Kratos Fourth Quarter and Fiscal 2017 Financial Results Exceed Companys Estimates
Wednesday, February 28, 2018 4:20:11 PM ET
Fourth Quarter 2017 Revenues of $202.2 Million Increase 11.0 Percent over Fourth Quarter of 2016
Fiscal 2017 Revenues of $751.9 Million Increase 12.4 Percent over Fiscal 2016
Kratos Unmanned Systems Division Fiscal 2017 Revenues of $121.7 Million Increase 60.6 Percent over Fiscal 2016
Kratos Defense & Security Solutions, Inc. (KTOS ), a leading National Security Solutions provider, today reported its fourth quarter and full year fiscal 2017 financial results.
Kratos revenues and Adjusted EBITDA for the fourth quarter of 2017 were $202.2 million and $17.8 million, respectively. Fourth quarter 2017 revenues increased 11.0 percent over the fourth quarter of 2016 and 3.1 percent sequentially over the third quarter of 2017. Fourth quarter 2017 Adjusted EBITDA increased 32.8 percent over the fourth quarter of 2016 and 22.8 percent sequentially over the third quarter of 2017.
Kratos Unmanned Systems Division (KUSD) generated year over year revenue growth of 65.9 percent, from $25.5 million in the fourth quarter of 2016 to $42.3 million in the fourth quarter of 2017. KUSDs Adjusted EBITDA of $4.1 million, or 9.7 percent of revenue, in the fourth quarter of 2017, increased 86.4 percent over Adjusted EBITDA of $2.2 million in the fourth quarter of 2016. Kratos largest segment, Kratos Government Solutions (KGS), which includes Kratos Satellite Communications, Microwave Electronics and Training Systems businesses generated fourth quarter 2017 Adjusted EBITDA of $12.6 million, increasing sequentially 85.3 percent from the third quarter of 2017.
Kratos reported full fiscal year 2017 revenues of $751.9 million, increasing 12.4 percent from $668.7 million in fiscal year 2016. Adjusted EBITDA increased $9.4 million, or 20.9%, from $45.0 million in fiscal year 2016 to $54.4 million in fiscal year 2017. For fiscal year 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.
In the fourth quarter of 2017, as a result of the Companys annual impairment test of the carrying value of its goodwill balances, the Company recorded a non-cash impairment charge of $24.2 million related to its Defense Rocket Support Services (DRSS) business within the KGS segment. The majority of DRSSs business and revenue includes Kratos legacy government services business, which the Company has considered a non-core business and has de-emphasized since 2012.
For the full fiscal year 2017, Adjusted EPS* was $0.12 and net loss per share was $0.48. Net loss was $42.7 million. For the fourth quarter of 2017, Adjusted EPS* was $0.09 and net loss per share was $0.21. Net loss was $22.2 million, which included the loss on extinguishment of debt of $15.2 million related to the Companys refinancing of its Senior Secured Notes to replace its existing 7% Notes with 8-year 6.5% Notes, and included the $24.2 million impairment of goodwill.
Eric DeMarco, Kratos President and CEO, said, "Kratos fourth quarter and full year 2017 performance clearly demonstrated the continued upward trajectory of our Company and the successful execution of our strategy to build a business specializing in the rapid development, demonstration and fielding of affordable products and systems for national security. With the pending divestiture of PSS, Kratos is now primarily a pure play defense systems, product, technology and intellectual property company focused on well-funded mission critical DoD priority areas; including high performance unmanned aerial drone systems, satellite communications, missile defense, training systems and microwave electronics. Each of these markets, where Kratos is an industry leader, is expected to experience significant funding increases and growth, and continue to be long term, high priority areas."
Mr. DeMarco concluded, "We closed 2017 and began 2018 with many significant contract wins, including a $93 million, an $81 million, a $24.3 million and a $23 million unmanned aerial drone system award. Accordingly, for 2018, we are focused on execution, operational excellence and continued improved financial performance, and we expect Kratos revenues and Adjusted EBITDA to continue to organically grow, profit margins to expand and a return to positive cash flow generation."
The Company also announced today that it has signed a definitive agreement to divest its PSS business for net cash proceeds of approximately $70 million, which transaction is expected to close in the next 90 days, contingent on customary closing conditions and regulatory approvals. As a result of the announced divestiture, PSS will now be reflected as a discontinued operation going forward in the Companys financial statements. Accordingly, all prior year comparative data in future financial statements will be recast to reflect this business as discontinued operations for all periods presented. Kratos PSS business was forecast to achieve full year 2018 revenues and Adjusted EBITDA of approximately $140 to $150 million, and $9 to $12 million, respectively. Kratos PSS business generated full year 2017 revenues and Adjusted EBITDA before corporate overhead costs of $149.9 million and $6.9 million, respectively. As a result of the pending sale, Kratos 2018 Q1 and full year financial guidance provided today excludes PSS, as does all other financial information noted below.
Kratos first quarter 2018 financial guidance for revenues excluding the PSS business is $140 to $150 million, as compared to $132.0 million for the first quarter of 2017, and first quarter 2018 Adjusted EBITDA guidance of $9 to $11 million, as compared to $10.2 million for the first quarter of 2017. Kratos full year 2018 financial guidance for revenues excluding the PSS business is $640 to $650 million, as compared to $603.2 million for the full year of 2017, and full year 2018 Adjusted EBITDA guidance of $55 to $59 million, as compared to $47.5 million for the full year of 2017. Kratos is forecasting 2018 positive cash flow from operations of $35 to $45 million.
Management will discuss the Companys fourth quarter and fiscal year 2017 financial results, first quarter and full year 2018 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 9678809. 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 of the first quarter and full year 2018 revenue, Adjusted EBITDA and Adjusted EPS, and ability to generate positive cash flow from operations in 2018, 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, ability to close the pending divestiture of its PSS business, and market and industry developments, including projected growth. 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; risks that we are not able to close the pending divestiture of the PSS business on our anticipated timeline or at all; 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 31, 2017, 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 and capitalized contract and development costs, stock compensation expense, loss on extinguishment of debt, contract design retrofit costs, acquisition and restructuring related items and other, and impairment of goodwill, 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, impairment of goodwill, loss on extinguishment of debt, and foreign transaction gains and losses, and the associated margin rates). Additional non-GAAP financial measures include Revenues and Adjusted EBITDA related to our PSS business. 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.
*Adjusted earnings per share (Adjusted EPS) 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, certain non-recurring items such as acquisition and restructuring related items and other, the loss on extinguishment of debt, and the non-cash impairment of goodwill, 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.
Kratos Defense & Security Solutions, Inc.
Unaudited Condensed Consolidated Statements of Operations
(in millions, except per share data)
Three Months Ended Twelve Months Ended
December 31, December 25, December 31, December 25,
2017 2016 2017 2016
Service revenues $ 83.1 $ 90.1 $ 346.4 $ 348.1
Product sales 119.1 92.0 405.5 320.6
Total revenues 202.2 182.1 751.9 668.7
Cost of service revenues 57.9 66.4 247.5 255.8
Cost of product sales 87.6 69.1 307.1 259.3
Total costs 145.5 135.5 554.6 515.1
Gross profit - service revenues 25.2 23.7 98.9 92.3
Gross profit - product sales 31.5 22.9 98.4 61.3
Total gross profit 56.7 46.6 197.3 153.6
Selling, general and administrative expenses 37.3 33.4 147.5 132.6
Unused office space, restructuring expenses, and other - 1.5 0.5 12.0
Research and development expenses 5.1 3.8 17.8 13.9
Impairment of goodwill 24.2 - 24.2 -
Depreciation 0.8 0.7 2.7 3.2
Amortization of intangible assets 2.5 2.6 10.4 10.5
Operating income (loss) from continuing operations (13.2 ) 4.6 (5.8 ) (18.6 )
Interest expense, net (5.5 ) (8.6 ) (28.6 ) (34.7 )
Gain (loss) on extinguishment of debt (15.2 ) 0.2 (17.3 ) 0.2
Other income, net (0.1 ) 0.2 0.9 0.8
Loss from continuing operations before income taxes (34.0 ) (3.6 ) (50.8 ) (52.3 )
Provision (benefit) for income taxes from continuing operations (11.7 ) 0.8 (8.2 ) 8.1
Loss from continuing operations (22.3 ) (4.4 ) (42.6 ) (60.4 )
Income (loss) from discontinued operations, net of income taxes 0.1 0.1 (0.1 ) (0.1 )
Net loss $ (22.2 ) $ (4.3 ) $ (42.7 ) $ (60.5 )
Basic and diluted loss per common share:
Loss from continuing operations $ (0.21 ) $ (0.07 ) $ (0.48 ) $ (0.99 )
Income (loss) from discontinued operations - - - -
Net loss $ (0.21 ) $ (0.07 ) $ (0.48 ) $ (0.99 )
Weighted average common shares outstanding
Basic and diluted weighted average common shares outstanding 103.5 65.5 89.5 61.3
Adjusted EBITDA (1) $ 17.8 $ 13.4 $ 54.4 $ 45.0
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, amortization of capitalized contract and development costs, foreign transaction gain (loss), acquisition and
restructuring related items, impairment of goodwill, 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.
Amortization of capitalized contract and development costs. The Company incurs amortization of previously capitalized software development and non-
recurring engineering costs related to certain aerial targets in its Unmanned Systems business as these units are sold.
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.
Excess capacity and restructuring costs. The Company incurs excess capacity and excess overhead costs related to certain of its manufacturing businesses
within its Unmanned Systems and Modular Systems businesses due primarily to underutilization of manufacturing facilities and support costs resulting from
less than optimal volumes and efficiencies. The Company incurs restructuring costs for cost reduction actions which include employee termination costs,
facility shut-down related costs and remaining lease commitment costs for excess or exited facilities. Management believes that these costs are not
indicative of ongoing operating results as they are either non-recurring and/or not expected when full capacity and volumes are achieved.
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