Kratos Reports Third Quarter Financial Results

Unaudited Reconciliation of GAAP to Non-GAAP Measures

Note: (1) Adjusted EBITDA is a non-GAAP measure defined as GAAP net income (loss) attributable to Kratos adjusted for net income (loss) attributable to noncontrolling interest, income (loss) from discontinued operations, net interest expense, provision for income taxes, depreciation and amortization expense of intangible assets, amortization of capitalized contract and development costs, stock-based compensation, acquisition and restructuring related items and other, and foreign transaction gain (loss).

Adjusted EBITDA as calculated by us may be calculated differently than Adjusted EBITDA for other companies. We have provided Adjusted EBITDA because we believe it is a commonly used measure of financial performance in comparable companies and is provided to help investors evaluate companies on a consistent basis, as well as to enhance understanding of our operating results. Adjusted EBITDA should not be construed as either an alternative to net income or as an indicator of our operating performance or an alternative to cash flows as a measure of liquidity. The adjustments to calculate this non-GAAP financial measure and the basis for such adjustments are outlined below. Please refer to the following table below that reconciles GAAP net income (loss) to Adjusted EBITDA.

The adjustments to calculate this non-GAAP financial measure, and the basis for such adjustments, are outlined below:

Interest income and interest expense, net. The Company receives interest income on investments and incurs interest expense on loans, capital leases and other financing arrangements, including the amortization of issue discounts and deferred financing costs. These amounts may vary from period to period due to changes in cash and debt balances.

Income taxes. The Company's tax expense can fluctuate materially from period to period due to tax adjustments that may not be directly related to underlying operating performance or to the current period of operations and may not necessarily reflect the impact of utilization of our NOLs.

Depreciation. The Company incurs depreciation expense (recorded in cost of revenues and in operating expenses) related to capital assets purchased, leased or constructed to support the ongoing operations of the business. The assets are recorded at cost or fair value and are depreciated over the estimated useful lives of individual assets.

Amortization of intangible assets. The Company incurs amortization of intangible expense related to acquisitions it has made. These intangible assets are valued at the time of acquisition and are amortized over the estimated useful lives.

Amortization of capitalized contract and development costs. The Company incurs amortization of previously capitalized software development and non-recurring engineering costs related to certain targets in its Unmanned Systems and ballistic missile target businesses as these units are sold.

Stock-based compensation expense. The Company incurs expense related to stock-based compensation included in its GAAP presentation of selling, general and administrative expense. Although stock-based compensation is an expense of the Company and viewed as a form of compensation, these expenses vary in amount from period to period, and are affected by market forces that are difficult to predict and are not within the control of management, such as the market price and volatility of the Company's shares, risk-free interest rates and the expected term and forfeiture rates of the awards. Management believes that exclusion of these expenses allows comparison of operating results to those of other companies that disclose non-GAAP financial measures that exclude stock-based compensation.

Foreign transaction (gain) loss. The Company incurs transaction gains and losses related to transactions with foreign customers in currencies other than the U.S. dollar. In addition, certain intercompany transactions can give rise to realized and unrealized foreign currency gains and losses.

Acquisition and transaction related items. The Company incurs transaction related costs, such as legal and accounting fees and other expenses, related to acquisitions and divestiture activities. Management believes these items are outside the normal operations of the Company's business and are not indicative of ongoing operating results.

Restructuring costs. The Company incurs restructuring costs for cost reduction actions which include employee termination costs, facility shut-down related costs and remaining lease commitment costs for excess or exited facilities. Management believes that these costs are not indicative of ongoing operating results as they are either non-recurring and/or not expected when full capacity and volumes are achieved.

Legal related items. The Company incurs costs related to pending legal settlements and other legal related matters. Management believes these items are outside the normal operations of the Company's business and are not indicative of ongoing operating results.

Adjusted EBITDA is a non-GAAP financial measure and should not be considered in isolation or as a substitute for financial information provided in accordance with GAAP. This non-GAAP financial measure may not be computed in the same manner as similarly titled measures used by other companies. The Company expects to continue to incur expenses similar to the Adjusted EBITDA financial adjustments described above, and investors should not infer from the Company's presentation of this non-GAAP financial measure that these costs are unusual, infrequent, or non-recurring.

Reconciliation of Net income attributable to Kratos to Adjusted EBITDA is as follows:

	Three Months Ended						Nine Months Ended
	September 26,			September 27,			September 26,			September 27,
		2021			2020			2021			2020

Net income (loss) attributable to Kratos	$	(2.4	)	$	2.4		$	0.6		$	1.5
Loss from discontinued operations, net of income taxes		0.8			0.2			1.1			0.8
Interest expense, net		5.9			5.9			17.5			16.9
Provision (benefit) for income taxes from continuing operations		5.7			5.0			(0.6	)		1.8
Depreciation (including cost of service revenues and product sales)		5.0			4.5			15.7			13.1
Stock-based compensation		6.4			5.0			19.2			14.5
Foreign transaction (gain) loss		0.2			(0.7	)		0.4			(0.4	)
Amortization of intangible assets		1.1			1.7			3.7			5.4
Amortization of capitalized contract and development costs		0.3			0.2			0.8			0.7
Acquisition and restructuring related items and other		0.3			0.4			0.8			2.0
Plus: Net income (loss) attributable to noncontrolling interest		0.5			-			0.3			(0.1	)

Adjusted EBITDA	$	23.8		$	24.6		$	59.5		$	56.2


Reconciliation of acquisition and restructuring related items and other included in Adjusted EBITDA:
	Three Months Ended						Nine Months Ended
	September 26,			September 27,			September 26,			September 27,
		2021			2020			2021			2020
Acquisition and transaction related items	$	0.3		$	0.1		$	0.6		$	1.5
Restructuring costs		-			0.3			0.2			0.5

	$	0.3		$	0.4		$	0.8		$	2.0


Kratos Defense & Security Solutions, Inc.
Unaudited Segment Data
(in millions)

	Three Months Ended						Nine Months Ended
	September 26,			September 27,			September 26,			September 27,
		2021			2020			2021			2020
Revenues:
Unmanned Systems	$	61.3		$	53.5		$	177.5		$	137.5
Kratos Government Solutions		139.3			148.5			422.4			403.8
Total revenues	$	200.6		$	202.0		$	599.9		$	541.3

Operating income
Unmanned Systems	$	2.6		$	3.7		$	10.9		$	5.2
Kratos Government Solutions		14.6			14.1			27.6			31.1
Unallocated corporate expense, net		(6.7	)		(5.1	)		(19.8	)		(16.0	)
Total operating income	$	10.5		$	12.7		$	18.7		$	20.3

Note: Unallocated corporate expense, net includes costs for certain stock-based compensation programs (including stock-based compensation costs for stock options, employee stock purchase plan and restricted stock units), the effects of items not considered part of management’s evaluation of segment operating performance, and acquisition and restructuring related items, corporate costs not allocated to the segments, legal related items, and other miscellaneous corporate activities.

Reconciliation of Segment Operating Income to Adjusted EBITDA is as follows:

	Three Months Ended						Nine Months Ended
	September 26,			September 27,			September 26,			September 27,
		2021			2020			2021			2020
Unmanned Systems
Operating income	$	2.6		$	3.7		$	10.9		$	5.2
Other income		-			-			0.1			0.1
Depreciation		1.6			1.5			5.4			4.5
Amortization of intangible assets		0.2			0.2			0.8			0.4
Amortization of capitalized contract and development costs		0.3			0.2			0.8			0.7
Adjusted EBITDA	$	4.7		$	5.6		$	18.0		$	10.9
% of revenue		7.7	%		10.5	%		10.1	%		7.9	%

Kratos Government Solutions
Operating income	$	14.6		$	14.1		$	27.6		$	31.1
Other income		0.2			0.1			0.5			0.1
Depreciation		3.4			3.0			10.3			8.6
Amortization of intangible assets		0.9			1.5			2.9			5.0
Acquisition and restructuring related items and other		-			0.3			0.2			0.5
Adjusted EBITDA	$	19.1		$	19.0		$	41.5		$	45.3
% of revenue		13.7	%		12.8	%		9.8	%		11.2	%

Total Adjusted EBITDA	$	23.8		$	24.6		$	59.5		$	56.2
% of revenue		11.9	%		12.2	%		9.9	%		10.4	%

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