Kratos Reports Fourth Quarter and Fiscal Year 2018 Financial Results

SAN DIEGO, Feb. 28, 2019 (GLOBE NEWSWIRE) -- Kratos Defense & Security Solutions, Inc. (Nasdaq:KTOS), a leading National Security Solutions provider, today reported its fourth quarter and full year 2018 financial results.  For the fourth quarter 2018, Kratos reported Revenues of $164.4 million, Adjusted EBITDA of $18.0 million, or 10.9%, a 13.9% increase over 2017, Operating Income of $10.8 million, a 172.0% increase over 2017, Cash Flow from Operations of $2.7 million, and a Free Cash Flow from Operations use of $2.0 million.  For the fourth quarter 2018, the Company reported Adjusted EPS* of $0.09, a 28.6% increase over 2017, Net income of $4.7 million, a 121.2% increase over 2017, and GAAP EPS of $0.04, a 119.0% increase over 2017.

For the fourth quarter of 2018, Kratos reported bookings of $213.4 million and a book-to-bill ratio of 1.3 to 1.0, with backlog at December 30, 2018 of $620.7 million, up sequentially from $571.7 million at September 30, 2018.  December 30, 2018 backlog increased approximately 19% when compared to Backlog at December 31, 2017, with 2017 backlog presented on a comparable basis as if ASC 606 had been adopted at that time, or $519.9 million.    In the fourth quarter, Kratos’ bid and proposal pipeline increased by $0.1 million, up to approximately $6.8 billion, at December 30, 2018.   

For full year 2018, Kratos reported revenues of $618.0 million, Adjusted EBITDA of $60.5 million, or 9.8%, an increase of 27.4% over 2017 Adjusted EBITDA of $47.5 million, and Operating Income of $30.5 million, an increase of $42.5 million, or 354.2%, from a full year Operating loss of $12.0 million in 2017.  Fiscal 2018 Cash Flow from Operations was $18.1 million with a Free Cash Flow from Operations use of $4.5 million, compared to Fiscal 2017 Cash Flow from Operations use of $26.9 million with a Free Cash Flow from Operations use of $53.0 million, or an improvement of $45.0 million from Cash Flow from Operations in Fiscal 2017.  Improvement in Cash Flow from Operations in 2018 was primarily driven by the improvement in Operating Income, offset partially by working capital requirements.  For full year 2018, the Company reported Adjusted EPS* of $0.24, an increase of 380% over 2017. 

For full year 2018, Kratos reported bookings of $718.8 million and a book-to-bill ratio of 1.2 to 1.0, an increase of 54.6% or $253.9 million in increased annual bookings and a book-to-bill ratio of 0.8 to 1.0 for full year 2017.  All Kratos businesses recorded a book to bill ratio between 1.1 to 1 to 1.4 to 1 for the full year 2018. 

Full year 2018 Net loss was $3.5 million and GAAP EPS was a loss of $0.03, compared to a Net loss of $42.7 million and GAAP EPS loss of $0.48 for full year 2017.  Included in the 2017 Net loss was an impairment of goodwill of $24.2 million.
   
Full year 2018 revenues were up $14.7 million from full year 2017 revenues of $603.3 million.  Excluding the impact of the decline in Kratos’ legacy and non-core government services business, which decreased $17.1 million from 2017 to 2018, from $76.7 million to $59.6 million, Kratos’ revenues increased $31.8 million for full year 2018, or 6.0% organically, compared to full year 2017. 

Kratos’ fourth quarter and full year 2018 revenues came in below forecast primarily due to the timing of four Programs. These programs were either awarded later than expected, or have not ramped as quickly as originally forecast. We also experienced a delay in our DIU Program, with the related contract award now expected in Q2 2019.  We are working closely with our customers to ramp these new contract awards, including the hiring of highly cleared personnel on two new UAS Programs, and we are forecasting that each of these contracts will be back on the planned run rate by the middle of 2019, which is reflected in our 2019 guidance, as noted below.

For the fourth quarter of 2018, Kratos’ Government Solutions Division (KGS) generated Revenues of $128.2 million, Adjusted EBITDA of $15.1 million and Operating Income of $11.6 million.  For the fourth quarter of 2018, Kratos’ Unmanned Systems Division (KUSD) generated Revenues of $36.2 million, Adjusted EBITDA of $2.9 million and Operating Income of $1.3 million. 

For full year 2018, Kratos’ Government Solutions Division (KGS) generated Revenues of $485.1 million, Adjusted EBITDA of $49.6 million and Operating Income of $35.5 million, up from Revenues of $481.6 million, Adjusted EBITDA of $41.2 million and an Operating loss of $0.1 million for full year 2017.  For full year 2018, Kratos’ Unmanned Systems Division (KUSD) generated Revenues of $132.9 million, Adjusted EBITDA of $10.9 million and Operating Income of $5.1 million, up from Revenues of $121.7 million, Adjusted EBITDA of $6.3 million and an Operating loss of $3.6 million for full year 2017. 

The details of the Company’s adoption of the new revenue recognition standard, ASC 606, which is reflected on a prospective basis in 2018, is disclosed in the Company’s annual report filed on Form 10-K.

Eric DeMarco, Kratos’ President and CEO, said, “Kratos completed a very successful 2018, with our Unmanned Systems Division generating organic growth of approximately 75% over the past 24 months, and we are now forecasting Kratos target drone business to grow to approximately $250 million in annual revenue over the next few years, or 90% organic growth above 2018 revenues.  Additionally, we currently have six customer funded affordable tactical drone development programs, with several additional programs expected to be under contract by the end of this year.  Based on recent customer meetings, we are more confident than ever that Kratos Unmanned Systems Division will be a leader in the fast growing and forecast to be multi-billion dollar tactical drone market, and we ultimately expect our tactical drone business to be substantially larger than our target drone business as we achieve production.”

Mr. DeMarco continued, “Kratos’ space, satellite and training business, our Company’s largest division, which is also well aligned with DoD priorities, had a strong 2018, and with a last six month book to bill ratio of 1.5 to 1.0, is positioned for sustained future organic growth.  Additionally, Kratos’ ballistic missile targets and hypersonic systems business is currently pursuing a number of large new program opportunities, which if we are successful and schedules hold, could provide upside to our 2019 financial forecast, and position the business for further substantial growth in 2020.” 

Mr. DeMarco concluded, “Kratos’ business model of utilizing proven leading edge technology, not unproven bleeding edge technology, which reduces schedule risk, performance risk and cost risk, is a clear competitive differentiator for our Company, with Kratos’ proven ability to rapidly develop, demonstrate and field technology leading systems at an affordable cost being highly valued by our customers.  Kratos is a unique strategic technology asset, disrupting the national security market, with the right products at the right price and at the right time.”

Financial Guidance
Kratos is providing first quarter 2019 financial guidance of Revenues of $147 to $157 million, and Adjusted EBITDA of $9 to $11 million, and full year 2019 financial guidance of Revenues of $720 to $760 million, reflecting organic growth of approximately 12.5 percent, and Adjusted EBITDA of $71 to $77 million.  The first quarter 2019 financial guidance reflects the estimated impact of the recent partial government shutdown that has delayed certain domestic and Foreign Military Sales (FMS) contract awards and export license approvals required for international sales.  

The Company is providing full year 2019 cash flow from operations guidance of $40 to $50 million, capital expenditures of $28 to $30 million, and free cash flow guidance of $10 to $20 million, plus the expected final cash receipt of the retained working capital of the Company’s divested PSS business of approximately $4 to $6 million.  Capital expenditures are expected to continue to be elevated in 2019, reflecting expected outlays associated with manufacturing equipment for the Company’s new drone facility in Oklahoma and equipment for a new secured facility of approximately $6 to $8 million and approximately $4 to $6 million related to company owned aerial target drones the Company plans to build in preparation of fulfilling expected customer requirements.

This financial guidance includes the expected contribution of Florida Turbine Technologies, which acquisition by Kratos was also announced earlier today. 

Management will discuss the Company’s fourth quarter and full year 2018 financial results, as well as its first quarter and full year 2019 guidance on 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 2188115. 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.

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