Fourth Quarter Revenues of $182.1 Million Increase 10.1% Over Third Quarter Revenues
Fourth Quarter Adjusted EBITDA of $13.4 Million
Full Year Revenue of $668.7 Million and Full Year Adjusted EBITDA of $45.0 Million
Affirms Fiscal 2017 Financial Guidance
SAN DIEGO, Feb. 27, 2017 (GLOBE NEWSWIRE) — Kratos Defense & Security Solutions, Inc. (Nasdaq:KTOS), a leading National Security Solutions provider, today reported its fourth quarter and full year fiscal 2016 financial results. For the fourth quarter ended December 25, 2016, Kratos generated revenue and Adjusted EBITDA of $182.1 million and $13.4 million, respectively. Fourth quarter 2016 revenues increased sequentially 10.1% over third quarter 2016 revenues of $165.4 million, and 2.6% over the fourth quarter 2015 revenues of $177.5 million.
Kratos’ business units contributing to the fourth quarter 2016 sequential organic growth included: 39.3% in Unmanned Systems, 30.0% in Microwave Electronics, 24.4% in Defense and Rocket Support Services, and 12.1% in Satellite, Technology and Training Solutions. Kratos’ business units contributing to the fourth quarter 2016 year over year organic growth included: 59.6% in Unmanned Systems, 26.3% in Defense and Rocket Support Services, and 5.9% in Satellite, Technology and Training Solutions. Recent important contract awards in unmanned tactical combat aerial systems, unmanned aerial target systems and increased shipments drove organic growth in Kratos’ Unmanned Systems business.
Kratos’ book to bill ratio in the fourth quarter of 2016 and year to date book to bill ratio was 1.0 to 1.0. Kratos’ total backlog at the end of the fourth quarter of 2016 was approximately $900 million, including funded and unfunded backlog of approximately $626 million and $274 million, respectively. Kratos’ bid and proposal pipeline at December 25, 2016 was $5.7 billion.
For the fourth quarter ended December 25, 2016, approximately 57% of Kratos’ revenue was derived from U.S. Federal Government related customers, approximately 29% from commercial, state and local government customers, and approximately 14% from international customers.
During the fourth quarter of 2016, Kratos completed an equity offering generating net proceeds of $76.2 million, after underwriting costs, fees and expenses. Consistent with the Company’s stated use of proceeds raised in the equity offering, cash of approximately $14.1 million was utilized during the fourth quarter to retire approximately $14.5 million of the Company’s Senior Notes, bringing the total amount outstanding of Senior Notes at December 25, 2016 to approximately $435.5 million. During the fourth quarter, the Company made investments of $1.9 million in its Unmanned Systems business, primarily related to capital expenditures for the LCASD and UTAP-22 combat aircraft. In the fourth quarter, the Company also made an initial $5.1 million strategic investment in a satellite communication signal monitoring, signal intelligence and location identification technology and product line, which significantly enhances Kratos’ existing satellite communications business offering. Cash flow from operating activities for the fourth quarter of 2016 was a use of approximately $3.7 million, reflecting the working capital impact of the 10.1% fourth quarter 2016 over third quarter 2016 sequential revenue growth the Company generated, offset by the semi-annual payment of interest on the Company’s Senior Notes of approximately $15.8 million in November 2016. The Company’s cash balance at the end of the fourth quarter was $69.1 million.
For the quarter ended December 25, 2016, net loss was $4.3 million, adjusted income per share was $0.02 and GAAP earnings per share was a loss of $0.07. Adjusted income per share excludes income from discontinued operations, non-cash amortization expenses, as the Company has historically been acquisitive, non-cash stock compensation costs, transaction gains and losses, and certain non-recurring items such as excess capacity, acquisition and restructuring related items and other, 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 per share is a meaningful metric to present the Company’s financial results.
For the year ended December 25, 2016, Kratos generated revenues of $668.7 million, a 1.8% increase over 2015 revenues of $657.1 million, and Adjusted EBITDA of $45.0 million for year ended December 25, 2016, compared to $44.6 million in 2015. Net loss from continuing operations was $60.4 million for fiscal 2016, a GAAP EPS loss of $0.99, compared to a loss of $33.2 million for 2015, a GAAP EPS loss of $0.56. Adjusted loss per share was $0.07 for 2016 and 2015.
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.
Eric DeMarco, Kratos’ President and CEO, said, “Kratos finished 2016 exceeding our expectations, as our primary market space, U.S.DoD government contracting and National Security, continued to improve. Importantly, in addition to our strong fourth quarter 2016 financial performance, Kratos’ bookings and backlog in our largest business unit, which includes our satellite communications, cybersecurity and training businesses, was 1.2 to 1 in the fourth quarter and for 2016, positioning the Company for an even better 2017.”
Mr. DeMarco continued, “Kratos’ Unmanned Systems business also had a very strong fourth quarter, generating sequential revenue growth over the third quarter of almost 40%. We expect this growth to continue going forward with two new large under contract unmanned drone system programs beginning production, once we have a 2017 Federal budget. We expect these two programs to be the primary drivers of an expected doubling in size of our Unmanned Systems business over the following 24 months. Additionally, during the fourth quarter we were awarded a large contract from a new customer for Kratos’ high performance unmanned aerial target drone systems, and we are expecting an additional large new customer award for Kratos’ target drone systems in the next few months. Also significant, during the fourth quarter, we made important progress on each of our under contract unmanned combat aerial systems programs, including LCASD, DIUx, UTAP-22 and Gremlins, each of which is currently on schedule and on budget.”
Mr. DeMarco concluded, “We believe that 2016 was the beginning of a long-term growth trajectory for our Company, driven by an improving overall industry environment, Kratos specifically being in well-funded, high priority national security areas including satellite communications, cyber security and unmanned systems, and Kratos having large new programs entering expected long-term production beginning in 2017. We believe that Kratos has the right business, products and solutions, at a low cost at the right time. We are focused and executing on our core businesses, and we expect the Company’s overall financial performance to continue to improve and generate long-term value for Kratos shareholders.”
Management will discuss the Company’s 2016 financial results and fiscal year 2017 and first quarter 2017 guidance in a conference call beginning at 2:30 p.m. Pacific (5:30 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 66898084. 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 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 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 related to certain of the Company’s contracts, 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, 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); 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 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 and Pro Forma 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, foreign transaction gains and losses, the pro forma impact for the full year of restructuring actions we have taken as if such actions had been completed at the beginning of the year, 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
