Kratos Defense and Security Solutions Inc (KTOS) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Kratos Defense & Security Solutions Fourth Quarter 2020 Earnings Conference Call. (Operator Instructions) I would now like to hand the conference over to your speaker today, Ms. Marie Mendoza, Senior Vice President and General Counsel. Thank you. Please go ahead, ma'am.

Thank you. Good afternoon, everyone. Thank you for joining us for the Kratos Defense & Security Solutions Fourth 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. Good afternoon. Kratos ended 2020 on track, including a fourth quarter book-to-bill ratio of 1.2:1 and a last 12 months book-to-bill ratio of 1.4:1, positioning our company for continued future growth. Kratos' Unmanned Systems Q4 book-to-bill ratio was 2.0:1, including a number of tactical and target drone awards we received in the fourth quarter, and our Unmanned Systems business' last 12 months book-to-bill ratio was 1.4:1, reflecting increasing customer demand for Kratos' affordable high-performance jet drones.

As we begin 2021, approximately 60% of our business is focused on space, satellite and unmanned system areas, with these businesses being some of the fastest-growing and highest margin in our company. I believe that with today's report, you will see that the inner inertia of Kratos' business is rapidly accelerating, and that Kratos' positioning on several expected to be exceptionally long-term sustained strong growth areas has substantially increased. We believe that this rapidly increasing inertia is particularly representative in Kratos' space and satellite business, which I analogize somewhat to the computer mainframe business years ago, in then the PC and Microsoft came along and totally disrupted the market, which, in a way, is what Kratos is looking to do with our software-based open space platform to the legacy dedicated monolithic satellite ground infrastructure market.

It is possible that later this year, we will be able to report certain needle-moving opportunities or milestones that our space and satellite business has been successful on or achieved. Kratos' mission strategy and business plan remains being a disruptive technology and intellectual property based company, focused on national security and where affordability is the technology. We believe that Kratos' affordability and demonstrated ability to truly rapidly innovate and quickly deliver technology-leading products and systems will be an increasing differentiator and a competitive advantage to the company.

Since our last report to you, Kratos has received the largest Skyborg program task order from the United States Air Force totaling approximately $38 million, which includes drone aircraft, associated payload system integration and demonstration flights. All of the DoD continues to move forward with its plan for affordable attritable unmanned loyal wingman aircraft to augment and perform autonomous missions in support of human pilots. The Air Force has stated that they will be aggressively testing and flying Skyborg drones in 2021 and in preparation for providing manned, unmanned teaming and force multiplying Skyborg initial operating capability to the hands of the war fighter in 2023.

The Air Force stated intention for Skyborg drone IOC by 2023 is an incredibly important new development for Kratos. In addition to the $38 million Skyborg award, Kratos also received an approximately $18 million single-award contract from the Air Force Research Lab related to the low-cost attritable aircraft, or LCAT program, also as related to LCASD and the Valkyrie. This LCAP program award to Kratos includes drone aircraft and the continued evolution of the low-cost attritable drone capability set.

In addition to the $38 million Skyborg and this $18 million LCASD contract award, we also received additional approximate $10 million in contract awards related to tactical drones and the Valkyrie, including weapon and other system and authorization of the aircraft. And since our last report to you, the United States Air Force has announced that the Kratos XQ-58A Valkyrie is the USAF attritable 1 drone, which has now completed its fifth successful flight. In this flight, the F-22 Raptor and F-35 Lightning, the United States two 5th generation fighters, formed up off the wings of the Valkyrie as the Valkyrie flew autonomously in formation and a new gatewayONE program test. During the flight, data was successfully shared between the USAF F-35As and F-22 Raptors and the Marine Corps F-35B using the gatewayONE communication system, which had been integrated into the Valkyrie.

The Air Force reported that this was another major milestone in the services efforts to provide low-cost force multipliers in relevant operational environments.

The Advanced Battle Management System, or ABMS, attritableONE AFRL program also reported that the XQ-58A's modularity and its ability to carry robust payloads enable the rapid capability and integration into an attritable vehicle and that they were pleased with the seamless integration and demonstration of the flight. These are representative of just some of the significant Valkyrie-related milestones we have recently achieved and the ones that I am able to publicly disclose to you at this time.

Kratos currently has 2 company-owned Valkyries that are flying today, including in this recent ABMS attritableONE program, with these Kratos-owned assets expanding our first to market-leading position in this class of high-performance, affordable jet drone aircraft as we continue to fly and progress with our customers and our partner, the United States Air Force.

In addition to these 2 currently flying Kratos' owned Valkyries, at our Oklahoma facility, we are currently producing 12 additional Valkyries, with the first of these 12 scheduled to come off the production line in Q2 or Q3 of this year, with an expected production rate of 1 or 2 aircraft a month thereafter, depending on a number of factors, including, importantly, the customer demand signal. There are now several of our 12 in-production Valkyries under customer contract, with delivery scheduled to begin later this year, and we are in discussion with customers related to all remaining unsold Valkyries at this time.

Accordingly, we have begun internal planning for production of the next block of Valkyries once the initial block is complete. For customer related, competitive and other reasons, I cannot provide any additional information at this time.

We remain highly confident of the ultimate success of Kratos' Valkyrie as Kratos' partner is the United States Air Force. Kratos' Valkyrie is the only high-performance affordable attritable drone in its class flying today. As a result of Valkyrie's leading position, multiple and various communications, weapon and other systems and payloads have been and are being integrated and tested on the Valkyrie, including in live flight exercises with the actual flying aircraft, not surrogates or virtual simulations.

The Valkyrie has now flown with several U.S. 5th generation stealth fighters, the F-35A, F-35B and the USAF F-22. The Valkyrie is part of multiple large customer-funded priority programs, including Skyborg, ABMS, attritableONE, LCAT, LCASD and the Vanguards. And the Valkyrie is affordable and made in the USA.

In the final 2021 DoD budget, which is now approved, a bipartisan Congress increased the funding for attritable drones like the Valkyrie by $50 million over the Pentagon-based budget request. This increase was in addition to the $100 million congressional add for similar attritable drone technologies included in the final 2020 budget. We believe these increases are representative of the high priority and level of focus on this class of high-performance jet drone. Importantly, as noted in the final congressional documents, the additional 2021 $50 million is to assist in transitioning attritable drones like Valkyrie, Skyborg and LCAT to fully operational capabilities.

Also related to funding in the developing market, it was recently reported that the USAF is reviewing budget and platform considerations related to the FY '23 FYDP, which begins in calendar '22, for potential large fleet augmentation quantities of attritable drones to be procured for fielding. The Air Force also recently stated that the Skyborg could develop multiple drones and missions. And as I mentioned before, just a few weeks ago, the Air Force announced that the high priority Skyborg program to develop low-cost autonomous drones, able to team with pilot aircraft, was planned for initial operating capability by 2023.

From a new opportunity standpoint and representative of the planned for and continuing growing emphasis for Kratos' type of drones, the Air Force just this week released a call for proposals for a new low-cost attritable aircraft program. And the Air Force has recently discussed an additional very large new opportunity that we feel Kratos is uniquely well positioned for with the Valkyrie and certain of our other tactical drone suite.

Representative milestones for the Valkyrie currently planned for in 2021 include additional planned demonstration flights for certain customers and programs, continued integration of various payloads, including weapon systems, the continued operationalization of the Valkyrie for delivery to the war fighter and the delivery to customers of under contract Valkyrie aircraft as they come off the production line.

In our 2021 financial guidance for Valkyrie, we have taken into consideration the program delays we have experienced to date, including as related to COVID. And also that Assistant Secretary Defense of the Air Force for acquisition and technology and Skyborg and ABMS program advocate, Dr. Roper, has now left with the administration change and the potential for additional delays that could arise as a result of the transition of this position.

On Gremlins, it was reported by DARPA and Dynetics, Kratos' prime Gremlins partners, that the Gremlins program has continued to make progress, including the successful completion of a third test flight series, in which the Gremlins Air Vehicle, or GAV, and the Gremlins Recovery System successfully flew several additional times. The recent test series focused on certain objectives, including demonstrating the automated and manual system safety behaviors and continuing progress toward a multiple aerial docking scenario. The safety behavior successfully demonstrated safe operation of the XQ-61A (sic) [X-61A] Gremlin in range and in close formation with the manned C-130 recovery vehicle. And the Gremlins team is now planning to have the C-130 recover multiple XQ-61A (sic) X-61A Gremlins in mid-air in a flight series scheduled for this coming spring.

Importantly, it was also recently reported that a new additional phase of demonstrations will focus on Gremlin operational capabilities, including with the Gremlins' performing suppression and destruction of enemy air defense missions and that this demonstration will involve integrating intelligence, surveillance and reconnaissance sensors and certain autonomy with the Gremlin drones. And it was reported that DARPA has now announced that they are in discussions with multiple DoD organizations for the Gremlins to transition to once the DARPA program is complete.

Related to concept of operations. It's been reported that a government program representative recently stated that the whole concept is that the Air Force wants to see that attritable drones and related distributed air operations work like we've been discussing and that, in an operational setting, Gremlin X-61As would create a layered effect flying in cohort with XQ-58A Valkyries to achieve manned, unmanned teaming as the Defense Department wants more runway independence in future contested environments.

The government representative also reportedly said that if we have a more expensive Valkyrie, we may keep the Valkyries a little bit further out. And if I have a less expensive Gremlins type air vehicle, we could push them in a little bit further into a threat environment, and that this really does give the services flexibility and extra tools to determine what's that best mix of multiple attritable vehicles, both large and small, as well as manned aircraft to be able to go up against whatever the threat happens to be.

Obviously, we are extremely excited about these recent developments, and we remain highly confident that the Gremlins, similar to the Valkyrie, will ultimately transition to the services and become a program of record.

Also similar to the Valkyrie, there is currently no competing drone flying today in the Gremlins class. And Kratos, with our partners, are pushing ahead to achieve first-to-market position for delivery and fielding of the Gremlin to the war fighter. Planned for upcoming 2021 Gremlins milestones include additional successful demonstration flights to prove out the system and achieve all program objectives, and we have taken into consideration in our 2021 financial guidance that DARPA recently stated that the program has been delayed and pushed to the right by at least a year due to COVID, range-related and other considerations.

Kratos' Mako tactical drone program also continue to have excellent performance over the past few months, including successful customer flights, demonstrating system performance and capabilities, including with additional and new payloads. We expect Kratos' Mako position as a very high-performance tactical jet unmanned test vehicle to continue, under contract and with multiple customers, and we have just begun discussions with a certain customer for potential weaponization and tactical mission utilization of the platform.

As I have mentioned previously, most of the work related to the Mako is now classified, and I'm unable to comment further. And similar to Kratos' Valkyrie and the Gremlins, there is no competing drone in the Mako class flying today.

Kratos' Air Wolf continue to make progress over the past few months with a number of successful flights, certain of which had been initially planned for early last year, but which were delayed, including due to COVID and related range access issues. We have additional flights for Air Wolf currently scheduled over the next several months, which are critical to this program moving forward. As I have mentioned previously, Airwolf as well as Valkyrie and Gremlins have all been significantly impacted by COVID-19 range related and other restrictions. And I do remain concerned on a potential loss of the Air Wolf program momentum, although these recent successful system flights are encouraging.

Also similar to Valkyrie and Gremlins and Mako, Kratos' Air Wolf tactical system is once again the only system in its class flying today. Kratos' Thanatos program, which is also classified, continues on schedule with a number of important milestones we need to achieve in 2021, so the program can move to its next phase. Kratos' Rattlesnake program with our partner, AeroVironment, also continued to make progress, including the successful flight in the past few months by Kratos' modified tactical fire jet drone, the drone mothership, if you will, for the Rattlesnake program. And we are now hoping for additional flights in the next several months, where we expect to successfully deploy AeroVironment's tactical systems, drone from drone.

Even though Rattlesnake has also been significantly impacted from a schedule standpoint, including as a result of adverse COVID impacts and weapons range impacts, I remain extremely excited about Kratos and AeroVironment's opportunity here. The AeroVironment team is a clear national asset, in my opinion.

And Kratos' ghost works has continued to make important progress since our last report to you on a very exciting initiative, which Kratos is investing in, which, if successful, could lead to initial flights of the system as early as the first half of next year. I believe that this top priority Kratos Ghost Works program could be another potential game changer, if successful, based on recent government feedback as recently as just yesterday and the customer demand signal for the system and capability.

And we are currently now preparing for flight at Kratos' new Oklahoma jet UAS drone port and range facility, with Kratos' tactical and other UASs. Kratos' drone port, which is near our tactical UAS production facility, we believe, will be an incredibly important strategic and competitive asset for our company as this will provide us the flexibility to rapidly test and demonstrate, including for our customers, tactical drone systems and save the company a significant amount of money in range and other fees.

The facility will also enable us to fly confidential Kratos' ghost works and other aircraft out of sight from our competitors and others, including an upcoming plan for near-term flight. I want to impress upon you the strategic significance and importance of Kratos' new drone test facility and range.

We are forecasting significant growth for Kratos' tactical drone business for '21 over '20, with 2021 tactical drone revenues estimated to increase up to approximately $50 million to $60 million, with upside potential with additional potential contract awards and opportunities. Kratos' target drone business continued to perform well in Q4, with the recapitalization of strategic weapon systems driving demand for Kratos' target drone systems to test and evaluate these weapon systems and ensure the warfighter operational readiness.

Since our last report to you, Kratos' United States Air Force BQM-167 AFSAT program remains in full rate production, and we are currently negotiating the next multiyear sole source production award with expected increased quantities. We have now received an additional full year -- full rate production contract award from the United States Navy on the BQM-177 SSAT program, or FRP 2 for 48 aircraft. Deliveries of initial FRP 1 for 35 aircraft that we previously received are planned to begin in 2022, with FRP unit deliveries following in future periods. As you know, the USN SSAT program is a key element in Kratos' target growth forecast.

We have received an order for an additional 20 target drone systems from an additional -- excuse me, from an existing international customer, this customer's largest order to date, with deliveries of these units now forecast to begin next year.

On a confidential program, we are currently in low-rate initial production, and we now expect to receive a full rate production award in mid-2022, with deliveries of FRP units now forecast for 2023. This is approximately 1 year behind what we had previously anticipated. On an additional large new pending international target drone award, where Kratos was the only bidder, we continue to wait for U.S. government approval of this contract. And with the change in administration, we do not have an update for you at this time on expected timing. This potential contract award is now approximately 1 year delayed from our initial expectations.

With our Army customer, orders of target drones under our nearly $100 million contract continue to be significantly below our previous expectations for a number of customer-related reasons. There are several new target drone opportunities we are currently pursuing, both domestic and international, with current expected award dates beginning sometime next year.

We expect continued organic growth for Kratos' target drone business for '21 over '20. In our largest business, Kratos' space and satellite, our OpenSpace products and technology, which represent a brand-new approach to enable dynamic ground system operations, continues to be extremely well received by the market and our customers. Kratos' OpenSpace is based on common interfaces and open standards, providing a truly adaptable, scalable and flexible platform.

With Kratos' OpenSpace, almost every piece of the ground station and segment can be turned from hardware to software and then can react rapidly, dynamically and affordably to changing conditions. And Kratos' OpenSpace platform is the first fully digital, virtualized, software-defined platform in the satellite industry. Kratos' OpenSpace disrupts ground networks that have been historically based upon purpose-built proprietary hardware and stove pipe software applications by utilizing leading-edge, standard-based, fully integrated technology with end-to-end service delivery running on a COTS server or in the cloud.

Kratos' OpenSpace is a software-defined network that can be dynamically configured, managed and deployed with virtual functions that run on generic inexpensive computers, with dynamics to match the capabilities of new payloads supporting LEO, MEO and GEO systems and its open architecture to allow the integration with other applications on the ground and in the space layer. In the coming world of thousands of multi-orbit, highly-configurable spacecraft, a ground system built for 1 payload or constellation will not scale. It won't enable roaming. It will not be resilient or reliable, and it won't enable the brand-new applications and services required in the air and on the ground. This is all critical for both military and commercial applications and requirements, and Kratos' first-to-market OpenSpace and other proprietary technologies address these requirements.

Additionally, Kratos' OpenSpace SpectralNet and DataDefender products enable the space-based analog RF signal to IP conversion without losing the critical timing aspect. Simply stated, Kratos' products convert and digitize based analog RF system signals and transport the related IP packets reliably over any distance and network. Kratos' new space and satellite technologies have been critical in allowing us to win, obtain or expand a number of large, new and important customers, programs and relationships, including EarthLink and Microsoft Azure, which has partnered with Elon Musk's Starlink system, which plans for thousands of satellites in its global Internet connectivity network.

Kratos is now working with several web 2.0 companies, also referred to as hyperscalers, which is a key element of our forecast extremely strong future space and satellite growth trajectory. 5G is another additional large new market opportunity area for Kratos' space and satellite business. As customers stream more videos, shop online, video conference and get used to telemedicine visits with the doctor, dependence on connectivity is exploding and 4G LTE networks just cannot keep up.

Additionally, and including a large new national security AI-related market opportunity, the race is on to implement artificial intelligence across an increasing number of systems and devices that need 5G. As part of the 5G FAST Plan, the FCC hopes to sell more than 5,000 new flexible use overlay licenses for C-band spectrum in the 3.7 to 3.9 h gigahertz frequency. And in the first phase of the auction, which ran from December 8 to Jan 15, they received bids totaling $80.9 billion, the highest grossing auction of its kind in U.S. history, representative of the enormous future 5G market opportunity.

Kratos' opportunities in the 5G area, as I have discussed in detail previously, include working with our existing satellite customers, like SES, Intelsat and others as they plan for and execute the relocation of their customers out of this 5G spectrum to new spectrum with this effort, including new satellites and the associated ground infrastructure, all of which is within Kratos' core expertise.

On the DoD side, a disaggregation of the space and ground system procurement by the customer, similar to our commercial customers approach, is also creating a large new opportunity set for Kratos, including a number of new near-term opportunities we are currently pursuing. For competitive reasons, I will not comment further here, but the new DoD LEO and MEO constellations and this new customer procurement approach is opening this new market for Kratos. We believe that Kratos' space and satellite business is extremely well and uniquely positioned for the ongoing very large industry transformation and the opportunities this is presenting. And we expect Kratos' space and satellite business to experience organic growth for 2021 over 2020, with an up and to the right trajectory for the foreseeable future.

Kratos' cybersecurity business, which also includes a satellite and space focus, continues to perform well, with the federal government-mandated Cybersecurity Maturity Model Certification, or CMMC, adding to our market-leading FedRAMP compliance practice. Consisting of 5 maturity levels of security practices, ranging from basic to advanced, CMMC will be phased into DoD RFPs over the next several months. A CMMC third-party assessment organization called C3PAO will be required to conduct assessments on organizations seeking a CMMC level certification. And Kratos was recently accredited as a C3PAO by the CMMC accreditation body, with Kratos being one of the first organizations to receive such an accreditation. We are forecasting organic growth for Kratos' cybersecurity business for '21 over '20.

Kratos' turbine technology business was recently awarded a $12.7 million task order under its Advanced Turbine Technologies for Affordable Missions IDIQ contract, which is representative of the progress we are making in the execution of our disruption -- excuse me, of our disruptive next-generation engine strategy. The ATTAM program will be managed by the floor -- excuse me, by the turbine engine division of the Air Force Research Lab. And this Kratos award follows the successful ground testing of an affordable turbojet designed for use in future low-cost cruise missiles and attritable unmanned aerial drones. The design and test of the Kratos' 200-pound thrust class turbo jet engine was completed in under 18 months, once again demonstrating Kratos' rapid design and demonstration capabilities to meet the needs of today's Pentagon.

Testing of Kratos' new engine was performed at our new and recently commissioned Kratos engine test facility in Florida. Similar to Kratos' jet drone port and range facility, we believe that our new engine test facility will provide flexibility and enable more rapid development, test and fielding of Kratos' engines, providing our company with a significant competitive advantage in our customers' significant capability and value.

In addition to the ATTAM program I mentioned, Kratos currently has multiple engines running and designed in on next-generation platforms, with vehicle flight test planned for 2 of these new systems in the coming months. We believe that 2 of the current USAF Vanguard programs, Skyborg and Golden Horde, will provide significant future opportunity for Kratos' next-generation affordable high-performance engines, in addition to the significant and increasing demand for drones, cruise missiles and powered munitions.

We are forecasting organic growth for Kratos' DoD-focused engine business for 2021 over 2020 as we continue our engine development programs with production planned for future years. We expect Kratos' commercial-focused engine business to be down in '21 from '20. This is primarily due to COVID impacts on the market.

Kratos' microwave electronics business recently received an $11 million development contract award related to a new plant for next-generation satellite program. This recent award is representative of the continued successful execution of our microwave business strategy, including designed-in positions on major new production programs, including a focus on space and satellites. Our microwave business is pursuing a number of large new opportunities, and we are forecasting solid year-over-year organic growth for this business for '21 over '20.

Kratos' C5ISR business performed extremely well throughout 2020, and we believe it is well positioned for an expected sustained and up and to the right organic growth trajectory, including the expected ramp-up of the new GBSD program. The recapitalization of strategic weapon systems is presenting multiple new opportunities across Kratos, including for our C5ISR business, and we are currently in pursuit of several large new program opportunities, certain of which we hope to receive and report to you this year.

We are forecasting organic 2021 revenue growth for C5ISR over 2020, with margins expected to be down primarily as a result of program maturity mix as development programs like GBSD and others typically generate lower margins than mature full rate reduction programs.

Kratos' rocket system business also performed well in 2020, and we expect this level of performance and revenues to continue to increase in 2021, including growth in ballistic missile defense, hypersonics, suborbital, targets and other vehicle areas. Our high-performance directed energy and laser weapons business is also forecasting a strong and growing 2021 over '20, driven by expansion of existing and new program wins. We have a number of exciting programs in our laser weapon and directed energy business. However, due to the nature of most of this work, we're unable to provide many details.

In Kratos' training business, we recently lost the Royal Saudi Navy recompete I discussed in our Q3 call. This program contributed approximately $35 million in revenue in 2020. In our 2021 guidance, we have assumed that we will continue working on the RSNF contract until May, which is the extension that we have received, which is expected to generate approximately $15 million in 2021 or a $20 million decrease from what we got in 2020 from this contract.

Other key factors taken into consideration related to Kratos' initial full year guidance and our Q1 guidance we're giving today. In late December, and continuing into Q1 of this year, Kratos experienced significantly increased incidence of employees exposed to or testing positive for COVID, including in California and at our drone, satellite and C5ISR locations. Additionally, on December 31, 2020, the Pentagon reinstated military travel restrictions, which, as you know, has severely impacted Kratos' drone business related to weapons range and facility access pushing many Kratos programs, including tactical drone programs to the right. Also, increased global COVID restrictions and quarantine mandates, including in Europe, Australia, and in the Pacific Rim and elsewhere internationally, has significantly impacted Kratos' ability to travel to customer locations, including for system and program sign-off and acceptance, impacting Kratos' satellite, international, target drone and other businesses.

At Kratos, our employees are clearly our #1 asset and employee safety and well-being is our first priority. Accordingly, we have taken the necessary precautions to keep our employees safe, including significant distancing, spacing and multiple shifts in the workspace, employee quarantines, and we have restricted their travel. We have tried to estimate the continued impact of the continuing COVID situation in our 2021 guidance, which impacted significant at this time.

As you know, Kratos microwave business, our microwave electronics, is headquartered in Israel. And over the past several quarters, including the past several months, the U.S. dollar has significantly weakened against the Israeli shekel. What this means is that while Kratos' customers pay us in U.S. dollars, Kratos pays its employees and its vendors in Israel in shekels. This has resulted in a significant reduction in profitability in our microwave business that has 0 to do with operations or business execution.

For example, Kratos' forecasted fiscal 2021 EBITDA would be $2 million to $3 million higher in '21 if the shekel-dollar exchange rate today were what it was on January 1, '20. So we have tried to estimate any further changes in the shekel-dollar conversion situation in our 2021 guidance.

Our 2021 guidance includes internally funded investments in our unmanned systems business for the continued production of our 12 precontract Valkyries and internally funded investments related to the recently awarded GBSD development program, which has an approximate initial value to Kratos of $200 million as we are establishing a new leased facility, and we are acquiring all of the machinery, tooling and manufacturing and other equipment needed to successfully execute this program.

Our 2021 guidance includes investments in our space and satellite communication business to support a large number of new programs we have received, or that we expect to receive, including where we need additional secure or other infrastructure to perform the work and includes an expansion of our owned space situational awareness global network.

Our 2021 guidance includes investments in both our rocket system and turbine engine businesses, where we are developing new engines in conjunction with the customer and where we are making internally funded investments in the form of capital equipment and nonrecurring engineering so that Kratos owns critical intellectual property. The majority of these investments that we are making are to support large new programs that Kratos has received, or that we expect to receive, including in our space, satellite, unmanned systems, CFI (sic) [C5ISR] and engine areas, which are critical to our expected and long-term up and to the right organic growth trajectory.

Importantly, even after assuming all of these planned for investments and excluding the low price technically acceptable Royal Saudi contract we lost from both '20 and '21, our fiscal '21 guidance reflects both organic growth of over 10% and EBITDA growth, with forecasted 2021 revenue growth of approximately 14% year-over-year.

In summary, with the exception of our training business, we are expecting organic revenue growth across all of our other business units, which is the result of the investments we have made over the past few years, and we expect to increase our market share in future years as we continue to make these key strategic investments I went through today.

Deanna?

Thank you, Eric. Good afternoon. Kratos' fourth quarter 2020 revenues of $206.4 million were as we forecasted and in our range of $184 million to $224 million. Adjusted EBITDA for the fourth quarter was $22.3 million, above our expectation of $14 million to $20 million due primarily to a favorable mix of revenues, including certain programs and products and more mature life cycles.

In the fourth quarter, our unmanned systems segment reported revenues of $49.5 million up 29.2% from the fourth quarter of '19 due primarily to confidential programs. Unmanned systems generated adjusted EBITDA of $5.5 million, up from $2.9 million in the fourth quarter of 2019, primarily reflecting the increased drone system-related revenues and a favorable mix of revenues.

KGS reported revenues of $156.9 million, up from $146.8 million in the fourth quarter of '19, reflecting $11.7 million from the recent ASC acquisition and organic growth in our space and satellite, defense, rocket and microwave products businesses. This increase was offset partially by a net reduction of approximately $5.7 million in our training solutions business, which was related to the previously disclosed reduction in scope of certain international contracts.

KGS' fourth quarter 2020 revenues also included a net reduction of $2.7 million in the company's KTT business, resulting primarily from COVID-19 impacts in our commercial aero business area. KGS' fourth quarter 2020 adjusted EBITDA was $16.8 million, down from $17.3 million in the fourth quarter of '19, reflecting a less favorable mix of revenues and increased R&D costs of approximately $2.4 million.

GAAP EPS was $0.62 per share for the quarter compared to $0.03 in the fourth quarter of '19. Included in GAAP net income is a $75.3 million tax benefit, primarily reflecting the release of the valuation allowance or reserve on our deferred tax assets relating to our net operating losses, or NOLs.

Previously, we had recorded a full reserve on the carrying value of the assets related to these NOLs. Based on our recent earnings history over the past few years, and based upon our long-term forecast and expected tax deductions based upon current tax regulations and the expected utilization of our remaining NOLs, a substantial portion of the valuation allowance was no longer deemed necessary. Also included in fourth quarter net income is a loss from discontinued operations of $100,000 and a loss from noncontrolling interest of $100,000.

Our Q4 '20 consolidated operating income was $9 million, down from the fourth quarter of '19 operating income of $9.3 million, reflecting fourth quarter 2020 increases in stock compensation expense of $3.7 million and increased R&D of $2.6 million in the current period, which was primarily in our space and satellite business. As a reminder, over 80% of our total R&D is typically invested in our space and satellite business.

Our adjusted EBITDA for the fourth quarter is from consolidating continuing operations, including net income or loss attributable to noncontrolling interest and excludes noncash stock-based compensation cost of $6.5 million, acquisition and restructuring-related costs of $200,000 and foreign transaction loss of $400,000.

Moving on to the balance sheet and liquidity. Our cash balance was $380.8 million at December 27, and we had 0 amounts outstanding on our bank line of credit and $5.9 million of letters of credit outstanding. Debt outstanding was $301 million at the quarter end, and net cash at quarter end was $79.8 million. Cash flow generated from operations for the fourth quarter was $25.6 million, less capital expenditures of $12.9 million or free cash flow generated from ops of $12.7 million. For fiscal 2020, cash flow generated from ops was $44.7 million, less capital expenditures of $35.9 million, with free cash flow generated from ops of $8.8 million.

Included in our full year cash flow generated from operations was approximately $9.5 million of employer-related payroll taxes that were deferred under the CARES Act, of which 50%, or approximately $5 million, is due by the end of 2021, and the remaining amount is due at the end of 2022.

Capital expenditures include approximately $9 million of amounts related to the Valkyrie assets we are currently building. Our contract mix for the quarter was 74% related to fixed-price contracts, 21% on cost-plus contracts and 5% on time and material contracts. Revenues generated from contracts with the U.S. federal government during the quarter were approximately 71%, including revenues generated from contracts with the DoD, non-DoD federal government agencies and FMS contracts, which were approximately 5%. We generated 9% from commercial customers and 20% from foreign customers.

Our backlog at quarter end was $922.2 million, up sequentially from third quarter end backlog of $873.1 million, bookings of $254 million and a book-to-bill ratio of 1.2:1 for the fourth quarter of 2020. Funded backlog at quarter end was $643.3 million, with $278.9 million unfunded. Our bookings and pipeline give us visibility into our expected future revenue flow over the next 18 to 24 months.

For the year ended 12/27/20, our book-to-bill ratio was 1.4:1, with total bookings of $1.03 billion. Our book-to-bill ratio for the year was 1.4:1 for both our unmanned systems segment and our KGS segment.

And now moving on to financial guidance. We are providing our initial first quarter and full year 2021 guidance of revenues of $185 million to $195 million and $810 million to $850 million; and adjusted EBITDA of $12 million to $16 million and $81 million to $87 million, respectively. As Eric mentioned, our guidance reflects the impact of the recent loss of an international training contract, which had contributed over $34.5 million in revenue in 2020 and which is expected to generate approximately $15 million in 2021, or a decrease of $20 million year-over-year. And it includes a full year of the recent ASC signal acquisition that closed in mid-2020.

We expect our unmanned systems revenues for fiscal 2021 to be in the range of $210 million to $240 million, reflecting expected target revenues and contribution from recent tactical awards. We expect to be awarded certain international target awards during fiscal 2021 that we have been pursuing. However, under the new accounting standards under ASC 606, due to the expected contractual terms, the expected revenues will be recorded as delivered, which is not expected until 2022 and thereafter, rather than underwriting percentage of completion method as work is performed under the contract.

In summary, many of the expected international contract awards will be recorded under a delivery basis, which is expected to be in 2022 and thereafter, rather than over time as work is performed during 2021. Kratos' revenue mix for 2021 is expected to be more developmentally weighted, including as a result of the large number of new contract awards that we have received and includes discretionary investments versus a more mature product life cycle in 2020.

Discretionary investments include continued R&D expenditures, primarily in our space and satellite business, resulting in an expected increase of -- in R&D of $3 million to $5 million over 2020 levels. Other discretionary investments include infrastructure costs of approximately $3 million to $4 million related to government-mandated cybersecurity or Cybersecurity Maturity Model Certification or CMMC, costs. In addition, as Eric mentioned, the results of our Israeli microwave products EBITDA is directly impacted by the strength of the shekel versus the U.S. dollar, which is currently expected to negatively impact 2021 EBITDA by $2 million to $3 million when compared to 2020 exchange rate levels.

We are providing full year 2021 free cash flow guidance of a use of $30 million to $40 million. Forecasted investments for nonrecurring engineering in our rocket system and engine businesses for new products is expected to be approximately $10 million for FY '21. And consolidated capital expenditures are estimated to be $55 million to $60 million for 2021. Approximately $20 million to $25 million of the expected outlay is related to the continued production of Valkyrie aircraft prior to receipt of expected customer awards, therefore, these aircraft are currently reflected as company-owned assets until receipt of the related customer awards. Kratos will adjust the forecasted CapEx outlays as the ultimate balance sheet classification of these investments once expected customer orders and the nature of the contract terms can be determined, at which time, those expenditures may be reflected as inventory and will impact operating cash flow.

In total, approximately $30 million to $33 million of our expected capital expenditures are related to our unmanned systems segment.

Our expected capital expenditures also include investments in the company's space and satellite business secure facilities and expansion of our company-owned situational awareness network of approximately $11 million to $15 million, capital investments related to the recent GBSD award in our C5ISR business of over $7 million to $8 million, and investments related to the company's turbine and rocket system businesses.

Included in our 2020 operating cash flow is a benefit of $9.5 million related to the deferred payroll tax -- related taxes under the CARES Act, of which 50% or approximately $5 million is required to be repaid by the end of 2021, and the remainder to be repaid by the end of 2022.

In summary, there is an approximate $15 million negative impact in 2021 operating cash flow when compared to 2020, resulting from the approximate $10 million 2020 payroll tax deferral, plus the approximate $5 million 2021 repayment. In addition, there is an approximate $10 million of engine related NRE investment expected in '21, resulting in an aggregate $25 million negative impact to 2021 operating cash flow when compared to 2020.

Kratos' fiscal year '21 guidance includes the current forecast financial contribution from the recent Skyborg, AFRL and other tactical drone system contract awards, including as related to Valkyrie. Kratos' fiscal year 2021 guidance excludes any contribution from potential additional Valkyrie or other tactical drone production or system contracts, with potential additional awards to be taken into consideration in our financial forecast adjusted once such contracts or orders are received and the related financial contribution can be estimated, which would be dependent on criteria, including the type of contract vehicle, scope, timing and period of performance.

Thank you. So as we begin 2021, the organic opportunity set for Kratos across the company has truly never been greater. And over the past several months, as a result of certain industry-related dynamics, a number of interesting potential acquisition opportunities have arisen that we believe could uniquely and significantly benefit us, which we're going to be investigating. I'm not sure if anything will come out of them, but we're going to be looking at them.

With that, I'll turn it over to the moderator for questions.

(Operator Instructions) we have our first question from Ken Herbert from Canaccord.

Eric, appreciate all the detail on the programs and the outlook. I guess, just at a high level, your comments imply very significant sort of opportunity set and a growing opportunity set. As you look at your portfolio, are there any areas that you'd identify as perhaps at risk if we are in a more challenged budget environment, not necessarily in fiscal '22, but in fiscal '23 and beyond?

The one that comes to mind, Ken -- and again, we're not the prime and in no way am I speaking for our partner, Northrop, would be GBSD and the Strategic Triad. That is the one that I read about.

Okay. And on the flip side. You obviously lost an ally when Dr. Roper transitioned out of the Air Force. What signals are you getting? Or what are your conversations like today with your customers in the Air Force and across the military on specifically the tactical drone side? I mean, it sounds like there's still broad support, but can you point to specific examples that give you confidence that you'll continue to see very strong budget support for the tactical effort?

I believe that our relationships and support with the Skyborg program office could not be any stronger, for example. Any stronger than it is. I believe that our support with the Air Force Research Lab and LCAT and LCASD, I don't see how it could be any stronger than it is, especially with what's coming down the pipe for Kratos.

We've -- a lot of us have done this a long time. We always make sure that there's no single point of failure. I don't want to name names on this line, but we have numerous, multiple individuals and offices, that are firmly behind attritable aircraft, affordability, bringing quantities to the fight. And you've noticed today, I stressed multiple times that Kratos has 4 jet drones that are flying today that I can tell you about, 4 of them. No one else has anything like it. And they are becoming operationalized. They are becoming missionized. You heard me talk about IOC is coming. You heard me talk about a new procurement opportunity just came out this week. This is happening. And we have the -- I believe we have the right products at the right price, at the right place, at the right time. And the customer appreciates that.

Next question is from the line of Noah Poponak from Goldman Sachs.

So Eric, you gave us a ton of detail there on the programmatic moving pieces. And obviously, you continue to speak to a number of opportunities to grow. But you've also had some things move against you in terms of time lines and COVID-related delays. If I zoom out, you're -- despite all of that, you're saying you're going to grow about 10% organically top line this year. And the margins actually look pretty flat despite the incremental investments with EBITDA margin a little over 10%.

So I guess, beyond this year, which has a number of kind of transition elements to it, how should we think about -- does Kratos have a top line organic growth rate that accelerates meaningfully? Or does it just kind of hang around that 10% range? And do the margins expand meaningfully? Or do they kind of hang around where they are as we move beyond '21?

Both our forecast and our 5-year plan to expand meaningfully. If a current forecast hold, and the only -- Noah, the only item I can see that would impact us is the ranges and range access, okay? 2022 is -- organically, is a step function revenue above, step function above '21. It is -- and space and satellite, I mean, I believe our customers speak for themselves. And we are going to start delivering product, software and product, in '21 to these customers I've gone through. And on the tactical drone side, again, if the current plans hold, there is going to be in our drone business a step function in growth next year.

And then back to Ken's question, Noah, on GBSD. There is a significant step function for Kratos from '21 to '22, then from '22 to '23 as we execute on for our partner, Northrop. And these are under contract.

Okay. No, that's helpful. Hopefully, time lines hold and these things can stick together. Can you dive a little further into what's gone on with Valkyrie and your accounting for it? Because last year, you had introduced the notion of it being in your CapEx until you got an order, and you said, once you got an order, you could then move it into revenue. And it sounded like you only anticipated that happening last year. Did you move anything into revenue on Valkyrie in 2020? And why is this still happening in 2021, given you've had the orders you expected you'd have?

Sure. So Noah, it depends on the contractual terms of what is awarded. So if -- so for instance, if it's for flight demonstrations or exercises or testing payloads, et cetera, then that would be more recorded as those exercises and demonstrations are performed for outright sales of aircraft, and it would be on a percentage of completion basis as we're building those aircraft. And those costs would be transferred from fixed assets to inventory. So it depends on the actual makeup of the contractual terms.

Is that to say that you were expecting production orders, and you only got flight demonstration orders?

Oh, no. Oh, no. We have received orders for several vehicles that we will be delivering the first ones very soon. We have to be very careful here, Noah, because of the nature of these contracts, the government has not disclosed, okay? But we will be delivering in the government customers because we have several that have ordered aircraft, will be taking, my word here, title ownership, transfer of the aircraft to them beginning this year and then continuing into next year.

And as I indicated in my remarks, we're planning on more to come as we move through the year.

Okay. So the $50 million to $60 million of revenue that you mentioned in your 2021 plan for tactical drone, is that basically the Valkyrie orders you've received so far?

It's a big part of it.

Yes, sir.

And then how are you thinking about the potential for more orders in this year that convert this year? Or should we think about incremental orders this year and beyond -- convert beyond '21?

It depends on the nature of -- it depends on the nature of the contract. If the contract is such that we receive something, say, in June or July, and ownership begins transferring of the work in progress, then it's percent complete. If the nature of the contract, and there's one in particular we're working on, where it's not until delivery occurs and they sign off on acceptance with the DD250, it won't -- the revenue, we won't get it until Q1 of '22.

We have our next question from Greg Konrad from Jefferies.

You ended the script at kind of a cliff-hanger talking about acquisition opportunities that may or may not materialize. Any other details or at least appetite or maybe areas that you're seeing in organic opportunities?

So Greg, as you know, over the past multiple years, we have been focused organically. And our -- and that's coming to fruition this year, and it's going to be accelerating, like I said, next year and thereafter. We've -- and we've stayed away from anything large. We've done tuck-ins. There are some certain dynamics that are happening out there in the industry that have brought potential opportunities to us that are right in our bay leeway. Like we're not going to do anything outside our bay leeway. Right in our bay leeway that could truly be, for us, 1 plus 1 equals 4 or 5, not plus 1 equals 1 equals 2. 1 plus 1 equals 2. And we're going to -- and because of that change in potential mindset, we'll have to see what happens. I wanted to mention that to the group here because we've been focused primarily organically.

That's helpful. And then can you just remind us of the size of the space business today? And you mentioned needle-moving space opportunities. And I think you talked a little bit about them in the script. But any other detail around size, timing or just kind of the potential trajectory of the overall space business?

Sure, Greg. So the current business is just a little bit over $200 million currently.

Perfect.

And Greg, on the second part of your question. So heretofore, a large opportunity for us would typically, say, be less than $50 million, okay? Right now, because of some of the changes I've talked about in the procurement posture by the customers, which is incredibly favorable for Kratos, okay, we have several opportunities we're bidding as prime, over $100 million. This has never happened to us before, and these are real. And this is what the customer wants. The customer wants to disaggregate the aggregation of buying space, satellites and ground. And we have the technology advantage now with OpenSpace.

And so with the technology advantage and the change in the customer posture -- and you have to calibrate me because the glass is always 90% full. We're going to win some of these. We are very well positioned technologically and price.

Next is Mike Crawford from B. Riley Securities.

With the additional lot of Skyborg -- or Valkyrie builds contemplated to start later in the year and also this NRE related to the military jet turbine engines you have in a little bit of additional CapEx this year. But do you expect CapEx then to come back down to like a $20 million or $30 million or lower level in '22 and beyond? Or might there always be these [types of investments]?

Yes, we expect it to come down.

Yes. So it was -- Mike, it would probably be more normalized in that $25 million to $30 million range.

Yes. Okay. Excellent. And then with -- you mentioned briefly your partnership with AV, AeroVironment, where this is what they're -- you're contemplating pointing the switchblade into one of your drones?

I -- Mike, I'm hesitating because I just don't know if it's been disclosed precisely which variants of their drones we're doing. So we are integrating certain of their drones into our aircraft. And again, I'm not being coy, I just don't want to misspeak here on which variant because they've come out with some new variants.

Okay. And then the -- back to your engine business. Can you disclose like maybe what was the commercial aero revenue associated with those 2 businesses you acquired, say, in 2019 versus 2020? And where that level might be this year before it potentially rebounds in '22, '23?

Yes. So the COVID related impacts were over $10 million in 2020, Mike. So they were down from about -- and I don't have the precise numbers, but I want to say they were about, in '19, closer to $20 million and then down to $10 million in 2020.

Yes, for '21...

It's looking...

We forecasted, Mike, even substantially less than that.

Okay. And then just finally. There are some outsized potential hypersonics-related opportunities, particularly with the engines. And are those also pushing to the right due to travel and other restrictions but -- or have any of those getting closer to a decision point?

They are not pushing to the right because of -- thus far, because of COVID or travel, okay? However, on 2 large hypersonic programs we are on that are publicly out there, okay, we were scheduled to do several launches for our customers this year. Those have moved into Q1 or Q2 of '22 for reasons not related to COVID.

We have our next question from Peter Arment from Baird. Sorry, we have Michael Ciarmoli from Truist Security.

Eric, just on the Valkyries, and obviously, you're building them on your own dime right now. I mean, the expectation, just to calibrate us, I think you said they'll start -- you'll deliver the first 1 in 2Q or 3Q. I mean -- and you've got a lot of 12. So should we think 8 to 10 realistic this year? And as obviously COVID ranges, but is this seemingly below your expectations of how fast you would have been able to build and deploy these?

I see your question. Yes, we're doing our best to match them coming off the line with the customer. That's what we're doing our best, so they don't sit in capital for an extended period. So it could be 6 to 10 this year, okay, just depending on that customer dynamic.

Now, Mike, I'm glad you asked this question because there's another opportunity coming that we're going after that, I think, we're going to get. And it's an opportunity where we will own the aircraft, and this is the wrong word, the government will lease them for ops. They'll pay a service fee for ops. And so that's a potential that we're seeing, too, for these aircraft.

Got it. And then just -- I think you may have answered Ken's question around one of the challenges maybe or headwinds being range access. I mean, as you sit here today, how are you thinking about the competition? It seems like various agencies you're working with have given your potential competition ample time to sort of catch-up to you and close that gap. How are you -- realizing no one's flown yet, but how are you looking at some of these decisions, delays and the competition, obviously, having time to prove their own platforms?

Right. I -- as you guys and gals that know me, you know I have ants in my pants. And so the delays, I don't like them one bit because we are doing everything we can to match Kratos with what the Pentagon is saying is a top priority, which is to rapidly develop, demonstrate and field systems, including digital engineering, which, of course, we are a leader in that. We don't talk about that much, but we are an industry leader in that, probably second to none on that. And we have the capability. And Mike, we're doing it. We are popping out a new aircraft every couple, 3 years.

And so it's -- I understand it. I don't like it. I'm very frustrated. But we will win. And the reason we are going to win is we have a family of aircraft flying today. They're being missionized and operationalized, okay? They're incredibly affordable compared to anything the competition can do. Why is that? Because we are producing hundreds of target drones, and so we are levering off that supply chain, the materials, the engines, the electronics, the avionics, the wire harnesses, I can go on and on. We are leveraging off of all the quantities we're buying for the target drones, which is driving down the cost of our tactical drones. No one has that. No one has that potential. They cannot do it, all right?

And you mentioned no one has anything flying today. You're right. This is hard. These aircrafts that we can talk about -- that I can talk about here, they go up to Mach 0.95 and pull an incredible amount of Gs and do certain things. And a lot of it is on autonomous systems. I'm not going to call it fully AI yet. This is not easy. And again, the fact that we do hundreds and hundreds of flights with our target drones, which you just switch out the payloads and switch out certain things, and it's a tactical drone, this has given us an incredible advantage, and this is why we will win.

Got it. And then just one last one, maybe kind of a little housekeeping, Deanna. I think you said some of these international awards and programs are going to be more delivery weighted versus percent of completion. Is that creating a bit of a revenue headwind this year? And should we expect maybe a little bit more of a step function than next year?

Absolutely. Yes. Yes, because just with the contractual terms and our international contracts, typically, they would not fall under percent complete, so -- under the new revenue recognition standard. So that will be based on delivery, which would push it out a year or so.

Okay. Would you quantify that or no?

Mike, I'd say, this year, I think we're going to be building 30 to 50 target drones for international customers. Think about that, 30 or 50.

We have our next question from Peter Arment from Baird. Airline.

Eric, you had talked a lot about, in the past, getting the unmanned segment up to kind of $250 million in revenues or at least approaching that. Do we get that this year? Or is it just because some of the delays that you've seen that are out of your control that you're not going to -- you won't be able to hit that?

Yes. We're not going to get there this year. I talked about -- good to hear from you, Peter -- talked about in my prepared remarks that Army contract, that Army program we won that was just under $100 million a couple of years ago. I can't get into the reasons why, but that is rolling out far slower than we thought. It just is. We have another program. I can't talk much about it at all, but we are under contract. We are working our way through LRIP. That has been pushed out -- full rate production has been pushed out a couple of years.

And as Deanna just said, this international, this new accounting rule, where these international ones, where we would typically do percent complete and we get the revenue as we be building them, now we're going to get the revenue on certain of these upon delivery. And so as I was -- as we were just chatting with Mr. Ciarmoli, I think it's somewhere between 30 and 50 international target drones this year that we're not going to deliver these until '22 or '23. And a bunch of those are revenue recognition is on delivery. And so that's moved that out. And so that's why. But the opportunity set is still there. Those are the dynamics that are around it.

No, that's helpful. And you also -- just on the Gremlins pushout. It's got nothing to do with your system, obviously, that DARPA still hasn't -- I guess, is still trying to validate the recovery system. What -- is that the main factor? You're seeing it kind of slide to the right by 12 months or so?

Oh, no, no. No, no. The Dynetics system is incredible, it's incredible. Remember, we've had 2 impacts here. Number one was the massive earthquake 1.5 years ago at China Lake, where the demonstrations flights were supposed to be. If you pull up China Lake earthquake, it was like $7 billion in damage to the range. That was the first delay that delayed us 6 months until, I think, we went to Dugway, okay?

Then COVID hit. And the COVID -- and think about the range operations. You got to go into command centers. There's no way you can social distance in a command center out there. There are the DoD travel restrictions, et cetera, et cetera. And this is why, like in the past couple of months, the DARPA program manager -- and I'm going to paraphrase here. I don't remember exactly what he said. But he said we've been pushed out approximately a year or more because of these types of things.

Next question is Seth Seifman from JPMorgan.

One thing I just want to clarify. The $210 million to $240 million of unmanned revenue that you talked about for '21, does that include the $50 million to $60 million of growth on the tactical drones?

Yes. It includes $50 million to $60 million of tactical drones. That's not growth, that's absolute dollars for a...

The [tactical]?

Yes.

Right. Okay. Okay. Got it. Okay. Was there meaningful tactical drone revenue in 2020?

There was. So some of the development classified work that we're working on. So it was in the range of $20 million plus.

Yes, that's right.

Okay. Okay. So the growth there is...

Yes, it was like to $20 million.

Okay. And so the growth there is from 20 up to -- it's going from $20 million up to that $50 million to $60 million range?

That's correct. Yes.

Okay. Okay. And then not to totally belabor the point. But just to understand a little bit better the Valkyrie accounting. I guess the orders that you have thus far cover an undisclosed portion of the initial 12 that you were building. And the -- what you'll be building next year, the CapEx covers a remaining portion of those 12 plus the 1 to 2 a month that you are thinking about building thereafter?

Correct.

Yes. Seth, the customers have not disclosed how many aircraft they're procuring from us. It's several. We are -- we cannot -- we are under strict guidance. We cannot get ahead of them on this.

Right. But these are percentage of completion, right?

Potentially. So I think that was the question.

We have to be careful because, again, the customers have been very clear to us on this.

I'll just refer back to the -- I think it was a question Noah had asked. It depends on the specific contract terms and delivery, et cetera, and what the deliverable is.

Right. Right. And the ones that are already under contract or maybe it's not something that's disclosable. The ones that are -- of the 12, the ones that are already under contract, are those percentage of completion or delivery?

We're not going to say -- we can't say.

We're not allowed to.

Fair enough. That's fair enough. All good. Totally different question then. Eric, you talked about M&A a little bit there at the end and talked about what sound like some really interesting opportunities. I guess just when you think about what kind of capacity you have and what you might want the balance sheet to look like and all that kind of stuff, how -- what color can you put around that in the context of the M&A opportunities you described?

We're very fortunate right now that we're in, in my opinion, a substantive net cash positive position. We have no -- those are bonds. So that means we have significant debt capability if we want to go that route. We are positioned where we can be very flexible with where we're at. Depending on if any of these items that we're assessing. And Seth, as I said, way upfront, I don't know if anything will happen here. I really don't. But they have to be perfect for us.

We're not a big acquiring company. But these are so interesting, and these -- like I said, these are not 1 plus 1 equals 2. These are -- and I'm talking about going after and winning new work, big programs, these are 1 plus 1 equal 4. It depends on, obviously, what it would look like and what it would take. But right now, we feel comfortable with all of our options.

Next is Joe Gomes from NOBLE Capital.

So most of my questions have been answered here already, but I'll take a different tack. You put out a press release earlier this month about your autonomous truck. I was wondering, maybe give us a little more color on that and what that might mean to the company. What kind of addressable market are we talking about here?

Joe, if you could see me, I'm smiling ear to ear because no one ever asked that question. And I purposely don't talk about this because this is one of a handful of areas we're going to sneak up on the market in a very, very positive way. So as you're alluding to, we're not developing something. We have taken a military technology on autonomous vehicles, okay? Like autonomous tanks and autonomous trucks, and we have commercialized it. And we have a strategic agreement with a number of players, including Royal Trucking. And we are now rolling this out across the U.S. And I think we're in 7 -- 6, 7, 8 states already.

The opportunity pipeline is incredible. And the market expansion in other areas, because we're proving this out from a safety standpoint, a reduction in cost standpoint, a green -- I don't focus on that much at all, a green standpoint, it is significant. And this year, this year, could be the year where we announce we've landed this, which will be meaningful financially for us in '22. So it's an incredible technology that our guys down in Florida developed for the military, and we are exploiting it commercially. And no one has anything like this. We're the industry leader.

(Operator Instructions) Next is Noah Poponak from Goldman Sachs.

Eric, are you looking at more acquisition candidates or larger acquisition candidates?

Larger. Yes, this is not a -- good question. This is not a quantity thing. These are very specific that have come to us.

And should we be thinking about size of your cash balance or size of your cash balance plus what you'd add if you took leverage to 2 or 3 turns? Or should we be thinking you would potentially issue equity for something transformational? Or would you roll that out?

I don't know yet, and let me tell you why. The debt interest rates right now are incredibly low. It's just -- they're incredibly low. That would be one path. Depending on the size, we may be able to handle it with what we have and not significantly debt up the company at all because of our EBITDA and our cash position and the EBITDA and the balance sheet construct and the potential targets.

If it's a certain type of opportunity and with the seller, et cetera, maybe it's a combination of those, maybe there's some equity involved. I don't -- I truly just don't know yet. But what I indicated before is we're very fortunate we're in a position where all those alternatives are open to us. But, Noah, very importantly, don't look for us to come out of anything in a significant leverage position. We're not going to do that. We're not going to do that.

Okay. That's helpful. How much revenue did you lose out of 2021 from the accounting change on the international items?

I'm going to do a total guess here. So I'm going to pick the midpoint of my number. So if we're at like 40 drones and it's a mix of fighter jets, et cetera, I'm going to say 15 to 20, maybe 20 -- 15 to 20 -- Deanna's nodding. 15 to 20, 25 in there, just depending on the percent complete that moved.

No further questions at this time. I turn the call back over to Mr. Eric DeMarco.

Great. Thank you for joining us today. And I know that this one -- the prepared remarks are a little longer than usual. It's because, obviously, it was the end of the year. We haven't had a chance to chat with you in 4 or 5 months. And there have been a lot of exciting things that have happened in our space business, which is really looking good and, obviously, in the drone business. So thank you very much for joining us.

Ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.