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KEYW Reports Second Quarter 2016 Financial Results

Revenue from continuing operations of $73.3 million, up 1.3% after excluding SETA revenue from same period last year

GAAP EPS from continuing operations of ($0.01); normalization of tax provision would add $0.05 to GAAP EPS

Adjusted EBITDA from continuing operations of $9.4 million, or 12.8% of revenue

Second quarter funding actions of $59 million, year-to-date funding actions of $176 million

Pipeline of business opportunities at $11 billion; expect to submit approximately $1 billion in proposals in 2016

Company updates fiscal year 2016 revenue guidance

HANOVER, Md., Aug. 09, 2016 (GLOBE NEWSWIRE) — The KEYW Holding Corporation (Nasdaq:KEYW), a leading total solutions provider for the Intelligence Community’s toughest challenges, today announced second quarter 2016 financial results.

“The second quarter marked another step forward in KEYW’s strategic turnaround,” said Bill Weber, president and chief executive officer. “Our financial results were solid—with revenue and adjusted EBITDA from continuing operations coming in at, or above plan. In addition, we made tangible progress on the strategic initiatives presented at our Investor Day in April, including the completion of the Hexis sale and laying the foundation for growth. Specifically, we won prime solutions awards from new and existing customers, developed a new business pipeline that is consistent with the industry standard and strengthened our leadership team.”

Second Quarter 2016 Results from Continuing Operations

Revenue grew by 1.3% to $73.3 million in the second quarter of 2016, which excludes $3.5 million of SETA revenue from the same period last year. The increase in year-over-year second quarter 2016 revenue (excluding second quarter 2015 SETA revenue) was largely the result of increased product sales, including KEYW’s Remote Sensing Division, and the ongoing build-out of the company’s government cyber training initiatives. Including 2015 SETA revenue, revenue decreased 3.3% on a quarter-over-quarter basis.

Gross margin for the second quarter of 2016 was 32.6% compared with 31.0% sequentially and 32.0% for the same period in 2015. Gross margin improved sequentially and year-over-year primarily as the result of increased higher-margin product sales and cyber training revenue. Operating income for the second quarter of 2016 was $5.1 million, or 6.9% of revenue, compared with $6.3 million, or 8.3% of revenue, for the second quarter of 2015. The year-over-year decrease in operating income and margin resulted from higher facilities costs, business development investments and professional services fees. KEYW reported GAAP net loss from continuing operations of $0.4 million, or a $0.01 loss per diluted share, for the second quarter of 2016, largely as a result of GAAP tax rate in the second quarter of an implied 117%, which resulted from non-cash tax amortization of goodwill. If a normalized tax rate of 39.5% were applied, GAAP net income would have increased by $2.0 million, or $0.05 per diluted share. GAAP net loss (including loss on discontinued operations related to the company’s former Commercial Cyber Solutions segment) was $9.6 million, or a $0.24 loss per diluted share, for the second quarter.

Adjusted EBITDA was $9.4 million, or 12.8% of revenue, for the second quarter of 2016 versus $11.7 million, or 15.4% of revenue, in the prior-year period. Second quarter 2016 adjusted EBITDA showed a year-over-year decline primarily as a result of the factors affecting operating income mentioned above. Six-month cash flow from operations at June 30, 2016 was a solid $12.1 million, $11.0 million of which came in the second quarter, primarily as a result of significant receivables collections.

In the second quarter 2016, KEYW received $59 million in funding actions and ended the quarter with 1,047 employees, down compared to the first quarter of 2016 count, primarily due to the sale of the Hexis Cyber Solutions product lines.

Completed Sale of Hexis Cyber Solutions Product Lines

During the second quarter, KEYW concluded the sale of its HawkEye AP and HawkEye G product line businesses in two separate transactions with a total value of approximately $20 million in cash and purchaser stock. HawkEye AP was sold to Ignite Analytics, Inc. on May 2, 2016, and HawkEye G was sold to WatchGuard Technologies, Inc. on June 7, 2016. Beginning in the first quarter of 2016, the results of operations of Hexis Cyber Solutions are classified as discontinued operations for all periods presented.

Laying the Foundation for Growth

The company won prime positions on key Indefinite Delivery/Indefinite Quantity contracts with  U.S. Cyber Command and the Naval Research Laboratory, holding a combined ceiling value of $705 million over 5 years. Both contracts provide strong vehicles for driving new business while expanding the company’s footprint further into the Intelligence and Cyber communities. In addition to capturing new business, the company now has a pipeline of business opportunities totaling $11 billion and expects to submit approximately $1 billion in proposals during 2016. The company also strengthened its leadership, naming Mike Alber, as chief financial officer, appointing Chris Inglis to its Board of Directors and making key hires for boosting recruiting, employee engagement, and business development initiatives identified in the strategic growth plan.

Financial Outlook

For the full year 2016, KEYW expects revenue from continuing operations to be in the range of $290 million to $300 million, which includes approximately $2.5 million of revenue in the first quarter from KEYW’s divested SETA business. Full-year adjusted EBITDA margin expectations continue to be in the range of 10% to 13%. The company narrowed its expected 2016 revenue range by increasing the lower end and decreasing the higher end of guidance by $5 million, keeping the midpoint at $295 million.

“KEYW is on track with its strategic plan to expand our presence as a pure-play, end-to-end products and solutions provider to the Intelligence and Cyber Communities and supporting agencies,” Weber stated. “The company is achieving near-term incremental organic revenue growth while making targeted investments in business development and other growth initiatives. The company expects to report continuing progress in the second half of 2016, particularly in the areas of new product sales and pursuit of one or more large solutions contracts. KEYW has also taken steps to better align employee interests with investors’ through a stock option exchange in the second quarter. We believe 2016 will be a transformative year for KEYW, and we’ve put many of the pieces in place that will begin to show results in 2017 and beyond.”  

THE KEYW HOLDING CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
 
  Three months ended June 30,   Six months ended June 30,
  2016   2015   2016   2015
  (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited)
               
Revenues $ 73,346     $ 75,869     $ 146,988     $ 144,717  
Costs of Revenues, excluding amortization 49,467     51,615     100,264     100,222  
Gross Profit 23,879     24,254     46,724     44,495  
Operating Expenses              
Operating expenses 17,345     16,126     33,784     31,747  
Intangible amortization expense 1,467     1,816     2,935     3,607  
Total Operating Expenses 18,812     17,942     36,719     35,354  
Operating Income 5,067     6,312     10,005     9,141  
Non-Operating Expense, net 2,531     2,550     4,164     5,093  
Earnings before Income Taxes from Continuing Operations 2,536     3,762     5,841     4,048  
Income Tax Expense, net on Continuing Operations 2,972     24,768     4,367     24,924  
Net (Loss) Income from Continuing Operations (436 )   (21,006 )   1,474     (20,876 )
Loss before Income Taxes from Discontinued Operations (9,136 )   (10,214 )   (26,945 )   (19,848 )
Income Tax Expense (Benefit), net on Discontinued Operations     456     (490 )   (3,201 )
Net Loss on Discontinued Operations (9,136 )   (10,670 )   (26,455 )   (16,647 )
Net Loss $ (9,572 )   $ (31,676 )   $ (24,981 )   $ (37,523 )
               
Weighted Average Common Shares Outstanding              
Basic 40,358,981     38,243,184     40,086,725     37,935,621  
Diluted 40,358,981     38,243,184     40,741,286     37,935,621  
               
Basic net (loss) earnings per share:              
Continuing operations $ (0.01 )   $ (0.55 )   $ 0.04     $ (0.55 )
Discontinued operations (0.23 )   (0.28 )   (0.66 )   (0.44 )
Basic net loss per share $ (0.24 )   $ (0.83 )   $ (0.62 )   $ (0.99 )
               
Diluted net (loss) earnings per share:              
Continuing operations $ (0.01 )   $ (0.55 )   $ 0.04     $ (0.55 )
Discontinued operations (0.23 )   (0.28 )   (0.65 )   (0.44 )
Diluted net loss per share $ (0.24 )   $ (0.83 )   $ (0.61 )   $ (0.99 )
THE KEYW HOLDING CORPORATION AND SUBSIDIARIES
 
Condensed Consolidated Balance Sheets
(In thousands, except share and par value per share amounts)
 
  June 30, 2016   December 31, 2015
  (Unaudited)    
ASSETS      
Current assets:      
Cash and cash equivalents $ 47,930     $ 21,227  
Receivables 39,678     53,111  
Inventories, net 16,017     15,616  
Prepaid expenses 2,003     1,538  
Income tax receivable 354     302  
Assets of discontinued operations 3,170     7,765  
Total current assets 109,152     99,559  
       
Property and equipment, net 28,227     28,750  
Goodwill 289,990     297,223  
Other intangibles, net 8,023     10,957  
Other assets 1,529     1,508  
Non-current assets of discontinued operations     15,408  
TOTAL ASSETS $ 436,921     $ 453,405  
LIABILITIES AND STOCKHOLDERS’ EQUITY      
Current liabilities:      
Accounts payable $ 6,796     $ 10,299  
Accrued expenses 10,001     9,345  
Accrued salaries and wages 9,567     8,916  
Deferred income taxes 964     964  
Liabilities of discontinued operations 6,597     7,084  
Total current liabilities 33,925     36,608  
       
Convertible senior notes, net of discount 129,308     126,188  
Non-current deferred tax liability 30,760     26,890  
Other non-current liabilities 11,694     11,894  
TOTAL LIABILITIES 205,687     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, 40,787,838 
and 39,940,667 shares issued and outstanding
41     40  
Additional paid-in capital 331,434     327,045  
Accumulated deficit (100,241 )   (75,260 )
Total stockholders’ equity 231,234     251,825  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 436,921     $ 453,405  
THE KEYW HOLDING CORPORATION AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
  Six months ended June 30,
  2016   2015
  (Unaudited)   (Unaudited)
Net loss $ (24,981 )   $ (37,523 )
Adjustments to reconcile net loss to net cash provided by operating activities:      
Stock compensation 1,147     3,299  
Depreciation and amortization expense 7,437     10,080  
Impairment of Commercial Cyber Solutions goodwill 6,980      
Amortization of discount on convertible debt 3,120     2,548  
(Gain) loss on disposal of assets (3,447 )   1,148  
Loss on sale of assets held for sale 3,568      
Write-off of deferred financing costs 340      
Deferred taxes 3,870     21,501  
Changes in operating assets and liabilities:      
Receivables 18,294     1,600  
Inventories, net (1,502 )   (3,930 )
Prepaid expenses (1,421 )   323  
Accounts payable (4,811 )   672  
Accrued expenses 3,264     3,838  
Other 263     959  
Net cash provided by operating activities 12,121     4,515  
Cash flows from investing activities:      
Acquisitions, net of cash acquired     (20,766 )
Purchases of property and equipment (3,758 )   (4,921 )
Proceeds from sale of assets 16,226      
       
Net cash provided by (used in) investing activities 12,468     (25,687 )
Cash flows from financing activities:      
Proceeds from option and warrant exercises, net 2,114     125  
Net cash provided by financing activities 2,114     125  
Net increase (decrease) in cash and cash equivalents 26,703     (21,047 )
Cash and cash equivalents at beginning of period 21,227     39,601  
Cash and cash equivalents at end of period $ 47,930     $ 18,554  
Supplemental disclosure of cash flow information:      
Cash paid for interest $ 1,959     $ 1,920  
Cash paid for taxes $ 83     $ 98  

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. KEYW’s 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. Investors are encouraged 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.
THE KEYW HOLDING CORPORATION AND SUBSIDIARIES
 
ADJUSTED EBITDA RECONCILIATION TABLE
 (in thousands)
 
  Three months ended June 30,   Six months ended June 30,
  2016   2015   2016   2015
  (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited)
Net (loss) income from continuing operations $ (436 )   $ (21,006 )   $ 1,474     $ (20,876 )
Depreciation 1,931     1,388     3,486     2,718  
Intangible Amortization 1,467     1,816     2,935     3,607  
Restructuring, Acquisition and Other Nonrecurring Costs 411     50     1,842     1,239  
Gain on SETA Divestiture Net of Transaction Costs (226 )       (2,966 )    
Stock Compensation Amortization 669     2,110     1,147     3,300  
Interest Expense 2,614     2,566     5,579     5,109  
Tax Expense 2,972     24,768     4,367     24,924  
Adjusted EBITDA $ 9,402     $ 11,692     $ 17,864     $ 20,021  

Earnings Conference Call and Webcast
KEYW senior management will host a conference call and webcast today at 5:00 p.m. EDT to review the company’s second quarter 2016 financial results, followed by a question-and-answer session.

Individual investors and KEYW employees can connect to the Webcast via the Investor website beginning at 5 p.m. EDT today. We encourage institutional investors and analysts to listen to the session by calling 1-877-853-5645. The International Dial-In access number is1-408-940-3868.  The conference ID for the event is 49072734.

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 Investor 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