Good afternoon. My name is Jerome, and I'll be your conference operator today. I would like to welcome everyone to the Kratos Defense & Security Solutions Second Quarter 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. I would now like to turn the call over to Ms. Marie Mendoza. Please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us for the Kratos Defense & Security Solutions second quarter 2020 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.

Thank you, Marie, and good afternoon. Kratos continues to follow what we believe to be industry best practices during the continuing COVID-19 crisis, including working at home where practical, social distancing, facility cleaning, temperature checks, and only mission-essential travel occurring. We also continue to monitor and work closely with our supply chain and vendors, identifying and formulating additional sources and backup plans where we can for critical or potentially vulnerable sources to Kratos’ programs, and we have had no significant supply chain impacts to date. Though our primary customers, the United States government and the Department of Defense, work at home, social distancing, and travel restriction requirements continue to impact the timing of certain expected contract awards and delay certain planned system flights at government ranges and the achievement of certain contractual milestones, including customer product acceptance. The Kratos team continues to successfully adjust, adapt, manage, and execute in a challenging environment. As you know, Kratos is a technology company, and at Kratos, affordability is a technology. Our proven leading technology system integration approach designed to reduce financial and schedule risks, accelerate development, testing, and fielding, and lower costs continues to be strongly desired by our customers, and we believe it is an important competitive differentiator for our company. We also expect that Kratos’ venture capital and commercial base rapid system development, fielding, and overall affordability business model will be even more valuable to our customer base in a future environment, which includes increased federal government deficits and potential reduced discretionary spending. We believe that Kratos, as the affordable alternative technology company and system provider, is in the right place at the right time with the right products and at the right price point for today's environment to address U.S. mission-critical national security priorities. The recapitalization of strategic weapon systems continues to provide a growing and overall strong market opportunity for virtually all of our business areas, as represented by our 1.2:1 book-to-bill ratio in Q2 and our approximate $8 billion bid and opportunity pipeline. In the second quarter, Kratos' space and satellite communications business continued to transition to a software-defined-based business, including a focus on low Earth orbit, mid Earth orbit, and geostationary orbit satellite systems and as related to missile defense and hypersonic system applications. Within Kratos’ space division, we have been making substantial investments to create the world's first dynamic digital space round product family. With the coming of 5G and new software-defined spacecraft, the intersection and integration of space and terrestrial networks, particularly for mobility-based defense and commercial applications, has become very clear. Additionally, new developmental programs, such as hypersonic and ballistic space tracking sensors, or HBTSS, and tactical intelligence targeting access nodes, or TITAN, will require a new and resilient dynamic ground infrastructure. Accordingly, a new Kratos product family, the first of which we expect to begin to deliver in Q1 of ‘21, is designed to enable spacecraft and satellite operators to securely connect, operate, and manage within terrestrial software-defined networks, providing a seamless space-to-terrestrial ground platform. We believe the same technology can also be used as part of the $1.5 billion plus investment necessary for clearing the C-band spectrum within the U.S. for 5G. And we are in discussions with many of the satellite operators as they begin their transformation to digital infrastructure. We are very excited about Kratos’ 5G and our dynamic software-defined strategy. In the second quarter, we announced the acquisition of ASC, an antenna system and technology leader, positioning Kratos to be an even more comprehensive space and satellite communication systems provider to our DoD, national security, and other customers. ASC fits squarely in Kratos’ stated strategic model of being a unique differentiated technology product and system provider and being either number one or number two in our market space. In our space business, we were recently informed that one of our largest and most important contracts, which was coming up for recompete at the end of this year, has now been extended by the customer with Kratos through the end of 2021. This is outstanding news for our company given that Kratos now has only one significant recompete coming up at the end of this year, which is in our training business. Representative space programs Kratos supports include OPIR, SBIRS, WGS, AEHF, MUOS, and GPS, and we are currently forecasting our space business to have a strong Q3 and Q4 of this year. Our KTT and engine business, next-generation, and affordable system development initiatives and programs, which are focused on the expected to be extremely large attritable, expendable, and reusable jet drone and tactical missile markets, remain on track and on budget in Q2. At this time, we have several Kratos next-generation affordable engines in our class running, including for the Gray Wolf low-cost cruise missile system, which was recently reported. As I mentioned, Kratos’ affordable high-performance engines are focused on new and planned for cruise missiles, powered weapons, and drone systems, including those associated with the Skyborg and Golden Horde Vanguard programs and also ABMS. Our objective is for Kratos’ engines to be a disruptive market and industry growth driver similar to our expectations for Kratos’ high-performance jet drones. The class of engines Kratos is focused on is typically the number one bill of material cost item in the related system, and our plan is to deliver more efficient, powerful, and capable engines at a significantly reduced cost so that more capable systems can be procured in larger quantities at lower prices. We also see our engines further increasing Kratos’ drone and tactical weapon system’s affordability and low-cost competitive advantage, while bringing greater value to the customer set. We are currently forecasting to achieve certain important ground and flight test milestones in our engine businesses in the second half of this year and next year, and we believe that we are on track for our plan to achieve future production for our engines. As we discussed in our first quarter call, KTT’s commercial business areas are being adversely impacted by the global COVID-19 pandemic. As a result, KTT’s financial performance for the second quarter came in below our expectations. Unfortunately, this impact is now expected to continue throughout the remainder of 2020, with the current estimated impact being incorporated into our updated financial forecast. Kratos’ C5ISR business continues to perform well, including a large second-quarter missile defense-related contract award. Our C5ISR business supports missile defense, space and satellite, strategic triad, unmanned drone area, high-power directed energy, combat, and other systems. As previously reported, earlier this year, Northrop Grumman announced that Kratos' C5ISR is part of the Northrop Ground Based Strategic Deterrent team, and we are looking forward to supporting Northrop, an incredible partner of Kratos, on this critically important national security program. On the $50 million contract award that Kratos received early in Q1 of this year, which was subsequently protested by a competitor, the customer is currently going through a procurement reevaluation, and we are awaiting the determination. We are currently forecasting strong revenue and EBITDA performance in the second half of 2020 for our C5ISR business unit with a significant amount of the expected production and deliveries driven by a 2.4:1 second quarter book-to-bill ratio for this business. Kratos’ Israeli-based microwave electronics business continued to perform strongly in the second quarter of 2020, as we increased production on certain programs, and we are currently forecasting significant revenue and profit growth in the second half of this year as compared to the first half as these programs ramp. The electromagnetic spectrum and microwave electronics areas are two of the highest-priority and well-funded areas in both the United States and internationally as the U.S. and its allies pivot and focus on potential peer near-peer conflict, and Kratos' microwave business is uniquely positioned to address and grow in this mission-critical area. Representative systems Kratos' microwave business supports include F-15, F-16, Gripen, Iron Dome, Barak, Spyder, Arrow, and Sling of David. Kratos' rocket support services business had a very solid second quarter, and we are expecting continued solid performance for the second half of the year for this business. RSS is currently working on a number of ballistic missile target and other program launch systems, with Kratos' 2021 mission launch portfolio looking very substantial based on current production and the launch manifests. Similar to Kratos' satellite, C5ISR, and microwave electronics business areas, RSS is uniquely positioned in the well-funded missile defense and hypersonic program opportunity areas. Kratos' training solutions business had lower than expected revenues and EBITDA in Q2, and we are focusing on a large international program recompete at the end of this year that I mentioned previously. Our unmanned target drone system’s business continued strong execution in the second quarter with the U.S. Navy, Air Force, and Army being our primary customers. We continue to track towards full rate production on the Navy SSAT and another program, increased future quantities with the U.S. Army and the U.S. Air Force, and we're tracking for our annual revenue target drone objective of $0.25 billion in revenue. International target drone demand also remains strong, driven by systems testing and evaluation requirements related to the recapitalization of weapon systems, and we are currently expecting two large drone system orders in the second half of the year. Since our last report to you, we have continued to make significant progress in Kratos' tactical drone system business, with a total addressable market opportunity for this class of drone and for the engines they utilize continuing to expand. At the end of July, it was reported that Kratos was one of four recipients of a $400 million ceiling MAC, Skyborg, IDIQ contract. Skyborg, one of three U.S. Air Force Vanguard programs outlined in the Air Force Science and Technology 2030 initiative, is an affordable unmanned system that will partner with fighter jets and utilize artificial intelligence to conduct strikes and intelligence collection missions that are too dangerous for manned aircraft, significantly increasing capability, and being a force multiplier of the United States Air Force. The Vanguard initiative’s objective is to accelerate the time it takes to go from research to operational use, and the U.S. Air Force has stated that it wants Skyborg to be a program of record and drones to be fielded and operationally capable by 2023. Under the Air Force’s Skyborg program, as reflected in the recent Air Force video, there are envisioned to be multiple types or classes of drones, including expendables like Kratos’ AirWolf, reusables, like our Gremlins or our Mako, attritables, like our Valkyrie, and exquisites, like certain Kratos’ other program drones. With these various drone classes and mission specifically designed for permissive, contested, and highly contested environments, we believe that in addition to Kratos’ partnership with the Air Force on the XQ-58A and other related initiatives, we are uniquely positioned for future Skyborg opportunities, including the Valkyrie program, which is a partnership between the Air Force Research Laboratory and Kratos to develop semi-autonomous drones that can work in concert with unmanned fighters. The Valkyrie is affordable. It is flying today. It is not a model, a PowerPoint, or an exquisite high-cost aircraft. As part of Kratos’ partnership with the U.S. Air Force on the XQ-58A, we have two Kratos-owned Valkyries in inventory that can be utilized or delivered to the Air Force immediately, and we have a hot production line with the first of an additional 12 Valkyries currently scheduled to come off the line in March of next year, with an additional one or two a month thereafter. Kratos is currently producing approximately 150 jet drone systems in this class a year in the United States, including our tactical Mako, Gremlin, AirWolf, and Valkyrie systems, each of which are flying today. As a result of Kratos’ long production experience with this class of drone, Kratos’ supply chain, vendor base, subcontractors, and partners are all on board and in place, producing and delivering product in quantities today. As a result, we know the build time and actual cost to manufacture and produce our drones. There is no guessing and no expected large cost overruns or surprises to our customers from what we quote them. As I mentioned, Kratos’ drones are made in the United States of America in concert with our U.S. government partners and U.S.-based suppliers. Through our partnership with the U.S. Air Force, all Kratos drones, including the Valkyrie, are designed from inception to be runway independent, both at launch and at recovery. As a result, the Valkyrie can be pre-deployed and recovered virtually anywhere and has certain unrefueled range, performance, payloads, survivability, and other characteristics, all of which were determined in concert with our partner, the Air Force Research Lab. The Kratos Valkyrie was also specifically designed to fit inside standard shipping containers, further reflecting the expeditionary nature of the Kratos systems. Kratos’ tactical drone systems, those flying today and in development, including in our very close-hold ghost works, are all a result of a multiyear strategy plan and methodical execution, beginning with the DoD unmanned systems strategic roadmap and the evolving Air Force vision, including as described by the Assistant Secretary of the Air Force, Dr. Roper, and the Air Force Chief of Staff, General Brown. For Skyborg, the most current expected timeline and related milestones, as recently reported by the Air Force, include a kickoff meeting with all four Skyborg winners invited, followed by the downselect for drone system experimentation. The Air Force is deciding in the next 60 to 90 days which of the four Skyborg prototyping competitors will have their drones participate in operational experiments at multiple test centers around the country to produce the services' first autonomous vehicle for manned-unmanned teaming. The number of contracts the service will award for these exercises, as well as the number of drones procured overall and from each individual vendor, will depend upon U.S. Air Force funding availability and drone unit pricing. The Air Force has identified roughly 15 different mission sets that the program seeks to prove in an effort to achieve operational capability for the Skyborg drone. Information and data from the drones provided during flights and experiments will assist in determining the ultimate timeline for the planned program of record and rate production. We believe that the Air Force Vanguard Skyborg program is planned to move ahead very rapidly, including the Skyborg program. We believe that the total addressable market opportunity for Kratos' class of drone systems and for our engine business is continuing to increase with program opportunities that we can discuss, including Golden Horde, ABMF, LCASD, LCAT, and ACE, all of which we believe that Kratos' Valkyrie and other drones are uniquely qualified to rapidly and affordably address as I previously discussed. Related to the market opportunity, as I mentioned before, I encourage you to view the Skyborg Air Force Vanguard program video, which provides the USAF vision and notes the various types of Skyborg drones that are part of the Air Force's planned future force structure and ConOps. Additionally, it was just reported that the Air Force recently disclosed its vision for expendable, attritable, and other drones as related to the ABMF program, including price and cost points, which we are all very excited about. In addition to the Kratos Valkyrie, as to certain other Kratos tactical drones, we can discuss, our Mako jet drone continues to execute with certain customers and platforms, including, as was recently publicly reported, the Gremlins program with our partner, Dynetics, which has made important progress since our last report to you, even with the program experiencing certain COVID-19 DoD range-related delays. Additional flights are now scheduled for Q3 and Q4 of this year, and we fully believe and expect Gremlins to become a major future Kratos program, similar to our expectation for Valkyrie. Kratos' Thanatos program is on track, and we continue to have high future expectations for Thanatos similar to our expectations for Valkyrie and Gremlins. On our Rattlesnake program with our partner AeroVironment, this has also made substantial progress since our last report to you and is currently expected to fly later this year based on current range scheduling, which has also been delayed due to COVID. Program AirWolf has also continued to move forward, including certain payload and system integration efforts. However, similar to Kratos’ Rattlesnake, ABMS, Gremlin, and other programs, our planned AirWolf flights have been delayed due to the impact of certain DoD range and travel COVID-19-related restrictions, with a series of AirWolf flights now scheduled for later this year and in Q1 of '21, and we also continue to have high expectations for this program. We’re extremely excited and proud of what Kratos has accomplished, and we remain focused on our long-term strategic objective of being a leading drone system provider to the DoD in this expected to be an extremely large new market space. We understand that the government processes and related timelines for contract awards, system deployments, and test flights can be methodical and fluid and are not always consistent with desired public company expectation timelines. I can assure you that at Kratos, we are focused on what we can control and the ultimate success of the long-term strategic plan and vision we have communicated to you. As I mentioned before, we believe that we have the future tactical drone system market will be in the billions of dollars and various types of drone systems, some opportunities in the Kratos class. We believe that we have the right partner, the United States Air Force, the right high-performance drone systems at the right time and at the right affordable cost point, to obtain a large market share and deliver value for our customers and our shareholders.

Thank you, Eric. Good afternoon. Kratos’ second quarter of 2020 revenues of $170.4 million slightly exceeded our estimate of $160 million to $170 million. KGS reported revenues of $128.4 million, down from $145.4 million in the second quarter of 2019. As expected, our second quarter 2020 KGS revenues were impacted by a reduction of approximately $12.1 million in the company's training solutions business, which reduction was principally related to the previously disclosed reduction in scope of certain international contracts. KGS’s second quarter 2020 revenues also reflect the continued reduction of approximately $3.6 million in the company's legacy government services business and reductions of approximately $6 million in the company’s international satellite communications deployment business, and $3.3 million in the company’s KTT commercial aerospace business area, which have both been impacted by COVID-19. Organic revenue growth in the second quarter of 2020 was experienced in our microwave products, ballistic missile defense, and C5 ISR businesses. Our adjusted EBITDA of $15.3 million was in our expected range of $12 million to $16 million. Kratos’ adjusted EPS of $0.08 per share also was within our forecast of $0.05 to $0.09 per share for the quarter. GAAP EPS was a loss of $0.01 per share. At the second quarter, our unmanned system segment generated adjusted EBITDA of $3 million, down from $3.5 million in the second quarter of ‘19, primarily reflecting the higher mix of development programs, including Thanatos and low rate initial production programs, which are typically lower margin programs 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. KGS generated adjusted EBITDA of $12.3 million, down from $15.7 million in Q2 of ‘19 and operating income of $7.7 million, down from $10.7 million in Q2 of ‘19. A more favorable mix of operating margins and adjusted EBITDA margin in the company’s space and satellite, C5ISR, and microwave products businesses in Q2 '20 were offset primarily by expected less favorable margins and the company's training solutions business as a result of the completion of a large international fixed price contract at the end of 2019 and due to a less favorable mix in the company's turbine business. Our Q2 consolidated operating income was $2.9 million, down from the second quarter of '19 operating income of $9 million, reflecting a higher mix of development programs, increased infrastructure costs, an increase in non-cash stock compensation expense of $2 million, increased R&D expenses of $1.5 million, primarily in our space and satellite business, and increased depreciation expense of $200,000. Our adjusted EBITDA for the second quarter is from consolidated continuing operations, including net income or loss attributable to non-controlling interest and excludes non-cash stock-based compensation costs of $4.8 million, acquisition and restructure-related costs of $1.1 million, and a foreign transaction loss of $100,000. On a GAAP basis, net loss for the second quarter was $700,000, which includes a tax benefit of $1.8 million and loss from discontinued operations of $200,000. Moving on to the balance sheet and liquidity. Our cash balance was $397.2 million at June 28th, which includes $240.5 million of net proceeds raised in the company's June equity offering. At quarter end, we had zero amounts outstanding on our bank line of credit and $5.7 million of letters of credit outstanding. Debt outstanding was $295.9 million at quarter end and net cash at quarter end was $101.3 million. Cash flow generated from operations for the second quarter was $6.8 million less CapEx of $7.7 million for free cash flow used from operations of $900,000. During the quarter, we collected $600,000 related to the retained working capital of the legacy PSS business that we sold in 2018, bringing the total receipts we have collected to $6.2 million since we sold the business. Our contract mix for the quarter was 74% of revenues generated from fixed price contracts, 20% from cost plus fixed price contracts, and 6% generated from time material contracts. Revenues generated from contracts with the U.S. federal government during the quarter were approximately 76%, including revenues generated from contracts with the DoD, non-DoD federal government agencies, and FMS contracts, which were approximately 5%. We generated 8% from commercial customers and 16% from foreign customers. Our third quarter and full-year 2020 guidance includes the expected contribution from the recently closed ASC Signal acquisition. We're providing third quarter 2020 guidance of revenues of $195 million to $205 million and adjusted EBITDA of $17 million to $20 million. We are increasing our full-year 2020 guidance for revenues from $720 million to $760 million to $740 million to $780 million, primarily reflecting the expected contribution of the ASC Signal acquisition for the second half of 2020. We are maintaining our adjusted EBITDA full-year guidance of $72 million to $78 million, which reflects the expected contribution from the ASC Signal acquisition, offset primarily by margin compression in our commercial aero turbine business, which has been impacted by COVID-19. We are affirming our full-year 2020 free cash flow guidance of generation of $7 million to a use of $18 million, including capital expenditures of approximately $38 million to $42 million. Our third quarter and full-year 2020 guidance includes our current assumptions of the expected impact of COVID-19 on our industry, business, and operations. We will provide an update to these assumptions and the expected impact on our financial projections, if any, in our third quarter earnings conference. Our adjusted EBITDA guidance reflects an overall forecasted improved revenue mix and profitability in our DoD and national security business areas, including in our space, satellite, unmanned systems, and microwave electronics operations. Kratos’ fiscal year 2020 guidance excludes any potential contribution from expected Valkyrie or other tactical drone production or system contracts, with expected orders to be taken into consideration and our financial forecast adjusted once such contracts or orders are received and the related financial contribution can be estimated. The 2020 capital expenditure forecast currently includes expected outlays of $15 million to $17 million associated with the production of 12 Valkyrie aircraft prior to receipt of expected customer awards and therefore reflected as company-owned tactical drones until receipt of the related customer award, at which time the costs incurred may be transferred to project costs. Kratos will adjust these initial forecasted capital expenditure outlays and the ultimate balance sheet classification of these investments once expected customer orders and the nature of the contract terms and related financial contribution can be estimated.

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

Your first question comes from the line of Josh Sullivan from Benchmark. Your line is now open.

On Skyborg, congratulations on the win. How should we think about IDIQ past quarter, you got the end of this fiscal year coming up. Is there an impetus to make an award? And then can you just remind us what's in the budget for ‘20 and ‘21 at this point?

Josh, the Air Force has been providing public guidance, and right now we are in the source selection phase. Therefore, we cannot disclose more than what we've mentioned in our prepared remarks. A couple of weeks ago, the Air Force indicated their intention to make the first task order award within 60 to 90 days. Regarding funding for Skyborg, the Air Force has stated they have sufficient funding for their planned activities this year and next year. Congress has recently added $100 million to their RD&TE accounts for projects like this, and there is currently a budget negotiation between the Senate and the House concerning the 2021 budget, with the Senate proposing an additional $128 million. Overall, it appears that there is adequate funding, potentially a couple of hundred million each year, to pursue their objectives as they aim toward the program of record in the coming year.

And then just under the new Trump administration interpretation of drone export rules. Can you talk about your exposure to that and any international interest in the drone portfolio at this point?

Yes. So, first of all, I want to be very clear. We are focused primarily on the United States Department of Defense and the Pentagon. That's where we are focusing the vast, vast majority of our resources. We have received State Department approval to discuss marketing both the Valkyrie and the Mako in a number of countries and I think five eyes and maybe beyond that. It is getting a little competitive in a couple of other countries internationally. And so I don't want to get into too many details, because we've got some plans that we're executing. But we’re primarily focused on the U.S., and let's say that there are a couple of them internationally that we were executing some plans that are very confidential right now.

And then switching over to the space opportunity, you mentioned software-defined solutions. How do you see this evolving? What advantages does Kratos have in this area? We have seen terrestrial communication systems venture into this space. What are your insights on the market size and how much of it can you potentially capture?

This aspect has somewhat overshadowed our efforts in the drone sector. The number of Low Earth Orbit (LEO) and Medium Earth Orbit (MEO) satellites is increasing, and as we shift toward spot beam satellites and high-throughput satellites, it is driving a new generation of ground equipment. This connects closely to developments in 5G, as we transition analog signals in space to Internet Protocol systems and 5G technology on the ground. This evolution is shaping our approach to software-defined radio space platform strategy. Rather than producing ground equipment and modems tailored for large, traditional geostationary satellites, the new equipment we will deliver will communicate with various satellite types across different frequency bands. It will allow communication with both military and commercial satellites, integrating with the 5G infrastructure. Our team includes telecommunications experts in leadership roles who are guiding this strategy, and we are collaborating with operators on this initiative. Our outlook for the satellite business is optimistic, anticipating annual organic growth of 10% to 20% over the next year or two.

Your next question comes from the line of Ken Herbert from Canaccord. Your line is now open.

I first wanted to just ask you, you called out, Eric, a couple of potentially large target export drone contracts you could sign in the second half of this year, maybe in the fourth quarter. Can you just provide a little bit more detail on those and clarify whether or not those are currently reflected in the guidance for the expectations because those represent perhaps some upside?

So they are both international. One of them is an existing customer, but this would be a significant increase in the quantities that they're talking; it’s approximately two dozen drones with one of them just under. The other one is a new customer, brand new, and it's tying directly into what I mentioned, Ken, is these customers are procuring new weapon systems, new radars, and they want to exercise and improve them out against threat-representative drones. And we make the highest-performance drones in the world that's just unknown both in the target area and in the system area. Relative to the guidance, as you said, I'm hoping and I think we're going to get these, both of these in Q4. They really won't be additive until for us until next year, because unlike say for the U.S. Army where we'll build drones in advance and put them in inventory or put them in capital so we can quick turn them. Since these are international, we don’t lean forward, if you know what I mean until we’ve got them. And so once we get them, we'll get rolling on them. And so these really will kick in next year for us.

And as I think about your engine business, both TD and KTT, you've obviously been able now to publicly talk about Gray Wolf and what you're doing there. Could you maybe just comment on what some of the next catalysts could be in this business or contracts we should potentially watch out for?

I want to highlight that we haven't discussed Gray Wolf much, but it has been mentioned in the media a few times, including recently, and it's associated with our government contracting and work with national security clients. One key catalyst that I believe we can influence is what I hope to share during the next earnings call. Looking ahead to our Q4 report early next year, if our timeline goes as planned, we might have significant catalysts related to upcoming ground and air vehicle tests. If everything proceeds smoothly, I should be able to provide some insights, if not specifics, about the progress we're making on certain programs as we start delivering units and move toward low-rate initial production and potentially full-rate production in the future. We're making good strides, and there’s one particular project KTT is focused on that we haven't yet discussed, but it has the potential to generate meaningful unit revenues for us next year.

And just one final clarification, you called out a couple of times the COVID-related disruption on the commercial business within KTT. Can you maybe size what that was in the quarter, either in an EBITDA or revenue standpoint, or was it relatively immaterial?

So, Ken, on the commercial turbine business that's about a $3 million to $5 million impact from a revenue perspective in the quarter.

Your next question comes from the line of Mike Crawford from B. Riley. Your line is now open.

So can you talk about the ABMS? So are you qualified on all seven lines of that effort? And then you said there was some information about the cost ranges for these different categories of vehicles, be they attritable, expendable, and so forth?

I won't comment on the first part because it is competitive. Regarding your second question, there was an article published last night in Aerospace Aviation Week that discussed an ABMS briefing. It mentioned four aspects of ABMS, which is referred to as the Internet of military connectivity. They are considering disposables, attritables, and exquisitely designed drones. The disposables were priced from zero to 3 million, while attritables ranged from zero to five, five to 20, and 20 and above. They provided examples of different types of drones, and during one of the Air Force briefings, there were two designs that closely resembled some of ours. The key takeaway, Mike, is that it's not just about Skyborg, Golden Horde, and the LCASD program; it also includes ABMS, DARPA's work with ACE, and several others. The market for this class of drone is expanding and gaining momentum.

And then final question, I know you probably can't talk per se about what your Skyborg competitors are proposing for vehicles. But do you think that you have a good sense of which aircraft each of the other three competitors would be positioning to get onto some of these programs?

Absolutely. Okay, you're confident…

Next questions are from the line of Peter Arment from Baird. Your line is now open.

Actually, I’m Eric Ruden on the line for Peter. I guess first off just a housekeeping question. In terms of timeline on the Skyborg, I know last quarter we were talking about a fifth test flight concurrent contract award in August, September timeline. Is that now replaced by the 60 to 90-day timeline you mentioned or the downselect, or am I confusing those?

Yes, you're just a little confused. The fifth flight was not related to Skyborg; it was related to the LCASD program. And so that is not correlated to Skyborg; they are mutually exclusive.

So is that timeline still on track for the August, September then?

On which timeline, which one?

The fifth test flight?

No, I don't know what's been publicly announced on this, but let's just say events have changed so that fifth test flight, we don't need to refer to it as that anymore. We've achieved everything we needed to achieve under that program and the flights we completed.

And then switching gears a bit, on the ASC Signal acquisition, I saw you added $20 million of the revenue for this year. But any color you can provide on the annual run rate and just margin profile going forward?

For the $20 million of revenue that we expect to contribute for the second half, it’s roughly about $1 million to $2 million of adjusted EBITDA for the second half associated with that $20 million.

Your next question comes from the line of Sheila Kahyaoglu from Jefferies. Your line is open.

Eric or Deanna, because it's a numbers question. I just wanted to talk about the puts and takes for the first half versus the second half. I think you mentioned about five points of COVID impact to the top line in the first half. So that will help you from the down 3% organic you have. But how do we get to growth in the second half? You had mentioned some C5ISR contracts. Maybe can you talk about the growth contributions in the second half in terms of revenue for 2020?

So on the unmanned side, we are expecting awards from a production perspective on some of our programs so to go into full-rate production. On our Navy program, that’s one of the expectations for the growth from the first half to the second half, as well as some of the contract awards that we've seen in our C5ISR business and in our microwave products business, and the anticipated production and deliveries in the second half, as well as on our space and satellite business.

And does that also help profitability then in terms of the business contributions…

Yes, so it's a more favorable mix as well as leverage on the infrastructure costs.

And then Eric, one for you. I guess I can't help but notice you mentioned 5G comments and there was some speculation about Kratos and potential partnership with another large prime. How do you think about your business just given the runway and opportunity that you have?

For Kratos, we have never been better positioned across the entire company than we are today. All of the work the team has put in on the development programs, on getting design-in positions in our microwave business, our 5G and digital strategy in our space business that we've been working on, we just don't talk about it a lot. I think I mentioned we're talking to the operators. It's all coming together. And our target drone business continues to just cruise track right along. Obviously, the tactical business, as I mentioned, the total addressable market is not only getting bigger but it appears to be accelerating. We feel great right now, probably better than we've ever felt for the company.

Your next question comes from Seth Seifman from JPMorgan. Your line is now open.

This is Ben on for Seth. I wanted to quickly ask about giving us some more color on the training recompete that you mentioned that I guess is up for the end of this year. Just kind of, how should we think about the potential headwind from that in case you can extend that?

So Ben, the contribution this year for that contract is roughly about $35 million, and that will be up for recompete at the end of this year.

And I noticed that the CapEx guidance has come down since the beginning of the year. I was just kind of wondering what was driving that production in your expected spend?

It's actually classification-related. So if you noted some of the commentary we put on CapEx that the classification on the balance sheet could potentially adjust to other balance sheet items, depending on the nature of the contract. So, for instance, initially we had included in our CapEx guidance about $4 million to $5 million of capital targets for our Firejet or our 178 target. Now that those contracts have been awarded, those have actually been reflected in inventory. So it's not necessarily a change in total investment, but it's just a change in classification on the balance sheet.

Your next question comes from the line of Michael Ciarmoli from Truist Securities. Your line is now open.

This is Amanda on for Michael. I just had a quick question on some of the flight testing that you have later in the year or early next year. Is any of that dependent on whether there is a vaccine or solution for COVID? Just wondering if there's any risk in the ongoing environment for it to get pushed out further.

On the first part, I truly do not know if it's dependent on that; it's customer driven. And we are working very closely with the customer, the DoD, and honoring and respecting their protocols and restrictions, including travel and social distancing and getting in command centers and things like that. The information I provided today is the most recent information on what is currently scheduled for our flights. We have a number of other programs that we don't talk about for obvious reasons that are scheduled for flights as well. So that's the most recent information. I'm hoping things to move to the left. But as you indicated correctly, we've had a few moves to the right from when we last spoke to because the virus situation just got worse. And so I know it's not crystal clear, but that's the best we can do. We're literally giving you the best information we have today.

If I could ask one more quick question. In your guidance, is there any flexibility built in for the possibility of the CR this year?

It just really depends; that's why one of the reasons we give a range. We give a range, but it depends on how long it goes and it depends on if it's just a standard CR. A few years ago, the government shutdown. Right now we feel pretty good based on what we're getting from our contacts in Washington, including our lobbying firm. Right now, based on what's being discussed as possible, we feel good about our forecast. It's very solid. Our government business, our military business is knocking it out of the park right now; it's literally just knocking it out of the park. The only reason in my opinion that we're not doing better than we had forecast is we have some small commercial pockets, primarily in our engine business that where things have been delayed till next year.

Your next question comes from the line of Pete Skibitski from Alembic Global. Your line is now open.

Eric, can you talk about the sequential growth in backlog? It looks up almost 6% sequentially, and I think somewhere I read that that does not include ASC. So I'm just wondering if you can maybe give us some of the chunky pieces that led to that growth.

And Deanna help me; one of the bigger chunky pieces is in our C5ISR business.

You're exactly right, yes. And that was really into our book-to-bill.

The missiles system, radar system, defense, and we do some classified systems in there, this is all hardware, is really, really going good. And I'll tell you, if things come together the way they look like in the next few months, either our second half and potentially Q3 bookings in that business are going to be incredible; bookings are going to be incredible. And also, as Deanna mentioned, if timing holds on certain production programs we already have where we're expecting to go from LRIP to full-rate production and receive those contracts, those full-rate production contracts in the second half, our second half booking for the company could be very, very strong, which is one of the reasons we're so optimistic about ‘20, ‘21, and beyond.

And kind of related to that is the C5. I think Northrop has said they expect to book their first kind of chunky GBSD award, I think, by the end of this month. So should we expect on that basis that maybe you guys see your first chunky order from them by the end of the quarter?

As I said, Northrop is an incredible partner, and I'm sorry, we will not get ahead of them. So I just got to let this go.

Last one for me, just I'm a little confused on the training programs, the $35 million a year program that's coming up for recompete at the end of this year. Is that separate from the Saudi Navy program that I think is running down over the next two years? I wasn't sure if that's being recompeted as well or not.

No, that is the same contract fee.

Your next question comes from the line of Joe Gomes from Noble Capital. Your line is now open.

Most of my questions have been answered, but just two quick ones. Eric, last quarter you talked about you had, I think it was said 200 job openings, you’re trying to fill quickly. Given what's been going on with the COVID and some of the programs, government programs that have been out there, how has that progressed for you guys?

So far, so good. And I chalk it up to and I'm getting this from our division presidents that the work that we're doing is extremely interesting. The space work that we're doing, it's we’re like the commercial technology company literally in Colorado Springs where we’re doing our space work and our 5G work. And it's exciting work for these, I call them kids, for these kids. And the C5ISR work that we're doing in Pennsylvania, I mean, working on these weapon systems and seeing, it's incredible, very interesting work. And obviously, the drone stuff is really, really interesting. So, so far so good. But your question is very correct, because our hiring plan for the next six months and into Q1 of next year is very strong. So, that's an area the entire team is focused on. We got to get the right people in with the right clearances to execute the programs.

And just a technical one, with the offering completed. What's a good number for diluted shares now?

125 million.

There are no further questions at this time. You may continue.

Very good. Thank you for joining us this afternoon. We look forward to speaking with you with the next planned call, which should be early November. Thank you very much.

This concludes today's conference call. You may now disconnect. Thank you.