Kratos Defense and Security Solutions (NASDAQ: KTOS) CEO Interview



Kratos Defense and Security Solutions
CEO: Eric DeMarco



WSA: Good day from Wall Street.  This is Juan Costello with the Wall Street Analyst.  Joining us today is Eric DeMarco, CEO of Kratos Defense & Security Solutions.  The company trades on NASDAQ and the ticker symbol is KTOS.  Thanks for joining us today, Eric.

Eric DeMarco:  Thank you, Juan.  Good afternoon, sir.

WSA: Good day.  Now, starting off, please give us a history and overview of Kratos for some of our listeners that are new to the story.

Eric DeMarco:  Kratos was founded in 2007.  This is the same management team that built the Titan Corporation and we sold it to L-3.  And our strategy with Kratos is we’re building a company that’s focused on strategic national security priorities that are include unmanned systems and robotics, satellite communications, missile systems and radars, cyber security, and electronic warfare.

WSA: Excellent.  So, can you talk about some of your recent contracts that we should be aware of?

Eric DeMarco:  Yes.  We’ve recently been awarded and been able to announce some very important programs in the unmanned aerial system area, where we are manufacturing and supporting very high performance unmanned aerial systems and drones.  We also recently announced that our cyber security business won a very large contract with the Department of Homeland Security, that we’re looking to help grow our company over the next few years.  And lastly, we’ve been announcing recently some large critical infrastructure security contract wins where we deploy security systems to protect some of this country’s most important strategic assets.

WSA: Well good.  And what were some of the recent highlights of your quarterly results?

Eric DeMarco:  Yes.  We reported our quarterly results, which was our fiscal year-end just last week and some of the highlights were our critical infrastructure security business grew 14% organically in 2013.  Our satellite communication business is growing very rapidly and most importantly, we are looking to build a next generation high-performance unmanned combat aerial system and we are making very significant progress on this aircraft with test flights currently planned with our customers in 2015.

WSA: Excellent.  Then, what do you say are some of the factors, Eric, that make Kratos unique and able to capitalize on some of the current trends in your sector?

Eric DeMarco:  Right.  Kratos is a unique company.  There is no doubt about it.  We are one of the few companies that is product, technology, and intellectual-property focused in very important areas of unmanned systems and robotics, satellite communications, and electronic warfare.  And the recent 2014 defense budget and 2015 defense budget request in the just released quadrennial defense review, which is the four-year strategic plan for US National Security, emphasized the importance of these areas and how well funded they’re going to be.

WSA: Good.  And what are some of other goals and milestones that you’re hoping to accomplish over the course of the next year?

Eric DeMarco:  Okay.  So over the next year, most importantly, we have a number of flights planned on a separate unmanned aerial system program we’re currently under contract for over the next several months.  And if we’re successful with this program, this could be the largest production program in the company.  It could be 50 to 100 million a year in annual revenue if we’re successful over the next several months and through next year on this with the flights.  In addition, in the next couple three months, we’re planning on refinancing our debt.  We currently pay a 10% interest rate.  We’re hoping to pay 7 to 7.5 on a refinancing situation, which will significantly increase the company’s free cash flow, $15 to $20 million a year, which will be very important to us in helping pay down the debt, which of course will equate to the equity.

WSA: Great.  And perhaps you can walk us through your background and experience a little bit, Eric, and talk about the key management there.

Eric DeMarco:  Yes.  As I mentioned very briefly upfront, prior to Kratos, I was the president of the Titan Corporation, which was Tom Tom Nancy, TTN on the New York, where we built a very significant national security company and when we got it to right around $2 billion, it was sold to L-3 for 15 times EBITDA, the enterprise value.  At that time, it was one of the highest multiples ever paid for a defense company and we have been very fortunate here that a number of the executives that built Titan are here at Kratos helping build this company.  We are one of the very few billion-dollar pure play high technology defense companies left.  They’ve all been acquired.  And our strategy is to make a lot of money for our investors and our stakeholders and our bested employees as we build the company for a liquidity event.

WSA: Sure.  And as far as investors in the financial community are concerned, do you believe that the KTOS story and your message in the company’s upside are completely understood and appreciated by them and if not, what do you wish investors better understood about the company?

Eric DeMarco:  I would – what I would like to see is investors spend a little additional time looking at the company and the fact that we’re product technology and intellectually – intellectual-property focused versus a services company.  For some reason, we are often put into the same type of a peer group as a defense services company.  And the services businesses, because of some procurement rule changes are being commoditized, where contracts are being awarded on the lowest price technically acceptable, which by definition commoditizes the businesses.  Where Kratos, the products and technology that we’re delivering, we have IP positions.  We’re designed in to these very important programs and platforms and a large portion of our business is sole sourced, where we’re the only provider of it, because there are just so few of companies like us left in the electronic warfare or unmanned system or C5ISR areas, and I think that delineation is very, very important.

WSA: Certainly.  And so once again, joining us today is Eric DeMarco, CEO of Kratos Defense and Security Solutions, which trades on NASDAQ, ticker symbol is KTOS, currently trading at $7.71 a share, marketing camp north of 440 million.  And before we conclude here, Eric, to recap some of your key points, why do you believe investors should consider the company as a good investment opportunity today?

Eric DeMarco:  I think today is an excellent time to look at a company like Kratos for an investment.  National Security is here to stay.  Russia is rearming and remilitarizing and look at what’s going I the Crimea right now; China is increasing their defense budget double digits and they are getting much more aggressive in the South China Sea and that entire area; Iran is focused on nuclear weapon; North Korea, nuclear systems and missile systems.  I can go on and on.  And then, there’s the terrorist threat.  Companies like Kratos will always be in demand for our services and our products and it gives a very predictable business base for us just by the nature of the national security environment today.  And then, in addition to that, as I mentioned before, we are going to be executing a refinancing of our debt.  We already are forecasting a significant free cash flow generation in 2014.  Once we refinance, it will be significantly increased and we’re going to take that free cash flow, de-lever the company, which will increase the equity value for our shareholders.

WSA: Well, we certainly look forward to continuing to track the company’s growth and to report on your upcoming progress.  And we’d like to thank you for taking a time to join us today, Eric, and update our audience on KTOS.

Eric DeMarco:  And I thank you again, sir, for giving me the opportunity to speak with you and your audience.



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