Kratos Reports Fourth Quarter and Fiscal 2021 Financial Results

Fiscal 2021 Revenues of $811.5 Million and Fourth Quarter 2021 Revenues of $211.6 Million Increased 8.5 percent and 2.5 Percent over Fiscal Year and Fourth Quarter 2020 Revenues, Respectively

Fiscal 2021 Unmanned Systems Segment Revenues of $231.9 Million and Fourth Quarter 2021 Revenues of $54.4 Million, Increased 24.0 Percent and 9.9 Percent over Fiscal Year and Fourth Quarter 2020 Revenues, Respectively

        Fiscal 2021 Space, Satellite and Cyber Business Revenues of $276.3 million and Fourth Quarter 2021 Revenues of $78.4 Million, Increased 18.9 percent and 9.0 Percent over Fiscal Year and Fourth Quarter 2020 Revenues, Respectively

Fourth Quarter 2021 Consolidated Book to Bill Ratio of 1.5 to 1
Fiscal 2021 Consolidated Book to Bill Ratio of 1.0 to 1

SAN DIEGO, Feb. 22, 2022 (GLOBE NEWSWIRE) — Kratos Defense & Security Solutions, Inc. (Nasdaq:KTOS), a leading National Security Solutions provider, today reported its fourth quarter and fiscal 2021 financial results. For the fourth quarter of 2021, Kratos reported Revenues of $211.6 million, Operating Income of $9.2 million, Net Loss of $2.6 million and Adjusted EBITDA of $23.4 million.   Included in Net Loss is a tax provision of $4.5 million on Income before taxes of $3.0 million.

Kratos reported fourth quarter 2021 Net Loss of $2.6 million, and GAAP loss per share of $0.02, compared to Net Income of $78.1 million and GAAP EPS income of $0.62 for the fourth quarter of 2020, which included a non-recurring non-cash tax benefit of $75.3 million. Adjusted EPS was $0.11 for the fourth quarter of 2021 compared to $0.08 for the fourth quarter of 2020. The Company has approximately $235 million of net operating loss carryforwards, which are expected to substantially shield Kratos from paying future cash income taxes.   

Fourth quarter 2021 Revenues of $211.6 million increased $5.2 million, or 2.5 percent, from fourth quarter 2020 Revenues of $206.4 million, reflecting increases in the Company’s Unmanned Systems, Space, Satellite and Cyber, Microwave Products and Turbine Technologies businesses, offset partially by reductions of approximately $9.4 million in our Training Solutions business resulting primarily from a previously disclosed reduction of an international training contract. On a pro forma basis, excluding this reduction, Revenue grew organically 7.7 percent in the fourth quarter of 2021, as compared to the fourth quarter of 2020.   Additionally, fourth quarter 2021 revenues continued to be negatively impacted by COVID-related employee absenteeism, supply chain delays, increased lead times for delivery of necessary components, customer delays and travel restrictions, primarily in our Space, Satellite and Cyber, Microwave Products and C5ISR businesses, resulting in expected revenues of approximately $11.2 million being deferred into future periods.

Operating Income of $9.2 million in the fourth quarter of 2021 increased from $9.0 million in the fourth quarter of 2020, with fourth quarter 2021 Operating Income including increases in Internally Funded Research & Development of $1.4 million over the fourth quarter of 2020. Fourth quarter 2021 Adjusted EBITDA of $23.4 million increased from $22.3 million in the fourth quarter of 2020.

Fourth quarter 2021 Cash Flow Generated from Operations was $0.7 million, and Free Cash Flow Used from Operations was $12.4 million, after funding $13.1 million of capital expenditures, including in our high growth Unmanned Systems, Space, Satellite and Cyber and Turbine Technologies business areas.

For the fourth quarter of 2021, Kratos’ Unmanned Systems Segment (KUS) Revenues of $54.4 million increased 9.9 percent, as compared to $49.5 million in the fourth quarter of 2020. KUS Operating Income decreased from $3.5 million in the fourth quarter of 2020 to $2.3 million in the fourth quarter of 2021, primarily due to a less favorable mix of revenues, including an increase in development programs, which typically generate lower margins, and due to an increase in SG&A costs of approximately $1.3 million and an increase of R&D expenses of approximately $0.3 million.

Fourth quarter 2021 KUS Adjusted EBITDA of $4.6 million decreased from fourth quarter 2020 Adjusted EBITDA of $5.5 million, primarily reflecting increases in certain development programs, including in the tactical drone area, which typically generate lower margins, and due to an increase in SG&A costs, including costs related to increased headcount.
        
KUS’s book-to-bill ratio for the fourth quarter of 2021 was 2.4 to 1.0 and 1.1 to 1.0 for the last twelve months ended December 26, 2021, with bookings of $263.6 million for the twelve months ended December 26, 2021.   Total backlog for KUS at the end of the fourth quarter of 2021 was $269.6 million, up from $194.5 million at the end of the third quarter of 2021, and up from $237.9 million at the end of the fourth quarter of 2020.      

For the fourth quarter of 2021, Kratos’ Government Solutions Segment (KGS) reported Revenues of $157.2 million, up from Revenues of $156.9 million in the fourth quarter of 2020, reflecting organic growth in our Space, Satellite and Cyber, Microwave Products and Turbine Technologies businesses, offset by a reduction of $9.4 million in our Training Solutions business resulting primarily from the loss of an international training contract. KGS reported operating income of $14.7 million, up from Operating Income of $12.5 million in the fourth quarter of 2020, primarily reflecting a more favorable revenue mix in the Company’s Space, Satellite and Cyber, Microwave Products and Turbine Technologies businesses.  

Kratos’ Space, Satellite and Cyber business generated Revenues of $78.4 million in the fourth quarter of 2021, an organic increase of 9.0 percent over the fourth quarter of 2020 Revenues of $71.9 million.

Fourth quarter 2021 KGS Adjusted EBITDA of $18.8 million increased from fourth quarter 2020 Adjusted EBITDA of $16.8 million, including a more favorable mix of revenues, primarily in the Space, Satellite and Cyber business generated from deliveries of OpenSpace software and work performed on certain confidential programs, and including a favorable mix and deliveries in our Microwave Products and a favorable mix in our Turbine Technologies businesses.

For the fourth quarter of 2021, KGS reported a book-to-bill ratio of 1.2 to 1.0, and a book to bill ratio of 1.0 to 1 for the twelve months ended December 26, 2021.   Included in KGS is Kratos’ Space, Satellite and Cyber business, which reported a book to bill ratio for the twelve months ended December 26, 2021 of 1.1 to 1. KGS’s total backlog at the end of the fourth quarter of 2021 was $684.3 million, up from $644.6 million at the end of the third quarter of 2021, and flat from $684.2 million at the end of the fourth quarter of 2020.

For the fourth quarter of 2021, Kratos reported consolidated bookings of $323.1 million and a book-to-bill ratio of 1.5 to 1.0, with consolidated bookings of $840.0 million and a book-to-bill ratio of 1.0 to 1.0 for the last twelve months ended December 26, 2021. Backlog on December 26, 2021 was $953.9 million, up sequentially from $839.1 million at September 26, 2021 and up from $922.2 million at December 27, 2020, and Kratos’ bid and proposal pipeline was $9.4 billion at December 26, 2021, up from $9.1 billion at September 26, 2021.   Backlog at December 26, 2021 was comprised of funded backlog of $653.7 million and unfunded backlog of $300.2 million.

Fiscal 2021 Revenues of $811.5 million increased 8.5 percent, as compared to Revenues of $747.7 million in fiscal 2020, reflecting organic growth in Kratos’ Unmanned Systems, Space, Satellite and Cyber, Microwave Products, and Turbine Technologies businesses, offset partially by certain reductions of approximately $26.1 million in our Training Solutions business. Fiscal 2021 Revenues include approximately $41.4 million from the recent ASC Signal acquisition, up from fiscal 2020 Revenues of $21.9 million, reflecting a full year of contribution in 2021. On a proforma basis, excluding the reduction in our Training Solutions business and excluding the ASC acquisition, Consolidated Revenues increased organically 10.7 percent.

In fiscal 2021, our Unmanned Systems business generated revenue of $231.9 million, an increase of 24 percent over 2020 revenues of $187.0 million. In fiscal 2021 our KGS business generated revenue of $579.6 million, an increase of 3.4 percent over 2020 revenue of $560.7 million. On a proforma basis, excluding the reduction in our Training Solutions business and excluding the ASC acquisition, revenues in our KGS business grew 5.4 percent from fiscal 2020 to fiscal 2021.

Consolidated Operating Income of $27.9 million for fiscal 2021 decreased 4.8 percent, as compared to $29.3 million in fiscal 2020. Fiscal 2021 Operating Income includes increases in non-cash stock-based compensation expense of $4.8 million, depreciation expense of $3.2 million and R&D expenses of $8.2 million, primarily reflecting investments in the Company’s Space, Satellite and Cyber business. Kratos reported fiscal 2021 Net Loss of $2.0 million and loss per share of $0.02, compared to 2020 Net Income of $79.6 million and GAAP EPS of $0.67. Included in fiscal 2020 Net Income is a non-cash tax benefit of $73.5 million. Adjusted EPS was $0.36 for fiscal 2021 compared to $0.33 for fiscal 2020.

Fiscal 2021 Adjusted EBITDA of $82.9 million increased from 2020 Adjusted EBITDA of $78.5 million, primarily reflecting the increase in Revenues, net of the impact of the mix of revenues, including certain programs and products in more mature lifecycles, offset by increased investments including in R&D.

For fiscal year 2021, Cash Flow Generated from Operations was $35.3 million, and Free Cash Flow Used from Operations was $11.2 million, after funding $46.5 million of capital expenditures. Cash on hand on December 26, 2021 was $349.4 million.

Eric DeMarco, Kratos’ President and CEO, said, “For fiscal year 2021, our largest businesses, Unmanned Systems and Space, Satellite and Cyber, reported revenue growth of approximately 24% and 19%, respectively, with Kratos’ Unmanned Systems and KGS reporting fourth quarter book to bill ratios of 2.4 to 1.0 and 1.2 to 1.0, respectively, or a consolidated book to bill ratio of 1.5 to 1.0, positioning the Company for a continued future up and to the right growth trajectory. As we begin 2022, we remain laser focused on our disruptive, affordable, rapid development, leading technology, customer aligned mission.”

Mr. DeMarco, continued, “The DoD has recently communicated its continued commitment to and prioritization of loyal wingman tactical drone and autonomous systems for the future force structure, including additional new planned for program opportunities and potential envisioned concepts of operations. With the numerous tactical drone programs Kratos has successfully competed for and been awarded, the family of affordable aircraft we have flying today and additional systems Kratos Ghost Works has in development with the customer, we believe that Kratos is uniquely positioned to address this new, large market opportunity when the customer calls.”

Mr. DeMarco concluded, “Similar to Kratos’ tactical drone business, we believe that our Space and Satellite business has the opportunity, with our first to market, software based virtualized products, to disrupt the ground infrastructure market and provide Kratos a significant future growth opportunity. Accordingly, in 2022 we will continue our internally funded investments and remain focused on achieving “designed in” program and constellation positions, increasing our market share, while also forecasting increasing revenue, profitability and positive cash flow for this business throughout the year.”

Financial Guidance
We are providing our first quarter and full year 2022 guidance as follows:

Our Fiscal year 2022 financial guidance we are providing today includes our current forecasted business mix, and our assumptions related to the expected impact of continued employee absenteeism, manufacturing, production and supply chain disruptions, parts shortages and related price increases in materials and components, travel restrictions and other COVID-19 related items that have and continue to impact the industry and Kratos.  

In January and February of 2022, we experienced a significant increase in the intensity and effects of COVID–19, including the new Omicron variant, on our employees, consultants, vendors, suppliers, customers, etc. We have assumed that these COVID–19 related impacts to our business, which are significantly impacting our fiscal first quarter 2022 forecast, will begin to subside in our second fiscal quarter, and continue to improve throughout our fiscal 2022. Our assumption of an improving COVID-19 related environment throughout the year, combined with the expectation of a Fiscal 2022 DoD budget by the end of the first quarter, directly relates to our 2022 quarter over quarter financial forecast improvement, including Kratos’ expectation that its financial performance in the second half of 2022 will be substantially greater than the first half.
  
The estimated impact of these COVID-related issues, including the availability of certain raw materials and lack of capacity at mills supporting Kratos’ hardware programs, is currently estimated to impact our first quarter Revenues and Adjusted EBITDA by $12 to $15 million and $2 to $4 million, respectively, and currently estimated to impact our fiscal 2022 Revenues and Adjusted EBITDA by $20 to $25 million and $5 to $8 million, respectively. We will provide future updates as appropriate.

The forecasted financial trajectory in the second half of 2022 reflects the expected mix of revenues, including the expected timing of software product deliveries in our Space, Satellite and Cyber business based upon the forecasted order flow and roll out of our new OpenSpace solution. As we have discussed previously, as this business is transitioning to a more software-focused solution, financial performance is becoming more cyclical, as we experienced in 2021, with increased revenue and margins projected around the September 30 Government fiscal and other customers’ calendar year-end, when increased order and procurement decisions are typically made to fully expend or obligate current fiscal year funding. This cyclicality also results in our projection that we will experience reduced profit margins in the first half of Kratos’ fiscal year, and in particular the first quarter, with increased margins in the second half of the year, due to increased financial leverage on our fixed overhead, manufacturing, research, development and administrative infrastructure, as forecasted revenues increase sequentially throughout the year.

There is currently no Federal Fiscal Year 2022 (October 1, 2021 – September 30, 2022) defense budget in place and the defense industry is operating under a Federal Budget Continuing Resolution Authorization (CRA), which Kratos has been operating under throughout our entire fourth quarter of fiscal 2021 (October 1, 2021 – December 26, 2021) and thus far during our first quarter of fiscal 2022. Under a CRA, there are no new start program awards or new programs of record, no increases in production on existing programs, and no transition from existing development programs to production, among other items, all which impact Kratos. The effects of the current CRA adversely impacted Kratos’ fourth quarter of 2021 and are expected to adversely impact Kratos’ fiscal 2022, with the most significant impact to financial performance currently expected in our first and second quarters, including an expected reduction in bookings, which estimated impact we have included in our 2022 financial guidance provided today.

The existing CRA currently expires on March 11, 2022, at which time we have assumed that a Federal Fiscal Year 2022 defense budget will be approved and become law, which assumption is included in our Fiscal 2022 financial guidance. However, the final approved and authorized DoD budget for 2022 and its timing is currently uncertain, and the longer a CRA continues beyond the March 11, 2022 expiration date, the greater the potential adverse impact on the defense industry and Kratos.

Forecasted Q122 and FY22 Operating Income and Adjusted EBITDA reflect the expected mix of development-type contracts and expected investments, including in our Space, Satellite and Cyber, Unmanned Systems, C5ISR, Turbine Technologies and Rocket System businesses, where we have received, are pursuing or expect to receive a number of new contract awards.   Kratos’ FY22 forecasted revenues also include the final impact of the 2021 loss of a large international training contract, which contributed approximately $13.0 million to the Company’s FY21 first and second quarter revenues and include the estimated contribution from the recently closed CTT and Cosmic AES acquisitions.

The 2022 estimated Operating Cash Flow includes approximately $10 to $12 million of continued planned engineering costs in our Rocket System and Turbine Technologies businesses for new products and investments, including the design and development of an affordable hypersonic vehicle, Erinyes, and a complementary propulsion system. 2022 Operating Cash Flow also includes an approximate $5 million outflow, representing the final installment of the required payback of the 2020 deferred employer-related payroll taxes.

Total estimated capital expenditures for 2022 are $55 to $65 million, which includes approximately $25 to $30 million for expected capital expenditures related to normal annual maintenance. In addition, the 2022 capital expenditure forecast currently includes expected outlays of $18 to $20 million associated with the continued production of Valkyrie aircraft prior to receipt of expected customer award(s); therefore, these aircraft are currently reflected as Company-owned assets until receipt of the related customer award(s). Kratos will adjust the forecasted capital expenditure outlays and the ultimate balance sheet classification of these investments once expected customer orders and the nature of the contract terms can be determined. Other non-recurring, non-maintenance capital expenditures include expected investments of approximately $12 to $14 million related to the build out of secure facilities for the Company’s Unmanned Systems business and the Company’s Space, Satellite and Cyber business, and for approximately $5 – $6 million of expected capital investments related to the GBSD program and investments related to the Company’s Turbine Technologies and Rocket System businesses, including for Erinyes. Approximately $9 – $14         million of capital expenditures and approximately $6 – $7 million of engineering costs that were initially expected to be incurred in 2021 have carried forward into the Company’s 2022 capital and operating budgets.

Kratos is waiting for the previously mentioned CRA to end, 2022 Defense Budget approval and for the 2023 DoD Budget Request and Future Years’ Defense Program (FYDP) submission, each of which program and related funding content may significantly impact Kratos’ current 2022 and future internally funded investment expectations.

Management will discuss the Company’s fourth quarter and fiscal 2021 financial results, as well as its first quarter and full year 2022 guidance on 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 2121619. 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 and fields transformative, affordable technology, platforms, and systems for United States National Security related customers, allies, and commercial enterprises.  Kratos is changing the way breakthrough technologies for these industries are rapidly brought to market through proven commercial and venture capital backed approaches, including proactive research, and streamlined development processes.  At Kratos, affordability is a technology, and we specialize in unmanned systems, satellite communications, cyber security/warfare, microwave electronics, missile defense, hypersonic systems, training and combat systems and next generation turbo jet and turbo fan engine development. 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 for its first quarter and full year 2022 revenues, R&D, operating income, depreciation, amortization, stock based compensation expense, and Adjusted EBITDA, and full year 2022 operating cash flow, capital expenditures and other investments, and free cash flow use, the Company’s future growth trajectory and ability to achieve improved revenue mix and profit in certain of its business segments and the expected timing of such improved revenue mix and profit, the Company’s expectation of ramp on projects and that investments in its business will result in an increase in the Company’s market share and total addressable market and position the Company for significant future organic growth, profitability, cash flow and an increase in shareholder value, the Company’s bid and proposal pipeline, demand for its products and services, including the Company’s alignment with today’s National Security requirements and expectation that the 2022 DoD budget will be favorable for the Company, ability to successfully compete in the tactical unmanned aerial system area and expected new customer awards, including the magnitude and timing of funding and the future opportunity associated with such awards, and expected contract awards related to the Company’s Skyborg Vanguard program and other new tactical unmanned programs, performance of key contracts and programs, 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 and to achieve financial leverage on fixed administrative costs, benefits to be realized from the Company’s net operating loss carry forwards, the availability and timing of government funding for the Company’s offerings, including the strength of the future funding environment, the short-term delays that may occur as a result of Continuing Resolutions or delays in DoD budget approvals, timing of LRIP and full rate production 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, market and industry developments, and the current estimated impact of COVID-19 and employee absenteeism, supply chain disruptions and delays on our financial projections, industry, business and operations, 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 un