Kratos to sell public safety and security system integration business

March 01, 2018

By Marjorie Censer

Kratos Defense & Security Solutions said Wednesday it has agreed to sell its public safety and security system integration business for $69 million to Securitas Electronic Security.

Eric DeMarco, Kratos' chief executive, said the move is intended to focus the contractor on high-tech defense products and systems, including drones, satellite communications and missile defense.

"I'm absolutely convinced [by] what we see coming in our satellite business, our training business, our microwave electronics business and our unmanned business," he told analysts in a Wednesday evening call. "We have got to focus on those because we've won some big stuff. We're going to win some other big stuff, and we need to focus where the big growth opportunities are."

In recent years, Kratos has focused on bolstering its unmanned systems business. In 2016, the unit reported sales of $76 million. DeMarco said that year he expected the business to hit about $140 million in sales in two years.

This week, he said the division is meeting those objectives.

"We expect this business to generate approximately $150 million in revenue in 2018, achieving the goal we had previously set of doubling our 2016 UAS revenues in two years," he told analysts. "Similar to 2017, we expect the second half of 2018 for our unmanned business to be much stronger than the first half."

The PSS deal, Kratos said, is expected to ultimately yield about $70 million in cash proceeds. The transaction is expected to close in the next 90 days.

Meanwhile, the contractor also reported Wednesday sales in 2017 reached $752 million, up about 12 percent from 2016. The company recorded a loss for the year of almost $43 million, less than the nearly $61 million Kratos lost in 2016.

While the contractor saw growth in its product sales, which reached $406 million, up from $321 million the prior year, its services sales declined slightly. In the most recent quarter, Kratos said, it recorded a non-cash impairment charge of $24 million related to its defense rocket support services business, which is part of its government services segment.

DeMarco said during Wednesday's call the company has deemphasized its government services work as it zeroes in on technology, intellectual property and systems.

"We have been focused on building a high-growth, high-margin business," he said. "Kratos' services business, though being a great cash flow generator and which has allowed us to successfully execute our strategy and build the technology product and systems company that we have today, has historically adversely impacted the company's book-to-bill ratio and our growth rates."

Asked by an analyst whether Kratos might consider divesting the rocket support business, as it has done with the PSS unit, DeMarco declined to detail its plans.

"We are routinely looking at the portfolio to see what makes best sense for the shareholders, and that's all I should say about that," he said.