Kratos Defense & Security Solutions' Q2 revenue falls 21.4 percent

Kratos Defense & Security Solutions' Q2 revenue falls 21.4 percent
Kratos Defense & Security Solutions reported its second quarter fiscal 2015 financial results, which have been recast to reflect the pending divestiture of the company's U.S. and U.K. Operations of its Electronic Products (EP) businesses as discontinued operations. The sale and divestiture of Kratos' EP businesses is expected to close during the company's third fiscal quarter of 2015. Additionally, the quarter and six months ended June 28, 2015 and prior year comparative results for the EP businesses subject to divestiture have been reflected as discontinued operations in the company's financial statements. 

Accordingly, for the second quarter ended June 28, 2015, Kratos generated revenue and adjusted EBITDA from continuing operations of $160.5 million and $12.1 million, respectively.

Second quarter 2015 revenues from continuing operations increased sequentially from $156.9 million in the first quarter of 2015, and adjusted EBITDA increased sequentially from $7.6 million in the first fiscal quarter of 2015. Important program areas supported by Kratos include unmanned systems, satellite communications, cyber security, electromagnetic rail gun, directed energy, hypersonics, missile and radar systems, missile defense, signal monitoring and intelligence and electronic warfare.

Kratos' second quarter Adjusted EBITDA was positively impacted by a favorable product sale mix, including approximately 50 percent gross margins being generated in the Company's satellite communications and related cyber security businesses. Kratos' adjusted EBITDA and financial results from continuing operations in the second and first quarters of 2015 were also impacted by significant discretionary internally funded investments the company is making, primarily in the unmanned systems and satellite communication areas. These investments, which include internal research & development (IR&D), non-recurring engineering (NRE), capital expenditures and business development, are expected to continue as the company executes its communicated strategic plan.

Revenues and adjusted EBITDA for the quarter ended June 28, 2015 generated by the discontinued EP businesses were $22.3 million and $4.1 million, respectively.  Total Kratos combined revenue and adjusted EBITDA from continuing and discontinued operations for the second quarter ended June 28, 2015 were $182.8 million and $16.2 million, respectively. 

For the quarter ended June 28, 2015, approximately 62 percent of Kratos' revenue was derived from U.S. Federal Government related customers, approximately 28 percent from commercial, state and local government customers, and approximately 10 percent from international customers.

Kratos' total backlog at the end of the second quarter, excluding the discontinued EP businesses, was approximately $954 million, including funded and unfunded backlog of approximately $555 million and $399 million, respectively.  Book to bill for the second quarter was .8 to 1 and for the last twelve months was 1.0 to 1.  Kratos' bid and proposal pipeline at June 28, 2015, also excluding the discontinued EP businesses, was approximately $6.8 billion, up slightly from $6.4 billion in the first quarter.

Cash flow from continuing operations for the second quarter was a use of approximately $12.3 million, which reflected the semi-annual interest payment of approximately $22 million on the Company's Senior Notes and an increase in inventory levels, with an expectation of associated shipments and collections later in 2015.  Cash flows from continuing operations and from discontinued operations was a combined use of $8.3 million.

For the quarter ended June 28, 2015, adjusted EPS was a loss of $0.02.  Adjusted EPS excludes non-cash amortization expenses, as the Company has historically been acquisitive, non-cash stock compensation costs, transaction gains and losses, and certain non-recurring items such as excess capacity and restructuring costs, contract design retrofit costs, and transaction related expenses and includes cash actually expected to be paid for income taxes in order to reflect the benefit of the Company's net operating loss carryforwards of approximately $200 million.  Kratos believes that reporting Adjusted EPS is a meaningful metric to present the Company's financial results. For the quarter ended June 28, 2015, GAAP EPS was a loss of $0.25.

Eric DeMarco, Kratos' President and CEO, said, "Kratos' second quarter financial performance was solid and as expected, with both revenue and adjusted EBITDA increasing sequentially over our first quarter, and within our previously communicated and expected range.  Kratos' second quarter results included sequential quarter over quarter growth in our unmanned systems, satellite communications and microwave electronics businesses, and we continue to expect Kratos' second half 2015 revenue and adjusted EBITDA to sequentially exceed the first half of the year. Additionally, in the second quarter Kratos' Public Safety and Security business margins increased over the first quarter, with the month of June's gross margins being the highest generated in 2015."

Mr. DeMarco continued, "In the second quarter, we continued to make progress in our strategically important unmanned systems area, with Kratos remaining on track for fourth quarter 2015 demonstration flights of our unmanned tactical aerial platform with our U.S. Government sponsor, continued progress on two under contract unmanned aerial drone system programs that are expected to enter production next year, progress with our unmanned ground system and vehicle business with both a new government agency and a commercial customer, and our pursuit of two large new unmanned aerial system opportunities with U.S. Government agencies. Additionally, in the second quarter we continued to make progress in positioning the Company on a number of new and potentially large U.S. Government, commercial and international satellite communication system programs, including a number of new nano and small sat initiatives."

Mr. DeMarco concluded, "Strategically, we remain committed to pursuing what we believe to be our Company's greatest future and long term growth opportunity areas, differentiated products and technology, including unmanned systems and satellite communications, where we are and expect to continue to make significant internally funded investments. We are executing this plan and making these discretionary investments with a backbone of the majority of Kratos' existing business being specialty product and technology focused, where Kratos is a clear industry leader, and where we have a large backlog and bid and proposal pipeline."
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