Kratos Reports Third Quarter 2019 Financial Results

Third Quarter 2019 Revenues of $184.1 Million
Increases 15.5% over Third Quarter 2018 Revenues

Third Q ua r t e r 2019 Kratos’ Unmanned Systems Division Revenues of
$45.7 Million Increases 37.2% over Third Quarter 2018 Revenues

Third Quarter 2019 Operating Income of $11.5 Million
Increases 13.9% over Third Quarter 2018 Operating Income

Affirms Full Year 2019 Financial Guidance

SAN DIEGO, Nov. 05, 2019 (GLOBE NEWSWIRE) -- Kratos Defense & Security Solutions, Inc. (Nasdaq:KTOS), a leading National Security Solutions provider, today reported its third quarter 2019 financial results. For the third quarter 2019, Kratos reported Revenues of $184.1 million, a 15.5% increase over the third quarter of 2018, and third quarter 2019 Adjusted EBITDA of $20.4 million, or 11.1%, a 22.2% increase over the third quarter of 2018. Excluding the impact of the recent FTT acquisition, revenues grew organically 5.3% from the third quarter of 2018 to the third quarter of 2019. Third quarter 2019 Operating Income of $11.5 million increased 13.9% over the third quarter of 2018. Third quarter 2019 Cash Flow from Operations was $10.2 million, and third quarter 2019 Free Cash Flow generated from Operations was $2.1 million, after capital expenditures of $8.1 million, which included the continued build out of the Company’s new drone manufacturing facility in Oklahoma, where the XQ-58 Valkyrie will be produced. Third quarter 2019 Adjusted EPS* was $0.09, a 12.5% increase over the third quarter of 2018. Kratos reported third quarter 2019 Net Income of $2.5 million, a 47.1% increase over third quarter 2018 Net Income of $1.7 million. 

For the third quarter of 2019, Kratos’ Unmanned Systems Division (KUSD) reported Revenues of $45.7 million, an increase of $12.4 million, or 37.2%, over 2018 third quarter Revenues of $33.3 million, and Adjusted EBITDA of $4.9 million, an increase of 88.5% over 2018 third quarter Adjusted EBITDA of $2.6 million. Third quarter KUSD Operating Income of $3.3 million increased 230.0% over 2018 Operating Income of $1.0 million. KUSD’s third quarter 2019 book-to-bill ratio was 1.2 to 1.0 and 1.3 to 1.0 for the last twelve months ended September 29, 2019. Total backlog for KUSD at the end of the 2019 third quarter was $160.9 million. 

Kratos’ Government Solutions Division (KGS) reported third quarter 2019 Revenues of $138.4 million, an increase of 9.8% over 2018 third quarter Revenues of $126.1 million. Excluding the impact of the FTT acquisition, which contributed $16.3 million to third quarter 2019 revenues, KGS Revenues decreased 3.2%, or $4.0 million, from the third quarter of 2018, resulting from the continued reduction in the Company’s deemphasized legacy government services revenues, which declined $5.1 million from the third quarter of 2018. Third quarter 2019 KGS Adjusted EBITDA of $15.5 million increased 9.9% over third quarter 2018 Adjusted EBITDA of $14.1 million, and third quarter 2019 KGS Operating Income of $11.1 million increased from third quarter 2018 Operating Income of $11.0 million. 

For the third quarter of 2019, Kratos reported bookings of $172.5 million and a book-to-bill ratio of 0.9 to 1.0, with bookings of $713.1 million in the last twelve months and a book-to-bill ratio of 1.0 to 1.0. Backlog at September 29, 2019 was $608.7 million. All Kratos business units reported a book-to-bill ratio for the last twelve months between 1.0 to 1.4, with the exception of the Company’s Training Solutions business. In the third quarter, Kratos’ bid and proposal pipeline increased by $100 million, up to approximately $7.7 billion, at September 29, 2019.  

For the nine months ended September 29, 2019, cash generated from operations was $30.2 million, and Free Cash Flow generated from operations was $12.3 million, after capital expenditures of $17.9 million. Net leverage ratio as of September 29, 2019 was 1.5 to 1, computed as net debt of $113.8 million over trailing twelve months Adjusted EBITDA of $75.1 million.

Eric DeMarco, Kratos’ President and CEO, said, “Since our last report to you, Kratos’ tactical drone business continued to make important progress, including our XQ-58A Valkyrie completing Flight 3, successfully executing 100 Percent of the test points and Kratos’ Unmanned Systems Division receiving new contract awards for tactical drone capability expansion, mission system integration and concepts of operations. Our confidence continues to increase that Kratos’ market leading position in affordable, high performance drones, of which we believe Kratos has the only existing systems in the class today, including Valkyrie, Mako and Gremlins, will become a long-term growth driver and value generator for the Company.” 

Mr. DeMarco concluded, “Over the past few years, Kratos has successfully received a number of development and production programs, certain of which are forecasted for significant future growth as production both begins and increases, including in our unmanned systems business, which reported 37% organic revenue growth and a 1.3 to 1.0 book to bill ratio over the past 12 months. Though short-term delays may occur as a result of Continuing Resolutions or delays in DoD budget approvals, we are confident in the long-term growth trajectory and direction of our business based on our existing program portfolio and opportunity pipeline which increased to $7.7 billion.”
  
Financial Guidance

Kratos is affirming its full year 2019 financial guidance for Revenues of $720 to $740 million, Adjusted EBITDA of $71 to $77 million and its full year 2019 Free Cash Flow guidance of $10 to $20 million, including capital expenditures and the expected final cash receipt of the retained working capital from 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, equipment for a new secured facility of approximately $6 to $8 million and approximately $6 to $8 million related to the planned manufacture of Company-owned aerial target drones in preparation of fulfilling expected customer requirements.

Consistent with prior years practice, Kratos plans to provide next year, or fiscal 2020 financial guidance, with its full fiscal year 2019 financial report, currently planned for February 2020. This schedule provides the Company additional insight into both the timing and funding content of Department of Defense (DoD) Budgets and the potential impact of Continuing Resolution Authorizations, under which typically no new contract awards, or increases in existing production programs or contracts can be made. 

Management will discuss the Company’s third quarter 2019 financial results, as well as its fourth 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 8466148. 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) develops and fields transformative, affordable technology, platforms and systems for United States National Security related customers, allies and commercial enterprises. Kratos is changing the way breakthrough technologies for these industries are rapidly brought to market through proven commercial and venture capital backed approaches, including proactive research and streamlined development processes. Kratos specializes in unmanned systems, satellite communications, cyber security/warfare, microwave electronics, missile defense, hypersonic systems, training and combat systems and next generation turbo jet and turbo fan engine development. For more information go to www.kratosdefense.com.

N o t i c e 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 Company’s expectations regarding its future financial performance, including the Company’s expectations for its fourth quarter and full year 2019 revenue and Adjusted EBITDA, full year 2019 capital expenditures and ability to generate positive cash flow from operations and positive free cash flow in 2019, the timing and amount of the Company’s receipt of retained working capital from the Company’s divested PSS business, the Company’s ability to achieve projected growth in certain of the Company’s business units and the expected timing of such growth, the Company’s expectation of ramp on projects, the Company’s 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 and expected new customer awards, performance of key contracts and programs, including the timing of production and demonstration related to certain of the Company’s contracts and product offerings, 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 carry forwards, the availability and timing of government funding for the Company’s offerings, including the strength of the future funding environment, the short-term delays that may occur as a result of Continuing Resolutions or delays in DoD budget approvals, 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, including projected growth. 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 and extended continuing resolutions, the Federal budget deficit and Federal government shut-downs; risks of adverse regulatory action or litigation; risks associated with debt leverage and cost savings and cash flow improvements expected as a result of the refinancing of our 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, as amended); risks that the UAS and UGS markets do not experience significant growth; risks that we cannot expand our customer base or that our products do not achieve broad acceptance which could impact our ability to achieve our anticipated level of growth; risks of increases in the Federal government initiatives related to in-sourcing; risks related to security breaches, including cyber security 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 30, 2018, and in our other filings made with the Securities and Exchange Commission.

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