SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 27, 2019
Kratos Defense & Security Solutions, Inc.
(Exact name of registrant as specified in its charter)
(State or Other Jurisdiction of
(Commission File Number)
(IRS Employer Identification No.)
10680 Treena St., Suite 600
San Diego, CA 92131
(Address of Principal Executive Offices) (Zip Code)
(Registrant’s Telephone Number, Including Area Code)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Item 1.01 Entry into a Material Definitive Agreement.
On February 27, 2019, Kratos Defense & Security Solutions, Inc. (“we”, “Kratos” or the “Company”) entered into a purchase agreement (the “Purchase Agreement”) with Shirley Brostmeyer, an individual, Joseph Brostmeyer, an individual, The Shirley C. Brostmeyer Revocable Trust, u/a/d August 25, 2002, as amended and restated August 13, 2014, a Florida revocable trust (“SB Trust”), The Shirley Brostmeyer 2018 Family Trust, u/a/d December 17, 2018, a Florida irrevocable trust (“2018 SB Trust”), The Joseph D. Brostmeyer Revocable Trust, u/a/d August 25, 2002, as amended and restated August 13, 2014, a Florida revocable trust (“JB Trust”), The Joseph D. Brostmeyer 2018 Irrevocable Trust, u/a/d December 17, 2018, a Florida irrevocable trust (“2018 JB Trust” and, together with SB Trust, 2018 SB Trust and JB Trust, each a “Seller” and, collectively, the “Sellers”), and Joseph Brostmeyer, as the Sellers Representative.
Pursuant to the terms of the Purchase Agreement, on February 27, 2019 (the “Closing Date”), we acquired from the Sellers 80.1% of the issued and outstanding shares of capital stock of Florida Turbine Technologies Inc., a Florida corporation (“FTT”), and 80.1% of the membership interests in FTT CORE, LLC, a Delaware limited liability company (“FTT Core” and, together with FTT and their respective subsidiaries, the “Acquired Companies”), for an aggregate purchase price of $60 million, a portion of which was paid to the holders of minority interests in certain of the Acquired Companies. The purchase price was $33 million in cash, subject to adjustments for transaction expenses incurred by the Acquired Companies, indebtedness of the Acquired Companies, cash on hand of the Acquired Companies, certain amounts payable or potentially payable to employees of the Acquired Companies and post-closing working capital adjustments, and 1,825,406 shares of our common stock (with a value of approximately $27 million).
The number of shares of our common stock (the “Shares”) issued to the holders of capital stock of FTT and membership interests of FTT Core (collectively, the “FTT Shareholders”) was based on the volume weighted average sale price per share of the our common stock on the NASDAQ Global Select Market as reported by Bloomberg Financial Markets, over the trailing 60-day period ending on February 25, 2019. Following the closing of the acquisition and issuance of the Shares, the FTT Shareholders will have certain registration rights with respect to the Shares.
Upon completion of the acquisition, we withheld an aggregate of $6 million from the cash portion of the purchase price, to be delivered to an escrow agent, which will be held as collateral and security for the rights of certain indemnified parties, including in connection with post-closing working capital adjustments.
Simultaneously with the execution of the Purchase Agreement and completion of the acquisition, the Company, FTT, FTT Core and the Sellers entered into an exchange agreement (the “Exchange Agreement”) pursuant to which, among other things, (i) FTT Core will be converted into a Delaware corporation, (ii) beginning in January 2024, the Holders will have an annual right (the “Put Right”) to sell all of the minority interests in FTT Inc. and FTT Core (the “Minority Interests”) to the Company at a purchase price based on an assumed enterprise value of 12 times the trailing 12 months EBITDA of the Acquired Companies, subject to adjustment as set forth in the Exchange Agreement (the “Minority Interest Purchase Price”) (provided, however, that following certain events, including a change of control, the Put Right will be accelerated and the Minority Interest Purchase Price will be increased to 14 times the trailing 12 months EBITDA of the Acquired Companies), and (iii) beginning in January 2025, the Company will have an annual right to purchase all of the Minority Interests from the Holders at the Minority Interest Purchase Price.
Kratos and the Sellers have made customary representations, warranties, and covenants in the Purchase Agreement, including, among other things, regarding (i) the operation of the Acquired Companies’ business
prior to the closing, and (ii) Kratos’ obligations to maintain certain employee benefits for employees of the Acquired Companies and to provide indemnification insurance for the Acquired Companies’ directors, managers and officers. The Purchase Agreement also provides for indemnification of the Sellers and Kratos, under certain circumstances.
The foregoing description of the Purchase Agreement and the Exchange Agreement and the transactions contemplated thereby does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Purchase Agreement and the Exchange Agreement, copies of which will be filed as exhibits to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019.
Item 3.02 Unregistered Sale of Equity Securities.
The disclosures made in response to Item 1.01 above are incorporated herein by reference.
The issuance of the Shares was exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”) pursuant to Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder.
Item 8.01 Other Events.
On February 28, 2019, the Company issued a press release announcing the acquisition of the Acquired Companies, a copy of which is attached hereto as Exhibit 99.1 and incorporated herein by reference.
Item 9.01. Financial Statements and Exhibits.
Certain statements in this Current Report on Form 8-K and in the press release attached hereto may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements relate to a variety of matters, including but not limited to the timing and amount of anticipated payments to be made pursuant to the Purchase Agreement and the Exchange Agreement and other statements that are not purely statements of historical fact. These forward-looking statements are made on the basis of the current beliefs, expectations and assumptions of the management of the Company and the Acquired Companies and are subject to significant risks and uncertainty. Investors are cautioned not to place undue reliance on any such forward-looking statements. All such forward-looking statements speak only as of the date they are made, and neither the Company nor the Acquired Companies undertakes any obligation to update or revise these statements, whether as a result of new information, future events or otherwise.
Factors that could cause actual results to differ materially from the forward-looking statements contained herein include, but are not limited to: any operational or cultural difficulties associated with the integration of the businesses of the Company and the Acquired Companies; potential adverse reactions or changes to business relationships resulting from the announcement and completion of the proposed acquisition of the Acquired Companies; unexpected costs, charges or expenses resulting from the proposed acquisition of the
Acquired Companies; litigation or adverse judgments relating to the proposed acquisition of the Acquired Companies; the failure to realize synergies and cost savings from the transaction or delay in realization thereof; and any changes in general economic and/or industry-specific conditions. Additional factors that could cause actual results to differ materially from those described in the forward-looking statements are set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, which was filed with the SEC on February 28, 2018, under the heading “Item 1A-Risk Factors,” and in subsequent reports on Forms 10-Q and 8-K and other filings made with the SEC by the Company.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Kratos Defense & Security Solutions, Inc.
Date: February 28, 2019
/s/ Deanna H. Lund
Deanna H. Lund
Executive Vice President and Chief Financial Officer
Kratos Defense & Security Solutions Acquires Advanced Turbine Engine Developer Florida Turbine Technologies
New Kratos Business Unit to Focus on the Development and Production of Small, Affordable, High-Performance, Jet Engines for the Next Generation of Tactical Weapon Systems and Tactical Jet Unmanned Aerial Systems
SAN DIEGO, Feb. 28, 2019 (GLOBE NEWSWIRE) Kratos Defense & Security Solutions, Inc. (Nasdaq: KTOS), a leading National Security Solutions provider, announced today that it has acquired an 80.1% interest in Florida Turbine Technologies, Inc. and FTT Core, LLC (collectively “FTT”) a leading technology company and innovation leader in advanced turbine engines, for $60 million, consisting of $33 million in cash and $27 million in Kratos common stock. Kratos has an option to acquire the remaining 19.9% of FTT at a future date. FTT is strategically positioned to compete in the small-sized, affordable turbofan and turbojet marketspace as a market disrupter and technology leader. Recognizing that Kratos and FTT share the same passion for developing and delivering innovative and cost-saving solutions to customers, this acquisition is expected to accelerate FTT’s
small engine development programs, and facilitate integration of these leading-edge engine solutions with evolving Kratos tactical systems. FTT, which is forecasting revenues and adjusted EBITDA of approximately $45 million and $4.5 million, respectively, for the 10 month period March 1 through December 31, 2019, will now be part of the Kratos Turbine Technologies (KTT) Division, which will be focused on the development and production of small, affordable, high-performance, jet engines for the next generation of tactical weapon systems and tactical jet unmanned aerial systems (UAS). The KTT Division will be included in the Kratos Government Solutions (KGS) Segment.
FTT, based in Jupiter, FL, with offices in Oklahoma, Puerto Rico, Canada, Germany, and the United Kingdom, was founded in 1998 by Shirley and Joseph Brostmeyer. Shirley, a graduate of the University of Virginia, earned a B.S. in Mechanical Engineering before earning an M.S. in Mechanical Engineering from Rensselaer Polytechnic Institute. Her strong leadership and passion for engineering has been a driver in the development of FTT into an industry leader in the propulsion marketplace. Joe, who has over 30 years of aerospace experience and has authored more than 20 patents, has been and will continue to be a driving force in the company’s culture of innovation. Similar to Shirley, Joe holds a B.S and an M.S in Aeronautical Engineering from Rensselaer Polytechnic Institute. What started as an engineering services firm has evolved into a highly-respected industry-leading turbomachinery design and manufacturing company specializing in engineering, development, and testing of gas turbines, propulsion components, and systems for military and commercial applications. The Brostmeyers’ passion for technology development and transformational change was the foundation for the success and evolution of FTT and aligns directly with the Kratos mantra. Both Joe and Shirley will remain directly involved with the company as a part of Kratos.
Steve Fendley, Kratos Unmanned Systems Division President said, “The ‘leap frog’ opportunities that FTT technologies and products bring to the Kratos family and to our Unmanned Systems Division are transformational. We pride ourselves on being a disruptive alternative in the unmanned systems arena; FTT in general, and specifically FTT engine systems integrated with our jet UAS, are expected to multiply our disruptive offering. Kratos’ affordable high-performance unmanned jet aircraft systems have proven their performance and utility in a multitude of roles for the US Military and around the globe. Existing and evolving FTT engine systems offer thrust and specific fuel consumption performance improvements that have historically
been ‘unobtanium’ in the low-cost jet engine market. These engine performance characteristics will enable our systems to affordably deliver in new airborne performance realms aligned with the defense industry needs for increased performance for contested environments, as well as increased endurance for longer on-station and mission times. As we continue to improve our UAS and develop new UAS, the FTT engines will provide the right performance solution, enabling the capability enhancement plus retaining our system affordability theme. With the technology foundation of the FTT engines, and a similar affordability threshold that the FTT owners/leadership have been committed to since their inception, we expect to realize increased performance, increased range/endurance, and corresponding increased survivability without increasing costs. The scenario with FTT is much like it was when Kratos acquired CEi. The technology foundation was in place at CEi, the initial products were in place, the opportunity to be transformational and apply the technology and products to a substantially larger opportunity base existed, but would have been a challenge for a small business. Kratos has been able to transition CEi and take advantage of the opportunities; Kratos believes that FTT as a part of Kratos has the potential to follow a similar path of evolution and success.”
Kratos also announced today that it has appointed Stacey Rock as President of its new Kratos Turbine Technologies (KTT) Division. Over Stacey’s 29 year career, he has served in a variety of technical and leadership roles most recently as Senior Vice President of the Weapons & Defense Solutions business unit within its Kratos Defense Rocket Support Services Division. Stacey has been instrumental in Kratos’ hypersonic, high energy laser, and directed energy programs, and in the development of Kratos’ tethered drone systems. Stacey is an aerodynamicist by training, and began his career as a research engineer supporting development and testing of transonic, supersonic, and hypersonic weapons systems. He received a B.S. in Aerospace Engineering from Auburn University and an M.S. in Aerospace Engineering from North Carolina State University.
Stacey Rock, Kratos Turbine Technologies (KTT) Division President said, “Shirley and Joe Brostmeyer have built a world-class turbine engine company, and I am very excited to work with them under our newly established KTT Division. Continuing their vision, our focus is on the development of small, affordable, highly-efficient, turbojet and turbofan engines that we believe will transform the engine market for jet powered tactical weapon systems and unmanned aerial systems. The acquisition of FTT creates a powerful force combining the proven technology of FTT and the proven performance of Kratos as a mid-tier defense contractor and weapons systems developer. Our strategy is to expedite the flight testing of our engines through collaboration with our KUSD group and our company-owned unmanned aircraft. In addition, we plan to build on our existing relationships with the major weapons primes to position our aircraft and engines for future tactical systems. Specifically, the acquisition of a propulsion developer/supplier enables us to compete for and participate in both new and upgraded weapons programs as an integral supplier of the airframe and propulsion systems.”
Eric DeMarco, CEO of Kratos said, “The projected market for advanced turbojet and turbofan engines in our class alone is easily in the many thousands over the next five years given the projected number of extended-range and low-cost cruise missile systems and next generation unmanned weapons systems to be acquired. Beyond traditional turbojet and turbofan engines, we are also focused on developing advanced, affordable engines for hypersonic systems that will demonstrate a new class of hypersonic propulsion system. Through the acquisition of FTT, we have gained a tremendous capability to provide not only engines but also complete weapons systems. We are very excited about the intrinsic value that FTT brings to our company and, when combined with our other business units, anticipate that our strategic market positions for many current and future systems will increase substantially.”
Canaccord Genuity served as exclusive financial advisor to Kratos in connection with the transaction and Paul Hastings LLP served as legal counsel.
About Kratos Defense & Security Solutions
Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) develops and fields transformative, affordable technology, platforms and systems for United States National Security related customers, allies and commercial enterprises. Kratos is changing the way breakthrough technology for these industries are rapidly brought to market through proven commercial and venture capital backed approaches, including proactive research and streamlined development processes. Kratos specializes in unmanned systems, satellite communications, cyber security/warfare, microwave electronics, missile defense, hypersonic systems, training and combat systems. For more information go to www.KratosDefense.com.
Notice Regarding Forward-Looking Statements
Certain statements in this press release may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are made on the basis of the current beliefs, expectations and assumptions of the management of Kratos and are subject to significant risks and uncertainty. Investors are cautioned not to place undue reliance on any such forward-looking statements. All such forward-looking statements speak only as of the date they are made, and Kratos undertakes no obligation to update or revise these statements, whether as a result of new information, future events or otherwise. Although Kratos believes that the expectations reflected in these forward-looking statements are reasonable, these statements involve many risks and uncertainties that may cause actual results to differ materially from what may be expressed or implied in these forward-looking statements. For a further discussion of risks and uncertainties that could cause actual results to differ from those expressed in these forward-looking statements, as well as risks relating to the business of Kratos in general, see the risk disclosures in the Annual Report on Form 10-K of Kratos for the year ended December 31, 2017, and in subsequent reports on Forms 10-Q and 8-K and other filings made with the SEC by Kratos.
Source: Kratos Defense & Security Solutions, Inc.