Kratos Reports Third Quarter 2023 Financial Results

Note Regarding Use of Non-GAAP Financial Measures and Other Performance Metrics
This news release contains non-GAAP financial measures, including Adjusted EPS (computed using income from continuing operations before income taxes, excluding income (loss) from discontinued operations, excluding income (loss) attributable to non-controlling interest, excluding depreciation, amortization of intangible assets, amortization of capitalized contract and development costs, stock-based compensation expense, acquisition and restructuring related items and other, which includes, but is not limited to, legal related items, non-recoverable rates and costs, and foreign transaction gains and losses, less the estimated impact to income taxes) and Adjusted EBITDA (which includes net income (loss) attributable to noncontrolling interest and excludes, among other things, losses and gains from discontinued operations, acquisition and restructuring related items, stock compensation expense, foreign transaction gains and losses, and the associated margin rates). Additional non-GAAP financial measures include Free Cash Flow from Operations computed as Cash Flow from Operations less Capital Expenditures plus proceeds from sale of assets and Adjusted EBITDA related to our KUS and KGS businesses. Kratos believes this information is useful to investors because it provides a basis for measuring the Company’s available capital resources, the actual and forecasted operating performance of the Company’s business and the Company’s cash flow, excluding non-recurring items and non-cash items that would normally be included in the most directly comparable measures calculated and presented in accordance with GAAP. The Company’s management uses these non-GAAP financial measures, along with the most directly comparable GAAP financial measures, in evaluating the Company’s actual and forecasted operating performance, capital resources and cash flow. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with GAAP, and investors should carefully evaluate the Company’s financial results calculated in accordance with GAAP and reconciliations to those financial results. In addition, non-GAAP financial measures as reported by the Company may not be comparable to similarly titled amounts reported by other companies. As appropriate, the most directly comparable GAAP financial measures and information reconciling these non-GAAP financial measures to the Company’s financial results prepared in accordance with GAAP are included in this news release.

Another Performance Metric the Company believes is a key performance indicator in our industry is our Book to Bill Ratio as it provides investors with a measure of the amount of bookings or contract awards as compared to the amount of revenues that have been recorded during the period and provides an indicator of how much of the Company’s backlog is being burned or utilized in a certain period. The Book to Bill Ratio is computed as the number of bookings or contract awards in the period divided by the revenues recorded for the same period. The Company believes that the rolling or last twelve months’ Book to Bill Ratio is meaningful since the timing of quarter-to-quarter bookings can vary.

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
	October 1,				September 25,			October 1,			September 25,
		2023				2022			2023			2022

Service revenues	$	106.5			$	88.6		$	301.8		$	235.3
Product sales		168.1				140.0			461.5			413.7
Total revenues		274.6				228.6			763.3			649.0
Cost of service revenues		79.0				65.1			227.2			171.2
Cost of product sales		122.2				108.6			339.4			313.2
Total costs		201.2				173.7			566.6			484.4
Gross profit - service revenues		27.5				23.5			74.6			64.1
Gross profit - product sales		45.9				31.4			122.1			100.5

Total gross profit		73.4				54.9			196.7			164.6

Selling, general and administrative expenses		47.5				44.2			136.7			126.1
Acquisition and restructuring related items and other		-				0.4			0.9			7.0
Research and development expenses		10.3				9.6			30.4			28.0
Depreciation		1.9				1.3			4.8			3.9
Amortization of intangible assets		1.5				3.0			4.5			6.3
Operating income (loss)		12.2				(3.6	)		19.4			(6.7	)
Interest expense, net		(5.1	)			(4.1	)		(15.5	)		(12.9	)
Loss on extinguishment of debt		-				-			-			(13.0	)
Other expense, net		(0.3	)			(1.1	)		(0.4	)		(1.0	)
Income (loss) from continuing operations before income taxes		6.8				(8.8	)		3.5			(33.6	)
Provision (benefit) for income taxes from continuing operations		3.8				(0.8	)		6.9			(4.6	)
Income (loss) from continuing operations		3.0				(8.0	)		(3.4	)		(29.0	)
Income from discontinued operations, net of income taxes		-				-			0.2			0.7
Net income (loss)		3.0				(8.0	)		(3.2	)		(28.3	)
Less: Net income attributable to noncontrolling interest		4.6		-		-			8.1			0.3
Net loss attributable to Kratos	$	(1.6	)		$	(8.0	)	$	(11.3	)	$	(28.6	)

Basic and diluted loss per common share attributable to Kratos:
Loss from continuing operations	$	(0.01	)		$	(0.06	)	$	(0.09	)	$	(0.23	)
Income from discontinued operations		-				-			-			-
Net loss		(0.01	)		$	(0.06	)	$	(0.09	)	$	(0.23	)


Basic and diluted weighted average common shares outstanding		129.6				127.2			129.3			126.5

Adjusted EBITDA (1)	$	27.7			$	20.0		$	66.3		$	51.5



Unaudited Reconciliation of GAAP to Non-GAAP Measures

Note: (1) Adjusted EBITDA is a non-GAAP measure defined as GAAP net loss attributable to Kratos adjusted for net income attributable to noncontrolling interest, income from discontinued operations, net interest expense, provision (benefit) 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 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 (loss) 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 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 lease commitment costs for unused, 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.

Non-recoverable rates and costs . In fiscal 2022, the Company incurred non-recoverable rates and costs as a result of its inability to hire the required direct labor base to execute on its backlog due to a challenging environment in hiring and retaining skilled personnel. In addition, in 2022 the Company incurred non-recoverable rate growth resulting from a smaller than planned direct labor base due to delays in customer program execution and awards.

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 Loss attributable to Kratos to Adjusted EBITDA is as follows:
	Three Months Ended							Nine Months Ended
	October 1,				September 25,			October 1,			September 25,
		2023				2022			2023			2022

Net loss attributable to Kratos	$	(1.6	)		$	(8.0	)	$	(11.3	)	$	(28.6	)
Income from discontinued operations, net of income taxes		-				-			(0.2	)		(0.7	)
Interest expense, net		5.1				4.1			15.5			12.9
Loss on extinguishment of debt		-				-			-			13.0
Provision (benefit) for income taxes from continuing operations		3.8				(0.8	)		6.9			(4.6	)
Depreciation (including cost of service revenues and product sales)		6.7				5.9			19.5			16.5
Stock-based compensation		6.4				6.6			19.0			19.9
Foreign transaction loss		0.4				1.4			1.4			1.5
Amortization of intangible assets		1.5				3.0			4.5			6.3
Amortization of capitalized contract and development costs		0.8				0.4			2.0			1.0
Acquisition and restructuring related items and other		-				7.4			0.9			14.0
Plus: Net income attributable to noncontrolling interest		4.6				-			8.1			0.3

Adjusted EBITDA	$	27.7			$	20.0		$	66.3		$	51.5



Reconciliation of acquisition and restructuring related items and other included in Adjusted EBITDA:

	Three Months Ended							Nine Months Ended
	October 1,				September 25,			October 1,			September 25,
		2023				2022			2023			2022
Acquisition and transaction related items	$	-			$	0.2		$	-		$	0.6
Restructuring costs		-				0.8			-			1.1
Non-recoverable rates and costs		-				6.4			-			6.4
Legal related items		-				-			0.9			5.9
	$	-			$	7.4		$	0.9		$	14.0


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

	Three Months Ended							Nine Months Ended
	October 1,				September 25,			October 1,			September 25,
		2023				2022			2023			2022
Revenues:
Unmanned Systems	$	56.7			$	50.0		$	156.8		$	159.0
Kratos Government Solutions		217.9				178.6			606.5			490.0
Total revenues	$	274.6			$	228.6		$	763.3		$	649.0

Operating income (loss)
Unmanned Systems	$	2.6			$	(0.1	)	$	3.2		$	(4.6	)
Kratos Government Solutions		15.9				3.3			35.2			18.4
Unallocated corporate expense, net		(6.3	)			(6.8	)		(19.0	)		(20.5	)
Total operating income (loss)	$	12.2			$	(3.6	)	$	19.4		$	(6.7	)

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 Segment Operating Income (Loss) to Adjusted EBITDA is as follows:

	Three Months Ended							Nine Months Ended
	October 1,				September 25,			October 1,			September 25,
		2023				2022			2023			2022
Unmanned Systems
Operating income (loss)	$	2.6			$	(0.1	)	$	3.2		$	(4.6	)
Other income (expense)		0.1				(0.1	)		0.1			-
Depreciation		2.1				1.7			5.9			5.0
Amortization of intangible assets		0.1				0.2			0.3			0.7
Amortization of capitalized contract and development costs		0.5				0.4			1.3			1.0
Acquisition and restructuring related items and other		-				-			-			5.9
Adjusted EBITDA	$	5.4			$	2.1		$	10.8		$	8.0
% of revenue		9.5	%			4.2	%		6.9	%		5.0	%

Kratos Government Solutions
Operating income	$	15.9			$	3.3		$	35.2		$	18.4
Other income		0.1				0.4			0.9			0.5
Depreciation		4.6				4.2			13.6			11.5
Amortization of intangible assets		1.4				2.8			4.2			5.6
Amortization of capitalized contract and development costs		0.3				-			0.7			-
Acquisition and restructuring related items and other		-				7.2			0.9			7.5
Adjusted EBITDA	$	22.3			$	17.9		$	55.5		$	43.5
% of revenue		10.2	%			10.0	%		9.2	%		8.9	%

Total Adjusted EBITDA	$	27.7			$	20.0		$	66.3		$	51.5
% of revenue		10.1	%			8.7	%		8.7	%		7.9	%


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


								October 1,			December 25,
									2023			2022
Assets
Current assets:
Cash and cash equivalents								$	42.2		$	81.3
Accounts receivable, net									351.9			328.5
Inventoried costs									150.1			125.5
Prepaid expenses									18.3			11.9
Other current assets									41.9			35.4
Total current assets									604.4			582.6
Property, plant and equipment, net									227.3			213.1
Operating lease right-of-use assets									50.6			47.4
Goodwill									558.2			558.2
Intangible assets, net									50.7			55.2
Other assets									99.6			95.0
Total assets								$	1,590.8		$	1,551.5
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable								$	57.4		$	57.3
Accrued expenses									40.3			33.8
Accrued compensation									55.2			52.2
Accrued interest									1.8			1.5
Billings in excess of costs and earnings on uncompleted contracts									79.4			62.1
Current portion of operating lease liabilities									12.1			10.8
Other current liabilities									15.9			15.6
Other current liabilities of discontinued operations									0.9			0.9
Total current liabilities									263.0			234.2
Long-term debt									234.2			250.2
Operating lease liabilities, net of current portion									43.0			40.8
Other long-term liabilities									76.8			77.4
Other long-term liabilities of discontinued operations									1.1			1.4
Total liabilities									618.1			604.0
Commitments and contingencies
Redeemable noncontrolling interest									19.3			11.2
Stockholders’ equity:
Additional paid-in capital									1,633.5			1,608.4
Accumulated other comprehensive loss									2.5			(0.8	)
Accumulated deficit									(682.6	)		(671.3	)
Total Kratos stockholders’ equity									953.4			936.3
Total liabilities and stockholders’ equity								$	1,590.8		$	1,551.5



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

								Nine Months Ended
								October 1,			September 25,
									2023			2022
Operating activities:
Net loss								$	(3.2	)	$	(28.3	)
Less: income from discontinued operations									0.2			0.7
Loss from continuing operations									(3.4	)		(29.0	)
Adjustments to reconcile loss from continuing operations to net cash used in operating activities from continuing operations:
Depreciation and amortization									24.0			22.8
Amortization of lease right-of-use assets									8.5			7.8
Deferred income taxes									0.1			0.3
Stock-based compensation									19.0			19.9
Litigation related charges									-			5.5
Amortization of deferred financing costs									0.5			0.6
Loss on extinguishment of debt									-			13.0
Provision for doubtful accounts									1.0			-
Changes in assets and liabilities, net of acquisitions:
Accounts receivable									(23.5	)		17.0
Unbilled receivables									(9.1	)		(18.2	)
Inventoried costs									(23.7	)		(28.0	)
Prepaid expenses and other assets									(15.7	)		(17.4	)
Operating lease liabilities									(8.2	)		(7.7	)
Accounts payable									(0.6	)		1.0
Accrued compensation									3.1			3.0
Accrued expenses									6.4			1.1
Accrued interest									0.3			(1.2	)
Billings in excess of costs and earnings on uncompleted contracts									17.4			(10.6	)
Income tax receivable and payable									1.9			(8.3	)
Other liabilities									(0.2	)		(3.9	)
Net cash used in operating activities from continuing operations									(2.2	)		(32.3	)
Investing activities:
Cash paid for acquisitions, net of cash acquired									-			(132.2	)
Capital expenditures									(33.1	)		(34.8	)
Proceeds from sale of assets									8.3			0.1
Net cash used in investing activities from continuing operations									(24.8	)		(166.9	)
Financing activities:
Proceeds from the issuance of long-term debt									-			200.0
Borrowing under credit facility									54.0			100.0
Redemption of Senior Secured Notes									-			(309.8	)
Repayment under credit facility, term loan and other debt									(67.8	)		(1.2	)
Debt issuance costs									-			(3.2	)
Payment under finance leases									(1.2	)		(1.0	)
Payments of employee taxes withheld from share-based awards									(3.6	)		(12.3	)
Proceeds from shares issued under equity plans									6.5			6.1
Net cash used in financing activities from continuing operations									(12.1	)		(21.4	)
Net cash flows from continuing operations									(39.1	)		(220.6	)
Net operating cash flows of discontinued operations									-			(0.3	)
Effect of exchange rate changes on cash and cash equivalents									-			(3.3	)
Net decrease in cash, cash equivalents and restricted cash									(39.1	)		(224.2	)
Cash, cash equivalents and restricted cash at beginning of period									81.3			349.4
Cash, cash equivalents and restricted cash at end of period								$	42.2		$	125.2



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							Nine Months Ended
	October 1,				September 25,			October 1,			September 25,
		2023				2022			2023			2022
Net loss attributable to Kratos	$	(1.6	)		$	(8.0	)	$	(11.3	)	$	(28.6	)
Less: GAAP provision (benefit) for income taxes		3.8				(0.8	)		6.9			(4.6	)
Less: Net income attributable to noncontrolling interest		4.6				-			8.1			0.3
Less: income from discontinued operations, net of income taxes		-				-			(0.2	)		(0.7	)
Income (loss) from continuing operations before taxes		6.8				(8.8	)		3.5			(33.6	)
Add: Amortization of intangible assets		1.5				3.0			4.5			6.3
Add: Amortization of capitalized contract and development costs		0.8				0.4			2.0			1.0
Add: Depreciation		6.7				5.9			19.5			16.5
Add: Stock-based compensation		6.4				6.6			19.0			19.9
Add: Loss on extinguishment of debt		-				-			-			13.0
Add: Foreign transaction loss		0.4				1.4			1.4			1.5
Add: Acquisition and restructuring related items and other		-				7.4			0.9			14.0
Non-GAAP Adjusted income from continuing operations before income taxes		22.6				15.9			50.8			38.6
Income taxes on Non-GAAP measure Adjusted income from continuing operations*		6.9				5.7			15.5			13.9
Non-GAAP Adjusted net income	$	15.7			$	10.2		$	35.3		$	24.7


Diluted earnings per common share	$	(0.01	)		$	(0.06	)	$	(0.09	)	$	(0.23	)
Less: GAAP provision (benefit) for income taxes		0.03				(0.01	)		0.05			(0.03	)
Less: Net income attributable to noncontrolling interest		0.03				-			0.06			-
Less: income from discontinued operations, net of income taxes		-				-			-			-
Add: Amortization of intangible assets		0.01				0.02			0.03			0.05
Add: Amortization of capitalized contract and development costs		0.01				-			0.02			0.01
Add: Depreciation		0.05				0.05			0.15			0.13
Add: Stock-based compensation		0.05				0.05			0.15			0.16
Add: Loss on extinguishment of debt		-				-			-			0.10
Add: Foreign transaction loss		-				0.01			0.01			0.01
Add: Acquisition and restructuring related items and other		-				0.06			0.01			0.11
Income taxes on Non-GAAP measure Adjusted income from continuing operations*		(0.05	)			(0.04	)		(0.12	)		(0.11	)
Adjusted income from continuing operations per diluted common share	$	0.12			$	0.08		$	0.27		$	0.20

Weighted average diluted common shares outstanding		129.6				127.2			129.3			126.5

*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, 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.

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