Building Momentum

$49.6 Million Contract for Unmanned Targets

Mayhem, and More

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Industrials

Aerospace & Defense

Kratos Defense & Security Solutions Inc.

Fourth Quarter and Full 2022 Operating Results
Revenues for the fourth quarter of 2022 were $249.3 million, up from $211.6 million in the fourth quarter of 2021, reflecting a 17.8% increase. Excluding the impact of the SRE, Cosmic, and CTT acquisitions, which contributed $29.1 million in revenues in the fourth quarter of 2022, Kratos revenues grew organically 4.1%.
For the fourth quarter of 2022, Kratosâ€™ Unmanned Systems segment generated revenue of 
 $62.7 million, an increase of 15.3% as compared to 
 $54.4 million in the fourth quarter of 2021, primarily reflecting an increase in tactical drone related activity as compared to 2021. KUSâ€™s operating income was 
 $1.8 million&nbsp;in the fourth quarter of 2022 compared to 
 $2.3 million&nbsp;in the fourth quarter of 2021, reflecting a less favorable mix of revenues including an increase in development programs which typically generate lower margins, increased supply chain costs of approximately&nbsp; 
 $0.6 million, and an increase of R&amp;D expenses of approximately&nbsp; 
 $0.2 million. Unmanned Systems&#8217; adjusted EBITDA for the fourth quarter of 2022 was&nbsp; 
 $4.5 million, compared to fourth quarter 2021 segment adjusted EBITDA of&nbsp; 
 $4.6 million, reflecting increases in certain development programs which typically generate lower margins and increases in SG&amp;A, R&amp;D, and supply chain related and employee costs.
For the fourth quarter of 2022, Kratosâ€™ Government Solutions Segment reported revenue of 
 $186.6 million, compared to 
 $157.2 million in the same period last year. The increased revenues include the aggregate contribution of approximately 
 $29.1 million from the Cosmic AES, CTT, and SRE acquisitions, organic revenue growth in the Turbine Technologies and C5ISR businesses, offset primarily by a reduction of 
 $2.7 million related to the legacy Training Solutions business. Excluding the legacy Training Solutions business and the impact of the acquired businesses, segment revenues grew organically 2.2%, or 
 $3.3 million, from 
 $150.3 million in the fourth quarter of 2021 to 
 $153.6 million in the fourth quarter of 2022.
KGS reported operating income of 
 $8.8 million in the fourth quarter of 2022 compared to 
 $14.7 million in the fourth quarter of 2021, primarily reflecting a less favorable revenue mix and an increase in R&amp;D from 
 $8.0 million in the fourth quarter of 2021 to 
 $9.4 million in the fourth quarter of 2022, resulting from ongoing development efforts in the Space and Satellite business related to the OpenSpace C2, TT&amp;C, and other ground station solutions.
Kratos reported consolidated operating income of $4.1 million in the fourth quarter compared to $9.2 million in the same period last year. Included in fourth quarter 2022 operating income is non-cash stock compensation expense of 
 $6.4 million and Company-funded R&amp;D expense of 
 $10.6 million, primarily reflecting significant ongoing development efforts being made, including in the Space and Satellite business to develop virtual, software-based OpenSpace command &amp; control (C2), telemetry tracking &amp; control (TT&amp;C) and other ground system solutions. Also included in fourth quarter 2022 net loss is a tax provision of 
 $6.0 million primarily resulting from a non-cash valuation allowance of 
 $5.6 million recorded related to deferred tax assets of certain state net operating loss carryforwards and R&amp;D credits. 
 
 Kratos reported a fourth quarter 2022 net loss of $4.9 million and a GAAP net loss per share of 
 $0.07, compared to a net loss of 
 $2.6 million and a GAAP Net Loss per share of 
 $0.02 for the fourth quarter of 2021. Adjusted EPS was 
 $0.08 for the fourth quarter of 2022, compared to 
 $0.11 for the fourth quarter of 2021. 
 
For the full year 2022, Kratos reported revenues of $898.3 million, an increase of $86.8 million, or 10.7%, from $811.5 million in 2021. For 2022, excluding the impact of the acquisitions, which contributed revenues of $95.5 million during the year and excluding the impact of the legacy training services business, which was down $21.5 million from $40.1 million compared to 2021, organic revenue growth was 1.7%. Government Solutions segment revenue rose 16.7%, or $97 million for the full year to $676.6 million, with the majority of the growth driven by the acquisitions. Unmanned Systems segment revenues of $221.7 million were down from $231.9 million in 2021,&nbsp;primarily due to the timing of program contract awards. 
 
Gross profit margin for 2022 was 25.16%, down from 27.74% in 2021. Margins on services decreased to 26.5% for 2022, from 28.8% for 2021, due primarily to a less favorable mix of revenues, primarily in the space, training &amp; cyber business and in the turbine technologies business. Margins on product sales decreased for the year ended December 25, 2022, as compared to December 26, 2021 to 24.4% from 27.3%, respectively, primarily due to a less favorable mix of certain programs with an increase in lower margin developmental programs. 
Kratos reported an operating loss of 
 $2.6 million for 2022. Included in the fiscal year 2022 operating loss is a 
 $6.4 million charge related to certain non-recoverable costs, including rate and cost growth items resulting from an inability to hire the required planned direct labor base, both internally and by subcontractors, to execute on backlog in the C5ISR business. Also included is a non-recoverable indirect cost rate growth resulting from a smaller than planned direct labor base due to delays in customer program execution and awards in the Training Solutions business. Included as well is non-cash stock compensation expense of 
 $26.3 million, Company-funded R&amp;D expense of 
 $38.6 million, and a 
 $5.5 million litigation settlement related charge resulting from the resolution of a dispute with an international customer in the Unmanned Systems segment.&nbsp;A loss on extinguishment of debt of 
 $13.0 million is also included in the fiscal year 2022 net loss. Kratos reported a fiscal year 2022 net loss of 
 $36.9 million and a GAAP net loss per share of 
 $0.29, compared to a net loss of 
 $2.0 million and a GAAP net loss per share of 
 $0.02 for the fiscal year 2021. Adjusted EPS was 
 $0.31 for fiscal year 2022, compared to 
 $0.36 for fiscal year 2021. Adjusted EBITDA for 2022 totaled $70.7 million, down from $82.9 million in 2021.
Book and Bill 
 
Kratos&#8217; Unmanned Systems unit reported a book-to-bill ratio for the fourth quarter of 2022 of 1.0 to 1.0 and 0.7 to 1.0 for the last twelve months ended 
 December 25, 2022, with bookings of 
 $61.9 million for the three months ended 
 December 25, 2022, and bookings of 
 $153.6 million for the twelve months ended 
 December 25, 2022. Total backlog for Unmanned Systems at the end of the fourth quarter of 2022 was 
 $201.6 million compared to 
 $202.4 million at the end of the third quarter of 2022. 
 
Government Solutions reported a book-to-bill ratio of 1.2 to 1.0 and a book-to-bill ratio of 1.2 to 1.0 for the twelve months ended 
 December 25, 2022&nbsp;with bookings of 
 $230.8 million and 
 $845.5 million for the three and twelve months ended 
 December 25, 2022, respectively. KGSâ€™s total backlog at the end of the fourth quarter of 2022 was 
 $910.8 million, as compared to 
 $866.6 million at the end of the third quarter of 2022.
For the fourth quarter of 2022, Kratos reported consolidated bookings of 
 $292.7 million and a book-to-bill ratio of 1.2 to 1.0, with consolidated bookings of 
 $999.1 million and a book-to-bill ratio of 1.1 to 1.0 for the last twelve months ended 
 December 25, 2022. Consolidated backlog on 
 December 25, 2022 was 
 $1.11 billion, as compared to 
 $1.07 billion at 
 September 25, 2022. Kratosâ€™ bid and proposal pipeline increased slightly to 
 $10 billion at 
 December 25, 2022, as compared to 
 $9.9 billion at 
 September 25, 2022. Backlog at 
 December 25, 2022 was comprised of funded backlog of 
 $721.4 million and unfunded backlog of 
 $391.0 million.
New Business 
 
Management highlighted a number of significant awards and developments across the business during the year including,
<ul>
<li>In Kratos&#8217; rocket systems business, the Company has now received 2 important new hypersonic system related program awards, Mayhem and MACH TB;</li>
<li>Kratos recently received the initial $30 million in funding on a new potential $250 million C5ISR production program in the microwave electronics area;</li>
<li>The Company has recently been selected as the Engine Design Team for the Boom-led Collaboration on a new supersonic propulsion system called Symphony, a sustainable and cost-efficient engine for Boom&#8217;s planned overture supersonic airliner;</li>
<li>Kratos is also supporting Rolls Royce on a B-52 RE engine program;</li>
<li>Another growth area for Kratos is new space and related launch vehicles and propulsion systems, where KTT is currently under contract on multiple DoD government and commercial space system related programs, involving Kratos&#8217; hardware and products in support of some of the most technologically advanced propulsion systems in the world;</li>
<li>In the Drone Missile and Powered Munitions area, Kratos and KTT have made significant progress over the past several months, including technically delivering engines to a confidential customer for a yet to be announced UAS and receiving word from a customer regarding the future opportunity for up to 1000s of Kratos engines;</li>
<li>The Company&nbsp;recently received additional large production awards for the Air Force&#8217;s AFSAT program, featuring the Kratos&#8217; BQM-167 Target and the United States Navy SSAT program featuring Kratos&#8217; 177 target drone;</li>
<li>The Company is currently in pursuit of certain new domestic target drone opportunities, that if successful, could provide the next growth step function for the business;</li>
<li>Kratos has recently seen a number of potential new international target drone opportunities;</li>
<li>In the tactical drone area, Kratos recently received a contract for an initial 2 Valkyries from the United States Marines along with sensors, weapons systems payloads, et cetera Under the Affordable Autonomous Cooperative Killers program;</li>
<li>The U.S. Air Force has now stated that the Skyborg and the Golden Horde Vanguard programs, both of which Kratos is involved in, are transitioning to become programs of record and are expected to form the nucleolus of new combat systems, including collaborative combat aircraft or CCAs. Both Kratos&#8217; Valkyrie and the Mako tactical jet drones have performed under the Skyborg program, and the Golden Horde program has demonstrated how a group of unmanned aircraft or weapons can communicate with each other and operate collectively, rather than singularly;</li>
<li>There has been increased interest in certain other Kratos&#8217; tactical drone systems, in addition to the Valkyrie, which management believe is as a result of what is occurring in the Ukraine, also included as related to affordable mass swarming and drone attrition rates;</li>
<li>The Company has moved forward with its second serial production run of at least 12 of the next generation block of Kratos&#8217; Valkyries. This decision is important for several reasons, including having XQ-58A systems available to immediately meet expected customer demand and supporting Kratos&#8217; first to market leadership position. Management also wants to ensure that there is no break in the current Valkyrie production line, so that the Company can continue to improve on the learning curve efficiencies and related declining cost experience to achieve the target costs currently being provided in proposals to potential customers.</li>
</ul>
Capital Structure and Cash Flows
 As of December 25, 2022, Kratos had cash and cash equivalents of $81.3 million and $140 million remaining in borrowing capacity under its credit facility. Total debt decreased by $39.2 million to $257.5 million at the end of 2022, from $296.7 million as of December 26, 2021.
During 2022, the Company used $25.6 million of cash from operations, driven by the larger reported loss in 2022 when compared to 2021. Capital expenditures for the year were $45.4 million, flat with the $46.5 million in 2021. Kratos used $132.2 million on acquisitions in 2022, up from $12.3 million in the prior year. Free cash flow was a use of $71 million in 2022.
Updated Projections
We believe that 2023 will be a transition year for Kratos to greater revenue, profit, and cash flow with significant prior year investments in technology, products and systems, transitioning from development RDT&amp;E or LRIP to funded programs, contracts or full rate production,&nbsp;As the Company begins 2023, every Kratos business is expecting organic growth, according to management.&nbsp;Kratos&#8217; rocket system business is expected to be one of the fastest growing businesses in 2023 driven by the increased global interest in air and missile defense systems. Similarly, management expect the C5ISR segment to be another driver in 2023. Management forecasted revenue for 2023 to grow approximately 10%, with increased margins, reduced internally funded investments, and increased cash flow.
With building momentum, for 2023 management guided to revenue of $980 million to $1 billion and adjusted EBITDA of $85-$89 million. In the first quarter, we are projecting revenue of $220 million, adjusted EBITDA of $15.5 million, a GAAP EPS loss of $0.03 and adjusted EPS of $0.07. For the full year, we are estimating revenue of $985 million, adjusted EBITDA of $89 million, GAAP EPS of $0.03, and adjusted EPS of $0.39.

Kratos Defense & Security Solutions Inc. (KTOS)

Building Momentum

Fundamental Analysis:

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Building Momentum (KTOS)

$49.6 Million Contract for Unmanned Targets (KTOS)

Mayhem, and More (KTOS)

Selected for Symphony Engine Design Team (KTOS)

Inbox Intel from Channelchek.