KEYW Reports Fourth Quarter and Fiscal Year 2015 Financial Results

Fourth quarter revenue of $81 million; full year, $312 million;

Fourth quarter earnings per share of ($0.12); full year earnings per share, ($1.31)

Fourth quarter Adjusted EBITDA (see below) of $4.1 million; full year, $9.4 million;

Fourth quarter Government Solutions revenue of $75 million; full year, $298 million;

Fourth quarter Government Solutions Adjusted EBITDA of $9.1 million; full year, $38.8 million

Company actively exploring strategic alternatives for its Hexis Cyber Solutions subsidiary as part of comprehensive strategic plan; and

KEYW announces definitive agreement to sell its SETA business to eliminate conflicts of interest in pursuing new contracts and customers.


HANOVER, Md., Feb. 24, 2016 (GLOBE NEWSWIRE) — The KEYW Holding Corporation (Nasdaq:KEYW), a leading total solutions provider solving the Intelligence Community’s toughest challenges, today announced fourth quarter and fiscal year 2015 financial results.

“In my first full quarter leading KEYW, I continue to see tremendous possibility for revenue growth and profitability for this company,” said Bill Weber, CEO and President of KEYW. “The bright spots I see now and emerging in the next few quarters convince me that KEYW’s best years lie ahead. We’ll address our performance in 2015 and tell you what to expect in 2016. However, I assure you that the KEYW you see evolving over the next several quarters will look different than the company you’ve known up to this point. We’ve made tangible progress in formulating our strategic plan and have begun putting words into action.

“As I said to you last quarter, priority one was to come to some definitive conclusions on operating the Hexis business unit going forward.  We are well underway on a process to explore strategic alternatives for Hexis, and we expect to have something to announce shortly.  In the meantime, we are prepared to operate Hexis this year with a disciplined investment from the parent company of no more than $7 million.  In addition, we’ve signed a definitive agreement to sell our SETA business, which will give us access to large prime contract opportunities in two intelligence agencies.   On the Government Solutions side of the house, we have begun the build-out of a world-class business development organization with a proven track record of winning large product and services contract vehicles, especially in the intelligence community.  Finally, we’ve added Mark W. Sopp to our Board of Directors, effective March 16, 2016. More detail on each of these strategic moves can be found in our recent press releases.”

Fourth Quarter 2015 Results

The company reported fourth quarter 2015 revenue of $80.7 million compared with $73.6 million in the fourth quarter 2014, an increase of 9.7%, driven by growth in its Government Solutions business primarily as a result of growth it the products business and the two acquisitions KEYW made in the first quarter of 2015. Gross margin for both periods was 32% of revenue. KEYW reported a GAAP net loss per diluted share of $0.12 in the fourth quarter of 2015 compared with a GAAP loss of $0.15 per diluted share in the prior-year period.

Adjusted EBITDA was $4.1 million for the fourth quarter of 2015 versus $0.6 million in the prior year period. The year-over-year increase was largely the result of increased sales in the Government Solutions business and increased sales and gross margins related to the company’s Commercial Cyber Solutions segment, which were partially offset by decreased margins and higher operating expense related to the company’s Government Solutions segment. During the fourth quarter 2015, KEYW received $70.7 million in funding actions and ended the quarter with 1,174 employees.

Government Solutions

Government Solutions segment revenue in the fourth quarter of 2015 was $75.1 million compared with $70.0 million in the fourth quarter of 2014, an increase of 7.4% over the prior year period. The increase was primarily the result of increased government product sales and the 2015 acquisitions of Milestone Intelligence Group and Ponte Technologies, partially offset by lower revenue on certain services contracts.

Government Solutions gross margin in the fourth quarter of 2015 was 28.5%, a decrease from 29.4% in the prior year. The decrease in gross margin relates to certain services contract rate reductions, increased costs in our aviation services operation and higher sales of lower margin products on a year-over-year basis. Adjusted EBITDA margin in the Government Solutions segment for the fourth quarter of 2015 was 12.1% compared with 12.4% in the fourth quarter of the prior year. The decrease in adjusted EBITDA margin was driven by the previously mentioned lower gross margin and costs associated with KEYW’s new Advanced Cyber Research and Training Center.

Commercial Cyber Solutions

Fourth quarter 2015 Commercial Cyber Solutions segment revenue was $5.6 million compared with $3.6 million in the fourth quarter of 2014, an increase of 54.1% year-over-year and 85.9% sequentially compared to the third quarter of 2015. The year-over-year and sequential increases in revenue in the fourth quarter were driven by higher HawkEye AP product revenue. Commercial Cyber Solutions bookings for the quarter were $6.2 million.

The company reported a fourth quarter adjusted EBITDA loss in the Commercial Cyber Solutions segment of $5.0 million, as compared to a loss of $8.1 million in the fourth quarter of the prior year. The largest driver of the decreased loss in adjusted EBITDA was the previously mentioned increase in revenue and a decrease in operating expenses. Fourth quarter 2015 operating expenses were $10.6 million compared with $11.8 million in the prior-year quarter, largely as the result of lower sales and marketing expense.

Company Exploring Strategic Alternatives for Commercial Cyber Solutions Business

As a result of a strategic review of its performance over the last two quarters, the company decided to explore strategic alternatives for its commercial cyber solutions business, Hexis Cyber Solutions.  KEYW is in the advanced stages of this process and anticipates announcing the results of the process in the coming weeks. In the meantime, the company announced that it has reduced operating expenses at Hexis Cyber Solutions in the month of January 2016 at a $10 million annual run-rate.

HawkEye G Deployments and Customer Update

As of February 24, 2016, the total number of HawkEye G installations was 40. The total number of HawkEye G revenue-generating customers increased to 21, up from 18 at November 9, 2015.

Full Year 2015 Results

Full year revenue for 2015 was $311.8 million compared with full year revenue for 2014 of $290.6 million, an increase of 7.3%. Net loss for 2015 was $50.5 million compared with a net loss of $13.6 million in 2014. Fully diluted GAAP loss per share in 2015 was $1.31 compared with fully diluted GAAP loss per share of $0.36 in 2014. 2015 GAAP loss per diluted share included a $28.8 million ($0.74 per share) non-cash charge taken in the second quarter to establish a valuation allowance for deferred tax assets. 2015 full-year Adjusted EBITDA for 2015 was $9.4 million, or 3.0% of 2015 revenue. Full-year 2015 revenue for the Government Solutions segment was $297.9 million compared with full-year revenue for 2014 of $279.3 million, an increase of 6.7%.  Full year 2015 Adjusted EBITDA for the Government Solutions segment was $38.8 million, or 13.0% of 2015 segment revenue. Cash flow from operations for full year 2015 was $12.3 million.

Financial Outlook

For the full year 2016 KEYW expects its Government Solutions segment revenue to be in the range of $280 million to $305 million, which excludes approximately $12 million of revenue from KEYW’s SETA business. For an accurate comparison, 2015 revenue was $286 million, excluding the SETA business contribution. Adjusted EBITDA margin is expected to be in the range of 10% to 13%. The company expects 2016 Government Solutions revenue to demonstrate a similar quarterly seasonal pattern as seen in the last two years.  Adjusted EBITDA margin is expected to be roughly flat with the fourth quarter 2015 through the first half of 2016 then increase to normal low- to mid-teen percentages by the end of the year.

“I firmly believe that the vision for KEYW we will be sharing with you is entirely achievable. However, dramatic changes such as we will outline do not happen overnight and without cost,” concluded Mr. Weber. “The growth and value-building strategy we’re embarking on will produce a new KEYW that will result in greater shareholder value while making the absolute most out of the culture that the men and women at KEYW have created – it is an advantage for us, and has helped to produce some of the most unique technologies and solutions sets available to the Intelligence Community today.”

Revision to Prior Periods

The balances at December 31, 2014 and for the year and quarter then ended included in this press release and the tables that follow have been revised to reflect the correction of certain errors in 2014 and 2013 that management believes are not material.

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, including the preparation of our annual operating budget; and
  • to evaluate the effectiveness of our business strategies.
  Three months ended
December 31, 2015
  Three months ended
December 31, 2014
  Year ended
December 31, 2015
  Year ended
December 31, 2014
  (Unaudited and in thousands)
Net Loss $ (4,765 )   $ (5,782 )   $ (50,547 )   $ (13,610 )
Depreciation 2,293     2,179     8,400     7,461  
Intangible Amortization 2,372     3,074     11,449     12,162  
Acquisition Costs and Other Nonrecurring Costs 272     281     2,638     363  
Stock Compensation Amortization 1,135     1,368     5,524     6,421  
Interest Expense 2,608     2,508     10,299     8,934  
Tax (Benefit) Expense 147     (3,077 )   21,598     (8,622 )
Adjusted EBITDA $ 4,062     $ 551     $ 9,361     $ 13,109  


THE KEYW HOLDING CORPORATION AND SUBSIDIARIES

Government Solutions Statements of Operations

  Three months ended
December 31, 2015
  Three months ended
December 31, 2014
  Year ended
December 31, 2015
  Year ended
December 31, 2014
  (Unaudited and in thousands)
               
Revenues $ 75,117     $ 69,953     $ 297,935     $ 279,250  
Costs of Revenues, excluding amortization 53,732     49,389     208,206     192,908  
Gross Profit 21,385     20,564     89,729     86,342  
               
Operating expenses 15,129     14,841     63,726     56,534  
Intangible amortization expense 1,714     1,794     7,087     7,737  
Net Operating Income 4,542     3,929     18,916     22,071  
               
Reconciliation of Net Operating Income to Adjusted EBITDA:              
               
Depreciation 1,612     1,588     5,877     5,594  
Intangible Amortization 1,714     1,794     7,087     7,737  
Acquisition Costs and Other Nonrecurring Costs 99     21     1,311     103  
Stock Compensation Amortization 1,135     1,368     5,524     6,421  
Other Non-operating Income 4         41     130  
Segment Adjusted EBITDA $ 9,106     $ 8,700     $ 38,756     $ 42,056  


THE KEYW HOLDING CORPORATION AND SUBSIDIARIES

Commercial Cyber Solutions Statements of Operations

  Three months ended
December 31, 2015
  Three months ended
December 31, 2014
  Year ended
December 31, 2015
  Year ended
December 31, 2014
  (Unaudited and in thousands)
               
Revenues $ 5,573     $ 3,616     $ 13,875     $ 11,324  
Costs of Revenues, excluding amortization 855     842     4,014     2,493  
Gross Profit 4,718     2,774     9,861     8,831  
               
Operating expenses 10,616     11,774     43,106     39,905  
Intangible amortization expense 658     1,280     4,362     4,425  
Net Operating Loss (6,556 )   (10,280 )   (37,607 )   (35,499 )
               
Reconciliation of Net Operating Loss to Adjusted EBITDA:              
               
Depreciation 681     591     2,523     1,867  
Intangible Amortization 658     1,280     4,362     4,425  
Acquisition Costs and Other Nonrecurring Costs 173     260     1,327     260  
Segment Adjusted EBITDA $ (5,044 )   $ (8,149 )   $ (29,395 )   $ (28,947 )


THE KEYW HOLDING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)

  Three months ended
December 31, 2015
  Three months ended
December 31, 2014
  Year ended
December 31, 2015
  Year ended
December 31, 2014
  (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited)
Revenues              
Government Solutions $ 75,117     $ 69,953     $ 297,935     $ 279,250  
Commercial Cyber Solutions 5,573     3,616     13,875     11,324  
Total 80,690     73,569     311,810     290,574  
Costs of Revenues, excluding amortization              
Government Solutions 53,732     49,389     208,206     192,908  
Commercial Cyber Solutions 855     842     4,014     2,493  
Total 54,587     50,231     212,220     195,401  
Gross Profit              
Government Solutions 21,385     20,564     89,729     86,342  
Commercial Cyber Solutions 4,718     2,774     9,861     8,831  
Total 26,103     23,338     99,590     95,173  
Operating Expenses              
Operating expenses 25,745     26,615     106,832     96,439  
Intangible amortization expense 2,372     3,074     11,449     12,162  
Total 28,117     29,689     118,281     108,601  
Operating Loss (2,014 )   (6,351 )   (18,691 )   (13,428 )
Non-Operating Expense, net 2,604     2,508     10,258     8,804  
Loss before Income Taxes (4,618 )   (8,859 )   (28,949 )   (22,232 )
Income Tax (Benefit) Expense, net 147     (3,077 )   21,598     (8,622 )
Net Loss $ (4,765 )   $ (5,782 )   $ (50,547 )   $ (13,610 )
Weighted Average Common Shares Outstanding              
Basic 39,905,618     37,593,663     38,722,340     37,442,680  
Diluted 39,905,618     37,593,663     38,722,340     37,442,680  
Loss per Share              
Basic $ (0.12 )   $ (0.15 )   $ (1.31 )   $ (0.36 )
Diluted $ (0.12 )   $ (0.15 )   $ (1.31 )   $ (0.36 )


THE KEYW HOLDING CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets
(In thousands, except share and par value per share amounts)

  December 31, 2015   December 31, 2014
  (Unaudited)    
ASSETS      
Current assets:      
Cash and cash equivalents $ 21,227     $ 39,601  
Receivables 58,367     57,005  
Inventories, net 17,780     13,375  
Prepaid expenses 1,883     2,207  
Income tax receivable 302     3,951  
Deferred tax asset, current     2,878  
Total current assets 99,559     119,017  
       
Property and equipment, net 34,091     28,634  
Goodwill 312,690     295,984  
Other intangibles, net 13,557     21,109  
Other assets 1,508     1,909  
TOTAL ASSETS $ 461,405     $ 466,653  
LIABILITIES AND STOCKHOLDERS’ EQUITY      
Current liabilities:      
Accounts payable $ 11,607     $ 10,266  
Accrued expenses 9,582     7,337  
Accrued salaries and wages 11,014     11,648  
Deferred revenue 3,441     4,488  
Deferred income taxes 964      
Total current liabilities 36,608     33,739  
Long-term liabilities:      
Convertible senior notes, net of discount 126,188     120,107  
Non-current deferred tax liability 26,890     7,045  
Other non-current liabilities 11,894     6,619  
TOTAL LIABILITIES 201,580     167,510  
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, 39,940,667 and 37,601,474 shares issued and outstanding 40     38  
Additional paid-in capital 327,045     315,818  
Accumulated deficit (67,260 )   (16,713 )
Total stockholders’ equity 259,825     299,143  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 461,405     $ 466,653  


THE KEYW HOLDING CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

  Year ended
December 31, 2015
  Year ended
December 31, 2014
  (Unaudited)   (Unaudited)
Net loss $ (50,547 )   $ (13,610 )
Adjustments to reconcile net loss to net cash provided by operating activities:      
Stock compensation 5,524     6,421  
Depreciation and amortization expense 19,849     19,623  
Amortization of discount on convertible debt 5,149     2,209  
Write-off of deferred financing costs     1,976  
Loss on disposal of long-lived assets 1,186      
Windfall tax benefit from option exercise 823     (1,044 )
Deferred taxes 22,428     (6,234 )
Changes in operating assets and liabilities:      
Receivables 1,368     (4,307 )
Inventories, net (4,441 )   (2,977 )
Prepaid expenses 356     (583 )
Income taxes, net 2,827     1,751  
Accounts payable 1,341     2,262  
Accrued expenses 5,059     2,233  
Other 1,336     714  
Net cash provided by operating activities 12,258     8,434  
Cash flows from investing activities:      
Acquisitions, net of cash acquired (20,991 )   (2,940 )
Purchases of property and equipment (13,286 )   (8,022 )
Capitalized software development costs (456 )   (1,489 )
Net cash used in investing activities (34,733 )   (12,451 )
Cash flows from financing activities:      
Proceeds from issuance of convertible debt     149,500  
Purchase of convertible note hedges     (18,403 )
Issuance cost of convertible senior notes and revolving credit facility     (6,446 )
Proceeds from revolver, net     46,000  
Repayment of term note     (131,000 )
Windfall tax benefit from option exercise (823 )   1,044  
Proceeds from option and warrant exercises, net 4,924     443  
Net cash provided by financing activities 4,101     41,138  
Net (decrease) increase in cash and cash equivalents (18,374 )   37,121  
Cash and cash equivalents at beginning of period 39,601     2,480  
Cash and cash equivalents at end of period $ 21,227     $ 39,601  


As previously announced, a conference call has been scheduled to discuss these results today at 5:00 p.m. EST. At that time, Management will review the company’s fourth quarter and full-year 2015 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 February 24, 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 22390796.

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