Kratos Reports Strong Third Quarter Fiscal 2016 Financial Results with Revenue of $165.4 Million and Adjusted EBITDA of $13.5 Million

SAN DIEGO, Nov. 02, 2016 (GLOBE NEWSWIRE) — Kratos Defense & Security Solutions, Inc. (Nasdaq:KTOS), a leading National Security Solutions provider, today reported its third quarter fiscal 2016 financial results.  For the third quarter ended September 25, 2016, Kratos generated Revenue and Adjusted EBITDA of $165.4 million and $13.5 million, respectively.  Driving this strong financial performance was Kratos’ Government Solutions Segment (KGS), the Company’s largest, which generated $112.8 million in revenue for the third quarter of 2016, an approximate 3.8 percent increase over the third quarter of 2015.  For the nine month period ended September 25, 2016, KGS generated Revenue of $341.4 million, an approximate 5.6 percent increase over the nine month period ended September 27, 2015.  KGS includes the Company’s Satellite Communications, Microwave Electronics, Directed Energy, Electromagnetic Rail Gun, Training, Rocket Support and Modular Systems businesses.

For the three and nine month periods ended September 25, 2016, Kratos’ Unmanned Systems Segment (KUS) generated revenues of $18.3 million and $50.3 million, respectively.  Over the nine month period ended September 25, 2016, KUS received a number of new Tactical High Performance Unmanned Aerial System (UAS) contract awards, including the Air Force Research Lab (AFRL) Low Cost Attritable Strike Demonstration (LCASD) contract, a Defense Advanced Research Project Agency (DARPA) Gremlins Prime contract award and a confidential Tactical UAS contract award.  Additionally, Kratos also just recently received a contract award from the Defense Innovation Unit Experimental (DIUx), in conjunction with the U.S. Strategic Command (STRATCOM) and the Strategic Capabilities Office (SCO) for the integration of certain sensors into Kratos’ UTAP-22 UAS, to explore the use of high speed drones in either fully autonomous or semi-autonomous roles, in support of fourth and fifth generation fighter aircraft.  As a result of these recent contract awards and other UAS and drone programs the Company is working on, Kratos is currently forecasting for its Unmanned Systems Business to approximately double in size over the next 24 months.

The operating income for the three months ended September 25, 2016 includes a charge for the expected loss accrual of $18.7 million recorded as an increase to cost of product sales on the recently awarded LCASD cost share contract.  As previously discussed, the $40.8 million cost share contract awarded by the AFRL includes initial customer funding of $7.3 million with an expected Kratos investment of approximately $33.5 million over the 30 month period of performance.  For the Company’s investment, Kratos will retain hard and other assets currently estimated at approximately $14.2 million, including aircraft, related support and other equipment, and important intellectual property, software, data, platform and system rights.     

For the three months ended September 25, 2016 Kratos generated a book-to-bill ratio of 1.2 to 1.0, including a 1.8 to 1.0 book-to-bill ratio by Kratos’ Satellite, Technology and Training Division, 1.4 to 1.0 by Kratos’ Microwave Electronic Products Division, and 1.5 to 1.0 in Kratos’ Modular Systems Division.  Kratos’ total backlog at the end of the third quarter of 2016 was approximately $901 million, including funded and unfunded backlog of $582 million and $319 million, respectively.  Kratos’ bid and proposal pipeline at September 25, 2016 was approximately $6.3 billion. 

For the third quarter ended September 25, 2016, approximately 58 percent of Kratos’ revenue was derived from U.S. Federal Government related customers, approximately 31 percent from commercial, state and local government customers, and approximately 11 percent from international customers.

For the quarter ended September 25, 2016, adjusted net income per share, or Adjusted EPS, was $0.03. 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 which primarily reflects the third quarter contract loss accrual recorded on the recently awarded LCASD cost share contract, 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 $300 million.  Kratos believes that reporting Adjusted EPS is a meaningful metric to present the Company’s financial results.  GAAP EPS was a loss of $(0.39) per share.   

Kratos announced today that it is increasing its full year 2016 Revenue guidance to $665 million, above its previous fiscal 2016 Guidance of $659 million, and Kratos is also increasing full year 2016 Adjusted EBITDA Guidance to $43 million, above its previous fiscal guidance of $42 million.  Kratos is also providing its initial full fiscal year 2017 financial guidance for Revenue of $700 million to $720 million and Adjusted EBITDA of $52 million to $54 million.    

Eric DeMarco, Kratos’ President and CEO, said, “We are pleased with our third quarter financial performance, and in particular the execution of Kratos’ Government Solutions Segment.  Included in KGS, Kratos’ Satellite, Technology and Training business unit, our Company’s largest and strongest cash flow generator, has reported approximately 12 percent year over year organic growth for the first nine months of 2016 over the similar 2015 period.  Additionally, Kratos’ third quarter contract awards were strong, with a book-to-bill ratio of 1.2 to 1.0, positioning the Company for future growth, and providing visibility into the Company’s expected financial performance.  Also importantly, for the first nine months of 2016, all Kratos domestic business units generated positive cash flow from operations except Unmanned Systems, where we have been in an investment mode in an exciting new growth market area: high performance jet powered unmanned aerial systems.”

Mr. DeMarco continued, “Just recently Kratos received an incredibly important strategic contract from the Defense Innovation Unit Experimental, which reports directly to the United States Secretary of Defense, related to Kratos’ high performance, internally-funded, company developed unmanned aerial aircraft, our UTAP-22.  Under the DIUx contract award, multiple Kratos UTAP-22s are scheduled to fly in a significant exercise in the near future, demonstrating a number of advanced mission capabilities in a complex environment.  The DIUx award is the most important step to date towards our objective of achieving production status for the UTAP-22.  We also believe the DIUx contract award, Kratos’ fourth high performance, jet powered unmanned aerial system contract award this year, further validates Kratos’ position as the leader in this new and growing market area.  With the DIUx contract award, all of Kratos’ high performance UAS initiatives are now funded by customers, except LCASD, where we are working under a cost share type contract where Kratos will own important intellectual property in this system.  We are currently expecting an additional, new large unmanned aerial drone system contract award by the end of 2016 or the beginning of 2017, and we  have recently entered into discussions with another U.S. Government Agency regarding additional significant funding for Kratos’ UTAP-22 initiative, which we are hopeful of receiving in 2017.”

Management will discuss the third quarter 2016 financial results, fiscal year 2016 financial guidance and initial fiscal year 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 1940825.  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 achieve projected 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, 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 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.