Kratos Reports Third Quarter 2020 Financial Results

Press Contact:
Yolanda White
858-812-7302 Direct

Investor Information:
877-934-4687
investor@kratosdefense.com


Kratos Defense & Security Solutions, Inc.
Unaudited Condensed Consolidated Statements of Operations
(in millions, except per share data)

	Three Months Ended						Nine Months Ended
	September 27,			September 29,			September 27,			September 29,
	2020			2019			2020			2019

Service revenues	$	67.6		$	70.8		$	194.1		$	207.1
Product sales		134.4			113.3			347.2			325.3
Total revenues		202.0			184.1			541.3			532.4
Cost of service revenues		50.5			50.2			141.9			142.8
Cost of product sales		94.4			85.3			250.5			248.0
Total costs		144.9			135.5			392.4			390.8
Gross profit - service revenues		17.1			20.6			52.2			64.3
Gross profit - product sales		40.0			28.0			96.7			77.3

Total gross profit		57.1			48.6			148.9			141.6

Selling, general and administrative expenses		33.1			29.4			97.3			88.2
Acquisition and restructuring related items		0.4			-			2.0			2.2
Research and development expenses		7.7			4.6			19.4			13.0
Depreciation		1.5			1.4			4.5			4.3
Amortization of intangible assets		1.7			1.7			5.4			5.2
Operating income		12.7			11.5			20.3			28.7
Interest expense, net		(5.9	)		(5.4	)		(16.9	)		(16.2	)
Other income (expense), net		0.8			(0.7	)		0.6			(1.1	)
Income from continuing operations before income taxes		7.6			5.4			4.0			11.4
Provision for income taxes from continuing operations		5.0			2.8			1.8			3.8
Income from continuing operations		2.6			2.6			2.2			7.6
Income (loss) from discontinued operations, net of income taxes		(0.2	)		-			(0.8	)		2.4
Net income		2.4			2.6			1.4			10.0
Less: Net income (loss) attributable to noncontrolling interest		-			0.1			(0.1	)		0.5
Net income attributable to Kratos	$	2.4		$	2.5		$	1.5		$	9.5

Basic income per common share attributable to Kratos:
Income from continuing operations	$	0.02		$	0.02		$	0.02		$	0.07
Income (loss) from discontinued operations		-			-			(0.01	)		0.02
Net income		0.02		$	0.02		$	0.01		$	0.09

Diluted income per common share attributable to Kratos:
Income from continuing operations	$	0.02		$	0.02		$	0.02		$	0.07
Income (loss) from discontinued operations		-			-			(0.01	)		0.02
Net income		0.02		$	0.02		$	0.01		$	0.09

Weighted average common shares outstanding:
Basic weighted average common shares outstanding		123.1			106.5			112.9			105.8
Diluted weighted average common shares outstanding		126.4			109.9			115.9			109.0

Adjusted EBITDA (1)	$	24.6		$	20.4		$	56.2		$	57.1



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 adjusted for net income (loss) attributable to noncontrolling interest, income (loss) from discontinued operations, net interest expense, provision 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 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 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 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.

Reconciliation of Net income attributable to Kratos to Adjusted EBITDA is as follows:

	Three Months Ended						Nine Months Ended
	September 27,			September 29,			September 27,			September 29,
	2020			2019			2020			2019

Net income attributable to Kratos	$	2.4		$	2.5		$	1.5		$	9.5
(Income) loss from discontinued operations, net of income taxes		0.2			-			0.8			(2.4	)
Interest expense, net		5.9			5.4			16.9			16.2
Provision for income taxes from continuing operations		5.0			2.8			1.8			3.8
Depreciation (including cost of service revenues and product sales)		4.5			4.0			13.1			11.6
Stock-based compensation		5.0			2.8			14.5			8.2
Foreign transaction (gain) loss		(0.7	)		0.8			(0.4	)		1.3
Amortization of intangible assets		1.7			1.7			5.4			5.2
Amortization of capitalized contract and development costs		0.2			0.3			0.7			1.0
Acquisition and restructuring related items and other		0.4			-			2.0			2.2
Plus: Net income (loss) attributable to noncontrolling interest		-			0.1			(0.1	)		0.5

Adjusted EBITDA	$	24.6		$	20.4		$	56.2		$	57.1



Reconciliation of acquisition and restructuring related items and other included in Adjusted EBITDA:
	Three Months Ended						Nine Months Ended
	September 27,			September 29,			September 27,			September 29,
	2020			2019			2020			2019
Acquisition and transaction related items	$	0.1		$	0.1		$	1.5		$	1.9
Restructuring costs		0.3			(0.1	)		0.5			0.3

	$	0.4		$	-		$	2.0		$	2.2


Kratos Defense & Security Solutions, Inc.
Unaudited Segment Data
(in millions)

	Three Months Ended						Nine Months Ended
	September 27,			September 29,			September 27,			September 29,
	2020			2019			2020			2019
Revenues:
Unmanned Systems	$	53.5		$	45.7		$	137.5		$	123.1
Kratos Government Solutions		148.5			138.4			403.8			409.3
Total revenues	$	202.0		$	184.1		$	541.3		$	532.4

Operating income (loss)
Unmanned Systems	$	3.7		$	3.3		$	5.2		$	5.6
Kratos Government Solutions		14.1			11.1			31.1			33.2
Unallocated corporate expense, net		(5.1	)		(2.9	)		(16.0	)		(10.1	)
Total operating income	$	12.7		$	11.5		$	20.3		$	28.7

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						Nine Months Ended
	September 27,			September 29,			September 27,			September 29,
	2020			2019			2020			2019
Unmanned Systems	$	5.6		$	4.9		$	10.9		$	10.4
% of revenue		10.5	%		10.7	%		7.9	%		8.4	%
Kratos Government Solutions		19.0			15.5			45.3			46.7
% of revenue		12.8	%		11.2	%		11.2	%		11.4	%
Total Adjusted EBITDA	$	24.6		$	20.4		$	56.2		$	57.1
% of revenue		12.2	%		11.1	%		10.4	%		10.7	%


Kratos Defense & Security Solutions, Inc.
Unaudited Condensed Consolidated Balance Sheets
(in millions)


							September 27,			December 29,
							2020			2019
Assets
Current assets:
Cash and cash equivalents							$	374.7		$	172.6
Restricted cash								0.7			-
Accounts receivable, net								276.6			264.4
Inventoried costs								78.3			61.1
Prepaid expenses								17.9			9.4
Other current assets								22.6			11.4
Current assets of discontinued operations								-			3.3
Total current assets								770.8			522.2
Property, plant and equipment, net								136.1			116.9
Operating lease right-of-use assets								40.1			42.1
Goodwill								475.3			455.6
Intangible assets, net								42.0			39.5
Other assets								8.9			9.7
Total assets							$	1,473.2		$	1,186.0
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable							$	54.7		$	53.8
Accrued expenses								28.8			32.7
Accrued compensation								45.4			37.1
Accrued interest								6.4			1.6
Billings in excess of costs and earnings on uncompleted contracts								36.3			34.3
Current portion of operating lease liabilities								8.9			9.9
Other current liabilities								16.2			10.0
Other current liabilities of discontinued operations								3.0			3.3
Total current liabilities								199.7			182.7
Long-term debt								300.3			295.1
Operating lease liabilities, net of current portion								35.7			37.6
Other long-term liabilities								84.7			78.7
Other long-term liabilities of discontinued operations								2.6			2.8
Total liabilities								623.0			596.9
Commitments and contingencies
Redeemable noncontrolling interest								14.9			15.0
Stockholders’ equity:
Additional paid-in capital								1,545.4			1,286.5
Accumulated other comprehensive loss								0.4			(0.4	)
Accumulated deficit								(710.5	)		(712.0	)
Total Kratos stockholders’ equity								835.3			574.1
Total liabilities and stockholders’ equity							$	1,473.2		$	1,186.0



Kratos Defense & Security Solutions, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(in millions)

							Nine Months Ended
							September 27,			September 29,
							2020			2019
Operating activities:
Net income							$	1.4		$	10.0
Less: income (loss) from discontinued operations								(0.8	)		2.4
Income from continuing operations								2.2			7.6
Adjustments to reconcile income from continuing operations to net cash provided by operating activities from continuing operations:
Depreciation and amortization								18.5			16.8
Amortization of lease right-of-use assets								7.3			8.7
Deferred income taxes								(0.3	)		(4.1	)
Stock-based compensation								14.5			8.2
Amortization of deferred financing costs								0.7			0.7
Provision for doubtful accounts								0.2			-
Changes in assets and liabilities, net of acquisitions:
Accounts receivable								6.4			7.4
Unbilled receivables								(12.3	)		2.0
Inventoried costs								(4.8	)		(10.3	)
Prepaid expenses and other assets								(15.8	)		(0.2	)
Operating lease liabilities								(8.0	)		(3.1	)
Accounts payable								(1.7	)		(6.5	)
Accrued compensation								6.5			0.9
Accrued expenses								(4.9	)		(0.3	)
Accrued interest								4.8			4.8
Billings in excess of costs and earnings on uncompleted contracts								(2.7	)		(2.8	)
Income tax receivable and payable								(1.4	)		1.7
Other liabilities								9.9			(1.3	)
Net cash provided by operating activities from continuing operations								19.1			30.2
Investing activities:
Cash paid for acquisitions, net of cash acquired								(43.9	)		(17.6	)
Capital expenditures								(23.0	)		(17.9	)
Proceeds from sale of assets								0.1			0.3
Net cash used in investing activities from continuing operations								(66.8	)		(35.2	)
Financing activities:
Proceeds from the issuance of long-term debt								4.8			-
Payment of long-term debt								(0.7	)		-
Proceeds from the issuance of common stock, net of issuance costs								240.4			-
Payment under finance leases								(0.5	)		(0.4	)
Proceeds from exercise of restricted stock units, employee stock options, and employee stock purchase plan								4.0			3.0
Net cash provided by financing activities from continuing operations								248.0			2.6
Net cash flows from continuing operations								200.3			(2.4	)
Net operating cash flows of discontinued operations								2.1			0.8
Effect of exchange rate changes on cash and cash equivalents								0.4			(0.4	)
Net increase (decrease) in cash, cash equivalents and restricted cash								202.8			(2.0	)
Cash, cash equivalents and restricted cash at beginning of period								172.6			183.0
Cash, cash equivalents and restricted cash at end of period							$	375.4		$	181.0



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 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 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						Nine Months Ended
	September 27,			September 29,			September 27,			September 29,
	2020			2019			2020			2019
Income from continuing operations before taxes	$	7.6		$	5.4		$	4.0		$	11.4
Add: Amortization of intangible assets		1.7			1.7			5.4			5.2
Add: Amortization of capitalized contract and development costs		0.2			0.3			0.7			1.0
Add: Depreciation		4.5			4.0			13.1			11.6
Add: Stock-based compensation		5.0			2.8			14.5			8.2
Add: Foreign transaction (gain) loss		(0.7	)		0.8			(0.4	)		1.3
Add: Acquisition and restructuring related items and other		0.4			-			2.0			2.2
Adjusted income from continuing operations before income taxes		18.7			15.0			39.3			40.9

Estimated cash tax provision		0.6			0.7			2.3			2.3
Adjusted income from continuing operations	$	18.1		$	14.3		$	37.0		$	38.6


Adjusted income from continuing operations per diluted common share	$	0.14		$	0.13		$	0.32		$	0.35

Weighted average diluted common shares outstanding		126.4			109.9			115.9			109.0

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