Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Kratos Defense & Security Solutions Inc (NASDAQ:KTOS)
Q2 2019 Earnings Call
Jul 31, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome the Kratos Defense & Security Solutions Second Quarter 2019 Earnings Conference Call. [Operator Instructions].

I would now like to introduced your host for today's conference, Ms. Marie Mendoza, Senior Vice President and General Counsel. Ms. Mendoza, you may begin.

Marie Mendoza -- Vice President and General Counsel

Thank you. Good afternoon, everyone. Thank you for joining us for the Kratos Defense & Security Solutions Second Quarter 2019 Conference Call. With me today is Eric DeMarco, Kratos' President and Chief Executive Officer; and Deanna Lund, Kratos' Executive Vice President and Chief Financial Officer.

Before we begin the substance of today's call, I'd like everyone to please take note of the safe harbor paragraph that is included at the end of today's press release. This paragraph emphasizes the major uncertainties and risks inherent in the forward-looking statements we will make this afternoon. 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 reconsideration 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.

Eric M. DeMarco -- President and Chief Executive Officer

Thank you, Marie. Good afternoon. Both our industry and Kratos recently received some very good news with Congress agreeing to a 2-year budget and debt ceiling agreement, which includes 2020 and 2021 defense spending of $738 billion and $741 billion, respectively, both increases over the 2019 defense budget of approximately $718 billion. This congressional budget agreement, which we understand has White House support, will hopefully be finalized into law by the end of this calendar year after an expected limited continuing resolution allowing time for the appropriators to reconcile the bills.

This budget agreement once signed in the law positions several large Kratos programs, including our drone business to begin development, begin initial production or realize increased production, we believe positioning the company for sustained significant future organic growth. Additionally, as a result of the increasing geopolitical threat environment, we could see even higher defense budgets in the future as indicated by the 5-year future years' defense program plan or FYDP, which was recently released in March of this year. Directly related to increasing defense budgets, the recapitalization of strategic weapon systems to address peer and near peer threat is accelerating globally in Kratos' primary business areas of unmanned systems, missile defense, hypersonics, space, microwave electronics and training systems are well positioned to address the U.S. and our allies mission-critical national security priorities and requirements.

We believe that Kratos has proven ability to rapidly develop, demonstrate and field technology-leading systems at an affordable cost is a unique and important competitive differentiator for our company in the eyes of our customers. The DoD wants leading technology and affordable systems right now, not in 10 or 20 years, which we believe is providing nontraditional defense system providers like Kratos with multiple large new opportunities, which is reflected in our growth rate and the continued expansion of our bid and proposal pipeline. In June, the Air Force stated that it is focused on working with smaller companies like Kratos with Kratos specifically being named, which, we believe, is related to our unique and differentiated capabilities.

In the second quarter, the Kratos AFRL XQ-58A Valkyrie unmanned combat aerial system successfully completed the second of 5 scheduled demonstration flights with all test points in the second flight being achieved. Kratos has partnered with the Air Force Research Lab to develop Valkyrie to the Low Cost Attritable Strike Demonstrator program, or LCASD, the Air Force's effort to field the loyal wingman-type drone that can accompany a fighter jet or other combat aircraft in manned-unmanned teams. The Air Force has stated that it is currently looking at incorporating the XQ-58A Valkyrie with manned fighters, including specifically the F-35 and the F-15EX as force multiplier augmenters in the manned-unmanned teaming role, and there have been public discussions regarding teaming 3 Kratos Valkyries with an F-35 or an F-15EX.

The Air Force has recently announced that the upcoming F-35 block 4 upgrade and technical 3 refresh program will include the command, control and communications capability for unmanned-manned teaming with drone systems, and it was specifically mentioned that this would include Kratos' Valkyrie. The Air Force is also planning on adding sensors and weapons to Valkyrie and is looking to insert artificial intelligence and the XQ-58A via the recently announced Skyborg program. As a result, we are now in discussions with a number of companies regarding integrating their weapon systems with the Valkyrie, with this being coordinated directly with Kratos' customers. It was recently reported that the assistant secretary of the Air Force for acquisition, technology and logistics stated that he hopes to acquired an initial 20 to 30 Valkyries in the near future for further experimentation related to these initiatives and concepts of operations.

The assistant secretary also reportedly stated that he is looking for the Valkyrie to have the spiraling of development and to become a program of record as soon as fiscal year '21, which begins next calendar year. It was also just recently reported that the Air Force is looking at Kratos' Valkyrie and Skyborg to be one of the service's new Vanguard Programs, a concept that was introduced in the 2030 Science and Technology Strategy. The focus of the Vanguard Program Strategy is to transition technology faster from development to the field and to the war fighter.

As I believe you can see, since the second successful Valkyrie flight, momentum for the XQ-58A is building, including with potential new customers. One of these potential new customers recently expressed interest in acquiring up to an initial 10 Valkyries in either the fourth quarter of this year or the first half of 2020. This would be in addition to the 20 to 30 Valkyries to potentially be initially acquired by the Air Force customer. Congressional momentum and interest is also increasing. With the House of Representatives Committee requesting up to a $50 million funding increase for the Valkyrie in the 2020 defense budget and a Senate committee requesting a $100 million Valkyrie funding increase in the 2020 defense budget.

These requested Congressional funding increases for the Valkyrie, the ultimate amount of which will be determined via the normal Congressional budgetary reconciliation process, are in addition to the in excess of $100 million in funding for the LCAD LCASD Valkyrie program, we understand is already included in the 2020 defense budget. Accordingly, we believe that we are on track to achieve initial orders of at least 20 to 30 Valkyries by the end of this year or early next year with the expectation of significantly increased future orders in 2020, 2021 and for future program of record. Based on these recent events, information and meetings we have had with the customers over the past few weeks, we have now placed the order for a number for Valkyrie engines under an initial flexible 24 engine unit purchasing framework agreement.

For customer-related competitive and other considerations, we are limited to what will say here other than we have now made the initial engine orders, which are a critical long-lead item for the Valkyrie that we expect to receive the engines from this initial order beginning in the second half of next year in order to match up with the current Valkyrie manufacturing and production flow expectations, and that we plan to order additional engines by the end of this year. This is all consistent with our recent announcement that we will be manufacturing and producing the Valkyrie in our new Oklahoma City facility where we are currently making a significant capital investment in preparation for this production.

On the Gremlins program. We have begun delivery of the Gremlin tactical drone UAVs to our prime partner Dynetics for the upcoming initial system demonstration flights. The initial Gremlin system and demonstration flights are scheduled for Q3, Q4 of this year. And once the Gremlin demonstrations are successfully completed, we expect increased momentum and customer and Congressional interest for the Gremlin drone similar to what we have experienced with the Valkyrie after its successful demonstration flights. We have recently met with our Dynetics partner and the government customers, and we have increased confidence in the ultimate success of the Gremlin's programs and UAS platform, which Kratos produces.

Based on the current demonstration flight schedule, we expect an initial Gremlin order in the first half of 2020 with ultimate timing being driven by the customer and becoming clearer after nominal flight demonstrations. Program Thanatos remains on track. We are currently investing in and building out the required secured program facility and expected to be complete by the end of this year. We expect Thanatos to give a meaningful financial contribution to Kratos beginning in 2020. On Thanatos, assuming successful execution over the approximate 30-month development phase, we now believe the program has the potential to ultimately be as important and significant to Kratos as we currently believe Valkyrie to be.

On Program F, which is government-funded where Kratos is the prime and our air vehicle is flying today, we remain on track for additional customer sponsor test flights late this year. We're in the first half of next year where we expect to demonstrate certain commission payload capabilities. Customer interest in Program F remains high with 1 customer now indicating that they currently plan to place an initial order for 100 Program F systems once all demonstration flights are successfully completed. We have also delivered to another potential Program F customer, a preliminary ROM or a rough order of magnitude estimate for 1,000 systems to be delivered over an approximate 3-year period once demonstration flights are complete.

We remain highly confident that Program F will achieve production status and be fielded in large quantities once the demonstration flights are successfully complete as a result of customer need, the mission requirement and the threat we're addressing here. On Spartan. We have now received initial contract funding from our prime partner where Kratos is responsible for the air vehicle and we expect additional clarity on this program path by the end of the year. So on Spartan, we're under contract. Program Athena, which is classified, is also now under contract with system development set to begin later on this year or early next year. Kratos has Eton ISR UAS, which is flying today, is under a funded development contract with the government agency with this program currently expected to be a meaningful financial contributor to Kratos beginning in the second half of 2020 after successfully completing the development program. Program Apollo is now expected to be funded within the next 90 days, and we expect to begin significantly executing on this program in 2020.

On Kratos' DIU Mako UAS program, we have now received initial funding with this program objective set now expected to be consolidated with Apollo. Accordingly, we will report on this initiative on a combined basis in the future with Apollo. In our last report to you, we had indicated that we expected to potentially have a new Mako customer under contract by the end of this year. This situation has now developed whereby this customer may be interested in Kratos' Valkyries instead of the Mako as a result of the successful Valkyrie demonstration flights. We will keep you apprised as this opportunity continues to evolve. As you know, Kratos in AeroVironment recently announced that we have teamed up to demonstrate integrated high-performance tactical UAS and tactical missile system capabilities.

Simply stated, a Kratos drone will deploy an AeroVironment tactical drone weapon system. We have customer interest in this initiative, which interest has now expanded to 2 additional potential customers as a result of the community becoming aware of this Kratos AeroVironment initiative and of the potential capabilities of this very affordable and mission-capable system. We are currently planning on demonstrating the system either late this year or early next year, both well within 1 year from when we announced this initiative, which also was very favorable to the customer community. On Projects A and Z. We recently met with the potential customer, and we are now working toward the second half 2020 potential initial contract award.

We have now submitted our response to the Skyborg program RFI. We have met with the customer and we are highly confident that Kratos will ultimately have a significant role in the Skyborg program with our platforms with Kratos Valkyrie and our BQM drones specifically mentioned by the Air Force in the Skyborg program announcement. There is a new classified opportunity that we have been discussing with the government agency called Project OmegA. We believe that this opportunity has now progressed and that Kratos could potentially receive an initial contract award in Q1, Q2 next year. As I previously mentioned, Kratos' proven ability to rapidly develop, demonstrate and field operationally relevant, low cost affordable systems is a key competitive differentiator for our company and one that is highly valued by the customer community.

Directly related to Kratos' positioning, Kratos' family of high-performance jet powered tactical unmanned aerial drone systems are currently flying today. They are not models. They are not concepts or PowerPoint presentations. As a result, we believe that Kratos has a significant lead in this area and that this is a clear differentiator compared to any of our potential competitors. We are aggressively pressing and taking advantage of our market-leading position. We continue to expect significant organic growth from our target drone business with multiple long-term programs under production contracts. These programs include the U.S. Air Force, Navy, Army and other agencies and from a very large multiyear international award we received in 2018 with most of our target drone programs being either solo or single source.

Under this international award, Kratos' high-performance jet target drone systems recently headlined a war games exercise with the Swedish FMV and a missile firing exercise with the German Navy. During this live fire exercise of the open water outside of Harnosand in Sweden, 19 Kratos target drone flights were utilized in both high and low altitude patterns allowing the German Navy to run attack scenarios to test multiple weapon systems. This is just a recent example of Kratos' target drones exercising state-of-the-art radar, missile and weapon systems capabilities for test system and crew training and overall operational revenues. Our SSAT BQM-177 program with United States Navy continues to ramp up. And in the second quarter, Kratos received sole source Low Rate Initial Production year 3, a $25.4 million contract award.

A total of 105 BQM-177 target drones are expected to be produced under LRIP 1, 2 and 3. We just recently met with our SSAT navy customer and the current expectation is for a full rate production contract award to be issued to Kratos in the first half of 2020 and as a result for significant increased production ramping in Kratos' fiscal '21. On our U.S. Air Force AFSAT BQM-167 program, in the second quarter, Kratos received a $31.8 million sole source contract for production year 15 of the 167 target drone. With production lot year 15, the total number of target drones for lots 1 through 15 is 482. The ultimate value to Kratos from these target drone contracts are expected to be significantly higher than the published target drone award amounts as a result of related drone payloads, decoys, flares, chaff, spares and other ancillaries required by the systems being awarded under separate contracts.

Once and for reproduction, these target drone programs have historically been decades long in both production and operations. It was recently reported that bulk of the United States fifth generation fighters, the F-22 Raptor and the F-35 Lightning engaged multiple Kratos BQM target drones in an exercise demonstrating once again that Kratos' target drones are the highest performance direct representative drone systems in the world. We are also under production contracts with United States Army for Kratos' 167M and 178 Firejet target drones, both of which we expect increase future production quantities. Additionally, a program with a confidential customer continues to ramp production with this expected to become one of Kratos' largest long-term future production programs in a few years.

As I mentioned in our last report to you, in Q2, the Next-generation Aerial Target, or NGAT RFI, was issued by the United States Air Force, which Kratos expects to respond to in Q3. For competitive and other reasons, I will not comment on this large new opportunity. However, as I previously mentioned, if you take a look at the NGAT RFI, I believe you will understand why Kratos is extremely excited about what this new opportunity can mean for our company. We believe that Kratos is uniquely positioned for the additional new large target drone opportunities that are coming. On Kratos' unmanned aerial target drone business, we see this business growing to approximately $250 million in annual revenue over the next few years and potentially significantly higher if we are successful on NGAT. Kratos' turbine technology continues to perform as expected, including importantly our commercial and MRO businesses, which are jewels, including their management teams.

And we also continue to make progress on our next generation class of jet drone and tactical missile propulsion systems. Our plan is for KTT's technology and affordability to be disruptive to the tactical system market, similar to Kratos' tactical drone business and be a significant future revenue, profit and cash flow generator for the company. Kratos is an industry leader in ballistic missile targets. And in the second quarter, multiple Kratos missile defense target supported Exercise Formidable Shield 2019. In the exercise, Kratos supported the United States Navy's sixth fleet and NATO's navel striking and support forces at the U.K. Ministry of Defense Hebrides Range in Scotland.

The multinational exercise featured ships, aircraft and personnel from 12 countries. Similar to Kratos' target drones, Kratos' ballistic missile targets are an integral part of weapon system and radar test evaluation and operational readiness. Kratos also has important intellectual property or exclusive rights positioning in our affordable BMD target suite. We currently expect to receive a large sole-source BMD target contract award in late Q3 or Q4 of this year. This award has been delayed from a previously expected first half 2019 award period. We are also in pursuit of a competitive, new, very large BMD target, hypersonic system opportunity, which has also been delayed from a previously expected first half 2019 award period with award now expected in Q3 or Q4 of this year.

This new opportunity, if Kratos is successful, is expected to represent one of the largest multiyear single contract award programs in our company's history and would be a very significant financial contributor to our company beginning next year. We have also just recently responded to a new hypersonic system RFP that we believe we are uniquely qualified for, with this award expected late this year or early next year. And we have just recently been approached by a separate customer regarding an additional hypersonic program system opportunity, which we are responding to and which is expected to be awarded in early 2020. In the hypersonic systems area, where Kratos has successfully performed missions on a number of hypersonic programs, Kratos has proprietary rights or intellectual property on certain systems, which we believe provide us a clear competitive advantage at an affordable cost.

Both Kratos' BMD target and/or hypersonic businesses' backlogs and opportunity pipelines are currently at all-time highs. Kratos' microwave electronics products business had a 1.3:1 Q2 book-to-bill ratio. It performed as expected and is on schedule and on budget on all major programs. Kratos' microwave business is designed into a number of potentially very large programs, including missile, missile defense, radar, the F-15, F-16 weapon, Iron Dome, Barak and certain guided munition systems, each of which are expected to begin production and ramp over the next several quarters.

For example, on the Barak-8 missile System, it was recently announced, I believe, last week that K-ras has placed an order with Rafael for 1,000 Barak-8 Missiles and where Kratos' content is approximately 50,000 per missile. As a result of this contract award, we currently expect this program to begin ramping for Kratos in the second half of next year. Also just a few days ago, it was reported that the Arrow III missile achieved 3 successful test interceptions over Alaska. Kratos' content per Arrow III is approximately 10,000 per missile. Once production on Barak-8, Arrow and other Kratos designed-in programs occurs, we expect a very strong organic growth trajectory for this business, which historically has generated some of the highest profit margins in the company.

Kratos' microwave businesses' backlog and bid and proposal pipeline are currently near all-time highs. Kratos' C5ISR products business, which is missile defense, missile system and radar focused, had a 1.9:1 book-to-bill ratio in Q2. Major programs for this business include Patriot, THAAD, SHORAD, [Indecipherable]. Just recently, Carter announced a multibillion dollar weapon systems order with Raytheon, which included an undisclosed number of Patriot missile system batteries. Kratos is the sole source provider of a significant portion of the hardware for the Patriot system with our content being several millions of dollars per system. Additionally, Lockheed Martin recently received an approximately $1.5 billion THAAD award from KSA, increasing the total value of this opportunity to $5.3 billion. Kratos is a major THAAD system hardware provider and our content is several millions of dollars per system. Kratos' C5ISR backlog and bid and proposal pipeline are currently at multiyear highs.

Kratos' training systems business continues to perform well with this business leading virtual environment technology being a key contributor to Kratos receiving the honor of best in show for its booth at Paris Air Show. We are currently in production and working on a number of programs, including helicopter and fixed wing training systems, the KC-46 and on a U.S. Navy FMS program in Saudi Arabia, which is now on a recompete and the largest contributor of this business. Prior to the recent RFP for the recompete, funding for the remaining period of performance through the end of the year on this program was de-scoped by approximately $5 million, contributing to our adjusting the high end of our expected revenues for the second half of the year.

Kratos' training bid and opportunity pipeline is one of the strongest in the company. Kratos' Space and Satellite business continues to adjust and position itself for the changing market, including the extremely large number and size of opportunities I discussed in great detail on last quarter's report, which I encourage you to review. The space and satellite areas of the DoD budget are seeing some of the largest increases as a result of the perceived peer threat environment, which is driving significantly increased funding for new capabilities, functionality, spacecraft and ground infrastructure. Existing systems like the United States' nuclear command, control and communications architecture are aging with this system's last major upgrade occurring in the 1980s, which are driving an important opportunity set for Kratos.

Also, the rapid expansion of commercial space bringing new low earth orbit capabilities is an area that government is looking to leverage, allowing for redundant and resilient communications. The Air Force is also looking for cost savings by leveraging off of the commercial space assets, which also brings new opportunities to Kratos. As a result of these changing requirements, Kratos is becoming a key enabler of the space industry's movement to virtualized and cloud-based ground operations through our next generation digital infrastructure systems that are supporting traditional satellites as well as the next generation of small satellite constellations. A recent example has been Kratos' work with Lockheed on the MBMM program, where Kratos' virtual software modem allows for the ability to quickly scale for handling a large number of users.

Other examples include supporting efforts to create ground systems as a service offering, including Lockheed's Verge, KSAT and others where Kratos is under contract and I cannot mention due to NDAs. Kratos' technology here is revolutionizing the way missions are managed, reducing costs and enabling new defense and commercial services. As a result of the changing market, Kratos' satellite business is transitioning to more of a software-based solution versus legacy hardware-based solutions, resulting in somewhat reduced expected revenues, but at increased EBITDA margins.

Representative major space programs we support include WGS, AEHF, CBERS, MUOS and GPS, and I can now inform you that we have a sole-source position on OPIR. From a capital allocation standpoint, there are no changes in our plans since our last report to you. We expect the company's future cash flow to continue to increase year-over-year with the current primary expectation for this cash flow to continue to delever and strengthen Kratos' balance sheet. We intend to maintain adequate cash on the balance sheet to enable us to successfully execute on our business plan and to fund the expected growth in existing production programs and growth in production programs that we believe we are going to receive. We currently foresee no major acquisitions in our strategic road map.

We believe the production programs, development programs and opportunities that we currently have are industry-leading. They are significantly differentiating and that Kratos is positioned for long-term revenue, profit and cash flow organic growth. For Kratos' guidance, the first of 2019 came in somewhat stronger than we had initially forecast, including a favorable business mix with higher product, systems, software and solutions revenues and lower-than-expected service business revenues, which trend we are currently forecasting to continue. Also, as I mentioned at the beginning of this year, Kratos was in pursuit of 3 BMD target or hypersonic opportunities, which we have factored probability of win and value amounts in our 2019 forecast based on timing expectations at that time.

Of the 3, Kratos has been successfully awarded the first opportunity. It's under contract. On the second opportunity, which I previously mentioned has been delayed from an expected first half of 2019 award. It is now currently in source selection and is expected to be awarded in the next few months. The third opportunity solicitation has also been delayed and is now expected to be released late this year with an anticipated first half 2020 award date. So as a result of the favorable business mix, these delays in the expected future trend of reduced services revenues were reaffirming our EBITDA, our profit and our cash flow guidance and were reducing the high end of the revenue range. Importantly, we have lost nothing here.

A couple of opportunities have moved to the right and on the second BMD target hypersonic opportunity, the one currently in source selection. The Kratos team is successful here. As I previously stated, this is expected to be one of the largest single award contracts in our company's history with an ultimate value to Kratos of several hundreds of millions of dollars single award. We remain optimistic that we will be awarded these opportunities. In closing, the trajectory of Kratos is directionally up and increasing. The 2-year budget deal has positioned us for a new program and increased production on a number of programs, key elements of our future significant organic growth expectations.

We believe that Valkyrie is on track for initial production and a program of record. Gremlins is scheduled for beginning demonstration flights in Q3, Q4 of this year. And we expect initial production once all demonstration flights are successfully completed with Program F, Thanatos and others expected to follow. Over the next 6 months, we expect to receive a number of new contract awards, including in the hypersonic or BMD target areas, which are successful to be major catalysts and growth drivers for the company. Deanna?

Deanna Lund -- Executive Vice President and Chief Financial Officer

Thank you, Eric. Good afternoon. Kratos' second quarter 2019 revenues of $187.9 million exceeded our expectations of $175 million to $185 million, an increase of $36.7 million or 24.3% year-over-year. Excluding the impact of the recently acquired FTT entity, which contributed $17.2 million in revenues, Kratos revenues grew organically 12.9% in the second quarter.

Our adjusted EBITDA came in at $19.2 million above our expectation of $16 million to $18 million, primarily driven by a favorable mix of revenues and execution. Kratos' adjusted EPS of $0.08 per share also exceeded our forecast of $0.05 to $0.07 per share for the quarter. In the second quarter, KGS generated revenues of $145.4 million, up 25.8% from $115.6 million for Q2 '18, adjusted EBITDA of $15.7 million or 10.8% of revenues, up from $8.4 million in Q2 of '18 and operating income of $10.7 million, up from $5 million in Q2 '18, which included a $2.8 million of expense related to a legal settlement.

Excluding the impact of the FTT acquisition, KGS revenues grew organically 10.9% year-over-year. Operating income and adjusted EBITDA were impacted by a favorable mix of revenues and leverage on fixed manufacturing overhead and administrative expenses. Revenues in our Unmanned Systems segment increased 19.4% from $35.6 million in the second quarter of '18 to $42.5 million, and adjusted EBITDA decreased from $3.7 million to $3.5 million in the second quarter of '19. Our Q2 operating income was $9 million, up from the second quarter of '18 operating income of $2.6 million.

Our adjusted EBITDA for the second quarter is from consolidated continuing operations, including net income attributable to noncontrolling interests and excludes noncash stock-based compensation costs of $2.8 million, severance-related costs of $300,000 and transaction-related costs of $600,000. On a GAAP basis, net income for the second quarter was $3.9 million, which includes income from discontinued operations of $3 million, resulting from a $3.6 million gain related to the release of an indemnification liability following the lapse of the statute of limitations associated with the potential tax liability that was recorded in 2015 as part of the sale of the company's electronic products division.

Net income also include a tax provision of $2.5 million. Moving on the balance sheet and liquidity. Our cash balance was $176.2 million at June 30. At quarter end, we had 0 amounts outstanding on our bank line of credit and $5.7 million of letters of credits outstanding. Debt outstanding was $294.6 million at quarter end and net debt was $118.4 million. Our LTM adjusted EBITDA was $71.4 million with a net leverage ratio of 1.7:1. Cash flow generated from continuing operations for the second quarter was $4 million and capital expenditures were $5.8 million, including approximately $3.6 million related to the Unmanned Systems division primarily reflecting the build out of the company's new manufacturing facility in Oklahoma.

Our DSOs or days sales outstanding decreased from 136 to 115 days due to the contractual milestone payments on long-term delivery contracts in our training solutions, modular systems and Unmanned Systems businesses. The reduction in DSOs was one of the primary drivers for the operating cash flow generation for the quarter. Our contract mix for the quarter was 83%, generated from fixed price contracts, 12% from cost-plus contracts and 5% from time and material contracts. Revenues generated from contracts with the U.S. Federal Government during the quarter were approximately 71%, including revenues generated from contracts with the DoD, non-DoD, federal government agencies and FMS or foreign military sales contracts, which were approximately 8%. We generated 11% from commercial customers and 18% from foreign customers.

Our book-to-bill ratio for the quarter was 1:1, and for the last 12 months was 1.1:1. Our bookings were $188 million for the quarter. Today, we are providing third quarter revenue guidance of $175 million to $185 million, adjusted EBITDA guidance of $16 million to $18 million and adjusted EPS guidance of $0.05 to $0.07 per share and are adjusting the high end of our full year revenue guidance to $720 million to $740 million and reaffirming our full year guidance for adjusted EBITDA of $71 million to $77 million. We are also reaffirming our full year 2019 cash flow from operations guidance of $40 million to $50 million, capital expenditures of $28 million to $30 million and free cash flow guidance of $10 million to $20 million, plus the expected final cash receipt of the retained working capital of the company's divested PSS business of approximately $4 million to $6 million.

Approximately, $1.4 million of these amounts have been collected through June 30. We expect capital expenditures to be at elevated levels for 2019, with continued expected significant outlays in Q3 as we make the necessary investments for manufacturing and test equipment for our new Oklahoma facility and a new secured facility of approximately $6 million to $8 million and approximately $4 million to $6 million related to aerial target drones the company plans to manufacture in preparation of fulfilling expected customer requirements. We expect our estimated cash taxes to be approximately $2.5 million to $3.5 million for FY '19, reflecting the impact of the over $300 million in net operating losses that we have. Eric?

Eric M. DeMarco -- President and Chief Executive Officer

Great. Thank you, Deanna. We'll now turn it over to the moderator for any questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Mike Crawford with B. Riley FBR. You may proceed with your question.

Mike Crawford -- B. Riley FBR -- Analyst

Thank you. Just first quickly. The equipments in the new secured facility that is not in Oklahoma or in CEI operations in the Sacramento area. Is that somewhere else?

Eric M. DeMarco -- President and Chief Executive Officer

It is...

Mike Crawford -- B. Riley FBR -- Analyst

It's somewhere else.

Eric M. DeMarco -- President and Chief Executive Officer

It's not, yes, somewhere else, right.

Mike Crawford -- B. Riley FBR -- Analyst

Okay. All right. And then just, Eric, please, on hypersonics, I think it would be helpful if you could differentiate it into kind of 3 different subcomponents if you could and discuss maybe the possibilities related to like a KTT type of small engine replacement versus what you might be able to do on the suborbital side with your Oriole rockets or just altogether as a whole system.

Eric M. DeMarco -- President and Chief Executive Officer

You've got it. So in our rocket support services business, we have exclusive rights perpetual in nature for specific solid rocket booster stack that is very well positioned to put hypersonic vehicles in the right place at the right time at the right speed at a very affordable cost. This can include hypersonic target. This can include testing hypersonic front end. So we do not do the front end, for example, a glide vehicle. But we can put that glide vehicle in the right place at the right spot at the right time with our stack. So that would be in the solid rocket so the non-air breathing side. In our -- in KTT, this would be on the air breathing side. And I just cannot say a lot there, other than we are involved in propulsion systems for air breathing hypersonic systems.

Mike Crawford -- B. Riley FBR -- Analyst

Okay great. Thank you very much.

Eric M. DeMarco -- President and Chief Executive Officer

You got it.

Operator

Thank you. And our next question comes from Seth Seifman with JPMorgan. You may proceed with your question.

Seth Seifman -- JPMorgan -- Analyst

Thanks very much. Good afternoon Eric, Deanna. I wonder if you could talk a little bit more of the Saudi training contract, the recompete that's coming up. Can you tell us when it is? And also to the extent on the recompete that there's any remaining risk for 2019? And what the risk might be for 2020?

Eric M. DeMarco -- President and Chief Executive Officer

Yes. So 2019 is bolted in, the period performance goes through then. It's in solicitation right now. Contract award and you heard talk about some delays, so this is just most recent. Contract award is expected sometime between now in the end of this year, all right? The contract has -- I don't want to get too far ahead. The nature and the scope of the contract of vehicle has changed in the recompete. So the future potential exposure is around $25 million to $30 million a year, but margins are significantly reduced.

Seth Seifman -- JPMorgan -- Analyst

Okay. And then as a follow-up. When you talk about the satellite business and how it's evolving, I think I spoke a little bit about this last quarter and it sounds like maybe it's moved forward even a little bit more. When you think about that business becoming more software oriented and less hardware orientated, what does that mean about the size of it as we think about maybe next year or something like that, the growth rate of it and the profitability?

Eric M. DeMarco -- President and Chief Executive Officer

Yes. So think of that business right now and this specific satellite product business as being somewhere between $90 million and $100 million of revenue, this specific piece in its current configuration. Think of margin somewhere around 13%, 14%, 15%, all right? I'm looking at that probably on the revenue side year-over-year going forward, 2% to 5% going up, but the margins increasing significantly because it's shifting away to more being software-based, things like a software-defined radio. And that's not only for the margins, the modeling, it's looking very good for the future cash flow as well.

Seth Seifman -- JPMorgan -- Analyst

Excellent. Okay I will. I'll hop back in the queue for now. Thank you very much.

Eric M. DeMarco -- President and Chief Executive Officer

Okay.

Operator

Thank you. And our next question comes from Josh Sullivan with Seaport Global. You may proceed with your question.

Josh Sullivan -- Seaport Global -- Analyst

Good afternoon Eric.

Eric M. DeMarco -- President and Chief Executive Officer

Hi Josh.

Josh Sullivan -- Seaport Global -- Analyst

On the Valkyrie, the 2020 markups in the House and the Senate, the Valkyrie related programs. At $150 million, a little over $200 million, it seems to be above the 25-unit assumptions of $3 million a piece. What is that incremental dollar content composed of?

Eric M. DeMarco -- President and Chief Executive Officer

Yes. So I'm going to talk generally, so I don't get ahead of people. Integrating weapon systems, integrating ISR systems, OK? The cost of sending teams out as they're trying to develop concepts of operations. So it's getting the planes ready very similar to what's been publicly reported. So these are operationally capable by 2022, 2023 and they are with the forces.

Josh Sullivan -- Seaport Global -- Analyst

And would those be your systems or your electronic packages?

Eric M. DeMarco -- President and Chief Executive Officer

They most likely would not. We very well may be the system integrator, which would then increase the sales price per plane up from the current estimate to a higher number of -- we're the prime system integrator. But if we're not the system integrator, then either the government or the prime would do the system integrating. There are 2 models, we're doing both models right now literally.

Josh Sullivan -- Seaport Global -- Analyst

Got it. And then I guess related to that, the capacity at the Oklahoma facility for Valkyrie's Program F, et cetera, you mentioned the potential next year to have some pretty significant orders. Do you have the capacity to meet those orders or you are going to need to reach out or engage any other manufacturing partners at this point?

Eric M. DeMarco -- President and Chief Executive Officer

Yes. this is -- so as we talked about last time, we've got 100,000 square feet under contract with 2 additional approximate 100,000 square-foot facilities connected to that facility. Auto players are going to be up and going in the next few months. We've developed the factory with absolute cutting-edge, next-generation technology manufacturing processes and process flows. So based -- if you recall about 6 months ago, we talked about our base case anticipation and then pie in the sky or the stars aligned case that we had. We can handle a base case scenario over the first couple of 3 years with what our current plan is. Under stars aligned case, then we would have to increase the build up there.

Josh Sullivan -- Seaport Global -- Analyst

Okay. Got it. And then just one on Program F. I think you mentioned the need for 1,000 units over 3 years. Can you just talk about the funding status of that? And then just an idea of what the individual ship set value to Kratos might look like?

Eric M. DeMarco -- President and Chief Executive Officer

Yes. So tying into your previous question. If we are the system integrator and we integrate the system and deliver it excluding one element, which I believe the government would integrate, I think approximately 500,000 to 600,000 per system. If we deliver the system and then I'm going to use the word payloads are integrated onto the system, I think 300,000 a system. And on the funding question, Josh, I believe as soon we complete the final demonstration, which is scheduled for Q2 of next year, I believe this will be funded very rapidly because of the requirement and the threat.

Josh Sullivan -- Seaport Global -- Analyst

Thank you sir.

Operator

Thank you. And our next question comes from Ken Herbert with Cannacord. You may proceed with your question.

Ken Herbert -- Cannacord -- Analyst

Good afternoon Eric, Deanna. Eric, I just wanted to first ask about the $10 million sort of reduction in the guidance or $20 million at the upper end of the revenue range. Can you just parse out the timing of that relative to some of the mixed impact you're seeing? I mean, how should we think about maybe the pieces of that?

Eric M. DeMarco -- President and Chief Executive Officer

Yes. So as I said, we had factored -- there are 3 BMD target hypersonic opportunities that we were chasing -- we have been chasing from the beginning of the year. And as I said, we had factored timing. We had assumed we would not get all of them, but we had a factored timing. If we get 2 of them and we get 2 of them by the first half of the year, we are good. If we get 3 of them and we get 3 of them at certain times of the year, we are good or we could even be better off than what we guided to.

As I mentioned, one of them we won and on this second one, the large one, I am -- it's so frustrating because its -- there are continuing responses with the customer question set. And so I'm saying, between now and the end of the year, it will be awarded -- it could be awarded imminently. But we're virtually pulling it out and pushing it out to the very end of the year because we're just not -- we can't tell when it will be awarded. And the other one, the third one, and this is why we factor things. The third one has most likely moved now to a 2020 award. So that is the primary reason along with that, the defunding.

We had a solid contract, but the customers from time to time defund on the training contract, they defunded the $5 million for the second 6 months of the year. The profitability that we are seeing in our C5ISR business, for example, on the weapon systems we're working on is phenomenal. The mix is very strong. The software mix in the space business is very, very strong. And we see those trends continuing, which is why we're very comfortable with the EBITDA, the operating income, the EPS and the cash flow. And if we'd gotten those -- if those other ones, those have been awarded where we initially thought, we'd really be sitting pretty.

Ken Herbert -- Cannacord -- Analyst

Okay. That's very helpful. And is there anything contemplated in the fiscal '19 guidance around Valkyrie in terms of revenues?

Eric M. DeMarco -- President and Chief Executive Officer

Not production.

Deanna Lund -- Executive Vice President and Chief Financial Officer

No.

Eric M. DeMarco -- President and Chief Executive Officer

No. We're -- not production. We're under the original contract with AFRL, and we're going through the flight series. So that is included in there. And we mentioned late last year, Ken, I think that we had mentioned we had gotten 3 spirals that are tied directly to the base contract. Those spirals on the development contract are in there but nothing for production. And so if -- that's an upper. If -- that's an upside if we receive an award.

Ken Herbert -- Cannacord -- Analyst

Okay. Okay. That's very helpful. And if I could, Deanna, just one final question. The -- it looks like you've given nice third quarter guidance. If you think about the free cash flow, I know typically you're very strong seasonally. How should we think about that especially in light of your, I guess, assumption that we have some sort of continuing resolution into the calendar fourth quarter? Do we see the risk of things maybe get pushed out of the year fiscal fourth quarter? Or how should we think about that?

Deanna Lund -- Executive Vice President and Chief Financial Officer

So for third quarter, as I had mentioned in my prepared remarks, capex is going to continue to be quite elevated, and that's going to be our highest capex quarter for the year, anywhere probably in the $10 million to $11 million range. So that will certainly impact our free cash flow. The other piece is going to be the timing of milestones and when we achieve those milestones. Second quarter was very favorable with a number of those milestones being achieved, but as we achieved some, the new ones need to be achieved as well. So the rest of the second half and the timing of the cash flow in Q3 and Q4 is going to depend on the achievement of those milestones. At this point, we believe we're going to achieve those milestones that we expected, but it -- that can move sometimes.

Ken Herbert -- Cannacord -- Analyst

Okay. So I guess it sounds like even if there is, based on your assumptions, some sort of continuing resolution, it doesn't jeopardize the cash flow outlook for the year.

Deanna Lund -- Executive Vice President and Chief Financial Officer

It shouldn't. The bigger impact is really from an operational milestone perspective and when we hit those milestones.

Ken Herbert -- Cannacord -- Analyst

Perfect thank you very much.

Deanna Lund -- Executive Vice President and Chief Financial Officer

Sure. Thank you.

Operator

Thank you. And our next question comes from Peter Arment from Baird. You may proceed with your question.

Peter Arment -- Baird -- Analyst

Good afternoon Eric, a question on just R&D, and I guess this is more of a response to just what we've seen in the industry. Get your thoughts on just the step-up in requirements in the industry for more internal R&D investments. If I look at your most recent quarter, you're at about 2.5% of sales. Are you feeling, I mean just given all the opportunities that you have, that you're going to have to step that up? Maybe just get some color on that initially.

Eric M. DeMarco -- President and Chief Executive Officer

Sure. And so certain parts of our business require far less R&D than other parts. So for example, our C5ISR business, let's say for this discussion, that's about $70 million, just for this discussion. And let's say our training business, another one, there is some R&D in there, but it's less than, say, our satellite business. Let's say that that's $90 million to $100 million of revenue. We have our traditional legacy services business, which really has no R&D, which is like $50 million to $60 million of revenue.

So the major focuses of our R&D are in 3 spots: Unmanned Systems, space and satellite communications, and our Microwave Electronics business; and then of course, our turbine business is behind that. So our 2.5% or 3% on the surface is a little bit of misnomer. It's really closer to 6% overall. And then in addition to that 6%, you know we're -- we've really refined ourselves over the past several years where we are a rifle shot.

We're now chasing dozens and dozens of R&D programs in this company. We are rifle-shotted on 1 or 2 Unmanned Systems of any -- of significance, 1 or 2 on our sat-based business, 1 or 2 on our microwave business. Again, I'm talking of significance -- there are more than that but of significance. So I don't know what the other companies do, but I'm very comfortable. We are one of the absolute leaders in very focused research and development on leading technology systems in our core competencies.

Peter Arment -- Baird -- Analyst

That's very helpful. And then just as a follow-up, when you look at the Government Solutions business, it's pretty much split between half services, half products. When you look out just given the opportunities, the growth that you're seeing, is this a segment that still could easily get into the low double digits for operating margins when you think about the -- where defense spending is going? Thanks.

Eric M. DeMarco -- President and Chief Executive Officer

Absolutely. The -- it's going to happen, and let me tell you why it's going to happen. Okay. Number one, our microwave business, these are my words now. There's a bow wave of good stuff coming in the next year or 2. I mean that Barak-8 program, that's just the beginning. I've read reports they're looking at 5,000 to 6,000 missiles; and again, our content is 50,000 a missile. The Gripen Fighter, they're in Block shipset 1 of 100 of them. Our content is 250,000 per. We are about to receive very soon a very large order for an upgrade on an F-15 system, on an F-16 system.

Then on our satellite business, this shift that's occurring, it's reducing revenue a little bit. The margins are going up. I mean this is moving toward being a software business. And then, Peter, the biggie that could be not a trend like I'm talking about but a step function, if we're successful on this opportunity we're pursuing in the BMD hypersonic area, that's going to be a step function increase in production sales, product sales and margins.

Peter Arment -- Baird -- Analyst

Appreciate the color. Thank you. Got it.

Operator

Thank you. Our next question comes from Noah Poponak with Goldman Sachs. You may proceed with your question.

Noah Poponak -- Goldman Sachs -- Analyst

Good afternoon. Eric, which tactical programs have pulled to the left to contribute to the end of '19 that you previously didn't think would do so?

Eric M. DeMarco -- President and Chief Executive Officer

Pulled to the left of '19.

Noah Poponak -- Goldman Sachs -- Analyst

No, pulled to the left of what you thought 3 to 6 months ago and now contribute to the end of '19 when you previously didn't think they would.

Eric M. DeMarco -- President and Chief Executive Officer

Oh, that contributed to the end of '19. It really hasn't yet. I mean if we get a Valkyrie, God willing, a Valkyrie ordered by September 30, the answer to your question would be there is one right there.

Noah Poponak -- Goldman Sachs -- Analyst

It sounded like, in your prepared remarks, like maybe F or Athena had. Am I reading that incorrectly?

Eric M. DeMarco -- President and Chief Executive Officer

Those are still in -- so they are in development. So let me be very clear. Program F is -- the airplane -- the vehicle is flying. It is in the test flight phase, and those were assumed -- those development revenues were assumed in our guidance.

Noah Poponak -- Goldman Sachs -- Analyst

Okay. So it's not like you're -- it's not like they're going through development faster and you're getting more development revenues on those programs than you thought you would.

Eric M. DeMarco -- President and Chief Executive Officer

No, no, no. Now but on the converse to that, like Spartan or Athena, those are going to be more additive to '20 than I originally thought because those have been pulled to the left. Their occurrence than I thought, I thought they were going to be -- I thought we'd get funding in '20.

Noah Poponak -- Goldman Sachs -- Analyst

Right. So those are moving faster. So I'm hearing you correctly that those are moving faster but they're not contributing to '19.

Eric M. DeMarco -- President and Chief Executive Officer

Right. That is correct.

Noah Poponak -- Goldman Sachs -- Analyst

Okay. Yes, because, I mean, where I was kind of going with that is, in your prepared remarks, listening through all of major opportunities and I totally understand that these are beyond '19 major movers that it sounded like even if it's the development revenues of things that are still in development that some things are moving to the left a bit. You beat the 1Q revenue guidance. You beat that 2Q revenue guidance where you guided the quarter specifically. You've been telling us you're embedding budget conservatism into the fourth quarter. The budget now looks better than anybody thought it was going to be for -- with this 2-year deal. And so I'm just surprised you haven't had enough incremental upper surprises to offset the one thing that slid to not have to lower the guidance.

Eric M. DeMarco -- President and Chief Executive Officer

Well, it's -- on the one thing that slipped, I might -- no, I might not have been clear. There are 2 opportunities in the BMD target and hypersonic area, both of which we expected to be awarded in the first half of the year. In my assumption, I assumed we would win 1 of those other 2, OK? Both of those have been pushed out. One of them to the third one, it looks like it's going to be the first quarter of '20. The other one has been pushed into the second half as I mentioned I think to Ken. It could be imminently awarded. But I'm saying by the end of the year because now I'm gun shy. I'm just gun shy. Those...

Noah Poponak -- Goldman Sachs -- Analyst

Can you size those for us?

Eric M. DeMarco -- President and Chief Executive Officer

Okay. So the big one, it is -- it could be -- again, it's single award. It could be an incremental $50 million to $75 million a year in revenue beginning next year. It could be more than that depending on OPTEMPO of missions. The third one that has been pushed to '20, that can be an incremental $25 million to $50 million a year. These are new, specifically related to OPTEMPO of missions.

Noah Poponak -- Goldman Sachs -- Analyst

So in what you lost from the plan which was the factored versions of that...

Eric M. DeMarco -- President and Chief Executive Officer

Yes.

Noah Poponak -- Goldman Sachs -- Analyst

Is what you lost from the factored versions of that more than the $10 million to $20 million depending on how you define it at the high end or the new midpoint of what came out of the revenue guidance? Let's say that there were actually some offset.

Eric M. DeMarco -- President and Chief Executive Officer

There's one other definitive piece. The de-scoping of that Saudi training contract took $5 million -- that I had bolt -- I had that in hard because you don't expect to get de-scoped. I had that $5 million hard in the second half of the year. That funding is gone. So there's that piece. And there's another -- this is softer, approximately $5 million of satellite revenue, $5 million to $7 million that has converted from hardware to software, which where the margins are great, that is also out. And so that bundle, let's say that, that is $20 million. I have offset that $20 million by 20. You know what I mean? Knocked that down.

Noah Poponak -- Goldman Sachs -- Analyst

The -- last year, there was the DIU program that slid and then there were 2 services programs that moved around a little bit on you. Are those all now totally final?

Eric M. DeMarco -- President and Chief Executive Officer

Yes. DIU is under contract. The services contract -- the services ones, they're under contract. They are absolutely ramping up. The number of billets are ramping up. They are is still not where I thought they would be, but they -- absolutely, they're moving, yes.

Noah Poponak -- Goldman Sachs -- Analyst

Okay. Your comment on a new separate customer looking at Valkyrie, I think you said -- sounded like you said could buy it in the fourth quarter. Or is that purely order? Or is that potentially revenue producing in the fourth quarter?

Eric M. DeMarco -- President and Chief Executive Officer

Okay. So that's actually an excellent question. So as you know, there are 3 Valkyries: One is the United States Air Force's and 2 are Kratos'. It's possible that customer or another one I didn't talk about in the prepared remarks, it's possible we could sell one or both of our Valkyries by the end of the year, and so that would be a sale. It's possible. My tummy tells me -- I'm going to tell you what I think is going to happen. I think we're going to get -- I believe we're going to get an order from this customer. We're going to get an order for the 5 to 10. And I think this customer or the other customer, they're going to start leasing the other ones to doing integration work into them and doing testing with them. But I could be wrong.

Noah Poponak -- Goldman Sachs -- Analyst

Okay. And then, Deanna, on the margins, the guidance implies lower margins in the back half versus the first half. Can you just walk us through why that happens?

Deanna Lund -- Executive Vice President and Chief Financial Officer

That's on the mix of what the expectations are on software content versus less software content in the second half.

Noah Poponak -- Goldman Sachs -- Analyst

You guys have talked in the past about having this cyber business with software like margins. Did you have that in the first half and it doesn't happen in the second half? Or have you not had that all and you're not assuming it at all and it could happen? Or where -- what's the thoughts it could happen here?

Deanna Lund -- Executive Vice President and Chief Financial Officer

We had some in the first half.

Eric M. DeMarco -- President and Chief Executive Officer

Noah, remember our discussion -- I remember, Noah, this discussion with you. We typically don't put in our internal plan certain of these software sales because they're very hard to predict when the -- these are very unique systems. And historically, and this is why in the second half of the year for the past 2 or 3 years our margins, we've just killed it, around that federal fiscal year of September 30, either because my opinion, the government, the customer, they want to spend the funds they have or obligated before the next fiscal year, we get significant software sales in Q3 and Q4.

Noah Poponak -- Goldman Sachs -- Analyst

So could that still happen this year?

Eric M. DeMarco -- President and Chief Executive Officer

Absolutely could historically.

Deanna Lund -- Executive Vice President and Chief Financial Officer

Historically.

Eric M. DeMarco -- President and Chief Executive Officer

It absolutely could.

Noah Poponak -- Goldman Sachs -- Analyst

And it's not in the outlook.

Eric M. DeMarco -- President and Chief Executive Officer

Correct. There's some, but we'd be very -- we're very conservative on that, which we've demonstrated in prior years.

Noah Poponak -- Goldman Sachs -- Analyst

Can you size what you had from that in the first half?

Eric M. DeMarco -- President and Chief Executive Officer

I don't know.

Deanna Lund -- Executive Vice President and Chief Financial Officer

No, I don't have that either.

Eric M. DeMarco -- President and Chief Executive Officer

Yes, I don't know.

Noah Poponak -- Goldman Sachs -- Analyst

Okay. Thanks so much for answering my questions. I appreciate it.

Eric M. DeMarco -- President and Chief Executive Officer

Okay, Thank you.

Operator

Thank you. And our next question comes from Joe Gomes with NOBLE Capital. You may proceed with your question.

Joe Gomes -- NOBLE Capital -- Analyst

Good afternoon.

Eric M. DeMarco -- President and Chief Executive Officer

Good afternoon.

Joe Gomes -- NOBLE Capital -- Analyst

You talked a little bit about the exercise with the Swedish FMV in Germany. Has that led to anymore increased interest in your products for them?

Eric M. DeMarco -- President and Chief Executive Officer

Absolutely. We are working on a similar, if not, significantly larger exercise next year now. Absolutely. Good question. Yes.

Joe Gomes -- NOBLE Capital -- Analyst

Okay. And then a couple of quarters ago, Boeing Australia made their announcement, and I don't know if you had heard anything or seen anything more on where theirs are that potentially could be viewed as a competitive to your guys' unmanneds?

Eric M. DeMarco -- President and Chief Executive Officer

Yes. I understand they gave a briefing on that in Washington just yesterday. As you know, Joe, it's a concept right now with the model. They rolled out a model. I'm going to -- let me answer it this way. I am extremely comfortable and confident that being one way independent, being able -- being less than 30 feet long, theirs is 38, having our published unrefueled range published is at least 3,000 miles. And our price at quantity without payloads of approximately $3 million, I am not worried about that BATS airplane 1 bit.

Joe Gomes -- NOBLE Capital -- Analyst

Okay that's great. Thanks.

Eric M. DeMarco -- President and Chief Executive Officer

You got it.

Operator

Thank you. And our next question comes from Michael Ciarmoli with SunTrust. You may proceed with your question.

Michael Ciarmoli -- SunTrust -- Analyst

Hey good evening guys. Thanks for taking the questions. Eric, can we just talk about -- I think you said you placed the order for 20 engines and long lead time, you're getting those. I think you said you'd be getting them in the second half. So how should we be thinking about the trajectory of free cash flow as you guys are presumably starting to ramp up production and you're going to have various aircraft in work in process? Just how should we think about that just given that you've started to order some materials here?

Eric M. DeMarco -- President and Chief Executive Officer

Right. And Michael, I was probably not clear, so I'm glad you asked a clarifying question. We have a -- think of it as a single award IDIQ contract we gave to the engine manufacturer. That single-award IDIQ contract is for 24 engines. We have placed an order for the first 5 to 10 on that single-award IDIQ. We expect, based on our interactions with our customers, etc., etc., to place another order before this year is out. And then we expect to place another order in either Q1 or Q2 of next year. And it's possible, Deanna and I on a call could say to you, if things happen, we'd place them all in one shot, OK? We have -- and I don't want to get -- OK. We have negotiated -- our customer here has worked with us on very favorable payment terms that we believe will align with receipts we will receive as they're being built. And I know you appreciate why I'm being delicate.

Michael Ciarmoli -- SunTrust -- Analyst

Sure. What about -- I mean you gave us sort of the laundry list of the programs, the updates, where they stood. It seems like a lot is going to happen in first half 2020, second half 2020. You just -- I think to Noah's question, you just said the BDMs could add $100 million to $125 million alone. Can you give us a sense, as you kind of knock down some of these orders, secure them, what does this exact pipeline look like from an order standpoint? Again, just with the varying programs that you've mentioned, the size of them, everything, decisions expected to be made late this year, early next year, can you size the pipeline?

Eric M. DeMarco -- President and Chief Executive Officer

So our published pipeline is $7.6 billion. I can assure you that, that number we look at very closely. So that is a very conservative number based on what our divisions are chasing. In that $7.6 billion, Mike, there is 0 for Valkyrie production that we're publishing. We're waiting for the first order and better clarity. I'm just giving example of the conservatism on this. That $7.6 billion, there are no IDIQs. There were no max. There's nothing like that. These are very discrete programs where you can find the program element number in the budget line items. And as you can see over the past few quarters, I don't know how many, it's been increasing. So it's very -- it's probably as healthy right now as it's been since 2011 -- Budget Control Act 2011, 2012.

Michael Ciarmoli -- SunTrust -- Analyst

But can you give us the magnitude? If we think about all these decisions, Gremlin, Thanatos, F, Spartan, Athena, the Mako, A and Z, can you size those?

Eric M. DeMarco -- President and Chief Executive Officer

Okay. So in the -- between now and say, the end of next year, let's go with Valkyrie. Based on current information, I think it's going to be 20 to 40. And the 40 is on top of the 10 that the Air Force mentioned -- the top of the 30 the Air Force mentioned, this other customer, OK? There are other things happening, but that's where I would put that. On F, that's not in the -- there's a piece, it's not a very big piece in the pipeline. That would be -- I would put the 1,000 units in at -- let's be conservative and let's say that we're not the system integrator at 300,000 or 400,000 a plane over 3 years. On Gremlins -- and I'm talking about in the next 18 months.

On Gremlins, if the test schedule holds and I think in the second half of next year, we could see an initial order for 100 or 200, say, at $1 million each. I know the number is $700,000 that's in the BCA, but I believe initially because they know we -- on the learning curve it'd be near $1 million. Thanatos will be in development -- will be under development contract. As I've told you, that's a few tens of millions of dollars for us over the development period. So Thanatos would not be beyond that in there, or with -- and Thanatos is the next one that's coming along. And so those would not be ready for production until the out-years starting in '21, '22.

Michael Ciarmoli -- SunTrust -- Analyst

Got it. Okay. And then just can you tell us, last one, status of Oklahoma. I mean I think you talked about the line of sight there to potentially 40 Valkyrie units. I mean is there any production happening right now? Is it still sort of outfitting the facility? Or what's actually happening in Oklahoma?

Eric M. DeMarco -- President and Chief Executive Officer

Absolutely. So it's been producing since the beginning of the year, a government customer. Last week was out there. I think they signed off and accepted, I'm not going to say, approximately 5 drones. It was 4 to 6 -- I mean 12, 6. He signed off on 6 drones last week that were manufactured there. It is ramping rapidly. And that's where we're going to build Valkyrie, and that's where we're going to build F. And that's where we're going to build Gremlins.

Michael Ciarmoli -- SunTrust -- Analyst

Perfect. Thanks a lot guys.

Operator

Thank you. And our next question comes from Sheila Kahyaoglu with Jefferies. You may proceed with your question.

Sheila Kahyaoglu -- Jefferies -- Analyst

Hi Deanna. Fairly comprehensive line of questioning, so I'll be quick. Just 2 questions. Maybe on Valkyrie as we look through the fiscal '20 budget coming together, how do you think about risks to it? And what's your ultimate upside, Eric, with regards to the budget on Valkyrie?

Eric M. DeMarco -- President and Chief Executive Officer

Yes. So my -- and I went through this. We have a consultant that helps us go through all the program element lines. On the current -- in the current existing budget request, in the $750 billion, and I know, the House, it came out at $738 billion because the House started at $733 billion. My understanding is there was about $119 million in there, OK? I don't believe that that's going to take a haircut, but let's say that takes a haircut. And it gets a haircut to $100 million, all right? But on top of that, the House and their $733 billion request had a $50 million plus-up in there for Valkyrie.

And the Senate and their $750 billion request had a $100 million plus-up in there for Valkyrie, all right? I believe based on -- I was just in Washington earlier this week meeting both congressionally and with customers. I believe truly we're going to see that $100 million or very close to it. But let's be conservative, and let's say a $75 million. So between the budget request and the plus-ups that we've all read about that have been publicly available, I'm thinking around $175 million. And then I think the question that Josh asked is very relevant. How much of that is planes relative to weapons integration, systems integration and test and operations? I don't know that yet.

Sheila Kahyaoglu -- Jefferies -- Analyst

That makes sense. Okay. And then as we think about the bridge to 2020 revenues, I haven't been able to keep up with all your programs. I don't know how you do -- like how do we think about what steps up in development funding next year? It doesn't seem like anything steps into production.

Eric M. DeMarco -- President and Chief Executive Officer

It doesn't -- say that again. It doesn't seem like what?

Sheila Kahyaoglu -- Jefferies -- Analyst

Does anything increase in terms of production? Like for instance, Program F, it seems like next step is flight test, so you wouldn't get a production contract for 2020.

Eric M. DeMarco -- President and Chief Executive Officer

Yes. So the hard increases for production next year that are very hard, the Navy SSAT program. We got LRIP 3. The Admiral program, we're going to get 4 in production in the first half. That is going to step up significantly. We have a confidential program. That is heading into full rate production next year. That is going to step up significantly. Thanatos. Thanatos will begin at the beginning of next year. That's brand new. That will be additive. We have a drone program with the United States Army. That is forecasted production is supposed to increase beginning next year as well. So we have some hard programs under contract that are funded that we can clearly see significant step-ups '19 to '20.

Sheila Kahyaoglu -- Jefferies -- Analyst

Thanks for clarifying.

Eric M. DeMarco -- President and Chief Executive Officer

Okay.

Operator

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Eric DeMarco for any final remarks.

Eric M. DeMarco -- President and Chief Executive Officer

Thank you all for joining us this afternoon. We look forward to updating you at the end of Q3. Thank you.

Operator

[Operator Closing Remarks]

Duration: 83 minutes

Call participants:

Marie Mendoza -- Vice President and General Counsel

Eric M. DeMarco -- President and Chief Executive Officer

Deanna Lund -- Executive Vice President and Chief Financial Officer

Mike Crawford -- B. Riley FBR -- Analyst

Seth Seifman -- JPMorgan -- Analyst

Josh Sullivan -- Seaport Global -- Analyst

Ken Herbert -- Cannacord -- Analyst

Peter Arment -- Baird -- Analyst

Noah Poponak -- Goldman Sachs -- Analyst

Joe Gomes -- NOBLE Capital -- Analyst

Michael Ciarmoli -- SunTrust -- Analyst

Sheila Kahyaoglu -- Jefferies -- Analyst

More KTOS analysis

All earnings call transcripts

AlphaStreet Logo