Kratos Reports Fourth Quarter and Full Year 2019 Financial Results

Full Year 2019 Revenues of $717.5 Million Increase 16.1% over Full Year
2018 Revenues

Fourth Quarter 2019 Revenues of $185.1 Million
Increase 12.6% over Fourth Quarter 2018 Revenues

Full Year 2019 Unmanned Systems Revenues of $161.4 Million
 Increase 21.4% over Full Year 2018 Revenues

Full Year 2019 Operating Income of $38.0 Million
Increase 24.6% over Full Year 2018 Operating Income

Provides Initial Full Year 2020 Financial Guidance

SAN DIEGO, Feb. 24, 2020 (GLOBE NEWSWIRE) -- Kratos Defense & Security Solutions, Inc. (Nasdaq:KTOS), a leading National Security Solutions provider, today reported its fourth quarter 2019 and full year 2019 financial results.  For the fourth quarter 2019, Kratos reported Revenues of $185.1 million, a 12.6% increase over the fourth quarter of 2018, and fourth quarter 2019 Adjusted EBITDA of $20.2 million, a 12.2% increase over the fourth quarter of 2018.  Revenues grew organically 3.6% from the fourth quarter of 2018 to the fourth quarter of 2019 excluding the impact of the 2019 FTT acquisition.  Operating Income was $9.3 million for the fourth quarter of 2019.  Fourth quarter 2019 Cash Flow from Operations was a use of $1.3 million, which primarily reflects the delay of certain expected contract milestone receipts.  Adjusted EPS* was $0.09 for the fourth quarter of 2019.  Kratos reported fourth quarter 2019 Net Income of $3.0 million, which includes legal costs of $0.6 million related to an ongoing dispute with an international customer.   GAAP EPS was $0.03 for the fourth quarter of 2019.

Full year 2019 revenues of $717.5 million increased $99.5 million or 16.1% over full year 2018 revenues.  Full year 2019 revenues increased organically 7.6% excluding the impact of the FTT acquisition.  Full year 2019 Adjusted EBITDA of $77.3 million increased 27.8% over full year 2018 Adjusted EBITDA of $60.5 million.  Full year 2019 Operating income of $38.0 million increased 24.6% over full year 2018 Operating income of $30.5 million.  Full year 2019 Adjusted EPS of $0.34 increased 41.7% over 2018 Adjusted EPS of $0.24 and 2019 Net income of $12.5 million increased 457.1% from 2018 Net loss of $3.5 million.  GAAP EPS was $0.11 for full year fiscal 2019.

For full year 2019, Kratos’ Unmanned Systems Division (KUSD) reported Revenues of $161.4 million, an increase of $28.5 million, or 21.4%, over full year 2018 Revenues of $132.9 million, and Adjusted EBITDA of $13.3 million, an increase of 22.0% over 2018 full year Adjusted EBITDA of $10.9 million.  Full year KUSD Operating Income of $6.1 million increased 19.6% over 2018 Operating Income of $5.1 million. KUSD’s book-to-bill ratio for the last twelve months ended December 29, 2019 was 1.3 to 1.  Total backlog for KUSD at the end of the 2019 fourth quarter was $152.9 million.  

For full year 2019, Kratos’ Government Solutions Division (KGS) reported Revenues of $556.1 million, an increase of 14.6% over full year 2018 Revenues of $485.1 million.  Excluding the impact of the FTT acquisition, which contributed $52.5 million to full year 2019 revenues, KGS Revenues increased organically 3.8%, or $18.5 million, from full year 2018, reflecting revenue growth across all divisions, however, our Space and Satellite business, experienced expected lower volumes in revenues and increased margins as a result of the ongoing transition from a hardware to software solution.  Full year 2019 KGS Adjusted EBITDA of $64.0 million increased 29.0% over full year 2018 Adjusted EBITDA of $49.6 million and full year 2019 KGS Operating Income of $45. 2 million increased 27.3% from full year 2018 Operating Income of $35.5 million.  

For the fourth quarter of 2019, Kratos reported bookings of $177.5 million and a book-to-bill ratio of 1.0 to 1.0, with bookings of $718.7 million in the last twelve months and a book-to-bill ratio of 1.0 to 1.0. Backlog at December 29, 2019 was $601.2 million.  Kratos’ bid and proposal pipeline increased in 2019 by $1 billion, from $6.7 billion at December 30, 2018 to approximately $7.7 billion, at December 29, 2019.   

For full year 2019, cash generated from operations was $28.9 million, and Free Cash Flow generated from operations was $2.6 million, after capital expenditures of $26.3 million.  Net leverage ratio as of December 29, 2019 was 1.6 to 1, computed as net debt of $122.5 million over trailing twelve months Adjusted EBITDA of $77.3 million.  Cash flow from operations in 2019 was impacted by the delay of certain expected contract milestone receipts on a Training Solutions program.

Eric DeMarco, Kratos’ President and CEO, said, “Over the past few months, Kratos’ Unmanned Systems business made important progress, including the successful initial flight of the Gremlin UAS, the fourth successful flight of the Valkyrie and tactical UAS system payload integration, missionizing and operational planning now underway.  Though the three-month Continuing Resolution Authorization (CRA) that began the 2020 fiscal year, along with the now addressed Valkyrie recovery system anomaly delayed Kratos’ previous Valkyrie program plans, we understand that there is now funding in place, we have clarity on expected contract awards and we are working towards our initial anticipated production and system orders.  As a result of the related clarity we now have, in coordination with the XQ-58 Valkyrie stakeholders and our expectation for contract awards, we have initiated the production plan for 12 Valkyries, with these aircraft deliveries expected to begin early next year.” 

Mr. DeMarco continued, “In addition to Kratos’ Valkyrie and Gremlins programs, which are just two examples of our large and growing customer funded tactical drone portfolio, we also are seeing increased and accelerating interest in Kratos’ other tactical drone systems.  As we begin 2020, we expect Kratos’ affordable, high performance tactical drones to be key elements of several new DoD programs and initiatives, including Skyborg, Advanced Battle Management System or ABMS and Vanguard.”

Mr. DeMarco concluded, “Today approximately 25% of Kratos business is in unmanned systems, 30% in space and satellite communications and 45% in C5ISR, including microwave electronics and electronic warfare, training solutions, missile systems, missile defense, radars, hypersonic systems and turbine technologies.  We believe that Kratos is clearly aligned with the U.S National Defense Strategy as most recently reflected in the 2020 DoD budget request and five year defense plan.”
    
Financial Guidance

Kratos is providing first quarter 2020 financial guidance of Revenues of $160 to $170 million, and Adjusted EBITDA of $12 to $15 million. Kratos is providing initial full year 2020 financial guidance for Revenues of $740 to $780 million, Adjusted EBITDA of $72 to $78 million, cash flow from operations of $30 to $50 million and Free Cash Flow generation of $7 million to a use of $18 million, including capital expenditures of $43 to $48 million (See Valkyrie discussion below).  Kratos’ full year 2020 initial financial guidance forecasts a revenue and Adjusted EBITDA trajectory similar to prior years, with the first fiscal quarter being the lowest of the fiscal year, with sequential quarterly increases thereafter.

Kratos’ initial 2020 financial guidance reflects full year 2020 over 2019 organic revenue growth for every Kratos business unit except Training Solutions, which we are currently guiding for an approximate $40 million fiscal 2019 to 2020 revenue decrease, primarily as a result of a previously disclosed ongoing contract protest and/or modification situation.  We will adjust our financial forecast as appropriate as this protest/contract situation evolves.  A forecasted reduction in operation tempo from 2019 activity on this project is also reflected in the first quarter 2020 guidance.   

Kratos’ first quarter and fiscal 2020 revenue guidance also reflects an expected continued decrease of approximately $10 million related to the Company’s legacy government services business.

Kratos’ initial fiscal year 2020 guidance excludes any potential contribution from expected Valkyrie or other tactical drone production or system contracts, with expected orders to be taken into consideration and our financial forecast adjusted once such contracts/orders are received and related financial contribution can be estimated. 

The 2020 capital expenditure forecast currently includes expected outlays of $15 to $17 million associated with production of 12 Valkyrie aircraft prior to receipt of expected customer production award(s) and therefore reflected as Company-owned tactical drones until receipt of customer award, and approximately $5 million related to production of Company-owned aerial target drone systems in preparation of fulfilling forecasted customer requirements.  Kratos will adjust/reduce these initial forecasted capital expenditure outlays once expected customer orders are received and the related financial contribution can be estimated.  

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