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KEYW Reports First Quarter 2016 Financial Results

Revenue from continuing operations of $73.6 million, up 7% versus the first quarter of 2015

EPS from continuing operations of $0.05

Adjusted EBITDA (see below) from continuing operations of $8.5 million, or 11.5% of revenue

Strong first quarter funding actions of $117 million

Concluded the divestiture of KEYW’s SETA business

Closed the sale of Hexis Cyber Solutions’ HawkEye AP product line business; progress made toward closing the sale of the HawkEye G product line business

HANOVER, Md., May 10, 2016 (GLOBE NEWSWIRE) — The KEYW Holding Corporation (Nasdaq:KEYW), a leading total solutions provider solving the Intelligence Community’s toughest challenges, today announced first quarter 2016 financial results.

“KEYW’s results were strong across all key metrics, including new awards and funding actions, revenue, adjusted EBITDA and EPS from continuing operations,” said president and CEO Bill Weber. “Focusing specifically on new contract awards, in the first quarter KEYW won the largest prime contract in our history, which will provide advanced cyber training content development, delivery, and training infrastructure to a U.S.-based customer. The single-award contract has a total ceiling value of $152 million over five years and contributed only $4 million to our total first quarter funding actions of $117 million.”

“With the sale of our systems engineering and technical assistance (SETA) business in the first quarter of 2016 and the progress made toward the sale of our Hexis Cyber Solutions business, we continue to leverage our strengths as an end-to-end intelligence solutions company,” continued Weber. “We believe that our unique strengths, including best-of-breed technologies and industry-leading technologists, position KEYW as a leading player in the Intelligence Community solutions market. We are aggressively pursuing an expanded presence in the agencies that serve our country’s intelligence missions and believe that our technologies will be the gateway to large prime services contracts in both our existing customers as well as those we expect to penetrate in the latter part of 2016 and into 2017.”

“For the remainder of 2016, we will focus on improving core fundamentals. Revenue growth efforts will be centered on expanding our product sales and winning new prime services contracts. As we’ve previously announced, KEYW is continuing the process of building a world-class business development organization. We recently announced a new addition to the team in John D. Johns, another industry-leading business developer with a track record of success in the national agency segment of the Intelligence Community. Our business development team is in the process of building and qualifying KEYW’s pipeline of new business opportunities. In the coming quarters, we will provide pipeline metrics, including the value of bids submitted and awaiting award. In terms of profitability and cash flow, we will continue to focus on improving operational efficiencies within KEYW,” concluded Weber.  

First Quarter 2016 Results from Continuing Operations

The company reported first quarter 2016 revenue of $73.6 million compared with $68.8 million in the first quarter 2015, an increase of $4.8 million, or 7.0%. KEYW’s first quarter 2016 revenue included approximately $2.5 million from its now-divested SETA business. SETA revenue for the first quarter of 2015 was $3.6 million. Excluding the SETA revenue contribution from both periods, KEYW revenue for the first quarter of 2016 grew by 9.0% compared with the same period in 2015. The year-over-year first quarter 2016 revenue growth was driven by increased product sales and the continued expansion of the company’s government cyber training initiatives.

Gross margin for the first quarter of 2016 was 31.0% compared with 29.4% for the same period in 2015.  Gross margin improved versus 2015 as a result of a mix shift toward our higher margin products and cyber training businesses. Operating income for the first quarter of 2016 was $4.9 million, or 6.7% of revenue, compared with $2.8 million, or 4.1% of revenue, for the first quarter of 2015. The year-over-year increase in operating income and margin resulted from the factors affecting gross margin, partially offset by higher facilities costs and professional fees. KEYW reported net income per diluted share from continuing operations of $1.9 million, or $0.05 per diluted share, for the first quarter of 2016. GAAP net loss (including loss on discontinued operations related to our former Commercial Cyber Solutions segment) was $15.4 million, or $0.39 per diluted share, for the first quarter.

Adjusted EBITDA was $8.5 million, or 11.5% of revenue, for the first quarter of 2016 versus $8.3 million, or 12.0% of revenue, in the prior-year period. First quarter 2016 EBITDA was stronger in dollars as a result of improved operating income. Cash flow from continuing operations was $8.6 million in the first quarter of 2016.

In the first quarter 2016, KEYW received $117 million in funding actions and ended the quarter with 1,076 employees, down compared to the fourth quarter of 2015 count due to the divestiture of KEYW’s SETA business and restructuring actions taken in Hexis in the first quarter.

Financial Outlook

For the full year 2016 KEYW expects revenue from continuing operations to be in the range of $285 million to $305 million, which includes approximately $2.5 million of revenue in the first quarter from KEYW’s divested SETA business. Adjusted EBITDA margin expectations are expected to be in the range of 10% to 13%. Both revenue and Adjusted EBITDA expectations are unchanged from previous guidance provided on April 7, 2016. The company continues to expect 2016 revenue from continuing operations to demonstrate a similar quarterly seasonal pattern as seen in the last two years, with higher product revenue driving quarterly increases in the second half of the year.

“I believe KEYW’s first quarter performance was a major step in the right direction,” said Weber. “I see a new spirit of excitement and optimism here at the company and in our eight facilities across the country. I view the role of management as shaping the goals and strategies for these extraordinary people and technologies to have the most impact in serving their existing and new customers. I believe that our success in fostering this environment will create a new growth story at KEYW and enhance shareholder value.”     

Sale of Hexis Cyber Solutions Product Line Businesses

On May 2, 2016, KEYW closed the sale of the HawkEye AP product line business to Ignite Analytics, Inc., an affiliate of Ignite Technologies, Inc.  Terms of the transaction were not disclosed.  As described in the company’s April 7, 2016 press release, the company has signed a non-binding letter of intent with respect to the sale of the Hawkeye G product line business, and continues to work toward consummating that sale, which remains subject to entering into a definitive sale agreement and the fulfillment of closing conditions thereunder. Beginning in the first quarter of 2016, the results of operations, assets, and liabilities of Hexis Cyber Solutions are classified as discontinued operations for all periods presented.

Adjusted EBITDA

Adjusted EBITDA, as defined by KEYW, is a financial measure that is not calculated in accordance with accounting principles generally accepted in the United States of America, or US GAAP. The adjusted EBITDA reconciliation tables below provide a reconciliation of this non-US GAAP financial measure to net income (loss), the most directly comparable financial measure calculated and presented in accordance with US GAAP. Adjusted EBITDA should not be considered as an alternative to net income, operating income or any other measure of financial performance calculated and presented in accordance with US GAAP. Our adjusted EBITDA may not be comparable to similarly titled measures of other companies because other companies may not calculate adjusted EBITDA or similarly titled measures in the same manner as we do. We prepare adjusted EBITDA 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. In addition, our board of directors and management use adjusted EBITDA:

  • as a measure of operating performance;
  • to determine a significant portion of management’s incentive compensation;
  • for planning purposes; and
  • to evaluate the effectiveness of our business strategies.
  Three months 
ended
March 31, 
2016
  Three months 
ended
 March 31, 
2015
  (Unaudited and in thousands)
Net income from continuing operations $ 1,909     $ 130  
Depreciation 1,555     1,331  
Intangible Amortization 1,467     1,791  
Restructuring, Acquisition and Other Nonrecurring Costs 1,392     1,158  
Gain on Divestiture Net of Transaction Costs (2,700 )    
Stock Compensation Amortization 478     1,189  
Interest Expense 2,966     2,543  
Tax Expense 1,396     156  
Adjusted EBITDA from Continuing Operations $ 8,463     $ 8,298  
THE KEYW HOLDING CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
 
  Three months ended March 31,
  2016   2015
  (Unaudited)   (Unaudited)
       
Revenues $ 73,642     $ 68,848  
Costs of Revenues, excluding amortization 50,797     48,607  
Gross Profit 22,845     20,241  
Operating Expenses      
Operating expenses 16,439     15,621  
Intangible amortization expense 1,467     1,791  
Total 17,906     17,412  
Operating Income 4,939     2,829  
Non-Operating Expense, net 1,634     2,543  
Earnings before Income Taxes from Continuing Operations 3,305     286  
Income Tax Expense, net on Continuing Operations 1,396     156  
Net Income from Continuing Operations $ 1,909     $ 130  
Loss before Income Taxes from Discontinued Operations (17,809 )   (9,634 )
Income Tax Benefit, net on Discontinued Operations (490 )   (3,657 )
Loss on Discontinued Operations (17,319 )   (5,977 )
Net Loss (15,410 )   (5,847 )
       
Weighted Average Common Shares Outstanding      
Basic 39,850,003     37,632,364  
Diluted 39,900,388     39,658,252  
       
Basic net earnings (loss) per share:      
Continuing operations $ 0.05     $  
Discontinued operations $ (0.44 )   $ (0.16 )
Basic net earnings (loss) per share $ (0.39 )   $ (0.16 )
       
Diluted net earnings (loss) per share:      
Continuing operations $ 0.05     $  
Discontinued operations $ (0.44 )   $ (0.15 )
Diluted net earnings (loss) per share $ (0.39 )   $ (0.15 )
THE KEYW HOLDING CORPORATION AND SUBSIDIARIES
 
Condensed Consolidated Balance Sheets
(In thousands, except share and par value per share amounts)
 
  March 31, 2016   December 31, 2015
  (Unaudited)    
ASSETS      
Current assets:      
Cash and cash equivalents $ 31,854     $ 21,227  
Receivables 51,327     53,111  
Inventories, net 15,686     15,616  
Prepaid expenses 1,318     1,538  
Income tax receivable 306     302  
Assets held for sale 12,369     7,765  
Total current assets 112,860     99,559  
       
Property and equipment, net 27,958     28,750  
Goodwill 289,990     297,223  
Other intangibles, net 9,490     10,957  
Other assets 1,305     1,508  
Non-current assets held for sale     15,408  
TOTAL ASSETS $ 441,603     $ 453,405  
LIABILITIES AND SHAREHOLDERS’ EQUITY      
Current liabilities:      
Accounts payable $ 9,216     $ 10,299  
Accrued expenses 8,751     9,345  
Accrued salaries and wages 9,116     8,916  
Deferred income taxes 964     964  
Liabilities held for sale 9,304     7,084  
Total current liabilities 37,351     36,608  
Long-term liabilities:      
Convertible senior notes, net of discount 127,742     126,188  
Non-current deferred tax liability 27,758     26,890  
Other non-current liabilities 11,762     11,894  
TOTAL LIABILITIES 204,613     201,580  
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, 39,881,064 and 39,940,667 shares issued and outstanding 40     40  
Additional paid-in capital 327,620     327,045  
Accumulated deficit (90,670 )   (75,260 )
Total stockholders’ equity 236,990     251,825  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 441,603     $ 453,405  
THE KEYW HOLDING CORPORATION AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
  Three months ended March 31,
  2016   2015
  (Unaudited)   (Unaudited)
Net loss $ (15,410 )   $ (5,847 )
Adjustments to reconcile net loss to net cash provided by operating activities:      
Stock compensation 488     1,189  
Depreciation and amortization expense 4,038     5,014  
Impairment of Commercial Cyber Solutions goodwill 6,980      
Estimated cost to sell disposal group 2,275      
Amortization of discount on convertible debt 1,555     1,268  
Gain on disposal of long-lived assets (3,221 )    
Write-off of deferred financing costs 340      
Deferred taxes 868      
Changes in operating assets and liabilities:      
Receivables 4,493     1,752  
Inventories, net (1,158 )   (1,644 )
Prepaid expenses (951 )   416  
Income taxes, net (4 )   (3,548 )
Accounts payable (737 )   (256 )
Accrued expenses 1,350     (3,830 )
Other 201     516  
Net cash provided by (used in) operating activities 1,107     (4,970 )
Cash flows from investing activities:      
Acquisitions, net of cash acquired     (16,328 )
Purchases of property and equipment (1,379 )   (2,004 )
Capitalized software development costs (188 )   (101 )
Proceeds from SETA sale 11,000      
Net cash provided (used in) by investing activities 9,433     (18,433 )
Cash flows from financing activities:      
Proceeds from option and warrant exercises, net 87     32  
Net cash provided by financing activities 87     32  
Net increase (decrease) in cash and cash equivalents 10,627     (23,371 )
Cash and cash equivalents at beginning of period 21,227     39,601  
Cash and cash equivalents at end of period $ 31,854     $ 16,230  
Supplemental disclosure of cash flow information:      
Cash paid for interest $ 1,926     $ 1,811  
Cash paid for taxes $ 42     $ 47  
               

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 first quarter 2016 financial results, followed by a question-and-answer session to further discuss the results.

Interested parties will be able to connect to our Webcast via the Investors page on our website, http://investors.keywcorp.com on May 10, 2016. We encourage people to register for an email reminder about the Webcast on the Event Calendar tab, also found on the Investors 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 91962659.

An archive of the Webcast will be available on our webpage following the call. In addition, a podcast of our conference call will be available for download from our Investors page of our website at approximately the same time as the webcast replay.

About KeyW
KeyW is an innovative national security solutions provider to the Intelligence, Cyber, and Counterterrorism communities. KeyW’s advanced technologies in cyber; intelligence, surveillance and reconnaissance; and analytics span the full spectrum of customer missions and enhanced capabilities. The company’s highly skilled workforce solves complex customer challenges such as preventing cyber threats, transforming data to actionable intelligence, and building and deploying sensor packages into any domain. For more information, please visit www.KeyWCorp.com and follow KeyW on Twitter @KeyWCorp.


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 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, including, but not limited to, express or implied statements concerning: our expectations regarding our future financial performance, including the potential impact of successful contract awards; our bid and proposal pipeline; our ability to achieve projected growth in certain of our business units and the expected timing of such growth; demand for our products, services and solutions serving the intelligence, cyber and counterterrorism communities; and performance of key contracts, including the timing of production related to certain of our contracts and product offerings. Factors that may cause our results to differ, potentially materially, from those expressed or implied in our forward-looking statements include, but are not limited to: risks to our business and financial results related to reductions and other spending constraints imposed on the U.S. Government, including as a result the Federal budget deficit and Federal government shut-downs; risks of adverse regulatory action or litigation; risks that changes, cutbacks or delays in spending by Intelligence Community (IC) customers, including the National Security Agency (NSA), the National Geospatial-Intelligence Agency (NGA), and other agencies within the IC, the Federal Bureau of Investigation, and the Department of Defense (DoD) may occur, which could cause delays or cancellations of key government contracts; risks of delays to or the cancellation of our projects as a result of protest actions submitted by our competitors; risks that changes may occur in Federal government (or other applicable) procurement laws, regulations, policies and budgets; risks related to changes in government and customer priorities and requirements (including cost-cutting initiatives, the potential deferral of awards, terminations or reduction of expenditures to respond to the priorities of Congress and the Administration; and those risk factors set forth in our Annual Report on Form 10-K, dated and filed March 16, 2018 with the Securities and Exchange Commission (SEC), and other filings that we make with the SEC from time to time. Due to such uncertainties and risks, investors are cautioned not to place undue reliance on such forward-looking statements. We are under no obligation to (and expressly disclaims any such obligation to) update or alter our forward-looking statements whether as a result of new information, future events or otherwise.

Media Contact:
Karen Coker
Director, Corporate Communications
443.733.1613
communications@keywcorp.com

Investor Contact:
Mark Zindler
Vice President, Investor Relations and Treasury
703.880.9379
investors@keywcorp.com