Kratos Reports Second Quarter Financial Results

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  Six Months Ended 
   June 27,  June 28,  June 27,  June 28, 
    2021    2020    2021    2020  
          
Service revenues $58.0  $62.9  $115.3  $126.5  
Product sales  147.1   107.5   284.0   212.8  
Total revenues  205.1   170.4      399.3       339.3    
Cost of service revenues     41.3       46.2       83.8       91.4    
Cost of product sales     111.8       78.2       212.5       156.1    
Total costs     153.1       124.4       296.3       247.5    
Gross profit - service revenues     16.7       16.7       31.5       35.1    
Gross profit - product sales     35.3       29.3       71.5       56.7    
                   
     Total gross profit     52.0       46.0       103.0       91.8    
                   
Selling, general and administrative expenses     35.6       32.7       70.9       64.2    
Acquisition and restructuring related items     0.3       1.1       0.5       1.6    
Research and development expenses     10.2       6.0       18.2       11.7    
Depreciation     1.4       1.5       2.6       3.0    
Amortization of intangible assets     1.2       1.8       2.6       3.7    
     Operating income     3.3       2.9       8.2       7.6    
Interest expense, net     (5.7 )     (5.6 )     (11.6 )     (11.0 )  
Other income (expense), net     -       0.3       0.2       (0.2 )  
Loss from continuing operations before income taxes     (2.4 )     (2.4 )     (3.2 )     (3.6 )  
Benefit for income taxes from continuing operations     (3.6 )     (1.8 )     (6.3 )     (3.2 )  
Income (loss) from continuing operations     1.2       (0.6 )     3.1       (0.4 )  
Loss from discontinued operations, net of income taxes     (0.3 )     (0.2 )     (0.3 )     (0.6 )  
     Net income (loss)     0.9       (0.8 )     2.8       (1.0 )  
     Less: Net loss attributable to noncontrolling interest     (0.2 )     (0.1 )     (0.2 )     (0.1 )  
     Net income (loss) attributable to Kratos   $ 1.1     $ (0.7 )   $ 3.0     $ (0.9 )  
                   
Basic income (loss) per common share attributable to Kratos:                  
     Income (loss) from continuing operations   $ 0.01     $ (0.01 )   $ 0.02     $ -    
     Loss from discontinued operations     -       -       -       (0.01 )  
     Net income (loss)     0.01     $ (0.01 )   $ 0.02     $ (0.01 )  
                   
Diluted income (loss) per common share attributable to Kratos:                  
     Income (loss) from continuing operations   $ 0.01     $ (0.01 )   $ 0.02     $ -    
     Loss from discontinued operations     -       -       -       (0.01 )  
     Net income (loss)   $ 0.01     $ (0.01 )   $ 0.02     $ (0.01 )  
                   
Weighted average common shares outstanding:                  
     Basic weighted average common shares outstanding     124.7       108.3       124.4       107.8    
     Diluted weighted average common shares outstanding     127.7       108.3       127.8       107.8    
                   
Adjusted EBITDA (1)   $ 17.6     $ 15.3     $ 35.7     $ 31.6    
         
                   
                   
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   Six Months Ended  
    June 27,   June 28,   June 27,   June 28,  
      2021       2020       2021       2020    
                   
Net income (loss) attributable to Kratos   $ 1.1     $ (0.7 )   $ 3.0     $ (0.9 )  
Loss from discontinued operations, net of income taxes     0.3       0.2       0.3       0.6    
Interest expense, net     5.7       5.6       11.6       11.0    
Benefit for income taxes from continuing operations     (3.6 )     (1.8 )     (6.3 )     (3.2 )  
Depreciation (including cost of service revenues and product sales)     5.8       4.2       10.7       8.6    
Stock-based compensation     6.6       4.8       12.8       9.5    
Foreign transaction (gain) loss     0.1       (0.1 )     0.2       0.3    
Amortization of intangible assets     1.2       1.8       2.6       3.7    
Amortization of capitalized contract and development costs     0.3       0.3       0.5       0.5    
Acquisition and restructuring related items and other     0.3       1.1       0.5       1.6    
Plus: Net loss attributable to noncontrolling interest     (0.2 )     (0.1 )     (0.2 )     (0.1 )  
                   
Adjusted EBITDA   $ 17.6     $ 15.3     $ 35.7     $ 31.6    
                   
                   
                   
Reconciliation of acquisition and restructuring related items and other included in Adjusted EBITDA:              
    Three Months Ended   Six Months Ended  
    June 27,   June 28,   June 27,   June 28,  
      2021       2020       2021       2020    
Acquisition and transaction related items   $ 0.1     $ 1.0     $ 0.3     $ 1.4    
Restructuring costs     0.2       0.1       0.2       0.2    
                   
    $ 0.3     $ 1.1     $ 0.5     $ 1.6    
                   
                   
Kratos Defense & Security Solutions, Inc.  
Unaudited Segment Data  
(in millions)  
                   
    Three Months Ended   Six Months Ended  
    June 27,   June 28,   June 27,   June 28,  
      2021       2020       2021       2020    
Revenues:                  
Unmanned Systems   $ 60.3     $ 42.0     $ 116.2     $ 84.0    
Kratos Government Solutions     144.8       128.4       283.1       255.3    
Total revenues   $ 205.1     $ 170.4     $ 399.3     $ 339.3    
                   
Operating income                  
Unmanned Systems   $ 4.1     $ 1.0     $ 8.3     $ 1.5    
Kratos Government Solutions     5.9       7.7       13.0       17.0    
Unallocated corporate expense, net     (6.7 )     (5.8 )     (13.1 )     (10.9 )  
Total operating income   $ 3.3     $ 2.9     $ 8.2     $ 7.6    
                   
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 to Adjusted EBITDA is as follows:                  
                   
    Three Months Ended   Six Months Ended  
    June 27,   June 28,   June 27,   June 28,  
      2021       2020       2021       2020    
Unmanned Systems                  
Operating income   $ 4.1     $ 1.0     $ 8.3     $ 1.5    
Other income     -       0.1       0.1       0.1    
Depreciation     2.2       1.4       3.8       3.0    
Amortization of intangible assets     0.3       0.2       0.6       0.2    
Amortization of capitalized contract and development costs     0.3       0.3       0.5       0.5    
Acquisition and restructuring related items and other     -       -       -       -    
Adjusted EBITDA   $ 6.9     $ 3.0     $ 13.3     $ 5.3    
% of revenue     11.4 %     7.1 %     11.4 %     6.3 %  
                   
Kratos Government Solutions                  
Operating income   $ 5.9     $ 7.7     $ 13.0     $ 17.0    
Other income     0.1       0.1       0.3       -    
Depreciation     3.6       2.8       6.9       5.6    
Amortization of intangible assets     0.9       1.6       2.0       3.5    
Amortization of capitalized contract and development costs     -       -       -       -    
Acquisition and restructuring related items and other     0.2       0.1       0.2       0.2    
Adjusted EBITDA   $ 10.7     $ 12.3     $ 22.4     $ 26.3    
% of revenue     7.4 %     9.6 %     7.9 %     10.3 %  
                   
Total Adjusted EBITDA   $ 17.6     $ 15.3     $ 35.7     $ 31.6    
% of revenue     8.6 %     9.0 %     8.9 %     9.3 %  
                   
                   
                   
                   
                   
Kratos Defense & Security Solutions, Inc.  
Unaudited Condensed Consolidated Balance Sheets  
(in millions)  
                   
           
            June 27,   December 27,  
              2021       2020    
Assets                  
Current assets:                  
Cash and cash equivalents           $ 369.3     $ 380.8    
Restricted cash             -       0.7    
Accounts receivable, net             265.0       272.3    
Inventoried costs             90.7       81.2    
Prepaid expenses             13.4       12.0    
Other current assets             30.3       17.8    
Total current assets             768.7       764.8    
Property, plant and equipment, net             145.5       143.8    
Operating lease right-of-use assets             40.1       42.9    
Goodwill             483.7       483.9    
Intangible assets, net             40.4       43.0    
Other assets             83.9       84.4    
Total assets           $ 1,562.3     $ 1,562.8    
Liabilities and Stockholders’ Equity                  
Current liabilities:                  
Accounts payable           $ 59.9     $ 55.4    
Accrued expenses             27.2       34.7    
Accrued compensation             46.2       48.1    
Accrued interest             1.5       1.5    
Billings in excess of costs and earnings on uncompleted contracts             43.5       34.0    
Current portion of operating lease liabilities             9.3       8.9    
Other current liabilities             11.8       11.9    
Other current liabilities of discontinued operations             2.7       3.1    
Total current liabilities             202.1       197.6    
Long-term debt             300.3       301.0    
Operating lease liabilities, net of current portion             35.3       38.6    
Other long-term liabilities             71.6       83.0    
Other long-term liabilities of discontinued operations             2.5       2.5    
Total liabilities             611.8       622.7    
Commitments and contingencies                  
Redeemable noncontrolling interest             14.6       14.8    
Stockholders’ equity:                  
Additional paid-in capital             1,563.1       1,556.3    
Accumulated other comprehensive loss             2.2       1.4    
Accumulated deficit             (629.4 )     (632.4 )  
Total Kratos stockholders’ equity             935.9       925.3    
Total liabilities and stockholders’ equity           $ 1,562.3     $ 1,562.8    
                   
                   
                   
Kratos Defense & Security Solutions, Inc.  
Unaudited Condensed Consolidated Statements of Cash Flows  
(in millions)  
                   
        Six Months Ended  
            June 27,   June 28,  
              2021       2020    
Operating activities:                  
Net income (loss)           $ 2.8     $ (1.0 )  
Less: loss from discontinued operations             (0.3 )     (0.6 )  
Income (loss) from continuing operations             3.1       (0.4 )  
Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities from continuing operations:                  
Depreciation and amortization             13.3       12.3    
Amortization of lease right-of-use assets             4.5       5.3    
Deferred income taxes             (0.9 )     (1.1 )  
Stock-based compensation             12.8       9.5    
Amortization of deferred financing costs             0.5       0.5    
Provision for (recovery of) doubtful accounts             (0.2 )     0.2    
Changes in assets and liabilities, net of acquisitions:                  
Accounts receivable             15.5       24.7    
Unbilled receivables             (7.9 )     (6.8 )  
Inventoried costs             (6.8 )     (4.5 )  
Prepaid expenses and other assets             (2.2 )     (10.8 )  
Operating lease liabilities             (4.5 )     (6.0 )  
Accounts payable             5.8       (9.1 )  
Accrued compensation             (1.8 )     1.4    
Accrued expenses             (7.5 )     (4.2 )  
Accrued interest             -       -    
Billings in excess of costs and earnings on uncompleted contracts             9.6       (0.5 )  
Income tax receivable and payable             (6.1 )     (3.0 )  
Other liabilities             (5.2 )     3.3    
Net cash provided by operating activities from continuing operations             22.0       10.8    
Investing activities:                  
Cash paid for acquisitions, net of cash acquired             (6.2 )     (15.5 )  
Capital expenditures             (20.5 )     (14.1 )  
 Proceeds from sale of assets             -       0.1    
Net cash used in investing activities from continuing operations             (26.7 )     (29.5 )  
Financing activities:                  
Payment of long-term debt             -       (0.1 )  
Proceeds from the issuance of common stock, net of issuance costs             -       240.5    
Payment under finance leases             (0.4 )     (0.3 )  
Payments of employee taxes withheld from share-based awards             (8.5 )     -    
Proceeds from shares issued under equity plans             2.5       1.4    
Net cash provided by (used in) financing activities from continuing operations             (6.4 )     241.5    
Net cash flows from continuing operations             (11.1 )     222.8    
   Net operating cash flows of discontinued operations             (0.8 )     1.7    
Effect of exchange rate changes on cash and cash equivalents             (0.3 )     0.1    
Net increase (decrease) in cash, cash equivalents and restricted cash             (12.2 )     224.6    
Cash, cash equivalents and restricted cash at beginning of period             381.5       172.6    
Cash, cash equivalents and restricted cash at end of period           $ 369.3     $ 397.2    
                   
                   
                   
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   Six Months Ended  
    June 27,   June 28,   June 27,   June 28,  
      2021       2020       2021       2020    
Net income (loss) attributable to Kratos   $ 1.1     $ (0.7 )   $ 3.0     $ (0.9 )  
Less: GAAP benefit for income taxes     (3.6 )     (1.8 )     (6.3 )     (3.2 )  
Less: Net loss attributable to noncontrolling interest     (0.2 )     (0.1 )     (0.2 )     (0.1 )  
Less: Loss from discontinued operations, net of income taxes     0.3       0.2       0.3       0.6    
Loss from continuing operations before taxes     (2.4 )     (2.4 )       (3.2 )     (3.6 )  
Add: Amortization of intangible assets     1.2       1.8         2.6       3.7    
Add: Amortization of capitalized contract and development costs     0.3       0.3       0.5       0.5    
Add: Depreciation     5.8       4.2       10.7       8.6    
Add: Stock-based compensation     6.6       4.8       12.8       9.5    
Add: Foreign transaction (gain) loss     0.1       (0.1 )     0.2       0.3    
Add: Acquisition and restructuring related items and other     0.3       1.1       0.5       1.6    
   Non-GAAP Adjusted income from continuing operations before income taxes     11.9       9.7       24.1       20.6    
Income taxes on Non-GAAP measure Adjusted income from continuing operations*     4.3       4.0       8.8       8.3    
   Non-GAAP Adjusted net income   $ 7.6     $ 5.7     $ 15.3     $ 12.3    
                   
                   
Diluted earnings per common share   $ 0.01     $ (0.01 )   $ 0.02     $ (0.01 )  
Less: GAAP benefit for income taxes     (0.03 )     (0.02 )     (0.05 )     (0.03 )  
Less: Net loss attributable to noncontrolling interest     -       -       -       -    
Less: Loss from discontinued operations, net of income taxes     -       -       -       0.01    
Add: Amortization of intangible assets     0.01       0.02       0.02       0.03    
Add: Amortization of capitalized contract and development costs     -       0.01       0.01       0.01    
Add: Depreciation     0.05       0.04       0.08       0.08    
Add: Stock-based compensation     0.05       0.04       0.10       0.09    
Add: Foreign transaction (gain) loss     -       -       -       -    
Add: Acquisition and restructuring related items and other     -       0.01       0.01       0.01    
Income taxes on Non-GAAP measure Adjusted income from continuing operations*     (0.03 )     (0.04 )     (0.07 )     (0.08 )  
Adjusted income from continuing operations per diluted common share   $ 0.06     $ 0.05     $ 0.12     $ 0.11    
                   
Weighted average diluted common shares outstanding     127.7       108.3       127.8       107.8    
                   
*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 (benefit), 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.                  
                   
                   
                   
                   
                   
                   
-end-  

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