The KeyW Holding Corporation (NASDAQ:KEYW), a pure-play national
security solutions provider for the Intelligence, Cyber and
Counterterrorism Communities’ toughest challenges, today announced
second-quarter 2017 financial and operating results.
CEO Commentary
“KeyW’s performance in the second quarter
exceeded our expectations for revenue and met our forecast for
adjusted EBITDA. We benefited from accelerated product solutions
sales as well as service solutions revenue from both legacy KeyW
programs and contracts from our Sotera acquisition. We expect
consolidated revenue to increase fairly ratably in the second half
of 2017; adjusted EBITDA should grow at a more rapid pace as a
result of increased affordable Intelligence, Surveillance and
Reconnaissance (ISR) and advanced cyber training and analytics
sales and acquisition-related cost synergies,” said Bill Weber,
KeyW’s president and chief executive officer.
“We’re on track with the Sotera integration
process and expect to meet or exceed our target of $3.5 million in
2017 cost synergies and a meaningfully higher total in 2018 to
achieve GAAP EPS accretion. We’re also working to maximize revenue
synergies, a benefit that made Sotera an attractive acquisition for
us.”
Business Development
Highlights
For the second quarter, bookings to backlog
totaled $98 million, or 0.8 times revenue. Trailing 12-month
contract award values totaled $623 million, or 1.2 times revenue.
The company reported having approximately $1.7 billion in proposals
submitted and awaiting award.
Second-Quarter 2017 Results from
Continuing Operations
Revenue increased by $50.7 million, or 69.1%,
for the three months ended June 30, 2017, compared with the three
months ended June 30, 2016. The increase is primarily attributable
to contracts acquired through the acquisition of Sotera, growth in
KeyW’s airborne ISR solutions and higher advanced geospatial
intelligence products and solutions sales, partially offset by the
completion of certain service solutions contracts.
Operating loss for the second quarter of 2017
was $8.8 million, or -7.1% of revenue, compared with operating
income of $5.1 million, or 6.9% of revenue, for the second quarter
of 2016. The decrease in operating income and margin resulted from
higher operating expenses due to higher acquisition-related and
other expenses of $13.3 million, stock compensation costs and
higher amortization expense.
Going forward, the company expects to report
lower acquisition and related expenses. As a result, KeyW expects
to report lower operating expenses and increased operating margin
in the second half of 2017, primarily due to cost synergies and
greater operational efficiency within the combined
organization.
KeyW reported GAAP net loss from continuing
operations of $16.7 million, or $0.34 per diluted share, for the
second quarter of 2017, largely because of the factors affecting
operating loss. There were no discontinued operations in the second
quarter of 2017.
Adjusted EBITDA from continuing operations was
$10.5 million, or 8.5% of revenue, for the second quarter of 2017,
versus $9.4 million, or 12.8% of revenue, in the prior-year period.
Second-quarter 2017 adjusted EBITDA from continuing operations
increased year-over-year primarily because of the additional
revenue acquired in the Sotera acquisition, partially offset by the
factors affecting operating loss. Adjusted EBITDA margin decreased
primarily because of the increased services content of the
additional revenue.
Additional Financial
Metrics
KeyW reported total backlog at June 30, 2017, of
$1.11 billion, of which $179.8 million was funded, compared with
total backlog at March 31, 2017, of $1.14 billion, of which $179.1
million was funded.
Cash flow used in operations for the six months
ended June 30, 2017 was $2.8 million, a decrease of $14.9 million
compared with the same period in 2016. The decrease was primarily
due to one-time invoice payment delays and increased cash expenses
related to the acquisition and integration of Sotera. Days sales
outstanding (DSO) were 66 days, slightly higher than the first
quarter of 2017, as outlined above. Cash and cash equivalents at
June 30, 2017 totaled $22.3 million. Borrowings in the second
quarter of 2017 included $10 million from the company’s 2017 Credit
Facility and $135 million from KeyW’s 2017 Term Loan Facility. At
June 30, 2017, the company was in compliance with all of its debt
covenants under the 2017 Credit Agreement.
2017 Financial Outlook
KeyW is reiterating the fiscal 2017 guidance it
issued on May 3, 2017, based on the company’s financial results for
the first half of 2017 and its current outlook for the remainder of
2017. The table below summarizes the company’s fiscal year 2017
guidance:
Fiscal 2017 Guidance |
Revenue |
$455 million - $485 million |
Adjusted EBITDA margin |
10% - 11% |
Diluted projected share count |
48.9 million |
“KeyW announced changes to our executive
leadership team in the second quarter, adding John Sutton as chief
operating officer and Marion Ruzecki as chief people officer.
Together, they bring the experience, momentum, operational
discipline and people-centric focus necessary to successfully
complete the integration of Sotera and prepare for the next phase
of growth,” concluded Weber.
Conference Call Information
As previously announced, a conference call has
been scheduled to discuss these results today at 5:00 p.m. EDT. At
that time, management will review the company's second-quarter 2017
financial results, followed by a question-and-answer session.
Interested parties will be able to connect to
our webcast via the Investor Relations page on our website,
http://investors.keywcorp.com, on August 9, 2017. We encourage
people to register for an email reminder about the webcast on the
Events and Presentations link, also found on the Investor Relations
page of our website. Interested parties may also listen to the
conference call by calling 1-877-853-5645. The International
Dial-In access number will be 1-408-940-3868. The conference ID for
the event is 51257648.
An archive of the webcast will be available on
our website following the call. In addition, a podcast of our
conference call will be available for download from the Investor
Relations page of our website at approximately the same time as the
webcast replay.
About KeyW
KeyW is a pure-play national security solutions
provider for the Intelligence, Cyber and Counterterrorism
Communities' toughest challenges. We support the collection,
processing, analysis and dissemination of information across the
full spectrum of their missions. We employ and challenge more than
2,000 of the most talented professionals in the industry with
solving such complex problems as preventing cyber threats,
transforming data into intelligence and combating global
terrorism.
Forward-Looking Statements: Statements made in this
press release that are not historical facts constitute
forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements include
but are not limited to: statements about our future expectations,
plans and prospects; our full-year 2017 revenue, adjusted EBITDA
margin and diluted share count estimates under the heading “2017
Financial Outlook”; second half 2017 revenue and adjusted EBITDA
growth rates; achievement of cost synergies related to the Sotera
acquisition and earnings accretion expected decreased acquisition
and other one-time costs and second-half 2017 operating expenses
and operating margin; and other statements containing the words
“estimates,” “believes,” “anticipates,” “plans,” “expects,” “will,”
“potential,” “opportunities,” and similar expressions. Our actual
results, performance or achievements or industry results may differ
materially from those expressed or implied in these forward-looking
statements. These statements involve numerous risks and
uncertainties, including but not limited to, those risk factors set
forth in our Annual Report on Form 10-K for the year ended December
31, 2016 filed with the SEC on March 15, 2017, our prospectus
supplement, dated and filed with the SEC on January 27, 2017, with
respect to our prospectus, dated December 22, 2016 included in our
registration statement amendment on Form S-3/A (Registration No.
333-215115) filed with the SEC on December 21, 2016, and other
filings that we make with the SEC from time to time. In addition,
our acquisition of Sotera Defense Solutions, completed on April 4,
2017, involves risks and uncertainties, including (i) the inability
to successfully implement integration strategies or realize the
anticipated benefits of the acquisition, including the possibility
that the expected synergies and cost reductions from the
acquisition will not be realized or will not be realized within the
expected time period; (ii) the increased leverage and interest
expense of the combined company and our ability to comply with debt
covenants under our secured credit facility entered into on April
4, 2017; (iii) changes in future business conditions that could
cause our goodwill, which will increase as a result of the Sotera
acquisition, to become impaired, requiring substantial write-downs.
(iv) areas of Sotera’s internal controls that may need to be
remediated or improved; (v) general economic conditions and/or
conditions affecting the parties’ current and prospective
customers; and (vi) other risk factors with respect to acquisitions
contained in section captioned “Risk Factors” contained in our
Annual Report on Form 10-K for the year ended December 31, 2016 and
other filings that we make with the SEC from time to time. Due to
such uncertainties and risks, readers are cautioned not to place
undue reliance on such forward-looking statements. KeyW is under no
obligation to (and expressly disclaims any such obligation to)
update or alter its forward-looking statements whether as a result
of new information, future events or otherwise, unless required by
law.
|
THE KeyW HOLDING CORPORATION AND
SUBSIDIARIESConsolidated Statements of Operations
(unaudited)(In thousands, except per share
amounts) |
|
|
Three months ended June 30, |
|
Six months ended June 30, |
|
2017 |
|
2016 |
|
2017 |
|
2016 |
Revenue |
$ |
124,058 |
|
|
$ |
73,346 |
|
|
$ |
192,314 |
|
|
$ |
146,988 |
|
Cost of
revenue |
94,181 |
|
|
49,467 |
|
|
142,070 |
|
|
100,264 |
|
Operating
expenses |
36,159 |
|
|
17,345 |
|
|
56,143 |
|
|
33,784 |
|
Intangible amortization expense |
2,489 |
|
|
1,467 |
|
|
4,139 |
|
|
2,935 |
|
Operating (loss)
income |
(8,771 |
) |
|
5,067 |
|
|
(10,038 |
) |
|
10,005 |
|
Non-operating expense, net |
4,777 |
|
|
2,531 |
|
|
7,394 |
|
|
4,164 |
|
(Loss) earnings before
income taxes from continuing operations |
(13,548 |
) |
|
2,536 |
|
|
(17,432 |
) |
|
5,841 |
|
Income tax expense, net
on continuing operations |
3,124 |
|
|
2,972 |
|
|
3,124 |
|
|
4,367 |
|
Net (loss) income from
continuing operations |
(16,672 |
) |
|
(436 |
) |
|
(20,556 |
) |
|
1,474 |
|
Loss before income
taxes from discontinued operations |
— |
|
|
(9,136 |
) |
|
— |
|
|
(26,945 |
) |
Income tax benefit, net
on discontinued operations |
— |
|
|
— |
|
|
— |
|
|
(490 |
) |
Net loss on
discontinued operations |
— |
|
|
(9,136 |
) |
|
— |
|
|
(26,455 |
) |
Net Loss |
$ |
(16,672 |
) |
|
$ |
(9,572 |
) |
|
$ |
(20,556 |
) |
|
$ |
(24,981 |
) |
|
|
|
|
|
|
|
|
Weighted average common
shares outstanding |
|
|
|
|
|
|
|
Basic |
49,546 |
|
|
40,359 |
|
|
48,061 |
|
|
40,087 |
|
Diluted |
49,546 |
|
|
40,359 |
|
|
48,061 |
|
|
40,741 |
|
|
|
|
|
|
|
|
|
Basic net (loss)
earnings per share: |
|
|
|
|
|
|
|
Continuing operations |
$ |
(0.34 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.43 |
) |
|
$ |
0.04 |
|
Discontinued operations |
— |
|
|
(0.23 |
) |
|
— |
|
|
(0.66 |
) |
Basic net loss per
share |
$ |
(0.34 |
) |
|
$ |
(0.24 |
) |
|
$ |
(0.43 |
) |
|
$ |
(0.62 |
) |
|
|
|
|
|
|
|
|
Diluted net (loss)
earnings per share: |
|
|
|
|
|
|
|
Continuing operations |
$ |
(0.34 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.43 |
) |
|
$ |
0.04 |
|
Discontinued operations |
— |
|
|
(0.23 |
) |
|
— |
|
|
(0.65 |
) |
Diluted net loss per
share |
$ |
(0.34 |
) |
|
$ |
(0.24 |
) |
|
$ |
(0.43 |
) |
|
$ |
(0.61 |
) |
|
THE KeyW HOLDING CORPORATION AND
SUBSIDIARIESCondensed Consolidated Balance Sheets
(unaudited)(In thousands, except par value per
share amounts) |
|
|
June 30, 2017 |
|
December 31, 2016 |
ASSETS |
|
|
|
Current assets: |
|
|
|
Cash and
cash equivalents |
$ |
22,266 |
|
|
$ |
41,871 |
|
Receivables |
90,022 |
|
|
43,141 |
|
Inventories, net |
17,378 |
|
|
15,178 |
|
Prepaid
expenses |
3,397 |
|
|
1,350 |
|
Income
tax receivable |
363 |
|
|
318 |
|
Assets of
discontinued operations |
— |
|
|
3,000 |
|
Total
current assets |
133,426 |
|
|
104,858 |
|
|
|
|
|
Property and equipment,
net |
44,130 |
|
|
40,615 |
|
Goodwill |
491,999 |
|
|
290,710 |
|
Other intangibles,
net |
27,181 |
|
|
7,871 |
|
Other assets |
3,029 |
|
|
1,399 |
|
TOTAL
ASSETS |
$ |
699,765 |
|
|
$ |
445,453 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
Current
liabilities: |
|
|
|
Revolver |
$ |
10,000 |
|
|
$ |
— |
|
Accounts
payable |
19,956 |
|
|
6,913 |
|
Accrued
expenses |
22,100 |
|
|
9,941 |
|
Accrued
salaries and wages |
29,882 |
|
|
15,122 |
|
Term loan
– current portion |
6,750 |
|
|
— |
|
Deferred
revenue |
6,890 |
|
|
3,760 |
|
Liabilities of discontinued operations |
— |
|
|
1,185 |
|
Total
current liabilities |
95,578 |
|
|
36,921 |
|
|
|
|
|
Convertible senior
notes, net of discount |
135,711 |
|
|
132,482 |
|
Term loan – non-current
portion, net of discount |
123,511 |
|
|
— |
|
Non-current deferred
tax liability, net |
33,394 |
|
|
30,409 |
|
Other non-current
liabilities |
12,398 |
|
|
12,705 |
|
TOTAL
LIABILITIES |
400,592 |
|
|
212,517 |
|
Commitments and
contingencies |
|
|
|
Stockholders’
equity: |
|
|
|
Preferred
stock, $0.001 par value; 5 million shares authorized, none
issued |
— |
|
|
— |
|
Common
stock, $0.001 par value; 100 million shares authorized, 49,674 and
40,977 shares issued and outstanding |
50 |
|
|
41 |
|
Additional paid-in capital |
420,667 |
|
|
333,883 |
|
Accumulated deficit |
(121,544 |
) |
|
(100,988 |
) |
Total stockholders’
equity |
299,173 |
|
|
232,936 |
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY |
$ |
699,765 |
|
|
$ |
445,453 |
|
|
THE KeyW HOLDING CORPORATION AND
SUBSIDIARIESCondensed Consolidated Statements of
Cash Flows (unaudited)(In thousands) |
|
|
Six months ended June 30, |
|
2017 |
|
2016 |
Net loss |
$ |
(20,556 |
) |
|
$ |
(24,981 |
) |
Adjustments to
reconcile net loss to net cash (used in) provided by operating
activities: |
|
|
|
Stock
compensation |
2,098 |
|
|
1,147 |
|
Depreciation and amortization expense |
7,797 |
|
|
7,437 |
|
Impairment of Commercial Cyber Solutions goodwill |
— |
|
|
6,980 |
|
Non-cash
interest expense |
3,474 |
|
|
3,120 |
|
Gain on
disposal of assets |
— |
|
|
(3,447 |
) |
Loss on
sale of assets held for sale |
— |
|
|
3,568 |
|
Write-off
of deferred financing costs |
— |
|
|
340 |
|
Deferred
taxes |
3,127 |
|
|
3,870 |
|
Changes
in assets and liabilities, net of effects of acquisitions: |
|
|
|
Receivables |
(6,086 |
) |
|
18,294 |
|
Inventories, net |
(2,200 |
) |
|
(1,502 |
) |
Prepaid
expenses |
(532 |
) |
|
(1,421 |
) |
Accounts
payable |
6,036 |
|
|
(4,811 |
) |
Accrued
expenses |
5,530 |
|
|
3,464 |
|
Other
non-current assets/liabilities |
(1,534 |
) |
|
63 |
|
Net cash (used in) provided by operating
activities |
(2,846 |
) |
|
12,121 |
|
Cash flows from investing activities: |
|
|
|
Acquisition, net of cash acquired |
(236,091 |
) |
|
— |
|
Purchases
of property and equipment |
(5,674 |
) |
|
(3,758 |
) |
Proceeds
from sale of assets |
— |
|
|
16,226 |
|
Net cash (used in) provided by investing
activities |
(241,765 |
) |
|
12,468 |
|
Cash flows from financing activities: |
|
|
|
Proceeds
from stock issuance, net |
84,586 |
|
|
— |
|
Proceeds
from issuance of term note |
135,000 |
|
|
— |
|
Issuance
cost of term note and revolving credit facility |
(4,689 |
) |
|
— |
|
Proceeds
from revolver, net |
10,000 |
|
|
— |
|
Proceeds
from option and warrant exercises, net |
109 |
|
|
2,114 |
|
Net cash provided by financing
activities |
225,006 |
|
|
2,114 |
|
Net (decrease) increase in cash and cash
equivalents |
(19,605 |
) |
|
26,703 |
|
Cash and cash equivalents at beginning of
period |
41,871 |
|
|
21,227 |
|
Cash and cash equivalents at end of period |
$ |
22,266 |
|
|
$ |
47,930 |
|
Supplemental disclosure of cash flow information: |
|
|
|
Cash
paid for interest |
$ |
4,007 |
|
|
$ |
1,959 |
|
Cash
paid for taxes |
$ |
16 |
|
|
$ |
83 |
|
|
|
|
|
|
|
|
|
Non-GAAP Financial Measures
Adjusted EBITDA from continuing operations, and
estimated adjusted EBITDA margin, as defined by KeyW, are financial
measures that are not calculated in accordance with accounting
principles generally accepted in the United States of America, or
U.S. GAAP. The adjusted EBITDA from continuing operations
reconciliation table and adjusted EBITDA as percentage of full year
revenue guidance reconciliation table below provide a
reconciliation of these non-U.S. GAAP financial measures to net
income (loss) from continuing operations and estimated net income
(loss) from continuing operations margin, the most directly
comparable financial measures calculated and presented in
accordance with U.S. GAAP. Adjusted EBITDA from continuing
operations and adjusted EBITDA margin should not be considered as
an alternative to net income, net income margin, operating income
or any other measure of financial performance calculated and
presented in accordance with U.S. GAAP. Our adjusted EBITDA from
continuing operations and adjusted EBITDA margin may not be
comparable to similarly titled measures of other companies because
other companies may not calculate adjusted EBITDA from continuing
operations, adjusted EBITDA margin or similarly titled measures in
the same manner as we do. We prepare adjusted EBITDA from
continuing operations and adjusted EBITDA margin to eliminate the
impact of items that we do not consider indicative of our core
operating performance. We encourage you to evaluate these
adjustments and the reasons we consider them appropriate.
We believe adjusted EBITDA from continuing
operations and adjusted EBITDA margin are useful to investors in
evaluating our operating performance for the following reasons:
• |
we have
various non-recurring transactions or non-operating transactions
and expenses that directly impact our net income from continuing
operations. Adjusted EBITDA from continuing operations is intended
to approximate the net cash provided by operations by adjusting for
non-recurring or non-operating items; and |
• |
securities
analysts use adjusted EBITDA from continuing operations as a
supplemental measure to evaluate the overall operating performance
of companies. |
Our board of directors and management use
adjusted EBITDA from continuing operations:
|
• |
as a measure
of operating performance; |
|
• |
to determine
a significant portion of management's incentive compensation; |
|
• |
for planning
purposes, including the preparation of our annual operating budget;
and |
|
• |
to evaluate
the effectiveness of our business strategies. |
Although adjusted EBITDA from continuing operations is
frequently used by investors and securities analysts in their
evaluations of companies, adjusted EBITDA from continuing
operations has limitations as an analytical tool, and you should
not consider it in isolation or as a substitute for analysis of our
results of operations as reported under GAAP. Some of these
limitations are:
|
|
• |
adjusted
EBITDA from continuing operations does not reflect our cash
expenditures or future requirements for capital expenditures or
other contractual commitments; |
|
|
• |
adjusted
EBITDA from continuing operations does not reflect changes in, or
cash requirements for, our working capital needs; |
|
|
• |
adjusted
EBITDA from continuing operations does not reflect interest expense
or interest income; |
|
|
• |
adjusted
EBITDA from continuing operations does not reflect cash
requirements for income taxes; |
|
|
• |
adjusted
EBITDA from continuing operations does not include non-cash
expenses related to stock compensation; |
|
|
• |
adjusted
EBITDA from continuing operations does not include acquisition
costs and other adjustments; |
|
|
• |
although
depreciation and amortization are non-cash charges, the assets
being depreciated or amortized will often have to be replaced in
the future, and adjusted EBITDA from continuing operations does not
reflect any cash requirements for these replacements; and |
|
|
• |
other
companies in our industry may calculate adjusted EBITDA from
continuing operations or similarly titled measures differently than
we do, limiting its usefulness as a comparative measure. |
THE KeyW HOLDING CORPORATION AND
SUBSIDIARIESAdjusted EBITDA from Continuing
Operations Reconciliation Table (in thousands and
unaudited) |
|
|
|
|
|
Three months ended Jun 30, |
|
Six months ended Jun 30, |
|
2017 |
|
2016 |
|
|
2017 |
|
|
|
2016 |
|
Net (Loss) Income from
Continuing Operations |
$ |
(16,672 |
) |
|
$ |
(436 |
) |
|
|
$ |
(20,556 |
) |
|
$ |
1,474 |
|
Depreciation |
2,225 |
|
|
1,931 |
|
|
|
|
3,657 |
|
|
|
3,486 |
|
Intangible
Amortization |
2,489 |
|
|
1,467 |
|
|
|
|
4,139 |
|
|
|
2,935 |
|
Stock Compensation
Amortization |
1,140 |
|
|
669 |
|
|
|
|
2,098 |
|
|
|
1,147 |
|
Interest Expense |
4,914 |
|
|
2,614 |
|
|
|
|
7,523 |
|
|
|
5,579 |
|
Tax Expense |
3,124 |
|
|
2,972 |
|
|
|
|
3,124 |
|
|
|
4,367 |
|
Acquisition Costs and
Other Adjustments |
13,324 |
|
|
185 |
|
|
|
|
15,011 |
|
|
|
(1,124 |
) |
Adjusted
EBITDA |
$ |
10,544 |
|
|
$ |
9,402 |
|
|
|
$ |
14,996 |
|
|
$ |
17,864 |
|
|
Adjusted EBITDA as Percentage of Full Year
Revenue Guidance Reconciliation Table(shown as % of
Revenue) |
|
|
Fiscal Year 2017 Estimate |
|
Low |
|
High |
Net (Loss) Income from
Continuing Operations |
|
(2.7 |
%) |
|
|
|
0.5 |
% |
|
Depreciation |
1.5 |
% |
|
|
1.5 |
% |
|
Intangible
Amortization |
1.8 |
% |
|
|
1.7 |
% |
|
Stock Compensation
Amortization |
0.9 |
% |
|
|
0.8 |
% |
|
Interest Expense |
3.6 |
% |
|
|
3.4 |
% |
|
Tax Expense |
1.6 |
% |
|
|
0.0 |
% |
|
Acquisition Costs and
Other Adjustments |
3.3 |
% |
|
|
3.1 |
% |
|
Adjusted
EBITDA |
|
10.0 |
% |
|
|
|
11.0 |
% |
|
Contacts:
Heather Williams
Corporate Media Relations
443.733.1613
communications@keywcorp.com
Mike Alber
Chief Financial Officer
443.733.1600
investors@keywcorp.com
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