Kratos Reports First Quarter 2013 Financial Results

Kratos Reports First Quarter 2013 Financial Results

                          Revenue of $252.8 Million

        Organic Revenue Growth of 8.3% Compared to First Quarter 2012

     Public Safety and Security Business Organic Revenue Growth of 24.6%

                            Pro Forma EPS of $0.06

       Affirms Previously Provided Fiscal Year 2013 Financial Guidance

SAN DIEGO, May 9, 2013 (GLOBE NEWSWIRE) -- Kratos Defense & Security
Solutions, Inc. (Nasdaq:KTOS), a leading National Security Solutions provider,
today reported first quarter revenues of $252.8 million, an increase of 20.7
percent over the first quarter of 2012. Excluding the contributions from
Composite Engineering, Inc. (CEI), which was acquired in June of 2012, Kratos
generated year over year organic revenue growth of 8.3% for the first quarter
of 2013 over first quarter 2012. Kratos' first quarter results also included
year over year organic growth of 24.6% in its Public Safety & Security
Solutions (PSS) business, with strong security and surveillance system
integration demand in the municipality, mass transit, energy, healthcare and
education vertical markets. Kratos' first quarter results also included
important contributions from Kratos' contracts supporting Intelligence,
Surveillance and Reconnaissance, Satellite Communications, Missile Defense,
Missile System, Radar, Electronic Warfare, Cyber Security, Unmanned Aerial
Drone, Aerial Target and Aerial System programs. In the first quarter of 2013,
Kratos' legacy traditional government information technology and services
business, which represents approximately 10 percent of Kratos' overall
revenues, declined 12.4% on a year over year basis.

Kratos also reported for the first quarter 2013 Adjusted EBITDA of $27.0
million or 10.7 percent of revenue, Cash Flow from Continuing Operations of
$5.1 million, Free Cash Flow of $1.8 million, and Pro Forma EPS from
Continuing Operations of $0.06. Kratos believes that reporting Pro Forma EPS
is a meaningful metric to present the Company's earnings. Pro Forma EPS
excludes non-cash amortization expenses, as the Company has historically been
acquisitive, 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 over $340 million. GAAP EPS was a loss of $0.18, which
includes a loss from discontinued operations of $0.04.

For the first quarter of 2013, Kratos generated a book-to-bill ratio of 0.6 to
1.0, with Kratos' PSS business generating a book-to-bill ratio of 1.2 to 1.0.
On a rolling 12-month basis, Kratos' book-to-bill ratio remained at 1.0 to
1.0. At March 31, 2013, Kratos reported total backlog of $1.2 billion and a
qualified bid and proposal pipeline of $3.8 billion.

Today, approximately 65 percent of Kratos' business is focused on providing or
supporting specialty products and technology for foundational or strategic
National Security programs and priorities, including Anti-Access/Area Denial
related initiatives. An additional approximate 25 percent of Kratos' business
is focused on providing critical infrastructure security, public safety and
cyber security related products and solutions for certain of our country's
most strategic and important assets, municipalities and agencies.
Approximately 30 to 35 percent of Kratos' overall business is funded by
commercial or international security focused customers rather than by U.S.
Federal Agencies. Additionally, no single Kratos contract is expected to
account for more than approximately 5 percent of Kratos' forecasted 2013
revenue. Kratos believes this global customer and contract diversification is
an important differentiator in today's overall integrated global security
market environment.

Kratos also today affirmed its previously communicated full year fiscal 2013
Revenue, Adjusted EBITDA and Free Cash Flow financial guidance.

Eric DeMarco, Kratos' President & CEO, said, "Kratos had a solid first
quarter, with our Public Safety and Security business exceeding our revenue
expectations, and we believe that we will see growth and EBITDA rate expansion
in PSS throughout 2013, with strong demand for Kratos' security and video
surveillance system integration solutions as a result of heightened security
awareness in the United States. Although the FY'13 Appropriations Bill and
current Sequestration have resulted in certain Kratos work being either
reduced in scope or delayed, other major Kratos supported programs, including
LCS, P-8, EA-18G, Trident II D5, MALD, Patriot, THAAD, AEGIS, Iron Dome, AFSAT
and Arrow, remain solidly funded. We also have a number of large DoD and
international opportunities we are pursuing, including in the Cyber, Missile
Defense, Electronic Warfare, Radar and ISR areas, where awards are currently
expected to be made in the second half of 2013. Additionally, in the aerial
drone area, we have accelerated our planned investment in certain new Kratos
aircraft from our initial budget due to customer opportunities that have
materialized faster than we originally anticipated, and demonstration flights
will now be required in the second half of 2013. The planned IR&D,
non-recurring engineering and capital spend for these aircraft of
approximately $3.0 million, which was previously forecasted to be incurred
throughout all of 2013, will now be substantially incurred by Kratos in our
second quarter so that we can meet the required customer flight schedules in
the second half of this year. Accordingly, even though we are off to a strong
start for 2013, due to continued significant U.S. Federal Government Budget
uncertainty, we are reaffirming our full fiscal year 2013 revenue, Adjusted
EBITDA, Free Cash Flow and quarterly revenue guidance, with a slight shift
between quarters in EBITDA margin rate as a result of the accelerated

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 34752903. 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.

About Kratos Defense & Security Solutions

Kratos Defense & Security Solutions, Inc. (Nasdaq:KTOS) is a specialized
National Security technology business providing mission critical products,
services and solutions for United States National Security.Kratos'core
capabilities are sophisticated engineering, manufacturing and system
integration offerings for National Security platforms and
programs.Kratos'areas of expertise include Command, Control, Communications,
Computing, Combat Systems, Intelligence, Surveillance and Reconnaissance
(C5ISR), satellite communication systems, electronic warfare, unmanned
systems, missile defense, cyber warfare, cybersecurity, information assurance,
and critical infrastructure security.Kratoshas primarily an engineering and
technically oriented work force of approximately 4,200.The vast majority
ofKratos'work is performed on a military base, in a secure facility or at a
critical infrastructure location.Kratos'primary end customers are national
security related agencies.News and information are available

Notice Regarding Forward-Looking Statements

This news release and filing contains certain forward-looking statements that
involve risks and uncertainties, including, without limitation, express or
implied statements concerning the Company's expectations regarding its future
financial performance, bid and proposal pipeline, demand for its products and
services, performance of key contracts, timing and expected impact of
integration and divestiture activities, and market and industry developments,
including the potential impact of sequestration and the impact of Federal
budget cuts on our business. Such statements are only predictions, and the
Company's actual results may differ materially. Investors are cautioned not to
place undue reliance on any such forward-looking statements. All such
forward-looking statements speak only as of the date they are made, and the
Company undertakes no obligation to update or revise these statements, whether
as a result of new information, future events or otherwise. Factors that may
cause the Company's results to differ include, but are not limited to: risks
of adverse regulatory action or litigation; risks associated with debt
leverage; risks that our cost cutting initiatives will not provide the
anticipated benefits; risks that changes, cutbacks or delays in spending by
the U.S. Department of Defense may occur, which could cause delays or
cancellations of key government contracts; risks that changes may occur in
Federal government (or other applicable) procurement laws, regulations,
policies and budgets; risks of the availability of government funding for the
Company's products and services due to performance, cost growth, or other
factors, changes in government and customer priorities and requirements
(including cost-cutting initiatives, the potential deferral of awards,
terminations or reduction of expenditures to respond to the priorities of
Congress and the Administration, or budgetary cuts resulting from
Congressional committee recommendations or automatic sequestration under the
Budget Control Act of 2011), risks of increases in the Federal government
initiatives related to in-sourcing; risks related to security breaches,
including cyber security attacks and threats or other significant disruptions
of our information systems, facilities and infrastructures; risks related to
our compliance with applicable contracting and procurement laws, regulations
and standards; risks relating to contract performance; risks of our
subcontractors or suppliers failure to perform their contractual obligations,
including the appearance of counterfeit parts in our products; changes in the
competitive environment (including as a result of bid protests); failure to
successfully integrate acquired operations and competition in the marketplace
which could reduce revenues and profit margins; risks associated with our
planned divestiture of certain non-core businesses; risks that potential
future goodwill impairments will adversely affect our operating results; risks
that anticipated tax benefits will not be realized in accordance with our
expectations; risks that a change in ownership of our stock could cause
further limitation to the future utilization of our net operating losses;
risks that the current economic environment will adversely impact our
business; and risks related to natural disasters or severe weather. These and
other risk factors are more fully discussed in the Company's Annual Report on
Form 10-K for the period ended December 30, 2012, and in our other filings
made with the Securities and Exchange Commission.

Note Regarding Use of Non-GAAP Financial Measures

This news release contains non-GAAP financial measures, including Pro Forma
EPS (computed using net income (loss) from continuing operations before income
taxes, excluding amortization of purchased intangibles, acquisition related
items less the estimated tax cash payments), Adjusted EBITDA (which excludes
losses from discontinued operations, acquisition related items, stock
compensation expense, and the associated margin rates), and Free Cash Flow
(which is computed using Cash Flow from Operating Activities less Capital
Expenditures).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 extraordinary items and
non-cash items that would normally be included in the most directly comparable
measures calculated and presented in accordance with generally accepted
accounting principles. 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 statements.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.

Kratos Defense & Security Solutions
Unaudited Condensed Consolidated Statements of Operations
(in millions, except per share data)
                                        Three Months Ended
                                        March 31,          March 25,
                                        2013               2012
Service revenues                         $115.5           $102.1
Product sales                            137.3             107.4
Total revenues                           252.8             209.5
Cost of service revenues                 88.2              79.8
Cost of product sales                    98.9              71.9
Total costs                              187.1             151.7
Gross profit - services                  27.3              22.3
Gross profit - products                  38.4              35.5
Total gross profit                      65.7              57.8
Selling, general and administrative      38.9              32.5
Merger and acquisition expenses          0.1               0.9
Research and development expenses        4.9               3.6
Depreciation                            1.0               1.2
Amortization of intangible assets        9.3               10.5
Operating income                        11.5              9.1
Interest expense, net                    (16.2)            (16.1)
Other income (expense), net              (0.7)             0.4
Loss from continuing operations before   (5.4)             (6.6)
income taxes
Provision (benefit) for income taxes     2.8               (4.1)
Loss from continuing operations         (8.2)             (2.5)
Loss from discontinued operations, net   (2.1)             (0.5)
of taxes
Net loss                                 $(10.3)          $(3.0)
Basic loss per common share:                               
Loss from continuing operations         $(0.14)          $(0.08)
Loss from discontinued operations, net  (0.04)            (0.01)
of taxes
Net loss                                $(0.18)          $(0.09)
Diluted loss per common share:                             
Loss from continuing operations         $(0.14)          $(0.08)
Loss from discontinued operations, net  (0.04)            (0.01)
of taxes
Net loss                                $(0.18)          $(0.09)
Weighted average common shares                             
Basic                                   56.6              32.5
Diluted                                 56.6              32.5
Adjusted EBITDA (1)                      $27.0            $25.1
Note: (1) Adjusted EBITDA is a non-GAAP measure defined as GAAP net income
(loss) plus (income) loss from discontinued operations, interest expense, net,
income taxes, depreciation and amortization, stock compensation, amortization
of intangible assets, and merger and acquisition expenses.
Adjusted EBITDA as calculated by us may be calculated differently than 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 an 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.Please refer to the following table that reconciles GAAP
net loss to Adjusted EBITDA:
Reconciliation of Net loss to Adjusted EBITDA is as follows:
                                        Three Months Ended
                                        March 31,          March 25,
                                        2013               2012
Net loss                                 $(10.3)          $(3.0)
Loss from discontinued operations        2.1               0.5
Merger and acquisition expenses          0.1               0.9
Interest expense, net                    16.2              16.1
Provision (benefit) for income taxes     2.8               (4.1)
Depreciation *                           4.9               3.1
Stock compensation                       1.9               1.1
Amortization of intangible assets        9.3               10.5
Adjusted EBITDA                          $27.0            $25.1
* Includes depreciation reported in cost of service revenues and product

Kratos Defense & Security Solutions                                         
Unaudited Segment Data                                                      
(in millions)                                                               
                                      Three Months Ended
                                      March 31,         March 25,
                                      2013              2012
Government Solutions                  $202.2          $168.9
Public Safety & Security              50.6             40.6
Total revenues                        $252.8          $209.5
Operating income (loss) from                            
continuing operations:
Government Solutions                  $12.2           $9.6
Public Safety & Security              1.2              1.2
Other activities                      (1.9)            (1.7)
Total operating income from           $11.5           $9.1
continuing operations
Note: Other activities in the three months ended March 31, 2013 and March
25, 2012 include merger and acquisition expenses of $0.1 million and $0.9
million, respectively.
Reconciliation of consolidated Adjusted EBITDA to Adjusted EBITDA by
segment is as follows:
                                      Three Months Ended
                                      March 31,         March 25,
                                      2013              2012
KGS                                    $24.7           $23.1
% of revenue                          12.2%             13.7%
PSS                                    2.3              2.0
% of revenue                           4.5%              4.9%
Total                                  $27.0           $25.1
% of revenue                          10.7%             12.0%

Kratos Defense & Security Solutions
Unaudited Condensed Consolidated Balance Sheet
(in millions)
                                                      As of
                                                      March 31,  December 30,
                                                      2013       2012
Current assets:                                                  
Cash and cash equivalents                             $51.6    $49.0
Restricted cash                                       5.3       5.5
Accounts receivable, net                              281.8     271.9
Inventoried costs                                     88.2      94.3
Prepaid expenses                                      18.0      17.4
Other current assets                                  10.2      17.3
Total current assets                                  455.1     455.4
Property, plant and equipment, net                    84.0      85.6
Goodwill                                              596.4     596.4
Intangible assets, net                                96.8      106.1
Other assets                                          38.3      40.4
Total assets                                          $1,270.6 $1,283.9
Liabilities and Stockholders' Equity                             
Current liabilities:                                             
Accounts payable                                      $71.6    $83.6
Accrued expenses                                      41.7      46.4
Accrued compensation                                  43.4      47.8
Accrued interest                                       21.7      6.3
Billings in excess of costs and earnings on            48.4      43.7
uncompleted contracts
Deferred income tax liability                          29.0      28.9
Other current liabilities                             19.8      22.1
Total current liabilities                             275.6     278.8
Long-term debt principal, net of current portion      629.5     629.7
Long-term debt premium                                17.7      18.7
Other long-term liabilities                           32.2      32.6
Total liabilities                                     955.0     959.8
Commitments and contingencies                                    
Stockholders' equity:                                            
Preferred stock, 5,000,000 shares authorized, $0.001
par value, no shares outstanding at March 31, 2013 and --       --
December 30, 2012.
Common stock, $0.001 par value, 195,000,000 shares
authorized; 56,654,577 and 56,613,024 shares issued    --       --
and outstanding at March 31, 2013 and December 30,
2012, respectively.
Additional paid-in capital                            848.8     847.1
Accumulated other comprehensive loss                   (0.7)     (0.8)
Accumulated deficit                                   (532.5)   (522.2)
Total stockholders' equity                            315.6     324.1
Total liabilities and stockholders' equity            $1,270.6 $1,283.9

Kratos Defense & Security Solutions
Unaudited Condensed Consolidated Statement of Cash Flows
(in millions)
                                                          Three Months Ended
                                                          March 31, March 25,
                                                          2013      2012
Operating activities:                                               
Net loss                                                  $(10.3) $(3.0)
Less: Loss from discontinued operations                   (2.1)    (0.5)
Loss from continuing operations                           (8.2)    (2.5)
Adjustments to reconcile loss from continuing operations
to net cash provided by operating activities from                   
continuing operations:
Depreciation and amortization                             14.2     13.6
Stock‑based compensation                                  1.9      1.1
Amortization of deferred financing costs                  1.3      1.3
Amortization of premium on Senior Secured Notes           (1.0)    (1.0)
Provision for doubtful accounts                           0.1      0.3
Changes in assets and liabilities, net of acquisitions:             
Accounts receivable                                       (9.8)    12.9
Inventoried costs                                          6.3      (7.1)
Prepaid expenses and other assets                          --      (4.9)
Accounts payable                                          (12.0)   6.0
Accrued compensation                                      (4.3)    0.7
Accrued expenses                                          (4.7)    (3.7)
Accrued interest payable                                   15.3     15.6
Billings in excess of costs and earnings on uncompleted    4.9      (1.1)
Income tax receivable and payable                         2.9      (5.0)
Other liabilities                                         (1.8)    (1.2)
Net cash provided by operating activities from continuing  5.1      25.0
Investing activities:                                               
Cash paid for acquisitions, net of cash acquired          1.2      (21.5)
Decrease in restricted cash                               0.2      0.4
Capital expenditures                                      (3.3)    (2.7)
Net cash used in investing activities from continuing      (1.9)    (23.8)
Financing activities:                                               
Repayment of debt                                          (0.3)    (0.3)
Other                                                      (0.2)    (0.1)
Net cash used in financing activities from continuing      (0.5)    (0.4)
Net cash flows from continuing operations                 2.7      0.8
Net operating cash flows from discontinued operations      0.2      3.9
Effect of exchange rate changes on cash and cash           (0.3)    (0.1)
Net increase in cash and cash equivalents                 2.6      4.6
Cash and cash equivalents at beginning of period          49.0     69.6
Cash and cash equivalents at end of period                $51.6   $74.2

Kratos Defense & Security Solutions
Unaudited Non-GAAP Measures
Adjusted Earnings Before Amortization and Acquisition Related Expenses
(in millions, except per share data)
                                                          Three Months Ended
                                                          March 31, March 25,
                                                          2013      2012
Loss from continuing operations before taxes               $(5.4)  $(6.6)
Add: Amortization of intangible assets                     9.3      10.5
Add: Merger and acquisition expenses                       0.1      0.9
Adjusted income from continuing operations before income  $4.0    $4.8
Estimated cash tax provision                             0.8      1.0
Adjusted income from continuing operations before          $3.2    $3.8
acquisition and amortization expenses
Diluted income per common share:                                    
Adjusted income from continuing operations                $0.06   $0.12
Weighted average common shares outstanding                          
Diluted                                                   56.6     32.5
Free Cash Flow
(in millions)
                                                          Three Months Ended
                                                          March 31, March 25,
                                                          2013      2012
Net cash provided by operating activities from continuing  $5.1    $25.0
Less: Capital expenditures                                 (3.3)    (2.7)
Free cash flow                                             $1.8    $22.3

CONTACT: Press Contact:
         Yolanda White
         858-812-7302 Direct
         Investor Information:

Kratos Logo
Press spacebar to pause and continue. Press esc to stop.