Kratos Reports First Quarter 2017 Financial Results
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Revenues of $167.8 Million Increase 9.7 Percent Over First Quarter 2016 Revenues
Affirms Fiscal 2017 Financial Guidance
SAN DIEGO, May 04, 2017 (GLOBE NEWSWIRE) — Kratos Defense & Security Solutions, Inc. (Nasdaq:KTOS), a leading National Security Solutions provider, today reported its first quarter 2017 financial results. For the first quarter ended March 26, 2017, Kratos generated revenues and Adjusted EBITDA of $167.8 million and $10.6 million, respectively. First quarter 2017 revenues increased 9.7 percent over first quarter 2016 revenues of $153.0 million, and 2017 Adjusted EBITDA more than doubled at $10.6 million, up from first quarter 2016 Adjusted EBITDA of $4.6 million. Kratos’ book to bill ratio in the first quarter of 2017 was 0.9 to 1.0, including book to bill ratios of 2.3 to 1.0 in Kratos’ Unmanned Systems Division, and 1.9 to 1.0 in Kratos’ Microwave Electronic Products Division. For the last twelve months ended March 26, 2017, Kratos’ book to bill ratio was 1.0 to 1.0. Kratos’ total backlog at the end of the first quarter of 2017 was approximately $878.3 million, including funded and unfunded backlog of approximately $616.2 million and $262.1 million, respectively. Kratos’ bid and proposal pipeline at March 26, 2017 was $5.9 billion.
Kratos’ business units contributing to the first quarter 2017 year-over-year growth included: 15.6 percent growth in Satellite Communications, Cyber Security, Technology and Training Solutions, 9.9 percent growth in Unmanned Systems, and 21.9 percent growth in Public Safety and Security. Recent contract awards in the satellite communications business area, where Kratos provides command, control, communication and RF Interference Mitigation products and solutions, U.S. Marine Corp, U.S. Air Force and other customer training systems, and high performance jet powered unmanned tactical combat and target drone aerial systems were primary organic growth contributors for the first quarter of 2017. Year over year growth in the Company’s Public Safety and Security business was driven primarily by security system and related communication equipment integration under a security system deployment program for a Mass Transportation Authority in a large metropolitan area.
For the first quarter ended March 26, 2017, approximately 57% of Kratos’ revenue was derived from U.S. Federal Government related customers, approximately 34% from commercial, state and local government customers, and approximately 9% from international customers.
During the first quarter of 2017, Kratos completed an equity offering generating net proceeds of approximately $81.9 million, after underwriting costs, fees and expenses. Consistent with the Company’s stated use of proceeds raised in the equity offering, cash of approximately $64.0 million was utilized during the first quarter to retire $62.7 million of the Company’s Senior Notes, bringing the total amount outstanding of total debt at March 26, 2017 to $374.3 million. The Company’s cash balance at March 26, 2017 was $73.4 million, yielding a total net debt position at the end of the first quarter of 2017 of $300.9 million. Over the last two fiscal quarters, the Company has retired $77.2 million of the Company’s Senior Notes, reducing the Company’s annual cash interest payments by approximately $5.4 million.
During the first quarter, the Company made investments of approximately $7.2 million, including capital expenditures of $5.2 million primarily related to its Unmanned Systems and Satellite Communications businesses, and approximately $2.0 million in development costs related to the Low Cost Attritable Strike Demonstrator (LCASD) tactical unmanned aircraft where Kratos will retain intellectual property rights. Cash flow from operating activities for the first quarter of 2017 was a use of approximately $8.7 million, reflecting the $2.0 million in LCASD development costs, and net working capital requirements of approximately $6.7 million primarily related to the build of inventory in anticipation of future scheduled product deliveries.
For the quarter ended March 26, 2017, net loss was $10.0 million, adjusted loss per share was $(0.01). Adjusted income per share excludes loss from discontinued operations, non-cash amortization expenses, as the Company has historically been acquisitive, non-cash stock compensation costs, foreign transaction gains and losses, and certain non-recurring items such as acquisition and restructuring related items and other, and loss on extinguishment of debt, and includes cash actually expected to be paid for income taxes on continuing operations, reflecting the benefit of the Company’s net operating loss carryforwards of over $300 million. Kratos believes that reporting adjusted income (loss) per share is a meaningful metric to present the Company’s financial results. GAAP earnings per share was a loss of $(0.13).
Kratos is affirming its previously provided 2017 guidance for revenues of $700 to $720 million, and Adjusted EBITDA of $52 to $54 million, with a similar quarterly revenue and Adjusted EBITDA trajectory as experienced in 2016. Kratos is providing second quarter 2017 revenue guidance of $170 to $176 million and Adjusted EBITDA guidance of $8 million to $12 million.
Eric DeMarco, Kratos’ President and CEO, said, “Kratos’ performance in the first quarter exceeded our expectations, including continued strength and customer demand in our Satellite Communications, Cyber Security, Technology and Training division. This division had a full year and fourth quarter 2016 book to bill ratio of 1.2 to 1.0 that we are now executing on. Kratos’ Satellite Communication business, the largest in our Company, is seeing strength across virtually every capability area, and we are forecasting this strong performance to continue going forward due to increasing bandwidth demands, and threats to U.S. space based assets. We are also seeing strong customer demand in Kratos’ Cyber Security and Training Systems business areas, where we won several large new program awards in 2016 which are just now beginning to ramp up, and where we are hopeful of receiving another very large new contract award later on this year.”
Mr. DeMarco continued, “In Kratos’ Unmanned Systems Division, in the first quarter we received Production Lot 13 from the U.S. Air Force for Kratos’ BQM 167 unmanned aerial target drone aircraft, one of the largest programs in our Company. We also received a contract award from a separate customer for a new jet powered high performance unmanned aerial drone system, where Kratos will initially be providing system engineering, avionics, data links and ground systems. If a 2017 Department of Defense (DoD) budget is approved, we would expect to begin production in the following few months on the U.S. Navy SSAT program for the BQM 177 unmanned aerial target drone system and on a confidential customer program. Once in production, we expect the SSAT Program to become one of the largest in Kratos over the following few years, and these two programs are expected to be key drivers to a doubling in size of Kratos’ unmanned systems business as they achieve full rate production.”
Mr. DeMarco went on, “In the first quarter, we continued to make important progress in our tactical unmanned aerial system (UAS) initiative with advancement to Phase II of the DARPA Gremlins Program as a subcontractor on the Dynetics team. On the Dynetics team, Kratos will design, develop and build prototype Gremlin Tactical UASs, tooling, support equipment, etc. On Kratos’ prime LCASD tactical UAS contract with the Air Force Research Lab (AFRL), we are on budget and on schedule for an estimated second quarter 2018 maiden flight. Kratos’ prime contract with the Defense Innovation Unit Experimental (DIUx) also currently remains on budget and on schedule for a second half 2017 demonstration with several Kratos Mako tactical UASs, previously named UTAP-22, set to fly in a major exercise.
Mr. DeMarco concluded, “In 2016, Kratos returned to growth, and we expect that growth to continue and to accelerate in 2017. In a few select areas, including satellite communications, microwave electronics, high performance UASs and training systems we believe that we are extremely well positioned, having the right products at the right price point to address mission critical National Security priority areas. We have recently recapitalized the Company, significantly reducing our debt and delevering the balance sheet, positioning Kratos to successfully execute on the multiple new contract awards we have recently received, and to fund the expected future growth of the business.”
Management will discuss the Company’s first quarter 2017 financial results and second quarter 2017 guidance in a conference call beginning at 2:00 p.m. Pacific (5:00 p.m. Eastern) today. Analysts and institutional investors may participate in the conference call by dialing (866) 393-0674, and referencing the call by ID number 10348101. The general public may access the conference call by dialing (877) 344-3935 or on the day of the event by visiting www.kratosdefense.com for a simultaneous webcast. A replay of the webcast will be available on the Kratos web site approximately two hours after the conclusion of the conference call.
About Kratos Defense & Security Solutions Kratos Defense & Security Solutions, Inc. (Nasdaq:KTOS) is a mid-tier government contractor at the forefront of the Department of Defense’s Innovation Initiative and Third Offset Strategy. Kratos is a leading technology, intellectual property and proprietary product and solution company focused on the United States and its allies’ national security. Kratos is the industry leader in high performance unmanned aerial drone target systems used to test weapon systems and to train the warfighter, and is a provider of high performance unmanned combat aerial systems for force multiplication and amplification. Kratos is also an industry leader in satellite communications, microwave electronics, cyber security/warfare, missile defense and combat systems. Kratos has primarily an engineering and technically oriented work force of approximately 2,900. Substantially all of Kratos’ work is performed on a military base, in a secure facility or at a critical infrastructure location. Kratos’ primary end customers are National Security related agencies. News and information are available at www.KratosDefense.com.
Notice Regarding Forward-Looking Statements This news release contains certain forward-looking statements that involve risks and uncertainties, including, without limitation, express or implied statements concerning the Company’s expectations regarding its future financial performance, including the Company’s expectations concerning the trajectory of 2017 revenue and Adjusted EBITDA, the Company’s ability to achieve projected growth in certain of the Company’s business units and the expected timing of such growth, its bid and proposal pipeline, demand for its products and services, including the Company’s ability to successfully compete in the tactical unmanned aerial system area and expected new customer awards, performance of key contracts, including the timing of production and demonstration related to certain of the Company’s contracts and product offerings, the impact of the Company’s restructuring efforts and cost reduction measures, including its ability to improve profitability and cash flow in certain business units as a result of these actions, benefits to be realized from the Company’s net operating loss carryforwards and the availability and timing of government funding for the Company’s UTAP-22 or Mako, timing of LRIP related to the Company’s unmanned aerial target system offerings, as well as the level of recurring revenues expected to be generated by these programs once they achieve full rate production, and market and industry developments. Such statements are only predictions, and the Company’s actual results may differ materially from the results expressed or implied by these statements. Investors are cautioned not to place undue reliance on any such forward-looking statements. All such forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update or revise these statements, whether as a result of new information, future events or otherwise. Factors that may cause the Company’s results to differ include, but are not limited to: risks to our business and financial results related to the reductions and other spending constraints imposed on the U.S. Government and our other customers, including as a result of sequestration, the Federal budget deficit and Federal government shut-downs; risks of adverse regulatory action or litigation; risks associated with debt leverage and expected cost savings and cash flow improvements expected as a result of the refinancing of our Senior Notes and the repurchase of Senior Notes; risks that our cost-cutting initiatives will not provide the anticipated benefits; risks that changes, cutbacks or delays in spending by the U.S.DoD may occur, which could cause delays or cancellations of key government contracts; risks of delays to or the cancellation of our projects as a result of protest actions submitted by our competitors; risks that changes may occur in Federal government (or other applicable) procurement laws, regulations, policies and budgets; risks of the availability of government funding for the Company’s products and services due to performance, cost growth, or other factors, changes in government and customer priorities and requirements (including cost-cutting initiatives, the potential deferral of awards, terminations or reduction of expenditures to respond to the priorities of Congress and the Administration, or budgetary cuts resulting from Congressional committee recommendations or automatic sequestration under the Budget Control Act of 2011, as amended); risks of increases in the Federal government initiatives related to in-sourcing; risks related to security breaches, including cybersecurity attacks and threats or other significant disruptions of our information systems, facilities and infrastructures; risks related to our compliance with applicable contracting and procurement laws, regulations and standards; risks relating to contract performance; risks related to failure of our products or services; risks associated with our subcontractors’ or suppliers’ failure to perform their contractual obligations, including the appearance of counterfeit or corrupt parts in our products; changes in the competitive environment (including as a result of bid protests); failure to successfully integrate acquired operations and competition in the marketplace, which could reduce revenues and profit margins; risks that potential future goodwill impairments will adversely affect our operating results; risks that anticipated tax benefits will not be realized in accordance with our expectations; risks that a change in ownership of our stock could cause further limitation to the future utilization of our net operating losses; risks that the current economic environment will adversely impact our business; and risks related to natural disasters or severe weather. These and other risk factors are more fully discussed in the Company’s Annual Report on Form 10-K for the period ended December 25, 2016, and in our other filings made with the Securities and Exchange Commission.
Note Regarding Use of Non-GAAP Financial Measures This news release contains non-GAAP financial measures, including Adjusted income (loss) per share (computed using income (loss) from continuing operations before income taxes, excluding amortization of intangible assets, stock compensation expense, loss on extinguishment of debt, contract design retrofit costs, acquisition and restructuring related items and other which includes but is not limited to unused office space expense, excess capacity, investments in unmanned combat systems initiatives, and foreign transaction gains and losses, less the estimated tax cash payments) and Adjusted EBITDA (which excludes, among other things, losses and gains from discontinued operations, restructuring and transaction related items, investments in unmanned combat systems initiatives, stock compensation expense, unused office space expense, and foreign transaction gains and losses, and the associated margin rates). Kratos believes this information is useful to investors because it provides a basis for measuring the Company’s available capital resources, the actual and forecasted operating performance of the Company’s business and the Company’s cash flow, excluding extraordinary items and non-cash items that would normally be included in the most directly comparable measures calculated and presented in accordance with generally accepted accounting principles. The Company’s management uses these non-GAAP financial measures along with the most directly comparable GAAP financial measures in evaluating the Company’s actual and forecasted operating performance, capital resources and cash flow. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with GAAP, and investors should carefully evaluate the Company’s financial results calculated in accordance with GAAP and reconciliations to those financial statements. In addition, non-GAAP financial measures as reported by the Company may not be comparable to similarly titled amounts reported by other companies. As appropriate, the most directly comparable GAAP financial measures and information reconciling these non-GAAP financial measures to the Company’s financial results prepared in accordance with GAAP are included in this news release.
Kratos Defense & Security Solutions, Inc.
Unaudited Condensed Consolidated Statements of Operations
