Kratos Reports Third Quarter 2020 Financial Results

Third Quarter 2020 Revenues of $202.0 Million Increase 9.7% from Third Quarter 2019 Revenues of $184.1 Million

Third Quarter 2020 Book to Bill Ratio of 1.8 to 1

SAN DIEGO, Oct. 29, 2020 (GLOBE NEWSWIRE) -- Kratos Defense & Security Solutions, Inc. (Nasdaq:KTOS), a leading National Security Solutions provider, today reported its third quarter 2020 financial results. For the third fiscal quarter of 2020, Kratos reported Revenues of $202.0 million, Adjusted EBITDA of $24.6 million, Operating Income of $12.7 million and Net Income of $2.4 million.

Third Quarter 2020 Revenues of $202.0 million increased 9.7 percent, as compared to Revenues of $184.1 million in the third quarter of 2019, reflecting organic growth in Kratos Unmanned Systems, Microwave Products, Defense and Rocket Support Systems, and C5ISR businesses, offset partially by certain reductions, including in our Training Solutions business, primarily resulting from a previously disclosed reduction in scope of certain international training contracts.

Third Quarter 2020 Adjusted EBITDA of $24.6 million increased 20.6 percent, as compared to $20.4 million in the third quarter of 2019, primarily reflecting a favorable mix of revenues, including certain programs and products in more mature lifecycles. Operating Income of $12.7 million for the third quarter of 2020 increased 10.4 percent, as compared to $11.5 million in the third quarter of 2019, including increases in non-cash stock-based compensation expense of $2.2 million, depreciation expense of $0.5 million and R&D of $3.1 million.

Third quarter 2020 Cash Flow generated from Operations was $8.3 million. After the funding of $8.9 million of capital expenditures, Free Cash Flow used from Operations was $0.6 million. Cash used to fund acquisitions was approximately $28.4 million, primarily for the ASC Signal acquisition. Cash on hand at September 27, 2020 was $374.7 million. Adjusted EPS* was $0.14 for the third quarter of 2020, compared to $0.13 for the third quarter of 2019. Kratos reported third quarter 2020 Net Income of $2.4 million, and GAAP EPS of $0.02 for the third quarter of 2020.

For the third quarter of 2020, Kratos’ Unmanned Systems Segment (KUS) Revenues of $53.5 million increased 17.1 percent, as compared to $45.7 million in the third quarter of 2019, and operating income increased by 12.1 percent, from $3.3 million to $3.7 million in the third quarter of 2020. KUS Adjusted EBITDA of $5.6 million increased 14.3 percent, as compared to third quarter 2019 Adjusted EBITDA of $4.9 million, primarily reflecting increases in certain target drone programs, offset by certain development programs, including tactical drone development programs, which typically generate lower margins. KUS’s book-to-bill ratio for the third quarter of 2020 was 1.3 to 1.0 and 1.2 to 1.0 for the last twelve months ended September 27, 2020. Total backlog for KUS at the end of the third quarter of 2020 was $189.5 million.

For the third quarter of 2020, Kratos’ Government Solutions Segment (KGS) reported Revenues of $148.5 million, an increase of 7.3 percent, as compared to revenues of $138.4 million in the third quarter of 2019, and operating income of $14.1 million, an increase of 27.0 percent, as compared to operating income of $11.1 million in the third quarter of 2019. Revenues in the third quarter of 2020 include approximately $10.2 million from the recent ASC Signal acquisition, offset by previously disclosed scope reductions of certain international training programs. Third quarter 2020 KGS Adjusted EBITDA increased 22.6 percent, to $19.0 million, as compared to $15.5 million in the third quarter of 2019, reflecting a favorable mix of revenues, including products in more mature production lifecycles. For the third quarter of 2020, KGS reported bookings of $289.3 million and a book-to-bill ratio of 1.9 to 1.0. KGS bookings for the last twelve months ended September 27, 2020 were $751.4 million with a book to bill ratio of 1.4 to 1.0. KGS total backlog at the end of the third quarter of 2020 was $683.6 million, up from $542.8 million at the end of the second quarter of 2020.

For the third quarter of 2020, Kratos reported consolidated bookings of $356.7 million and a book-to-bill ratio of 1.8 to 1.0, with consolidated bookings of $956.0 million and a book-to-bill ratio of 1.3 to 1.0 for the last twelve months ended September 27, 2020. Backlog at September 27, 2020 was $873.1 million, up from $683.4 million at June 28, 2020 and Kratos’ bid and proposal pipeline was $8.3 billion at September 27, 2020. Backlog at September 27, 2020 was comprised of funded backlog of $579.3 million and unfunded backlog of $293.8 million.

Eric DeMarco, Kratos’ President and CEO, said, “We believe that our third quarter financial results reflect Kratos’ market leading position to address the ongoing recapitalization of strategic weapon systems by the U.S. and its allies. In the third quarter, we continued to execute on our strategy of being a technology company bringing affordable, disruptive systems, products and solutions to the National Security Market.” Mr. DeMarco continued, “At Kratos, affordability is a technology, and we are currently pursuing a number of programs, including in the tactical unmanned aerial drone, hypersonic, space, satellite communication, next generation engine and other areas, which we believe provide large growth opportunities for our Company.”

Mr. DeMarco concluded, “Since our last report to you, we believe that the total addressable market opportunity for Kratos’ class of made in America, affordable, attritable high performance jet drones has increased and is accelerating. We have continued to make progress in the tactical drone area, and our expectations for Kratos’ tactical drone business has never been greater. We are in close communication with our customers, and over the coming weeks and months we expect to receive contract awards, increased funding and perform a number of flights related to our tactical drones, including Kratos’ Valkyrie, and we expect this business to be one of our strongest future organic growth drivers beginning next year.”

Financial Guidance

We are affirming our full year 2020 guidance of Revenues of $740 to $780 million and Adjusted EBITDA of $72 million to $78 million. We are also affirming our full year 2020 Free Cash Flow guidance of generation of $7 million to a use of $18 million, including capital expenditures of approximately $36 to $40 million, which reflects certain previously expected outlays for unmanned drone systems now being reflected as inventory or as uses in Operating Cash Flow.

The 2020 capital expenditure forecast currently includes expected outlays of $11 to $15 million associated with the production of 12 Valkyrie aircraft prior to receipt of expected customer award(s); therefore, these aircraft are currently reflected as Company-owned assets until receipt of the related customer award(s). Kratos will adjust these initial forecasted capital expenditure outlays and the ultimate balance sheet classification of these investments once expected customer orders and the nature of the contract terms can be determined.

Kratos’ 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 or orders are received and the related financial contribution can be estimated, which would be dependent on criteria, including; the type of contract vehicle, scope, timing and period of performance.

Our Full Year 2020 guidance range also includes our current forecasted business mix for the fourth quarter, our assumptions of the expected impact of COVID-19 and the estimated impact of the recent Continuing Resolution Authorization (CRA), which began on October 1, 2020, on our industry, business, operations and forecast financial results.

Under the CRA, new and increased production or contract awards are delayed and cannot occur until the relevant federal fiscal year budget is approved, i.e. the 2021 federal fiscal year budget. Kratos currently has expected new contract awards, including expected production awards, and existing programs on which we expect future increased or full rate production or performance to be received, which are now dependent on approval of the 2021 federal fiscal year budget.

Consistent with previous years, we currently intend on providing Kratos’ initial Fiscal 2021 Financial Guidance when we report our full year 2020 Results, which will enable us to incorporate current information and impacts from expected tactical drone awards, the Election, the CRA and the estimated impact of COVID 19, including to our tactical drone and other businesses that are dependent on government weapon and test range access and operations, and the most recent information on a very large international recompete previously discussed.

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