Fiscal Year 2022 Results
For fiscal year 2022, Kratos reported Revenues of $898.3 million, Operating Loss of $2.6 million, Net Loss of $36.9 million and Adjusted EBITDA of $70.7 million. Included in the fiscal year 2022 Operating and Net Losses is a $6.4 million charge related to certain non-recoverable costs, including rate and cost growth items resulting from an inability to hire the required planned direct labor base, both internally and by our subcontractors, to execute on our backlog in our C5ISR business, and a non-recoverable indirect cost rate growth resulting from a smaller than planned direct labor base due to delays in customer program execution and awards in our Training Solutions business. Also included in the fiscal year 2022 Operating and Net Losses is non-cash stock compensation expense of $26.3 million, Company-funded R&D expense of $38.6 million, and a $5.5 million litigation settlement related charge resulting from the resolution of a dispute with an international customer in our Unmanned Systems segment, which contractual arrangement was entered into in March 2011, prior to Kratos’ acquisition of CEi (Composite Engineering Inc.). A loss on extinguishment of debt of $13.0 million is also included in the fiscal year 2022 Net Loss.
Kratos reported a fiscal year 2022 Net Loss of $36.9 million and a GAAP Net Loss per share of $0.29, compared to a Net Loss of $2.0 million and a GAAP Net Loss per share of $0.02 for the fiscal year 2021. Adjusted EPS was $0.31 for fiscal year 2022, compared to $0.36 for fiscal year 2021.
Fiscal year 2022 Revenues of $898.3 million increased $86.8 million, or 10.7 percent, from fiscal year 2021 Revenues of $811.5 million. Fiscal year 2022 Revenues include an aggregate contribution of $95.5 million from the Cosmic AES, CTT, and SRE acquisitions, offset in part, by a reduction of $21.5 million related to our legacy Training Solutions business. Excluding the legacy Training Solutions business and the impact of the acquired businesses, revenues increased organically 1.7 percent.
Fiscal year 2022 Cash Flow Used in Operations was $25.6 million and Free Cash Flow Used in Operations was $71.0 million, after funding $45.4 million of capital expenditures. Cash Flow Used in Operations in fiscal year 2022 includes approximately $23.8 million in increased inventory balances primarily related to advanced inventory purchases made to mitigate supply chain disruptions, internal investments of approximately $9.1 million related to our Zeus launch systems and Erinyes hypersonic systems, and software development costs of $7.6 million related to our OpenSpace C2 platform.
Eric DeMarco, Kratos’ President and CEO, said, “Kratos begins 2023 with a record backlog and pipeline, including Kratos Rocket Systems recently receiving two new major hypersonic related program awards, MACH TB and Mayhem, including as related to Kratos’ Zeus and Erinyes hypersonic systems, Kratos receiving a new potential $250 million microwave electronics single award production contract and Kratos receiving another large new satellite system program award that we have yet to formally announce. Additionally, Kratos recently successfully integrated and launched four ballistic missile targets with our Government partner, demonstrating our industry leading position in this area, and Kratos was selected as the engine design team for the Boom-led collaboration on a new supersonic propulsion system, Symphony, a sustainable and cost-efficient engine for Boom’s Overture supersonic airliner.”
Mr. DeMarco continued, “In the tactical drone area, Kratos received a contract for an initial two Valkyries from the U.S. Navy, along with sensors, weapon systems payloads, etc. under the Affordable Autonomous Cooperative Killers program, which will also be utilized by the U.S. Marines to provide the amphibious force options for new strike, intelligence gathering and electronic warfare capabilities and as a “mothership” for small drones. Additionally, the U.S. Air Force’s 40th Flight Test Squadron at Eglin Air Force Base has now taken ownership of Valkyrie aircraft, where the Valkyries’ ability to autonomously operate over vast distances can be evaluated along with certain other objectives. Kratos has produced over 1,100 high performance jet drones to date and is the only company with a family of attritable and expendable runway independent jet drones flying today, with active production lines, not power points, renditions, designs or computer generated surrogates and we stand ready to support the customer with quantities of high performance, low cost systems to deter and defeat our adversaries.”
Mr. DeMarco concluded, “We are forecasting Kratos consolidated 2023 over 2022 revenue growth of approximately 10 percent, with increased margins, reduced internally funded investments and increased cash flow. Additionally, based on our backlog, new program awards and $10 billion opportunity pipeline, we expect a future up and to the right growth trajectory. We continue to be focused on execution, including obtaining and retaining qualified personnel, effectively managing the supply chain, subcontractors, vendors and inflation, each of which remain operational challenges, and continuing to bid on and win new program opportunities.”
Financial Guidance
The first quarter and Fiscal Year 2023 financial guidance we are providing today includes our current forecasted business mix, and our assumptions, including as related to: employee sourcing, hiring and retention; manufacturing, production and supply chain disruptions; parts shortages and related continued significant cost and price increases, including for employees, materials and components that are impacting the industry and Kratos. The range of our expected first quarter 2023 revenues includes assumptions of forecasted execution, including the number of new qualified personnel expected to be obtained and retained to successfully execute on our programs and contracts, as well as expected contract awards. Our Fiscal Year 2023 cash flow guidance also includes continued advanced purchases of inventory in an attempt to mitigate supply chain disruptions, which inventories are not currently expected to be converted to cash through the sales process until at least the second half of 2023.
Total estimated capital expenditures for 2023 are expected to be $45 to $50 million, which includes approximately $25 to $30 million for expected capital expenditures related to normal annual maintenance. In addition, the 2023 capital expenditure forecast currently includes expected outlays of $10 to $15 million associated with the continued production of Valkyrie aircraft, including our recent decision to move forward with our second serial production run of 12 next generation Valkyries. Other non-recurring, non-maintenance capital expenditures include expansion of the Company’s owned satellite monitoring network and our OpenSpace product of approximately $5 to $7 million, and approximately $4 - $6 million of expected capital investments related to the GBSD program.
On October 1, 2022, the U.S. Federal Government began operating under a Continuing Resolution Authorization (CRA) with no Federal Fiscal 2023 Budget or DoD budget being in place. Under a CRA, federal spending and its composition is substantially held consistent with the previous year’s budget, with no new contract awards, no increased production or spending on existing programs and no transition from development to production contracts, or from low-rate initial production to full rate production being allowed. The President signed the FY 2023 omnibus appropriations Bill (Federal Fiscal 2023 Budget) on December 29, 2022. The approximate three-month CRA from October 1, 2022 to December 29, 2022 adversely impacted the Company’s Fiscal 2022 fourth quarter and is expected to adversely impact the Company’s Fiscal 2023 first quarter, with such adverse impacts expected to begin to decline in Kratos’ second fiscal quarter of 2023.
