KeyW Corporation
KEYW HOLDING CORP (Form: 8-K, Received: 03/08/2017 16:54:54)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 8-K
 
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
Date of Report (Date of earliest event reported): March 8, 2017
 
THE KEYW HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
 
 
Maryland
(State or other jurisdiction of incorporation)
 
001-34891
(Commission File Number)
 
27-1594952
(IRS Employer Identification No.)
 
7740 Milestone Parkway, Suite 400
Hanover, Maryland 21076
(Address of principal executive offices) (Zip Code)
 
(443) 733-1600
(Registrant's telephone number, including area code)
 
Not Applicable
(Former name or former address, if changed since last report)
 
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 ( see General Instruction A.2. below):
 
 
¨
 
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
¨
 
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
¨
 
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
¨
 
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))





Item 1.01
 
Entry Into a Material Definitive Agreement.

On March 8, 2017, The KeyW Corporation (“KeyW”), a Maryland corporation and a wholly-owned subsidiary of The KeyW Holding Corporation (the “Company”), announced that it entered into an Agreement and Plan of Merger (the “Merger Agreement”), dated as of March 8, 2017, by and among KeyW, Sandpiper Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary of KeyW (“Merger Sub”), Sotera Holdings Inc., a Delaware corporation (“Sotera”), and Sotera Equity Partners GP LLC, a Delaware limited liability company, as the “Stockholders’ Representative,” pursuant to which, among other things, Merger Sub will be merged with and into Sotera (the “Merger”), with Sotera surviving the Merger as a wholly-owned subsidiary of KeyW. Sotera is an agile, mid-sized national security technology company that delivers innovative systems, solutions and services in support of the critical missions and programs of Civilian Agencies, Department of Defense, Intelligence Community, Department of Homeland Security, federal law enforcement agencies and other parts of the federal government charged with ensuring the safety and security of our nation. The Merger is expected to close in the second quarter of 2017.
 
Merger Agreement
 
Under the terms of the Merger Agreement, the aggregate purchase price to be paid for Sotera at closing is $235.0 million in cash, subject to certain adjustments (the “Merger Consideration”). KeyW intends to fund the Merger Consideration in part through a senior secured debt financing (the “Financing”).
 
The Merger Consideration is subject to adjustment (increased or decreased) on a dollar-for-dollar basis to the extent the working capital of Sotera as of the closing differs from a specified target. The Merger Agreement requires the deposit of $4.0 million of the Merger Consideration into escrow to secure payment of any post-closing working capital adjustments in favor of KeyW. In addition, the Merger Agreement includes customary indemnification obligations and requires the deposit of (i) $1.8 million of the Merger Consideration into escrow to secure the indemnification obligations of the securityholders of Sotera for breaches of representations and warranties, and (ii) $0.6 million of the Merger Consideration into escrow to secure the indemnification obligations of the securityholders of Sotera for any breach of covenants or certain indemnifiable matters set forth in the Merger Agreement. KeyW is also purchasing a buy-side representation and warranty insurance policy for the benefit of KeyW.
 
The Merger Agreement includes customary interim operating covenants. The consummation of the Merger is subject to the satisfaction of customary conditions, including expiration or termination of all applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and any other regulatory approvals.
 
The Merger Agreement contains customary termination rights, including the right of Sotera to terminate the Merger Agreement if all of the conditions to closing have been satisfied, Sotera has delivered written notice to KeyW that Sotera is ready, willing and able to effect the closing, and KeyW fails to consummate the closing within 2 business days following such written notice, in which case a termination fee of $11.8 million will be payable by KeyW to Sotera. The termination fee is also payable if KeyW terminates as a result of the closing not occurring on or before June 5, 2017 (the “Termination Date”), and at the time of such Company termination, Sotera had a right to terminate the Merger Agreement pursuant to the foregoing sentence. The Merger Agreement also provides that either Sotera or KeyW may terminate the Merger Agreement if the closing has not occurred on or before the Termination Date; provided that if the marketing period for the Financing has commenced but not concluded before the Termination Date, the Termination Date will be extended to the end of the marketing period, plus 5 business days.

Item 2.02
 
Results of Operations and Financial Condition.
 
On March 8, 2017, the Company issued a press release announcing its financial results for the three and twelve months ended December 31, 2016. A copy of the Company’s press release is attached hereto as Exhibit 99.1.

As provided in General Instruction B.2 of Form 8-K, the information contained in this Item 2.02 and Exhibit 99.1 shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall it be deemed to be incorporated by reference in any filing under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such a filing.

Item 7.01
 
Regulation FD Disclosure.

On March 8, 2017, the Company issued a press release announcing the entering into of the Merger Agreement. A copy of the Company’s press release is attached hereto as Exhibit 99.2.





The Company will hold a conference call and webcast on March 8, 2017 to discuss its financial results for the three and twelve months ended December 31, 2016 and the Sotera transaction. A copy of the slide presentation regarding the Sotera transaction included in the webcast is attached hereto as Exhibit 99.3.

As provided in General Instruction B.2 of Form 8-K, the information contained in this Item 7.01, Exhibit 99.2 and Exhibit 99.3 shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall it be deemed to be incorporated by reference in any filing under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such a filing.

Item 9.01
 
Financial Statements and Exhibits
 
Exhibit Number
 
Description
99.1
 
Press Release of the Company dated March 8, 2017.
99.2
 
Press Release of the Company, dated March 8, 2017.
99.3
 
Investor Presentation, dated March 8, 2017.





SIGNATURES

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.
 
 
THE KEYW HOLDING CORPORATION
 
(Registrant)
 
 
 
 
 
 
 
/s/ Michael J. Alber
DATE: March 8, 2017
Michael J. Alber
 
Executive Vice President and Chief Financial Officer





EXHIBIT INDEX
 
Exhibit Number
 
Description
99.1
 
Press Release of the Company dated March 8, 2017.
99.2
 
Press Release of the Company, dated March 8, 2017.
99.3
 
Investor Presentation, dated March 8, 2017.


Contacts:
 
 
Heather Williams
Corporate Media Relations
443.733.1613
communications@keywcorp.com
 
Chris Donaghey
Investor Relations
443.733.1600
investorrelations@keywcorp.com

KeyW Reports Fourth-Quarter and Fiscal Year 2016 Financial Results

Fourth-quarter revenue from continuing operations of $68.9 million; full year, $288.0 million;
Fourth-quarter GAAP EPS from continuing operations of $(0.08); full year, $0.05;
Fourth-quarter adjusted EBITDA from continuing operations (see below) of $5.2 million; full year, $31.4 million;
Company issues fiscal 2017 financial guidance; and
KeyW announces it has entered into a definitive agreement to acquire Sotera Defense Solutions (see separate press release issued today and associated presentation on the KeyW Investors web page).

HANOVER, Md., March 8, 2017 (GLOBE NEWSWIRE) - The KeyW Holding Corporation (NASDAQ: KEYW), a leading total solutions provider solving the Intelligence, Cyber, and Counterterrorism Communities’ toughest challenges, today announced fourth-quarter and fiscal year 2016 financial results.

“In 2016, we set out to build a solid foundation for growth in 2017 and beyond. The pivot strategy we laid out in our 2015 year-end call last February and our Analyst Day in April called for divesting our commercial cyber solutions and SETA businesses, as well as the transformation of our business development (BD) function and other key operational changes,” said Bill Weber, KeyW’s president and chief executive officer. “I said that by the end of 2016, KeyW would be a different company than it was at the time. Importantly, we have achieved that fundamental transformation. We entered 2017 as a streamlined, much stronger, and healthier end-to-end, pure-play solutions provider serving primarily the Intelligence community (IC). We showed impressive growth across several of our business sectors, including cyber operations, affordable Intelligence, Surveillance and Reconnaissance (ISR), advanced cyber training and analytics.

“I’m especially pleased with progress we’ve made in BD, particularly with bid volume and a better-than-expected win rate. Fourth-quarter funding actions totaled $80.4 million and $313 million for full-year 2016. During 2016, we made great progress in building a best-in-class BD function that integrated our corporate BD team and our operations personnel into a cohesive unit. Contract award value (1) totaled approximately

(1) “Contract award value” equals the ceiling value of single-award contracts where KEYW was named as the winning competitive bidder, and includes the stated value of all priced option periods. No value is ascribed to multiple-award IDIQ contracts.



$460 million, well above one times revenue in 2016, and the bids we’ve submitted and continue to submit are laying the groundwork for organic revenue growth in 2017 and 2018. In addition, our pipeline of new business now is sustainable at more than $8 billion, with an increasing portion of that qualified,” continued Weber. “Our BD team submitted bids totaling more than $1.2 billion in 2016, and expects to submit bids this year totaling three to four times forecasted 2017 revenue. One major area of focus in 2017 will be to broaden the reach of our higher-end capabilities beyond our current IC customer base to a wider range of IC and related clients. These skill sets include cyber training and advanced engineering. In short, we expect that KeyW’s transformation will continue to gain footing in 2017 in terms of new customer wins, increased organization efficiency and enhanced corporate culture.

“As separately announced, we are extremely excited about our definitive agreement to acquire Sotera Defense Solutions. We believe the transaction accelerates the growth plan we’ve been communicating since early 2016. The acquisition will provide new and enhanced access to agencies within the IC; add significant scale, creating a unique, IC-focused solutions provider; add new and complementary capabilities; provide access to a larger portfolio of prime contracts and IDIQ vehicles; yield highly achievable cost synergies; and generate an enhanced cash flow profile and be accretive to EPS,” added Weber. “We expect the transaction to close early in the second quarter, and look forward to a smooth integration.”

Fourth-Quarter 2016 Results from Continuing Operations

Revenue declined by 4.8% from the fourth quarter of 2015 to $68.9 million, which excludes $2.7 million of SETA revenue from the same period last year. Decreased year-over-year fourth-quarter 2016 revenue (excluding fourth-quarter 2015 SETA revenue) resulted primarily from the completion of two large solutions contracts earlier in 2016 as well as revenue from a product-based transaction entered in to in the fourth quarter of 2016 but expected to be recognized in 2017. Including 2015 SETA revenue, revenue decreased by 8.2% on a quarter-over-quarter basis. Partially offsetting this decline was growth in KeyW's airborne ISR business, higher advanced geospatial intelligence products and solutions sales and increased revenue from other solutions contracts.

Gross margin for the fourth quarter of 2016 was 30.0% and 28.5% for the same period in 2015. Gross margin improved year-over-year primarily as the result of a change in revenue mix toward higher-margin airborne ISR services revenue and advanced geospatial intelligence products and solutions sales.




Operating loss for the fourth quarter of 2016 was $0.5 million, or -0.8% of revenue compared with operating income of $3.7 million, or 4.9% of revenue, for the fourth quarter of 2015. The year-over-year decrease in operating income and margin resulted from higher indirect costs, partially offset by increased gross margin. The increase in indirect expenses was driven by higher BD costs and additional general and administrative expenses.

KeyW reported GAAP net loss from continuing operations of $3.1 million, or $0.08 per diluted share, for the fourth quarter of 2016, largely because of the factors affecting operating income. GAAP net loss (including loss on discontinued operations related to the company's former Commercial Cyber Solutions segment) was $3.2 million, or $0.08 per diluted share, for the fourth quarter.

Adjusted EBITDA from continuing operations was $5.2 million, or 7.5% of revenue, for the fourth quarter of 2016, versus $8.2 million, or 11.0% of revenue, in the prior-year period. Fourth quarter 2016 adjusted EBITDA from continuing operations declined year-over-year primarily because of the factors affecting operating income.

Full Year 2016 Results from Continuing Operations

Full-year 2016 revenue was $288.0 million compared with full-year revenue for 2015 of $ 297.9 million, a decrease of 3.3%. Excluding the contribution of the divested SETA business from both periods, revenue was essentially flat on a year-over-year basis. Net income from continuing operations for 2016 was $1.9 million compared with a net loss from continuing operations of $29.9 million in 2015. Fully diluted GAAP net income per share from continuing operations in 2016 was $0.05 compared with fully diluted GAAP loss per share from continuing operations of $0.77 in 2015. 2016 GAAP loss per diluted share included a $19.6 million ($0.51 per share) non-cash charge taken in the second quarter to establish a valuation allowance for deferred tax assets in future periods. Adjusted EBITDA from continuing operations for 2016 was $31.4 million, or 10.9% of revenue. Cash flow from operations for full year 2016 was $23.1 million.

“We look forward to 2017 as being a year of growth and stable margin performance. A number of key product sales we were driving to recognize in late 2016 have moved into 2017, including several significant product-based ISR solutions transactions. Also encouraging is that our recompete exposure in 2017 is significantly lower than previous years-fully 77% of our revenue guidance midpoint is in existing backlog. Only 10% is dependent on our winning contract recompetes. We will also continue to focus on generating organizational efficiencies and winning new solutions contracts that leverage our unique product portfolio.




“We’re also optimistic about early indications in the new federal budgetary and procurement climate that align with KeyW’s core capabilities in cyber, advanced engineering and other areas. A new, businesslike approach to federal contracting, as well as regulatory and corporate tax relief, would benefit nimble government solutions companies like us,” concluded Weber.

Financial Outlook

Excluding the impact of the Sotera transaction, for the full year 2017, KeyW expects revenue to be in the range of $300 million to $320 million, which represents organic growth of approximately 7% at the midpoint. Full-year adjusted EBITDA margin expectations continue to be in the range of 10% to 12%, unchanged from preliminary guidance issued on January 26, 2017.

As previously announced, a conference call has been scheduled to discuss these results today at 5:00 p.m. EST. At that time, management will review the company's fourth quarter and full-year 2016 financial results and the details of the planned Sotera acquisition announced today, followed by a question-and-answer session.

Interested parties will be able to connect to our webcast via the Investor Relations page on our website, on March 8, 2017. Interested parties may also listen to the conference by calling 1-877-853-5645. The International dial-in access number will be 1-408-940-3868. The conference ID for the event is 56194282.

An archive of the webcast will be available on our webpage following the call. In addition, a podcast of our conference call will be available for download from our Investor Relations page of our website at approximately the same time as the webcast replay.

About KeyW

KeyW is a total solutions provider for the Intelligence, Cyber and Counterterrorism communities' toughest challenges. We support the collection, processing, analysis and dissemination of information across the full spectrum of their missions. We employ and challenge more than 1,000 of the most talented professionals in the industry with solving such complex problems as preventing cyber threats, transforming data into intelligence and combating global terrorism.

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 about expected bid activity, customer wins and increased organization efficiency; statements regarding our pending acquisition of Sotera Defense Systems; our full-year 2017 revenue and adjusted EBITDA margin estimates under the heading “Financial Outlook” 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, those risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC on March 15, 2016 and our subsequent Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2016, June 30, 2016 and September 30, 2016 filed with the SEC on May 10, 2016, August 9, 2016 and November 2, 2016, respectively, as required under the Securities Act of 1934, as amended, our prospectus supplement, dated and filed with the SEC on January 27, 2017, with respect to our prospectus, dated December 22, 2016 included in our registration statement amendment on Form S-3/A (Registration No. 333-215115) filed with the SEC on December 21, 2016, 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.



THE KeyW HOLDING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
 
Three months ended December 31,
 
Twelve months ended December 31,
 
2016
 
2015
 
2016
 
2015
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
 
 
 
 
 
 
 
 
 
Revenues
$
68,928

 
$
75,118

 
$
288,027

 
$
297,935

Costs of Revenues, excluding amortization
48,196

 
53,732

 
196,772

 
208,206

Gross Profit
20,732

 
21,386

 
91,255

 
89,729

Operating Expenses
 

 
 

 
 

 
 

Operating expenses
19,620

 
15,991

 
71,434

 
66,512

Intangible amortization expense
1,650

 
1,714

 
6,113

 
7,087

Total
21,270

 
17,705

 
77,547

 
73,599

Operating (Loss) Income
(538
)
 
3,681

 
13,708

 
16,130

Non-Operating Expense, net
2,609

 
2,604

 
9,386

 
10,258

Earnings before Income Taxes from Continuing Operations
(3,147
)
 
1,077

 
4,322

 
5,872

Income (Benefit) Tax Expense, net on Continuing Operations
(35
)
 
2,982

 
2,457

 
35,782

Net (Loss) Income from Continuing Operations
(3,112
)
 
(1,905
)
 
1,865

 
(29,910
)
Loss before Income Taxes from Discontinued Operations
(93
)
 
(14,193
)
 
(28,082
)
 
(42,896
)
Income Tax Expense (Benefit), net on Discontinued Operations
5

 
(3,004
)
 
(489
)
 
(14,184
)
Loss on Discontinued Operations
(98
)
 
(11,189
)
 
(27,593
)
 
(28,712
)
Net Loss
$
(3,210
)
 
$
(13,094
)
 
$
(25,728
)
 
$
(58,622
)
 
 
 
 
 
 
 
 
Weighted Average Common Shares Outstanding
 
 
 
 
 
 
 
Basic
40,965,978

 
39,905,618

 
40,500,656

 
38,722,340

Diluted
40,965,978

 
39,905,618

 
41,012,014

 
38,722,340

 
 
 
 
 
 
 
 
Basic net (loss) earnings per share:
 
 
 
 
 
 
 
Continuing operations
$
(0.08
)
 
$
(0.05
)
 
$
0.05

 
$
(0.77
)
Discontinued operations

 
(0.28
)
 
(0.69
)
 
(0.74
)
Basic net earnings (loss) per share
$
(0.08
)
 
$
(0.33
)
 
$
(0.64
)
 
$
(1.51
)
 
 
 
 
 
 
 
 
Diluted net (loss) earnings per share:
 
 
 
 
 
 
 
Continuing operations
$
(0.08
)
 
$
(0.05
)
 
$
0.05

 
$
(0.77
)
Discontinued operations

 
(0.28
)
 
(0.68
)
 
(0.74
)
Diluted net earnings (loss) per share
$
(0.08
)
 
$
(0.33
)
 
$
(0.63
)
 
$
(1.51
)



THE KEYW HOLDING CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets
(In thousands, except share and par value per share amounts) 
 
December 31, 2016
 
December 31, 2015
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
41,871

 
$
21,227

Receivables
43,141

 
53,828

Inventories, net
15,178

 
15,616

Prepaid expenses
1,350

 
1,538

Income tax receivable
318

 
302

Assets of discontinued operations
3,000

 
7,765

Total current assets
104,858

 
100,276

 
 
 
 
Property and equipment, net
40,615

 
28,750

Goodwill
290,710

 
297,223

Other intangibles, net
7,871

 
10,957

Other assets
1,399

 
1,508

Non-current assets of discontinued operations

 
15,408

TOTAL ASSETS
$
445,453

 
$
454,122

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
6,913

 
$
10,299

Accrued expenses
9,941

 
9,345

Accrued salaries and wages
15,122

 
8,916

Deferred revenue
3,760

 
717

Deferred income taxes
1,170

 
964

Liabilities of discontinued operations
1,185

 
7,084

Total current liabilities
38,091

 
37,325

Long-term liabilities:
 

 
 

Convertible senior notes, net of discount
132,482

 
126,188

Non-current deferred tax liability
29,239

 
26,890

Other non-current liabilities
12,705

 
11,894

TOTAL LIABILITIES
212,517

 
202,297

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
Preferred stock, $0.001 par value; 5 million shares authorized, none issued

 

Common stock, $0.001 par value; 100 million shares authorized, 40,977,448 and 39,940,667 shares issued and outstanding
41

 
40

Additional paid-in capital
333,883

 
327,045

Accumulated deficit
(100,988
)
 
(75,260
)
Total stockholders’ equity
232,936

 
251,825

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
445,453

 
$
454,122




THE KEYW HOLDING CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)


 
Twelve months ended December 31,
 
2016
 
2015
 
(Unaudited)
 
 
Net loss
$
(25,728
)
 
$
(58,622
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 
 

Stock compensation
3,472

 
5,524

Depreciation and amortization expense
13,578

 
19,849

Impairment of Commercial Cyber Solutions goodwill
6,980

 
8,000

Amortization of discount on convertible debt
6,294

 
5,149

Write-off of deferred financing costs
340

 

(Gain) loss on disposal of assets
(3,447
)
 
1,186

Loss on sale of assets held for sale
3,568

 

Shortfall tax benefit from option exercise

 
823

Deferred taxes
1,967

 
22,428

Changes in operating assets and liabilities:
 

 
 

Receivables
15,516

 
1,368

Inventories, net
(663
)
 
(4,441
)
Prepaid expenses
(759
)
 
356

Income tax receivable
(16
)
 
2,827

Accounts payable
(4,694
)
 
1,341

Accrued expenses
6,240

 
5,134

Other
447

 
1,336

Net cash provided by operating activities
23,095

 
12,258

Cash flows from investing activities:
 

 
 

Acquisitions, net of cash acquired
(2,504
)
 
(20,991
)
Purchases of property and equipment
(18,410
)
 
(13,742
)
Proceeds from sale of assets
16,226

 

Net cash used in investing activities
(4,688
)
 
(34,733
)
Cash flows from financing activities:
 

 
 

Shortfall tax benefit from option exercise

 
(823
)
Proceeds from option and warrant exercises, net
2,237

 
4,924

Net cash provided by financing activities
2,237

 
4,101

Net increase (decrease) in cash and cash equivalents
20,644

 
(18,374
)
Cash and cash equivalents at beginning of period
21,227

 
39,601

Cash and cash equivalents at end of period
$
41,871

 
$
21,227

Supplemental disclosure of cash flow information:
 

 
 

Cash paid for interest
$
3,883

 
$
3,914

Cash paid (refunded) for taxes
$
40

 
$
(3,601
)
Equity issued for acquisitions, net
$
1,130

 
$
1,618

Non-cash fixed asset additions
$

 
$
5,652





Non-GAAP Financial Measures

Adjusted EBITDA from continuing operations, and estimated 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 from continuing operations and estimated adjusted EBITDA margin reconciliation tables below provide a reconciliation of this non-U.S. GAAP financial measure to net income (loss), and net income (loss) margin, the most directly comparable financial measures calculated and presented in accordance with U.S. GAAP. Adjusted EBITDA from continuing operations and adjusted EBITDA margin should not be considered as an alternative 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 from continuing operations and adjusted EBITDA margin may not be comparable to similarly titled measures of other companies because other companies may not calculate adjusted EBITDA from continuing operations, adjusted EBITDA margin or similarly titled measures in the same manner as we do. We prepare adjusted EBITDA from continuing operations 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 from continuing operations 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 from continuing operations. Adjusted EBITDA from continuing operations 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 from continuing operations as a supplemental measure to evaluate the overall operating performance of companies.

Our board of directors and management use adjusted EBITDA from continuing operations:

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 from continuing operations is frequently used by investors and securities analysts in their evaluations of companies, adjusted EBITDA from continuing operations 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 from continuing operations does not reflect our cash expenditures or future requirements for capital expenditures or other contractual commitments;
adjusted EBITDA from continuing operations does not reflect changes in, or cash requirements for, our working capital needs;
adjusted EBITDA from continuing operations does not reflect interest expense or interest income;



adjusted EBITDA from continuing operations does not reflect cash requirements for income taxes;
adjusted EBITDA from continuing operations does not include non-cash expenses related to stock compensation;
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 from continuing operations does not reflect any cash requirements for these replacements; and
other companies in our industry may calculate adjusted EBITDA from continuing operations or similarly titled measures differently than we do, limiting its usefulness as a comparative measure.



THE KEYW HOLDING CORPORATION AND SUBSIDIARIES
ADJUSTED EBITDA FROM CONTINUING OPERATIONS RECONCILIATION TABLE
(in thousands)

 
Three months ended December 31,
 
Twelve months ended December 31,
 
2016
 
2015
 
2016
 
2015
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
Net (Loss) Income from Continuing Operations
$
(3,112
)
 
$
(1,905
)
 
$
1,865

 
$
(29,910
)
Depreciation
1,468

 
1,612

 
6,449

 
5,877

Intangible Amortization
1,651

 
1,714

 
6,113

 
7,087

Stock Compensation Amortization
1,300

 
1,135

 
3,472

 
5,524

Interest Expense
2,617

 
2,608

 
10,812

 
10,299

Tax (Benefit) Expense (2)
(35
)
 
2,982

 
2,457

 
35,782

Acquisition Costs and Other
Adjustments
 (3)
1,299

 
98

 
255

 
1,311

Adjusted EBITDA
$
5,188

 
$
8,244

 
$
31,423

 
$
35,970


(2) The income tax (benefit) expense for 2015 included a valuation allowance for deferred tax assets.
(3) The acquisition costs and other adjustments included a $3.0 million gain on the divestiture of SETA net of transaction costs and a write-off of $1.1 million related to a discontinued joint venture in 2016.



ADJUSTED EBITDA MARGIN RECONCILIATION TABLE
(2017 Guidance)

 
Fiscal Year 2017 Guidance
Amounts shown as % Revenue
Low
 
High
 
 
 
 
Net Income (Loss)
0.4
%
 
2.0
%
Interest expense, net
3.5
%
 
3.2
%
Provision for income taxes
0.2
%
 
1.2
%
Depreciation and Amortization
4.6
%
 
4.3
%
Stock Compensation
1.3
%
 
1.3
%
Adjusted EBITDA
10.0
%
 
12.0
%
 
 
 
 

# # # #




Contacts:
 
 
Heather Williams
Corporate Media Relations
443.733.1613
communications@keywcorp.com
 
Chris Donaghey
Investor Relations
443.733.1600
investorrelations@keywcorp.com

KeyW Enters Into Definitive Agreement to Acquire Sotera Defense Solutions
Combination will create differentiated, pure-play Intelligence Community-focused provider of scale;
Transaction accelerates KeyW’s previously articulated growth strategy;
Offers high-end portfolio of products and services in support of the most difficult and complex national security and counterterrorism missions;
Will maintain strong adjusted EBITDA margin profile of 10+%; and
Projected to be immediately accretive to adjusted EPS in fiscal year 2017; GAAP EPS in 2018.

HANOVER, Md., March 8, 2017 (GLOBE NEWSWIRE) -- The KeyW Holding Corporation (NASDAQ: KEYW) today announced that its wholly-owned operating company, The KeyW Corporation, has signed a definitive agreement to acquire Sotera Defense Solutions (Sotera) in an all-cash transaction valued at approximately $235 million, inclusive of an expected $46 million net present value of acquired tax benefits. This transaction will augment the strengths of each company to create a leading pure-play products and solutions provider to the Intelligence Community (IC) and related customers with expected combined pro-forma revenue of approximately $535 million in 2017. The transaction, approved by the boards of directors of both companies, has received the requisite approval of the Sotera shareholders, and, subject to other customary conditions, is expected to close in the second quarter of 2017. The transaction is expected to be immediately accretive to 2017 adjusted EPS (GAAP EPS, excluding transaction expenses) and significantly accretive to 2018 GAAP EPS. Under the terms of the agreement, Sotera will become a wholly-owned subsidiary of The KeyW Corporation following the transaction.
“Both KeyW and Sotera deliver advanced technologies to the Intelligence, Cyber and Counterterrorism communities to secure our nation and its allies,” said Bill Weber, KeyW’s chief executive officer. “We share a common goal to expand our footprints among IC customers and leverage unique capabilities to significantly benefit existing and new customers, as well as add scale. This combination will provide customers access to these high-value solutions while also creating new opportunities for our employees and driving additional value for shareholders.”
Sotera Defense Solutions, formerly known as Global Defense Technology & Systems, Inc., is privately owned by funds managed by Ares Management, L.P. Sotera is a prime contractor on approximately 80% of its work, and is expected to generate an estimated $225 million in revenue and $20 million in adjusted EBITDA in calendar year 2017.
Together, KeyW and Sotera will deliver an advanced portfolio of solutions, including cyber, geospatial, cloud and data analytics, engineering, analysis and operations and machine learning. On a pro-forma basis, the combined company is expected to generate approximately $535 million in revenue and more than $55 million in adjusted EBITDA in 2017 before synergies.
“We’re pleased to join forces with KeyW,” said Deb Alderson, chief executive officer of Sotera Defense Solutions. “The customers, contracts and offerings of each business complement each other well and will be attractive for all





stakeholders. Our team’s focus and solid execution made Sotera the superb company it is today. Sotera looks forward to working with Bill and the KeyW management team on a smooth integration that allows us to leverage our combined capabilities to create added near-term value for our customers’ vital missions.”
“This transaction is demonstrative of the impressive national security platform that the team at Sotera has built,” said Matthew Cwiertnia, partner in the Ares Private Equity Group. “In particular, we want to thank Deb for her leadership and tireless commitment to the company. It has been a pleasure to be her partner.”

SUMMARY OF STRATEGIC AND FINANCIAL BENEFITS
Together, KeyW and Sotera expect to provide significant benefits to customers, employees and shareholders alike:
Provides New and Enhanced Access to Agencies within the IC: Sotera will add high-priority new customer agencies to KeyW’s existing IC portfolio, including highly sought-after FBI and DHS customers, and create additional inroads at new areas of the DoD (e.g., Army Intelligence). The new customer base is expected to accelerate KeyW’s organic expansion plan.

Adds Significant Scale, Creating Unique, IC-Focused Provider: The transaction will create a pure-play IC-focused services provider with an estimated $535 million of pro forma 2017 revenue and approximately 2,100 skilled employees, with approximately 80% having Top Secret and above clearances. The scale of the combined companies will provide a more competitive cost model to drive additional growth.

Adds New and Complementary Capabilities for IC Customers: Sotera will add complementary capabilities to KeyW’s existing suite in agile software and solution development, cyber security and data analytics. In addition, the new KeyW will offer customers advanced emerging technologies focused on machine learning and big data solutions.

Provides Access to Large Portfolio of Prime Contracts and IDIQ Vehicles: Sotera will bring more than 12 prime IDIQ and GWAC contract vehicles to the combined company, which will expand KeyW’s overall presence in the IC and DoD. The combined contract portfolio provides the opportunity to sell both KeyW and Sotera capabilities to new and existing customers with an enhanced business development function. Sotera’s impressive BD infrastructure, combined with KeyW’s recently transformed BD function, will accelerate KeyW’s goal of having the IC’s leading BD capability going forward.

Highly-Achievable Cost Synergies: The transaction expects to yield approximately $3.5 million of cost synergies within the fiscal year 2017, and approximately $7 million within 12-18 months.

Enhanced Cash Flow Profile and Accretive to Earnings Per Share (EPS): The cash flow profile of the combined business will enable deleveraging beginning immediately; the anticipated tax attributes will increase net cash flow through an expected reduction of cash tax expense. The deal is expected to be immediately accretive to FY2017 adjusted EPS and GAAP EPS accretive in FY2018.






Transaction STRUCTURE
KeyW intends to fund the transaction with proceeds from a new secured credit facility arranged by RBC Capital Markets and cash on hand. The combined company will have pro forma debt to trailing 12-month adjusted EBITDA (as defined for credit facility purposes) of approximately 4.4x. The merger structure is expected to preserve certain tax attributes (subject to applicable U.S. Code 382 limitations on net operating loss carryforwards), providing tax benefits with an expected net present value of approximately $46 million.
Governance and Leadership
The combined company will be governed by KeyW’s current board of directors, and Bill Weber, KeyW’s CEO, will lead the company. Additional leaders will be drawn from both companies and named as the integration progresses. The headquarters of the combined company will remain in Hanover, Md.

Advisors
RBC Capital Markets is serving as financial advisor to KeyW, and Morrison & Foerster LLP is serving as legal advisors. Guggenheim Securities is also serving as a financial advisor to KeyW and Holland & Knight LLP is serving as securities counsel to KeyW. Macquarie Capital and Sagent Advisors are serving as financial advisors to Ares Management and Sotera, with Proskauer Rose LLP serving as legal counsel to Sotera.
Conference Call and Webcast
KeyW senior management will discuss this announcement and related matters at 5:00 p.m. (ET) today during our previously scheduled earnings call and webcast for the fourth fiscal quarter and fiscal year ended December 31, 2016, followed by a question-and-answer session to further discuss the results.
Interested parties will be able to connect to our webcast and the presentation accompanying the conference call via the Investor Relations page on our website on March 8, 2017. We encourage people to register for an email alert about the Webcast through the Events and Presentations tab, also found on the Investor Relations page of our website. Interested parties may also listen to the conference call by calling 1-877-853-5645. The International Dial-In access number will be 1-408-940-3868. The conference ID for the event is 56194282.
An archive of the webcast will be available on our webpage following the call. In addition, a podcast of our conference call will be available for download from our Investor Relations page of our website at approximately the same time as the webcast replay.

ABOUT SOTERA
Sotera is an agile, mid-sized national security technology company that delivers innovative systems, solutions and services in support of the critical missions and programs of Civilian Agencies, Department of Defense, Intelligence Community, Department of Homeland Security, federal law enforcement agencies and other parts of the federal government charged with ensuring the safety and security of our nation. Our over 1,100 employees remain focused on delivering essential enterprise IT, cyber security systems and operations, data fusion and analytics, intelligence analysis, and C5ISR solutions to our customers throughout the Federal Government.






ABOUT KeyW
KeyW is a total solutions provider for the Intelligence, Cyber and Counterterrorism communities' toughest challenges. We support the collection, processing, analysis and dissemination of information across the full spectrum of their missions. We employ and challenge more than 1,000 of the most talented professionals in the industry with solving such complex problems as preventing cyber threats, transforming data into intelligence and combating global terrorism.

FORWARD-LOOKING STATEMENTS

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, statements regarding KeyW’s future prospects, projected financial results, estimated integration costs and acquisition related amortization expenses, business plans and the benefits of the business combination transaction involving KeyW and Sotera, including future financial and operating results such as fiscal year 2017 expected or projected revenue, adjusted EBITDA and debt to adjusted EBITDA ratio, the combined company’s plans, objectives, expectations and intentions and other statements that are not historical facts. Words such as “may,” “will,” “should,” “likely,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “believes,” “estimates” and similar expressions are also used to identify these forward-looking statements. These statements are based on the current beliefs and expectations of KeyW’s management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. Forward-looking statements are made only as of the date hereof, and KeyW does not undertake any obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, historical information should not be considered as an indicator of future performance.

In addition to factors previously disclosed in KeyW’s reports filed with the Securities and Exchange Commission (“SEC”), the following factors could cause actual results to differ materially from forward-looking statements: (i) the Sotera transaction not being timely completed, if completed at all, including the ability to obtain regulatory approvals and meet other closing conditions to the transaction in a timely manner, if at all; (ii) risks associated with obtaining the financing for the transaction on the expected terms and schedule, or at all; (iii) KeyW’s or Sotera’s respective businesses experiencing disruptions due to transaction-related uncertainty or other factors making it more difficult to maintain relationships with employees, business partners or governmental entities; (iv) the parties being unable to successfully implement integration strategies or realize the anticipated benefits of the acquisition, including the possibility that the expected synergies and cost reductions from the proposed acquisition will not be realized or will not be realized within the expected time period; (v) the increased leverage and interest expense of the combined company; (vi) general economic conditions and/or conditions affecting the parties’ current and prospective customers and/or (vii) difficulties with, or delays in, the inability to achieve the parties’ and combined company’s revenue and adjusted EBITDA guidance for 2017, due to, among other things, unanticipated circumstances, trends or events affecting the combined company's financial performance. Factors other than those referred to above could also cause KeyW’s or Sotera’s results to differ materially from expected results.






Non-GAAP Financial Measures
This press release contains forward looking estimates of adjusted EBITDA, including adjusted EBITDA margin. Adjusted EBITDA, as defined by KeyW, is a financial measure that is not calculated in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. Adjusted EBITDA should not be considered as an alternative to net income, operating income or any other measure of financial performance calculated and presented in accordance with U.S. GAAP. Our adjusted EBITDA may not be comparable to similarly titled measures of other companies because other companies may not calculate adjusted EBITDA or similarly titled measures in the same manner as we do. We prepare adjusted EBITDA 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 is 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;
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.

As used in this press release, with respect to estimated adjusted EBITDA for Sotera and the combined company, respectively, KeyW defines adjusted EBITDA as GAAP net income before interest, income taxes, depreciation and amortization, excluding stock-based compensation, transaction and integration costs and other adjustments, as applicable, associated with the proposed transaction. Reconciliations of estimated adjusted EBITDA to GAAP net income is not provided because GAAP net income generated by the Sotera operations for the applicable future period is not accessible or estimable at this time. In this regard, KeyW has not yet completed the necessary valuation of the various assets to be acquired in the proposed acquisition, for accounting purposes, or an allocation of the purchase price among the various types of assets. In addition, the final interest and debt expense associated with the transactions contemplated by the commitment letter have not been finalized and are therefore unavailable. Accordingly, the amount of depreciation and amortization, interest and debt expense and other factors that will be included in the additional GAAP net income assuming the proposed transaction is consummated is not accessible or estimable at this time, and is therefore not available without unreasonable effort. The amount of such additional resulting depreciation and amortization, applicable interest and debt expense, and other factors could be significant, such that actual GAAP net income would vary substantially from the estimated adjusted EBITDA included in this presentation.

###



Acquisition of Sotera Defense Solutions March 8, 2017


 
2 This presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, statements regarding KeyW’s future prospects, projected financial results, estimated integration costs and acquisition related amortization expenses, business plans and the benefits of the business combination transaction involving KeyW and Sotera, including future financial and operating results such as fiscal year 2017 expected or projected revenue, adjusted EBITDA and debt to adjusted EBITDA ratio, the combined company’s plans, objectives, expectations and intentions and other statements that are not historical facts. Words such as “may,” “will,” “should,” “likely,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “believes,” “estimates” and similar expressions are also used to identify these forward-looking statements. These statements are based on the current beliefs and expectations of KeyW’s management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. Forward-looking statements are made only as of the date hereof, and KeyW does not undertake any obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, historical information should not be considered as an indicator of future performance. In addition to factors previously disclosed in KeyW’s reports filed with the Securities and Exchange Commission (“SEC”), the following factors could cause actual results to differ materially from forward-looking statements: (i) the Sotera transaction not being timely completed, if completed at all, including the ability to obtain regulatory approvals and meet other closing conditions to the transaction in a timely manner, if at all; (ii) risks associated with obtaining the financing for the transaction on the expected terms and schedule, or at all; (iii) KeyW’s or Sotera’s respective businesses experiencing disruptions due to transaction-related uncertainty or other factors making it more difficult to maintain relationships with employees, business partners or governmental entities; (iv) the parties being unable to successfully implement integration strategies or realize the anticipated benefits of the acquisition, including the possibility that the expected synergies and cost reductions from the proposed acquisition will not be realized or will not be realized within the expected time period; (v) the increased leverage and interest expense of the combined company; (vi) general economic conditions and/or conditions affecting the parties’ current and prospective customers and/or (vii) difficulties with, delays in or the inability to achieve the parties’ and combined company’s revenue and adjusted EBITDA guidance for 2017, due to, among other things, unanticipated circumstances, trends or events affecting the combined company's financial performance. Factors other than those referred to above could also cause KeyW’s or Sotera’s results to differ materially from expected results. Forward Looking Statements


 
3 Non-GAAP Financial Measures This presentation contains forward looking estimates of adjusted EBITDA, including adjusted EBITDA margin. Adjusted EBITDA, as defined by KeyW, is a financial measure that is not calculated in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. Adjusted EBITDA should not be considered as an alternative to net income, operating income or any other measure of financial performance calculated and presented in accordance with U.S. GAAP. Our adjusted EBITDA may not be comparable to similarly titled measures of other companies because other companies may not calculate adjusted EBITDA or similarly titled measures in the same manner as we do. We prepare adjusted EBITDA 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 is 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; 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 i ts usefulness as a comparative measure.


 
4 Presenters Bill Weber President & Chief Executive Officer, KeyW Mike Alber Executive Vice President, Chief Financial Officer, KeyW


 
5 Approvals and Timing  Approved by KeyW and Sotera’s Board of Directors  Expected transaction close during early part of Q2 2017, subject to customary regulatory approvals Overview  Total cash purchase price of $235 million, subject to customary pre- and post-closing adjustments  Represents 9.8x 2017E adjusted EBITDA, net of expected present value of tax benefits of ~$46 million Transaction Overview Transaction Structure  KeyW intends to fund the transaction with a new secured credit facility and cash on hand  Pro forma net debt to trailing twelve months adjusted EBITDA of 4.4x  Transaction structure preserves tax attributes, subject to applicable §382 limitation Leadership Team  Bill Weber (KeyW CEO) and Mike Alber (KeyW CFO) to remain CEO and CFO, respectively, of combined company  Key leadership personnel from Sotera will remain in place following the acquisition


 
6 Defense Intelligence Counterterrorism Other Fed. / Comm. National Intelligence 17% FBI CT 28% DHS CT 2% DoD Intel 31% DoD S&T 18% Other Federal & Commercial 4% Sotera: Overview A pure-play provider of innovative technology systems, solutions and services for critical U.S. national security missions Overview Core Competencies & Capabilities  Sotera delivers systems, solutions and services to the Intelligence Community, Department of Defense, Department of Homeland Security and federal law enforcement agencies − Key customers include FBI and DoD intelligence agencies − 1,100 employees, with ~80% of direct employees with TS or greater clearance levels − 79% of revenues derived from prime contracts − 50% Cost Plus / 45% T&M and Fixed Price Segment Overview Revenue Mix by End-Customer Analytics / Visualization Agile Development Cyber Security Internet of Things Cloud Computing Big Data Machine Learning / Artificial Intelligence National Intelligence National Intelligence Defense Intelligence Advanced Programs & Technologies  Counterterrorism Watchlisting  Agile Software Development  Classified Networks  Next Generation IT Solutions  Cloud Migration  Scientific Services  Life-Cycle Software Support  Secure IT / Communications Networks  Systems Integration  Cyber Solutions  Big Data Analytics & Fusion  Cloud Engineering  Agile Lifecycle Engineering


 
7 Transaction Rationale: Strategic Adds New and Complementary Capabilities Adds Significant Scale, Creating Unique, IC-focused Provider Provides Access to Large Portfolio of Prime Contracts and IDIQ Vehicles Provides New and Enhanced Access to Agencies within the IC


 
8 Provides New and Enhanced Access to Target Agencies within the IC Sotera Customers Increased Access to the IC FBI NAVY ARMY USMC NSA USASAC DISA ARCYBER DARPA DIA 25% 60%


 
9 Adds Significant Scale, Creating Unique, IC- focused Provider  The acquisition of Sotera creates a pure-play, IC-focused services provider of scale – ~2,100 skilled employees, of which ~80% will have Top Secret or greater clearance  Scale provides a more competitive cost model to drive additional growth  Sotera also provides greater access to traditional Department of Defense intelligence customers – Creates opportunity to cross-sell KeyW’s solutions to additional IC customers Combined Company Pro Forma FY2017 Revenue Overview IC 87% DoD & Other 13% IC 78% DoD & Other 22% IC 83% DoD & Other 17% $310 (1) $225 $535 (1) Represents midpoint of FY2017 KeyW revenue guidance. ($ in millions)


 
10 Adds New and Complementary Capabilities Agile Development  Designs, develops, documents, tests, integrates and implements custom software modules and solutions focused on C4ISR and intelligence-related applications  Services range from firmware development for weapons systems to web-based portal development for network operations centers Cloud Computing  Provides leading edge cloud architecture and software engineering solutions to the IC / DoD  Combines cloud capabilities with data fusion and visual analytics to create new capabilities for intelligence analysis Big Data  Offers tools which provide multiple data science analytical capabilities including: distributed graph analytics, aggregate micro-paths, social media analysis and community tracking Analytics / Visualization  Delivers data analytics, cyber and visualization solutions for IC and DoD Tactical ISR mission systems operating in a cloud computing environment  Analytic capabilities include all-source analysis, watchlisting, targeting and DOMEX utilizing community standard messing handling, data visualization and collaboration tools Machine Learning / Artificial Intelligence  Design deep learning (Neural Network)  Develop Learning Models (Supervised, Semi-Supervised, Unsupervised)  Correlation, Discovery, Pattern of Life Internet of Things (“IoT”)  Exploration of IoT data for information discovery  Modeling IoT data for Extract Transform and Load  Developing predictive analytics for IoT challenge problems Cyber Security  Supports cyber signals intelligence and cyber warfare priorities by leveraging systems engineering, network architecture, software development, intelligence analysis and IT security capabilities to defend or exploit vital information  Protects against threats including bot net attacks, network infiltration and attacker reconnaissance


 
11 Provides Access to Large Portfolio of Prime Contracts and IDIQ Vehicles Enhanced BD engine will accelerate KeyW’s solutions growth strategy GSA Schedules ID/IQs & GWACs Prime / Sub Mix GSA Schedules Professional Engineering Services GSA Schedules MOBIS GSA Schedules IT Schedule 70 GSA Schedules Schedule 56 Existing Sotera Existing KeyW & Sotera GSA Schedules INSCOM GISS GSA Schedules CIO-SP3 GSA Schedules SSE NexGen GSA Schedules NRL ITD GSA Schedules Army TIES GSA Schedules ITSSS GSA Schedules DHS EAGLE II 58% 79% 67% 42% 21% 33% Prime Sub BPAs GSA Schedules DONCJIS GSA Schedules IATI GSA Schedules DIA E-SITE


 
12 Only public pure-play provider to the Intelligence Community and its mission High-end portfolio of products and services in support of the most difficult and complex national security and counterterrorism missions Proprietary and highly-engineered solutions to address a larger segment of the Intelligence Community


 
13 Highly-Achievable Cost Synergies  $3.5 million of synergies expected to be realized in the 2nd half of 2017  Total expected long-term synergies of $7 – $10 million Transaction Rationale: Financial Enhanced Cash Flow Profile  Projected cash flow profile of the combined business enables rapid deleveraging: ~$43 million of pro forma 2017 operating cash flow  Tax attributes of an expected $46 million at NPV increase net cash flow through reduction of cash tax expense Accretive to Earnings per Share (EPS)  Expect immediate accretion to EPS (GAAP excluding transaction expenses and before amortization of acquired intangibles) in FY2017  Expect significant accretion to EPS (both GAAP and before amortization of acquired intangibles) in FY2018 Creates IC-Focused Company of Scale  Combined pro forma 2017 revenues of $535 million  Combined pro forma 2017 adjusted EBITDA of $62 million  Maintains long-term adjusted EBITDA margin profile of 10+%  Further diversifies contract base


 
14 Capitalization and Leverage Commentary Pro Forma Capitalization Table  The acquisition of Sotera is expected to be funded through existing balance sheet cash and a new $135 million 5-year Term Loan  Committed financing in place  Provides a well-balanced capital structure with flexibility for continued capital deployment and debt repayment  Attractive interest rates and acquired tax assets expected to provide strong and stable cash flow Amount (1) Leverage (2) Cash $10.0 New Term Loan 135.0 Existing Debt 149.5 Total Net Debt $274.5 4.4x (1) PF as of Dec-31-2016. (2) Based on ~$62 million of Adj. EBITDA. ($ in millions)


 
15 Summary Creates differentiated, pure-play intelligence services provider with pro forma 2017 $535 million of revenue and $62 million of adjusted EBITDA Accelerates KeyW management’s growth plan within the IC Balances and diversifies customer base and capabilities, adds substantial scale, and increases addressable market Scale improves competitive dynamic in today’s budget environment Enhances free cash flow and pro forma earnings