KEYW HOLDING CORP - FORM 8-K - EX-99.1 - EXHIBIT 99.1 - November 6, 2018

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EXHIBIT 99.1

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.

__________________________________________________________ 
(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.



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:

 
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.

About KeyW

KeyW is a pure-play national security solutions provider for the Intelligence, Cyber and Counterterrorism communities' toughest challenges. KeyW supports information collection, processing, analysis, and dissemination across the full spectrum of customer missions. KeyW employs and challenges nearly 2,000 highly talented professionals with solving such complex problems as preventing cyber threats, transforming data into intelligence, and combating global terrorism. 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 about our future expectations, plans and prospects; statements regarding the modification of our largest flight services program and its impact on our results of operations; our full-year 2018 revenue and adjusted EBITDA margin estimates under the heading “2018 Financial Outlook”; the profitability of our third quarter award programs; and other 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. These statements involve numerous risks and uncertainties, including but not limited to, the outcome of the modification of our largest flight services program, our ability to ultimately realize revenue from bookings and awards reported in this press release, and those risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on March 16, 2018 and other filings that we make with the SEC from time to time. Due to such uncertainties and risks, readers are cautioned not to place undue reliance on such forward-looking statements. KeyW is under no obligation to (and expressly disclaims any such obligation to) update or alter its forward-looking statements whether as a result of new information, future events or otherwise, unless required by law.


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





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
 %



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