KeyW Reports Third-Quarter 2018 Financial Results

  • Revenue of $126.7 million
  • Operating income of $3.7 million
  • Adjusted EBITDA (see table 1 below) of $13.7 million or 10.8% of revenue
  • Contract awards of $312 million
  • Company revises its fiscal year 2018 financial guidance

 HANOVER, Md., November 6, 2018 (GLOBE NEWSWIRE)—The KeyW Holding Corporation (NASDAQ: KEYW), today announced third-quarter 2018 financial and operating results.

CEO Commentary

“KeyW continued to execute our plan, delivering strong revenue, profitability, cash flow and contract awards.  We exceeded our revenue, profitability and awards objectives for the quarter, paid down $10 million of debt and are well-positioned to close the year with solid momentum heading into 2019.  We are winning new work across all our core focus areas, the spending environment remains strong and our pipeline provides significant growth opportunities,” said Bill Weber, KeyW’s president and chief executive officer.

Third-Quarter 2018 Results

 Revenues for the quarter of $126.7 million increased $4.3 million, or 3.5%, compared to the prior-year quarter. The improvement was primarily attributable to an increased level of effort on existing business, increased sensor and product solution sales and strong program performance.

Operating income for the quarter was $3.7 million, compared with operating income of $0.5 million in the prior-year quarter. The increase in operating income and margin resulted primarily from the increase in revenue and program profitability over the prior-year quarter.  Operating expenses in the quarter included $0.8 million of acquisition and integration costs and an additional $2.3 million of non-recurring expenses.

The third-quarter GAAP net loss decreased to $2.0 million or $(0.04) per diluted share compared to $6.0 million or $(0.12) per diluted share in the prior-year quarter due to the improvements in Operating income.  The increase in non-operating expenses over the prior-year quarter was primarily attributable to an increase in interest expense. 

Adjusted EBITDA for the quarter was $13.7 million, or 10.8% of revenue, compared to $11.5 million, or 9.4% of revenue, in the prior-year quarter.  Adjusted EBITDA increased year-over-year primarily because of higher profitability driven by strong program performance and increased sensor and product solutions sales.

Net cash used in operating activities was effectively breakeven for the nine months ended September 30, 2018.  For the three months ended September 30, 2018, the company generated $13.4 million in cash flow from operations, driven by cash earnings and an improvement in Days Sales Outstanding (DSO).  DSO declined to 64 days during the third quarter, which is in line with historical levels.  In the third quarter, based on this strong cash flow, the company paid down $10.0 million of its First Lien Term Loan facility and cash and cash equivalents at September 30, 2018, were $30.7 million.

Business Development Highlights and Contract Awards

Total backlog of $1.1 billion at September 30, 2018, which reflects the write-down of the flight services work and other programs, remained at the same level as June 30, 2018, due to contract awards of $312 million[1], or 2.5x awards to revenue.  In addition, the company reported having approximately $1.7 billion in proposals submitted and awaiting award as of September 30, 2018.

Third quarter awards were spread over numerous contracts, enhancing the diversity of our contract portfolio. The awards were comprised of 61 percent new business plus base growth and 39 percent recompete work, and were diversified across cyber, intelligence surveillance and reconnaissance and IT analytics work. The company continued to demonstrate a strong win rate in our traditional sweet spot of programs valued at $50 million and below, comprising both sole-source single awards and task orders within our portfolio of IDIQ and Blanket Purchase Agreement (BPA) contract vehicles.  The company also won several large programs including a software development and integration support contract estimated to exceed $100 million over the next four to five years and an $88 million software development single-award BPA, both for classified customers. 

In addition, KeyW continued to expand its strong portfolio of IDIQ vehicles, winning two attractive IDIQ prime awards during the quarter.  The GSA’s Remote Sensing, Command Control Communications and Computer program is a high-end $135 million technology vehicle for technically innovative intelligence, surveillance and reconnaissance services and solutions.  The company also won a prime award on the $500 million HELIOS IDIQ contract to support the Defense Intelligence Agency’s advanced science and technology missions.

During the third quarter, the company executed a contract modification with the prime contractor on the company’s largest flight services program.  The modification will maintain existing services through the fourth quarter of 2018 and consequently have no impact on the company’s results of operations in 2018.  In 2019, the company will cease flight operations on the program, but will continue providing operations and maintenance for sensor solutions to support the ongoing program mission requirements.      

 2018 Financial Outlook

KeyW is revising the fiscal year 2018 guidance it issued on March 15, 2018, based on the company’s financial results for the first nine months of 2018 and its current outlook for the fourth-quarter of 2018.  The table below summarizes the company’s fiscal year 2018 guidance:

[1] Third quarter 2018 and trailing-twelve-month contract awards include approximately $63 million of contract value taken on certain IDIQ contracts where there is a historical precedent basis for estimating future revenues.  The $63 million in contract awards referenced here is not included in Total Backlog as of September 30, 2018.

 

 

Revised Fiscal 2018 Guidance

Prior Fiscal 2018 Guidance

Revenue

$500 million – $515 million

$495 million – $515 million

Adjusted EBITDA margin

9.1% – 9.5%

8.9% – 9.3%

Conference Call Information

As previously announced, KeyW will host a conference call and webcast today, November 6, 2018, at 8:00 a.m. ET.  Management will review the company’s third-quarter 2018 financial results, followed by a question-and-answer session. Listeners may access a presentation summarizing the third-quarter 2018 results and providing additional information regarding 2018 expectations on the company’s website.

Interested parties will be able to connect to the webcast on the Investor Relations page of the website,  https://www.keywcorp.com/investor-relations/, on November 6, 2018.  Prospective attendees may register for an email reminder about the webcast on the Events and Presentations tab, also found on the Investor Relations page. The conference call dial-in number will be 1-877-451-6152 and conference ID 13683918. The international dial-in number will be 1-201-389-0879.

The company will post an archive of the webcast following the call on the KeyW Investor Relations page.

THE KeyW HOLDING CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (unaudited)
(In thousands, except per share amounts)

 

Three months ended September 30,

 

Nine months ended September 30,

 

2018

 

2017 (1)

 

2018

 

2017 (1)

Revenue

$126,690

 

 

$122,394

 

 

380,572

 

 

$314,708

Cost of revenue, excluding amortization

91,771

 

 

93,475

 

 

281,813

 

 

236,122

Operating expenses

28,455

 

 

24,781

 

 

81,262

 

 

81,672

Intangible amortization expense

2,721

 

 

3,604

 

 

9,399

 

 

8,858

Operating income (loss)

3,743

 

 

534

 

 

8,098

 

 

(11,944)

Interest expense, net

6,240

 

 

4,829

 

 

16,974

 

 

12,352

Loss on extinguishment of debt

166

 

 

 

 

11,595

 

 

Other non-operating loss (income)

9

 

 

(246)

 

 

(123)

 

 

(375)

Loss before income taxes

(2,672)

 

 

(4,049)

 

 

(20,348)

 

 

(23,921)

Income tax (benefit) expense, net

(686)

 

 

1,980)

 

 

(3,569)

 

 

5,039

Net loss

(1,986)

 

 

(6,029)

 

 

$

(16,779)

 

 

$

(28,960)

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

Basic

49,833

 

 

49,771

 

 

49,814

 

 

48,627

Diluted

49,833

 

 

49,771

 

 

49,814

 

 

48,627

 

 

 

 

 

 

 

 

Loss per share

 

 

 

 

 

 

 

Basic

$

(0.04)

 

 

$

(0.12)

 

 

$

(0.34)

 

 

$

(0.60)

Diluted

$

(0.04)

 

 

$

(0.12)

 

 

$

(0.34)

 

 

$

(0.60)

(1) The balances for the three and nine months ended September 30, 2017, have been revised to reflect the correction of certain errors that management has determined are not material. Also as the Company adopted the requirements of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, as amended as of January 1, 2018, using the modified retrospective method, there is a lack of comparability to the prior periods presented.

 

THE KeyW HOLDING CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (unaudited)
(In thousands, except par value per share amounts)

 

September 30, 2018

 

December 31, 2017 (1)

ASSETS

 

 

 

Current assets:

 

 

 

Cash and cash equivalents

$

30,667

 

 

$

17,832

 

Accounts receivables, net

34,027

 

 

49,880

 

Unbilled receivables, net

55,490

 

 

37,785

 

Inventories, net

26,342

 

 

24,337

 

Prepaid expenses

3,456

 

 

2,266

 

Income tax receivable

213

 

 

210

 

Total current assets

150,195

 

 

132,310

 

 

 

 

 

Property and equipment, net

26,524

 

 

36,141

 

Goodwill

455,197

 

 

455,197

 

Other intangibles, net

47,645

 

 

57,045

 

Other assets

4,018

 

 

2,913

 

TOTAL ASSETS

$

683,579

 

 

$

683,606

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

Current liabilities:

 

 

 

Accounts payable

$

13,778

 

 

$

25,609

 

Accrued expenses

16,190

 

 

17,862

 

Accrued salaries and wages

32,227

 

 

29,341

 

Term loan – current portion, net of discount

 

 

6,750

 

Convertible senior notes – current portion, net of discount

21,780

 

 

 

Deferred revenue

3,465

 

 

6,090

 

Total current liabilities

87,440

 

 

85,652

 

 

 

 

 

Convertible senior notes – non-current portion, net of discount

 

 

138,998

 

Term loan – non-current portion, net of discount

273,649

 

 

120,627

 

Deferred tax liability, net

15,735

 

 

19,367

 

Other non-current liabilities

10,630

 

 

11,444

 

TOTAL LIABILITIES

387,454

 

 

376,088

 

Commitments and contingencies

 

 

 

Stockholders’ equity:

 

 

 

Preferred stock, $0.001 par value; 5,000 shares authorized, none issued

 

 

 

Common stock, $0.001 par value; 100,000 shares authorized, 49,859 and 49,876 shares issued and outstanding

50

 

 

50

 

Additional paid-in capital

428,835

 

 

422,901

 

Accumulated deficit

(133,208

)

 

(115,433

)

Accumulated other comprehensive income

448

 

 

 

Total stockholders’ equity

296,125

 

 

307,518

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

683,579

 

 

$

683,606

 

 (1) The balances at December 31, 2017, have been revised to reflect the correction of certain errors that management has determined are not material. Also as the Company adopted the requirements of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, as amended as of January 1, 2018, using the modified retrospective method, there is a lack of comparability to the prior period presented

THE KeyW HOLDING CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (unaudited)
(In thousands)

 

Nine months ended September 30,

 

2018

 

2017 (1)

Net loss

$

(16,779)

 

 

$

(28,960)

 

 

 

 

 

 

 

 

 

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

 

 

 

Share-based compensation

3,501

 

 

3,054

 

Depreciation and amortization expense

18,178

 

 

16,371

 

Loss on extinguishment of debt

11,595

 

 

 

Non-cash interest expense

3,661

 

 

5,356

 

Loss on disposal of assets

3,185

 

 

 

Deferred taxes

(3,468)

 

 

5,012

 

Changes in balance sheet items, net of effects of acquisitions:

 

 

 

Accounts receivable, net

15,853)

 

 

4,663

 

Unbilled receivables, net

(16,540)

 

 

(2,334)

 

Inventories, net

(2,297)

 

 

(5,829)

 

Prepaid expenses

(1,596)

 

 

(219)

 

Accounts payable

(11,831)

 

 

3,949

 

Accrued expenses

(2,702)

 

 

3,983

 

Other non-current assets/liabilities

(801)

 

 

(1,857)

 

Net cash (used in) provided by operating activities

(41)

 

 

3,189

 

Cash flows from investing activities:

 

 

 

Acquisitions, net of cash acquired

 

 

(236,091)

 

Purchases of property and equipment

(2,347)

 

 

(5,128)

 

Net cash used in investing activities

(2,347)

 

 

(241,219)

 

Cash flows from financing activities:

 

 

 

Proceeds from issuance of term note

290,000

 

 

135,000

 

Principal payments of term loan

(141,625)

 

 

(1,688)

 

Principal payments of convertible senior notes

(126,892)

 

 

 

Settlement of capped call transactions

2,118)

 

 

 

Payment of debt issuance costs

(7,482)

 

 

(4,689)

 

Payment of debt extinguishment costs

(711)

 

 

 

Proceeds from revolver

25,000

 

 

10,000

 

Repayment of revolver

(25,000)

 

 

(10,000)

 

Proceeds from stock issuance, net

 

 

84,586

 

Other

(185)

 

 

216

 

Net cash provided by financing activities

15,223

 

 

213,425

 

Net increase (decrease) in cash and cash equivalents

12,835

 

 

(24,605)

 

Cash and cash equivalents at beginning of period

17,832

 

 

41,871

 

Cash and cash equivalents at end of period

$

30,667

 

 

$

17,266

 

Supplemental disclosure of cash flow information:

 

 

 

Cash paid for interest

$

15,088

 

 

$

6,622

 

Cash (received) paid for income taxes, net

$

(137)

 

 

$

15

 

(1) The balances for the nine months ended September 30, 2017, have been revised to reflect the correction of certain errors that management has determined are not material. Also as the Company adopted the requirements of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, as amended as of January 1, 2018, using the modified retrospective method, there is a lack of comparability to the prior period presented.

Non-GAAP Financial Measures

Adjusted EBITDA and adjusted EBITDA margin, as defined by KeyW, are financial measures that are not calculated in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. The adjusted EBITDA reconciliation table and adjusted EBITDA as percentage of full year revenue guidance reconciliation table below provide a reconciliation of these non-U.S. GAAP financial measures to net income (loss) and estimated net income (loss) margin, the most directly comparable financial measures calculated and presented in accordance with U.S. GAAP.  Adjusted EBITDA and adjusted EBITDA margin should not be considered as alternatives to net income, net income margin, operating income or any other measure of financial performance calculated and presented in accordance with U.S. GAAP. Our adjusted EBITDA and adjusted EBITDA margin may not be comparable to similarly titled measures of other companies because other companies may not calculate adjusted EBITDA, adjusted EBITDA margin or similarly titled measures in the same manner as we do. We prepare adjusted EBITDA and adjusted EBITDA margin 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.

We believe adjusted EBITDA and adjusted EBITDA margin are useful to investors in evaluating our operating performance for the following reasons:

  • we have various non-recurring transactions or non-operating transactions and expenses that directly impact our net income. Adjusted EBITDA is intended to approximate the net cash provided by operations by adjusting for non-recurring or non-operating items; and
  • securities analysts use adjusted EBITDA as a supplemental measure to evaluate the overall operating performance of companies.

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.

Although adjusted EBITDA is frequently used by investors and securities analysts in their evaluations of companies, adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results of operations as reported under GAAP. Some of these limitations are:

 

  • adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or other contractual commitments;
  • adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
  • adjusted EBITDA does not reflect interest expense or interest income;
  • adjusted EBITDA does not reflect cash requirements for income taxes;
  • adjusted EBITDA does not include non-cash expenses related to stock compensation;
  • adjusted EBITDA does not include acquisition and integration costs;
  • adjusted EBITDA does not include other adjustments which are non-recurring expenses;
  • although depreciation and amortization are non-cash charges, the assets being depreciated or amortized will often have to be replaced in the future, and adjusted EBITDA does not reflect any cash requirements for these replacements; and
  • other companies in our industry may calculate adjusted EBITDA or similarly titled measures differently than we do, limiting its usefulness as a comparative measure.

 

THE KeyW HOLDING CORPORATION AND SUBSIDIARIES
Adjusted EBITDA Reconciliation Table
(in thousands and unaudited)
Table 1

 

Three months ended September 30,

 

Nine months ended September 30,

 

2018

 

2017 (1)

 

2018

 

2017 (1)

Net loss

$

(1,986)

 

 

$

(6,029)

 

 

$

(16,779)

 

 

$

(28,960)

 

Depreciation

2,953

 

 

3,087

 

 

8,779

 

 

7,513

 

Intangible amortization

2,721

 

 

3,604

 

 

9,399

 

 

8,858

 

Share-based compensation

1,252

 

 

956

 

 

3,501

 

 

3,054

 

Loss on extinguishment of debt

166

 

 

 

 

11,595

 

 

 

Interest expense, net

6,240

 

 

4,829

 

 

16,974

 

 

12,352

 

Tax (benefit) expense

(686)

 

 

1,980

 

 

(3,569)

 

 

5,039

 

Acquisition and integration costs

755

 

 

3,049

 

 

2,291

 

 

18,060

 

Other adjustments

2,295

 

 

 

 

5,404

 

 

 

Adjusted EBITDA

$

13,710

 

 

$

11,476

 

 

$

37,595

 

 

$

25,916

 

(1) The balances for the three and nine months ended September 30, 2017, have been revised to reflect the correction of certain errors that management has determined are not material. Also as the Company adopted the requirements of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, as amended as of January 1, 2018, using the modified retrospective method, there is a lack of comparability to the prior periods presented.

Adjusted EBITDA as Percentage of Full Year Revenue Guidance Reconciliation Table

 

Fiscal Year 2018 Estimate

 

Low

 

High

Net loss

(4.2)

%

 

(3.6)

%

Depreciation

2.3

%

 

2.3

%

Intangible amortization

2.4

%

 

2.4

%

Share-based compensation

1.0

%

 

0.9

%

Loss on extinguishment of debt

2.3

%

 

2.3

%

Interest expense, net

4.7

%

 

4.5

%

Tax benefit

(0.9)

%

 

(0.8)

%

Acquisition and integration costs

0.5

%

 

0.4

%

Other adjustments

1.0

%

 

1.1

%

Adjusted EBITDA Margin

9.1

%

 

9.5

%

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