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Kratos Reports Strong Second Quarter Fiscal 2016 Financial Results with Revenue and Adjusted EBITDA of $168.2 Million and $13.5 Million, Respectively

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Adjusted EPS of $.01

Increases Full Year 2016 Revenue Guidance by $10 Million above Current Consensus Estimates

SAN DIEGO, Aug. 04, 2016 (GLOBE NEWSWIRE) — Kratos Defense & Security Solutions, Inc. (Nasdaq:KTOS), a leading National Security Solutions provider, today reported its second quarter fiscal 2016 financial results.  For the second quarter ended June 26, 2016, Kratos generated Revenue and Adjusted EBITDA of $168.2 million and $13.5 million, respectively.  Driving this strong financial performance was Kratos’ Satellite, Technology and Training Division, which generated second quarter 2016 revenue of $70.3 million, which was a year-over-year increase of 21.2 percent, and a sequential increase from the first quarter of 19.1 percent.  Kratos’ Satellite, Technology and Training Division is the largest business in the Company, and generates the strongest free cash flow.  The book-to-bill ratio in this Division was 1.1 to 1 for the second quarter, positioning the business for continued solid future performance.

In the second quarter, Kratos’ Unmanned Systems Division generated revenue of $17.8 million, a 25.3% sequential increase over the first quarter of 2016.  In addition to Kratos’ Satellite, Technology and Training business, other Kratos businesses reporting second quarter 2016 year-over-year organic growth were Microwave Electronics, which generated second quarter 2016 revenue of $12.6 million, a 8.6 percent increase over the second quarter of 2015; and Defense and Rocket Support Services, which generated second quarter 2016 revenue of $23.2 million, a 1.8% increase over the second quarter of 2015.

Kratos’ book-to-bill ratio in the second quarter of 2016 was 0.8 to 1.0 and was 0.9 to 1.0 for the last twelve months ended June 26, 2016.  Kratos’ total backlog at the end of the second quarter of 2016 was $875 million, including funded and unfunded backlog of $542 million and $333 million, respectively.  Kratos’ bid and proposal pipeline at June 26, 2016 was $6.2 billion

For the second quarter ended June 26, 2016, approximately 61 percent of Kratos’ revenue was derived from U.S. Federal Government related customers, approximately 27 percent from commercial, state and local government customers, and approximately 12 percent from international customers.

Throughout the first half of 2016, Kratos maintained significant engineering, technical, management and other unmanned aerial system (UAS) related resources in anticipation of successfully being awarded three new high performance tactical UAS program opportunities which the Company has been competitively pursuing.   With the recent Low-Cost Attritable Strike (LCASD) Unmanned Aerial System Demonstration contract award, the Company has now been awarded all three of these new tactical UAS programs. The maintenance of the resources and the associated costs related to the pursuit of these new UAS opportunities continued to adversely impact Kratos’ second quarter and first half 2016 Adjusted EBITDA and Cash Flow.  Cash flow from continuing operations for the second quarter of 2016 was a use of approximately $0.9 million, which includes the semi-annual interest payment for the Senior Notes of $15.8 million, with a total cash use of $2.5 million for the quarter. 

In the second quarter, the Company substantially completed the restructuring and facility consolidation in its Modular System Division (MSD) with the closing of Kratos’ Charleston Marine Container (CMCI) manufacturing plant, and the transfer of associated work to other MSD facilities.  The activities in the second quarter included a $4.8 million restructuring charge comprised of a non-cash impairment of intangible and fixed assets of $3.4 million and an unused office lease accrual for the vacated facility of approximately $1.4 million

For the quarter ended June 26, 2016, adjusted net income per share, or EPS, was $0.01 and GAAP EPS was a loss of $(0.17).  Adjusted EPS excludes 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 excess capacity and restructuring costs and investments in unmanned combat systems initiatives, and includes cash actually expected to be paid for income taxes on continuing operations, excluding the impact of the discontinued operations, and reflecting the benefit of the Company’s net operating loss carryforwards of approximately $200 millionKratos believes that reporting Adjusted EPS is a meaningful metric to present the Company’s financial results.

Kratos announced today that it is increasing its full year 2016 Revenue Guidance by $10 million above current consensus estimates of $649 million, up to $659 million, and full year 2016 Adjusted EBITDA Guidance above current consensus estimates of $40.5 million, up to $42 million.    

Eric DeMarco, Kratos’ President and CEO, said, “We are extremely pleased with our second quarter financial performance, and in particular the execution of our Satellite, Technology and Training Division.  This division, Kratos’ largest business unit, along with our Microwave Electronics business, are extremely solid, core, free cash flow generating strategic assets of the Company, which have allowed us to make the critical investments necessary in the tactical unmanned combat aerial system area.  With our recent LCASD program win, Kratos’ Unmanned Systems Division has now successfully been awarded each of the three new high performance tactical unmanned aerial system opportunities we have been focused on.  Additionally, we are now confident that Kratos’ UTAP-22 will be receiving government funding either later this year or in 2017, all of which we believe clearly position Kratos as a leader in this new and fast growing market space.  As we head into the second half of 2016, we believe that the U.S. defense budget has bottomed and is now turning upwards, providing us increased visibility on order flow and confidence in the business.”

Management will discuss the second quarter 2016 financial results and fiscal year 2016 financial 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 51274053.  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 2,800. 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 and filing 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 sustain year over year organic growth in certain of the Company’s business units, 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, performance of key 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, 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. 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 outstanding senior notes and the repurchase of outstanding 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 associated with the divestiture of our U.S. and U.K. Electronic Products business; 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 27, 2015, 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 EPS (computed using net income (loss) from continuing operations before income taxes, excluding amortization of purchased intangibles, stock compensation expense, transaction and restructuring related items and other, litigation related items, unused office space expense, contract design retrofit costs and unanticipated contract costs, excess capacity, investments in unmanned combat systems initiatives,  the pro forma impact of cost reduction actions as if made at the beginning of the first  quarter, 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, and foreign transaction gains and losses, the pro forma impact for the full quarter of restructuring actions we have taken as if such actions had been completed at the beginning of the quarter,  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  
(in millions, except per share data)  
                   
    Three Months Ended   Six  Months Ended  
    June 26,   June 28,   June 26,   June 28,  
      2016       2015       2016       2015    
                   
Service revenues   $ 88.2     $ 88.8     $ 170.8