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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10-Q
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended April 1, 2018
 
¨        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
 
Commission file number 001-34460
 
 
KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
(Exact name of Registrant as specified in its charter)
Delaware
13-3818604
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
4820 Eastgate Mall, Suite 200
San Diego, CA 92121
(858) 812-7300
(Address, including zip code, and telephone number, including
area code, of Registrant’s principal executive offices)
 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ý  No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes ý  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer ý
Accelerated filer o
 
 
Non-accelerated filer o
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
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.   Yes o  No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o  No ý
As of May 7, 2018, 103,513,103 shares of the registrant’s common stock were outstanding.
 


Table of Contents

KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
 
FORM 10-Q
 
FOR THE QUARTERLY PERIOD ENDED APRIL 1, 2018
 
INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements.
KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 (in millions, except par value and number of shares)
 (Unaudited)
 
April 1, 2018
 
December 31, 2017
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
127.8

 
$
130.5

Restricted cash
0.4

 
0.4

Accounts receivable, net
57.7

 
74.2

Unbilled receivable, net
151.2

 
138.1

Inventoried costs
48.2

 
49.0

Prepaid expenses
6.8

 
11.1

Other current assets
12.9

 
9.5

Current assets of discontinued operations
52.1

 
58.6

Total current assets
457.1

 
471.4

Property, plant and equipment, net
61.5

 
58.0

Goodwill
425.7

 
425.7

Intangible assets, net
20.3

 
22.0

Other assets
7.8

 
8.1

Non-current assets of discontinued operations
38.8

 
38.8

Total assets
$
1,011.2

 
$
1,024.0

Liabilities and Stockholders Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
31.3

 
$
34.7

Accrued expenses
33.8

 
40.9

Accrued compensation
34.1

 
30.2

Accrued interest
6.6

 
1.7

Billings in excess of costs and earnings on uncompleted contracts
38.2

 
42.8

Other current liabilities
7.8

 
9.4

Current liabilities of discontinued operations
23.2

 
29.2

Total current liabilities
175.0

 
188.9

Long-term debt principal, net of current portion
293.6

 
293.5

Other long-term liabilities
24.2

 
24.1

Non-current liabilities of discontinued operations
5.9

 
6.0

Total liabilities
498.7

 
512.5

Commitments and contingencies


 


Stockholders equity:
 

 
 

Preferred stock, $0.001 par value, 5,000,000 shares authorized, 0 shares outstanding at April 1, 2018 and December 31, 2017

 

Common stock, $0.001 par value, 195,000,000 shares authorized; 103,513,103 and 103,297,525 shares issued and outstanding at April 1, 2018 and December 31, 2017, respectively

 

Additional paid-in capital
1,237.2

 
1,233.7

Accumulated other comprehensive loss
(1.5
)
 
(1.4
)
Accumulated deficit
(723.2
)
 
(720.8
)
Total stockholders equity
512.5

 
511.5

Total liabilities and stockholders equity
$
1,011.2

 
$
1,024.0

 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in millions, except per share amounts)
 (Unaudited)
 
Three Months Ended
 
April 1, 2018
 
March 26, 2017
Service revenues
$
46.0

 
$
49.2

Product sales
97.0

 
82.8

Total revenues
143.0

 
132.0

Cost of service revenues
32.9

 
35.0

Cost of product sales
69.3

 
60.9

Total costs
102.2

 
95.9

Gross profit
40.8

 
36.1

Selling, general and administrative expenses
29.8

 
30.0

Research and development expenses
3.6

 
4.4

Unused office space, restructuring expenses, and other
0.4

 
0.3

Operating income from continuing operations
7.0

 
1.4

Other income (expense):
 

 
 

Interest expense, net
(5.1
)
 
(8.2
)
Loss on extinguishment of debt

 
(2.1
)
Other income, net
0.3

 
0.2

Total other expense, net
(4.8
)
 
(10.1
)
Income (loss) from continuing operations before income taxes
2.2

 
(8.7
)
Provision for income taxes from continuing operations
0.9

 
1.4

Income (loss) from continuing operations
1.3

 
(10.1
)
Discontinued operations
 
 
 
Income (loss) from operations of discontinued component
(3.9
)
 
0.3

Income tax benefit (expense)
0.4

 
(0.2
)
Income (loss) from discontinued operations
(3.5
)
 
0.1

Net loss
$
(2.2
)
 
$
(10.0
)
Basic income (loss) per common share:
 

 
 

Net income (loss) from continuing operations
$
0.01

 
$
(0.13
)
Net loss from discontinued operations
(0.03
)
 

Net loss per common share
$
(0.02
)
 
$
(0.13
)
Diluted income (loss) per common share:
 
 
 
Net income (loss) from continuing operations
$
0.01

 
$
(0.13
)
Net loss from discontinued operations
(0.03
)
 

Net loss per common share
$
(0.02
)
 
$
(0.13
)
 
 
 
 
Weighted average common shares outstanding:
 
 
 
Basic
103.7

 
77.3

Diluted
105.7

 
77.3

Comprehensive Loss
 
 
 
Net loss (from above)
$
(2.2
)
 
$
(10.0
)
Change in cumulative translation adjustment
(0.1
)
 
0.1

Comprehensive loss
$
(2.3
)
 
$
(9.9
)
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


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KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
 
Three Months Ended
 
April 1, 2018
 
March 26, 2017
Operating activities:
 

 
 
Net loss
$
(2.2
)
 
$
(10.0
)
Less: Income (loss) from discontinued operations
(3.5
)
 
0.1

Income (loss) from continuing operations
1.3

 
(10.1
)
Adjustments to reconcile income (loss) from continuing operations to net cash provided by (used in) operating activities from continuing operations:
 

 
 

Depreciation and amortization
4.5

 
5.5

Stock-based compensation
1.7

 
2.1

Deferred income taxes

 
0.8

Amortization of deferred financing costs
0.2

 
0.4

Amortization of discount on Senior Secured Notes

 
0.2

Loss on extinguishment of debt

 
2.1

Changes in assets and liabilities, net of acquisitions:
 

 
 

Accounts receivable and unbilled receivables
2.2

 
1.6

Inventoried costs
1.3

 
(8.9
)
Prepaid expenses and other assets
0.8

 
(3.8
)
Accounts payable
(3.0
)
 
0.1

Accrued compensation
3.8

 
(2.7
)
Accrued expenses
(6.1
)
 

Advance payments received on contracts
(0.6
)
 
0.7

Accrued interest
4.9

 
6.0

Billings in excess of costs and earnings on uncompleted contracts
(3.7
)
 
1.2

Income tax receivable and payable
0.2

 
0.4

Other liabilities
(1.0
)
 
(1.0
)
Net cash provided by (used in) operating activities from continuing operations
6.5

 
(5.4
)
Investing activities:
 

 
 

Capital expenditures
(6.7
)
 
(5.1
)
Net cash used in investing activities from continuing operations
(6.7
)
 
(5.1
)
Financing activities:
 
 
 

Extinguishment of long-term debt

 
(64.0
)
Debt issuance costs
(0.1
)
 

Proceeds from the issuance of common stock
(1.1
)
 
81.9

Repayment of debt
(0.2
)
 
(0.3
)
Proceeds from exercise of restricted stock units, employee stock options, and employee stock purchase plan
1.8

 
0.8

Net cash provided by financing activities from continuing operations
0.4

 
18.4

Net cash flows of continuing operations
0.2

 
7.9

Net operating cash flows of discontinued operations
(3.1
)
 
(4.3
)
Net investing cash flows of discontinued operations

 
(0.2
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
0.2

 

Net increase (decrease) in cash, cash equivalents and restricted cash
(2.7
)
 
3.4

Cash, cash equivalents and restricted cash at beginning of period
130.9

 
70.7

Cash, cash equivalents and restricted cash at end of period
$
128.2

 
$
74.1


The accompanying notes are an integral part of these condensed consolidated financial statements.

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KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(Unaudited)
 
Note 1. Summary of Significant Accounting Policies
 
All references to the “Company” and “Kratos” refer to Kratos Defense & Security Solutions, Inc., a Delaware corporation, and its subsidiaries.
 
(a)
Basis of Presentation

 The information as of April 1, 2018 and for the three months ended April 1, 2018 and March 26, 2017 is unaudited. The condensed consolidated balance sheet as of December 31, 2017 was derived from the Company’s audited consolidated financial statements at that date. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods presented. The results have been prepared in accordance with the instructions to Form 10-Q and do not necessarily include all information and footnotes necessary for presentation in accordance with accounting principles generally accepted in the U.S. (“GAAP”) These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes included in the Company’s audited annual consolidated financial statements for the fiscal year ended December 31, 2017, included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 28, 2018 (the “Form 10-K”). Interim operating results are not necessarily indicative of operating results expected in subsequent periods or for the year as a whole.

As discussed in “Discontinued Operations” in Note 3, on February 28, 2018, the Company entered into an agreement to sell the operations of its Public Safety & Security business unit which had previously been reported as a separate reportable business segment. Accordingly, PSS (as defined below) and its subsidiaries have been classified as held for sale and reported in discontinued operations in the condensed consolidated financial statements for all periods presented.

(b)
Principles of Consolidation
 
The condensed consolidated financial statements include the accounts of the Company and its 100% owned subsidiaries for which all inter-company transactions have been eliminated in consolidation.
 
(c)
Fiscal Year
 
The Company has a 52/53 week fiscal year ending on the last Sunday of the calendar year, with interim fiscal periods ending on the last Sunday of each calendar quarter. The three month periods ended April 1, 2018 and March 26, 2017 consisted of 13-week periods. There are 52 calendar weeks in the fiscal year ending on December 30, 2018 and 53 calendar weeks in the fiscal year ending on December 31, 2017.
 
(d)    Accounting Estimates

There have been no significant changes in the Company’s accounting estimates for the three months ended April 1, 2018 as compared to the accounting estimates described in the Form 10-K.

(e)    Accounting Standards Updates

In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-18 (“ASU 2016-18”), Statement of Cash Flows (Topic 230) - Restricted Cash, which requires that restricted cash and cash equivalents be included with cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the consolidated statements of cash flows. The new standard is effective for public entities for fiscal years beginning after December 15, 2017 and for interim periods therein. The Company adopted ASU 2016-18 as of January 1, 2018. The adoption of the ASU 2016-18 did not have a material impact on the Company's consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15 (“ASU 2016-15”), Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 is designed to clarify how entities should classify cash receipts and cash payments in the statement of

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cash flows. ASU 2016-15 became effective for the Company beginning January 1, 2018. The standard requires retrospective application. The adoption of the ASU 2016-15 did not have a material impact on the Company's consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02 (“ASU 2016-02”), Leases. ASU 2016-02 requires that lessees recognize assets and liabilities for the rights and obligations underlying leases with a lease term of more than one year. The amendments in this ASU are effective for annual periods beginning after December 15, 2018. The FASB has proposed a change that would allow a company to elect an optional transition method that applies the new lease requirements through a cumulative-effect adjustment in the period of adoption. The Company expects to adopt the standard on December 31, 2018 using the proposed optional transition method if finalized in its current form. The Company is reviewing its leases to determine the impact of the adoption of ASU 2016-02 on its consolidated financial statements.

Effective January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers, as amended (Topic 606) (“ASC 606”), which establishes a broad principle that requires entities to assess the products or services promised in contracts with customers at contract inception to determine the appropriate unit at which to record revenues, which is referred to as a performance obligation. Revenue is recognized when control of the promised products or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those products or services. The new standard supersedes GAAP guidance on revenue recognition and requires the use of more estimates and judgments than the present standards. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

ASC 606 may be applied either retrospectively or through the use of a modified-retrospective method. The full retrospective method requires companies to recast each prior reporting period presented as if the new guidance had always existed. Under the modified retrospective method, companies would recognize the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings at the date of initial application. The Company adopted the new revenue standard through the use of the modified-retrospective method. The cumulative effects of applying the new guidance to all contracts with customers that were not completed as of January 1, 2018 was recorded as a decrease in opening equity of $0.2 million. Additional disclosures have been included in Note 2 in accordance with the ASU. The following changes were made to our condensed consolidated balance sheet on January 1, 2018 as a result of the adoption of ASC 606 (in millions):
 
Balance at January 1, 2018
 
ASC 606 Adjustment
 
Adjusted Balance at January 1, 2018
 
 
 
Assets
 
 
 
 
 
Unbilled receivable, net
$
138.1

 
$
1.3

 
$
139.4

Inventoried costs
49.0

 
(0.3
)
 
48.7

 
 
 
 
 
 
Liabilities
  
 
 
 
 
Accrued expenses
$
40.9

 
$
(0.6
)
 
$
40.3

Billings in excess of costs and earnings on uncompleted contracts
42.8

 
1.8

 
44.6

 
 
 
 
 
 
Stockholders’ Equity
 
 
 
 
 
Accumulated deficit
$
(720.8
)
 
$
(0.2
)
 
(721.0
)


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The following table summarizes the impacts of ASC 606 adoption on the Company’s operating income from continuing operation for the three months ended April 1, 2018 (in millions):
 
For the period ended April 1, 2018
 
 
 
Balances Without Adoption of ASC 606
 
Effect of Change Higher/(Lower)
 
As Reported
 
 
Service revenues
$
46.0

 
$
46.0

 
$

Product sales
97.0

 
89.3

 
7.7

Total revenues
143.0

 
135.3

 
7.7

Cost of service revenue
32.9

 
32.9

 

Cost of product sales
69.3

 
65.1

 
4.2

Total costs
102.2

 
98.0

 
4.2

Gross profit
40.8

 
37.3

 
3.5

Selling, general and administrative expenses
29.8

 
29.8

 

Total operating income from continuing operations
$
7.0

 
$
3.5

 
$
3.5


The following table summarizes the impacts of ASC 606 adoption on the Company’s balance sheet as of April 1, 2018 (in millions):
 
April 1, 2018
 
 
 
Balances Without Adoption of ASC 606
 
Effect of Change Higher/(Lower)
 
As Reported
 
Assets
 
 
 
 
 
Accounts receivable
$
57.7

 
$
55.6

 
$
2.1

Unbilled receivables
151.2

 
147.1

 
4.1

Inventoried costs
48.2

 
52.4

 
(4.2
)
 
 
 
 
 
 
Liabilities
  
 
 
 
 
Billings in excess of costs and earnings on uncompleted contracts
38.2

 
39.7

 
(1.5
)
 
 
 
 
 
 
Stockholders’ Equity
 
 
 
 
Accumulated deficit
$
(723.2
)
 
$
(726.7
)
 
$
3.5


Other than the adjustments noted above, there have been no changes in the Company’s significant accounting policies for the three months ended April 1, 2018 as compared to the significant accounting policies described in the Form 10-K.

(f)
Fair Value of Financial Instruments
 
The carrying amounts and the related estimated fair values of the Company’s long-term debt financial instruments not measured at fair value on a recurring basis at April 1, 2018 and December 31, 2017 are presented in Note 9. The carrying value of all other financial instruments, including cash equivalents, accounts receivable, accounts payable, accrued expenses, billings in excess of cost and earnings on uncompleted contracts, income taxes payable and short-term debt, approximated their estimated fair values at April 1, 2018 and December 31, 2017 due to the short-term nature of these instruments.

(g)
Reclassifications
 
Certain prior year amounts have been reclassified to conform to the current year presentation



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Note 2. Revenue Recognition

As described in Note 1, the Company adopted ASC 606 on January 1, 2018, using the modified retrospective method. The Company recorded a decrease in opening equity of $0.2 million as of January 1, 2018 due to the cumulative impact of adopting ASC 606. The impact of adopting ASC 606 for the three months ended April 1, 2018 was an increase of $7.7 million to revenues and a corresponding increase in cost of revenues of $4.2 million. Total net cash provided by operating activities from continuing operations, total net cash used by investing activities from continuing operations and total net cash provided by financing activities on our consolidated statements of cash flows were not impacted by the adoption of ASC 606. Discontinued operations were not affected by the implementation of ASC 606.

The reported results for 2018 reflect the application of ASC 606 guidance while the reported results for periods prior to January 1, 2018 were prepared under the guidance of ASC 605, Revenue Recognition. The adoption of ASC 606 represents a change in accounting principle. In accordance with ASC 606, revenue is recognized when a customer obtains control of promised services. The amount of revenue recognized reflects the consideration that the Company expects to be entitled to receive in exchange for these services.

Prior to the adoption of ASC 606, the Company recognized the majority of its revenues using the percentage-of-completion method of accounting. Based on the nature of products provided or services performed, revenue was recorded as costs were incurred (the “percentage-of-completion cost-to-cost method”) or as units were delivered (the “percentage-of-completion units-of-delivery method”). For the majority of contracts, the customer obtains control or receives benefits as work is performed on the contract. As a result, under ASC 606 revenue is recognized over a period of time utilizing the cost-to-cost method. This change generally results in an acceleration of revenue for contracts that were historically accounted for using the percentage-of-completion units-of-delivery method as revenues are now recognized earlier in the performance period as costs are incurred.

To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC 606. The majority of the Company’s contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using the best estimate of the standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling price is the expected-cost-plus-margin approach, under which the Company forecasts the expected costs of satisfying a performance obligation and then adds an appropriate margin for that distinct good or service.

Remaining Performance Obligations

Since the Company’s adoption of ASC 606 on January 1, 2018, revenues from remaining performance obligations are now calculated as the dollar value of the remaining performance obligations on executed contracts. On April 1, 2018, the Company had approximately $551.8 million of remaining performance obligations. The Company expects to recognize approximately 55% of the remaining performance obligations as revenue in 2018, an additional 26% by 2020, and the balance thereafter.

Contract Estimates

Due to the nature of the work required to be performed on many performance obligations, the estimation of total revenue and cost at completion is complex, subject to many variables and requires significant judgment. It is common for the Company’s long-term contracts to contain award fees, incentive fees, or other provisions that can either increase or decrease the transaction price. These variable amounts generally are awarded upon achievement of certain performance metrics, program

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milestones or cost targets and can be based upon customer discretion. Variable consideration is estimated at the most likely amount to which the Company is expected to be entitled. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information (historical, current and forecasted) that is reasonably available.

Contracts are often modified to account for changes in contract specifications and requirements. Contract modifications are considered to exist when the modification either creates new or changes the existing enforceable rights and obligations. Most of the Company’s contract modifications are for goods or services that are not distinct from the existing contract due to the significant integration service provided in the context of the contract and are accounted for as if they were part of that existing contract. The effect of a contract modification on the transaction price, and the measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.

There is a Company-wide standard and disciplined quarterly Estimate at Completion (EAC) process in which management reviews the progress and execution of outstanding performance obligations. As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities and the related changes in estimates of revenues and costs. The risks and opportunities include management's judgment about the ability and cost to achieve the schedule (e.g., the number and type of milestone events), technical requirements (e.g., a newly-developed product versus a mature product) and other contract requirements. Management must make assumptions and estimates regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation (e.g., to estimate increases in wages and prices for materials and related support cost allocations), execution by subcontractors, the availability and timing of funding from customers and overhead cost rates, among other variables.

Based on this analysis, any quarterly adjustments to net sales, cost of sales, and the related impact to operating income are recognized as necessary in the period they become known. These adjustments may result from positive program performance, and may result in an increase in operating income during the performance of individual performance obligations, if it is determined the Company will be successful in mitigating risks surrounding the technical, schedule and cost aspects of those performance obligations or realizing related opportunities. Likewise, these adjustments may result in a decrease in operating income if it is determined the Company will not be successful in mitigating these risks or realizing related opportunities. Changes in estimates of net sales, cost of sales and the related impact to operating income are recognized quarterly on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current and prior periods based on a performance obligation's percentage of completion. A significant change in one or more of these estimates could affect the profitability of one or more of the Company’s performance obligations. When estimates of total costs to be incurred on a performance obligation exceed total estimates of revenue to be earned, a provision for the entire loss on the performance obligation is recognized in the period the loss is determined. No adjustment on any one contract was material to our unaudited Condensed Consolidated Financial Statements for the three-month periods ended April 1, 2018, and March 26, 2017.

Contract Assets and Liabilities

For each of the Company’s contracts, the timing of revenue recognition, customer billings, and cash collections results in a net contract asset or liability at the end of each reporting period. Fixed-price contracts are typically billed to the customer either using progress payments, whereby amounts are billed monthly as costs are incurred or work is completed, or performance based payments, which are based upon the achievement of specific, measurable events or accomplishments defined and valued at contract inception. Cost-type contracts are typically billed to the customer on a monthly or semi-monthly basis.
Contract assets consist of unbilled receivables, primarily related to long-term contracts where revenue recognized under the cost-to-cost method exceeds amounts billed to customers. Unbilled receivables are classified as current assets and, in accordance with industry practice, include amounts that may be billed and collected beyond one year due to the long term nature of many of our contracts. Accumulated contract costs in unbilled receivables include direct production costs, factory and engineering overhead, production tooling costs, and, for government contracts, recovery of allowable general and administrative expenses. Unbilled receivables also include certain estimates of variable consideration described above. These contract assets are not considered a significant financing component of the Company’s contracts as the payment terms are intended to protect the customer in the event the Company does not perform on its obligations under the contract.


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Table of Contents

Contract liabilities include advance payments and billings in excess of revenue recognized. Certain customers make advance payments prior to the satisfaction of the Company’s performance obligations on the contract. These amounts are recorded as contract liabilities until such performance obligations are satisfied, either over time as costs are incurred or at a point in time when deliveries are made. Contract liabilities are not a significant financing component as they are generally utilized to pay for contract costs within a one-year period or are used to ensure the customer meets contractual requirements.

Net contract assets (liabilities) are as follows (in millions):
 
April 1, 2018
 
January 1, 2018
 
Net Change
Contract assets
$
151.2

 
$
139.4

 
$
11.8

Contract liabilities
$
40.7

 
$
46.8

 
$
(6.1
)
Net contract assets
$
110.5

 
$
92.6

 
$
17.9


The change in the balances of the company’s contract assets and liabilities primarily results from the advance payments from customers exceeding reductions from recognition of revenue as performance obligations were satisfied and related billings.

Disaggregation of Revenue

The following series of tables presents our revenue disaggregated by several categories. For the majority of contracts, the customer obtains control or receives benefits as work is performed on the contract. Revenue by contract type was as follows (in millions):

Three Months Ended
 
April 1, 2018
Revenues
 
Kratos Government Solutions
 
Fixed price
$
101.8

Cost plus fee
7.2

Time and materials
6.2

Total Kratos Government Solutions
115.2

Unmanned Systems
 
Fixed price
21.9

Cost plus fee
5.5

Time and materials
0.4

Total Unmanned Systems
27.8

Total Revenues
$
143.0


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Revenue by customer was as follows:
 
Three Months Ended
 
April 1, 2018
Revenues
 
Kratos Government Solutions
 
US Government
 
Department of Defense (DoD)
$
73.5

Non-DoD
3.3

Total US Government
76.8

US Commercial
17.4

Non-US Government
7.5

Non-US Commercial
13.5

Total Kratos Government Solutions
115.2

Unmanned Systems
 
US Government
 
Department of Defense (DoD)
24.1

Non-DoD
0.1

Total US Government
24.2

US Commercial

Non-US Government
3.5

Non-US Commercial
0.1

  Total Unmanned Systems
27.8

    Total Revenues
$
143.0



Note 3. Discontinued Operations

On February 28, 2018, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) to sell the operations of Kratos Public Safety & Security Solutions, Inc., a Delaware corporation and wholly owned subsidiary of the Company (“PSS”), with Securitas Electronic Security, Inc., a Delaware corporation (“Buyer”). Pursuant to the Purchase Agreement, the Company has agreed to sell to Buyer all of the issued and outstanding capital stock of PSS for a purchase price of $69 million in cash, subject to a net working capital adjustment at closing (the “Transaction”). The Company expects to receive approximately $70 million of net cash proceeds from the Transaction, after taking into account amounts to be paid by the Company pursuant to a negotiated transaction services agreement between the Company and Buyer, receipt by the Company of approximately $7 million in net working capital to be retained by the Company, and associated transaction fees and expenses. The Company currently expects the Transaction to close in the second quarter of 2018, following the completion of required regulatory and other related approvals.

In accordance with ASC 360-10-45-9, Property, Plant, and Equipment (Topic 360) and ASC 205-20-45-3 Presentation of Financial Statements (Topic 205), PSS and its subsidiaries have been classified as held for sale and reported in discontinued operations in the accompanying condensed consolidated financial statements for all periods presented.


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Table of Contents

The following table presents the results of discontinued operations (in millions):

 
April 1, 2018

March 26, 2017
Revenue
$
23.9

 
$
36.8

Cost of sales
18.9

 
27.8

Selling, general and administrative expenses
8.1

 
8.7

Other expense
0.8

 

Income (loss) from discontinued operations before income taxes
(3.9
)
 
0.3

Income tax benefit (expense)
0.4

 
(0.2
)
Income (loss) from discontinued operations
$
(3.5
)

$
0.1


Revenue and operating results for the three months ended April 1, 2018 were impacted by approximately $1.8 million and $2.0 million, respectively, of cost adjustments on certain security system deployment projects for a mass transit authority. Transaction expenses of $0.8 million primarily comprised of legal fees related to the pending disposition were included in Other expense for the three months ended April 1, 2018. Depreciation expense included in Selling, general and administrative expenses was $0.1 million and $0.1 million for the three months ended April 1, 2018 and March 26, 2017, respectively.

The following is a summary of the assets and liabilities of discontinued operations in the accompanying condensed consolidated balance sheets as of April 1, 2018 and December 31, 2017 (in millions):

 
April 1, 2018
 
December 31, 2017
Cash and cash equivalents
$
(0.7
)
 
$
(0.9
)
Accounts receivable, net and unbilled receivables, net
48.6

 
56.0

Inventoried costs
2.6

 
1.5

Other current assets
1.6

 
2.0

Current assets of discontinued operations
$
52.1

 
$
58.6

 
 
 
 
Property, plant and equipment, net
$
3.0

 
$
3.0

Goodwill
35.6

 
35.6

Other assets
0.2

 
0.2

Non-current assets of discontinued operations
$
38.8

 
$
38.8

 
 
 
 
Accounts payable
$
9.4

 
$
14.2

Accrued expenses
3.4

 
4.7

Accrued compensation
4.9

 
4.6

Billings in excess of cost and earnings on uncompleted contracts
4.5

 
4.3

Other current liabilities
1.0

 
1.4

Current liabilities of discontinued operations
$
23.2

 
$
29.2

Non-current liabilities of discontinued operations
$
5.9

 
$
6.0



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Table of Contents

Note 4. Goodwill and Intangible Assets
 
(a)
Goodwill
 
The carrying amounts of goodwill as of April 1, 2018 and December 31, 2017 by reportable segment are as follows (in millions):
 
Kratos Government Solutions
 
Unmanned Systems
 
Total
Gross value
$
567.9

 
$
111.1

 
$
679.0

Less accumulated impairment
239.5

 
13.8

 
253.3

Net
$
328.4

 
$
97.3

 
$
425.7


(b)    Purchased Intangible Assets
 
The following table sets forth information for finite-lived and indefinite-lived intangible assets (in millions):
 
 
As of April 1, 2018
 
As of December 31, 2017
 
Gross
Value
 
Accumulated
Amortization
 
Net
Value
 
Gross
Value
 
Accumulated
Amortization
 
Net
Value
Acquired finite-lived intangible assets:
 

 
 

 
 
 
 

 
 

 
 
Customer relationships
$
52.6

 
$
(49.5
)
 
$
3.1

 
$
52.6

 
$
(49.1
)
 
$
3.5

Contracts and backlog
29.9

 
(25.3
)
 
4.6

 
29.9

 
(24.8
)
 
5.1

Developed technology and technical know-how
25.0

 
(19.3
)
 
5.7

 
25.0

 
(18.6
)
 
6.4

Trade names
1.4

 
(1.4
)
 

 
1.4

 
(1.3
)
 
0.1

Total finite-lived intangible assets
108.9

 
(95.5
)
 
13.4

 
108.9

 
(93.8
)
 
15.1

Indefinite-lived trade names
6.9

 

 
6.9

 
6.9

 

 
6.9

Total intangible assets
$
115.8

 
$
(95.5
)
 
$
20.3

 
$
115.8

 
$
(93.8
)
 
$
22.0


Consolidated amortization expense related to intangible assets subject to amortization was $1.7 million and $2.6 million for the three months ended April 1, 2018 and March 26, 2017, respectively.

Note 5. Inventoried Costs
 
Inventoried costs consisted of the following components (in millions):
 
 
April 1, 2018
 
December 31, 2017
Raw materials
$
33.2

 
$
35.9

Work in process
13.0

 
11.4

Finished goods
2.0

 
2.3

Subtotal inventoried costs
48.2

 
49.6

Less: Customer advances and progress payments

 
(0.6
)
Total inventoried costs
$
48.2

 
$
49.0

 


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Table of Contents

Note 6. Stockholders’ Equity
 
A summary of the changes in stockholders’ equity is provided below (in millions):
 
 
For the Three Months Ended
 
April 1, 2018
 
March 26, 2017
Stockholders’ equity at beginning of period
$
511.5

 
$
276.4

Impact from adoption of ASC 606 (Note 1)
(0.2
)
 

Comprehensive loss:
 

 
 

Net loss
(2.2
)
 
(10.0
)
Change in cumulative translation adjustment
(0.1
)
 
0.1

Total comprehensive loss
(2.3
)
 
(9.9
)
Stock-based compensation
1.7

 
2.1

Issuance of common stock for cash

 
81.9

Issuance of common stock for employee stock purchase plan
1.8

 
1.4

Restricted stock units exchanged for taxes

 
(0.5
)
Stockholders’ equity at end of period
$
512.5

 
$
351.4


The components of accumulated other comprehensive loss are as follows (in millions):

 
April 1, 2018
 
March 26, 2017
Cumulative translation adjustment
$
(1.1
)
 
$
(1.0
)
Post-retirement benefit reserve adjustment net of tax expense
(0.4
)
 
(0.6
)
Total accumulated other comprehensive loss
$
(1.5
)
 
$
(1.6
)

There were no reclassifications from accumulated other comprehensive loss to net loss for the three months ended April 1, 2018 and March 26, 2017.

Common stock issued by the Company for the three months ended April 1, 2018 and March 26, 2017 was as follows (in millions):
 
 
For the Three Months Ended
 
April 1, 2018
 
March 26, 2017
Shares outstanding at beginning of the period
103.3

 
73.9

Stock issued for cash

 
11.9

Stock issued for employee stock purchase plan, stock options and restricted stock units exercised
0.2

 
0.6

Shares outstanding at end of the period
103.5

 
86.4

 
Note 7. Net Loss Per Common Share
 
The Company calculates net loss per share in accordance with FASB Accounting Standards Codification Topic 260, Earnings per Share (Topic 260). Under Topic 260, basic net loss per common share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the reporting period. Diluted net loss per common share reflects the effects of potentially dilutive securities.

Shares from stock options and awards, excluded from the calculation of diluted net loss per share because their inclusion would have been anti-dilutive, were 0.3 million and 0.2 million for the three months ended April 1, 2018 and March 26, 2017, respectively.
 

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Table of Contents


Note 8. Income Taxes
 

The Tax Act subjects certain payments made by a U.S. company to a related foreign company to certain minimum taxes (Base Erosion Anti-Abuse Tax or “BEAT”) and imposes a new minimum tax on certain non-U.S. earnings (Global Intangible Low-Tax Income or “GILTI”). We have elected to recognize the resulting tax on GILTI as a period expense in the period the tax is incurred. We estimate that the effect from the BEAT and GILTI taxes on our estimated annual effective tax rate will not be material.

The U.S. government enacted tax legislation commonly known as the U.S. Tax Cuts and Jobs Act of 2017 on December 22, 2017 (the “Tax Act”). The Tax Act made broad and complex changes to the U.S. tax code, including but not limited to, a reduction to the U.S. federal corporate income tax rate from 35% to 21%; a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; eliminating the corporate alternative minimum tax (“AMT”) and changing realization of AMT credits; changing rules related to uses and limitations of net operating loss (“NOL”) carryforwards created in tax years after December 31, 2017; changes to the limitations on available interest expense deductions; and changes to other existing deductions and business-related exclusions. The SEC issued Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act” (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date to complete the accounting under ASC 740, “Income Taxes.” The Company’s accounting for the income tax effects of the Tax Act is incomplete. In accordance with SAB 118, we were able to make reasonable estimates on certain effects of the Tax Act reflected in the financial statements as of December 31, 2017. There have been no material changes to the provisional amounts as disclosed in the Form 10-K. We are continuing to evaluate the estimates used to record and disclose the effects of the Tax Act.

A reconciliation of the income tax expense (benefit) from continuing operations computed by applying the statutory federal income tax rate of 21% to income from continuing operations before income taxes to the income tax provision for the three months ended April 1, 2018 and applying the statutory federal income tax rate of 35% to loss from continuing operations before income taxes to the income tax provision for the three months ended March 26, 2017 was as follows (in millions):
 
 
 
 
April 1,
2018
 
March 26,
2017
Income tax expense (benefit) at federal statutory rate
$
0.5

 
$
(3.1
)
State and foreign taxes, net of federal tax benefit and valuation allowance
0.2

 
0.2

GILTI
0.1

 

Nondeductible expenses and other
0.2

 
0.4

Impact of deferred tax liabilities for indefinite-lived assets
0.4

 
1.2

Increase in reserves for uncertain tax positions
0.2

 
0.1

Increase (decrease) in federal valuation allowance
(0.7
)
 
2.6

Total income tax provision
$
0.9

 
$
1.4


In assessing the Company’s ability to realize deferred tax assets, management considers, on a periodic basis, whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. As such, management has determined that it is appropriate to maintain a full valuation allowance against the Company’s U.S. federal, combined state and certain foreign deferred tax assets, with the exception of an amount equal to its deferred tax liabilities, which can be expected to reverse over a definite life.
Federal and state income tax laws impose restrictions on the utilization of NOLs and tax credit carryforwards in the event that an “ownership change” occurs for tax purposes, as defined by Section 382 of the Internal Revenue Code of 1986, as amended (“Section 382”). In general, an ownership change occurs when shareholders owning 5% or more of a “loss corporation” (a corporation entitled to use NOLs or other loss carryovers) have increased their ownership of stock in such corporation by more than 50 percentage points during any three-year period. The annual base Section 382 limitation is calculated by multiplying the loss corporation’s value at the time of the ownership change by the greater of the long-term tax-exempt rate determined by the Internal Revenue Service in the month of the ownership change or the two preceding months.

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Table of Contents

This base limitation is subject to adjustments, including an increase for built-in gains recognized in the five-year period after the ownership change.
In March 2010, an “ownership change” occurred that will limit the utilization of NOL carryforwards. In July 2011, another “ownership change” occurred. The March 2010 ownership change limitation is more restrictive. In prior years, the Company acquired corporations with NOL carryforwards at the date of acquisition (“Acquired NOLs”). The Acquired NOLs are subject to separate limitations that may further restrict the use of Acquired NOLs. As a result, the Company’s federal annual utilization of NOL carryforwards was limited to at least $27.0 million a year for the five years succeeding the March 2010 ownership change and at least $11.6 million for each year thereafter subject to separate limitations for Acquired NOLs. If the entire limitation amount is not utilized in a year, the excess can be carried forward and utilized in future years.
For the three months ended April 1, 2018, there was no impact of such limitations on the income tax provision, since the amount of taxable income did not exceed the annual limitation amount. However, future equity offerings or acquisitions that have equity as a component of the purchase price could also cause an “ownership change.” If and when any other “ownership change” occurs, utilization of the NOLs or other tax attributes may be further limited.
As discussed elsewhere, deferred tax assets relating to the NOL and credit carryforwards are offset by a full valuation allowance. In addition, utilization of state tax loss carryforwards is dependent upon sufficient taxable income apportioned to the states.
The Company is subject to taxation in the U.S. and various state and foreign tax jurisdictions. The Company’s tax years for 2000 and later are subject to examination by the U.S. and state tax authorities due to the existence of the NOL carryforwards. Generally, the Company’s tax years for 2002 and later are subject to examination by various foreign tax authorities as well.
As of December 31, 2017, the Company had $14.0 million of unrecognized tax benefits that, if recognized, would impact the effective income tax rate for continuing operations, subject to possible offset by an increase in the deferred tax asset valuation allowance. During the three months ended April 1, 2018, unrecognized tax benefits increased by $0.1 million relating to various current year positions. As of December 31, 2017, the Company had $1.6 million of unrecognized tax benefits related to discontinued operations. During the three months ended April 1, 2018, there was no change in unrecognized tax benefits related to discontinued operations.

The Company recognizes interest and penalties related to unrecognized tax benefits in its provision for income taxes. For the three months ended April 1, 2018 and March 26, 2017, the Company recorded an expense for interest and penalties of $0.1 million. For the three months ended April 1, 2018 and March 26, 2017, there was no material benefit recorded related to the removal of interest and penalties. The Company believes that it is reasonably possible that as much as $0.4 million of the liabilities for uncertain tax positions will expire within twelve months of April 1, 2018 due to the expiration of various applicable statutes of limitations.


Note 9. Debt
 
(a)    Issuance of 6.5% Senior Secured Notes due 2025

In November 2017, the Company issued and sold $300 million aggregate principal amount of 6.5% Senior Secured Notes due 2025 (the “6.5% Notes”) in a private placement conducted pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended (the “Act”). The Company incurred debt issuance costs of $6.6 million associated with the new 6.5% Notes. The Company utilized the net proceeds from the sale of the 6.5% Notes, as well as cash from its recent equity offering to extinguish the outstanding 7% Notes (as defined below). The total reacquisition price of the 7% Notes was $385.2 million, including a $12.0 million call premium, and $0.3 million of accrued interest.

The 6.5% Notes are governed by the Indenture, dated as of November 20, 2017 (the “Indenture”), among the Company, the Company’s existing and future domestic subsidiaries parties thereto (the “Subsidiary Guarantors”) and Wilmington Trust, National Association, as trustee and collateral agent. A Subsidiary Guarantor can be released from its guarantee if (a) all of the capital stock issued by such Subsidiary Guarantor or all or substantially all of the assets of such Subsidiary Guarantor are sold or otherwise disposed of; (b) the Company designates such Subsidiary Guarantor as an Unrestricted Subsidiary (as defined in the Indenture); (c) the Company exercises its legal defeasance option or its covenant defeasance option; or (d) upon satisfaction and discharge of the Indenture or payment in full in cash of the principal of, premium, if any, and accrued and unpaid interest on the 6.5% Notes.

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Table of Contents


The 6.5% Notes bear interest at a rate of 6.5% per year from the date of original issuance or from the most recent payment date on which interest has been paid or provided for. Interest on the 6.5% Notes is payable in arrears on May 30 and November 30 of each year, beginning on May 30, 2018. The 6.5% Notes are fully and unconditionally guaranteed by the Subsidiary Guarantors.

The 6.5% Notes and the guarantees (as set forth in the Indenture, the “Guarantees”) are the Company’s senior secured obligations and are equal in right of payment with all other senior obligations of the Subsidiary Guarantors’ existing and future secured debt to the extent of the assets securing that secured debt. The Company’s obligations under the 6.5% Notes are secured by a first priority lien on substantially all of the Company’s assets and the assets of the Subsidiary Guarantors, except with respect to accounts receivable, inventory, deposit accounts, securities accounts, cash, securities and general intangibles (other than intellectual property), on which the holders of the 6.5% Notes have a second priority lien, junior to the lien securing the Company’s obligations under the Credit Agreement (as defined below).

The 6.5% Notes will be redeemable, in whole or in part, at any time on or after November 30, 2020 at the respective redemption prices specified in the Indenture. In addition, the Company may redeem up to 40% of the 6.5% Notes before November 30, 2020 with the net proceeds of certain equity offerings. The Company may also redeem some or all of the 6.5% Notes before November 30, 2020 at a redemption price of 100% of the principal amount thereof plus accrued and unpaid interest, to, but excluding, the redemption date, if any, plus a “make whole” premium. In addition, during each 12-month period commencing on the issue date and ending on or prior to November 30, 2020, the Company may redeem up to 10% of the original aggregate principal amount of the 6.5% Notes issued under the Indenture at a redemption price of 103.000% of the principal amount thereof, plus accrued and unpaid interest, to, but excluding, the date of redemption, if any. The Company may also be required to make an offer to purchase the 6.5% Notes upon a change of control and certain sales of its assets.

The Indenture contains covenants limiting, among other things, the Company’s ability and the Subsidiary Guarantors’ ability to: (a) pay dividends on or make distributions or repurchase or redeem the Company’s capital stock or make other restricted payments; (b) incur additional debt and guarantee debt; (c) prepay, redeem or repurchase certain debt; (d) issue certain preferred stock or similar equity securities; (e) make loans and investments; (f) sell assets; (g) incur liens; (h) consolidate, merge, sell or otherwise dispose of all or substantially all of the Company’s assets; (i) enter into transactions with affiliates; and (j) enter into agreements restricting the Company’s ability and certain of its subsidiaries’ ability to pay dividends. These covenants are subject to a number of exceptions. As of April 1, 2018, the Company was in compliance with the covenants contained in the Indenture governing the 6.5% Notes.

The terms of the Indenture require that the net cash proceeds from asset dispositions be either utilized to (i) repay or prepay amounts outstanding under the Credit Agreement unless such amounts are reinvested in similar collateral, (ii) permanently reduce other indebtedness, (iii) make an investment in assets that replace the collateral of the 6.5% Notes or (iv) a combination of (i), (ii) and (iii). To the extent there are any remaining net proceeds from the asset disposition after application of (i), (ii) and (iii), such amounts are required to be utilized to repurchase the 6.5% Notes at par.

The Indenture also provides for events of default which, if any such event occurs, would permit or require the principal, premium, if any, interest, if any, and any other monetary obligations on all the then-outstanding 6.5% Notes to become or to be declared due and payable immediately.

As of April 1, 2018, there was $300.0 million of 6.5% Notes outstanding.


(b)
Issuance of 7.00% Senior Secured Notes due 2019
 
In May 2014, the Company refinanced its $625.0 million of 10% Senior Secured Notes due in 2017 (the “10% Notes”) with $625.0 million of newly issued 7.00% Senior Secured Notes due in 2019 (the “7% Notes”, and collectively with the 6.5% Notes, the “Notes”). The net proceeds from the issuance of the 7% Notes was $618.5 million after an original issue discount of $6.5 million. The Company incurred debt issuance costs of $8.8 million associated with the 7% Notes. The Company utilized the net proceeds from the issuance of the 7% Notes, a $41.0 million draw on its Credit Agreement, as well as cash from operations to extinguish the 10% Notes. The total reacquisition price of the 10% Notes was $661.5 million including a $31.2 million early termination fee, the write-off of $15.5 million of unamortized issue costs, $12.9 million of unamortized premium, along with $5.3 million of additional interest while in escrow, which resulted in a loss on extinguishment of debt of $39.1 million. On October 16, 2014, the Company exchanged the outstanding 7% Notes for an equal amount of 7% Notes that had been registered under the Act.


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Table of Contents

The 7% Notes were governed by an Indenture dated May 14, 2014 among the Company, certain of the Company’s subsidiaries and Wilmington Trust, National Association, as trustee and collateral agent. The Company paid interest on the 7% Notes semi-annually, in arrears, on May 15 and November 15 of each year. The 7% Notes included customary covenants and events of default as well as a consolidated fixed charge ratio of 2.0:1 for the incurrence of additional indebtedness. Negative covenants include, among other things, limitations on additional debt, liens, negative pledges, investments, dividends, stock repurchases, asset sales and affiliate transactions. Events of default include, among other events, non-performance of covenants, breach of representations, cross-default to other material debt, bankruptcy, insolvency, material judgments and changes in control.

During the year ended December 25, 2016, the Company repurchased and extinguished $14.5 million of the outstanding 7% Notes, which resulted in a gain of $0.4 million offset by $0.1 million of unamortized issuance cost and $0.1 million of unamortized discount resulting in a gain on extinguishment of debt of $0.2 million.

During the quarter ended March 26, 2017, the Company repurchased and extinguished $62.7 million of the outstanding 7% Notes, which resulted in a loss of $1.4 million and the realization of $0.4 million of unamortized issuance cost and $0.3 million of unamortized discount resulting in a loss on extinguishment of debt of $2.1 million.

During the quarter ended December 31, 2017, the Company redeemed and extinguished the remaining $372.8 million of outstanding 7% Notes, which resulted in a loss of $12.0 million and the realization of $1.9 million of unamortized issuance cost and $1.3 million of unamortized discount resulting in a loss on extinguishment of debt of $15.2 million.


(c)    Other Indebtedness

$110.0 Million Credit Agreement

On May 14, 2014, the Company entered into a $110.0 million Credit and Security Agreement, dated May 14, 2014 (the “Credit Agreement”), with the lenders from time to time party thereto, SunTrust Bank, as Agent (the “Agent”), PNC Bank, National Association, as Joint Lead Arranger and Documentation Agent, and SunTrust Robinson Humphrey, Inc., as Joint Lead Arranger and Sole Book Runner. The Credit Agreement established a five-year senior secured revolving credit facility in the maximum amount of $110.0 million (subject to a potential increase of the maximum principal amount to $135.0 million, subject to the Agent’s and applicable lenders’ approval as described therein), consisting of a subline for letters of credit in an amount not to exceed $50.0 million, as well as a swingline loan in an aggregate principal amount at any time outstanding not to exceed $10.0 million. The obligations under the Credit Agreement are secured by a first priority lien on the Company’s accounts receivable, inventory, deposit accounts, securities accounts, cash, securities and general intangibles (other than intellectual property). The obligations under the Credit Agreement are secured by a second priority lien, junior to the lien securing the Notes, on all of the Company’s other assets.

The Credit Agreement contains certain covenants, which include, but are not limited to, restrictions on indebtedness, liens, and investments, and limits on other various payments, as well as a financial covenant relating to a minimum fixed charge coverage ratio of 1.15:1 (as modified per the Third Amendment and the Fourth Amendment, as defined and discussed below). Events of default under the terms of the Credit Agreement include, but are not limited to: failure of the Company to pay any principal of any loans in full when due and payable; failure of the Company to pay any interest on any loan or any fee or other amount payable under the Credit Agreement within three business days after the date when due and payable; failure of the Company or any of its subsidiaries to comply with certain covenants and agreements, subject to applicable grace periods and/or notice requirements; any representation, warranty or statement made in or pursuant to the Credit Agreement or any related writing or any other material information furnished by the Company or any of its subsidiaries to the Agent or the lenders proving to be false or erroneous; and the occurrence of an event or condition having or reasonably likely to have a material adverse effect, which includes a material adverse effect on the business, operations, condition (financial or otherwise) or prospects of the Company or the ability of the Company to repay its obligations. Where an event of default arises from certain bankruptcy events, the commitments will automatically and immediately terminate and the principal of, and interest then outstanding on, all of the loans will become immediately due and payable. Subject to certain notice requirements and other conditions, upon the occurrence of an event of default, including the occurrence of a condition having or reasonably likely to have a material adverse effect, commitments may be terminated and the principal of, and interest then outstanding on, all of the loans may become immediately due and payable.

On May 31, 2015, the Company entered into a third amendment (the “Third Amendment”) to the Credit Agreement. Under the terms of the Third Amendment, the definitions of certain terms of the Credit Agreement were modified, the disposition by the Company of Herley Industries, Inc. (“Herley”) and certain of Herley’s subsidiaries, including Herley-CTI, Inc., EW Simulation Technology, Ltd. and Stapor Research, Inc. (collectively, the “Herley Entities”), was approved by the lenders, a minimum $175.0 million repurchase of the 7% Notes by the Company was required and the payment in full of the

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outstanding balance of the Credit Agreement was required. Additionally, the measurement of the fixed charge coverage ratio of 1.15:1 was modified as follows: (i) the fixed charge coverage ratio will not be measured as of the end of any quarterly reporting period ending after June 30, 2015, if on such date (a) there are no outstanding revolving loans or swingline loans and (b) the aggregate amount outstanding under letters of credit is less than or equal to $17.0 million, and (ii) as to any subsequent quarterly reporting period ending after June 30, 2015, and not covered by clause (i) above, a fixed charge coverage ratio of at least 1.05:1 must be maintained if the percentage of (a) outstanding revolving loans plus the sum of the outstanding swingline loans and outstanding letters of credit that are in excess of $17.0 million, to (b) the revolving credit commitment, minus the Herley Disposition Proceeds Reinvestment Reserve (as defined in the Third Amendment) is greater than 0.00% but less than 15.00% or a fixed charge coverage ratio of at least 1.10:1 must be maintained if the aforementioned percentage is equal to or greater than 15.00% but less than 25.00%. In all other instances, a fixed charge coverage ratio of at least 1.15:1 must be maintained. For purposes of computing the fixed charge coverage ratio, the associated reduction in consolidated interest expense in connection with the repurchase of the 7% Notes with proceeds from the sale of the Herley Entities shall be deemed to have occurred on the first day of the most recently completed four quarterly reporting periods prior to the sale.

On August 20, 2015, the Company entered into a fourth amendment (the “Fourth Amendment”) to the Credit Agreement. Among other things, the Fourth Amendment provides for a modification of the Third Amendment as it relates to when the minimum fixed charge coverage ratio will be measured based upon the Company’s outstanding borrowings. Outstanding borrowings for purposes of computing the applicable minimum fixed charge coverage ratio exclude any letter of credit exposure outstanding of $17.0 million plus the amount of letters of credit outstanding for the divested Herley Entities for which a cash deposit has been placed in escrow by the Buyer to cover the amount of such outstanding letters of credit, should the letters of credit be pulled.

On November 20, 2017, the Company entered into an amended and restated Credit Agreement with the lenders from time to time party thereto, the Agent, PNC Bank, National Association, as Joint Lead Arranger and Documentation Agent, and SunTrust Robinson Humphrey, Inc., as Joint Lead Arranger and Sole Book Runner. As amended and restated, the Credit Agreement establishes a five year senior secured revolving credit facility in the aggregate principal amount of $90.0 million (subject to a potential increase of the aggregate principal amount to $115.0 million, subject to SunTrust’s and applicable lenders’ approval), consisting of a subline for letters of credit in an amount not to exceed $50.0 million, as well as a swingline loan in an aggregate principal amount at any time outstanding not to exceed $10.0 million.

Borrowings under the revolving credit facility may take the form of a base rate revolving loan, Eurodollar revolving loan or swingline loan. Base rate revolving loans and swingline loans will bear interest at a rate per annum equal to the sum of the Applicable Margin (as defined in the Credit Agreement) from time to time in effect plus the highest of (i) the Agent’s prime lending rate, as in effect at such time, (ii) the federal funds rate, as in effect at such time, plus 0.50% per annum and (iii) the Adjusted LIBO Rate (as defined in the Credit Agreement) determined at such time for an interest period of one month, plus 1.00% per annum. Eurodollar revolving loans will bear interest at a rate per annum equal to the sum of the Applicable Margin from time to time in effect plus the Adjusted LIBO Rate. The Applicable Margin varies between 1.00%-1.50% for base rate revolving loans and swingline loans and 2.00%-2.50% for Eurodollar loans, and is based on several factors including the Company’s then-existing borrowing base and the lenders’ total commitment amount and revolving credit exposure. The calculation of the Company’s borrowing base takes into account several items relating to the Company and its subsidiaries, including amounts due and owing under billed and unbilled accounts receivable, then held eligible raw materials inventory, work-in-process inventory, and applicable reserves.

The measurement of a minimum fixed charge coverage ratio under the Credit Agreement was modified in November 2017 to require measurement if Excess Availability (as defined in the Credit Agreement) is less than fifty percent of the lesser of the borrowing base or the total commitment amount.

As of April 1, 2018, there were no borrowings outstanding on the Credit Agreement and $9.6 million outstanding on letters of credit, resulting in net borrowing base availability of $59.0 million. The Company was in compliance with the financial covenants of the Credit Agreement and its amendments as of April 1, 2018.

Debt Acquired in Acquisition

The Company has a $10.0 million ten-year term loan with a bank in Israel entered into on September 16, 2008 in connection with the acquisition of one of its wholly owned subsidiaries. The balance under the term loan as of April 1, 2018 was $0.5 million, and the loan is payable in quarterly installments of $0.3 million plus interest at LIBOR plus a margin of 1.5%. The loan agreement governing the term loan contains various covenants, including a minimum net equity covenant as defined in the loan agreement. The Company was in compliance with all covenants contained in the loan agreement as of April 1, 2018.

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Fair Value of Long-term Debt
 
Carrying amounts and the related estimated fair values of the Company’s long-term debt financial instruments not measured at fair value on a recurring basis at April 1, 2018 and December 31, 2017 are presented in the following table:
 
 
 
As of April 1, 2018
 
As of December 31, 2017
$ in millions
 
Principal
 
Carrying
Amount
 
Fair Value
 
Principal
 
Carrying
Amount
 
Fair Value
Total long-term debt including current portion
 
$
300.5

 
$
294.1

 
$
312.5

 
$
300.8

 
$
294.3

 
$
312.7

 
The fair value of the Company’s long-term debt was based upon actual trading activity (Level 1, Observable inputs -quoted prices in active markets).

 As of April 1, 2018, the difference between the carrying amount of $294.1 million and the principal amount of $300.5 million presented in the table above is the unamortized debt issuance costs of $6.4 million, which are being accreted to interest expense over the term of the related debt. As of December 31, 2017, the difference between the carrying amount of $294.3 million and the principal amount of $300.8 million presented in the table above is the unamortized debt issuance costs of $6.5 million, which are being accreted to interest expense over the term of the related debt.

Note 10. Segment Information
 
The Company operates in two reportable segments. The Kratos Government Solutions (“KGS”) reportable segment is comprised of an aggregation of KGS operating segments, including the microwave electronic products, satellite communications, modular systems and defense and rocket support services operating segments. The Unmanned Systems (“US”) reportable segment consists of its unmanned aerial system and unmanned ground and seaborne system businesses. The KGS and US segments provide products, solutions and services for mission critical national security programs. KGS and US customers primarily include national security related agencies, the U.S. Department of Defense (the “DoD”), intelligence agencies and classified agencies, and to a lesser degree, international government agencies and domestic and international commercial customers.

As discussed in “Discontinued Operations” in Note 3, on February 28, 2018, the Company entered into a Purchase Agreement to sell the operations of its Public Safety & Security business unit which had previously been reported as a separate reportable business segment. Accordingly, PSS and its subsidiaries have been classified as held for sale and reported in discontinued operations in the accompanying condensed consolidated financial statements for all periods presented.

The Company organizes its reportable segments based on the nature of the products, solutions and services offered. Transactions between segments are generally negotiated and accounted for under terms and conditions similar to other government and commercial contracts. This presentation is consistent with the Company’s operating structure. In the following table total operating income (loss) from continuing operations of the reportable business segments is reconciled to the corresponding consolidated amount. The reconciling item “unallocated corporate expense, net” includes costs for certain stock-based compensation programs (including stock-based compensation costs for stock options, employee stock purchase plan and restricted stock units), the effects of items not considered part of management’s evaluation of segment operating performance, merger and acquisition expenses, corporate costs not allocated to the segments, and other miscellaneous corporate activities.


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 Revenues, depreciation and amortization, and operating income (loss) generated by the Company’s reportable segments for the three month periods ended April 1, 2018 and March 26, 2017 are as follows (in millions):
 
 
Three Months Ended
 
April 1, 2018
 
March 26, 2017
Revenues:
 

 
 
Kratos Government Solutions
 
 
 
Service revenues
$
46.0

 
$
49.2

Product sales
69.2

 
67.2

Total Kratos Government Solutions
115.2

 
116.4

Unmanned Systems
 
 
 
Service revenues

 

Product sales
27.8

 
15.6

Total Unmanned Systems
27.8

 
15.6

Total revenues
$
143.0

 
$
132.0

Depreciation & amortization:
 
 
 
Kratos Government Solutions
$
3.6

 
$
3.7

Unmanned Systems
0.9

 
1.8

Total depreciation and amortization
$
4.5

 
$
5.5

Operating income (loss) from continuing operations:
 

 
 

Kratos Government Solutions
$
7.9

 
$
9.1

Unmanned Systems
0.8

 
(5.0
)
Total segment operating income
8.7

 
4.1

Unallocated corporate expense, net
(1.7
)
 
(2.7
)
Total operating income from continuing operations
$
7.0

 
$
1.4



Note 11. Significant Customers
 
Revenue from the U.S. Government, which includes foreign military sales, includes revenue from contracts for which the Company is the prime contractor as well as those for which the Company is a subcontractor and the ultimate customer is the U.S. Government. The KGS and US segments have substantial revenue from the U.S. Government. Sales to the U.S. Government amounted to approximately $100.9 million and $96.3 million, or 71% and 73% of total Kratos revenue, for the three months ended April 1, 2018 and March 26, 2017, respectively.
 

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Note 12. Commitments and Contingencies
 
In addition to commitments and obligations in the ordinary course of business, the Company is subject to various claims, pending and potential legal actions for damages, investigations relating to governmental laws and regulations and other matters arising out of the normal conduct of the Company’s business. The Company assesses contingencies to determine the degree of probability and range of possible loss for potential accrual in its condensed consolidated financial statements. An estimated loss contingency is accrued in the Company’s condensed consolidated financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable and unfavorable resolutions could occur, assessing litigation contingencies is highly subjective and requires judgments about future events. When evaluating contingencies, the Company may be unable to provide a meaningful estimate due to a number of factors, including but not limited to the procedural status of the matter in question, the presence of complex or novel legal theories, and the ongoing discovery and development of information important to the matters. In addition, damage amounts claimed in litigation against it may be unsupported, exaggerated or unrelated to possible outcomes and, as such, are not meaningful indicators of its potential liability. The Company regularly reviews contingencies to determine the adequacy of its accruals and related disclosures. The amount of ultimate loss may differ from these estimates. It is possible that cash flows or results of operations could be materially affected in any particular period by the unfavorable resolution of one or more of these contingencies. Whether any losses finally determined in any claim, action, investigation or proceeding could reasonably have a material effect on the Company’s business, financial condition, results of operations or cash flows will depend on a number of variables, including the timing and amount of such losses; the structure and type of any remedies; the monetary significance any such losses, damages or remedies may have on the Company’s condensed consolidated financial statements; and the unique facts and circumstances of the particular matter that may give rise to additional factors.

Legal and Regulatory Matters
U.S. Government Cost Claims.

The Company’s contracts with the DoD are subject to audit by the Defense Contract Audit Agency (“DCAA”). As a result of these audits, from time to time the Company is advised of claims concerning potential disallowed, overstated or disputed costs. For example, during the course of recent audits of the Company’s contracts, the DCAA is closely examining and questioning certain of the established and disclosed practices that it had previously audited and accepted. The Company’s personnel regularly scrutinizes costs incurred and allocated to contracts with the U.S. Government for compliance with regulatory standards. For those Company subsidiaries and fiscal years which have not yet been audited by the DCAA or for those audits which are in process which have not been completed by the DCAA, the Company cannot reasonably estimate the range of loss, if any, that may result from audits and reviews in which it is currently involved given the inherent difficulty in predicting regulatory action, fines and penalties, if any, and the various remedies and levels of judicial review available to the Company in the event of an adverse finding. As a result, the Company has not recorded any liability related to these matters.

Other Litigation Matters.

The Company is subject to normal and routine litigation arising from the ordinary course and conduct of business and, at times, as a result of acquisitions and dispositions. Such disputes include, for example, commercial, employment, intellectual property, environmental and securities matters. The aggregate amounts accrued related to these matters are not material to the total liabilities of the Company. The Company intends to defend itself in any such matters and does not currently believe that the outcome of any such matters will have a material adverse impact on the Company’s financial condition, results of operations or cash flows.

Note 13. Condensed Consolidating Financial Statements

As of April 1, 2018, the Company had $300.0 million in outstanding Notes (see Note 9). The Notes are guaranteed by the Subsidiary Guarantors and are collateralized by the assets of all of the Company’s 100% owned subsidiaries. The Notes are fully and unconditionally guaranteed on a joint and several basis by each Subsidiary Guarantor and the Company. There are no contractual restrictions with respect to the Notes limiting cash transfers from Subsidiary Guarantors by dividends, loans or advances to the Company. The Notes are not guaranteed by the Company’s foreign subsidiaries (the “Non-Guarantor Subsidiaries”).

The following tables present condensed consolidating financial statements for the parent company, the Subsidiary Guarantors and the Non-Guarantor Subsidiaries, respectively. The condensed consolidating financial information below follows

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the same accounting policies as described in the condensed consolidated financial statements, except for the use of the equity method of accounting to reflect ownership interests in 100% owned subsidiaries, which are eliminated upon consolidation.

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Table of Contents


Condensed Consolidating Balance Sheet
April 1, 2018
(Unaudited)
(in millions)
 
Parent Company
 
Subsidiary Guarantors on a Combined Basis
 
Non-Guarantors on a Combined Basis
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
  Cash, cash equivalents and restricted cash
$
118.2

 
$
(1.6
)
 
$
11.6

 
$

 
$
128.2

Accounts receivable and unbilled receivables, net

 
181.8

 
27.1

 

 
208.9

  Amounts due from affiliated companies
240.3

 

 

 
(240.3
)
 

  Inventoried costs

 
29.9

 
18.3

 

 
48.2

  Other current assets
3.1

 
12.1

 
4.5

 

 
19.7

  Current assets of discontinued operations

 
52.1

 

 

 
52.1

    Total current assets
361.6

 
274.3

 
61.5

 
(240.3
)
 
457.1

Property, plant and equipment, net
1.7

 
53.0

 
6.8

 

 
61.5

Goodwill

 
382.8

 
42.9

 

 
425.7

Intangible assets, net

 
14.6

 
5.7

 

 
20.3

Investment in subsidiaries
475.4

 
72.7

 

 
(548.1
)
 

Other assets
0.8

 
7.0

 

 

 
7.8

Non-current assets of discontinued operations

 
38.8

 

 

 
38.8

    Total assets
$
839.5

 
$
843.2

 
$
116.9

 
$
(788.4
)
 
$
1,011.2

Liabilities and Stockholders Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
2.2

 
$
25.2

 
$
3.9

 
$

 
$
31.3

Accrued expenses
8.7

 
29.8

 
1.9

 

 
40.4

Accrued compensation
5.0

 
25.6

 
3.5

 

 
34.1

Billings in excess of costs and earnings on uncompleted contracts

 
36.0

 
2.2

 

 
38.2

Amounts due to affiliated companies

 
207.6

 
32.7

 
(240.3
)
 

Other current liabilities
0.7

 
2.3

 
4.8

 

 
7.8

Current liabilities of discontinued operations
0.6

 
22.5

 
0.1

 

 
23.2

    Total current liabilities
17.2

 
349.0

 
49.1

 
(240.3
)
 
175.0

Long-term debt, net of current portion
293.6

 

 

 

 
293.6

Other long-term liabilities
12.4

 
4.7

 
7.1

 

 
24.2

Non-current liabilities of discontinued operations
3.8

 
2.1

 

 

 
5.9

    Total liabilities
327.0

 
355.8

 
56.2

 
(240.3
)
 
498.7

Total stockholders equity
512.5

 
487.4

 
60.7

 
(548.1
)
 
512.5

    Total liabilities and stockholders equity
$
839.5

 
$
843.2

 
$
116.9

 
$
(788.4
)
 
$
1,011.2


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Table of Contents


Condensed Consolidating Balance Sheet
December 31, 2017
(Unaudited)
(in millions)

 
Parent Company
 
Subsidiary Guarantors on a Combined Basis
 
Non-Guarantors on a Combined Basis
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
  Cash, cash equivalents and restricted cash
$
121.3

 
$
(1.1
)
 
$
10.7

 
$

 
$
130.9

Accounts receivable and unbilled receivables, net

 
183.8

 
28.5

 

 
212.3

  Amounts due from affiliated companies
238.1

 

 

 
(238.1
)
 

  Inventoried costs

 
30.8

 
18.2

 

 
49.0

  Other current assets
3.7

 
13.5

 
3.4

 

 
20.6

  Current assets of discontinued operations

 
58.6

 

 

 
58.6

    Total current assets
363.1

 
285.6

 
60.8

 
(238.1
)
 
471.4

Property, plant and equipment, net
1.9

 
49.3

 
6.8

 

 
58.0

Goodwill

 
382.8

 
42.9

 

 
425.7

Intangible assets, net

 
15.8

 
6.2

 

 
22.0

Investment in subsidiaries
471.1

 
70.0

 

 
(541.1
)
 

Other assets
0.8

 
7.3

 

 

 
8.1

Non-current assets of discontinued operations

 
38.8

 

 

 
38.8

    Total assets
$
836.9

 
$
849.6

 
$
116.7

 
$
(779.2
)
 
$
1,024.0

Liabilities and Stockholders Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
  Accounts payable
$
2.3

 
$
27.9

 
$
4.5

 
$

 
$
34.7

  Accrued expenses
5.7

 
33.6

 
3.3

 

 
42.6

  Accrued compensation
5.6

 
20.7

 
3.9

 

 
30.2

Billings in excess of costs and earnings on uncompleted contracts

 
38.2

 
4.6

 

 
42.8

  Amounts due to affiliated companies

 
206.4

 
31.7

 
(238.1
)
 

  Other current liabilities
1.4

 
4.3

 
3.7

 

 
9.4

Current liabilities of discontinued operations
1.0

 
28.1

 
0.1

 

 
29.2

    Total current liabilities
16.0

 
359.2

 
51.8

 
(238.1
)
 
188.9

Long-term debt, net of current portion
293.5

 

 

 

 
293.5

Other long-term liabilities
12.1

 
5.1

 
6.9

 

 
24.1

Non-current liabilities of discontinued operations
3.8

 
2.2

 

 

 
6.0

    Total liabilities
325.4

 
366.5

 
58.7

 
(238.1
)
 
512.5

 Total stockholders equity
511.5

 
483.1

 
58.0

 
(541.1
)
 
511.5

    Total liabilities and stockholders equity
$
836.9

 
$
849.6

 
$
116.7

 
$
(779.2
)
 
$
1,024.0



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Table of Contents


Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
Three Months Ended April 1, 2018
(Unaudited)
(in millions)
 
Parent Company
 
Subsidiary Guarantors on a Combined Basis
 
Non-Guarantors on a Combined Basis
 
Eliminations
 
Consolidated
Service revenues
$

 
$
42.7

 
$
3.3

 
$

 
$
46.0

Product sales

 
85.5

 
16.4

 
(4.9
)
 
97.0

  Total revenues

 
128.2

 
19.7

 
(4.9
)
 
143.0

Cost of service revenues

 
30.4

 
2.5

 

 
32.9

Cost of product sales

 
63.2

 
11.0

 
(4.9
)
 
69.3

  Total costs

 
93.6

 
13.5

 
(4.9
)
 
102.2

  Gross profit

 
34.6

 
6.2

 

 
40.8

Selling, general and administrative expenses
0.4

 
26.7

 
3.1

 

 
30.2

Research and development expenses

 
3.2

 
0.4

 

 
3.6

  Operating income (loss) from continuing operations
(0.4
)
 
4.7

 
2.7

 

 
7.0

Other income (expense):
 
 
 
 
 
 
 
 
 
  Interest income (expense), net
(5.2
)
 
0.1

 

 

 
(5.1
)
  Other income (expense), net
(0.8
)
 
0.8

 
0.3

 

 
0.3

  Total other income (expense), net
(6.0
)
 
0.9

 
0.3

 

 
(4.8
)
Income (loss) from continuing operations before income taxes
(6.4
)
 
5.6

 
3.0

 

 
2.2

Provision for income taxes from continuing operations
0.1

 
0.5

 
0.3

 

 
0.9

Income (loss) from continuing operations
(6.5
)
 
5.1

 
2.7

 

 
1.3

Loss from discontinued operations

 
(3.5
)
 

 

 
(3.5
)
Equity in net income (loss) of subsidiaries
4.3

 
2.7

 

 
(7.0
)
 

Net income (loss)
$
(2.2
)
 
$
4.3

 
$
2.7

 
$
(7.0
)
 
$
(2.2
)
Comprehensive income (loss)
$
(2.3
)
 
$
4.3

 
$
2.6

 
$
(6.9
)
 
$
(2.3
)


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Table of Contents


Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
Three Months Ended March 26, 2017
(Unaudited)
(in millions)
 
Parent Company
 
Subsidiary Guarantors on a Combined Basis
 
Non-Guarantors on a Combined Basis
 
Eliminations
 
Consolidated
Service revenues
$

 
$
46.6

 
$
2.6

 
$

 
$
49.2

Product sales

 
73.3

 
12.7

 
(3.2
)
 
82.8

  Total revenues

 
119.9

 
15.3

 
(3.2
)
 
132.0

Cost of service revenues

 
33.1

 
1.9

 

 
35.0

Cost of product sales

 
54.0

 
10.1

 
(3.2
)
 
60.9

  Total costs

 
87.1

 
12.0

 
(3.2
)
 
95.9

  Gross profit

 
32.8

 
3.3

 

 
36.1

Selling, general and administrative expenses
2.1

 
25.1

 
3.1

 

 
30.3

Research and development expenses

 
4.0

 
0.4

 

 
4.4

  Operating income (loss) from continuing operations
(2.1
)
 
3.7

 
(0.2
)
 

 
1.4

Other income (expense):
 
 
 
 
 
 
 
 
 
  Interest income (expense), net
(8.2
)
 

 

 

 
(8.2
)
  Loss on extinguishment of debt
(2.1
)
 

 

 

 
(2.1
)
  Other income (expense), net

 

 
0.2

 

 
0.2

  Total other income (expense), net
(10.3
)
 

 
0.2

 

 
(10.1
)
Income (loss) from continuing operations before income taxes
(12.4
)
 
3.7

 

 

 
(8.7
)
Provision for income taxes from continuing operations
0.1

 
1.0

 
0.3

 

 
1.4

Income (loss) from continuing operations
(12.5
)
 
2.7

 
(0.3
)
 

 
(10.1
)
Income (loss) from discontinued operations
(0.1
)
 
0.2