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Kratos Defense & Security Solutions Inc (KTOS 9.12%)
Q4Â 2019 Earnings Call
Feb 24, 2020, 5:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the Kratos Defense & Security Solutions Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]
I would now like to hand the conference over to your speaker today, Marie Mendoza, Senior Vice President and General Counsel. Please go ahead, ma'am.
Marie C. Mendoza -- Vice President, General Counsel and Secretary
Thank you. Good afternoon, everyone, thank you for joining us for the Kratos Defense & Security Solutions fourth quarter and fiscal year-end 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 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.
Eric DeMarco -- President and Chief Executive Officer
Thank you, Marie. Today, Kratos is better positioned than ever to successfully achieve our tactical drone strategy and the related significant returns for our partners, our stakeholders and our shareholders. In my remarks, I will discuss certain of the important milestones we have achieved since our last report to you, including as recently as just last week and what is planned for 2020 and beyond. For our initial 2020 financial guidance that we're providing today, every Kratos' business unit is forecasting year-over-year 2020 over 2019 organic growth, except for our Training business, which we have an approximate $40 million reduction currently forecast, primarily due to an ongoing protest situation we discussed on our last quarter's call with you.
Additionally, as related to our initial 2020 guidance, we have excluded or have significantly factored from our 2020 forecast a number of potentially important items, which we will not include in the forecast until we have both timing and financial impact clarity. For example, we have not included in our initial 2020 guidance any expected financial contribution from Kratos' Valkyrie or other tactical drone production system or integration activities. We have excluded these items, not as a result of lack of confidence. We have more confidence than ever, but rather that certain items like the Valkyrie opportunity are literally currently in the works and we will exclude from our forecast related potential financial contribution until with the quantities, pricing, contract structure and the program timing is finalized. We intend to adjust our initial 2020 financial guidance as appropriate, once these expected events occur.
In addition to Valkyrie, we also have a number of other important items we have also either excluded from or significantly factored in our 2020 financial forecast that we also will discuss today and for which we intend to adjust our financial forecast once we have a resolution or additional clarity as appropriate. And we have also excluded a number of new-to-Kratos potential large program opportunities we are pursuing, certain of which are currently expected to be awarded in 2020, which we would also adjust our 2020 forecast for as appropriate if we're successful.
So for 2019, we finished the year with our Unmanned Systems business generating year-over-year organic revenue growth of 21.4% and Kratos generating 16.1% revenue growth overall. Our full year-over-year adjusted EBITDA growth was 27.8% with adjusted EPS growth of 41.7%, and we finished 2019 with a bid pipeline of $7.7 billion, up $1 billion or 14.9% year-over-year with substantially all of our pipeline comprised of single award opportunities. Nearly 15% or $1.1 billion of our bid pipeline is related to our Unmanned Systems business and this $1.1 billion does not currently include the expected potential production values for Valkyrie, Gremlins or other tactical drone opportunities, which we will adjust the pipeline for once we have expected additional clarity. We believe our current Unmanned Systems business opportunity pipeline reflects both the depth and the breadth of the number of drone opportunities available to Kratos in addition to the Valkyrie and Gremlins opportunity and supports our very strong future forecast and our growth trajectory.
In addition to our opportunity pipeline, another key element of our expected future organic growth is Kratos alignment with the national security priorities as the US DoD and its allies recapitalize strategic weapon systems in order to address peer, near-peer and nation-state threats and the increased funding that is forecast for those areas. We believe that Kratos aligns with DoD priorities as reflected in the 2018 National Defense Strategy and most recently in the 2021 DoD budget request and the future years' defense program or fit-up which emphasize include autonomous systems and drones, space and satellite communications, C5ISR and microwave electronics, missile defense and hypersonic systems.
Today, approximately 25% of Kratos' business is in Unmanned Systems, approximately 30% of our business is in Space and Satellite Communications, and approximately 25% is in Missile Defense, Hypersonic Systems, Microwave Electronics, Missiles, Radars and C5ISR with the balance being in turbine technologies and training solutions. As I mentioned before, we're beginning 2020 with Kratos having to continue to make significant progress executing our strategy and we now have greater clarity than ever on our planned significant long-term growth programs, platforms and systems, including new funding we understand to now be in place for Kratos' Valkyrie based on the recently released 2020 DoD budget and related Congressional request.
The progress we have made since our last report to you includes a fourth successful Valkyrie flight in January with all test points being achieved and a reengineered recovery system operating nominally or without incident. It's being reported that Valkyrie will be flying in an exercise with both the F-35 and the F-22 in the first half of 2020. It's being reported that the Valkyrie will be involved in the new multi-billion dollar Advanced Battle Management System or ABMS program. This is a planned multi-domain mega-network to move data at machine speeds, connecting multiple platforms, including manned aircraft and drones and where Kratos' Satellite business is also targeting certain space aspects. It was reported that Kratos' Valkyrie is a Skyborg program drone, with Skyborg being the US Air Force's artificial intelligence-enabled division where future manned fighter aircraft will be supported by unmanned drones. It was reported that the US Air Force selected three next-generation technologies to be developed under the services Vanguard program, one of which includes the Skyborg wingman drone program.
Vanguard Programs are expected to be game-changers, awarded and fielded over a three-year period, which we are forecasting for Kratos' Valkyrie and which the USAF has recently specifically indicated is the plan for Skyborg. The integration of various communication, payload and weapon systems into the Valkyrie are either currently under way or planned, including those under contract and funded. The process to missionize and operationalize aspects of the Valkyrie are also under way or planned, including those now under contract and funded and the Kratos Air Force Research Laboratory team received the Laureate Award for the XQ-58A for technology and innovation, for proving that low-cost can be achieved while maintaining high performance with the XQ-58A being the pathfinder for the attributable class of aircraft that provides the warfighter the capability to project air power with mass complexity and unpredictability.
Also, since our last report to you, DARPA has announced a successful first flight of the Gremlins jet drone, which Kratos has the exclusive production rights for and that Gremlins program Phase 4 is now moving forward, which I will comment on more later. We believe that these data points over the past few months are representative of the progress, the momentum and trajectory Kratos' tactical drone initiative continues to make, of our relationships and partnerships with the customer community and of the significant opportunity for our Company and our stakeholders.
Also over the past few months, Kratos has continued to receive a large number of new product, hardware and production programs, including Kratos' Space and Satellite business won a position on the $5.1 billion US Army Global Tactical Advanced Communication Systems, or GTACS, a multiple award IDIQ vehicle. The GTACS contract is expected to be a key element of the anticipated future organic growth trajectory of Kratos' Space and Satellite business. Kratos' Unmanned Systems division won a position on the $982 million unmanned surface family of systems, IDIQ MAC vehicle. Kratos' C5ISR business won a $50 million single-award contract and our C5ISR business also received an initial $2.7 million single-award contract on a new to Kratos large program of record system opportunity.
Our microwave electronics business won a new initial $24 million production program for a missile system and we also recently received an approximate $16 million electronic warfare initial production program as well. These are two new expected to be long-term multi tens of millions of dollar production programs for our Company.
Kratos' Space and Satellite business received a $39 million sole-source space situational awareness contract related to Kratos' globally owned and operated SSA network. Kratos' unique and proprietary global SSA network capabilities are an increasing demand today's congested space environment. So certain of these awards we received later than we had originally expected, which has resulted in a push out to the right of certain execution aspects, we now have received them, which provide us additional confidence in our projected long-term future organic growth trajectory.
In our Unmanned Systems target drone business, we remain on track to achieve approximately $250 million in revenue in the next few years with Kratos having multiple programs and opportunities expected to contribute to those projected organic growth trajectory. For example, we expect to go into full-rate production negotiations this year on two target drone systems that are currently in low rate initial production or LRIP with full-rate production or FRP, awards expected either later on this year or early next year. One target drone program that is expected to achieve full-rate production is the BQM-177A or SSAT, and it was just recently reported that the US Navy plans to purchase 55 BQM-177As in FY '21. We also expect to begin negotiations on the continued manufacturer of a target drone currently in full-rate production, and we expect that these negotiations will involve a substantial increase in quantities produced over the next five-year term. We also expect to begin FRP on a confidential program later this year or early next year. These programs are all sole-sourced to Kratos.
In the tactical drone area, as I mentioned, we believe that Kratos' Valkyrie has continued to make substantial progress toward being under contract for initial production this year and for future system fielding. The government recently completed its investigation into the recovery system anomaly experienced in the third Valkyrie test flight, last year. And we believe that we have successfully addressed this issue as demonstrated in our most recent successful flight, a few weeks ago. This resolved recovery system situation and related now complete customer investigation, resulted in delays that have pushed Kratos' previous Valkyrie expectation and program plan approximately six months to the right. These types of anomalies and delays can occur in rapid development programs like the XQ-58.
We believe that the Valkyrie funding is now in place with the completion of the DoD's fiscal 2020 defense appropriation process, we expect an initial Valkyrie related production system and payload integration award sometime in the current-month, as we complete the process to work the details with the stakeholders. This is just one of several Valkyrie-related opportunities we are currently pursuing, including one with an entity where we are currently forecasting orders for a total of approximately 30 XQ-58 drones within the next 18 months. As a result of the progress we have made, the availability of initial funding, our communications with our customers, supporters and stakeholders and related expectation of near-term awards, we have now increased our orders for long-lead items for the first 12 production Valkyries. Based on our current Oklahoma City fiscal year 2020 manufacturing and build plan, we expect to be able to begin delivery of the first of these initial 12 production Valkyries in Q1 of 2021 with monthly deliveries of additional Valkyries expected thereafter.
We are leaning forward here, ahead of the expected contract awards as we are highly confident that receipt of initial Valkyrie production contracts is not if, but when, based on the most recent information that we have. In summary, for Kratos' Valkyrie, even though our previous expectations moved to the right, we have continued to make significant process with our customers and we now have a line of sight on the timing of expected initial contract awards and for an ultimate potential program of record.
As I mentioned, DARPA recently reported the Gremlins Tactical UAS could successfully execute its first flight in November 2019. This initial Gremlins program flight had been delayed for several months as a result of last year's California earthquake, which impacted the China Lake flight range operations with the first Gremlins flight was initially planned. The successful flight was conducted at Dugway Proving Ground. And during the test, which lasted one hour and forty-one minutes, the X-61A Gremlin flu with no anomalies, and the DARPA Dynetics team completed all test objectives, including transitioning the X-61A from a cold engine start to stable flight, validating Gremlins data links, handing off control of the drone between air and ground control stations, deploying the docking arm and collecting data on the air vehicle. At the end of the mission, however, the vehicle was lost during the ground recovery sequence due to a failure to extract the main chute. This recovery system is not part of the operational system. This is used for certain test flights only and we understand that our partner Dynetics is working with the recovery system provider to reengineer the system. However, importantly, as I mentioned before, just a few weeks ago, DARPA reported that it now plans to award Dynetics, our partner Phase 4 of Gremlins to demonstrate distributed airborne operations using a minimum of four of the X-61A Gremlin air vehicles that Kratos produces.
The goal of Gremlins is to enhance the US armed forces' operational flexibility and to develop the capability for transport or bomber host aircraft to launch and recover large numbers of low-cost unmanned aircraft that would augment the capability and increase the survivability of manned combat aircraft in contested aerospace. As a result of the successful Gremlins flight and DARPA's announcement of an expected Phase 4 award, we remain confident that Gremlins will transition to a service and become a major future program. Program F which has now been renamed Airwolf, remains on track, additional funding is now in place and multiple additional system demonstration flights over the next several months are now scheduled. Program Thanatos and all other Kratos' tactical drone programs and initiatives also remain on track with our expectations, including a Kratos' tactical drone deploying another tactical drone in a demonstration this year.
Over the past several weeks, we have received a number of inquiries regarding the 5GAT, or Fifth Generation Aerial Target drone as a result of certain publicity the 5GAT program has received and certain comments made in the public marketplace. Accordingly, I'll address certain of these inquiries now. Kratos is on the 5GAT program team and is working under a contract funded to Kratos by the government. A few weeks ago, it was reported that the Fifth Generation Aerial Target drone successfully had its initial ground engine test run. The 5GAT has not flown yet and its first flight is currently scheduled for later on this year. The 5GAT is a very unique aircraft developed for a unique mission set as a target drone, not a tactical drone and is vastly different from Kratos' Valkyrie. For example, the Valkyrie can fly for greater than nine hours unrefueled. The 5GAT can fly approximately 1.5 hours unrefueled. The Valkyrie has internal weapons or bomb base. The 5GAT has no internal weapons or bomb base. Kratos' Valkyrie is runway independent while the 5GAT has landing gear and is tied to and dependent upon a runway. And the Valkyrie is affordable and low cost at approximately $3 million while the 5GAT is reported to cost approximately $10 million. These are just some of the differences between the 5GAT and the Valkyrie. Additionally, Kratos has its own 5GAT solution that we have not previously disclosed, which we are confident will prove to be a far better solution for a majority of the currently envision mission sets at an affordable cost.
For Kratos' Unmanned Systems business, including targets and tactical drones, in spite of certain of our programs expected initial or increased production moving to right, including from the recent CRA, we are expecting strong year-over-year organic growth for 2020 over 2019 with the timing of program and contract awards, including the sole-source contract awards I mentioned, determining the ultimate magnitude of this expected growth. We are also expecting even greater year-over-year organic growth for '21 over 2020 based on current program visibility, the 2021 DoD budget request and the fit.
In our Space and Satellite business, as I mentioned, since our last report to you, we have received a number of important contract wins. So certain of these awards were received later than we initially planned, which is pushing certain related 2020 execution to the right. Included in these delays was an expected sole-source contract award related to a large new satellite program which is forecast to be a significant long-term future organic growth driver for the business, and one of our larger future programs. There are also numerous additional new space and satellite opportunities that we are pursuing, including as related to the next generation National Defense Space Architecture, or NDSA, which is anticipated to be compromised of seven different layers, which include a transport layer to provide assured resilient, low latency military data and communications connectivity worldwide to a full range of warfighter platforms, a battle management layer to provide architecture tasking, mission command and control and data dissemination to support time-sensitive kill chain closure at campaign scales, and also attracting layer to provide global indications, warning, tracking and targeting of advanced missile threats, including hypersonic missile systems.
Related to the NDSA, the Pentagon recently stated that they want the industry to provide one satellite per week under its plans to orbit these seven constellations with each satellite having a different function. These satellites are anticipated to be smaller, at a few hundred kilograms, cheaper at approximately $10 million each, and shorter live at about five years than today's typical military satellites, which can wait tons and cost billions of dollars and which are expected to operate for decades. This is all part of the space market transition I have been talking to about on previous calls, which we believe will provide Kratos with an incredibly large opportunity for our ground C2, SSA, and other equipment. Under the NDSA program, the DoD has announced its plan to orbit several dozen satellites through 2022, then expecting to continue to launch dozens more. We are truly excited about this new opportunity.
Also in our Space business in Q4, we continue the expected transition to the software-defined content product model and business mix, we have discussed previously. We expect the transition from legacy dedicated analog hardware products to open architecture software-defined products to continue in 2020, resulting in a reduced revenue growth rate but also resulting in an expected higher EBITDA margin. We saw this trend in Q4 of 2019 with the mix of somewhat reduced revenues and higher profit margins. Irrespective of the business mix transition that's occurring and certain program delays, we are expecting solid organic revenue growth for our Satellite business in 2020 over 2019, with further organic growth expected for 2021 over 2020. In our microwave electronics products business, as I mentioned before, at the end of '19, we received the initial $25 million production order, and what is expected to be one of the largest programs for this business, and we also received an expected initial $16 million production award for a new airborne EW system. Our microwave business currently has an all-time record backlog and similar to Kratos' Unmanned Systems and Satellite Communications businesses, we are expecting solid 2020 over 2019 organic revenue growth, with that growth expected to continue for '21 over 2020.
Our C5ISR, BMD target, hypersonic systems and turbine businesses are also forecasting organic growth for 2020 over 2019. With the recapitalization of strategic weapon systems being a key driver of this forecasted growth, including in the missile, radar, hypersonic, BMD and unmanned systems areas. Kratos' turbines next-generation engine programs and initiatives remain on schedule. In C5ISR, as I mentioned, we recently received a new approximate $50 million single-award contract which we expected to begin contributing immediately in Q1 of fiscal 2020. However, this Kratos award has now been protested by a competitor with the resulting stop-work notice issued to Kratos by the customer. Accordingly, we have removed the expected financial contribution from the single award program out of our initial 2020 guidance until the protest situation is successfully resolved.
As I discussed earlier in our last quarter's call, in our training business, Kratos' largest contract with the US and Royal Saudi Navy also remains in a protest situation, as we discussed previously. As this protest situation is being resolved, Kratos currently expects to continue working at least through March 31st of 2020. This situation is significantly impacting Kratos' initial 2020 guidance with an approximate $40 million, 2020 to 2019 revenue reduction currently forecast due to the uncertainty. We will update our guidance accordingly as the situation is resolved.
Deanna?
Deanna Lund -- Executive Vice President and Chief Financial Officer
Thank you, Eric. Good afternoon. Kratos' fourth quarter 2019 revenues of $185.1 million were just below the low end of our estimate of $187 million to $207 million, primarily as a result of our training and C5ISR businesses, and delays in expected contract starts and the timing of production ramps in our Unmanned Systems business, certain of which have now been received and the production schedules are forecast to contribute commencing in Q2 of 2020.
Our adjusted EBITDA of $20.2 million was at the high end of our estimate of $14 million to $20 million due to a favorable mix of revenues and execution, primarily in our Space and Satellite Communications, training solutions and microwave products businesses. Our adjusted EPS of $0.09 per share also exceeded our forecast of $0.03 to $0.07 per share for the quarter. Excluding the impact of FTT, which we acquired in 2019, and which contributed $14.8 million in revenues for the quarter, Kratos' revenues grew organically 3.6% in the fourth quarter compared to the prior year. Importantly, there was no CRA in 2018 like we had in Q4 of 2019.
In the fourth quarter, KGS generated revenues of $146.8 million, up 14.6% from $128.2 million for Q4 2018, adjusted EBITDA of $17.3 million or 11.8% of revenues, up from $15.1 million in Q4 of '18 and operating income of $12 million, up from $11.6 million in Q4 of 2018. Excluding the impact of the FTT acquisition, KGS revenues increased organically 3% year-over-year.
Operating income and adjusted EBITDA were positively impacted in the fourth quarter by a favorable mix of revenues, including higher-margin software revenues and leverage on fixed manufacturing overhead and administrative expenses. Revenues in our Unmanned Systems segment increased 5.8% from $36.2 million in the fourth quarter of '18 to $38.3 million, and adjusted EBITDA was $2.9 million for both periods, primarily reflecting project mix, including that in 2019. And forecast for 2020, we are working on a number of new tactical drone development programs, which typically have a lower profit margin than full-rate 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.
Our Q4, consolidated operating income was $9.3 million, down from the fourth quarter of 2018 operating income of $10.8 million, primarily due to approximately $600,000 in legal fees in 2019 related to an ongoing dispute with an international customer and $800,000 of increased amortization related to the FTT acquisition. Our adjusted EBITDA for the fourth quarter is from consolidated continuing operations, including net income or loss attributable to non-controlling interests and excludes non-cash stock-based compensation cost of $2.8 million, foreign transaction gains of $100,000 and acquisition and restructuring-related items and other thousand $400,000, and legal costs of $600,000.
On a GAAP basis, net income for the fourth quarter was $3 million, which includes $400,000 of loss attributable to non-controlling interests and a tax provision of $1 million and loss from discontinued operations of $700,000. For the fiscal year 2019, revenues increased $99.5 million or 16.1% from 2018 to 2019. Excluding the FTT acquisition which contributed $52.5 million, revenues increased 7.6% organically. Full-year 2019 adjusted EBITDA increased $16.8 million or 27.8% to $77.3 million.
Moving onto the balance sheet and liquidity. Our cash balance was $172.6 billion at December 29. At quarter-end, we had zero amounts outstanding on our bank line of credit and $5.4 million of letters of credit outstanding. Debt outstanding was $295.1 million at quarter-end, and net debt was $122.5 million. Our LTM adjusted EBITDA was $77.3 million with a net leverage ratio of 1.6 to 1. Cash flow generated from operations for the fourth quarter was a use of $1.3 million, less capital expenditures of $8.4 million, or free cash flow use of $9.7 million. For fiscal 2019, cash flow generated from continuing operations was $28.9 million, less capex of $26.3 million for free cash flow generation of $2.6 million.
In addition, we collected $3.6 million in FY '19 related to the legacy projects we retained from our disposition of the PSS business. This compares to our estimated free cash flow expectation of $10 million to $20 million for 2019 with the primary variance being due to certain expected receivable collections that did not come in before year-end. This is reflected by the increase in DSOs from 120 days at the end of the third quarter to 130 days at the end of the year, have been primarily due to the structural milestone payments, a long-term delivery project in our training solutions business. The most significant item impacting the milestone collections and DSOs at year-end was a termination for convenience or a T for C on a very large substantially complete simulator training program that we received in late November. A T for C can occur from time-to-time in the government contracting industry, basically, representing exactly what they say, that is their originally planned scope, period of performance or number of systems to be delivered has been changed at the convenience of the government customer through no fault of the contractor.
Under long-term contracts like the training system project, milestone payments are typically paid by the government customer at 80% or 90% of cost incurred as program milestones are achieved, with the last 10% or 20% of payments withheld until final delivery has been accepted. On this contract, Kratos' receivable balance, which is primarily related to these final billings, withholds or retention amounts are currently over $11 million. We had expected to bill nearly $9 million on this project by 2019 year-end. However, due to the T for C, we will now not be able to bill and collect these amounts until we have completed the termination settlement process with the customer.
Also impacting Kratos' 2020 cash forecast was the customer requested delivery schedule change for a separate large training system program. This training system delivery scheduled delay, which resulted from customer requested configuration modification also resulted in delays in certain billing milestones until unit deliveries are made. As a result, program deliveries have now been pushed from 2019 and 2020 to 2021, with the situation impacting our estimated 2019 billings by an approximate $5 million. The contract mix for the quarter was 81% fixed price, 14% cost-plus and 5% time and materials. Revenues generated from contracts with the US federal government for the quarter were approximately 71%, including revenues generated from contracts with the DoD, non-DoD, federal government agencies and FMS contracts which were approximately 11%. We generated 12% from commercial customers and 17% from foreign customers. Our book-to-bill ratio for the quarter was 1.1 to 1, and for the trailing 12 months was 1.1 to 1. Our bookings were $177.5 million for the quarter with a total backlog of $601.2 million. Our bookings for the year were $718.7 million.
Today, we are providing initial guidance for 2020 of full-year revenue of $740 million to $780 million, adjusted EBITDA of $72 million to $78 million, operating cash flow of $30 million to $50 million, and capital expenditures of $43 million to $48 million. And free cash flow guidance of a generation of $7 million to a use of $18 million. Our initial guidance includes a number of factors and assumptions I will discuss. As you know, our industry had a three-month continuing resolution to begin the fiscal year with the CR being resolved at the end of December with their 2020 DoD budget being approved. As we discussed with you on last quarter's call, under a CR, there are no new program starts, no new production contracts and no new increases on the existing production contracts.
As we discussed when we reported Q3 over the past few years, Kratos has been very successful in receiving numerous new program awards, which programs are currently in development, and with the initial production expected to commence, or programs that are currently in production with increased production expected. As a result of our large number of new programs, Kratos' near-term forecast was exposed to potential delays that a CRA could cause. This was the primary reason that we stated that we would wait until now to provide our initial 2020 financial guidance so that we could have more current information we provide here at 2020 forecast.
In summary, the CR basically pushed a number of expected contract awards and expected program execution or ramp up to the right by approximately three to six months impacting our 2020 first-half forecast, and pushing certain expected programs and program ramps out into the second half of the year or into 2021. This has all been taken into consideration in today's initial 2020 guidance. Additionally, we have excluded from our initial 2020 guidance, any Valkyrie or other tactical drone production or tactical system revenue, which we will continue to exclude until we receive contract awards and understand their exact scope, timing, deliverables and related financial contribution. We have also significantly factored and reduced our initial 2020 guidance for the USN, RSN F contract protest situation, which Eric mentioned and which also discussed with you last year.
The currently estimated impact of this USN F navy training program and protest situation is approximately $40 million in reduced revenues from '19 to '20, and that reduced expected margin rates due to the new contractual structure. We have also eliminated from our guidance any 2020 contribution from the $50 million C5ISR award we received which was protested by a competitor. And we have factored into our guidance continued headwinds from our legacy government services business, which is forecasted to decline approximately $10 million from '19 to '20. Even when factoring into our initial 2020 guidance, all of these considerations for 2020, every Kratos' business unit is forecasting organic revenue growth over 2019, except for our training solutions business. The current operation tempo of the RSN F contract and the impact of the reduced government services business has also been reflected in our first quarter 2020 guidance.
For fiscal 2020, Kratos is currently forecasting capital expenditures of $43 million to $48 million, which includes approximately $15 million to $17 million related to the 12 production Valkyries, Eric had mentioned that we are leaning forward and planning on building Company-owned tactical drone prior to contract receive, which will be reflected as capital expenditures. Once we have received contract awards, the cost will be transferred to a revenue-generating program. We are also forecasting approximately $5 million for certain Kratos capital target drones that we plan on building to have on hand in order to be able to quickly address customer lease or another mission requirements. And we are forecasting capital investments of approximately $5 million related to small engine development at KTT, and investments aggregating approximately $9 million to $10 million for new business opportunities in our Satellite and C5ISR businesses.
We expect our estimated cash taxes to be approximately $3 million to $4 million for 2020, reflecting the impact of our over $300 million in net operating losses that we have. Amortization is expected to be approximately flat at approximately $8.5 million for 2020, and depreciation is expected to increase approximately $4 million per year to $20 million for FY '20, reflecting the increase in capital expenditures we have incurred over the past few years. The Company intends to adjust the impact of depreciation expense for purposes of computing adjusted EPS going forward to address this is expected increased to provide for a more comparable metrics on a year-over-year basis. As such, the forecasted adjusted EPS for FY '20 is $0.44 to $0.47 compared to FY '19 adjusted EPS using a similar adjustment for depreciation expense of $0.48 per share. First quarter 2020 adjusted EPS is forecasted at $0.05 to $0.08 compared to Q1 2019 on a comparable basis of $0.11 per share.
Eric?
Eric DeMarco -- President and Chief Executive Officer
Thank you, Deanna. So in closing, today Kratos has four high-performance low-cost attributable tactical jet drones in our class flying that I can disclose to you, the Valkyrie, the Gremlin, Mako and Airwolf. We are the only company with affordable drones in this class that are flying today, and we have several others in development, including certain we have not disclosed for competitive, security-related or other considerations.
As represented by certain programs that the DoD has disclosed to date, including Skyborg, ABMS, Vanguard, LCAT, the arsenal plane, and most recently, DARPA's long shotgun Gunslinger programs, we believe there will be significant future demand for drones like Kratos'. We believe that the momentum that Kratos has is reflected by was what reported most recently by the Air Force just last week, where the Air Force stated at the Valkyrie will fly in the services next Advanced Battle Management System experiment in April, and that the Air Force expects that will see an attritable drone program called Skyborg in the fiscal 2022 budget. We believe that if we continue to execute, we will be successful.
With that, I'll turn it over to the moderator for questions.
Questions and Answers:
Operator
Thank you. [Operator Instructions] Our first question comes from Sheila Kahyaoglu with Jefferies. You may proceed with your question.
Sheila Kahyaoglu -- Jefferies LLC -- Analyst
Thank you. Good afternoon, Eric and Deanna. Eric, thank you for all those comments. I just wanted to clarify some of the Valkyrie items if you don't mind. You mentioned a flip to the right, but we have a budget in place. Can you walk through the timeline for Valkyrie, and how we should be thinking about that?
And then, just related to that bigger picture on unmanned profitability was a little bit late, what are the moving pieces as we go through '19 into '20 on the mix?
Eric DeMarco -- President and Chief Executive Officer
Right. So on Valkyrie, Sheila, I'll talk about what's publically out there that you can go and reach to. As I mentioned, we are going to be flying in an exercise with both the F-22 in the F-35 sometime in the next few months. The Air Force has announced that we will be flying in the ABMS program in the next couple of months. The budget, if you take a look at some of the budget lines, like the tech transition program, that's for prototyping and experimentation, there is $219 million in there. I think there was a congressional add specifically for the LCAT of $100 million. There is another line for experimentation project funds of about $90 million. And there is another line for the future Air Force integrated technology demos of $157 million. That all ties into what the Air Force stated last week that in the 2020 budget, they believe Skyborg and my understanding is, they were talking Skyborg and the Valkyrie interchangeably that the Skyborg program is adequately funded for '20, it's adequately funded for '21 and Skyborg is heading to a program in '22.
So to your question, we need to continue to successfully execute, continue to successfully fly. We are in discussions, right now with customers for, as we talked about contract awards. Because of our belief of what's about to happen, we have begun building 12 initial production Valkyries, so we can start delivering the first of these in the first quarter of next year and then deliver one or two a month, every month thereafter. So we believe that we're tracking and if we execute, we're going to succeed.
Sheila Kahyaoglu -- Jefferies LLC -- Analyst
So is it correct to assume that there was $40 million in the guide? But now that those 12 production vehicles are six months to the right, so they're '21 guidance?
Deanna Lund -- Executive Vice President and Chief Financial Officer
Well, this is, Sheila, we're not quite sure what you're asking since is the first time we are giving 2020 guidance, so there was nothing included previously because we have not provided guidance previously.
Sheila Kahyaoglu -- Jefferies LLC -- Analyst
Okay. And there was a comment in the prepared remarks said, you alluded to slipping to the right by six months, so I just wanted to clarify, was that the production timing of the delivery?
Deanna Lund -- Executive Vice President and Chief Financial Officer
Sure. Yeah. So there was a slip in the schedule of estimated production and that is reflected in the 2020 guide. The $40 million, we're talking about is related to the training program, the Royal Saudi Naval forces, so that's the impact from '19 to '20.
Sheila Kahyaoglu -- Jefferies LLC -- Analyst
Sure. Okay, got it. And then just a follow-up on the unmanned profitability, if is there any way you guys can bridge that?
Deanna Lund -- Executive Vice President and Chief Financial Officer
Sure. So from an operating income standpoint, so for the fourth quarter of 2019, there is approximately $600,000 of legal fees related to a dispute with an international target customer that is included in the operating income, and then the other piece is the mix of programs, it's more focused in the fourth quarter, two developmental programs, which are typically on the lower side of a margin rate perspective as compared to production margin rate.
Sheila Kahyaoglu -- Jefferies LLC -- Analyst
Okay. Thank you.
Deanna Lund -- Executive Vice President and Chief Financial Officer
Sure.
Operator
Thank you. Our next question comes from Peter Skibitski with Alembic Global. You may proceed with your question.
Peter Skibitski -- Alembic Global Advisors -- Analyst
Yeah. Hello, guys. On the $50 million C5ISR when that's been protested, can you tell us the name of the program and maybe when the protest period is expected to be up? I didn't think it like 90 days to rule on it. And then how many years would that be executed over if you do retain it?
Eric DeMarco -- President and Chief Executive Officer
Right. So Pete, because it's literally active right now, I don't want to name the program because I don't want to get the customer on publicly involved here. You're right on the 90 days. Typically it's 110 is the full run period with the GAO. And we were looking to burn it over four, no more than five years, fairly ratably.
Peter Skibitski -- Alembic Global Advisors -- Analyst
Got it, OK. And then just one follow-up. Eric, can you update us on some of the hypersonic competitions, the BMD target, solid rocket motor ones? I think you had won one last year, lost the second one, and I think you had a third one that was still kind of in the running. And maybe you can update us on the third one. And also I never got a sense of the size and execution period for the one that you did win.
Eric DeMarco -- President and Chief Executive Officer
Right. So I'll start there. The one that we were successful on, the projected contribution to us over the base period and all options and it was a single award contract is $150 million, OK. That's the contribution to us. There is a third one, and I'm not going to be talking about it much because it is about to enter the solicitation period. And this year, it's expected to be later this year, it's is expected to be awarded and we're going to compete for it.
Peter Skibitski -- Alembic Global Advisors -- Analyst
Okay. The $150 million, how many years was that over?
Eric DeMarco -- President and Chief Executive Officer
The one that was protested?
Peter Skibitski -- Alembic Global Advisors -- Analyst
No, the other one you won the first one?
Eric DeMarco -- President and Chief Executive Officer
That one was over -- we're going to probably six or seven years.
Peter Skibitski -- Alembic Global Advisors -- Analyst
Okay. Thanks, guys.
Eric DeMarco -- President and Chief Executive Officer
Yeah.
Operator
Thank you. Our next question comes from Ken Herbert with Canaccord. You may proceed with your question.
Kenneth Herbert -- Canaccord Genuity -- Analyst
Hi. Good afternoon, Eric and Deanna.
Deanna Lund -- Executive Vice President and Chief Financial Officer
Hi, Ken.
Kenneth Herbert -- Canaccord Genuity -- Analyst
Hey, I just wanted to follow up on the Valkyrie. I mean, Eric, you made a comment that you think it is or you believe it's fully funded obviously, through the fiscal '20 enacted budget. But it looks like it's obviously a high priority for the unfunded US from the Air Force, and that's obviously, not just Valkyrie, but Skyborg and elements of the ABMS. Can you just comment if you think your customer's priority or intention around the Valkyrie as part of the broader Skyborg or ABMS programs have changed? Or how you view intensity at your customer right now in terms of the schedule and moving forward?
Eric DeMarco -- President and Chief Executive Officer
Right. Ken, I definitely believe they've changed. And I'll point to the reported remarks by the Air Force, last week, where I think I'm being spot on here, but I may be paraphrasing, and I can send them to you where as you said, in the unfunded priority list, the Skyborg is the number one priority. It was reported that the Air Force said that they were using Skyborg and Valkyrie interchangeably. I believe they specifically said that one of the reasons why a Skyborg attributable drone program was not a program of record in '21 was because they felt it was adequately funded already in 2020 and 2021, and so they were going to move it to 2022. And I believe they said that their enthusiasm remains very, very high for the entire program, which I think in my opinion is further represented by we're going to be as it's publicly available now, we're going to be involved with the ABMS program very, very soon, which includes the F-22 and the F-35. And those are the ones that are publicly out there. And obviously, we're aware of a number of other things that are going to happen or that are expected to happen over the course of this year that we believe reiterate the enthusiasm for a high performance, very low-cost drone.
Kenneth Herbert -- Canaccord Genuity -- Analyst
Okay, thank you. And I'm imagining, I mean you're investing just on the capex side $16 million this year for the production of 12 of the Valkyries. Are you expecting visibility on a contract to change after the scheduled April test flight or do you expect better visibility later on in the year?
Eric DeMarco -- President and Chief Executive Officer
Because of where things are right now, Ken, I'm not getting ahead of anybody. I'm not going to comment beyond the prepared remarks. I'm sorry.
Kenneth Herbert -- Canaccord Genuity -- Analyst
Okay. No, that's great. Just one final then question. Again, on the pre-production, I'm guessing you'll be prepared to start to deliver, I think you said in early next year or January. Do you expect the $16 million in capital or the spending this year to fully produce those 12, or is that going to spill into 2021 as well?
Eric DeMarco -- President and Chief Executive Officer
That's a good question. We are planning on delivering the first Valkyrie or Valkyries in Q1, and then one or two every month thereafter.
Kenneth Herbert -- Canaccord Genuity -- Analyst
Okay. So the capex this year funds the capex, but it sounds like production will obviously spill from this year, will cover both '20 and '21 of those 12 units.
Eric DeMarco -- President and Chief Executive Officer
Correct. And that if we increased the 12 based on input, that will increase it, exactly.
Kenneth Herbert -- Canaccord Genuity -- Analyst
Perfect. Okay. Thank you.
Eric DeMarco -- President and Chief Executive Officer
Yeah, sure.
Operator
Thank you. Our next question comes from Mike Crawford with B. Riley, FBR. You may proceed with your question.
Mike Crawford -- B. Riley FBR -- Analyst
Thanks. Excluding that Valkyrie build, that's being capitalized into revenue guidance until you have better visibility and quantities, pricing structure and timing. Once we get that, is it expected that there will be like a revenue catch-up and that fees then will be recognized as a percent complete based on milestones or is that also unknown?
Deanna Lund -- Executive Vice President and Chief Financial Officer
At this point, what we would expect, Mike is that would be on a percent complete based on the percentage of completion of the total cost that's expected
Mike Crawford -- B. Riley FBR -- Analyst
And just hypothetically, let's say you got an award I don't know, in the second quarter and when we see the second quarter reported, there would be like a revenue catch-up, as these things move from capex into I guess, work in progress and --
Deanna Lund -- Executive Vice President and Chief Financial Officer
That will be the expectation, yes.
Mike Crawford -- B. Riley FBR -- Analyst
Okay, thank you. And the 15% of the $1.1 billion bid and proposal pipeline that's Unmanned, so it's like $165 million, but that's just for targets?
Eric DeMarco -- President and Chief Executive Officer
Yes.
Deanna Lund -- Executive Vice President and Chief Financial Officer
Yeah.
Eric DeMarco -- President and Chief Executive Officer
Yes. And I'll say substantially, there may be a dog or cat in there, but absolutely substantially, that's all target drones.
Mike Crawford -- B. Riley FBR -- Analyst
Okay. And then on the Airwolf program F, when was that renamed? Why was it renamed? Is there any expectation for when you could start to get like a low rate initial production or anything of that sort, for that program?
Eric DeMarco -- President and Chief Executive Officer
I will just say, the decision was made to change the name and that's what it is now. And we have a number of flights for that in Q2 between five and 10, several that are scheduled. And assuming those are successful, the final -- I'll call them justification flights would be expected in the second half of the year. And then maybe next year, we'll begin to deliver some units.
Mike Crawford -- B. Riley FBR -- Analyst
Okay, great. Thank you.
Eric DeMarco -- President and Chief Executive Officer
Thank you.
Operator
Thank you. Our next question comes from Seth Seifman with JPMorgan. You may proceed with your question.
Seth Seifman -- JPMorgan Securities LLC -- Analyst
Thanks very much and good afternoon. I wonder, in the Unmanned business, thinking just about the target drones, we kind of saw run rate in the second and third quarter kind of approaching the mid-40s or in the mid-40s, came down in the third quarter to something closer to what it was previously. I guess, how do we see that trajectory moving forward? Why did it come down? When should we get back to where we were, and then beyond? And then at what point do you see getting to that kind of $250 million that just the target drones can provide and so?
Eric DeMarco -- President and Chief Executive Officer
Right. So there are two programs that we're in development, they moved to LRIP, and we've been executing on the LRIP. Both of those programs, as I mentioned are now planned to go into full-rate production. The one I can talk specifically about because the public information is out there is on the Navy BQM-177 program, where they have indicated that on it's going to be moving to FRP with a baseline initial quantity of 55 per year, and we've been at 30 or 35 per year. And so we see a step-up there. That's the confidential program that's going to be moving to FRP and that one is expected to get somewhere to $25 million to $30 million in revenue. And then on the labs at the Air Force program, we are entering negotiations for the next five-year build. And it appears that five-year build is going to be at quantities that have been higher at the previous annual build levels.
So that's how we see the trajectory going up. And the up and down that you mentioned to before, we have two handfuls of international customers that have operations, and those operations are not annual and not recurring. There are certain big ones that are every two years. There are some that happen every three years. And those have caused some of the ups and those would have been one of the factors causing the ups and downs has been the timing on the production of the drones for those international ones. And very importantly, Seth, on these international ones, certain of the international customers, they do a service type model. So what they will do is they will pay us to bring 20 drones out to arrange for an exercise, with a fee set for, in my example, one month's worth of work will be paid for that month for those flights which are called representations. If they shoot down the drones, they buy them. And so if one year they shoot down 10, and the next year, they shoot down 20, of course, we like it when they shoot them down because we get to build more. When they shoot down 20, that can cause an increase in that quarter if they shot more down.
Seth Seifman -- JPMorgan Securities LLC -- Analyst
All right. Okay. And then I guess with regard to the outlook, you talked about some visibility toward '21. I guess, what level of confidence that do you have that the backlog exiting this year will be higher than it was at the end of 2019?
Eric DeMarco -- President and Chief Executive Officer
Yes. If the expected timing right now holds on some going to full-rate production, then it's very, very high that it will. If the timing holds, what was in the 2020 budget, what's in the 2021 request. But Seth, your point, it's a very important point. Because let's take this contract where we're looking to, it's going to be a five-year contract and it's going to be a follow-on on full-rate production. And we're sole-source and we own the data right for the airplane and no one else can build it. When we get that contract award, we may not put five years in our backlog. We will only put in one year. It's the way we do it. We put in one year at a time as it's funded, even though it's a single award, sole-source five-year contract. So, please keep that in mind also.
Seth Seifman -- JPMorgan Securities LLC -- Analyst
Okay, great. Thanks very much.
Eric DeMarco -- President and Chief Executive Officer
Yeah.
Operator
Thank you. [Operator Instructions] Our next question comes from Peter Arment with Baird. You may proceed with your question.
Peter Arment -- Robert W. Baird & Co. -- Analyst
Yeah. Good afternoon, Eric, Deanna. Eric, I guess I just wanted to do -- there's been a lot of questions obviously, tied to the guidance in Valkyrie. But I guess the two biggest swing factors which should be the takeaways are thinking about 2020 guidance is the $40 million from the Saudi contract, and then the fact that you don't have any Valkyrie in which would have been under percentage of complete. Are those are the two big swing factors that we should be thinking about?
Deanna Lund -- Executive Vice President and Chief Financial Officer
That's correct, Peter. And the other piece is related to our legacy government services business that is expected to decline $10 million year-over-year as well. So, you've got --
Peter Arment -- Robert W. Baird & Co. -- Analyst
Got it.
Deanna Lund -- Executive Vice President and Chief Financial Officer
Supporting on Saudi, $10 million on services, and then the exclusion of any revenue related to production orders for Valkyrie.
Peter Arment -- Robert W. Baird & Co. -- Analyst
Okay. And then, if I could just a follow-up to that. So the seven, -- Eric, what's the kind of the biggest swing factor when we're looking at the $740 million and $780 million that you've given out? Is there anything else that you would call out?
Eric DeMarco -- President and Chief Executive Officer
I'm noodling. No. There is nothing else right now that I'd call out on the full-year, nothing.
Peter Arment -- Robert W. Baird & Co. -- Analyst
Okay.
Eric DeMarco -- President and Chief Executive Officer
Nothing else significant. No individual item or program comes to my picture.
Peter Arment -- Robert W. Baird & Co. -- Analyst
So, Airwolf, I know that, that was always planned to have demonstration flights in sometime during 2020, sounds like you've got a lot in Q2. But that sounds like more revenue opportunity in 2021. Is that, correct?
Eric DeMarco -- President and Chief Executive Officer
Yes. Yeah, a material one, I would say, yes.
Peter Arment -- Robert W. Baird & Co. -- Analyst
Okay. That's helpfully you've answered my question. Thanks again, Eric.
Eric DeMarco -- President and Chief Executive Officer
Thank you.
Operator
Thank you. Our next question comes from Noah Poponak with Goldman Sachs. You may proceed with your question.
Noah Poponak -- Goldman Sachs -- Analyst
Hello, everyone.
Eric DeMarco -- President and Chief Executive Officer
Good afternoon.
Deanna Lund -- Executive Vice President and Chief Financial Officer
Hello.
Noah Poponak -- Goldman Sachs -- Analyst
When do you now expect a Valkyrie award?
Eric DeMarco -- President and Chief Executive Officer
As I said on I believe Mr. Crawford's question, I am not going to put any times out there as we are in discussion with the customer.
Noah Poponak -- Goldman Sachs -- Analyst
Okay. Eric, you had previously said you expected an award within 90 days of 2020 budget finalization, that occurred in --
Eric DeMarco -- President and Chief Executive Officer
Right.
Noah Poponak -- Goldman Sachs -- Analyst
So I guess, I'm still confused as if that occurred in mid-December, and the customer enthusiastically wants this capability, what changed from what you thought would happen in the 90-day window or has the 90-day window not changed?
Eric DeMarco -- President and Chief Executive Officer
In my opinion, the primary item that changed is when we have the recovery system anomaly on the Valkyrie, the customer made a decision to do an investigation into what happened. And that investigation took a few months, and it is complete now. In my mind, is one of the primary ones.
Noah Poponak -- Goldman Sachs -- Analyst
So the investigation from time of that incident until the time of agreed-upon resolution took exactly how long?
Eric DeMarco -- President and Chief Executive Officer
Hold on. Three and a half to four months.
Noah Poponak -- Goldman Sachs -- Analyst
Okay.
Eric DeMarco -- President and Chief Executive Officer
So we were --
Noah Poponak -- Goldman Sachs -- Analyst
Should I?
Eric DeMarco -- President and Chief Executive Officer
Noah, we had additional flights scheduled immediately after that third flight where the anomaly occurred that we're pushed out to the right, which is turned out to be the fourth flight that just happened a few weeks ago.
Noah Poponak -- Goldman Sachs -- Analyst
Okay. What was below your plan for the fourth quarter of 2019?
Deanna Lund -- Executive Vice President and Chief Financial Officer
Okay. Sorry. I'm just answering your question.
Eric DeMarco -- President and Chief Executive Officer
Hold on one second.
Deanna Lund -- Executive Vice President and Chief Financial Officer
Yeah. So there were a couple of production execution that we've had some timing delays with some of our vendors and our C5ISR modular systems business, as well as some in our Unmanned business. And then in our --
Noah Poponak -- Goldman Sachs -- Analyst
Okay. Are those in your 2020 revenue guidance?
Deanna Lund -- Executive Vice President and Chief Financial Officer
Yes, they are.
Noah Poponak -- Goldman Sachs -- Analyst
Okay. And then with regard to the margins, we've sort of asked about this before, but it's a little tricky in trying to discern on the one hand, new programs in this industry are margin dilutive before eventually getting to full-rate production, and you're getting down a learning curve and then they can be much higher margins. But on the other hand, you've already spent a lot of your own R&D dollars, you've already had a lot of capital and facilities in place that are empty, which would suggest that the revenue on these new programs would have really good drop through in incremental margins. Your guidance for 2020 implies margins down, even though you are not including a much more of the newer program revenue than we were all thinking you would. So how should we'll be thinking about the direction of margin? Is that a one-year dilution until you can get closer to full-rate, or is it longer than that? Are they lower margin on a run-rate basis? Any more light you can shed there would be helpful.
Eric DeMarco -- President and Chief Executive Officer
All right. And Noah, the first part of what you said was absolutely spot on. We have and in particular, in our Unmanned business, a number of new pure development programs that are ramping, one of the biggest being Thanatos. And as I've talked about before and I've [Technical Issues] and I'm going to be scaling back on some of that for reasons, those programs are dilutive to the margins, as you said.
Going into production, we would fully expect when we receive production orders for Valkyrie or Gremlins. Exactly as you said, those margins in the manufacturing facility are going to be significant because they're are covering fixed overheads that exist today that don't have the coverage on the quantities. So you're correct on that. Now, you said that we have empty manufacturing facilities, I want to just address that, we do not. We are building fire jet drones right now in Oklahoma City, lots of them. I don't want for competitive reasons, I don't want to --
Noah Poponak -- Goldman Sachs -- Analyst
I guess I shouldn't have said empty. I just meant less sufficient than they were ultimately --
Eric DeMarco -- President and Chief Executive Officer
Correct. But your thesis is correct. But as we move from LRIP to full-rate production on certain of these target drone programs, and as hopefully, things materialize, the way we believe they're going to materialize on the tactical side, as we deliver more units, we see those margins being higher and offsetting the lower development margins.
Noah Poponak -- Goldman Sachs -- Analyst
Okay. Thank you.
Eric DeMarco -- President and Chief Executive Officer
Yeah, sure.
Operator
Thank you. Our next question comes from Joe Gomes with Noble Capital. You may proceed with your question.
Joe Gomes -- Noble Capital Markets Inc. -- Analyst
Good afternoon.
Eric DeMarco -- President and Chief Executive Officer
Hi, Joe.
Joe Gomes -- Noble Capital Markets Inc. -- Analyst
When you guys were talking about your successful fourth flight and the Valkyrie, you mentioned something about a substantial envelope expansion. And I was just wondering what you meant by that.
Eric DeMarco -- President and Chief Executive Officer
Okay. I believe what has been put out there, I believe is higher, faster and more maneuvers. I believe that's what it's been publicly disclosed.
Joe Gomes -- Noble Capital Markets Inc. -- Analyst
Okay. Eric, one you didn't mention and maybe you can't as you were talking previously, anything on the Arrow environment. I know previously, you talked about an early 2020 flight there and I was wondering if you might be able to give us an update.
Eric DeMarco -- President and Chief Executive Officer
Absolutely. So I touched on it briefly in the prepared remarks, but since, you've asked I'll be very specific. We have the AeroVironment tactical drone systems. We have them at our facility. System integration has begun. I was with the CEO of AeroVironment, just last week and we specifically followed up on this and he actually sent me something today on it, so things are tracking. And I see the only item that can flex specific timing is getting the range slot or the range timing, but pencil in Q2.
Joe Gomes -- Noble Capital Markets Inc. -- Analyst
Okay. And just one last one. Obviously, we saw last quarter, the Dynetics acquisition, and I just wondering, if you might give us a little color as to what that might mean, either positively or negatively toward your relationship with that company?
Eric DeMarco -- President and Chief Executive Officer
I have to say, I was extremely pleased to see that David King, the CEO of Dynetics is staying with the combined entity in the same function as the President of Dynetics. I will be with him in a few -- we have a meeting scheduled in a few weeks. As you know, Dynetics has been just an incredible partner and team made of ours. And I am very, very hopeful because of what Leidos has announced that there will be no change at-all in their operating mode and specifically related to us. We've seen nothing yet our relationship with them as fantastic. They are a great company.
Joe Gomes -- Noble Capital Markets Inc. -- Analyst
Okay, great. Thank you.
Eric DeMarco -- President and Chief Executive Officer
Yeah.
Operator
Thank you. Our next question comes from Sheila Kahyaoglu with Jefferies. You may proceed with your question.
Sheila Kahyaoglu -- Jefferies LLC -- Analyst
Hey, guys. Thank you again. I have two follow-up questions if that's OK. Eric, on BQM-177, I think you mentioned 55 a year. You had previously, I think talked about a higher number in the 80 to 100 range. Did I misunderstand or is that correct? Or is there a ramp next year?
Eric DeMarco -- President and Chief Executive Officer
Right. What did specifically, I'm saying, what has been publicly released and that's what I will say is, that right now, in the initial full-rate production, year one by it's out there at 55 drones, the initial. Any other quantities beyond that is not public Sheila, I don't want to talk about it. That's what's out there and I wanted to update people on that.
Sheila Kahyaoglu -- Jefferies LLC -- Analyst
Okay. Is that lower than what you expected this year, I guess, or I had misunderstood the 80 to 100 as not -- that's a full rate number is what you are referring to.
Eric DeMarco -- President and Chief Executive Officer
No. That initial number is somewhat lower than I initially expected, yes.
Sheila Kahyaoglu -- Jefferies LLC -- Analyst
Okay.
Eric DeMarco -- President and Chief Executive Officer
But let's -- we'll what happens as we move forward.
Sheila Kahyaoglu -- Jefferies LLC -- Analyst
Okay. And then sorry to harp on this, but one last question on the Valkyrie. You said you expect integration award sometime this month. So would that change how you're thinking about it or?
Eric DeMarco -- President and Chief Executive Officer
No. Sheila, if I said that or insinuating that, I apologize. I have been very careful not to give or insinuate any timings. So if I did, I apologize.
Sheila Kahyaoglu -- Jefferies LLC -- Analyst
Okay, all right. Okay. Thank you very much.
Eric DeMarco -- President and Chief Executive Officer
Okay.
Operator
Thank you. Our next question comes from Peter Arment with Baird. You may proceed with your question.
Peter Arment -- Robert W. Baird & Co. -- Analyst
Yeah. Now, maybe just following up on a similar question, Eric. So the initial related production system in the payload integration award is some point later in the year, not this quarter?
Eric DeMarco -- President and Chief Executive Officer
I'm not going to say that. I'm not going to say any timing on it. The discussion and interactions Peter, are literally going on right now.
Peter Arment -- Robert W. Baird & Co. -- Analyst
Got it. No, that's helpful. Thanks, Eric.
Eric DeMarco -- President and Chief Executive Officer
Okay.
Operator
Thank you. And 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 further remarks.
Eric DeMarco -- President and Chief Executive Officer
Great. Thank you. Thank you all for joining us today. And we'll look forward to talking to you when we report Q1.
Operator
[Operator Closing Remarks]
Duration: 76 minutes
Call participants:
Marie C. Mendoza -- Vice President, General Counsel and Secretary
Eric DeMarco -- President and Chief Executive Officer
Deanna Lund -- Executive Vice President and Chief Financial Officer
Sheila Kahyaoglu -- Jefferies LLC -- Analyst
Peter Skibitski -- Alembic Global Advisors -- Analyst
Kenneth Herbert -- Canaccord Genuity -- Analyst
Mike Crawford -- B. Riley FBR -- Analyst
Seth Seifman -- JPMorgan Securities LLC -- Analyst
Peter Arment -- Robert W. Baird & Co. -- Analyst
Noah Poponak -- Goldman Sachs -- Analyst
Joe Gomes -- Noble Capital Markets Inc. -- Analyst
