Kratos Reports Second Quarter 2017 Financial Results
Thursday, July 27, 2017 4:00:19 PM ET
Revenues of $185.7 Million Increase Sequentially 10.7 Percent, Over First Quarter 2017 Revenues and Increased 10.4 Percent Over the Prior Year
Kratos Unmanned Systems Business Revenues Sequentially Increase 42.3 Percent Over First Quarter 2017 Revenues and Increased 24.7 Percent Over the Prior Year
Kratos Increases Fiscal 2017 Financial Guidance
Kratos Defense & Security Solutions, Inc. (KTOS ), a leading National Security Solutions provider, today reported its second quarter 2017 financial results. For the second quarter ended June 25, 2017, Kratos generated Revenues and Adjusted EBITDA of $185.7 million and $11.5 million, respectively. Second quarter 2017 Revenues increased 10.7 percent sequentially over first quarter 2017 Revenues, and second quarter 2017 Adjusted EBITDA increased 8.5 percent sequentially over first quarter 2017 Adjusted EBITDA.
Kratos business units contributing to the second quarter 2017 sequential revenue growth included: 42.3 percent revenue growth in Kratos Unmanned Systems, 14.6 percent revenue growth in Defense and Rocket Support Solutions, 13.5 percent revenue growth in Modular Systems, 7.9 percent revenue growth in Satellite Communications, Cyber Security, Technology and Training Systems, and 3.0 percent in Kratos Public Safety and Security business.
Contributors for the sequential revenue growth in the second quarter for Kratos Unmanned Systems Division included execution on numerous High Performance Unmanned Aerial Drone System programs; Defense and Rocket Support Solutions contributors included work in the Ballistic Missile Defense, High Power Directed Energy, Laser and C5 areas; Modular Systems contributors included work on various Missile, Radar and C5 systems including Patriot, Satellite Communications Systems contributors included Advanced Extreme High Frequency (AEHF), Wideband Global Satellite (WGS), Space Based Infrared System (SBIR), Mobile User Objective System (MOUS) and certain Confidential programs; and Public Safety and Security contributors included a new physical access control project for a large healthcare customer.
Year-over-year consolidated organic revenue growth of 10.4 percent was driven by revenue growth of 24.7 percent in both Kratos Unmanned Systems and Kratos Public Safety and Security businesses, as well as revenue growth of 4.7 percent in Kratos Government Solutions Segment, primarily driven by strength in Kratos Satellite Communications, Cyber Security, Technology and Training Systems business.
For the second quarter of 2017, approximately 60% of Kratos revenue was derived from U.S. Federal Government related customers, approximately 29% from commercial, state and local government customers, and approximately 11% from international customers. Kratos bid and proposal pipeline at June 25, 2017 was $5.9 billion.
For the second quarter of 2017, net loss was $6.2 million, and adjusted income per share was $0.01. Adjusted income per share 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, and certain non-recurring items such as acquisition and restructuring related items and other, and includes cash actually expected to be paid for income taxes on continuing operations, reflecting the benefit of the Companys net operating loss carryforwards of over $300 million. Kratos believes that reporting adjusted income (loss) per share is a meaningful metric to present the Companys financial results. GAAP earnings per share was a loss of $(0.07).
Kratos is increasing its previously provided fiscal year 2017 guidance for revenues to $720 to $740 million, and maintaining its full year Adjusted EBITDA guidance of $52 to $54 million. Kratos is providing third quarter 2017 revenue guidance of $180 to $190 million and Adjusted EBITDA guidance of $10 million to $14 million. The maintaining of fiscal year 2017 Adjusted EBITDA guidance reflects estimated investments in the Companys Bid and Proposal pipeline and costs related to investments we have been making, and expect to continue to make, in new platforms and technologies, including a very large, near-term opportunity where Kratos will retain Intellectual Property Ownership in the unmanned aerial system. For 2017, Kratos continues to expect a similar quarterly Revenue and Adjusted EBITDA trajectory as experienced in 2016, with significant projected increases in fourth quarter 2017 Revenue and Adjusted EBITDA, as a result of the expected timing of product deliveries and program execution.
Eric DeMarco, Kratos President and CEO, said, "The Company had an outstanding second quarter, with the most notable performance in Kratos Unmanned Systems, Satellite Communications, Cyber Security and Training Systems businesses. Kratos Unmanned Systems business generated quarter-over-quarter revenue growth of 42 percent, and we are expecting significant revenue and margin growth to continue into the second half of 2017, and 2018. With the late June 2017 award for Low Rate Initial Production (LRIP) I on the U.S. Navy SSAT program, which fell in Kratos third fiscal quarter, and the expected production award by the end of this year of a separate, new confidential contract, we can clearly see a path to the expected future doubling of our Unmanned Systems business. This expected doubling of Kratos Unmanned Systems business excludes the potential future upside from platforms we are developing in the tactical combat drone area, which if we are successful, we anticipate will even further increase our growth. Additionally, every significant Kratos high performance unmanned aerial jet drone program is currently on schedule and on budget. Between now and the end of 2017, we expect to receive several new unmanned aerial drone system contract awards, including one with the potential for approximately 100 aircraft to be delivered over approximately 3 to 5 years. Over the past few months, with continued increasing customer awards and interest in our unmanned drone system business, we are more confident than ever in the successful achievement of our strategy in the UAS area."
Mr. DeMarco went on, "Kratos Satellite Communications, Cyber Security and Training Systems Division, our Companys crown jewel and largest business unit, continued its outstanding operational execution in our second quarter. Kratos Satellite Communications business continues to experience increased funding related to protecting the U.S. space segment, increased bandwidth demands, and an ever increasing number of satellites. Kratos Training Systems business is also having a very solid year, and we are hopeful of receiving by the end of this year a single award contract with a potential value to Kratos of approximately $100 million over an approximate 3 to 4 year period. We are looking for our Satellite Communications and Training Systems business to continue its solid execution in the second half of 2017, with fourth quarter profitability looking particularly solid based on current production mix, delivery and execution schedules."
Mr. DeMarco concluded, "Similar to last year, we are looking for Kratos to finish 2017 very strongly, with increased revenue and Adjusted EBITDA in the second half of the year, based on our backlog and recent and expected contract awards. Importantly, every Kratos business unit is expected to generate positive cash flow in 2017, except Kratos Unmanned Systems Division, where we are currently investing in a large, new unmanned combat aerial system (UCAS) government program. Since 2013, we have invested approximately $75 million in unmanned aerial drone system platform development, and over the past several years, our near-term earnings and free cash flow have been negatively impacted due to these investments. As these investments are expected to be substantially complete by the end of this year, and we are now beginning production on certain of these platforms, we are currently forecasting a return to Kratos being cash flow positive in 2018. We believe these investments have resulted in the successful award of the numerous unmanned aerial drone contracts we have won over the past year, and additional opportunities we expect to be successful on in the future."
Management will discuss the Companys second quarter 2017 financial results, third quarter guidance and 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 54130026. 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. (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 Companys expectations regarding its future financial performance, including the Companys expectations concerning the quarterly trajectory of 2017 revenue and Adjusted EBITDA and ability to generate positive cash flow in certain of its business units during 2017, the Companys ability to achieve projected growth in certain of the Companys business units and the expected timing of such growth, its bid and proposal pipeline, demand for its products and services, including the Companys 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 Companys contracts and product offerings, the impact of the Companys 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 Companys net operating loss carryforwards and the availability and timing of government funding for the Companys offerings, timing of LRIP related to the Companys 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 Companys 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 Companys 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 Companys 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; and risks related to natural disasters or severe weather. These and other risk factors are more fully discussed in the Companys 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 (loss) 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 (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, and the associated margin rates). Kratos believes this information is useful to investors because it provides a basis for measuring the Companys available capital resources, the actual and forecasted operating performance of the Companys business and the Companys 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 Companys management uses these non-GAAP financial measures along with the most directly comparable GAAP financial measures in evaluating the Companys 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 Companys 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 Companys 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 25, June 26, June 25, June 26,
2017 2016 2017 2016
Service revenues $ 91.6 $ 88.2 $ 176.6 $ 170.8
Product sales 94.1 80.0 176.9 150.4
Total revenues 185.7 168.2 353.5 321.2
Cost of service revenues 67.0 64.4 128.8 124.7
Cost of product sales 71.3 58.6 132.2 115.4
Total costs 138.3 123.0 261.0 240.1
Gross profit - service revenues 24.6 23.8 47.8 46.1
Gross profit - product sales 22.8 21.4 44.7 35.0
Total gross profit 47.4 45.2 92.5 81.1
Selling, general and administrative expenses 37.3 33.1 72.7 67.1
Unused office space, restructuring expenses, and other 0.1 4.8 0.4 10.3
Research and development expenses 4.1 4.0 8.5 6.9
Depreciation 0.6 0.7 1.2 1.7
Amortization of intangible assets 2.7 2.6 5.4 5.3
Operating income (loss) from continuing operations 2.6 - 4.3 (10.2 )
Interest expense, net (7.2 ) (8.7 ) (15.4 ) (17.4 )
Loss on extinguishment of debt - - (2.1 ) -
Other income, net 0.2 0.2 0.4 0.5
Loss from continuing operations before income taxes (4.4 ) (8.5 ) (12.8 ) (27.1 )
Provision for income taxes from continuing operations 1.8 1.8 3.3 5.4
Loss from continuing operations (6.2 ) (10.3 ) (16.1 ) (32.5 )
Loss from discontinued operations, net of income taxes - (0.1 ) (0.1 ) (0.1 )
Net loss $ (6.2 ) $ (10.4 ) $ (16.2 ) $ (32.6 )
Loss from continuing operations $ (0.07 ) $ (0.17 ) $ (0.20 ) $ (0.54 )
Income (loss) from discontinued operations - - - (0.01 )
Net loss $ (0.07 ) $ (0.17 ) $ (0.20 ) $ (0.55 )
Weighted average common shares outstanding
Basic and diluted weighted average common shares outstanding 86.6 59.8 82.0 59.7
Adjusted EBITDA (1) $ 11.5 $ 13.5 $ 22.1 $ 18.1
Unaudited Reconciliation of GAAP to Non-GAAP Measures
Note: (1) Adjusted EBITDA is a non-GAAP measure defined as GAAP net income (loss) plus (income) loss from discontinued
operations, net interest expense, income taxes, depreciation and amortization, stock compensation, amortization of intangible
assets, foreign transaction gain (loss), acquisition and restructuring related items, contract design retrofit costs, investment in unmanned
combat systems, litigation related charges, unused office space expense and costs related to pending customer change orders.
Adjusted EBITDA as calculated by us may be calculated differently than Adjusted EBITDA for other companies. We have provided
Adjusted EBITDA because we believe it is a commonly used measure of financial performance in comparable companies and is provided to
help investors evaluate companies on a consistent basis, as well as to enhance understanding of our operating results. Adjusted EBITDA
should not be construed as either an alternative to net income or as an indicator of our operating performance or an alternative to cash flows
as a measure of liquidity. The adjustments to calculate this non-GAAP financial measure and the basis for such adjustments are outlined below.
Please refer to the following table below that reconciles GAAP net income (loss) to Adjusted EBITDA.
The adjustments to calculate this non-GAAP financial measure, and the basis for such adjustments, are outlined below:
Interest income and expense. The Company receives interest income on investments and incurs interest expense on loans, capital leases and other
financing arrangements, including the amortization of issue discounts and deferred financing costs. These amounts may vary from period to period due to
changes in cash and debt balances.
Income taxes. The Companys tax expense can fluctuate materially from period to period due to tax adjustments that may not be directly related to
underlying operating performance or to the current period of operations and may not necessarily reflect the impact of utilization of our NOLs.
Depreciation. The Company incurs depreciation expense (recorded in cost of revenues and in operating expenses) related to capital assets purchased
or constructed to support the ongoing operations of the business. The assets are recorded at cost or fair value and are depreciated over the estimated
useful lives of individual assets.
Amortization of intangible assets. The Company incurs amortization of intangible expense related to acquisitions it has made. These intangible assets are
valued at the time of acquisition and are amortized over the estimated useful lives.
Stock-based compensation expense. The Company incurs expense related to stock-based compensation included in its GAAP presentation of selling,
general and administrative expense. Although stock-based compensation is an expense of the Company and viewed as a form of compensation, these
expenses vary in amount from period to period, and are affected by market forces that are difficult to predict and are not within the control of management,
such as the market price and volatility of the Companys shares, risk-free interest rates and the expected term and forfeiture rates of the awards.
Management believes that exclusion of these expenses allows comparison of operating results to those of other companies that disclose non-GAAP
financial measures that exclude stock-based compensation.
Foreign transaction (gain) loss. The Company incurs transaction gains and losses related to transactions with foreign customers in currencies other than
the U.S. dollar. In addition, certain intercompany transactions can give rise to realized and unrealized foreign currency gains and losses.
Acquisition and restructuring related items. The Company incurs transaction related costs, such as legal and accounting fees and other expenses, related to
acquisitions and divestiture activities. Management believes these items are outside the normal operations of the Companys business and are not
indicative of ongoing operating results.
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