Kratos’ First Quarter 2018 and Prior Year Financial Results Reflect Public Safety and Security Business as a Discontinued Operation Pending Expected Second Quarter Divestiture
Share
First Quarter 2018 Revenues of $143.0 Million Increase 8.3 Percent over First Quarter of 2017
Kratos’ Unmanned Systems Division First Quarter 2018 Revenues of $27.8 Million Increase 78.2 Percent over First Quarter 2017
First Quarter Positive Cash Flow from Operations of $6.5 Million
First Quarter Book–To-Bill Ratio of 1.2 to 1.0
Affirms Full Year 2018 Financial Guidance
SAN DIEGO, May 10, 2018 (GLOBE NEWSWIRE) — Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS), a leading National Security Solutions provider, today reported its first quarter 2018 financial results, which, along with comparable 2017 financial results, have been recast to reflect the pending divestiture of the Company’s Public Safety & Security (PSS) business as a discontinued operation. The sale and divestiture of Kratos’ PSS business is expected to close during the Company’s second fiscal quarter of 2018.
Accordingly, for the first quarter ended April 1, 2018, Kratos generated revenue of $143.0 million, an increase of 8.3 percent over the first quarter of 2017. First quarter 2018 Adjusted EBITDA from continuing operations was $13.7 million, an increase of 34.3 percent over Adjusted EBITDA of $10.2 million in the first quarter of 2017. First quarter 2018 gross margins increased to 28.5 percent from 27.3 percent in the first quarter of 2017, operating income increased 400 percent to $7.0 million in 2018 from $1.4 million in 2017 and Kratos Adjusted EBITDA margin rate increased to 9.6 percent in 2018 from 7.7 percent in 2017. In the first quarter of 2018 Kratos generated positive cash from operations of $6.5 million, the Company’s total backlog was $551.8 million, book-to-bill ratio was 1.2 to 1.0 and Kratos’ bid and proposal pipeline was approximately $6 billion.
For the first quarter of 2018, Kratos’ Unmanned Systems Division (KUSD) generated year over year revenue growth of 78.2 percent, to $27.8 million, up from $15.6 million in the first quarter of 2017. KUSD’s first quarter 2018 Adjusted EBITDA of $1.7 million, or 6.1 percent of revenue, increased from an Adjusted EBITDA loss of $2.8 million in the first quarter of 2017. In addition, in the first quarter of 2018, KUSD received in excess of $200 million in sole source or single award contracts, all of which is expected to be converted to revenue over the life of the expected contracts, and reported a book to bill ratio of 2.6 to 1.0.
In the first quarter of 2018, all businesses within Kratos’ Government Solutions (KGS) generated year-over-year revenue growth, except Kratos’ legacy, non-core government services business, which saw a decline of $8.1 million, resulting in an overall decline in KGS revenues of 1.0% from the first quarter of 2017. Excluding the legacy government services business, KGS revenue in the first quarter of 2018 increased 7.3 percent over the first quarter of 2017. KGS’ Adjusted EBITDA in the first quarter of 2018 was $12.0 million, down from $13.0 million in the first quarter of 2017, primarily due to the decline in Kratos legacy government services business and product mix. During the first quarter of 2018, KGS’ satellite communications business was selected to participate in the U.S. Air Force TETRAS program under a $998 million multiple award IDIQ contract, and Kratos’ Microwave Electronics Division received an approximate $20 million initial sole source contract award in support of a new airborne electronic warfare system.
Approximately $7.7 million of the increase in the first quarter 2018 revenues was a result of the Company’s adoption of the new revenue recognition guidance effective January 1, 2018. Approximately $3.2 million and $4.5 million of the increase were related to the KGS and KUSD divisions, respectively. The Company’s adoption of the new revenue recognition guidance impacts the timing of revenue recognition. The adoption also resulted in an approximate $138.6 million reduction in total backlog.
For the first quarter of 2018, Adjusted EPS* was $0.05 and EPS from continuing operations was $0.01. In the first quarter of 2018, net loss was $2.2 million, which included a loss from discontinued operations of $3.5 million, or a loss from discontinued operations of $0.03 per share, and net loss per share was $0.02.
Eric DeMarco, Kratos’ President and CEO, said, “Kratos’ core unmanned target drone, satellite communications, microwave electronics, training and missile defense related businesses drove Kratos’ first quarter results. These businesses, and in particular Kratos’ unmanned target drone business with several new programs under contract and beginning production, and existing programs with expected increased production quantities, are forecast to drive a strong organic growth curve for our Company over the next several years. Additionally, with our Dynetics team Gremlins win, Kratos has successfully won every high performance tactical unmanned aerial drone program we have pursued, beating certain of the largest aerospace and defense companies in the industry in competitive solicitations. With the Gremlins award, we are now more confident than ever that Kratos’ tactical unmanned aerial systems business will significantly increase the already strong organic growth we are forecasting for our current core businesses in future years.”
Mr. DeMarco concluded, “With a 2018 DoD budget now in place, we have high confidence in Kratos’ 2018 financial forecast, including an extremely strong third and fourth quarter, as we execute and deliver on the numerous new, long term programs we have under contract. With the planned divestiture of PSS, we have positioned Kratos as a high growth, technology and intellectual property based aerospace and defense Company, and we are laser focused on operational execution, increasing Kratos’ profit margins and increasing our cash flow.”
Financial Guidance
Kratos is affirming its full year 2018 financial guidance for revenues, excluding the PSS business, of $640 to $650 million, compared to $603.3 million for the full year of 2017, and full year 2018 Adjusted EBITDA guidance of $55 to $59 million, compared to $47.6 million for full year 2017. Kratos is also affirming its full year 2018 financial guidance of positive cash flow generation from operations of $35 to $45 million, including the expected collection of net working capital proceeds of the PSS business retained by Kratos.
Kratos’ second quarter 2018 financial guidance for revenues excluding PSS is $140 to $150 million, as compared to $147.9 million for the second quarter of 2017, and second quarter 2018 Adjusted EBITDA guidance is $9.0 to $11.0 million, which reflects the anticipated product mix based on delivery and production schedules, as compared to $10.2 million for the second quarter of 2017.
Similar to 2017, as a result of the approximate six month U.S. Federal Budget Continuing Resolution Authorization which ended March 23, 2018, and the approval of the 2018 DoD Budget, Kratos is forecasting strong third and fourth quarters of fiscal 2018, and for the second half of its fiscal year financial performance to be substantially stronger than the first half of 2018.
Management will discuss the Company’s first quarter 2018 financial results, second quarter and full year 2018 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 4268676. 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) develops transformative, affordable technology for the Department of Defense and commercial customers. Kratos is changing the way breakthrough technology for these industries is brought to market through proactive research and a streamlined development process. Kratos specializes in unmanned systems, satellite communications, cyber security/warfare, microwave electronics, missile defense, training and combat systems. For more information go to 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 of the second quarter and full year 2018 revenue, Adjusted EBITDA and Adjusted EPS, and ability to generate positive cash flow from operations in 2018, 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 offerings, 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, ability to close the pending divestiture of its PSS business, and market and industry developments, including projected growth. 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; risks that we are not able to close the pending divestiture of the PSS business on our anticipated timeline or at all; 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 31, 2017, 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 and capitalized contract and development costs, stock compensation expense, loss on extinguishment of debt, contract design retrofit costs, acquisition and restructuring related items and other, and impairment of goodwill, 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, impairment of goodwill, loss on extinguishment of debt, foreign transaction gains and losses, and the associated margin rates). Additional non-GAAP financial measures include Revenues and Adjusted EBITDA related to our KUSD, KGS and PSS businesses. 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.
*Adjusted earnings per share (Adjusted EPS) 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, certain non-recurring items such as acquisition and restructuring related items and other, the loss on extinguishment of debt, and the non-cash impairment of goodwill, 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.
Kratos Defense & Security Solutions, Inc.
Unaudited Condensed Consolidated Statements of Operations
