Kratos Reports First Quarter Fiscal 2014 Financial Results

Kratos Reports First Quarter Fiscal 2014 Financial Results

        Revenue of $200.1 Million and Adjusted EBITDA of $17.1 Million

               Proposal Pipeline Increases 25% to $6.5 Billion

          Backlog $1.1 Billion and Book-to-Bill Ratio of 1.0 to 1.0

                       Affirms 2014 Financial Guidance

  Standard & Poor's Revises Outlook to Stable as Clarity Regarding the U.S.
       Defense Budget Has Improved in Recent Months; B Rating Affirmed

SAN DIEGO, April 30, 2014 (GLOBE NEWSWIRE) -- Kratos Defense & Security
Solutions, Inc. (Nasdaq:KTOS), a leading National Security Solutions provider,
today reported first quarter fiscal 2014 revenues of $200.1 million and
Adjusted EBITDA of $17.1 million, or 8.5 percent of revenue. In the first
quarter, Kratos saw strength in certain high technology and higher margin
areas of its business, including satellite communications, unmanned aerial and
ground system command and control systems, electronic warfare, missile systems
and radars. In the first quarter, the Company experienced lower than expected
revenues in its Public Safety & Security Solutions (KPSS) segment, its
critical infrastructure security system deployment business, as certain
projects wound down and were completed and certain expected new security
program deployments began later than anticipated. KPSS recently received a
number of new contract awards, and the Company expects KPSS to generate
sequential organic growth in the second quarter of fiscal 2014 over the first
quarter of approximately 10%, with organic revenue growth of 5% to 10%
expected for fiscal 2014 over 2013.

For the first quarter of fiscal 2014, Kratos reported a Book-to-Bill Ratio of
1.0 to 1.0 and reported total backlog at March 30, 2014 of $1.1 billion.
Kratos reported total backlog at December 29, 2013 of $1.1 billion. At the end
of the first quarter, the Company's qualified bid and proposal pipeline was
$6.5 billion, an approximate 25% increase above the December 29, 2013 proposal
pipeline of $5.2 billion. The Company's bookings and new contract
opportunities have increased substantially over the past several months and in
particular since the approval of the fiscal year 2014 Department of Defense
(DoD) appropriations bill in January 2014.

Kratos also announced today that Standard & Poor's (S&P) recently revised
Kratos' outlook to stable from negative and affirmed Kratos' "B" rating. S&P
noted that clarity regarding the U.S. defense budget has improved in recent
months, and S&P's view is that there is less potential for disruption in
demand and volatility surrounding its base-case forecast for Kratos than in
the past due to a more certain outlook for near-term U.S. defense spending.
S&P also noted that the stable outlook reflects its view that Kratos' credit
metrics will gradually improve over the next few years due to a combination of
debt reduction, improved cash flow, and modest earnings growth.

Cash Flow from Operations for the first quarter was $1.7 million and Free Cash
Flow was a use of $1.4 million, with a net reduction in accounts receivable
generating a $17.8 million source of cash flow from operations, despite an
increase in Days Sales Outstanding (DSOs) of 10 days. The DSOs increase
primarily resulted from previously forecast lower first quarter revenues, as
well as certain expected missile system program milestone receipts being
delayed due to a subcontractor related issue. The subcontractor issue is
expected to be resolved and the milestones achieved in the second and third
quarters of 2014, the first of which was resolved and collected in April.

Kratos is also announcing today that it recently had a number of successful
"Blue Sky" internally funded flights with its newest and highest performance
Unmanned Aerial System (UAS) platform and that it has made important progress
on a related high performance unmanned aerial drone system program. This UAS
platform and program, where the Company is currently under contract, could in
the future become the largest program in Kratos if the Company successfully
achieves certain contractual performance milestones.

Additionally, Kratos has also made progress on its Unmanned Combat Aerial
System (UCAS) initiative, with the Company just recently beginning production
on three new UCAS aircraft in conjunction with the Company's sponsor. Initial
test flights for this platform are currently scheduled for the second half of
2015. The Company has also recently been informed that a certain National
Security related agency with which Kratos has been in discussions has
presented an additional new opportunity for a Kratos UAS platform the Company
is now pursuing.

In the first quarter of 2014, the Company continued an elevated internal
research, development (IR&D) and other investment effort and spend related to
its UCAS and UAS programs and initiatives and certain new Electronic Warfare,
Radar and Satellite Communication programs, many in conjunction with the
Company's customers, with the objective of the Company's products being
"designed in" to these important, new, large, long-term program opportunities.
As previously communicated, Kratos expects to incur significant IR&D in the
second quarter of fiscal 2014 on these programs, with a lower IR&D spend
planned for the second half of the year.

In the first quarter of fiscal 2014, and as previously communicated, Kratos
continued to "right size" and restructure the business and certain of its
operations in response to the Department of Defense (DoD) budgetary
environment, the DoD's current and expected future priorities, including an
emphasis on higher technology, lower cost products and solutions, the
Company's contracting government services business, and the shift in DoD
funding toward strategic national security programs and platforms.
Accordingly, in the first quarter the Company's employee headcount declined by
approximately 120 personnel, with reductions in related fringe benefits,
communications, travel, facility utilization and certain other overhead costs.
The Company intends to continue to aggressively manage its cost structure
throughout 2014, including a previously acquired company's headquarters
facility lease, which is expiring later this year and will not be renewed,
thereby increasing Kratos' future free cash flow. Certain other cost savings
actions and reductions are also currently planned.

The Company today affirmed its previously communicated full year fiscal 2014
financial guidance of Revenues of $920 million to $980 million, Adjusted
EBITDA of $93 to $106 million, and Free Cash Flow of $25 to $40 million.
Revenues and Adjusted EBITDA are expected to increase and ramp throughout
2014, due primarily to: (a) The effect of limited U.S. Federal or DoD budget
clarity and extended Continuing Resolution Authorizations (CRA) throughout
fiscal 2013, which significantly impacted and delayed expected contract awards
and orders, thereby adversely impacting first half 2014 revenues and Adjusted
EBITDA. (b) The receipt of previously delayed 2014 production orders on
several of the Company's largest programs, including Trident, EA-18G, a
certain missile program and a large confidential program, with product
deliveries and related revenue expected to ramp throughout 2014. (c) Kratos'
beginning work in the second quarter of 2014 on a new, $450 million, five-year
plus options, single award Missile Defense Agency (MDA) contract, on which
Kratos is a key team member. (d) KPSS, which is forecasting 2014 organic
revenue growth of 5% to 10% based on current backlog and bid and proposal
opportunities, including an expected sequential revenue decline from Q4 2013
to Q1 2014 and an expected revenue increase throughout the balance of fiscal
2014 as certain large security system deployments conclude in the first
quarter and new programs, many of which have recently been awarded, begin. (e)
Approximately $18 million to $25 million in IR&D expense and other
discretionary internally funded investments by the Company, with the first
half of 2014's currently forecasted internally funded investment spend
expected to be significantly higher than the second half of 2014, as the
Company pursues large new opportunities in the UAS, UCAS, electronic warfare,
radar, signal processing, and satellite communication areas.

(in Millions)
               (Actual) Guidance
               March 30 June 30     September 30 December 31 Full Year
Revenue         $200     $220 - $235 $240 - $265  $260 - $280 $920 - $980
Adjusted EBITDA $17      $18 - $22   $28 - $32    $30 - $35   $93 - $106

Eric DeMarco, Kratos' President & CEO, said, "Since we reported our fourth
quarter results in March, we have made solid progress with certain of our most
important initiatives -- unmanned aerial drone and combat systems -- including
recent successful test flights of our newest high performance aircraft.We are
making significant internally funded investments in the unmanned area, as
these are large potential mid- and long-term growth opportunities for our
Company.Also significantly, an additional U.S. Government agency with which
we have been in discussions recently indicated the potential of a new
opportunity with one of our unmanned aerial drone system platforms, which we
are currently exploring.Additionally, over the past several months, we have
received important aircraft and command and control system contract awards in
the unmanned aerial and ground vehicle areas, where we are an industry leader,
with unmanned systems products and solutions representing approximately 20
percent of Kratos' business today."

Mr. DeMarco continued, "Unmanned systems, the electromagnetic spectrum,
missile systems, radars, signal intelligence, satellite communications and ISR
are the long-term opportunity areas for Kratos -- areas where we are
strategically focused and making significant investments.Successful execution
in these areas is very important to Kratos' long-term strategic plan, as we
strive to grow our Company's core technology and intellectual property
offerings and achieve "designed in" positions on critical national security

Mr. DeMarco concluded, "Kratos' PSS business opportunity pipeline is the
strongest that it has ever been, and beginning in the second quarter, we
expect solid organic growth from this business, continuing throughout the
balance of the year.Additionally, contract awards, bookings and opportunities
in our Federal Government business have been strengthening since the beginning
of the year, and we expect sequential growth in this business beginning in the
second quarter and continuing throughout 2014.Accordingly, as we believe that
we are well aligned with U.S. National Security priority areas, we are focused
internally with no further acquisitions contemplated.For 2014, Kratos'
objectives remain the continued aggressive management of our cost structure,
the achievement of our financial forecast and most importantly our Adjusted
EBITDA and operating cash flow, a reduction in accounts receivable DSOs, the
generation of solid free cash flow, and the reduction of our net debt and

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 31387804. 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.

AboutKratos Defense & Security Solutions

Kratos Defense & Security Solutions, Inc.(Nasdaq:KTOS) is a specialized
National Security technology business providing mission critical products,
solutions and services 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, cyber security, information
assurance, and critical infrastructure security.Kratoshas primarily an
engineering and technically oriented work force of approximately 3,700.
Substantially all 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

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
to our business and financial results related to the reductions and other
spending constraints imposed on the U.S. Government and our other customers,
including as a result of sequestration, the Federal budget deficit and Federal
government shut-downs; risks of adverse regulatory action or litigation; risks
associated with debt leverage and our ability to refinance our debt on
favorable terms, or at all, including the timing and expected cost savings and
cash flow improvements anticipated to result from a potential refinancing of
our outstanding senior notes; 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 related to
failure of our products or services; risks of our subcontractors' or
suppliers' failure to perform their contractual obligations, including the
appearance of counterfeit or corrupt 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
withdivestiture of 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; risks and costs associated with our potential senior notes
refinancing, which may not be completedon terms and conditions as favorable
as we expect or which may not be completed at all due to adverse market
conditions, changes in our business, or other reasons; 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 29, 2013, 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, stock compensation expense, restructuring related items and other,
unused office space expense and contract design retrofit costs and other, less
the estimated tax cash payments), Adjusted EBITDA (which excludes losses from
discontinued operations, acquisition related items, restructuring related
items and other, stock compensation expense, unused office space expense,
contract design retrofit costs and other 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 30, March 31,
                                                          2014      2013
Service revenues                                           $100.6  $115.5
Product sales                                              99.5     137.3
Total revenues                                             200.1    252.8
Cost of service revenues                                   74.1     88.2
Cost of product sales                                      73.4     98.9
Total costs                                                147.5    187.1
Gross profit - services                                    26.5     27.3
Gross profit - products                                    26.1     38.4
Total gross profit                                         52.6     65.7
Selling, general and administrative expenses               37.0     38.9
Restructuring and acquisition related items and other      0.5      0.1
Research and development expenses                          5.2      4.9
Unused office space expense and other                      0.2      --
Depreciation                                               0.8      1.0
Amortization of intangible assets                          5.6      9.3
Operating income (loss)                                    3.3      11.5
Interest expense, net                                      (16.1)   (16.2)
Other income (expense), net                                0.2      (0.7)
Loss from continuing operations before income taxes        (12.6)   (5.4)
Provision for income taxes                                 2.3      2.8
Loss from continuing operations                            (14.9)   (8.2)
Income (loss) from discontinued operations, net of taxes   (0.1)    (2.1)
Net loss                                                   $(15.0) $(10.3)
Basic and diluted loss per common share:                            
Loss from continuing operations                            $(0.26) $(0.14)
Income (loss) from discontinued operations, net of taxes   --      (0.04)
Net loss                                                   $(0.26) $(0.18)
Weighted average common shares outstanding                          
Basic and diluted                                          57.4     56.6
Adjusted EBITDA (1)                                        $17.1   $27.0
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, contract design
retrofit costs and restructuring and acquisition related
items and other.
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                 
                                                          Three Months Ended
                                                          March 30, March 31,
                                                          2014      2013
Net loss                                                   $(15.0) $(10.3)
(Income) loss from discontinued operations                 0.1      2.1
Restructuring and acquisition related items, excess        1.0      0.1
capacity and other
Interest expense, net                                      16.1     16.2
Contract design retrofit costs                             1.0      --
Provision for income taxes                                 2.3      2.8
Depreciation *                                             4.0      4.9
Stock compensation                                         1.8      1.9
Unused office space expense and other                      0.2      --
Amortization of intangible assets                          5.6      9.3
Adjusted EBITDA                                            $17.1   $27.0
* Includes depreciation reported in cost of service                 
revenues and product sales.
Reconciliation of restructuring and acquisition related             
items and other included in Adjusted EBITDA:
                                                          Three Months Ended
                                                          March 30, March 31,
                                                          2014      2013
Acquisition and transaction related items                  $--     $0.1
Excess capacity and restructuring costs                    1.0      --
                                                          $1.0    $0.1

Kratos Defense & Security Solutions
Unaudited Segment Data
(in millions)
                                   Three Months Ended
                                   March 30,     March 31,
                                   2014          2013
Government Solutions                $151.2      $202.2
Public Safety & Security            48.9         50.6
Total revenues                      $200.1      $252.8
Operating income (loss) from                     
continuing operations:
Government Solutions                $4.1        $12.2
Public Safety & Security            1.0          1.2
Other activities                    (1.8)        (1.9)
Total operating income from         $3.3        $11.5
continuing operations
Note: Other activities in the three months ended March 30, 2014 and March 31,
2013 include restructuring, excess capacity, and acquisition expenses of $1.0
million and $0.1 million,
Reconciliation of consolidated
Adjusted EBITDA to Adjusted EBITDA               
by segment is as follows:
                                   Three Months Ended
                                   March 30,     March 31,
                                   2014          2013
KGS                                 $15.4       $24.7
% of revenue                        10.2%         12.2%
PSS                                 1.7          2.3
% of revenue                        3.5%          4.5%
Total                               $17.1       $27.0
% of revenue                        8.5%          10.7%

Kratos Defense & Security Solutions
Unaudited Condensed Consolidated Balance Sheet
(in millions)
                                                      As of
                                                      March 30,  December 29,
                                                      2014       2013
Current assets:                                                  
Cash and cash equivalents                              $53.6    $55.7
Restricted cash                                        5.0       5.0
Accounts receivable, net                               248.0     265.8
Inventoried costs                                      81.1      74.6
Prepaid expenses                                       10.8      10.4
Other current assets                                   14.8      18.8
Total current assets                                   413.3     430.3
Property, plant and equipment, net                     84.0      84.8
Goodwill                                               596.4     596.4
Intangible assets, net                                 64.3      69.9
Other assets                                           38.4      35.2
Total assets                                           $1,196.4 $1,216.6
Liabilities and Stockholders' Equity                             
Current liabilities:                                             
Accounts payable                                       $48.2    $61.9
Accrued expenses                                       41.1      46.2
Accrued compensation                                   38.7      44.9
Accrued interest                                       20.8      5.2
Billings in excess of costs and earnings on            54.5      52.5
uncompleted contracts
Deferred income tax liability                          28.4      28.4
Other current liabilities                              12.4      11.9
Total current liabilities                              244.1     251.0
Long-term debt principal, net of current portion       628.5     628.8
Long-term debt premium                                 13.5      14.5
Other long-term liabilities                            26.2      26.5
Total liabilities                                      912.3     920.8
Commitments and contingencies                                    
Stockholders' equity:                                            
Common stock                                           --        --
Additional paid-in capital                             859.5     856.0
Accumulated other comprehensive loss                   (0.9)     (0.8)
Accumulated deficit                                    (574.5)   (559.4)
Total stockholders' equity                             284.1     295.8
Total liabilities and stockholders' equity             $1,196.4 $1,216.6

Kratos Defense & Security Solutions
Unaudited Condensed Consolidated Statement of Cash Flows
(in millions)
                                                          Three Months Ended
                                                          March 30, March 31,
                                                          2014      2013
Operating activities:                                               
Net loss                                                   $(15.0) $(10.3)
Less: Loss from discontinued operations                    (0.1)    (2.1)
Loss from continuing operations                            (14.9)   (8.2)
Adjustments to reconcile loss from continuing operations
to net cash provided by operating activities from                   
continuing operations:
Depreciation and amortization                              9.6      14.2
Stock‑based compensation                                   1.8      1.9
Change in unused office space accrual                      0.2      --
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      0.1
Changes in assets and liabilities, net of acquisitions:             
Accounts receivable                                        17.8     (9.8)
Inventoried costs                                          (6.7)    6.3
Prepaid expenses and other assets                          2.2      --
Accounts payable                                           (13.7)   (12.0)
Accrued compensation                                       (6.3)    (4.3)
Accrued expenses                                           (5.2)    (4.7)
Accrued interest payable                                   15.6     15.3
Billings in excess of costs and earnings on uncompleted    (0.1)    4.9
Income tax receivable and payable                          1.8      2.9
Other liabilities                                          (0.8)    (1.8)
Net cash provided by operating activities from continuing  1.7      5.1
Investing activities:                                               
Cash paid for acquisitions, net of cash acquired           (1.6)    1.2
Decrease in restricted cash                                --       0.2
Capital expenditures                                       (3.1)    (3.3)
Net cash used in investing activities from continuing      (4.7)    (1.9)
Financing activities:                                               
Repayment of debt                                          (0.2)    (0.3)
Other                                                      1.6      (0.2)
Net cash (used) provided by financing activities from      1.4      (0.5)
continuing operations
Net cash flows from continuing operations                  (1.6)    2.7
Net operating cash flows from discontinued operations      (0.5)    0.2
Effect of exchange rate changes on cash and cash           --       (0.3)
Net increase (decrease) in cash and cash equivalents       (2.1)    2.6
Cash and cash equivalents at beginning of period           55.7     49.0
Cash and cash equivalents at end of period                 $53.6   $51.6

Kratos Defense & Security Solutions
Unaudited Non-GAAP Measures
Adjusted Earnings Before Amortization and Acquisition Related Expenses and
Other Items
(in millions, except per share data)
                                                          Three Months Ended
                                                          March 30, March 31,
                                                          2014      2013
Loss from continuing operations before taxes               $(12.6) $(5.4)
Add: Amortization of intangible assets                     5.6      9.3
Add: Stock compensation                                    1.8      1.9
Add: Unused office space expense and other                 0.2      --
Add: Contract design retrofit costs                        1.0      --
Add: Restructuring and acquisition related items and other 1.0      0.1
Adjusted income from continuing operations before income   (3.0)    5.9
Estimated cash tax provision                               0.7      0.8
Adjusted income from continuing operations before          $(3.7)  $5.1
acquisition and amortization expenses
Diluted income per common share:                                    
Adjusted income from continuing operations                 $(0.06) $0.09
Weighted average common shares outstanding                          
Diluted                                                    57.4     56.6

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

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