Kratos Defense & Security Solutions Inc.
Eric Demarco, President and CEO
Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) provides mission critical engineering, IT services, strategic communications and war fighter solutions for the U.S. federal government and for state and local agencies. Principal services include C4ISR, weapon systems sustainment, military weapon range operations and technical services, network engineering services, information assurance and cybersecurity solutions, security and surveillance systems, and critical infrastructure design and integration. The Company is headquartered in San Diego, California, with resources located throughout the U.S. and at key strategic military locations. News and information are available at www.KratosDefense.com.
WSR: Good day from Wall Street. This is Juan Costello, Senior Analyst with The Wall Street Reporter and joining us today is Eric DeMarco, CEO of Kratos Defense & Security Solutions. The company trades on NASDAQ and their ticker symbol is KTOS and the company is a defense contractor. Thanks for joining us today Eric.
Eric DeMarco: Thank you for having me Juan.
WSR: Getting right into it, start off by talking about the US Army contract for missiles.
Eric DeMarco: This recent contract announcement we put out is with the US Army Aviation and Missile Research Development and Engineering Center for weapons development or the AMRDEC. This is armor contract where we are going to be doing a significant amount of work relative to sensor technology, advanced technologies and supercomputers.
WSR: So, you provide mission-critical engineering, IT services, strategic communications. What are some of your other products and uses and applications of your products?
Eric DeMarco: One of Kratos’ primary areas has to do with weapon systems upgrades, weapon systems sustainment and weapon system modification for weapon systems that are the in the US arsenal and that are also in the arsenals of friendly US/Allied governments under Foreign Military sales contracts. The types of work that we do in these areas have to do with guidance systems, sensor technologies, or involved in simulator technologies, missile and aviation component technologies and as I mentioned before, modeling and simulation for these type of systems.
WSR: What are some of the trends right now, as far as in that sector? How well positioned do you believe Kratos is to capitalize on them?
Eric DeMarco: One of the trends from an industry standpoint today has to do with unmanned systems, and that includes unmanned aerial systems, unmanned land systems, and unmanned undersea systems. Few of Kratos’ key capabilities have to do with the weaponization of unmanned systems and also design of certain types of sensors, whether they be electro-optical, infrared, photonic or other types of sensors into those systems.
WSR: Can you give us some of the highlights or an update on your contract with the Naval Surface Warfare Center?
Eric DeMarco: The contract we just were awarded and we announced last week with the Naval Surface Warfare Center, that is one of Kratos’ largest contracts and it was also one of our largest recompetes, which we have now won for the next five years. This contract basically bolts us in from a backlog and revenue standpoint from our major recompetes, now through 2012, and this is a contract where we’re involved in designing, developing, coordinating, and executing test and evaluation programs at the Dahlgren range on weapon systems and this has to do with lethality of weapon systems, vulnerability of weapon systems, explosive components, non-explosive components, all that are done at the Dahlgren Gun Range.
WSR: Just kind of round off some of your contract work here, you were also awarded the Homeland Security contract early in the month.
Eric DeMarco: Yes, we have a business that is involved in designing and deploying. We integrate security systems and these security systems incorporate all types of security elements from CCTV, with analytics to state-of-the-art biometrics, including Iris scanners, facial recognition scanners, voice recognition scanners, access control. We design these systems into strategic assets here in the United States, for example, airports, large oil companies, petrochemical companies, certain federal buildings that we’re not allowed to disclose, that provides homeland security aspects where these security systems are integrated into a command and control center for the first responder of those particular strategic assets a complete security view of what’s happening at that asset in case there is an event first responders going to respond.
WSR: You also put out your Q1 earnings call early in the month. Can you give us the highlights of some of the drivers?
Eric DeMarco: Thank you actually for mentioning that. Our first quarter, we had a great quarter. The most profitable quarter in the last probably seven or eight quarters. Our EBITDA rate continued to increase, it’s over 9% now for our government, our military business, over 8.6% for the entire company. What’s really driving our business right now are the areas of missile defense with the administration, this administration focusing on AEGIS Missile Defense. We’re one of the prime players of the systems and products in AEGIS Missile Defense. Our weapon systems sustainment business, particularly related to certain types of missile systems, is doing very, very well. And lastly, one of the fastest growing businesses that we have and our most profitable has to do with some of our Cyber Security products. These are software products we have that we licensed to certain government agencies, including classified agencies that help manage and protect their networks from threats.
WSR: Obviously that kind of cyber terrorism has become a lot more prevalent. What makes Kratos Defense & Security Solutions unique from some of the other players in the sector?
Eric DeMarco: There’s a couple of things that make us unique. First of all has to do with our geographic presence. When we put our business plan together, we said we were going to build our company every major BRAC, Base Realignment and Closure Recipient geography in the country and we have done that. One of our largest points of presence is Huntsville, Alabama for example, we have a workforce between 500 and 600 people down there and numerous agencies have moved and are moving into Huntsville, these are national security agencies. San Diego, California, largest concentration of warships in the world, extremely well positioned from the geo-political aspect. The Pacific Rim, we have several hundred people there. Hawaii, we run the missile range out in Hawaii, specifically related to ballistic missile defense test, AEGIS and obviously the beltway, Northern Virginia, Washington DC, Maryland, we have several hundreds of people in that area, including up the Pentagon and various other locations. So, we are extremely well positioned geographically with our customers, which are aligned with the National Security Priorities of AEGIS Missile Defense, sustaining existing and proven weapon systems and adding technologies and weaponization to unmanned systems.
WSR: Perhaps Eric, you can walk us through your background experience and that of the key management team over at Kratos for some of our investor audience that’s new to the company?
Eric DeMarco: Our key management is outstanding. Our management team is second to none. The operational management, that I mean our Division Presidents, most of them all have military backgrounds initially and then they have worked at some of the large OEMs; Ford Aerospace, Loral, L-3, ARINC, Northrop Grumman, General Dynamics. My background, prior to Kratos, I was the President of the Titan Corporation, which was ultimately sold to L-3 for over $2 billion. We have numerous executives from the Titan Corporation and that’s the team that helped to build back company from about $126 million in revenue to over $2 billion in revenue and took a $2 stock to ultimately a company that was sold for a $23 or $24 stock. So, we have a great team. I believe it’s second to none in the space.
WSR: Looking on to the horizon over the next twelve months, what does the landscape look like for Kratos Defense & Security Solutions?
Eric DeMarco: With the acquisition of Gichner, which we announced last month and we just completed our bond offering, so we’ll be closing the Gichner acquisition probably in the next couple of weeks. That’s going to bring our company to about $0.5 billion in revenue on a run-rate standpoint for next year and about $50 million in EBITDA. So, from a financial standpoint, we are extremely well positioned including from a capital structure standpoint to generate value for all of our stakeholders from an operational standpoint. As I’ve tried to elude to in this discussion, our company is very well aligned with the National Security Priorities we believe at. I think over the next twelve months, we’re going to continue to make inroads into unmanned systems and sensors, including at the AMRDEC. We’re going to continue to have significant amount of business relative to AEGIS and AEGIS Ballistic Missile Defense. I think our Cyber Security Practice and our Information Assurance Practice is going to continue to grow rapidly as the cyber demands in the United States for national security profile become more paramount.
WSR: Can you talk to us a little bit about your M&A strategy?
Eric DeMarco: In our space, it’s always important to try to increase your customer relationships, contract vehicles, the number of contract vehicles that you have and what’s referred to on our industry as past performance qualifications, which is your qualifications and the certain strategic areas that you want to try to penetrate and win more work in. And so, our company, we have not made an acquisition last year and a half now with Gichner. We had been making maybe one year up until then. And from a strategy standpoint, we are going to take our time, get Gichner integrated into the business, especially from the business development standpoint. And then we’re going to continue to look out to augment our capabilities in our core focus areas, weapons systems sustainment, ballistic missile defense, specifically related to AEGIS and FAD, information assurance, cyber security and the realm of C5ISR, which includes unmanned systems and sensors and weaponization of those areas.
WSR: When it comes to investors and the investment community, do you believe that the story is understood and appreciated by the investment community?
Eric DeMarco: I do. I believe that it is. Our top five, ten investors excluding the Quant Funds, the majority of them came over to Kratos from the Titan Corporation. These came into the management, State of Wisconsin and go down the list. These are large institutions and the same portfolio managers that made a significant amount of money at Titan. The financial strategy here from a ultimate value generation standpoint, short and middle-term, grow the business organically 5%, 6% a year, which is what we have been doing, make smart acquisitions that fit in your strategic plan, say it five, six, seven, eight times EBITDA, Gichner was 7.5 times, the two acquisitions before that were five times and six times EBITDA, respectively. And ultimately, a company like us typically is acquired when we reach critical mass to get the attention of an OEM and companies of large size typically get acquired for 12, 13, 14 times EBITDA; that’s the value proposition that the major shareholders are looking at.
WSR: Certainly, and so once again joining us today is Eric DeMarco, CEO and President of Kratos Defense Security Solution. The company trades on NASDAQ, the ticker symbol is KTOS, currently trading at $12.53 a share, market cap is 199.35 million. Before we conclude Eric, why do you believe that investors should consider KTOS today?
Eric DeMarco: We are very well aligned with the national security priorities. The business is growing. The last several quarters have shown increased profitability, not only year-over-year but sequentially. We’ve got a three quarter of a billion dollar backlog today. We have a $1.6 billion bid and proposal pipeline.
WSR: Those are some very key points and we certainly look forward to continue and track the company’s growth as well as report on your upcoming progress, and I like to thank you for taking the time to join us today, Eric and to update our investors on Kratos.
Eric DeMarco: Once again thank you for having me and thank you very much for having the interest in our company.
WSR: Thank you.
Eric DeMarco: Thank you.