GlobeNewswire Inc | Aug 3, 2021 04:00PM EDT

August 03, 2021

Second Quarter Revenues of $205.1 Million, Increased 20.4 percent over Second Quarter 2020

Second Quarter Unmanned Systems Segment Revenues of $60.3 Million, Increased 43.6 percent over Second Quarter 2020

Second Quarter KGS Segment Revenues of $144.8 Million, Increased 12.8 percent over Second Quarter 2020

Second Quarter 2021 Book to Bill Ratio of 0.9 to 1Last Twelve Months Ended June 27, 2021 Book to Bill Ratio of 1.2 to 1

SAN DIEGO, Aug. 03, 2021 (GLOBE NEWSWIRE) -- Kratos Defense & Security Solutions, Inc. (Nasdaq:KTOS), a leading National Security Solutions provider, today reported its second quarter 2021 financial results. For the second quarter of 2021, Kratos reported Revenues of $205.1 million, Operating Income of $3.3 million, Net Income of $1.1 million and Adjusted EBITDA of $17.6 million. Included in Kratos second quarter 2021 Adjusted EBITDA is approximately $0.4 million of a negative foreign exchange impact resulting from an increased Shekel value against the U.S. Dollar in Kratos Israeli-based microwave business. Without this adverse transaction exchange impact, second quarter 2021 Adjusted EBITDA would have been $18.0 million. For the second quarter of 2021, internally funded Research and Development expense increased $4.2 million over the second quarter of 2020 and increased $2.2 million sequentially over the first quarter of 2021.

Second quarter 2021 Revenues of $205.1 million increased 20.4 percent, as compared to Revenues of $170.4 million in the second quarter of 2020, reflecting organic growth in Kratos Unmanned Systems, Space, Satellite and Cyber, Rocket Support Systems and Microwave Electronics businesses, offset partially by certain reductions, including in our Training Solutions business, resulting primarily from a previously disclosed reduction in scope of certain international contracts.

Revenue grew organically 12.3 percent in the second quarter of 2021 as compared to the second quarter of 2020, excluding the impact of the ASC Signal, TDI and 5D acquisitions which contributed approximately $13.8 million. Revenue grew organically 15.9 percent in the second quarter of 2021 on a proforma basis, excluding the impact of the acquisitions and the reduction of the international training contracts of approximately $4.7 million.

Operating Income of $3.3 million in the second quarter of 2021 increased from $2.9 million in the second quarter of 2020, with second quarter 2021 Operating Income including increases in non-cash stock-based compensation expense of $1.8 million and R&D of $4.2 million over the second quarter of 2020. Second Quarter 2021 Adjusted EBITDA of $17.6 million increased 15.0 percent, as compared to $15.3 million in the second quarter of 2020, primarily reflecting the increase in revenues.

Second quarter 2021 Cash Flow Used from Operations was $0.7 million, and Free Cash Flow Used from Operations was $11.6 million, after funding $10.9 million of capital expenditures, including in our high growth Unmanned Systems and Space and Satellite business areas. For the six months ended June 27, 2021, Cash Flow Generated from Operations was $22.0 million, and Free Cash Flow Generated from Operations was $1.5 million, after funding $20.5 million of capital expenditures. Cash on hand at June 27, 2021 was $369.3 million. Kratos reported second quarter 2021 Net Income of $1.1 million, and GAAP EPS income of $0.01, compared to Net Loss of $0.7 million and GAAP EPS loss of $0.01 for the second quarter of 2020. Adjusted EPS was $0.06 for the second quarter of 2021 compared to $0.05 for the second quarter of 2020. The Company has approximately $280 million of net operating loss carryforwards, which are expected to substantially shield Kratos from paying future cash income taxes.

For the second quarter of 2021, Kratos Unmanned Systems Segment (KUS) Revenues of $60.3 million increased 43.6 percent, as compared to $42.0 million in the second quarter of 2020, and KUS operating income increased by 310.0 percent, to $4.1 million in the second quarter of 2021 from $1.0 million in the second quarter of 2020.

Second quarter 2021 KUS Adjusted EBITDA of $6.9 million increased 130.0 percent, as compared to second quarter 2020 Adjusted EBITDA of $3.0 million, primarily reflecting increases in certain tactical and target drone programs and financial leverage achieved on the KUS fixed manufacturing, overhead, general and administrative cost structure as production increases, offset by certain development programs, including in the tactical drone area, which typically generate lower margins.

KUSs book-to-bill ratio for the second quarter of 2021 was 0.4 to 1.0 and 1.0 to 1.0 for the last twelve months ended June 27, 2021, with bookings of $227.4 million for the twelve months ended June 27, 2021. Total backlog for KUS at the end of the second quarter of 2021 was $185.4 million, down from $222.4 million at the end of the first quarter of 2021, and up from $175.7 million at the end of the second quarter of 2020.

For the second quarter of 2021, Kratos Government Solutions Segment (KGS) reported Revenues of $144.8 million, an increase of 12.8 percent, as compared to revenues of $128.4 million in the second quarter of 2020, and operating income of $5.9 million, down from operating income of $7.7 million in the second quarter of 2020, primarily reflecting a less favorable revenue mix, including an increase in new development-type programs. Revenues in the second quarter of 2021 included organic growth in our Space, Satellite and Cyber, Rocket Support Systems and Microwave Products businesses, and $11.8 million from the ASC Signal acquisition, partially offset by reductions of approximately $4.7 million in our Training Solutions business, resulting primarily from the previously disclosed scope reductions in certain international programs.

Kratos Space, Satellite and Cyber business generated Revenues of $67.4 million in the second quarter of 2021, an increase of 35.9 percent over the second quarter of 2020 Revenues of $49.6 million. Excluding ASC, our Space, Satellite and Cyber business Revenues grew 12.1 percent organically. Second quarter 2021 KGS Adjusted EBITDA of $10.7 million was down from second quarter 2020 Adjusted EBITDA of $12.3 million, primarily reflecting a less favorable mix of revenues and increased investments in R&D expenses of approximately $4.2 million, which were primarily incurred in the Space and Satellite business.

For the second quarter of 2021, KGS reported a book-to-bill ratio of 1.1 to 1.0, including a book-to-bill ratio of 1.3 to 1.0 in Kratos Space, Satellite, Cyber and Training Solutions businesses. For the twelve months ended June 27, 2021, KGS reported a book to bill ratio of 1.2 to 1.0, with bookings of $726.0 million for the twelve months ended June 27, 2021. KGSs total backlog at the end of the second quarter of 2021 was $680.2 million, up from $670.5 million at the end of the first quarter of 2021, and up from $542.8 million at the end of the second quarter of 2020.

For the second quarter of 2021, Kratos reported consolidated bookings of $177.8 million and a book-to-bill ratio of 0.9 to 1.0, with consolidated bookings of $953.4 million and a book-to-bill ratio of 1.2 to 1.0 for the last twelve months ended June 27, 2021. Backlog at June 27, 2021 was $865.6 million, down sequentially from $892.9 million at March 28, 2021 and up from $683.4 million at June 26, 2020, and Kratos bid and proposal pipeline was $9.0 billion at June 27, 2021. Backlog at June 27, 2021 was comprised of funded backlog of $630.6 million and unfunded backlog of $235.0 million.

Eric DeMarco, Kratos President and CEO, said, Since our last report to you, Kratos UTAP-22 Mako jet drone successfully flew the Skyborg Autonomy Core System (ACS), which included Kratos Mako being the closest unmanned aircraft to fly with a manned fighter, an F-16 Falcon, in the history of aviation. Skyborg program related systems and payloads are now being integrated onto the first two Valkyries from our Oklahoma manufacturing line from the initial 12 Lot currently in production, with additional Skyborg and other program tactical drone flights, including Gremlins and Air Wolf, scheduled for the second half of this year. We believe that Kratos suite of Unmanned Systems, those flying today and new systems that are coming from our Ghost Works, will be transformational for our customers and our Company, as we continue to integrate various relevant payloads and systems, increasing our market leading position and progressing towards fielding and initial operating capability.

Mr. DeMarco continued, In Kratos space and satellite business, our new software-based OpenSpace and virtualized products are experiencing significant customer penetration and acceptance, including record bookings with approximately 30 customers year to date. We are forecasting an extremely strong second half of 2021 for this business, most notably for the fourth quarter, including significant margin expansion, with this growth trajectory expected to further accelerate into 2022.

Mr. DeMarco concluded, Our strategy is to be first to market, with the right products, at an affordable cost, at the right time. We are focused on exceeding our customers expectations with new, innovative, and disruptive technology and systems and driving significant organic growth and returns for our stakeholders. Financial Guidance

We are providing our third quarter 2021 guidance and reaffirming our previously provided full year 2021 Revenue, Adjusted EBITDA and Cash Flow guidance as follows:

$M Q321 FY21Revenues $195 - $205 $810 - $850R&D $9 - $10 $38 - $40Operating Income $2 - $5 $27 - $33Depreciation $5 - $6 $21 - $22Amortization $2 - $3 $6 - $7Stock Based Compensation $6 - $7 $25 - $26Adjusted EBITDA $16 - $20 $81 - $87Operating Cash Flow $23- $28Capital Expenditures $58 - $63Free Cash Flow Use ($30 - $40)

The third quarter and full year 2021 estimated Revenues and operating performance reflects the expected hardware, product and software mix based on current shipment and execution schedules. The third quarter and full year 2021 estimated Revenues also include the impact of the recent loss of a large international training contract, which contributed approximately $34.5 million to the Companys full year 2020 Revenues. Our full year 2021 guidance range includes our current forecasted business mix, and our most recent assumptions of the expected impact of COVID-19, of which Kratos experienced increased employee cases at the end of 2020, which continued into July 2021, including in California, Florida and Oklahoma and in certain of our drone, space and satellite, turbine and C5ISR locations, and recent supplier delays. In addition, estimated third quarter and full year 2021 Operating Income and Adjusted EBITDA reflect the expected mix of development-type contracts and expected investments, primarily in our Space and Satellite, Unmanned, C5ISR and Engine businesses, where we have received or are pursuing a number of large opportunities, including Ground Based Strategic Deterrent (GBSD), Over Head Persistent Infrared (OPIR) and Skyborg.

The full year 2021 estimated Operating Cash Flow includes approximately $10 million of planned investments in our Rocket Support Systems and Engine businesses for new products, including in the Hypersonic area, and to increase Kratos market share, as well as approximately $5 million of the required payback of the 2020 deferred employer related payroll taxes. The 2021 capital expenditure forecast currently includes expected outlays of $20 to $25 million associated with the continued production of Valkyrie aircraft prior to receipt of expected customer award(s); therefore, these aircraft are currently reflected as Company-owned assets until receipt of the related customer award(s). Kratos will adjust the forecasted capital expenditure outlays and the ultimate balance sheet classification of these investments once expected customer orders and the nature of the contract terms can be determined. In addition, the capital expenditure forecast includes investments in the Companys Space and Satellite business secure facilities and the Company-owned space domain awareness network, capital investments related to the recent GBSD award, and investments related to the Companys Turbine and Rocket Support Systems businesses.

Management will discuss the Companys second quarter 2021 financial results, as well as its third quarter and full year 2021 guidance on 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, and referencing the call by ID number 4751019. The general public may access the conference call by dialing (877) 344-3935 or on the day of the event by visiting www.kratosdefense.comfor 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 SolutionsKratos Defense & Security Solutions, Inc.(NASDAQ:KTOS) develops and fields transformative, affordable technology, platforms, and systems for United States National Security related customers, allies,and commercial enterprises. Kratosis changing the way breakthrough technologies for these industries are rapidly brought to market through proven commercial and venture capital backed approaches, including proactive research, and streamlined development processes. At Kratos, affordability is a technology, and wespecialize in unmanned systems, satellite communications, cyber security/warfare, microwave electronics, missile defense, hypersonic systems, training and combat systems and next generation turbo jet and turbo fan engine development. For more information go to www.kratosdefense.com.

Notice RegardingForward-LookingStatementsThis news release contains certain forward-looking statements that involve risks and uncertainties, including, without limitation, express or implied statements concerning the Companys expectations regarding its future financial performance, including the Companys expectations for its third quarter and full year 2021 revenue, R&D, operating income, depreciation, amortization, stock based compensation expense, and Adjusted EBITDA, and full year 2021 operating cash flow, capital expenditures and other investments, and free cash flow, the Companys future growth trajectory and ability to achieve improved revenue mix and profit in certain of its business segments and the expected timing of such profit, the Companys expectation of ramp on projects and that investments in its business will result in an increase in the Companys market share and total addressable market and position the Company for significant future organic growth, profitability, cash flow and shareholder value, the Companys bid and proposal pipeline, demand for its products and services, including the Companys alignment with todays National Security requirements, ability to successfully compete in the tactical unmanned aerial system area and expected new customer awards, including the magnitude and timing of funding and expected contract awards related to the Companys Valkyrie program and other new tactical unmanned programs, performance of key contracts and programs, including the timing of production and demonstration related to certain of the Companys contracts and product offerings, the impact of the Companys restructuring efforts and cost reduction measures, including its ability to improve profitability and cash flow in certain business units as a result of these actions, benefits to be realized from the Companys net operating loss carry forwards, the availability and timing of government funding for the Companys offerings, including the strength of the future funding environment, the short-term delays that may occur as a result of Continuing Resolutions or delays in DoD budget approvals, timing of LRIP and full rate production related to the Companys unmanned aerial target system offerings, as well as the level of recurring revenues expected to be generated by these programs once they achieve full rate production, market and industry developments, and the current estimated impact of COVID-19 on our financial projections, industry, business and operations, including projected growth. Such statements are only predictions, and the Companys actual results may differ materially from the results expressed or implied by these statements. 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 Companys 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 and extended continuing resolutions, the Federal budget deficit and Federal government shut-downs; risks of adverse regulatory action or litigation; risks associated with debt leverage and cost savings and cash flow improvements expected as a result of the refinancing of our 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. DoD may occur, which could cause delays or cancellations of key government contracts; risks of delays to or the cancellation of our projects as a result of protest actions submitted by our competitors; 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, as amended); risks that the UAS and UGS markets do not experience significant growth; risks that we cannot expand our customer base or that our products do not achieve broad acceptance which could impact our ability to achieve our anticipated level of growth; 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 related to the new DoD Cybersecurity Maturity Model Certification (CMMC); risks relating to contract performance; risks related to failure of our products or services; risks associated with 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 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 we may be required to record valuation allowances on our net operating losses which could adversely impact our profitability and financial condition; risks that the current economic environment will adversely impact our business; currently unforeseen risks associated with COVID-19 and risks related to natural disasters or severe weather. These and other risk factors are more fully discussed in the Companys Annual Report on Form 10-K for the period ended December 27, 2020, and in our other filings made with the Securities and Exchange Commission.

Note Regarding Use of Non-GAAP Financial Measures and Other Performance Metrics

This news release contains non-GAAP financial measures, including Adjusted earnings per share (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 and foreign transaction gains and losses, less the estimated impact to income taxes) and including 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 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 Companys available capital resources, the actual and forecasted operating performance of the Companys business and the Companys 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 Companys management uses these non-GAAP financial measures along with the most directly comparable GAAP financial measures in evaluating the Companys 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 Companys 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 Companys 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 Companys 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 White858-812-7302 Direct

Investor Information:877-934-4687investor@kratosdefense.com

Kratos Defense & Security Solutions, Inc. Unaudited Condensed Consolidated Statements of Operations (in millions, except per share data) Three Months Ended Six Months Ended June 27, June 28, June 27, June 28, 2021 2020 2021 2020 Service revenues $ 58.0 $ 62.9 $ 115.3 $ 126.5 Product sales 147.1 107.5 284.0 212.8 Total revenues 205.1 170.4 399.3 339.3 Cost of service 41.3 46.2 83.8 91.4 revenuesCost of product sales 111.8 78.2 212.5 156.1 Total costs 153.1 124.4 296.3 247.5 Gross profit - service 16.7 16.7 31.5 35.1 revenuesGross profit - product 35.3 29.3 71.5 56.7 sales Total gross profit 52.0 46.0 103.0 91.8 Selling, general and 35.6 32.7 70.9 64.2 administrative expensesAcquisition andrestructuring related 0.3 1.1 0.5 1.6 itemsResearch and 10.2 6.0 18.2 11.7 development expensesDepreciation 1.4 1.5 2.6 3.0 Amortization of 1.2 1.8 2.6 3.7 intangible assetsOperating income 3.3 2.9 8.2 7.6 Interest expense, net (5.7 ) (5.6 ) (11.6 ) (11.0 ) Other income (expense), - 0.3 0.2 (0.2 ) netLoss from continuingoperations before (2.4 ) (2.4 ) (3.2 ) (3.6 ) income taxesBenefit for incometaxes from continuing (3.6 ) (1.8 ) (6.3 ) (3.2 ) operationsIncome (loss) from 1.2 (0.6 ) 3.1 (0.4 ) continuing operationsLoss from discontinuedoperations, net of (0.3 ) (0.2 ) (0.3 ) (0.6 ) income taxesNet income (loss) 0.9 (0.8 ) 2.8 (1.0 ) Less: Net lossattributable to (0.2 ) (0.1 ) (0.2 ) (0.1 ) noncontrolling interestNet income (loss) $ 1.1 $ (0.7 ) $ 3.0 $ (0.9 ) attributable to Kratos Basic income (loss) percommon share attributable to Kratos:Income (loss) from $ 0.01 $ (0.01 ) $ 0.02 $ - continuing operationsLoss from - - - (0.01 ) discontinued operationsNet income (loss) 0.01 $ (0.01 ) $ 0.02 $ (0.01 ) Diluted income (loss)per common share attributable to Kratos:Income (loss) from $ 0.01 $ (0.01 ) $ 0.02 $ - continuing operationsLoss from - - - (0.01 ) discontinued operationsNet income (loss) $ 0.01 $ (0.01 ) $ 0.02 $ (0.01 ) Weighted average common shares outstanding:Basic weightedaverage common shares 124.7 108.3 124.4 107.8 outstandingDiluted weightedaverage common shares 127.7 108.3 127.8 107.8 outstanding Adjusted EBITDA (1) $ 17.6 $ 15.3 $ 35.7 $ 31.6 UnauditedReconciliation of GAAP to Non-GAAP Measures Note: (1) Adjusted EBITDA is a non-GAAP measure defined as GAAPnet income (loss) attributable to Kratos adjusted for net income (loss)attributable to noncontrolling interest, income (loss) fromdiscontinued operations, net interest expense, provision for income taxes, depreciation andamortization expense of intangible assets,amortization of capitalized contract and development costs, stock-based compensation,acquisition andrestructuring relateditems and other, and foreign transactiongain (loss). Adjusted EBITDA as calculated by us may becalculated differently than Adjusted EBITDA for other companies. We have providedAdjusted EBITDA because we believe it is a commonly usedmeasure of financial performance in comparable companies and is provided tohelp investors evaluate companies on a consistent basis, aswell as to enhance understanding of our operating results. Adjusted EBITDAshould not be construed as either an alternative to net incomeor as an indicator of our operating performance or an alternative to cash flowsas a measure of liquidity. The adjustments to calculate thisnon-GAAP financial measure and the basis for such adjustments are outlined below.Please refer to the following tablebelow that reconciles GAAP net income (loss) to Adjusted EBITDA. The adjustments to calculate this non-GAAPfinancial measure, and the basis for such adjustments, are outlined below: Interest income and interest expense, net. The Company receives interestincome on investments and incurs interest expense on loans, capital leases andother financing arrangements, including the amortization of issue discounts and deferred financing costs. These amounts may vary from period to perioddue to changes in cash and debt balances. Income taxes. The Company's tax expense can fluctuatematerially from period to period due to tax adjustments that may not be directly related tounderlying operating performance or to the current period ofoperations and may not necessarily reflect the impact of utilization of our NOLs. Depreciation. The Company incurs depreciation expense (recordedin cost of revenues and in operating expenses) related to capital assets purchased,leased or constructed to support the ongoing operations of the business. Theassets are recorded at cost or fair value and are depreciated over the estimateduseful lives of individual assets. Amortization of intangible assets. The Company incurs amortization ofintangible expense related to acquisitions it has made. These intangible assets arevalued at the time ofacquisition and are amortized over theestimated useful lives. Amortization of capitalized contract and development costs. TheCompany incurs amortization of previously capitalized software development and non-recurring engineering costs related to certain targets in itsUnmanned Systems and ballistic missile target businesses as these units are sold. Stock-based compensation expense. The Company incurs expenserelated to stock-based compensation included in its GAAP presentation of selling,general and administrative expense. Although stock-basedcompensation is an expense of the Company and viewed as a form of compensation, theseexpenses vary in amount from period to period, and are affected by marketforces that are difficult to predict and are not within the control of management,such as the market price and volatility of the Company'sshares, risk-free interest rates and the expected term and forfeiture rates of the awards.Management believes that exclusion of these expenses allowscomparison of operating results to those of other companies that disclose non-GAAPfinancial measures thatexclude stock-based compensation. Foreign transaction (gain) loss. The Company incurs transactiongains and losses related to transactions with foreign customers in currencies other thanthe U.S. dollar. In addition, certain intercompany transactionscan give rise to realized and unrealized foreign currency gains and losses. Acquisition and transaction related items. The Company incurs transactionrelated costs, such as legal and accounting fees and other expenses, related toacquisitions and divestiture activities. Management believesthese items are outside the normal operations of the Company's business and are notindicative of ongoing operating results. Restructuring costs. The Company incursrestructuring costs for cost reduction actions which include employee termination costs,facility shut-down related costs and remaining lease commitmentcosts for excess or exited facilities. Management believes that these costs are notindicative of ongoing operating results as they are eithernon-recurring and/or not expected when full capacity and volumes are achieved. Legal related items. The Company incurs costs related topending legal settlements and other legal related matters. Management believesthese items are outside the normal operationsof the Company's business and are not indicative of ongoing operating results. Adjusted EBITDA is a non-GAAP financial measure and should notbe considered in isolation or as a substitute for financial information provided inaccordance with GAAP. This non-GAAP financial measure may notbe computed in the same manner as similarly titled measures used by othercompanies. The Company expects to continue to incur expensessimilar to the Adjusted EBITDA financial adjustments described above, and investorsshould not infer from the Company's presentation of thisnon-GAAP financial measure that these costs are unusual, infrequent, or non-recurring. Reconciliation of Netincome attributable to Kratos to AdjustedEBITDA is as follows: Three Months Ended Six Months Ended June 27, June 28, June 27, June 28, 2021 2020 2021 2020 Net income (loss) $ 1.1 $ (0.7 ) $ 3.0 $ (0.9 ) attributable to KratosLoss from discontinuedoperations, net of 0.3 0.2 0.3 0.6 income taxesInterest expense, net 5.7 5.6 11.6 11.0 Benefit for incometaxes from continuing (3.6 ) (1.8 ) (6.3 ) (3.2 ) operationsDepreciation (includingcost of service 5.8 4.2 10.7 8.6 revenues and productsales)Stock-based 6.6 4.8 12.8 9.5 compensationForeign transaction 0.1 (0.1 ) 0.2 0.3 (gain) lossAmortization of 1.2 1.8 2.6 3.7 intangible assetsAmortization ofcapitalized contract 0.3 0.3 0.5 0.5 and development costsAcquisition andrestructuring related 0.3 1.1 0.5 1.6 items and otherPlus: Net lossattributable to (0.2 ) (0.1 ) (0.2 ) (0.1 ) noncontrolling interest Adjusted EBITDA $ 17.6 $ 15.3 $ 35.7 $ 31.6 Reconciliation of acquisition andrestructuring related items and other included in Adjusted EBITDA: Three Months Ended Six Months Ended June 27, June 28, June 27, June 28, 2021 2020 2021 2020 Acquisition andtransaction related $ 0.1 $ 1.0 $ 0.3 $ 1.4 itemsRestructuring costs 0.2 0.1 0.2 0.2 $ 0.3 $ 1.1 $ 0.5 $ 1.6 Kratos Defense & Security Solutions, Inc. Unaudited Segment Data (in millions) Three Months Ended Six Months Ended June 27, June 28, June 27, June 28, 2021 2020 2021 2020 Revenues: Unmanned Systems $ 60.3 $ 42.0 $ 116.2 $ 84.0 Kratos Government 144.8 128.4 283.1 255.3 SolutionsTotal revenues $ 205.1 $ 170.4 $ 399.3 $ 339.3 Operating income Unmanned Systems $ 4.1 $ 1.0 $ 8.3 $ 1.5 Kratos Government 5.9 7.7 13.0 17.0 SolutionsUnallocated corporate (6.7 ) (5.8 ) (13.1 ) (10.9 ) expense, netTotal operating income $ 3.3 $ 2.9 $ 8.2 $ 7.6 Note: Unallocated corporate expense, net includes costs for certainstock-based compensation programs (including stock-based compensation costsfor 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 relateditems, corporate costs not allocated to the segments, legal related items,and other miscellaneous corporate activities. Reconciliation ofSegment Operating Income to AdjustedEBITDA is as follows: Three Months Ended Six Months Ended June 27, June 28, June 27, June 28, 2021 2020 2021 2020 Unmanned Systems Operating income $ 4.1 $ 1.0 $ 8.3 $ 1.5 Other income - 0.1 0.1 0.1 Depreciation 2.2 1.4 3.8 3.0 Amortization of 0.3 0.2 0.6 0.2 intangible assetsAmortization ofcapitalized contract 0.3 0.3 0.5 0.5 and development costsAcquisition andrestructuring related - - - - items and otherAdjusted EBITDA $ 6.9 $ 3.0 $ 13.3 $ 5.3 % of revenue 11.4 % 7.1 % 11.4 % 6.3 % Kratos Government SolutionsOperating income $ 5.9 $ 7.7 $ 13.0 $ 17.0 Other income 0.1 0.1 0.3 - Depreciation 3.6 2.8 6.9 5.6 Amortization of 0.9 1.6 2.0 3.5 intangible assetsAmortization ofcapitalized contract - - - - and development costsAcquisition andrestructuring related 0.2 0.1 0.2 0.2 items and otherAdjusted EBITDA $ 10.7 $ 12.3 $ 22.4 $ 26.3 % of revenue 7.4 % 9.6 % 7.9 % 10.3 % Total Adjusted EBITDA $ 17.6 $ 15.3 $ 35.7 $ 31.6 % of revenue 8.6 % 9.0 % 8.9 % 9.3 % Kratos Defense & Security Solutions, Inc. Unaudited Condensed Consolidated Balance Sheets (in millions) June 27, December 27, 2021 2020 Assets Current assets: Cash and cash $ 369.3 $ 380.8 equivalentsRestricted cash - 0.7 Accounts receivable, 265.0 272.3 netInventoried costs 90.7 81.2 Prepaid expenses 13.4 12.0 Other current assets 30.3 17.8 Total current assets 768.7 764.8 Property, plant and 145.5 143.8 equipment, netOperating lease 40.1 42.9 right-of-use assetsGoodwill 483.7 483.9 Intangible assets, net 40.4 43.0 Other assets 83.9 84.4 Total assets $ 1,562.3 $ 1,562.8 Liabilities and Stockholders? EquityCurrent liabilities: Accounts payable $ 59.9 $ 55.4 Accrued expenses 27.2 34.7 Accrued compensation 46.2 48.1 Accrued interest 1.5 1.5 Billings in excess ofcosts and earnings on 43.5 34.0 uncompleted contractsCurrent portion ofoperating lease 9.3 8.9 liabilitiesOther current 11.8 11.9 liabilitiesOther currentliabilities of 2.7 3.1 discontinued operationsTotal current 202.1 197.6 liabilitiesLong-term debt 300.3 301.0 Operating leaseliabilities, net of 35.3 38.6 current portionOther long-term 71.6 83.0 liabilitiesOther long-termliabilities of 2.5 2.5 discontinued operationsTotal liabilities 611.8 622.7 Commitments and contingenciesRedeemable 14.6 14.8 noncontrolling interestStockholders? equity: Additional paid-in 1,563.1 1,556.3 capitalAccumulated other 2.2 1.4 comprehensive lossAccumulated deficit (629.4 ) (632.4 ) Total Kratos 935.9 925.3 stockholders? equityTotal liabilities and $ 1,562.3 $ 1,562.8 stockholders? equity Kratos Defense & Security Solutions, Inc. Unaudited Condensed Consolidated Statements of Cash Flows (in millions) Six Months Ended June 27, June 28, 2021 2020 Operating activities: Net income (loss) $ 2.8 $ (1.0 ) Less: loss from (0.3 ) (0.6 ) discontinued operationsIncome (loss) from 3.1 (0.4 ) continuing operationsAdjustments toreconcile income (loss)from continuingoperations to net cash provided by operatingactivities fromcontinuing operations:Depreciation and 13.3 12.3 amortizationAmortization of lease 4.5 5.3 right-of-use assetsDeferred income taxes (0.9 ) (1.1 ) Stock-based 12.8 9.5 compensationAmortization ofdeferred financing 0.5 0.5 costsProvision for (recovery (0.2 ) 0.2 of) doubtful accountsChanges in assets andliabilities, net of acquisitions:Accounts receivable 15.5 24.7 Unbilled receivables (7.9 ) (6.8 ) Inventoried costs (6.8 ) (4.5 ) Prepaid expenses and (2.2 ) (10.8 ) other assetsOperating lease (4.5 ) (6.0 ) liabilitiesAccounts payable 5.8 (9.1 ) Accrued compensation (1.8 ) 1.4 Accrued expenses (7.5 ) (4.2 ) Accrued interest - - Billings in excess ofcosts and earnings on 9.6 (0.5 ) uncompleted contractsIncome tax receivable (6.1 ) (3.0 ) and payableOther liabilities (5.2 ) 3.3 Net cash provided byoperating activities 22.0 10.8 from continuingoperationsInvesting activities: Cash paid foracquisitions, net of (6.2 ) (15.5 ) cash acquiredCapital expenditures (20.5 ) (14.1 ) Proceeds from sale of - 0.1 assetsNet cash used ininvesting activities (26.7 ) (29.5 ) from continuingoperationsFinancing activities: Payment of long-term - (0.1 ) debtProceeds from theissuance of common - 240.5 stock, net of issuancecostsPayment under finance (0.4 ) (0.3 ) leasesPayments of employeetaxes withheld from (8.5 ) - share-based awardsProceeds from sharesissued under equity 2.5 1.4 plansNet cash provided by(used in) financing (6.4 ) 241.5 activities fromcontinuing operationsNet cash flows from (11.1 ) 222.8 continuing operationsNet operating cashflows of discontinued (0.8 ) 1.7 operationsEffect of exchange ratechanges on cash and (0.3 ) 0.1 cash equivalentsNet increase (decrease)in cash, cash (12.2 ) 224.6 equivalents andrestricted cashCash, cash equivalentsand restricted cash at 381.5 172.6 beginning of periodCash, cash equivalentsand restricted cash at $ 369.3 $ 397.2 end of period 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 incomefrom continuing operations per diluted common share (Adjusted EPS) are non-GAAPmeasures for reporting financial performance and exclude the impact ofcertain items and, therefore, have not been calculated in accordance with GAAP. Managementbelieves that exclusion of these items assists in providing a more completeunderstanding of the Company's underlying continuing operations results andtrends and allowsfor comparability with our peer company index and industry. TheCompany uses these measures along with the corresponding GAAP financial measuresto manage the Company's business and to evaluate itsperformance compared to prior periods and the marketplace. The Company defines adjustedincome from continuing operations before amortization ofintangible assets, depreciation, stock-based compensation, foreign transaction gain/loss, andacquisition and restructuring related items and other. The estimated impactto income taxes includes the impact to the effective tax rate, current tax provision anddeferred tax provision, and excludes the impact of discrete items, includingtransaction related expenses and release of valuation allowance, or benefitrelated to the add-backs.*Adjusted EPS reflects adjustedincome on a per share basis using weighted average diluted sharesoutstanding. The following table reconciles the mostdirectly comparable GAAP financial measures to the non-GAAP financial measures. Three Months Ended Six Months Ended June 27, June 28, June 27, June 28, 2021 2020 2021 2020 Net income (loss) $ 1.1 $ (0.7 ) $ 3.0 $ (0.9 ) attributable to KratosLess: GAAP benefit for (3.6 ) (1.8 ) (6.3 ) (3.2 ) income taxesLess: Net lossattributable to (0.2 ) (0.1 ) (0.2 ) (0.1 ) noncontrolling interestLess: Loss fromdiscontinued 0.3 0.2 0.3 0.6 operations, net ofincome taxesLoss from continuing (2.4 ) (2.4 ) (3.2 ) (3.6 ) operations before taxesAdd: Amortization of 1.2 1.8 2.6 3.7 intangible assetsAdd: Amortization ofcapitalized contract 0.3 0.3 0.5 0.5 and development costsAdd: Depreciation 5.8 4.2 10.7 8.6 Add: Stock-based 6.6 4.8 12.8 9.5 compensationAdd: Foreign 0.1 (0.1 ) 0.2 0.3 transaction (gain) lossAdd: Acquisition andrestructuring related 0.3 1.1 0.5 1.6 items and otherNon-GAAP Adjustedincome from continuing 11.9 9.7 24.1 20.6 operations beforeincome taxesIncome taxes onNon-GAAP measure 4.3 4.0 8.8 8.3 Adjusted income fromcontinuing operations*Non-GAAP Adjusted $ 7.6 $ 5.7 $ 15.3 $ 12.3 net income Diluted earnings per $ 0.01 $ (0.01 ) $ 0.02 $ (0.01 ) common shareLess: GAAP benefit for (0.03 ) (0.02 ) (0.05 ) (0.03 ) income taxesLess: Net lossattributable to - - - - noncontrolling interestLess: Loss fromdiscontinued - - - 0.01 operations, net ofincome taxesAdd: Amortization of 0.01 0.02 0.02 0.03 intangible assetsAdd: Amortization ofcapitalized contract - 0.01 0.01 0.01 and development costsAdd: Depreciation 0.05 0.04 0.08 0.08 Add: Stock-based 0.05 0.04 0.10 0.09 compensationAdd: Foreign - - - - transaction (gain) lossAdd: Acquisition andrestructuring related - 0.01 0.01 0.01 items and otherIncome taxes onNon-GAAP measure (0.03 ) (0.04 ) (0.07 ) (0.08 ) Adjusted income fromcontinuing operations*Adjusted income fromcontinuing operations $ 0.06 $ 0.05 $ 0.12 $ 0.11 per diluted commonshare Weighted averagediluted common shares 127.7 108.3 127.8 107.8 outstanding *The impact to income taxes is calculated by recasting income before incometaxes to include the add-backs involved in determining Adjusted income fromcontinuingoperations before income taxes and recalculating the income tax provision(benefit), including current and deferred income taxes, using the Adjustedincome from continuingoperations before income taxes. The recalculation also adjusts for any discretetax expense, including transaction related expenses and the release ofvaluation allowance, orbenefit related to the add-backs. -end-