Note Regarding Use of Non-GAAP Financial Measures
This news release contains non-GAAP financial measures, including Adjusted income (loss) per share (computed using income (loss) from continuing operations before income taxes, excluding amortization of intangible assets, and capitalized contract and development costs, stock compensation expense, acquisition and restructuring related items and other, which includes but is not limited to legal related items and foreign transaction gains and losses, less the estimated tax cash payments) and Adjusted EBITDA (which includes net income attributable to noncontrolling interest and excludes, among other things, losses and gains from discontinued operations, restructuring and transaction 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 and Adjusted EBITDA related to our KUSD 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 extraordinary 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 statements. 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.
*Adjusted earnings per share (Adjusted EPS) excludes loss from discontinued operations, non-cash amortization expense, as the Company has historically been acquisitive, non-cash stock compensation costs, foreign transaction gains and losses, certain non-recurring items such as acquisition and restructuring related items and other, and includes cash actually expected to be paid for income taxes on continuing operations, reflecting the benefit of the Company’s net operating loss carry forwards of over $300 million. Kratos believes that reporting adjusted earnings per share is a meaningful metric to present the Company’s financial results.
| Kratos Defense & Security Solutions, Inc. | |||||||||||
| Unaudited Condensed Consolidated Statements of Operations | |||||||||||
| (in millions, except per share data) | |||||||||||
| (in millions, except per share data) | Three Months Ended | ||||||||||
| March 31, | April 1, | ||||||||||
| 2019 | 2018 | ||||||||||
| Service revenues | $ | 62.6 | $ | 46.0 | |||||||
| Product sales | 97.8 | 97.0 | |||||||||
| Total revenues | 160.4 | 143.0 | |||||||||
| Cost of service revenues | 42.0 | 32.9 | |||||||||
| Cost of product sales | 73.5 | 69.3 | |||||||||
| Total costs | 115.5 | 102.2 | |||||||||
| Gross profit - service revenues | 20.6 | 13.1 | |||||||||
| Gross profit - product sales | 24.3 | 27.7 | |||||||||
| Total gross profit | 44.9 | 40.8 | |||||||||
| Selling, general and administrative expenses | 28.7 | 27.3 | |||||||||
| Restructuring expenses, and other | 1.3 | 0.4 | |||||||||
| Research and development expenses | 3.9 | 3.6 | |||||||||
| Depreciation | 1.3 | 0.8 | |||||||||
| Amortization of intangible assets | 1.5 | 1.7 | |||||||||
| Operating income from continuing operations | 8.2 | 7.0 | |||||||||
| Interest expense, net | (5.5 | ) | (5.1 | ) | |||||||
| Other income (expense), net | (0.5 | ) | 0.3 | ||||||||
| Income from continuing operations before income taxes | 2.2 | 2.2 | |||||||||
| Provision (benefit) for income taxes from continuing operations | (1.5 | ) | 0.9 | ||||||||
| Income from continuing operations | 3.7 | 1.3 | |||||||||
| Loss from discontinued operations, net of income taxes | (0.6 | ) | (3.5 | ) | |||||||
| Net income (loss) | 3.1 | (2.2 | ) | ||||||||
| Less: Net income (loss) attributable to noncontrolling interest | - | - | |||||||||
| Net income (loss) attributable to Kratos Defense & Security Solutions | $ | 3.1 | $ | (2.2 | ) | ||||||
| Basic income (loss) per common share attributable to Kratos Defense: | |||||||||||
| Income from continuing operations | $ | 0.04 | $ | 0.01 | |||||||
| Loss from discontinued operations | (0.01 | ) | (0.03 | ) | |||||||
| Net income (loss) | $ | 0.03 | $ | (0.02 | ) | ||||||
| Diluted income (loss) per common share attributable to Kratos Defense: | |||||||||||
| Income from continuing operations | $ | 0.03 | $ | 0.01 | |||||||
| Income (loss) from discontinued operations | - | (0.03 | ) | ||||||||
| Net income (loss) | $ | 0.03 | $ | (0.02 | ) | ||||||
| Weighted average common shares outstanding: | |||||||||||
| Basic weighted average common shares outstanding | 104.9 | 103.7 | |||||||||
| Diluted weighted average common shares outstanding | 107.8 | 105.7 | |||||||||
| Adjusted EBITDA (1) | $ | 17.5 | $ | 13.7 | |||||||
| Unaudited Reconciliation of GAAP to Non-GAAP Measures | |||||||||||
| Note: (1) Adjusted EBITDA is a non-GAAP measure defined as GAAP net income (loss) attributable to Kratos Defense adjusted for net income | |||||||||||
| attributable to noncontrolling interest, income(loss) from discontinued operations, net interest expense, income taxes, depreciation and | |||||||||||
| amortization expense of intangible assets, and capitalized contract and development costs, stock compensation, | |||||||||||
| acquisition and restructuring related items, and foreign transaction gain (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 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 income (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 expense. 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 restructuring 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 remaining lease commitment costs for 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. | |||||||||||
| 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. | |||||||||||
| Three Months Ended | |||||||||||
| March 31, | April 1, | ||||||||||
| 2019 | 2018 | ||||||||||
| Net income (loss) attributable to Kratos Defense | $ | 3.1 | $ | (2.2 | ) | ||||||
| Income (loss) from discontinued operations, net of income taxes | 0.6 | 3.5 | |||||||||
| Interest expense, net | 5.5 | 5.1 | |||||||||
| Provision (benefit) for income taxes from continuing operations | (1.5 | ) | 0.9 | ||||||||
| Depreciation (including cost of service revenues and product sales) | 3.6 | 2.8 | |||||||||
| Stock-based compensation | 2.6 | 1.7 | |||||||||
| Foreign transaction (gain) loss | 0.5 | (0.2 | ) | ||||||||
| Amortization of intangible assets | 1.5 | 1.7 | |||||||||
| Amortization of capitalized contract and development costs | 0.3 | - | |||||||||
| Acquisition and restructuring related items and other | 1.3 | 0.4 | |||||||||
| Plus: Net income (loss) attributable to noncontrolling interest | - | - | |||||||||
| Adjusted EBITDA | $ | 17.5 | $ | 13.7 | |||||||
| Reconciliation of acquisition and restructuring related items and other included in Adjusted EBITDA: | |||||||||||
| Three Months Ended | |||||||||||
| March 31, | April 1, | ||||||||||
| 2019 | 2018 | ||||||||||
| Acquisition and transaction related items | $ | 1.2 | $ | - | |||||||
| Restructuring costs | 0.1 | 0.4 | |||||||||
| $ | 1.3 | $ | 0.4 | ||||||||
| Kratos Defense & Security Solutions, Inc. | |||||||||||
| Unaudited Segment Data | |||||||||||
| (in millions) | |||||||||||
| Three Months Ended | |||||||||||
| March 31, | April 1, | ||||||||||
| 2019 | 2018 | ||||||||||
| Revenues: | |||||||||||
| Unmanned Systems | $ | 34.9 | $ | 27.8 | |||||||
| Kratos Government Solutions | 125.5 | 115.2 | |||||||||
| Total revenues | $ | 160.4 | $ | 143.0 | |||||||
| Operating income (loss) from continuing operations: | |||||||||||
| Unmanned Systems | $ | 0.6 | $ | 0.8 | |||||||
| Kratos Government Solutions | 11.4 | 7.9 | |||||||||
| Unallocated corporate expense, net | (3.8 | ) | (1.7 | ) | |||||||
| Total operating income from continuing operations | $ | 8.2 | $ | 7.0 | |||||||
| 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 consolidated Adjusted EBITDA to Adjusted EBITDA by segment is as follows: | |||||||||||
| Three Months Ended | |||||||||||
| March 31, | April 1, | ||||||||||
| 2019 | 2018 | ||||||||||
| Unmanned Systems | $ | 2.0 | $ | 1.7 | |||||||
| % of revenue | 5.7 | % | 6.1 | % | |||||||
| Kratos Government Solutions | 15.5 | 12.0 | |||||||||
| % of revenue | 12.4 | % | 10.4 | % | |||||||
| Total Adjusted EBITDA | $ | 17.5 | $ | 13.7 | |||||||
| % of revenue | 10.9 | % | 9.6 | % | |||||||
| Kratos Defense & Security Solutions, Inc. | |||||||||||
| Unaudited Condensed Consolidated Balance Sheets | |||||||||||
| (in millions) | |||||||||||
| March 31, | December 30, | ||||||||||
| 2019 | 2018 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 178.4 | $ | 182.7 | |||||||
| Restricted cash | - | 0.3 | |||||||||
| Accounts receivable, net | 239.3 | 237.4 | |||||||||
| Inventoried costs | 69.2 | 46.8 | |||||||||
| Prepaid expenses | 13.3 | 8.9 | |||||||||
| Other current assets | 9.6 | 10.3 | |||||||||
| Current assets of discontinued operations | 7.3 | 8.3 | |||||||||
| Total current assets | 517.1 | 494.7 | |||||||||
| Property, plant and equipment, net | 113.5 | 67.1 | |||||||||
| Operating lease right-of-use assets | 38.1 | - | |||||||||
| Goodwill | 459.4 | 425.7 | |||||||||
| Intangible assets, net | 34.4 | 16.1 | |||||||||
| Other assets | 6.4 | 6.5 | |||||||||
| Total assets | $ | 1,168.9 | $ | 1,010.1 | |||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 47.4 | $ | 46.6 | |||||||
| Accrued expenses | 36.6 | 38.1 | |||||||||
| Accrued compensation | 37.2 | 33.5 | |||||||||
| Accrued interest | 6.5 | 1.6 | |||||||||
| Billings in excess of costs and earnings on uncompleted contracts | 39.7 | 34.9 | |||||||||
| Current portion of operating lease liabilities | 13.3 | - | |||||||||
| Other current liabilities | 9.3 | 4.7 | |||||||||
| Other current liabilities of discontinued operations | 5.3 | 5.3 | |||||||||
| Total current liabilities | 195.3 | 164.7 | |||||||||
| Long-term debt principal, net of current portion | 294.4 | 294.2 | |||||||||
| Operating lease liabilities, net of current portion | 31.3 | - | |||||||||
| Other long-term liabilities | 73.5 | 25.5 | |||||||||
| Other long-term liabilities of discontinued operations | 6.5 | 6.4 | |||||||||
| Total liabilities | 601.0 | 490.8 | |||||||||
| Commitments and contingencies | |||||||||||
| Redeemable noncontrolling interest | 15.0 | - | |||||||||
| Stockholders’ equity: | |||||||||||
| Additional paid-in capital | 1,275.0 | 1,244.5 | |||||||||
| Accumulated other comprehensive loss | (0.7 | ) | (0.7 | ) | |||||||
| Accumulated deficit | (721.4 | ) | (724.5 | ) | |||||||
| Total Kratos Defense stockholders’ equity | 552.9 | 519.3 | |||||||||
| Total liabilities and stockholders’ equity | $ | 1,168.9 | $ | 1,010.1 | |||||||
| Kratos Defense & Security Solutions, Inc. | |||||||||||
| Unaudited Condensed Consolidated Statements of Cash Flows | |||||||||||
| (in millions) | |||||||||||
| Three Months Ended | |||||||||||
| March 31, | April 1, | ||||||||||
| 2019 | 2018 | ||||||||||
| Operating activities: | |||||||||||
| Net income (loss) from consolidated operations | $ | 3.1 | $ | (2.2 | ) | ||||||
| Less: (loss) from discontinued operations | (0.6 | ) | (3.5 | ) | |||||||
| Income from continuing operations | 3.7 | 1.3 | |||||||||
| Adjustments to reconcile income from continuing operations to net cash provided by operating activities from continuing operations: | |||||||||||
| Depreciation and amortization | 5.1 | 4.5 | |||||||||
| Amortization of lease right-of-use assets | 3.7 | - | |||||||||
| Deferred income taxes | (3.4 | ) | - | ||||||||
| Stock-based compensation | 2.6 | 1.7 | |||||||||
| Amortization of deferred financing costs | 0.2 | 0.2 | |||||||||
| Changes in assets and liabilities, net of acquisitions: | |||||||||||
| Accounts receivable | (9.0 | ) | 16.4 | ||||||||
| Unbilled receivables | 19.7 | (14.2 | ) | ||||||||
| Inventoried costs | (10.8 | ) | 1.3 | ||||||||
| Advance payments received on contracts | 0.1 | (0.6 | ) | ||||||||
| Prepaid expenses and other assets | (1.1 | ) | 0.8 | ||||||||
| Operating lease liabilities | 2.8 | - | |||||||||
| Accounts payable | (0.8 | ) | (3.0 | ) | |||||||
| Accrued compensation | 3.1 | 3.8 | |||||||||
| Accrued expenses | (2.7 | ) | (6.1 | ) | |||||||
| Accrued interest | 4.9 | 4.9 | |||||||||
| Billings in excess of costs and earnings on uncompleted contracts | 3.0 | (3.7 | ) | ||||||||
| Income tax receivable and payable | 1.4 | 0.2 | |||||||||
| Other liabilities | (6.5 | ) | (1.0 | ) | |||||||
| Net cash provided by operating activities from continuing operations | 16.0 | 6.5 | |||||||||
| Investing activities: | |||||||||||
| Cash paid for acquisitions, net of cash acquired | (17.6 | ) | - | ||||||||
| Capital expenditures | (4.0 | ) | (6.7 | ) | |||||||
| Net cash used in investing activities from continuing operations | (21.6 | ) | (6.7 | ) | |||||||
| Financing activities: | |||||||||||
| Proceeds (use) from the issuance of common stock | - | (1.1 | ) | ||||||||
| Repayment of debt | - | (0.2 | ) | ||||||||
| Debt issuance costs | - | (0.1 | ) | ||||||||
| Repayment of lease obligation | (0.1 | ) | - | ||||||||
| Proceeds from exercise of restricted stock units, employee stock options, and employee stock purchase plan | 0.9 | 1.8 | |||||||||
| Net cash provided by financing activities from continuing operations | 0.8 | 0.4 | |||||||||
| Net cash flows from continuing operations | (4.8 | ) | 0.2 | ||||||||
| Net operating and investing cash flows of discontinued operations | 0.3 | (3.1 | ) | ||||||||
| Effect of exchange rate changes on cash and cash equivalents | (0.1 | ) | 0.2 | ||||||||
| Net decrease in cash and cash equivalents | (4.6 | ) | (2.7 | ) | |||||||
| Cash and cash equivalents and restricted cash at beginning of period | 183.0 | 130.9 | |||||||||
| Cash and cash equivalents and restricted cash at end of period | $ | 178.4 | $ | 128.2 | |||||||
| Kratos Defense & Security Solutions, Inc. | |||||||||||
| Unaudited Non-GAAP Measures | |||||||||||
| Computation of Adjusted Earnings Per Share | |||||||||||
| (in millions, except per share data) | |||||||||||
| Adjusted income (loss) from continuing operations and adjusted earnings per 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 (loss) from continuing operations before amortization of intangible assets, stock-based compensation, foreign transaction gain/loss, and | |||||||||||
| acquisition and restructuring related items and other. The Company uses the estimated cash tax provision in computing adjusted earnings per share | |||||||||||
| to reflect the benefit from the utilization of the Company's net operating losses. Adjusted EPS expresses adjusted income (loss) from continuing | |||||||||||
| operations 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 31, | April 1, | ||||||||||
| 2019 | 2018 | ||||||||||
| Income from continuing operations before taxes | $ | 2.2 | $ | 2.2 | |||||||
| Add: Amortization of intangible assets | 1.5 | 1.7 | |||||||||
| Add: Amortization of capitalized contract and development costs | 0.3 | - | |||||||||
| Add: Stock-based compensation | 2.6 | 1.7 | |||||||||
| Add: Foreign transaction (gain) loss | 0.5 | (0.2 | ) | ||||||||
| Add: Acquisition and restructuring related items and other | 1.3 | 0.4 | |||||||||
| Adjusted income from continuing operations before income taxes | 8.4 | 5.8 | |||||||||
| Estimated cash tax provision | 0.2 | 0.3 | |||||||||
| Adjusted income from continuing operations attributable to Kratos Defense | $ | 8.2 | $ | 5.5 | |||||||
| Diluted income per common share attributable to Kratos Defense: | |||||||||||
| Adjusted income from continuing operations | $ | 0.08 | $ | 0.05 | |||||||
| Weighted average common shares outstanding | |||||||||||
| Diluted | 107.8 | 105.7 | |||||||||
