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Kratos Revenue Exceeds $1B

DEFENSE: Sells $300M in Stock; Plans to Triple Drone Work

SAN DIEGO – Kratos Defense & Security Solutions (Nasdaq: KTOS), the defense tech provider that describes its offerings as affordable and transformative, broke the billion-dollar ceiling as 2023 came to a close. Annual revenue amounted to $1.037 billion, up from $898.3 million, the company said Feb. 13.
The business essentially broke even for the year, with a GAAP net loss of $8.9 million, or 7 cents per share. Excluding items, Kratos earnings were 12 cents per share. Analysts surveyed by Yahoo Finance had expected 9 cents.

Shares hit a 52-week high of $21.60 the next day.

The corporation, which is increasing its business in low-cost, expendable fighter drones, announced that it anticipates 10% organic revenue growth in 2024, projecting revenue in the range of $1.125 billion to $1.15 billion.

The business capped off February by issuing $300 million worth of stock.

In a statement released with the financial results, CEO Eric DeMarco said the company is working to triple its drone production. The company builds its drones in Sacramento and Oklahoma City. Its headquarters is Scripps Ranch.

“There is a once-in-a-generation recapitalization of strategic weapon systems occurring globally that Kratos is uniquely positioned to excel in,” DeMarco told the San Diego Business Journal on Feb. 27.

“Kratos’ products and software in unmanned systems, satellite communications, hypersonic systems, missiles, radars and nuclear programs are clearly aligned with the U.S. National Defense Strategy. At Kratos, affordability is a technology, and our 15% growth rate and $11 billion opportunity pipeline are representative of the value we bring our government customers and our industry partners.”

$300M Stock Offering to Facilitate Long-Term Strategy

Last week, Kratos was poised to close an underwritten offering of approximately 16.67 million shares of common stock at $18 per share. The estimated $288 million in proceeds may go to facilities and expand manufacturing capacity, Kratos said – though it listed several more options for the funds.

The stock sale was announced Feb. 21 after the market closed. Shares, which closed at $20.18 that day, ended trading the next day at $18.78.

Baird, RBC Capital Markets and Truist Securities acted as joint book-running managers for the offering. B. Riley Securities and Raymond James were passive book-runners for the offering; Benchmark Company and Noble Capital Markets were co-managers for the offering.

The underwriters exercised an over-allotment option to buy 2.5 million additional shares.

In a statement, Kratos said it expects to use the net proceeds “to facilitate its long-term strategy, including potential investment in facilities, expanding manufacturing capacity, anticipated capital expenditures for expansion of current sole-source/single award programs and high probability pipeline opportunities, further strengthen the company’s balance sheet in anticipation of upcoming customer and partner decisions and source selection on additional large, new program and contract opportunities, for general corporate purposes, including paydown of debt, and to pay fees and expenses in connection with the offering.”

Kratos Produces 160 Drones a Year, Wants to Build More

Kratos produces target drones as well as tactical drones that can go into battle. The tactical models, such as the XQ-58A Valkyrie, can fly singularly or in swarms. In a third option, a tactical drone can pair up with a conventional fighter jet, serving as a “loyal wingman.”

The drones are what the Defense Department calls an “attritable” asset. A military service can lose one in battle, but the loss is not nearly as costly as the loss of a fighter jet.
“We are currently producing approximately 160 high-performance tactical and target jet drones annually, with a validated and executing supply chain in place, and we are making the investments necessary to triple our drone production capacity,” DeMarco said in a statement that accompanied quarterly financial results.

“As the only company with a family of affordable, attritable, tactical jet drones flying today with weapons range pedigree and with additional new jet drones in development, all under customer funded contracts, we are confident that we will be successful. We are forecasting Kratos’ unmanned systems business to be one of our leading growth drivers in 2024, including target drone production and tactical drone RDT&E and S&T contracts, including a new tactical drone program award.”
The acronym RDT&E stands for research, development, test and evaluation. S&T stands for science and technology.

A Kratos Terrier Oriole sounding rocket lifts off on March 3, 2021 from the Wallops Flight Facility in Virginia. Photo courtesy Kratos Defense

Breaking Even in Q4; Federal Budget Situation Draws Concern

For the fourth quarter of 2023, Kratos reported a net loss of $2.4 million, or 2 cents per share, on total revenue of $273.8 million. Service revenue came to $100.8 million while product sales came to $173.0 million.

Total revenue for the quarter grew 9.8% over the same period of 2022.

Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) for the quarter was $29.1 million.
For the entirety of 2023, adjusted EBITDA was $95.4 million.
Kratos is facing several challenges, including that of attracting and retaining the right people.

“Business challenges include our ability to obtain and retain qualified personnel, including those that are willing and able to obtain National Security clearances and the related high cost of these individuals, which is currently adversely impacting our margins,” DeMarco said in the earnings statement. “Additionally, the U.S. Federal Government budgetary situation is a challenge for the industry and for Kratos, and one that we cannot control and an extended Continuing Resolution Authorization (CRA) could adversely impact our business and financial forecast if not resolved soon.”

Opportunities Seen in Rocket Business

Separately, Kratos announced Feb. 12 that it inked a deal with the U.S. Space Force for sounding rocket launch services.
Sounding rockets are, in the words of NASA, “small, low-cost flight opportunities to suborbital space.” They frequently carry scientific instruments.

Kratos and four other contractors will bid on task orders in the Sounding Rocket Program-4 between now and November 2027. The five contractors are splitting a maximum $877 million.

The Space Force plans nine more missions, according to Space Systems Command in El Segundo. The command announced Jan. 29 that Kratos had joined the vendor list and that the vendor pool expanded from two to five companies.

“Competition is at the center of our approach, and this on-ramp ensures all interested suborbital launch providers are bringing their very best solutions to the table,” said Lt. Col. Justin Beltz, chief of the Small Launch and Targets Division.

The primary locations of performance of the work will be at the contractor facilities and a variety of government launch sites, depending on mission requirements. Work is expected to be completed by November 2029.

This contract was a competitive acquisition, and three offers were received. Space Systems Command, Kirtland Air Force Base, New Mexico, awarded the contract.

Kratos announced on Feb. 20 that it has ordered a combined total of nine new Zeus 1 and Zeus 2 rocket motors in preparation for upcoming initial customer-funded flights. Kratos said it developed the Zeus family of solid rocket motors in response to the urgent need for affordable commercial launch vehicle stages for hypersonic test, ballistic missile target, sounding rocket and other customer missions.

Kratos Defense & Security Solutions
FOUNDED: 1994 as Wireless Facilities Inc.
CEO: Eric DeMarco
HEADQUARTERS: Scripps Ranch
BUSINESS: Defense contractor
REVENUE: $1.04 billion in 2023
STOCK: KTOS (Nasdaq)
EMPLOYEES: Approximately 3,900 full-time, part-time and on-call employees worldwide
WEBSITE: www.kratosdefense.com
CONTACT: 858-812-7300
NOTABLE: The Department of Defense completed an initial flight test of a Kratos-built unmanned aircraft – the U.S. Marine Corps’ XQ-58A Valkyrie – in early October at Eglin Air Force Base in Florida.

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