Kratos Defense & Security Solutions, Inc. (Nasdaq:KTOS), a National Security Solutions provider, today reported second quarter fiscal year 2012 revenues from continuing operations of $219.8 million, which excludes approximately $1.8 million of revenues relating to certain non-core businesses Kratos announced today it plans to divest, and which are now reflected in results of discontinued operations. Kratos’ Second Quarter Fiscal 2012 revenues from continuing operations of $219.8 million increased sequentially approximately 4.9 percent over the first quarter of fiscal 2012 comparable revenues of $209.5 million, with all of this increase being generated from organic growth. Kratos’ second quarter 2012 revenues increased approximately 28.5 percent over the second quarter of 2011, and Kratos’ revenue for the six-month period ended June 24, 2012 increased approximately 46 percent over the first fiscal six months of 2011. For the second quarter of fiscal 2012, Kratos reported adjusted EBITDA from continuing operations of $24.3 million, or 11.1 percent. Kratos’ book-to-bill ratio for the second quarter was 1.1 to 1.0, with a total backlog of $1.1 billion and a qualified bid and proposal pipeline of $4.1 billion at the end of the fiscal second quarter.
Pro Forma EPS from continuing operations for the second quarter of fiscal 2012 was $0.06. Pro Forma EPS excludes the amortization of purchased intangibles and other costs related to Kratos’ strategic acquisitions, the accrual for unused office space expense and other expense and assumes the estimated cash to be paid for income taxes, reflecting the significant expected benefit from Kratos’ over $300 million of Net Operating Loss carry forwards.
Kratos’ President & CEO, Eric DeMarco, said, “As we discussed last year when we acquired Integral Systems and also at the end of the first quarter, we have now completed our product and market review and have made the decision to divest certain non-core businesses that do not fit the strategic plan of the Company. We have commenced the divestiture process, and we currently hope to have these divestitures completed by the end of this fiscal year.”
Mr. DeMarco continued, “Operationally, Kratos’ second quarter results came in pretty much as expected, with sequential organic quarter-over-quarter revenue growth, and the business is positioned for even stronger organic sequential growth for the second half of the year. In the second quarter, Kratos’ Public Safety and Security (PSS) business generated substantially increased EBITDA margins over those of the first quarter, as we continued the integration of the critical infrastructure business we acquired at the beginning of 2012. We expect Kratos’ PSS business EBITDA margins to further expand sequentially quarter—over-quarter in the second half of this year, though not at the rate previously expected, as we have revised the integration plan to ensure successful customer project completion and satisfaction and the collection of the related contract receivables. Accordingly, substantial completion of this integration effort is now planned for the first quarter of next year rather than the second half of 2012. Importantly, we also expect continued sequential organic revenue growth from our PSS business in the second half of 2012, with a substantial portion of this expected revenue currently in booked backlog.”
Mr. DeMarco continued, “A second quarter programmatic highlight that we were able to publically disclose was the recent successful launch of a hypersonic propulsion research mission, HIFiRE 2, which was the fourth of a planned series of up to ten flights for this program. Including this successful launch, Kratos’ Rocket Support Services business in the second quarter continued to be one of the strongest performers for our Company, along with Kratos’ electronic warfare, cyber, satcom and specialty training products businesses. We are 100 percent focused on building our specialty products business, which is reflected in our substantially increased second quarter IR&D spend, where we accelerated some efforts previously scheduled for the second half of the year as a result of near term opportunities with certain National Security organizations. In addition to Kratos’ critical infrastructure security business, second half 2012 sequential organic growth is expected from our satellite communications equipment and specialty programs equipment areas, where we received a number of large orders in the first half of 2012 with deliveries currently scheduled for the third and fourth quarters of this year. Additionally, for the second half, we currently expect receipt of certain situational awareness and cyber security related software product orders, of which we had only a limited number during the first half of the year. During the second quarter, Kratos’ traditional government contracting services business continued to face an incredibly difficult environment, with the majority of procurements being awarded on a lowest cost, technically acceptable basis. Though traditional government services represent less than approximately 12 percent of our business today, the service business continues to contract in a commoditizing and very challenging marketplace.”
Kratos also announced today that it is updating its previously provided fiscal year 2012 revenue and Adjusted EBITDA guidance, reflecting the recent acquisition of Composite Engineering, Inc. (CEI), which closed on July 2, 2012, the planned divestiture of the non-core businesses, which will now be reported as discontinued operations, the revised integration timeline for the previously acquired critical infrastructure security business, and continued reduced government services revenues resulting from the contraction of this business.
As a result of the planned divestiture of certain non-core businesses, the financial results of which are now classified as discontinued operations in Kratos’ financial statements, for full fiscal year 2012, approximately $35 million of previously expected revenues will now be excluded from Kratos’ financial guidance for continuing operations. All reported Kratos financial information has been and will be recast to reflect these to be divested non-core businesses as discontinued operations.
Kratos will be reporting CEI’s operating results in its consolidated financial statements commencing July 2, 2012, the closing date of the acquisition of CEI by Kratos. For calendar 2011, CEI reported revenue and Adjusted EBITDA of approximately $94.1 million and $16.0 million, respectively, with a recent annual organic growth rate of approximately 20 percent. Additionally, approximately $8 million in previously forecasted annual Kratos revenues, which represented sales to CEI of certain electronics, ground flight control stations and onboard avionics for CEI aircraft, will now be eliminated in the consolidation of Kratos and CEI and excluded from Kratos’ future guidance and consolidated results of operations.
After taking into consideration the CEI acquisition, the impact of the discontinued operations, the revised integration timeline of the critical infrastructure business and the impact of the traditional government services revenues, the Company is updating its full year 2012 guidance of revenues from continuing operations to approximately $950 million to $1.0 billion and Adjusted EBITDA from continuing operations of approximately $120 million to $125 million. Kratos is also updating its previously provided full fiscal year 2012 Adjusted Free Cash Flow guidance to $50 million to $60 million, with Kratos’ first and third fiscal quarters of 2012 expected to generate significant positive Adjusted Free Cash Flow and the second and fourth fiscal quarters of 2012 expected to reflect negative to break even Adjusted Free Cash Flow, primarily as a result of the Company’s bi-annual interest payments on its Senior Notes being payable in the second and fourth quarters. For the second quarter of fiscal 2012, Kratos also experienced an Adjusted Free Cash Flow use as a result of an increase in specialty inventory products for certain National Security programs. The products are currently scheduled for delivery in the second half of 2012 and in 2013, once the manufacturing process is complete.
Kratos is currently not expecting to provide fiscal 2013 financial guidance until at least the first calendar quarter of 2013, when the Company announces its fiscal fourth quarter 2012 results, due primarily to the current and expected continued potential significant United States Federal Government budgetary uncertainty, including a possible extended Continuing Resolution Authorization for Federal Fiscal 2013 and the possibility of a Sequestration or other macroeconomic or Federal budgetary related events.
Mr. DeMarco concluded, “We believe that the first half of 2012’s operational performance is validating our strategy over the past few years of deemphasizing traditional government services and focusing on building our specialty or niche technology based products business and securing our Nation’s critical infrastructure. We fully expect continued sequential organic growth in the second half of the year based on our current backlog and delivery schedules, as well as expanding EBITDA margins and operating cash flow.”
Management will discuss the financial results in a conference call beginning at 2:00 p.m. Pacific (5:00 p.m. Eastern) today. Analysts and institutional investors may participate in the conference call by dialing 866-393-0674, referencing the call by ID number 99951815. The general public may access the conference call by dialing (877) 344-3935 or on the day of the event by visiting for a simultaneous webcast. A replay of the webcast will be available on the Kratos web site approximately two hours after the conclusion of the conference call.
