is a headwind in Q2 sequentially, and I would assume for the rest of the year as well, along the lines of the size that you talked about with Peter's question. On the flip side, you did get an extension on the Saudi FMS contract through the U.S. Navy. How long does that extension last and what does that do, versus what you had in the guidance previously?
There's a couple of pieces, Seth. There is the non-renewal of the international contract, but we were awarded the bridge contract on the previous contract that we had discussed in the prior quarters. There was also one contract that was a new bid that we lost, a new one that's under protest, that was lost in March. Netting all those three items, it's about a net $3 million-$5 million shortfall from where we were the last time we provided the estimate.
Right. Okay. Got it. Okay. Very good. Then is that Saudi, on the U.S. Navy FMS, is that now an extension in that this is now a Kratos contract again, or is this kind of a temporary extension while there's the adjudication or protest?
It's a Kratos contract through the end of the year.
Okay. Excellent. Very good. Thanks very much.
Thanks.
Thank you.
Your next question comes from the line of Noah Poponak with Goldman Sachs.
Hello, everyone.
Hi.
Hi.
Eric, last quarter when you gave the initial outlook for 2020, initial 2020 guidance, you emphasized that you had excluded or significantly factored down multiple items that could come your way in the year. Deanna just went through the moving pieces there in the guidance, and it's kind of a small number of contracts and a small amount of revenue. I understand that-
Noah, that was just for the training piece. That was the specific question that Seth had asked because there's other pieces. In the prepared remarks that we talked about the commercial aero impact in our KTT business and in our microwave products business, that's about $10 million-$12 million.
No, I understood those. I was about to say that there's a global pandemic, right? It's an unprecedented situation.
Yeah.
We're also watching other defense companies largely reiterate views or take guidance down very slightly. I guess I'm just wondering where the things you excluded or things that were significantly factored are as offsets. Are those still available to you in the back half of the year? Are we now looking at sort of I think Seth makes a good point, that it's a pretty back-end loaded profile based on the second quarter guidance? Do you still have these things that are excluded and factored that could be added later in the year? Are we sort of clinging to the new range here?
The C5ISR contract, $50 million that we won, that was protested. If we're successful there, that could be added. If we receive contract or contracts related to Valkyrie or other tactical drones, those would be added.
Okay.
There are, I'm going to say, a handful of other brand-new opportunities that are expected to be awarded in Q3, Q2 or Q3. If we're fortunate enough to win some of those could be additive because those are not in our forecast either.
Okay. How many months of delay do you have in the next upcoming test flights for Valkyrie and Gremlins from the disruption related to coronavirus?
The ones that are publicly out there, the ABMS flight with Valkyrie and some of our other drones, was previously scheduled for May. As I mentioned, this week, either yesterday or the day before, the Air Force announced that they're shooting for August, no later than September. Our Airwolf flights, which were scheduled for Q2, are now scheduled for Q3.
Okay.
The one with AeroVironment, which was scheduled for Q2, is now scheduled for Q3.
Got it. Eric, you had discussed previously how part and parcel to the $100 million plus up in funding that the Valkyrie saw, that came with a requirement for AFRL to submit a plan for that to Congress by, I believe it was March 31st.
Yes, sir.
Can you speak to whether or not that happened and if everything related to that timeline is still in place?
It absolutely happened. It was submitted. Noah, I don't know if it was submitted by March 31st. I don't know the date, to be very candid with you, but I know it has been submitted because I have been told it has been submitted. I have been told it has been accepted. I have been told that those are some of the reasons why I believe in the near future, the Air Force may be putting some information out.
Got it. Okay. Thank you.
Very good. Thank you.
This concludes our Q&A session. I would like to hand the call back over to Eric DeMarco for any closing remarks.
Great. Thank you all for joining us. We will chat with you when we report Q2 later on this year. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.