Kratos Defense & Security Solutions, Inc. (Nasdaq:KTOS), a
Technology Company in the Defense, National Security and Global
Markets, today reported its first quarter 2023 financial results.
For the first quarter of 2023, Kratos reported Revenues of $231.8
million, Operating Income of $0.5 million, Net Loss of $7.0
million, Adjusted EBITDA of $17.0 million and a consolidated book
to bill ratio of 1.1 to 1.0.
Included in first quarter 2023 Net Loss and
Operating Income is non-cash stock compensation expense of $6.6
million and Company-funded Research and Development (R&D)
expense of $10.2 million, primarily reflecting significant ongoing
development efforts being made, including in our Space and
Satellite business to develop our virtual, software-based OpenSpace
command & control (C2), telemetry tracking & control
(TT&C) and other ground system solutions.
Kratos reported a first quarter 2023 GAAP Net
Loss of $7.0 million and a GAAP Net Loss per share of $0.05,
compared to a Net Loss of $15.9 million and a GAAP Net Loss per
share of $0.12 for the first quarter of 2022. Adjusted EPS was
$0.06 for the first quarter of 2023, compared to $0.04 for the
first quarter of 2022.
First quarter 2023 Revenues of $231.8 million
increased $35.6 million, or 18.1 percent, from first quarter 2022
Revenues of $196.2 million. First quarter 2023
Revenues include contribution of $12.0 million of Revenue from the
acquisition of the Engineering Division of Southern Research
Institute (SRE), and consolidated organic Revenue growth of 12.0
percent, primarily in our Space, Satellite and Cyber, Turbine
Technologies, C5ISR and Microwave Products businesses.
First quarter 2023 Cash Flow Used in Operations
was $25.7 million, reflecting working capital requirements related
to revenue growth and continued advanced inventory purchases in an
effort to mitigate supply chain disruptions. Free Cash Flow Used in
Operations was $33.4 million after funding of $7.7 million of
capital expenditures.
For the first quarter of 2023, Kratos’ Unmanned
Systems Segment (KUS) generated Revenues of $48.0 million, as
compared to $52.6 million in the first quarter of 2022, primarily
reflecting reduced tactical drone related activity as compared to
2022. KUS’s Operating Loss was $0.6 million in the first quarter of
2023 compared to Operating Income of $0.5 million in the first
quarter of 2022, reflecting a less favorable mix of revenues and
the impact of reduced volume.
KUS’s Adjusted EBITDA for the first quarter of
2023 was $1.8 million, compared to first quarter 2022 KUS Adjusted
EBITDA of $3.0 million, reflecting increases in certain development
programs which typically generate lower margins and increases in
SG&A and supply chain related and employee costs and the impact
of reduced volume.
KUS’s book-to-bill
ratio for the first quarter of 2023 was 1.9 to 1.0 and 1.1 to 1.0
for the last twelve months ended March 26, 2023, with bookings of
$90.5 million for the three months ended March 26, 2023, and
bookings of $230.6 million for the last twelve months ended March
26, 2023. Total backlog for KUS at the end of the first
quarter of 2023 was $244.1 million compared to $201.6 million at
the end of the fourth quarter of 2022.
For the first quarter of 2023, Kratos’
Government Solutions Segment (KGS) Revenues of $183.8 million
increased 28.0 percent from Revenues of $143.6 million in the first
quarter of 2022. The increased Revenues includes the contribution
of approximately $12.0 million of Revenues from the SRE
acquisition, and organic revenue growth in our Space, Satellite and
Cyber, Turbine Technologies, C5ISR and Microwave Products
businesses, partially offset by a reduction of $2.2 million related
to our legacy Training Solutions business. Excluding
the SRE acquisition, KGS revenues grew organically 19.6 percent in
the first quarter of 2023 as compared to the first quarter of
2022.
KGS reported operating income of $7.7 million in
the first quarter of 2023 compared to $5.6 million in the first
quarter of 2022, primarily reflecting a more favorable revenue mix
and leverage on the fixed overhead and SG&A costs.
Kratos’ Space, Satellite and Cyber business
generated Revenues of $88.8 million in the first quarter of 2023
compared to $72.5 million in the first quarter of 2022, reflecting
a 22.5 percent organic growth rate. First quarter 2023 KGS Adjusted
EBITDA was $15.2 million, compared to first quarter 2022 KGS
Adjusted EBITDA of $10.8 million, reflecting a more favorable mix
in revenues and the increased revenue volume.
For the first quarter of 2023, KGS reported a
book-to-bill ratio of 0.9 to 1.0, a book to bill ratio of 1.1 to
1.0 for the last twelve months ended March 26, 2023 and bookings of
$161.3 million and $822.1 million for the three and last twelve
months ended March 26, 2023, respectively. KGS includes
Kratos’ Space, Training and Cyber business, which reported a book
to bill ratio of 1.2 to 1.0 for the first quarter of 2023 and a
book to bill ratio of 1.3 to 1.0 for the last twelve months ended
March 26, 2023. Bookings for Kratos’ Space, Training and Cyber
business for the three months and last twelve months ended March
26, 2023 were $112.1 million and $472.7 million, respectively.
KGS’s total backlog at the end of the first quarter of 2023 was
$888.3 million, as compared to $910.8 million at the end of the
fourth quarter of 2022.
For the first quarter of 2023, Kratos reported
consolidated bookings of $251.8 million and a book-to-bill ratio of
1.1 to 1.0, with consolidated bookings of $1.1 billion and a
book-to-bill ratio of 1.1 to 1.0 for the last twelve months ended
March 26, 2023. Consolidated backlog was $1.13 billion on March 26,
2023 and $1.11 billion on December 25, 2022. Kratos’ bid and
proposal pipeline was $10 billion at March 26, 2023 and December
25, 2022. Backlog at March 26, 2023 was comprised of
funded backlog of $789.0 million and unfunded backlog of $343.4
million.
Eric DeMarco, Kratos’ President and CEO, said,
“Kratos’ expected 2023 transition to sustained year over year
increasing revenues, profitability and operating cash flow, is on
track with our first quarter results, including 12 percent organic
growth and our affirmed full year 2023 financial
forecast. Kratos continued to win additional program
and contract awards, including as represented by our 1.9 to 1.0
Unmanned Systems and Kratos consolidated 1.1 to 1.0 first quarter
book to bill ratios, providing confidence in our future
forecast.”
Mr. DeMarco continued, “Recent highlights
include Kratos’ Space and Satellite business being notified that we
have been selected as part of a team for a new multi-billion dollar
satellite constellation, which includes Kratos’ virtualized
OpenSpace ground infrastructure system and our Turbine Technologies
business receiving a large next generation engine development
award, the value of which to Kratos could ultimately exceed $100
million. Additionally, Kratos’ C5ISR business is also well
positioned, with key programs including Sentinel, IBCS, SHORAD,
Patriot, HIMARS, SCAR and Enduring Shield.”
Mr. DeMarco, concluded, “In the drone area, we
continue to progress, receiving additional customer funded
contracts, including as related to Valkyrie, successfully
missionizing, operationalizing and flying our systems and
increasing our first to market leadership position in the tactical
area. Kratos today is producing hundreds of affordable high
performance jet drones in the United States, with established and
performing partners and suppliers, at real, known cost points and
we stand ready to support the U.S. industrial base, our Country’s
and Allies security requirements and deterrence of threats today,
with quantities and affordable mass.”
Financial Guidance
We are providing our initial 2023 second quarter
financial guidance and affirming our full year 2023 guidance today
which includes our current forecasted business mix, and our
assumptions, including as related to: employee sourcing, hiring and
retention; manufacturing, production and supply chain disruptions;
parts shortages and related continued significant cost and price
increases, including for employees, materials and components that
are impacting the industry and Kratos. The range of our expected
second quarter 2023 revenues includes assumptions of forecasted
execution, including the number of new qualified personnel expected
to be obtained and retained to successfully execute on our programs
and contracts, as well as expected contract awards.
Our second quarter and full year 2023 guidance
ranges are as follows:
Current Guidance Range |
$M |
Q223 |
FY23 |
Revenues |
$230 -
$240 |
$980 -
$1,000 |
R&D |
$9 -
$10 |
$36 -
$39 |
Operating
Income |
$0 -
$3 |
$25 -
$29 |
Depreciation |
$6 -
$7 |
$26 -
$28 |
Amortization |
$2 -
$3 |
$7 -
$10 |
Stock Based
Compensation |
$6 -
$7 |
$23 -
$26 |
Adjusted
EBITDA |
$14 -
$18 |
$85 -
$89 |
Operating
Cash Flow |
|
$55 -
$65 |
Capital
Expenditures |
|
$45 -
$50 |
Free Cash
Flow Generation |
|
$10 -
$20 |
Management will discuss the Company’s financial results, on a
conference call beginning at 2:00 p.m. Pacific (5:00 p.m. Eastern)
today. The call will be available at www.kratosdefense.com.
Participants may register for the call using this Online Form. Upon
registration, all telephone participants will receive the dial-in
number along with a unique PIN that can be used to access the call.
For those who cannot access the live broadcast, a replay will be
available on Kratos’ website.
About Kratos Defense & Security
SolutionsKratos Defense & Security Solutions, Inc.
(NASDAQ: KTOS) is a Technology Company that develops and fields
transformative, affordable systems, products and solutions for
United States National Security, our allies and global commercial
enterprises. At Kratos, Affordability is a Technology, and Kratos
is changing the way breakthrough technology is rapidly brought to
market – at a low cost – with actual products, systems, and
technologies rather than slide decks or renderings. Through proven
commercial and venture capital backed approaches, including
proactive, internally funded research and streamlined development
processes, Kratos is focused on being First to Market with our
solutions, well in advance of competition. Kratos is the recognized
Technology Disruptor in our core market areas, including Space and
Satellite Communications, Cyber Security and Warfare, Unmanned
Systems, Rocket and Hypersonic Systems, Next-Generation Jet Engines
and Propulsion Systems, Microwave Electronics, C5ISR and Virtual
and Augmented Reality Training Systems. For more information, visit
www.KratosDefense.com.
Notice
Regarding
Forward-Looking
StatementsThis
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 second quarter and full year 2023 revenues,
R&D, operating income (loss), depreciation, amortization, stock
based compensation expense, and Adjusted EBITDA, and full year 2023
operating cash flow, capital expenditures and other investments,
and free cash flow, the Company’s future growth trajectory and
ability to achieve improved revenue mix and profit in certain of
its business segments and the expected timing of such improved
revenue mix and profit, including the Company’s ability to achieve
sustained year over year increasing revenues, profitability and
cash flow, the Company’s expectation of ramp on projects and that
investments in its business, including Company funded R&D
expenses and ongoing development efforts, will result in an
increase in the Company’s market share and total addressable market
and position the Company for significant future organic growth,
profitability, cash flow and an increase in shareholder value, the
Company’s bid and proposal pipeline and backlog, including the
Company’s ability to timely execute on its backlog, demand for its
products and services, including the Company’s alignment with
today’s National Security requirements and the positioning of its
C5ISR and other businesses, ability to successfully compete and
expected new customer awards, including the magnitude and timing of
funding and the future opportunity associated with such awards,
including in the target and tactical drone and satellite
communication areas, 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 and to
achieve financial leverage on fixed administrative costs, the
ability of the Company’s advanced purchases of inventory to
mitigate supply chain disruptions and the timing of converting
these investments to cash through the sales process, 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 and full rate production 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, market and industry developments, and
the current estimated impact of COVID-19 and employee absenteeism,
supply chain disruptions, availability of an experienced skilled
workforce, inflation and increased costs, and delays in our
financial projections, industry, business and operations, 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. Department of Defense, or 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 unmanned aerial systems
and unattended ground sensor markets do not experience significant
growth; risks that products we have developed or will develop will
become programs of record; 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
related to the new DoD Cybersecurity Maturity Model Certification;
risks relating to the ongoing conflict in Ukraine; risks related 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 compete 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 we may be required to record valuation
allowances on our net operating losses which could adversely impact
our profitability and financial condition; risks that the current
economic environment will adversely impact our business, including
with respect to our ability to recruit and retain sufficient
numbers of qualified personnel to execute on our programs and
contracts, as well as expected contract awards and risks related to
increasing interest rates; currently unforeseen risks associated
with COVID-19 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 25, 2022, and in our other filings made with the
Securities and Exchange Commission.
Note Regarding Use of Non-GAAP Financial
Measures and Other Performance MetricsThis news release
contains non-GAAP financial measures, including Adjusted earnings
per share (computed using income from continuing operations before
income taxes, excluding income (loss) from discontinued operations,
excluding income (loss) attributable to non-controlling interest,
excluding depreciation, amortization of intangible assets,
amortization of capitalized contract and development costs,
stock-based compensation expense, acquisition and restructuring
related items and other, which includes, but is not limited to,
legal related items, non-recoverable rates and costs, and foreign
transaction gains and losses, less the estimated impact to income
taxes) and including Adjusted EBITDA (which includes net income
(loss) attributable to noncontrolling interest and excludes, among
other things, losses and gains from discontinued operations,
acquisition and restructuring related items, stock compensation
expense, foreign transaction gains and losses, and the associated
margin rates). Additional non-GAAP financial measures include Free
Cash Flow from Operations computed as Cash Flow from Operations
less Capital Expenditures and Adjusted EBITDA related to our KUS
and KGS businesses. Kratos believes this information is useful to
investors because it provides a basis for measuring the Company’s
available capital resources, the actual and forecasted operating
performance of the Company’s business and the Company’s cash flow,
excluding non-recurring items and non-cash items that would
normally be included in the most directly comparable measures
calculated and presented in accordance with GAAP. The Company’s
management uses these non-GAAP financial measures, along with the
most directly comparable GAAP financial measures, in evaluating the
Company’s 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 Company’s financial results calculated in
accordance with GAAP and reconciliations to those financial
results. 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 Company’s financial
results prepared in accordance with GAAP are included in this news
release.
Another Performance Metric the Company believes
is a key performance indicator in our industry is our Book to Bill
Ratio as it provides investors with a measure of the amount of
bookings or contract awards as compared to the amount of revenues
that have been recorded during the period and provides an indicator
of how much of the Company’s backlog is being burned or utilized in
a certain period. The Book to Bill Ratio is computed as the number
of bookings or contract awards in the period divided by the
revenues recorded for the same period. The Company believes that
the rolling or last twelve months’ Book to Bill Ratio is meaningful
since the timing of quarter-to-quarter bookings can vary.
Press Contact:Yolanda White858-812-7302
Direct
Investor
Information:877-934-4687investor@kratosdefense.com
Kratos
Defense & Security Solutions, Inc. |
|
Unaudited
Condensed Consolidated Statements of Operations |
|
(in
millions, except per share data) |
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 26, |
|
March 27, |
|
|
|
2023 |
|
2022 |
|
|
|
|
|
|
|
Service revenues |
|
$ |
91.6 |
|
|
$ |
67.9 |
|
|
Product
sales |
|
|
140.2 |
|
|
|
128.3 |
|
|
Total revenues |
|
|
231.8 |
|
|
|
196.2 |
|
|
Cost of
service revenues |
|
|
68.2 |
|
|
|
49.9 |
|
|
Cost of
product sales |
|
|
104.2 |
|
|
|
94.4 |
|
|
Total costs |
|
|
172.4 |
|
|
|
144.3 |
|
|
Gross profit
- service revenues |
|
|
23.4 |
|
|
|
18.0 |
|
|
Gross profit
- product sales |
|
|
36.0 |
|
|
|
33.9 |
|
|
|
|
|
|
|
|
Total gross profit |
|
|
59.4 |
|
|
|
51.9 |
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses |
|
|
44.8 |
|
|
|
40.3 |
|
|
Acquisition
and restructuring related items and other |
|
|
0.9 |
|
|
|
0.6 |
|
|
Research and
development expenses |
|
|
10.2 |
|
|
|
9.2 |
|
|
Depreciation |
|
|
1.4 |
|
|
|
1.3 |
|
|
Amortization
of intangible assets |
|
|
1.6 |
|
|
|
1.7 |
|
|
Operating income (loss) |
|
|
0.5 |
|
|
|
(1.2 |
) |
|
Interest
expense, net |
|
|
(5.3 |
) |
|
|
(5.9 |
) |
|
Loss on
extinguishment of debt |
|
|
- |
|
|
|
(13.0 |
) |
|
Other income
(expense), net |
|
|
(0.3 |
) |
|
|
0.1 |
|
|
Loss from continuing operations before income taxes |
|
|
(5.1 |
) |
|
|
(20.0 |
) |
|
Provision
(benefit) for income taxes from continuing operations |
|
|
0.7 |
|
|
|
(4.3 |
) |
|
Loss from continuing operations |
|
|
(5.8 |
) |
|
|
(15.7 |
) |
|
Loss from
discontinued operations, net of income taxes |
|
|
- |
|
|
|
(0.2 |
) |
|
Net loss |
|
|
(5.8 |
) |
|
|
(15.9 |
) |
|
Less: Net income attributable to noncontrolling interest |
|
|
1.2 |
|
|
|
- |
|
|
Net loss attributable to Kratos |
|
$ |
(7.0 |
) |
|
$ |
(15.9 |
) |
|
|
|
|
|
|
|
Basic loss
per common share attributable to Kratos: |
|
|
|
|
|
Loss from continuing operations |
|
$ |
(0.05 |
) |
|
$ |
(0.12 |
) |
|
Loss from discontinued operations |
|
|
- |
|
|
|
- |
|
|
Net loss |
|
$ |
(0.05 |
) |
|
$ |
(0.12 |
) |
|
|
|
|
|
|
|
Diluted loss
per common share attributable to Kratos: |
|
|
|
|
|
Loss from continuing operations |
|
$ |
(0.05 |
) |
|
$ |
(0.12 |
) |
|
Loss from discontinued operations |
|
|
- |
|
|
|
- |
|
|
Net loss |
|
$ |
(0.05 |
) |
|
$ |
(0.12 |
) |
|
|
|
|
|
|
|
Weighted
average common shares outstanding: |
|
|
|
|
|
Basic weighted average common shares outstanding |
|
|
128.1 |
|
|
|
125.9 |
|
|
Diluted weighted average common shares outstanding |
|
|
128.1 |
|
|
|
125.9 |
|
|
|
|
|
|
|
|
Adjusted
EBITDA (1) |
|
$ |
17.0 |
|
|
$ |
13.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited Reconciliation of GAAP to Non-GAAP
Measures |
|
|
|
|
|
|
|
|
|
|
|
Note: (1) Adjusted
EBITDA is a non-GAAP measure defined as GAAP net loss attributable
to Kratos adjusted for net income attributable to noncontrolling
interest, loss from discontinued operations, net interest expense,
provision (benefit) for income taxes, depreciation
and amortization expense of intangible assets, amortization of
capitalized contract and development costs, stock-based
compensation, acquisition and restructuring related items and
other, and foreign transaction loss. |
|
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 (loss) 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 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
interest expense, net. 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
Company's 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, leased 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 targets in its
Unmanned Systems and ballistic missile target businesses 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 Company's 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
transaction 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
Company's business and are not indicative of ongoing operating
results. |
|
Restructuring costs.
The Company incurs restructuring costs for cost reduction actions
which include employee termination costs, facility
shut-down related costs and lease commitment costs for unused,
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. |
|
|
Non-recoverable rates
and costs. In fiscal 2022, the Company incurred non-recoverable
rates and costs as a result of its inability to hire the
required direct labor base to execute on its backlog due to a
challenging environment in hiring and retaining skilled personnel.
In addition, in 2022 the Company incurred non-recoverable rate
growth resulting from a smaller than planned direct labor base due
to delays in customer program execution and awards. |
|
Legal related items.
The Company incurs costs related to pending legal settlements and
other legal related matters. Management believes these items
are outside the normal operations of the Company's business and are
not indicative of ongoing operating results. |
|
|
|
|
|
|
Adjusted EBITDA is a
non-GAAP financial measure and should not be considered in
isolation or as a substitute for financial information provided
in accordance with GAAP. This non-GAAP financial measure may
not be computed in the same manner as similarly titled measures
used by other companies. The Company expects to continue to
incur expenses similar to the Adjusted EBITDA financial adjustments
described above, and investors should not infer from the
Company's presentation of this non-GAAP financial measure that
these costs are unusual, infrequent, or non-recurring. |
|
|
|
|
|
|
Reconciliation of Net Loss attributable to Kratos to Adjusted
EBITDA is as follows: |
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 26, |
|
March 27, |
|
|
|
2023 |
|
2022 |
|
|
|
|
|
|
|
Net loss
attributable to Kratos |
|
$ |
(7.0 |
) |
|
$ |
(15.9 |
) |
|
Loss from
discontinued operations, net of income taxes |
|
|
- |
|
|
|
0.2 |
|
|
Interest
expense, net |
|
|
5.3 |
|
|
|
5.9 |
|
|
Loss on
extinguishment of debt |
|
|
- |
|
|
|
13.0 |
|
|
Provision
(benefit) for income taxes from continuing operations |
|
|
0.7 |
|
|
|
(4.3 |
) |
|
Depreciation
(including cost of service revenues and product sales) |
|
|
6.3 |
|
|
|
5.3 |
|
|
Stock-based
compensation |
|
|
6.6 |
|
|
|
7.0 |
|
|
Foreign
transaction loss |
|
|
0.8 |
|
|
|
- |
|
|
Amortization
of intangible assets |
|
|
1.6 |
|
|
|
1.7 |
|
|
Amortization
of capitalized contract and development costs |
|
|
0.6 |
|
|
|
0.3 |
|
|
Acquisition
and restructuring related items and other |
|
|
0.9 |
|
|
|
0.6 |
|
|
Plus: Net
income attributable to noncontrolling interest |
|
|
1.2 |
|
|
|
- |
|
|
|
|
|
|
|
|
Adjusted
EBITDA |
|
$ |
17.0 |
|
|
$ |
13.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of acquisition and restructuring related items and
other included in Adjusted EBITDA: |
|
|
|
|
|
Three Months Ended |
|
|
|
March 26, |
|
March 27, |
|
|
|
2023 |
|
2022 |
|
Acquisition
and transaction related items |
|
$ |
- |
|
|
$ |
0.3 |
|
|
Restructuring costs |
|
|
- |
|
|
|
0.1 |
|
|
Legal
related items |
|
|
0.9 |
|
|
|
0.2 |
|
|
|
|
$ |
0.9 |
|
|
$ |
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kratos
Defense & Security Solutions, Inc. |
|
Unaudited
Segment Data |
|
(in
millions) |
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 26, |
|
March 27, |
|
|
|
2023 |
|
2022 |
|
Revenues: |
|
|
|
|
|
Unmanned Systems |
|
$ |
48.0 |
|
|
$ |
52.6 |
|
|
Kratos Government Solutions |
|
|
183.8 |
|
|
|
143.6 |
|
|
Total revenues |
|
$ |
231.8 |
|
|
$ |
196.2 |
|
|
|
|
|
|
|
|
Operating
income (loss) |
|
|
|
|
|
Unmanned Systems |
|
$ |
(0.6 |
) |
|
$ |
0.5 |
|
|
Kratos Government Solutions |
|
|
7.7 |
|
|
|
5.6 |
|
|
Unallocated corporate expense, net |
|
|
(6.6 |
) |
|
|
(7.3 |
) |
|
Total operating income (loss) |
|
$ |
0.5 |
|
|
$ |
(1.2 |
) |
|
|
|
|
|
|
|
Note: Unallocated
corporate expense, net includes costs for certain stock-based
compensation programs (including stock-based compensation costs for
stock options, employee stock purchase plan and restricted stock
units), the effects of items not considered part of management’s
evaluation of segment operating performance, and acquisition and
restructuring related items, corporate costs not allocated to the
segments, legal related items, and other miscellaneous corporate
activities. |
|
|
|
|
|
|
Reconciliation of
Segment Operating Income (Loss) to Adjusted EBITDA is as
follows: |
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 26, |
|
March 27, |
|
|
|
2023 |
|
2022 |
|
Unmanned
Systems |
|
|
|
|
|
Operating income (loss) |
|
$ |
(0.6 |
) |
|
$ |
0.5 |
|
|
Other income |
|
|
- |
|
|
|
0.1 |
|
|
Depreciation |
|
|
1.9 |
|
|
|
1.6 |
|
|
Amortization of intangible assets |
|
|
0.1 |
|
|
|
0.3 |
|
|
Amortization of capitalized contract and development costs |
|
|
0.4 |
|
|
|
0.3 |
|
|
Acquisition and restructuring related items and other |
|
|
- |
|
|
|
0.2 |
|
|
Adjusted EBITDA |
|
$ |
1.8 |
|
|
$ |
3.0 |
|
|
%
of revenue |
|
|
3.8 |
% |
|
|
5.7 |
% |
|
|
|
|
|
|
|
Kratos
Government Solutions |
|
|
|
|
|
Operating income |
|
$ |
7.7 |
|
|
$ |
5.6 |
|
|
Other income |
|
|
0.5 |
|
|
|
- |
|
|
Depreciation |
|
|
4.4 |
|
|
|
3.7 |
|
|
Amortization of intangible assets |
|
|
1.5 |
|
|
|
1.4 |
|
|
Amortization of capitalized contract and development costs |
|
|
0.2 |
|
|
|
- |
|
|
Acquisition and restructuring related items and other |
|
|
0.9 |
|
|
|
0.1 |
|
|
Adjusted EBITDA |
|
$ |
15.2 |
|
|
$ |
10.8 |
|
|
%
of revenue |
|
|
8.3 |
% |
|
|
7.5 |
% |
|
|
|
|
|
|
|
Total Adjusted EBITDA |
|
$ |
17.0 |
|
|
$ |
13.8 |
|
|
%
of revenue |
|
|
7.3 |
% |
|
|
7.0 |
% |
|
|
|
|
|
|
|
Kratos
Defense & Security Solutions, Inc. |
|
Unaudited
Condensed Consolidated Balance Sheets |
|
(in
millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
March
26, |
|
December
25, |
|
|
|
2023 |
|
2022 |
|
Assets |
|
|
|
|
|
Current assets: |
|
|
|
|
|
Cash and cash equivalents |
|
$ |
46.7 |
|
|
$ |
81.3 |
|
|
Accounts receivable, net |
|
|
353.8 |
|
|
|
328.5 |
|
|
Inventoried costs |
|
|
134.0 |
|
|
|
125.5 |
|
|
Prepaid expenses |
|
|
14.3 |
|
|
|
11.9 |
|
|
Other current assets |
|
|
39.3 |
|
|
|
35.4 |
|
|
Total current assets |
|
|
588.1 |
|
|
|
582.6 |
|
|
Property, plant and equipment, net |
|
|
213.6 |
|
|
|
213.1 |
|
|
Operating lease right-of-use assets |
|
|
46.6 |
|
|
|
47.4 |
|
|
Goodwill |
|
|
558.2 |
|
|
|
558.2 |
|
|
Intangible assets, net |
|
|
53.6 |
|
|
|
55.2 |
|
|
Other assets |
|
|
97.0 |
|
|
|
95.0 |
|
|
Total assets |
|
$ |
1,557.1 |
|
|
$ |
1,551.5 |
|
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
Accounts payable |
|
$ |
54.9 |
|
|
$ |
57.3 |
|
|
Accrued expenses |
|
|
35.9 |
|
|
|
33.8 |
|
|
Accrued compensation |
|
|
56.2 |
|
|
|
52.2 |
|
|
Accrued interest |
|
|
1.5 |
|
|
|
1.5 |
|
|
Billings in excess of costs and earnings on uncompleted
contracts |
|
|
65.2 |
|
|
|
62.1 |
|
|
Current portion of operating lease liabilities |
|
|
11.1 |
|
|
|
10.8 |
|
|
Other current liabilities |
|
|
19.3 |
|
|
|
15.6 |
|
|
Other current liabilities of discontinued operations |
|
|
0.9 |
|
|
|
0.9 |
|
|
Total current liabilities |
|
|
245.0 |
|
|
|
234.2 |
|
|
Long-term debt |
|
|
250.3 |
|
|
|
250.2 |
|
|
Operating lease liabilities, net of current portion |
|
|
40.0 |
|
|
|
40.8 |
|
|
Other long-term liabilities |
|
|
76.8 |
|
|
|
77.4 |
|
|
Other long-term liabilities of discontinued operations |
|
|
1.4 |
|
|
|
1.4 |
|
|
Total liabilities |
|
|
613.5 |
|
|
|
604.0 |
|
|
Commitments and contingencies |
|
|
|
|
|
Redeemable noncontrolling interest |
|
|
12.4 |
|
|
|
11.2 |
|
|
Stockholders’ equity: |
|
|
|
|
|
Additional paid-in capital |
|
|
1,610.0 |
|
|
|
1,608.4 |
|
|
Accumulated other comprehensive loss |
|
|
(0.5 |
) |
|
|
(0.8 |
) |
|
Accumulated deficit |
|
|
(678.3 |
) |
|
|
(671.3 |
) |
|
Total Kratos stockholders’ equity |
|
|
931.2 |
|
|
|
936.3 |
|
|
Total liabilities and stockholders’ equity |
|
$ |
1,557.1 |
|
|
$ |
1,551.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kratos
Defense & Security Solutions, Inc. |
|
Unaudited
Condensed Consolidated Statements of Cash Flows |
|
(in
millions) |
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 26, |
|
March 27, |
|
|
|
2023 |
|
2022 |
|
Operating
activities: |
|
|
|
|
|
Net loss |
|
$ |
(5.8 |
) |
|
$ |
(15.9 |
) |
|
Less: loss from discontinued operations |
|
|
- |
|
|
|
(0.2 |
) |
|
Loss from continuing operations |
|
|
(5.8 |
) |
|
|
(15.7 |
) |
|
Adjustments to reconcile loss from continuing operations to net
cash used in operating activities from continuing operations: |
|
|
|
|
|
Depreciation and amortization |
|
|
7.9 |
|
|
|
7.0 |
|
|
Amortization of lease right-of-use assets |
|
|
2.7 |
|
|
|
2.6 |
|
|
Stock-based compensation |
|
|
6.6 |
|
|
|
7.0 |
|
|
Amortization of deferred financing costs |
|
|
0.2 |
|
|
|
0.3 |
|
|
Loss on extinguishment of debt |
|
|
- |
|
|
|
13.0 |
|
|
Provision for doubtful accounts |
|
|
0.9 |
|
|
|
- |
|
|
Changes in assets and liabilities, net of acquisitions: |
|
|
|
|
|
Accounts receivable |
|
|
(39.1 |
) |
|
|
31.9 |
|
|
Unbilled receivables |
|
|
13.1 |
|
|
|
(19.8 |
) |
|
Inventoried costs |
|
|
(8.3 |
) |
|
|
(15.3 |
) |
|
Prepaid expenses and other assets |
|
|
(7.8 |
) |
|
|
(9.5 |
) |
|
Operating lease liabilities |
|
|
(2.4 |
) |
|
|
(2.7 |
) |
|
Accounts payable |
|
|
(1.8 |
) |
|
|
1.3 |
|
|
Accrued compensation |
|
|
4.0 |
|
|
|
5.6 |
|
|
Accrued expenses |
|
|
2.0 |
|
|
|
6.1 |
|
|
Accrued interest |
|
|
- |
|
|
|
(1.3 |
) |
|
Billings in excess of costs and earnings on uncompleted
contracts |
|
|
3.2 |
|
|
|
(8.3 |
) |
|
Income tax receivable and payable |
|
|
(0.5 |
) |
|
|
(4.9 |
) |
|
Other liabilities |
|
|
(0.6 |
) |
|
|
(5.2 |
) |
|
Net cash used in operating activities from continuing
operations |
|
|
(25.7 |
) |
|
|
(7.9 |
) |
|
Investing activities: |
|
|
|
|
|
Cash paid for acquisitions, net of cash acquired |
|
|
- |
|
|
|
(58.5 |
) |
|
Capital expenditures |
|
|
(7.7 |
) |
|
|
(10.8 |
) |
|
Net cash used in investing activities from continuing
operations |
|
|
(7.7 |
) |
|
|
(69.3 |
) |
|
Financing activities: |
|
|
|
|
|
Proceeds from the issuance of long-term debt |
|
|
- |
|
|
|
200.0 |
|
|
Borrowing under credit facility |
|
|
15.0 |
|
|
|
100.0 |
|
|
Redemption of Senior Secured Notes |
|
|
- |
|
|
|
(309.8 |
) |
|
Repayment under credit facility, term loan and other debt |
|
|
(16.3 |
) |
|
|
- |
|
|
Debt issuance costs |
|
|
- |
|
|
|
(3.2 |
) |
|
Payment under finance leases |
|
|
(0.4 |
) |
|
|
(0.3 |
) |
|
Payments of employee taxes withheld from share-based awards |
|
|
(2.6 |
) |
|
|
(6.8 |
) |
|
Proceeds from shares issued under equity plans |
|
|
2.9 |
|
|
|
2.9 |
|
|
Net cash used in financing activities from continuing
operations |
|
|
(1.4 |
) |
|
|
(17.2 |
) |
|
Net cash flows from continuing operations |
|
|
(34.8 |
) |
|
|
(94.4 |
) |
|
Net operating cash flows of discontinued operations |
|
|
- |
|
|
|
0.1 |
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
0.2 |
|
|
|
(0.7 |
) |
|
Net decrease in cash, cash equivalents and restricted cash |
|
|
(34.6 |
) |
|
|
(95.0 |
) |
|
Cash, cash equivalents and restricted cash at beginning of
period |
|
|
81.3 |
|
|
|
349.4 |
|
|
Cash, cash equivalents and restricted cash at end of period |
|
$ |
46.7 |
|
|
$ |
254.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kratos
Defense & Security Solutions, Inc. |
|
Unaudited
Non-GAAP Measures |
|
Computation
of Adjusted Earnings Per Share |
|
(in
millions, except per share data) |
|
|
|
|
|
|
|
|
Adjusted income from
continuing operations and adjusted income from continuing
operations per diluted common share (Adjusted EPS) are
non-GAAP measures for reporting financial performance and
exclude the impact of certain items and, therefore, have not been
calculated in accordance with GAAP. Management believes that
exclusion of these items assists in providing a more complete
understanding of the Company's underlying continuing operations
results and trends and allows for comparability with our peer
company index and industry. The Company uses these measures along
with the corresponding GAAP financial measures to manage the
Company's business and to evaluate its performance compared to
prior periods and the marketplace. The Company defines
adjusted income from continuing operations before amortization
of intangible assets, depreciation, stock-based compensation,
foreign transaction gain/loss, and acquisition and
restructuring related items and other. The estimated impact to
income taxes includes the impact to the effective tax rate, current
tax provision and deferred tax provision, and excludes the
impact of discrete items, including transaction related expenses
and release of valuation allowance, or benefit related to the
add-backs.* |
Adjusted EPS reflects
adjusted income on a per share basis using weighted average diluted
shares outstanding. |
|
|
|
|
|
|
The following table
reconciles the most directly comparable GAAP financial measures to
the non-GAAP financial measures. |
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 26, |
|
March 27, |
|
|
|
2023 |
|
2022 |
|
Net
loss attributable to Kratos |
|
$ |
(7.0 |
) |
|
$ |
(15.9 |
) |
|
Less: GAAP
provision (benefit) for income taxes |
|
|
0.7 |
|
|
|
(4.3 |
) |
|
Less: Net
income attributable to noncontrolling interest |
|
|
1.2 |
|
|
|
- |
|
|
Less: loss
from discontinued operations, net of income taxes |
|
|
- |
|
|
|
0.2 |
|
|
Loss
from continuing operations before taxes |
|
|
(5.1 |
) |
|
|
(20.0 |
) |
|
Add:
Amortization of intangible assets |
|
|
1.6 |
|
|
|
1.7 |
|
|
Add:
Amortization of capitalized contract and development costs |
|
|
0.6 |
|
|
|
0.3 |
|
|
Add:
Depreciation |
|
|
6.3 |
|
|
|
5.3 |
|
|
Add:
Stock-based compensation |
|
|
6.6 |
|
|
|
7.0 |
|
|
Add: Loss on
extinguishment of debt |
|
|
- |
|
|
|
13.0 |
|
|
Add: Foreign
transaction loss |
|
|
0.8 |
|
|
|
- |
|
|
Add:
Acquisition and restructuring related items and other |
|
|
0.9 |
|
|
|
0.6 |
|
|
Non-GAAP Adjusted income from continuing
operations before income taxes |
|
|
11.7 |
|
|
|
7.9 |
|
|
Income taxes
on Non-GAAP measure Adjusted income from continuing
operations* |
|
|
3.5 |
|
|
|
2.8 |
|
|
Non-GAAP Adjusted net
income |
|
$ |
8.2 |
|
|
$ |
5.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
|
$ |
(0.05 |
) |
|
$ |
(0.12 |
) |
|
Less: GAAP
provision (benefit) for income taxes |
|
|
- |
|
|
|
(0.03 |
) |
|
Less: Net
income attributable to noncontrolling interest |
|
|
0.01 |
|
|
|
- |
|
|
Less: Loss
from discontinued operations, net of income taxes |
|
|
- |
|
|
|
- |
|
|
Add:
Amortization of intangible assets |
|
|
0.01 |
|
|
|
0.01 |
|
|
Add:
Amortization of capitalized contract and development costs |
|
|
- |
|
|
|
- |
|
|
Add:
Depreciation |
|
|
0.05 |
|
|
|
0.04 |
|
|
Add:
Stock-based compensation |
|
|
0.05 |
|
|
|
0.06 |
|
|
Add: Loss on
extinguishment of debt |
|
|
- |
|
|
|
0.10 |
|
|
Add: Foreign
transaction loss |
|
|
0.01 |
|
|
|
- |
|
|
Add:
Acquisition and restructuring related items and other |
|
|
0.01 |
|
|
|
- |
|
|
Income taxes
on Non-GAAP measure Adjusted income from continuing
operations* |
|
|
(0.03 |
) |
|
|
(0.02 |
) |
|
Adjusted income from continuing operations per diluted
common share |
|
$ |
0.06 |
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
Weighted average diluted common shares
outstanding |
|
|
128.1 |
|
|
|
125.9 |
|
|
|
|
|
|
|
|
*The impact to income
taxes is calculated by recasting income before income taxes to
include the add-backs involved in determining Adjusted income from
continuing operations before income taxes and recalculating
the income tax provision, including current and deferred income
taxes, using the Adjusted income from continuing operations
before income taxes. The recalculation also adjusts for any
discrete tax expense, including transaction related expenses and
the release of valuation allowance, or benefit related to the
add-backs. |
|
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