Kratos Defense & Security Solutions
Kratos Defense (KTOS) is a mid-size government contractor at the forefront of the DoD’s Third Offset Strategy. Kratos Defense is a leading technology, intellectual property and proprietary product and solutions company focused on the U.S. and its allies’ national security. A key element of its business plan is to make Company-funded investments related to key platforms, products and systems, so that the company own the related intellectual property. Kratos Defense is a demonstrated leader in innovation and rapidly designing, developing, demonstrating, and fielding leading technology products and systems at an affordable cost. Kratos Defense is an industry leader in high performance, jet powered, unmanned aerial drone target systems used to test weapon systems and to train the warfighter, and a provider of high performance unmanned combat aerial systems for force multiplication and amplification. Kratos Defense is also an industry leader in satellite communications, microwave electronics, cyber security/warfare, missile defense and combat and training systems. Kratos Defense has primarily an engineering and technically oriented work force of approximately 2,900 employees with a significant number holding national security clearances. Substantially all of its work is performed at customer locations, in a secure facility or at a critical infrastructure location. The company's primary end customers are national security related agencies and homeland security related agencies. The company believe that its technology, intellectual property, proprietary products and designed-in positions on its customers’ platforms and systems gives it a competitive advantage and creates a high barrier to entry into its markets. The company's entire organization is focused on executing its strategy of becoming the leading technology and intellectual property based company in its industry.1
Industry Update
In March 2017, President Trump submitted a budget proposal for fiscal year (FY) 2018 to Congress. The proposal includes funding of $639 billion for the DoD, comprising a base budget of $574 billion and Overseas Contingency Operations / Global War on Terror (OCO/GWT) funding of $65 billion. The requested FY 2018 funding level for the DoD is approximately $32 billion over the FY 2017 funding level. Congress must approve or revise the President’s FY 2018 budget proposals through enactment of appropriations bills and other policy legislation, which would then require final Presidential approval.
In March 2017, the debt ceiling was reached and the Treasury Department began taking “extraordinary measures” to finance the government. On September 8, 2017, the President signed a bill increasing the debt ceiling to December 8, 2017. The bill also approved $15.25 billion in relief funds for the victims of Hurricane Harvey and Hurricane Irma. It included an extension of government spending to December 8, 2017 as well. Congress must approve a new debt ceiling and create a new budget by December 8, 2017.
On September 28, 2017, the Senate Budget Committee released the FY 2018 Senate Budget Resolution. The budget proposes $3.3 trillion in net policy savings over ten years, the result of $4.9 trillion of largely unspecified spending cuts and $1.6 trillion of tax cuts, in addition to $1.4 trillion of claimed savings due to increased economic growth. The Senate's resolution keeps defense spending at the budget cap levels outlined by the Budget Control Act. It cuts non-defense spending starting in 2019, cutting it by as much as $106 billion by 2027.
It is unclear whether an annual appropriations bill will be enacted for FY 2018 at the levels proposed by the President. On October 1, 2017, the government has once again begun its fiscal year operating under a continuing resolution, which is set to expire on December 8, 2017.
It is unclear when or if an annual appropriations bill will be enacted for FY 2018 or at what levels. Failure to enact appropriations or an additional Continuing Resolution Authorization by December 8, 2017 could result in a government shutdown of unknown duration. If a prolonged government shutdown were to occur, it could result in program cancellations and/or stop work orders and could limit its ability to perform on its U.S. Government contracts and the U.S. Government’s ability to make timely payments.
Reportable Segments
The Company operates in three reportable segments: The Kratos Government Solutions (“KGS”) reportable segment is comprised of an aggregation of KGS operating segments, including its microwave electronic products, satellite communications, modular systems and defense and rocket support services operating segments. The Unmanned Systems (“US”) reportable segment consists of its unmanned aerial system and unmanned ground and seaborne system businesses. The Public Safety & Security (“PSS”) reportable segment provides independent integrated solutions for advanced homeland security, public safety, critical infrastructure, and security and surveillance systems for government and commercial applications. The company organize its business segments based primarily on the nature of the products, solutions and services offered. Transactions between segments are negotiated and accounted for under terms and conditions similar to other government and commercial contracts, and these intercompany transactions are eliminated in consolidation. For additional information regarding its reportable segments, see Note 8 of the Notes to Condensed Consolidated Financial Statements. From a customer and solutions perspective, the company view its business as an integrated whole, leveraging skills and assets wherever possible.
