Consolidated Operating Income of $27.9 million for fiscal 2021 decreased 4.8 percent, as compared to $29.3 million in fiscal 2020. Fiscal 2021 Operating Income includes increases in non-cash stock-based compensation expense of $4.8 million, depreciation expense of $3.2 million and R&D expenses of $8.2 million, primarily reflecting investments in the Company’s Space, Satellite and Cyber business. Kratos reported fiscal 2021 Net Loss of $2.0 million and loss per share of $0.02, compared to 2020 Net Income of $79.6 million and GAAP EPS of $0.67. Included in fiscal 2020 Net Income is a non-cash tax benefit of $73.5 million. Adjusted EPS was $0.36 for fiscal 2021 compared to $0.33 for fiscal 2020.

Fiscal 2021 Adjusted EBITDA of $82.9 million increased from 2020 Adjusted EBITDA of $78.5 million, primarily reflecting the increase in Revenues, net of the impact of the mix of revenues, including certain programs and products in more mature lifecycles, offset by increased investments including in R&D.

For fiscal year 2021, Cash Flow Generated from Operations was $35.3 million, and Free Cash Flow Used from Operations was $11.2 million, after funding $46.5 million of capital expenditures. Cash on hand on December 26, 2021 was $349.4 million.

Eric DeMarco, Kratos’ President and CEO, said, “For fiscal year 2021, our largest businesses, Unmanned Systems and Space, Satellite and Cyber, reported revenue growth of approximately 24% and 19%, respectively, with Kratos’ Unmanned Systems and KGS reporting fourth quarter book to bill ratios of 2.4 to 1.0 and 1.2 to 1.0, respectively, or a consolidated book to bill ratio of 1.5 to 1.0, positioning the Company for a continued future up and to the right growth trajectory. As we begin 2022, we remain laser focused on our disruptive, affordable, rapid development, leading technology, customer aligned mission.”

Mr. DeMarco, continued, “The DoD has recently communicated its continued commitment to and prioritization of loyal wingman tactical drone and autonomous systems for the future force structure, including additional new planned for program opportunities and potential envisioned concepts of operations. With the numerous tactical drone programs Kratos has successfully competed for and been awarded, the family of affordable aircraft we have flying today and additional systems Kratos Ghost Works has in development with the customer, we believe that Kratos is uniquely positioned to address this new, large market opportunity when the customer calls.”

Mr. DeMarco concluded, “Similar to Kratos’ tactical drone business, we believe that our Space and Satellite business has the opportunity, with our first to market, software based virtualized products, to disrupt the ground infrastructure market and provide Kratos a significant future growth opportunity. Accordingly, in 2022 we will continue our internally funded investments and remain focused on achieving “designed in” program and constellation positions, increasing our market share, while also forecasting increasing revenue, profitability and positive cash flow for this business throughout the year.”

Financial Guidance
We are providing our first quarter and full year 2022 guidance as follows:

Our Fiscal year 2022 financial guidance we are providing today includes our current forecasted business mix, and our assumptions related to the expected impact of continued employee absenteeism, manufacturing, production and supply chain disruptions, parts shortages and related price increases in materials and components, travel restrictions and other COVID-19 related items that have and continue to impact the industry and Kratos.  

In January and February of 2022, we experienced a significant increase in the intensity and effects of COVID–19, including the new Omicron variant, on our employees, consultants, vendors, suppliers, customers, etc. We have assumed that these COVID–19 related impacts to our business, which are significantly impacting our fiscal first quarter 2022 forecast, will begin to subside in our second fiscal quarter, and continue to improve throughout our fiscal 2022. Our assumption of an improving COVID-19 related environment throughout the year, combined with the expectation of a Fiscal 2022 DoD budget by the end of the first quarter, directly relates to our 2022 quarter over quarter financial forecast improvement, including Kratos’ expectation that its financial performance in the second half of 2022 will be substantially greater than the first half.
  
The estimated impact of these COVID-related issues, including the availability of certain raw materials and lack of capacity at mills supporting Kratos’ hardware programs, is currently estimated to impact our first quarter Revenues and Adjusted EBITDA by $12 to $15 million and $2 to $4 million, respectively, and currently estimated to impact our fiscal 2022 Revenues and Adjusted EBITDA by $20 to $25 million and $5 to $8 million, respectively. We will provide future updates as appropriate.

The forecasted financial trajectory in the second half of 2022 reflects the expected mix of revenues, including the expected timing of software product deliveries in our Space, Satellite and Cyber business based upon the forecasted order flow and roll out of our new OpenSpace solution. As we have discussed previously, as this business is transitioning to a more software-focused solution, financial performance is becoming more cyclical, as we experienced in 2021, with increased revenue and margins projected around the September 30 Government fiscal and other customers’ calendar year-end, when increased order and procurement decisions are typically made to fully expend or obligate current fiscal year funding. This cyclicality also results in our projection that we will experience reduced profit margins in the first half of Kratos’ fiscal year, and in particular the first quarter, with increased margins in the second half of the year, due to increased financial leverage on our fixed overhead, manufacturing, research, development and administrative infrastructure, as forecasted revenues increase sequentially throughout the year.

There is currently no Federal Fiscal Year 2022 (October 1, 2021 – September 30, 2022) defense budget in place and the defense industry is operating under a Federal Budget Continuing Resolution Authorization (CRA), which Kratos has been operating under throughout our entire fourth quarter of fiscal 2021 (October 1, 2021 – December 26, 2021) and thus far during our first quarter of fiscal 2022. Under a CRA, there are no new start program awards or new programs of record, no increases in production on existing programs, and no transition from existing development programs to production, among other items, all which impact Kratos. The effects of the current CRA adversely impacted Kratos’ fourth quarter of 2021 and are expected to adversely impact Kratos’ fiscal 2022, with the most significant impact to financial performance currently expected in our first and second quarters, including an expected reduction in bookings, which estimated impact we have included in our 2022 financial guidance provided today.