Kratos Defense & Security Solutions, Inc. Update

1. Adjusted for a change in revenue accounting principle, Kratos Q1 revenues missed expectations by 6%

2. Kratos operating income performance was aided by unexplained decline in depreciation (notably in its promoted Unmanned Systems (drone) segment), despite a material ramp in capex

3. Kratos Q2’2018 revenue guidance of $140 to $150m also fell short of expectations for $154 million

4. In a potentially deceptive manner, Kratos reduced its normalized free cash flow guidance for 2018 by 36% to 58%

5. New anomalies in Kratos financials call into question the accuracy of Its cash balances

6. Kratos trades at an irrational 160x 2018 free cash flow despite revenue disappointments, a new high in DSO, and evidence that suggests management is using deceptive free cash flow forecasts

7. Kratos would be worthless if given an industry free cash flow multiple. Giving them the benefit of the doubt, it is very easy to justify 45% to 75% downside risk ($3.15 to $6.30/sh)