Kratos Defense & Security
Solutions, Inc. KTOS, a leading National Security Solutions
provider, announced today that it has entered into a Definitive Agreement
(the "Agreement") to sell the U.S. and U.K. operations (the "Operations") of
its Electronic Products Division ("EPD") to Ultra Electronics Holdings plc
("Ultra") for $260 million in cash to be paid at closing and the
reimbursement of up to $5 million for taxes incurred as part of the
transaction, for a total of $265 million in total gross cash proceeds (the
"Transaction"), subject to certain working capital adjustments. The EPD
Operations to be divested include those located in Massachusetts,
Pennsylvania, New Jersey and the United Kingdom. The divested operations
provide electronic systems, subsystems and components for electronic
warfare, missile, radar, intelligence surveillance and reconnaissance
programs. Closing of the Transaction is subject to the receipt of certain
regulatory approvals and other conditions.
Under the terms of the Agreement, Kratos will be making a 338(h)(10)
election for income tax purposes, providing a "step up" in tax basis and
certain other related future tax attributes to Ultra. As a result of the
Transaction, Kratos will be utilizing approximately $180 million of its
total aggregate approximate $400 million in income tax net operating loss
(NOL) carryforwards, reducing the total taxable gain of the Transaction to
Kratos. Total Transaction related costs and net cash taxes to be paid are
estimated to aggregate approximately $25 million, resulting in total initial
estimated net cash proceeds from the Transaction to Kratos of approximately
$240 million. Post Transaction close, Kratos will have over $200 million in
NOL's and over $110 million in additional income tax related deductions
available to reduce future taxable income.
Kratos' Microwave and Electronic Products business post Transaction close
will include operations and manufacturing facilities in Israel, which
provide solid state power amplifiers, integrated microwave assemblies, beam
forming modules, wave form generators and other electronic systems and
subsystems for radar, missile, electronic warfare, satellite communications,
guided munitions, unmanned systems, navigation warfare and other platforms,
primarily for international security customers. Major programs supported by
Kratos' microwave business include Iron Dome, David's Sling, Arrow, Barak
and Euro Fighter. Additionally, in 2013 Kratos reorganized to better align
its businesses with the Company's strategic plan, combining its unmanned
command, control, communications, airborne avionics, ground and seaborne
systems business, formally part of EPD, with Kratos' Unmanned Systems
Division. These assets also remain with Kratos post Transaction close.
Following the closing of the Transaction, Kratos currently intends to
initiate a repurchase process for approximately $175 to $200 million of the
Company's 7 Percent Senior Secured Notes (the "Notes") at par, once all
requisite requirements have been met in accordance with the Notes Indenture
Agreement. In addition, Kratos intends to pay down all outstanding amounts
on the Company's $110 million bank credit facility, which total
approximately $41 million. In connection with the Transaction, the Company
also amended its credit facility to allow for this divestiture as well as
provide a permanent reduction in the financial covenants for future periods
under the credit agreement.
Eric DeMarco, Kratos' President & CEO, said, "The divestiture of these
Operations to Ultra is the culmination and conclusion of a detailed and
thorough strategic alternatives review performed by Kratos' board of
directors that we announced late last year. Through this process, our
strategy of building a technology and products based business that supports
strategic National Security programs while generating significant value for
our stakeholders has been both verified and demonstrated through the strong
interest we received for several Kratos businesses. The Operations that
Ultra is acquiring provide industry leading and formidable high technology
microwave products that are established on a significant number of the DoD's
strategic national security electronic warfare, missile, radar,
intelligence, surveillance and reconnaissance programs and platforms. I
believe that this business is well positioned to continue to take market
share from the competition and generate significant organic revenue and
profit growth over the next several years."
Mr. DeMarco continued, "This Transaction is financially accretive,
deleveraging and positions Kratos to continue to execute our long term
strategy. Post Transaction close, Kratos remains a leader in unmanned
systems, satellite communications, signal monitoring, cyber security,
microwave technology, and certain disruptive technology areas, including
hypersonics, directed energy and railgun. We see solid funding and
opportunity in each of these areas over the next several years, and we will
continue to make significant internal investments and own the intellectual
property in key and growing defense market segments where disruptive
technology provides an opportunity for exponential growth and value
creation."
Mr. DeMarco concluded, "We are focused on successful demonstration flights
with our new unmanned combat aircraft later this year, achieving initial
production on certain unmanned system programs currently under contract in
2016, and introducing our new satellite communication, signal monitoring and
related cyber products to the market over the next 24 months. We expect
these programs and initiatives and our internal investments to generate
strong revenue, profit and cash flow growth beginning in 2017-2018. Kratos'
strategic alternatives review is now complete, and the Company is focused on
executing the stated business plan, investing in our core business areas and
generating further long term value for our stakeholders."
SunTrust Robinson Humphrey, Inc. is serving as financial advisor to Kratos.
DLA Piper LLP (US) provided legal counsel to Kratos and its Board of
Directors. Bryant Riley, Founder, Chairman and CEO of B. Riley & Company,
provides Kratos with strategic planning and advice.
This press release does not constitute a solicitation or an offer to
repurchase the Company's Notes, nor shall there be a solicitation or offer
in any state or jurisdiction in which such solicitation would be unlawful
prior to qualification under the Securities laws of such state or
jurisdiction. In addition, the repurchase will be made only to such persons
and in such jurisdictions as is permitted under applicable law.
Management will conduct a conference call Monday, June 1, 2015 at 9:00 a.m.
Pacific (noon Eastern) to discuss the EPD Transaction, the strategic
rationale for the Transaction, the businesses the Company will retain
following the Transaction, the Company's planned uses of the net proceeds of
the Transaction and the strategic focus of the Company going forward.
Management will also discuss the financial and accounting impacts of the
Transaction and revised annual guidance for 2015. Analysts and institutional
investors may listen to the call by dialing (866) 393-0674 and referencing
the call ID number 56042138. The general public may access the conference
call by dialing (877) 344-3935. International participants may access the
call by dialing (970) 315-0304. The conference call will be broadcast
simultaneously and available at http://ir.kratosdefense.com/events.cfm.
Investors are advised to log on to the website at least 15 minutes prior to
the call to register, download and install any necessary audio software to
view the presentation Kratos' management will be presenting.
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