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Document and Entity Information - USD ($) $ in Millions	12 Months Ended
Dec. 25, 2011	Nov. 30, 2012	Jun. 26, 2011
Document and Entity Information
Entity Registrant Name	KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
Entity Central Index Key	0001069258
Document Type	10-K
Document Period End Date	Dec. 25, 2011
Amendment Flag	true
Amendment Description	This amendment (the “Amendment”) to the Annual Report on Form 10-K for the year ended December 25, 2011 (the “Original Form 10-K”), of Kratos Defense & Security Solutions, Inc. (the “Company”) which was originally filed with the Securities and Exchange Commission (“SEC”) on March 7, 2012, is being filed for the purpose of adding Note 17 - Condensed Consolidating Financial Statements (the “Guarantor Footnote”) to the consolidated financial statements filed with the Original Form 10-K in order to conform to the disclosure requirements of Rule 3-10 of Regulation S-X under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The purpose of the Guarantor Footnote is to provide additional supplementary financial information to the holders of the Company’s publicly-traded debt instruments. The addition of the footnote does not affect any other portion of the Company’s consolidated financial statements, including the Consolidated Balance Sheets, Statements of Operations, Statements of Stockholders’ Equity and Statements of Cash Flows. In addition, because the Company is reissuing its consolidated financial statements in order to add the Guarantor Footnote, SEC rules require that the Company retrospectively revise its consolidated financial statements to reflect certain events that occurred after the end of the fiscal year covered by the consolidated financial statements. Accordingly, the Company has revised its consolidated financial statements in accordance with FASB ASC Topic 205, Presentation of Financial Statements (“Topic 205”) to reflect the discontinuation of certain non-core businesses in June of 2012, an event which has already been reported in the Company’s Quarterly Reports on Form 10-Q for the fiscal quarters ended June 24, 2012 and September 30, 2012. As required by Rule 12b-15 under the Exchange Act, new certifications by the Company’s principal executive officer and principal financial officer are filed as exhibits to this Amendment under Item 15 of Part IV hereof. This Amendment solely modifies the following portions of the Original Form 10-K: Part II - Items 6, 7 and 9A; and Part IV - Item 15, and does not reflect any events occurring after December 25, 2011 or modify or update the disclosures in the Original Form 10-K that may have been affected by subsequent events, except as required to reflect the effects of the Company’s retrospective application of Topic 205 to reflect the discontinued operations and the addition of the Guarantor Footnote. All other Items of the Original Form 10-K are unaffected by this Amendment and such Items have not been included in this Amendment. This filing should be read in conjunction with the Original Form 10-K and the filings made by the Company with the SEC subsequent to the filing of the Original Form 10-K. The Company’s management has considered whether the addition of the Guarantor Footnote to conform to the requirements of Rule 3-10 of Regulation S-X under the Exchange Act, affects management’s conclusion, set forth in the Form 10-K, regarding the effectiveness, as of December 25, 2011, of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) and the Company’s internal control over financial reporting, (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Management continues to believe that, as of December 25, 2011: • The Company’s disclosure controls and procedures were functioning effectively to provide reasonable assurance that information required to be disclosed by the Company in its reports filed or submitted under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC’s rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure; and • The Company’s internal control over financial reporting was effective based on the criteria on which it was evaluated, as described in the Form 10-K. Management’s Annual Report on Internal Control over Financial Reporting is included in this Form 10-K/A.
Current Fiscal Year End Date	--12-25
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Public Float			$ 269.2
Entity Common Stock, Shares Outstanding		56,604,000
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	FY

Consolidated Balance Sheets - USD ($) $ in Millions	Dec. 25, 2011	Dec. 26, 2010
Current assets:
Cash and cash equivalents	$ 69.6	$ 10.8
Restricted cash	1.1	8.5
Accounts receivable, net	245.3	125.8
Inventoried costs	76.6	25.9
Income taxes receivable	2.9	2.3
Prepaid expenses	12.7	7.1
Other current assets	3.1	2.7
Current assets of discontinued operations	9.7	0.5
Total current assets	421.0	183.6
Property and equipment, net	72.5	28.4
Goodwill	571.6	226.8
Intangibles, net	124.6	89.1
Other assets	23.9	7.8
Long-term assets of discontinued operations	2.4
Total assets	1,216.0	535.7
Current liabilities:
Accounts payable	48.8	43.6
Accrued expenses	50.7	21.4
Accrued compensation	39.8	21.7
Billings in excess of costs and earnings on uncompleted contracts	36.2	17.2
Deferred income tax liability	8.5
Acquisition related holdback payments		8.1
Other current liabilities	21.9	3.4
Current portion of long-term debt	1.0
Current portion of capital lease obligations	0.6	0.6
Current liabilities of discontinued operations	6.3	2.1
Total current liabilities	213.8	118.1
Long-term debt, net of current portion	630.8	225.0
Long-term debt premium	22.8
Capital lease obligations, net of current portion	0.7	1.1
Deferred income tax liability	2.5	11.6
Other long-term liabilities	32.3	8.6
Long-term liabilities of discontinued operations	0.5	1.4
Total liabilities	903.4	365.8
Commitments and contingencies
Stockholders' equity:
Preferred stock, 5,000,000 shares authorized Series B Convertible Preferred Stock, $.001 par value, 10,000 shares outstanding at December 26, 2010 and 0 shares outstanding at December 25, 2011 (liquidation preference $5.0 million at December 26, 2010) (see note 11)
Common stock, $.001 par value, 195,000,000 shares authorized; 18,616,023 and 32,421,135 shares issued and outstanding at December 26, 2010 and December 25, 2011, respectively
Additional paid-in capital	720.6	553.5
Accumulated other comprehensive loss	(0.2)
Accumulated deficit	(407.8)	(383.6)
Total stockholders' equity	312.6	169.9
Total liabilities and stockholders' equity	$ 1,216.0	$ 535.7

Consolidated Statements of Operations - USD ($) shares in Millions, $ in Millions	12 Months Ended
	Dec. 25, 2011	Dec. 26, 2010	Dec. 27, 2009
Service revenues	$ 351.0	$ 284.8	$ 314.0
Product sales	362.9	123.7	20.5
Total revenues	713.9	408.5	334.5
Cost of service revenues	260.7	221.2	255.7
Cost of product sales	262.0	103.0	15.2
Total costs	522.7	324.2	270.9
Gross profit	191.2	84.3	63.6
Selling, general and administrative expenses	140.6	57.3	47.7
Research and development expenses	8.6	2.2	1.8
Recovery of unauthorized issuance of stock options, stock option investigation and related fees, and litigation settlement		(1.4)	(0.2)
Impairment of goodwill			41.3
Merger and acquisition expenses	12.5	3.1
Operating income (loss) from continuing operations	29.5	23.1	(27.0)
Other expense:
Interest expense, net	(51.1)	(22.3)	(10.4)
Other income, net		1.1	0.1
Total other expense, net	(51.1)	(21.2)	(10.3)
Income (loss) from continuing operations before income taxes	(21.6)	1.9	(37.3)
Provision (benefit) for income taxes from continuing operations	1.9	(12.7)	1.0
Income (loss) from continuing operations	(23.5)	14.6	(38.3)
Loss from discontinued operations	(0.7)	(0.1)	(3.2)
Net income (loss)	$ (24.2)	$ 14.5	$ (41.5)
Basic income (loss) per common share:
Income (loss) from continuing operations (in dollars per share)	$ (0.86)	$ 0.88	$ (2.76)
Loss from discontinued operations (in dollars per share)	(0.02)	(0.01)	(0.23)
Net income (loss) per common share: (in dollars per share)	(0.88)	0.87	(2.99)
Diluted income (loss) per common share:
Income (loss) from continuing operations (in dollars per share)	(0.86)	0.87	(2.76)
Loss from discontinued operations (in dollars per share)	(0.02)	(0.01)	(0.23)
Net income (loss) per common share: (in dollars per share)	$ (0.88)	$ 0.86	$ (2.99)
Weighted average common shares outstanding:
Basic (in shares)	27.4	16.6	13.9
Diluted (in shares)	27.4	16.9	13.9
Net income (loss) from above	$ (24.2)	$ 14.5	$ (41.5)
Other comprehensive income:
Change in cumulative translation adjustment net of tax expense of $0	0.1
Postretirement benefit reserve adjustment net of tax expense of $0	(0.3)
Other comprehensive loss, net of tax	(0.2)
Comprehensive income (loss)	$ (24.4)	$ 14.5	$ (41.5)

Consolidated Statements of Stockholders' Equity - USD ($) shares in Millions, $ in Millions	Total	Common Stock	Additional Paid-In Capital	Accumulated Other Comprehensive Loss	Accumulated Deficit
Balances at Dec. 28, 2008	$ 146.9		$ 503.5		$ (356.6)
Balance (in shares) at Dec. 28, 2008		12.8
Increase (Decrease) in Stockholders' Equity
Issuance of common stock for employee stock purchase plan, options and warrants	0.4		0.4
Issuance of common stock for employee stock purchase plan, options and warrants (in shares)		0.1
Issuance of common stock for acquisitions	0.1		0.1
Stock options issued for acquisitions	17.5		17.5
Stock options issued for acquisitions (in shares)		2.6
Paid in capital and common stock issued for contingent consideration	(0.2)		(0.2)
Paid in capital and common stock issued for contingent consideration (in shares)		0.3
Stock-based compensation	1.7		1.7
Net income (loss)	(41.5)				(41.5)
Balance at Dec. 27, 2009	124.9		523.0		(398.1)
Balance (in shares) at Dec. 27, 2009		15.8
Increase (Decrease) in Stockholders' Equity
Issuance of common stock for employee stock purchase plan, options and warrants	1.7		1.7
Issuance of common stock for employee stock purchase plan, options and warrants (in shares)		0.3
Issuance of common stock for cash	24.7		24.7
Issuance of common stock for cash (in shares)		2.5
Fair value of options assumed for acquisitions	1.7		1.7
Stock-based compensation	1.9		1.9
Conversion of convertible notes	0.5		0.5
Net income (loss)	14.5				14.5
Balance at Dec. 26, 2010	169.9		553.5		(383.6)
Balance (in shares) at Dec. 26, 2010		18.6
Increase (Decrease) in Stockholders' Equity
Issuance of common stock for employee stock purchase plan, options and warrants	2.0		2.0
Issuance of common stock for employee stock purchase plan, options and warrants (in shares)		0.4
Issuance of common stock for cash	61.1		61.1
Issuance of common stock for cash (in shares)		4.9
Issuance of common stock for acquisitions	109.7		109.7
Issuance of common stock for acquisitions (in shares)		10.4
Fair value of options assumed for acquisitions	1.9		1.9
Stock-based compensation	3.3		3.3
Redemption of Series B Convertible Preferred Stock (in shares)		0.1
Common stock repurchased	(10.9)		(10.9)
Common stock repurchased (in shares)		(2.0)
Net income (loss)	(24.2)				(24.2)
Other comprehensive loss, net of tax	(0.2)			$ (0.2)
Balance at Dec. 25, 2011	$ 312.6		$ 720.6	$ (0.2)	$ (407.8)
Balance (in shares) at Dec. 25, 2011		32.4

Consolidated Statements of Cash Flows - USD ($) $ in Millions	12 Months Ended
	Dec. 25, 2011	Dec. 26, 2010	Dec. 27, 2009
Operating activities:
Net income (loss)	$ (24.2)	$ 14.5	$ (41.5)
Less: Loss from discontinued operations	(0.7)	(0.1)	(3.2)
Income (loss) from continuing operations	(23.5)	14.6	(38.3)
Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities from continuing operations:
Depreciation and amortization	48.0	12.9	8.3
Deferred income taxes	(0.1)	(14.4)
Accrual for litigation settlement			(0.5)
Goodwill impairment charges			41.3
Amortization of premium on Senior Secured Notes	(2.8)
Amortization of deferred financing costs	3.8	5.0	0.7
Provision for doubtful accounts	1.8	0.4	0.4
Stock-based compensation	3.3	1.9	1.7
Mark to market on swaps	(0.3)	(1.0)	(0.1)
Change in accrual for excess facilities			0.6
Changes in assets and liabilities, net of acquisitions:
Accounts receivable	(14.4)	2.9	17.4
Inventoried costs	4.3	2.9	0.2
Prepaid expenses	1.4	(2.9)	1.3
Other assets	1.3	3.2	4.6
Accounts payable	(15.8)	8.7	1.8
Accrued expenses	4.1	(9.4)	(4.0)
Accrued compensation	(3.8)	3.4	1.4
Billings in excess of costs and earnings on uncompleted contracts	(1.8)	3.2	(3.9)
Accrual for contingent acquisition consideration			(0.1)
Income tax receivable and payable	(0.2)	(0.3)	0.5
Other liabilities	(0.1)	(2.8)	(7.1)
Net cash provided by operating activities from continuing operations	5.2	28.3	26.2
Investing activities:
Cash paid for acquisitions, net of cash acquired	(391.1)	(206.5)	(1.1)
Cash paid for contingent acquisition consideration		(0.4)	(3.6)
Proceeds (payments) from the disposition of discontinued operations		0.1	(2.4)
Cash transferred from (to) restricted cash	3.0	(0.1)
Capital expenditures	(7.5)	(2.3)	(0.4)
Net cash used in investing activities from continuing operations	(395.6)	(209.2)	(7.5)
Financing activities:
Proceeds from issuance of common stock, net of issuance costs	61.1	24.7	17.5
Proceeds from exercise of restricted stock units, employee stock options, and employee stock purchase plan	2.0	1.7	0.6
Proceeds from issuance of long-term debt	425.7	225.0
Payments of subordinated debt		(0.5)	(2.1)
Borrowings under credit facility		61.9	22.5
Repayments under credit facility	(2.7)	(119.6)	(46.9)
Repayment of capital lease obligations	(0.7)	(0.3)	(0.2)
Purchase of treasury stock	(10.9)
Debt issuance costs	(22.1)	(11.0)	(0.5)
Net cash provided by (used in) financing activities from continuing operations	452.4	181.9	(9.1)
Net cash flows from continuing operations	62.0	1.0	9.6
Net operating cash flows from discontinued operations	(2.7)	(0.1)	(3.4)
Effect of exchange rate changes on cash and cash equivalents	(0.5)
Net increase in cash and cash equivalents	58.8	0.9	6.2
Cash and cash equivalents at beginning of year	10.8	9.9	3.7
Cash and cash equivalents at end of year	69.6	10.8	9.9
Supplemental disclosure of cash flow information:
Cash paid during the year for interest	46.2	15.4	7.7
Net cash paid during the year for income taxes	1.5	0.9	0.3
Non-cash investing and financing activities:
Common stock and stock options issued for acquisitions	111.6	24.7
Paid-in capital for contingent acquisition consideration			$ (0.3)
Liability for contingent cash consideration	1.8	5.8
Supplemental disclosures of non-cash investing and financing transactions:
Fair value of assets acquired in acquisitions	731.3	304.9
Liabilities assumed in acquisitions	$ 197.2	$ 87.6

Organization and Summary of Significant Accounting Policies

12 Months Ended

Dec. 25, 2011

Organization and Summary of Significant Accounting Policies

Organization and Summary of Significant Accounting Policies

Note 1. Organization and Summary of Significant Accounting Policies

(a) Description of Business

Kratos Defense & Security Solutions, Inc. (“Kratos” or the “Company”) is a specialized national security technology business providing mission critical products, services and solutions for U.S. national security priorities. Kratos’ core capabilities are sophisticated engineering, manufacturing and system integration offerings for national security platforms and programs. Its principal products and services are related to, but are not limited to: electronic attack and electronic warfare platforms; tactical missile systems; strategic deterrence systems; Command, Control, Communications, Computing, Combat Systems, Intelligence, Surveillance and Reconnaissance (“C5ISR”); related cybersecurity, cyberwarfare, information assurance and situational awareness solutions; satellite communication systems and radio frequency interference detection and prevention; weapons systems lifecycle support and sustainment; military weapon range operations and technical services; missile, rocket and weapons system testing and evaluation; missile and rocket mission launch services, primarily for ballistic missile defense; public safety, critical infrastructure security and surveillance systems; modeling and simulation; unmanned aerial vehicle systems; and advanced network engineering and information technology (“IT”) services.

The Company conducts most of its business with the U.S. Government (which includes foreign military sales) and performs work as the prime contractor, subcontractor, or preferred supplier. The Company also conducts business with local, state, and foreign governments and domestic and international commercial customers.

The Company operates in two principal business segments: Kratos Government Solutions (“KGS”) and Public Safety & Security (“PSS”). The Company organizes its business segments based on the nature of the services offered. Transactions between segments are generally negotiated and accounted for under terms and conditions similar to other government and commercial contracts and these intercompany transactions are eliminated in consolidation. The financial statements in this Annual Report on Form 10-K (this “Annual Report”) are presented in a manner consistent with its operating structure. For additional information regarding the Company’s operating segments, see Note 14 of the Notes to the Consolidated Financial Statements. From a customer and solutions perspective, Kratos views its business as an integrated whole and leverages skills and assets wherever possible.

(b) Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of Kratos and its wholly-owned subsidiaries for which all intercompany transactions have been eliminated in consolidation. Kratos and its subsidiaries are collectively referred to herein as the “Company.”

In June of 2012, the Company committed to a plan to sell certain lines of business associated with antennas, satellite-cased products and fly-away terminals of the non-core businesses acquired in the Integral acquisition. In accordance with FASB ASC Topic 205, Presentation of Financial Statements (“Topic 205”), these businesses have been classified as held for sale and reported in discontinued operations in the accompanying consolidated financial statements. See Note 9.

In addition, because the Company is reissuing its consolidated financial statements, FASB ASC Topic 805, Business Combinations (“Topic 805”) requires that the Company retrospectively revise its consolidated financial statements to reflect certain adjustments. As such, the Company has retrospectively adjusted Goodwill for purchase price adjustments in the amount of $0.4 million at the acquisition date. See Notes 2 and 3.

Interest payable of approximately $2.0 million and $5.1 million as of December 26, 2010 and December 25, 2011, respectively, which was previously included within accounts payable has been reclassified to other current liabilities in the 2010 and 2011 consolidated balance sheets to conform with the presentation in the consolidated financial statements issued subsequent to December 25, 2011. See Note 1 (d).

(c) Fiscal Year

Fiscal years end on the last Sunday of the year and interim fiscal periods end on the last Sunday of the last month of each calendar quarter. The fiscal years ended on December 27, 2009, December 26, 2010 and December 25, 2011, each contained 52 calendar weeks.

(d) Reclassifications

Certain amounts in the December 27, 2009 and December 26, 2010 consolidated statements of operations have been reclassified to conform to the December 25, 2011 presentation. In each of the 2009 and 2010 consolidated statements of operations, $5.7 million of overhead expense was reclassified from general and administrative expenses to costs of goods sold.

In addition, interest payable of approximately $2.0 million and $5.1 million as of December 26, 2010 and December 25, 2011, respectively, which was previously included within accounts payable has been reclassified to other current liabilities in the 2010 and 2011 consolidated balance sheets to conform with the presentation in the consolidated financial statements issued subsequent to December 25, 2011.

(e) Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include revenue recognition, allowance for doubtful accounts, warranties, inventory valuation, valuation of long-lived assets including identifiable intangibles and goodwill, accounting for income taxes including the related valuation allowance on the deferred tax asset and uncertain tax positions, accruals for partial self-insurance, contingencies and litigation, contingent acquisition consideration, stock-based compensation and business combination purchase price allocations. In the future, the Company may realize actual results that differ from the current reported estimates and if the estimates that the Company has used change in the future, such changes could have a material impact on the Company’s consolidated financial position, results of operations and cash flows.

(f) Reverse Stock Split

On September 10, 2009, the Company completed a 1-for-10 reverse split of its common stock. All common stock, stock options, other equity incentive awards, and warrants to purchase common stock and earnings per share amounts have been retroactively restated as if the reverse stock split occurred at the beginning of the period ended December 27, 2009.

(g) Revenue Recognition

The Company generates its revenue from three different types of contractual arrangements: cost-plus-fee contracts, time-and-materials contracts, and fixed-price contracts. Revenue on cost-plus-fee contracts is recognized to the extent of allowable costs incurred plus an estimate of the applicable fees earned. The Company considers fixed fees under cost-plus-fee contracts to be earned in proportion to the allowable costs incurred in performance of the contract and recognizes the relevant portion of the expected fee to be awarded by the customer at the time such fee can be reasonably estimated, based on factors such as its prior award experience and communications with the customer regarding performance, including any interim performance evaluations rendered by the customer. Revenue on time-and-material contracts is recognized to the extent of billable rates times hours delivered for services provided, to the extent of material cost for products delivered to customers, and to the extent of expenses incurred on behalf of the customers.

The Company has three basic categories of fixed price contracts: fixed unit price, fixed price-level of effort, and fixed price-completion. Revenue recognition methods on fixed-price contracts will vary depending on the nature of the work and the contract terms. Revenues on fixed-price service contracts are recorded as work is performed in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Code (“ASC”) Topic 605, Revenue Recognition (“Topic 605”), specifically Topic 605-10-S99, which generally requires revenue to be deferred until all of the following have occurred: (1) there is a contract in place, (2) delivery has occurred, (3) the price is fixed or determinable, and (4) collectability is reasonably assured. Revenues on fixed-price contracts that require delivery of specific items may be recorded based on a price per unit as units are delivered. Revenue for fixed price contracts in which the Company is paid a specific amount to provide services for a stated period of time is recognized ratably over the service period.

On a portion of the fixed price-completion contracts revenue is recognized in accordance with Topic 605 using the percentage-of-completion method based on the ratio of total costs incurred to date compared to estimated total costs to complete the contract. Estimates of costs to complete include material, direct labor, overhead, and allowable indirect expenses for government contracts. These cost estimates are reviewed and, if necessary, revised monthly on a contract-by-contract basis. If, as a result of this review, management determines that a loss on a contract is probable, then the full amount of estimated loss is charged to operations in the period it is determined that it is probable a loss will be realized from the full performance of the contract. As of December 26, 2010 and December 25, 2011, the provisions for losses on contracts were $1.7 million and $3.5 million, respectively.

In certain instances in which it is impractical to estimate the final outcome of the project margin, but it is certain that the Company will not incur a loss on the project, the Company may record revenue equal to cost incurred, at zero margin. In the event that the cost incurred to date may be in excess of the funded contract value, the Company may defer those costs until the associated contract value has been funded by the customer. Once the final estimate of the outcome of the project margin is determined, the Company will record revenue using the percentage-of-completion method of accounting based on the ratio of total costs incurred to date compared to the estimated total costs to complete the project.

In accounting for the Company’s long-term contracts for production of products provided to the U.S. Government, the Company utilizes both cost-to-cost and units produced measures under the percentage-of-completion method of accounting under the provisions of Topic 605. Under the units produced measure of the percentage-of-completion method of accounting, sales are recognized as the units are accepted by the customer generally using sales values for units in accordance with the contract terms. The Company estimates profit as the difference between total estimated revenue and total estimated cost of a contract and recognizes that profit over the life of the contract based on units produced or as computed on the basis of the estimated final average unit costs plus profit. The Company classifies contract revenues as product sales or service revenues depending upon the predominant attributes of the relevant underlying contracts.

Significant management judgments and estimates, including but not limited to the estimated costs to complete projects, must be made and used in connection with the revenue recognized in any accounting period. A cancellation, schedule delay, or modification of a fixed-price contract which is accounted for using the percentage-of-completion method may adversely affect the Company’s gross margins for the period in which the contract is modified or cancelled. Under certain circumstances, a cancellation or negative modification could result in the Company having to reverse revenue that was recognized in a prior period, thus significantly reducing the amount of revenues recognized for the period in which the adjustment is made. Correspondingly, a positive modification may positively affect gross margins. In addition, a schedule delay or modifications can result in an increase in estimated cost to complete the project, which would also result in an impact to gross margins. Material differences may result in the amount and timing of the Company’s revenue for any period if management made different judgments or utilized different estimates.

It is the Company’s policy to review any arrangement containing software or software deliverables and services against the criteria contained in FASB ASC Topic 985, Software (“Topic 985”). Under the provisions of Topic 985, the Company reviews the contract value of software deliverables and services and determines allocations of the contract value based on vendor-specific objective evidence (“VSOE”) of fair value for each of the elements. All software arrangements requiring significant production, modification, or customization of the software are accounted for in conformity with Topic 605.

The Company’s contracts may include the provision of more than one of its services (“multiple element arrangements”). In these situations, the Company applies the guidance of Topic 605. Accordingly, for applicable arrangements, revenue recognition includes the proper identification of separate units of accounting and the allocation of revenue across all elements based on relative fair values.

For multiple element arrangements that include hardware products containing software essential to the hardware products’ functionality, undelivered software elements that relate to the hardware products’ essential software, and undelivered non-software services, the Company allocates revenue to all deliverables based on their relative selling prices. In such circumstances, the Company uses a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) VSOE, (ii) third-party evidence of selling price (“TPE”), and (iii) best estimate of the selling price (“ESP”).

VSOE generally exists only when the Company sells the deliverable separately and is the price actually charged by the Company for that deliverable. TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, the Company’s offerings contain significant differentiation such that comparable pricing of products with similar functionality cannot be obtained. Furthermore, the Company is unable to reliably determine what similar competitor products’ selling prices are on a stand-alone basis. Therefore, the Company typically is unable to obtain TPE of selling price. ESP reflects the Company’s best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis. The Company determines ESP for a product or service by considering multiple factors including, but not limited to major product groupings, geographies, market conditions, competitive landscape, internal costs, gross margin objectives and pricing practices. The determination of ESP is made through consultation with management, taking into consideration the Company’s marketing strategy.

The Company accounts for multiple element arrangements that consist only of software or software-related products, including the sale of upgrades to previously sold software, in accordance with industry specific software accounting guidance. For such transactions, revenue on arrangements that include multiple elements is allocated to each element based on the relative fair value of each element, and fair value is determined by VSOE. If the Company cannot objectively determine the fair value of any undelivered element included in such multiple element arrangements, the Company defers revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements. Under certain of the Company’s contractual arrangements, the Company may also recognize revenue for out-of-pocket expenses in accordance with Topic 605. Depending on the contractual arrangement, these expenses may be reimbursed with or without a fee.

Under certain of its contracts, the Company provides supplier procurement services and materials for its customers. The Company records revenue on these arrangements on a gross or net basis in accordance with Topic 605, depending on the specific circumstances of the arrangement. The Company considers the following criteria, among others, for recording revenue on a gross or net basis:

(1) Whether the Company acts as a principal in the transaction;

(2) Whether the Company takes title to the products;

(3) Whether the Company assumes risks and rewards of ownership, such as risk of loss for collection, delivery or returns;

(4) Whether the Company serves as an agent or broker, with compensation on a commission or fee basis; and

(5) Whether the Company assumes the credit risk for the amount billed to the customer subsequent to delivery.

For federal contracts, the Company follows U.S. Government procurement and accounting standards in assessing the allowability and the allocability of costs to contracts. Due to the significance of the judgments and estimation processes, it is likely that materially different amounts could be recorded if different assumptions were used or if the underlying circumstances were to change. The Company closely monitors compliance with, and the consistent application of its critical accounting policies related to contract accounting. Business operations personnel conduct periodic contract status and performance reviews. When adjustments in estimated contract revenues or costs are required, any significant changes from prior estimates are included in earnings in the current period. Also, regular and recurring evaluations of contract cost, scheduling and technical matters are performed by management personnel who are independent from the business operations personnel performing work under the contract. Costs incurred and allocated to contracts with the U.S. Government are scrutinized for compliance with regulatory standards by the Company’s personnel, and are subject to audit by the Defense Contract Audit Agency.

From time to time, the Company may proceed with work based on client direction prior to the completion and signing of formal contract documents. The Company has a formal review process for approving any such work. Revenue associated with such work is recognized only when it can be reliably estimated and realization is probable. The Company bases its estimates on previous experiences with the client, communications with the client regarding funding status, and its knowledge of available funding for the contract or program. As of December 26, 2010 and December 25, 2011, approximately $4.4 million and $7.8 million, respectively, of the Company’s unbilled accounts receivable balance were under an authorization to proceed or work order from its customers where a formal purchase order had not yet been received.

Costs incurred for shipping and handling are included in cost of product sales at the time the related revenue is recognized. Amounts billed to a customer for shipping and handling are reported as revenue.

(h) Inventoried costs

Inventoried costs are stated at the lower of cost or market. Cost is determined using the average cost or first-in, first-out method and is applied consistently within an operating entity. Inventoried costs primarily relate to work in process under fixed-price contracts using costs as the basis of the percentage-of-completion calculation under the units produced method of revenue recognition. These costs represent accumulated contract costs less the portion of such costs allocated to delivered items. Accumulated contract costs include direct production costs, factory and engineering overhead and production tooling costs. Pursuant to contract provisions of U.S. Government contracts, such customers may have title to, or a security interest in inventories related to such contracts as a result of advances, performance-based payments, and progress payments. The Company reflects those advances and payments as an offset against the related inventory balances.

The Company regularly reviews inventory quantities on hand, future purchase commitments with its suppliers, and the estimated utility of its inventory. If the Company’s review indicates a reduction in utility below carrying value, it reduces its inventory to a new cost basis.

(i) Derivative Instruments

In managing interest rate risk exposure, the Company entered into interest rate swap agreements. An interest rate swap is a contractual exchange of interest payments between two parties. A standard interest rate swap involves the payment of a fixed rate times a notational amount by one party in exchange for a floating rate times the same notational amount from another party. As interest rates change, the difference to be paid or received is accrued and recognized as interest expense or income over the life of the agreement. These instruments are not entered into for trading purposes. Counterparties to the Company’s interest rate swap agreements are major financial institutions. In accordance with FASB ASC Topic 815, Derivatives and Hedging, the Company recognizes interest rate swap agreements on the consolidated balance sheets at fair value. The interest rate swap agreements are marked to market with changes in fair value recognized in either other comprehensive income (loss) or in the carrying value of the hedged portions of fixed rate debt, as applicable (“Hedge Accounting”).

Hedge Accounting is discontinued when it is determined that a derivative instrument is not highly effective as a hedge. Hedge Accounting is also discontinued when: (1) the derivative instrument expires; is sold, terminated or exercised; or is no longer designated as a hedge instrument because it is unlikely that a forecasted transaction will occur; (2) a hedged firm commitment no longer meets the definition of a firm commitment; or (3) management determines that designation of the derivative as a hedging instrument is no longer appropriate.

When Hedge Accounting is discontinued, the derivative instrument will be either terminated, continue to be carried on the balance sheet at fair value, or redesignated as the hedging instrument in either a cash flow or fair value hedge, if the relationship meets all applicable hedging criteria. Any asset or liability that was previously recorded as a result of recognizing the value of a firm commitment will be removed from the balance sheet and recognized as a gain or loss in current period earnings. Any gains or losses that were accumulated in other comprehensive income from hedging a forecasted transaction will be recognized immediately in current period earnings, if it is probable that the forecasted transaction will not occur. See Note 10 for additional information with respect to derivative instruments.

(j) Research and Development

Costs incurred in research and development activities are expensed as incurred in accordance with ASC Topic 730, Research and Development.

(k) Income Taxes

The Company records deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The Company maintains a valuation allowance on the deferred tax assets for which it is more likely than not that the Company will not realize the benefits of these tax assets in future tax periods. The valuation allowance is based on estimates of future taxable income by tax jurisdiction in which the Company operates, the number of years over which the deferred tax assets will be recoverable, and scheduled reversals of deferred tax liabilities.

In accordance with the recognition standards established by FASB ASC Topic 740, Income Taxes (“Topic 740”), the Company makes a comprehensive review of its portfolio of uncertain tax positions regularly. In this regard, an uncertain tax position represents the Company’s expected treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return or claim, which has not been reflected in measuring income tax expense for financial reporting purposes. Until these positions are sustained by the taxing authorities, the Company has not recognized the tax benefits resulting from such positions and reports the tax effects as a liability for uncertain tax positions in its consolidated balance sheets.

(l) Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with FASB ASC Topic 718, Compensation-Stock Compensation (“Topic 718”). All of the Company’s stock compensation plans are considered equity plans under Topic 718, and compensation expense recognized is net of estimated forfeitures over the vesting period. The Company issues stock options and stock awards under its existing plans. The fair value of stock options is estimated on the date of grant using a Black-Scholes option-pricing model and is expensed on a straight-line basis over the remaining vesting period of the options, which is generally zero to four years. The fair value of stock awards is determined based on the closing market price of the Company’s common stock on the grant date and is adjusted at each reporting date based on the amount of shares ultimately expected to vest. Compensation expense for stock awards is expensed over the vesting period, usually five to ten years. The Company has no awards with market or performance conditions. Compensation expense for stock issued under the Company’s employee stock purchase plan is estimated at the beginning date of the offering period using a Black-Scholes option-pricing model and is expensed on a straight-line basis over the period of the offering, which is generally six months.

For the years ended December 27, 2009, December 26, 2010 and December 25, 2011, there was no incremental tax benefit from stock options exercised in the periods. The Company recorded cash received from the exercise of stock options of $0.2 million in 2009, $1.0 million in 2010, and $1.3 million in 2011. The following table shows the amounts recognized in the consolidated financial statements for 2009, 2010 and 2011 for stock-based compensation expense related to stock options, stock awards and to stock options offered under the Company’s employee stock purchase plan (in millions).

	Year ended December 27, 2009			Year ended December 26, 2010			Year ended December 25, 2011
Cost of revenues	$	0.0		$	0.0		$	0.0
Selling, general and administrative expenses	1.7			1.9			3.3
Total cost of employee stock-based compensation included in operating income (loss) from continuing operations, before income tax	1.7			1.9			3.3
Amount charged to loss from discontinued operations	0.0			0.0			0.0
Total charged against operations	$	1.7		$	1.9		$	3.3
Impact on net income (loss) per common share:
Basic	$	(0.13	)	$	(0.11	)	$	(0.12	)
Diluted	$	(0.13	)	$	(0.11	)	$	(0.12	)

(m) Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments, which results in bad debt expense. Management periodically determines the adequacy of this allowance by evaluating the comprehensive risk profiles of all individual customer receivable balances including, but not limited to, the customer’s financial condition, credit agency reports, financial statements and overall current economic conditions. Additionally, on certain contracts whereby the Company performs services for a prime/general contractor, a specified percentage of the invoiced trade accounts receivable may be retained by the customer until the project is completed. The Company periodically reviews all retainages for collectability and records allowances for doubtful accounts when deemed appropriate, based on its assessment of the associated credit risks. Changes to estimates of contract value are recorded as adjustments to revenue and not as a component of the allowance for doubtful accounts. Individual accounts receivable are written off to the allowance for doubtful accounts when the Company becomes aware of a specific customer’s inability to meet its financial obligation, and all collection efforts are exhausted.

The following table outlines the balance of the Company’s Allowance for Doubtful Accounts for 2009, 2010 and 2011. The table identifies the additional provisions each year as well as the write-offs that utilized the allowance (in millions).

Allowance for Doubtful Accounts	Balance at Beginning of Year		Provisions		Write-offs/ Recoveries			Balance at End of Year
Year ended December 27, 2009	$	1.1	$	0.4	$	(0.7	)	$	0.8
Year ended December 26, 2010	$	0.8	$	0.4	$	(0.5	)	$	0.7
Year ended December 25, 2011	$	0.7	$	1.8	$	(0.5	)	$	2.0

(n) Cash and Cash Equivalents

The Company’s cash equivalents consist of its highly liquid investments with an original maturity of three months or less when purchased by the Company.

The Company has restricted cash accounts of approximately $8.5 million at December 26, 2010 and $1.1 million at December 25, 2011. As of December 26, 2010, restricted cash consisted primarily of a seller escrow account related to the acquisition of Gichner Holdings, Inc. (“Gichner”) in the amount of $8.1 million, collateral for a credit card program, and a deposit relating to the run out of a now terminated self-insured workers compensation program. As of December 25, 2011, restricted cash consists primarily of grant funds which must be physically segregated in a separate bank account in accordance with the grant agreement.

(o) Property and Equipment, Net

Property and equipment, net owned by the Company is depreciated over the estimated useful lives of individual assets. Costs incurred for computer software developed or obtained for internal use are capitalized and classified in computer equipment. Equipment and facilities acquired under capital leases are amortized over the shorter of the lease term or the estimated useful life of the asset. Improvements, which significantly improve and extend the useful life of an asset, are capitalized and depreciated over the shorter of the lease period or the estimated useful life. Expenditures for maintenance and repairs are charged to operations as incurred.

Assets are depreciated using the straight-line method, with the following lives:

		Years
Buildings and improvements		15 - 39
Machinery and equipment		3 - 10
Computer equipment and software		1 - 10
Vehicles, furniture, and office equipment		5
Leasehold improvements		Shorter of useful life or length of lease

(p) Leases

The Company uses its incremental borrowing rate in the assessment of lease classification as capital or operating and defines the initial lease term to include renewal options determined to be reasonably assured. The Company conducts operations primarily under operating leases.

Most lease agreements for real property contain incentives for tenant improvements, rent holidays, or rent escalation clauses. For incentives for tenant improvements, the Company capitalizes the leasehold improvements which are depreciated over the shorter of the lease term or their estimated useful life and records a deferred rent liability which is amortized over the term of the lease as a reduction to rent expense. For rent holidays and rent escalation clauses during the lease term, the Company records minimum rental expenses on a straight-line basis over the term of the lease. For purposes of recognizing lease incentives, the Company uses the date of initial possession as the commencement date, which is generally when the Company is given the right of access to the space and begins to make improvements in preparation for intended use.

(q) Acquisitions

The Company accounts for business combinations using the acquisition method of accounting as prescribed by FASB ASC Topic 805, Business Combinations (“Topic 805”). The Company allocates the purchase price of its acquisitions to the tangible and intangible assets, and liabilities including certain contingent liabilities acquired based upon their estimated fair values. The excess of purchase price over those fair values is recorded as goodwill. Acquisition-related expenses and restructuring costs are recognized separately from the business combination and are expensed as incurred. Prior to fiscal 2009, the Company accounted for business combinations using the purchase method of accounting. Under the purchase method, the total purchase price, including transaction costs, was allocated to the acquired assets and liabilities based on their estimated fair value as of the date of acquisition.

(r) Goodwill and Other Intangible Assets, Net

In accordance with the provisions of FASB ASC Topic 350, Intangibles—Goodwill and Other (“Topic 350”), the Company performs impairment tests for goodwill as of the last day of each fiscal year, or when evidence of potential impairment exists. When it is determined that impairment has occurred, a charge to operations is recorded. Goodwill and other purchased intangible asset balances are included in the identifiable assets of the business segment to which they have been assigned. Any goodwill impairment, as well as the amortization of other purchased intangible assets, is charged against the respective business segments’ operating income.

In accordance with Topic 350, the Company classifies intangible assets into three categories: (1) intangible assets with finite lives subject to amortization, (2) intangible assets with indefinite lives not subject to amortization, and (3) goodwill. The Company tests intangible assets with finite lives for impairment if conditions exist that indicate the carrying value may not be recoverable. Such conditions may include an economic downturn in a geographic market or a change in the assessment of future operations. The Company records an impairment charge when the carrying value of the finite lived intangible asset is not recoverable by the cash flows generated from the use of the asset.

The Company determines the useful lives of identifiable intangible assets after considering the specific facts and circumstances related to each intangible asset. Factors considered when determining useful lives include the contractual term of any agreement, the history of the asset, the Company’s long-term strategy for the use of the asset, any laws or other local regulations which could impact the useful life of the asset, and other economic factors, including competition and specific market conditions. Intangible assets that are deemed to have finite lives are amortized, generally on a straight-line basis, over their useful lives, ranging from one to 15 years.

(s) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

Long-lived assets and certain identifiable intangibles are reviewed for impairment in accordance with FASB ASC Topic 360, Property, Plant, and Equipment, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future net cash flows (undiscounted and without interest) expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

(t) Fair Value of Financial Instruments

FASB ASC Topic 825, Financial Instruments requires that fair values be disclosed for the Company’s financial instruments. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, billings in excess of costs and earnings on uncompleted contracts, and income taxes payable, approximate fair value due to the short-term nature of these instruments. The fair value of the Company’s long-term debt is based upon actual trading activity. The fair value of capital lease obligations is estimated based on quoted market prices for the same or similar obligations with the same remaining maturities.

(u) Concentrations and Uncertainties

The Company maintains cash balances at various financial institutions and such balances commonly exceed the $250,000 insured amount by the Federal Deposit Insurance Corporation. The Company has not experienced any losses in such accounts and management believes that the Company is not exposed to any significant credit risk with respect to such cash and cash equivalents.

Financial instruments, which subject the Company to potential concentrations of credit risk, consist principally of the Company’s billed and unbilled accounts receivable. The Company’s accounts receivable result from sales to customers within the U.S. Government, state and local agencies and with commercial customers in various industries. The Company performs ongoing credit evaluations of its commercial customers. Credit is extended based on evaluation of the customer’s financial condition and collateral is not required. Accounts receivable are recorded at the invoiced amount and do not bear interest. See Note 13 for a discussion of the Company’s significant customers.

The Company has outstanding 10% Senior Secured Notes with an aggregate principal amount of $625.0 million which is due on June 1, 2017. The Company pays interest at the rate of 10% per annum semi-annually, in arrears, on June 1 and December 1 of each year. As of December 25, 2011, the principal amount of $625.0 million is outstanding under these Notes. In addition, the Company has $68.7 million available under its existing $90.0 million credit and security agreement. See Note 5 for a complete description of the Company’s debt.

The Company intends to fund its cash requirements with cash on hand, cash flows from operating activities and borrowings under its existing revolving credit facility. Management believes these sources of liquidity should be sufficient to meet the Company’s cash needs for at least the next 12 months. The Company’s quarterly and annual operating results have fluctuated in the past and may vary in the future due to a variety of factors, many of which are external to its control. If the conditions in its industry deteriorate, its customers cancel or postpone projects or if the Company is unable to sufficiently increase its revenues or further reduce its expenses, the Company may experience, in the future, a significant long-term negative impact to its financial results and cash flows from operations. In such a situation, the Company could fall out of compliance with its financial and other covenants which, if not waived, could limit its liquidity and capital resources.

(v) Debt Issuance Costs

Fees paid to obtain debt financing or amendments under such debt financing are treated as debt issuance costs and are capitalized and amortized over the expected term of the related debt. These payments are shown as a financing activity in the consolidated statements of cash flows and are included in other current assets and other assets in the consolidated balance sheets.

(w) Interest Expense, Net

Interest expense, net in the consolidated statements of operations is summarized in the following table (in millions):

	2009			2010			2011
Interest expense incurred primarily on the Company’s Senior Notes and previous credit facilities	$	(10.6	)	$	(22.4	)	$	(51.2	)
Miscellaneous interest income	0.2			0.1			0.1
Interest expense, net	$	(10.4	)	$	(22.3	)	$	(51.1	)

(x) Foreign Currency Translation

For operations outside the U.S. that prepare financial statements in currencies other than the U.S. dollar, results of operations and cash flows are translated at average exchange rates during the period, and assets and liabilities are generally translated at end-of-period exchange rates. Translation adjustments are included as a separate component of accumulated other comprehensive loss in the consolidated statements of stockholders’ equity.

The aggregate transaction loss included in determining net loss for the year ended December 25, 2011 was approximately $0.5 million, which is included in other income (expense), net on the accompanying consolidated statements of operations. There was no transaction gain or loss included in determining net income (loss) for the years ended December 27, 2009 or December 26, 2010.

(y) Product Warranties

Certain of the Company’s products, product finishes, and services are covered by a warranty to be free from defects in material and workmanship for periods ranging from one to ten years. Optional extended warranty contracts can also be purchased with the revenue deferred and amortized over the extended warranty period. The Company accrues a warranty liability for estimated costs to provide products, parts or services to repair or replace products in satisfaction of warranty obligations. Warranty revenues related to extended warranty contracts are amortized to income, over the life of the contract, using the straight-line method. Costs under extended warranty contracts are expensed as incurred.

The Company’s estimate of costs to service its warranty obligations is based upon historical experience and expectations of future conditions. To the extent that the Company experiences any changes in warranty claim activity or costs associated with servicing those claims, its warranty liability is adjusted accordingly.

(z) Treasury Stock

The Company may on occasion repurchase our common stock on the open market or in a private transaction. When such stock is repurchased it is not constructively or formally retired and may be reissued if certain regulatory requirements are met. The purchase price of the common stock repurchased is charged to additional paid-in-capital.

(aa) Recent Accounting Pronouncements

Other than as described below, no new accounting pronouncement issued or effective during the fiscal year has had or is expected to have a material impact on the consolidated financial statements.

In September 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-08, Intangibles—Goodwill and Other (“ASU 2011-08”). ASU 2011-08 is intended to simplify how entities, both public and nonpublic, test goodwill for impairment. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is “more-likely-than-not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The adoption of this guidance will result in a change in how the Company performs its goodwill impairment assessment; however, it will not have a material impact on the Company’s consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (“ASU 2011-05”). ASU 2011-05 revises the manner in which entities present comprehensive income in their financial statements. The guidance requires entities to report the components of comprehensive income in either a single, continuous statement or two separate but consecutive statements. ASU 2011-05 is required to be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and early adoption is permitted. The Company elected early adoption which did not have a material impact on its consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (“ASU 2011-04”). ASU 2011-04 requires the disclosure of quantitative information about unobservable inputs used in the valuation processes, and a qualitative discussion around the sensitivity of the measurements. The guidance in ASU 2011-04 is to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The Company does not expect that the provisions of the new guidance will have a material effect on its consolidated financial statements.

Goodwill and Other Intangible Assets

12 Months Ended

Dec. 25, 2011

Goodwill and Other Intangible Assets

Goodwill and Other Intangible Assets

Note 2. Goodwill and Other Intangible Assets

Goodwill

The Company performs its annual impairment test for goodwill in accordance with Topic 350 as of the last day of each fiscal year or when evidence of potential impairment exists.

The Company assesses goodwill for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment, referred to as a component. The Company determines its reporting units by first identifying its operating segments, and then assessing whether any components of these segments constitute a business for which discrete financial information is available and where segment management regularly reviews the operating results of that component. The Company aggregates components within an operating segment that have similar economic characteristics. For the annual and, if necessary, interim impairment assessment the Company identified its reporting units to be its operating segments which are Kratos Government Solutions and Public Safety and Security.

In order to test for potential impairment, the Company estimates the fair value of each of its reporting units based on a comparison and weighting of the income approach, specifically the discounted cash flow (“DCF”) method and the market approach, which estimates the fair value of its reporting units based upon comparable market prices and recent transactions and also validates the reasonableness of the implied multiples from the income approach. The Company reconciles the fair value of its reporting units to its market capitalization by calculating its market capitalization based upon an average of its stock price prior to and subsequent to the date the Company performs its analysis and assuming a control premium. The Company uses these methodologies to determine the fair value of its reporting units for comparison to their corresponding book values because there are no observable inputs available (Level 3 hierarchy as defined by FASB ASC Topic 820 Fair Value Measurements and Disclosures (“Topic 820”). If the book value exceeds the estimated fair value for a reporting unit, a potential impairment is indicated and Topic 350 prescribes the approach for determining the impairment amount, if any.

During the first quarter of 2009, given the significant decline in the stock market in general and specifically the Company’s stock price and market capitalization, which declined 39% from an average stock price of $12.90 per share as of December 28, 2008 to $7.80 per share as of February 28, 2009, the Company performed an impairment test for goodwill in accordance with Topic 350 as of February 28, 2009. The test indicated that the book value for the KGS reporting unit exceeded the fair values of these businesses and resulted in the Company recording a charge totaling $41.3 million in the KGS segment in the first quarter of 2009, for the impairment of goodwill. The impairment charge was primarily driven by adverse equity market conditions that caused a decrease in current market multiples and the Company’s average stock price as of February 28, 2009, compared with the test performed as of December 28, 2008. The Company’s forecasts of growth rates and operating margins had not changed as of February 28, 2009 as compared to the forecasts which were used as of December 28, 2008. The Company reconciled the fair value of its reporting units, which was calculated using the income approach to the Company’s market capitalization. As a result of this reconciliation, it was noted that investors were requiring a higher rate of return, and therefore, the discount factor which is based upon an estimated market participant weighted average cost of capital (“WACC”) increased 300 basis points from 14% in the Company’s year-end impairment test in 2008 as compared to 17% in the Company’s 2009 first quarter interim impairment test. This change was the key factor contributing to the $41.3 million goodwill impairment charge that was recorded in the first quarter of 2009.

While the Company’s methodology for evaluating goodwill and intangibles for impairment has always used the income and market approach, in the past the market approach was used solely to validate that the fair value derived from the income approach was comparable to its market peers. In December 2011, when the Company performed its annual impairment test for goodwill, the Company used a weighting of the income and market approach to derive the fair value of its reporting units which resulted in a more conservative fair value.

As of December 25, 2011 the fair value of the PSS reporting unit substantially exceeded its carrying value and the fair value of the KGS reporting unit exceeded its carrying value by 3.5%. Considering the relatively small excess of fair value over carrying value for the KGS segment and given the current market conditions and continued economic uncertainty in the U.S. defense industry as a result of the Budget Control Act, the fair value of the KGS reporting unit may deteriorate, resulting in an impairment of the goodwill in that unit. Due to continual changes in market and general business conditions, the Company cannot predict whether, and to what extent, its goodwill and long-lived intangible assets may be impaired in the future periods. Any resulting impairment loss could harm the Company’s profitability and financial condition.

The goodwill of the PSS and KGS reporting units are $33.0 million and $538.6 million, respectively.

The changes in the carrying amounts of goodwill for the years ended December 26, 2010 and December 25, 2011, are as follows (in millions):

	Public Safety & Security		Kratos Government Solutions			Total Goodwill
Balance as of December 27, 2009	$	—	$	110.2		$	110.2
Additions due to business combinations	32.4		83.8			116.2
Balance as of December 26, 2010	32.4		194.0			226.4
Retrospective adjustments	0.6		(0.2		)	0.4
Balance as of December 26, 2010 after retrospective adjustments	33.0		193.8			226.8
Additions due to business combinations	—		346.7			346.7
Allocation to discontinued operations	—		(1.5		)	(1.5		)
Retrospective adjustments	—		(0.4		)	(0.4		)
Balance as of December 25, 2011	$	33.0	$	538.6		$	571.6

The accumulated impairment losses as of December 26, 2010 and December 25, 2011 were $165.4 million; $147.1 million associated with the KGS segment and $18.3 million associated with the PSS segment.

If an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value, the Company will evaluate goodwill for impairment between annual tests in accordance with Topic 350.

Purchased Intangible Assets

The value of indefinite-lived intangible assets which are related to trade names was $24.5 million as of December 26, 2010 and December 25, 2011, respectively.

The following tables set forth information for finite-lived intangible assets subject to amortization (in millions):

	As of December 26, 2010							As of December 25, 2011
	Gross Value		Accumulated Amortization			Net Value		Gross Value		Accumulated Amortization			Net Value
Acquired intangible assets:
Customer relationships	$	41.5	$	(10.0	)	$	31.5	$	78.1	$	(19.8	)	$	58.3
Contracts and backlog	24.5		(13.9		)	10.6		60.1		(39.6		)	20.5
Developed technology and technical know-how	22.1		(1.9		)	20.2		22.1		(4.1		)	18.0
Trade names	1.2		(0.6		)	0.6		2.6		(0.8		)	1.8
Favorable lease	1.8		(0.1		)	1.7		1.8		(0.3		)	1.5
Total	$	91.1	$	(26.5	)	$	64.6	$	164.7	$	(64.6	)	$	100.1

The aggregate amortization expense for finite-lived intangible assets was $5.7 million, $9.2 million and $38.0 million for the years ended December 27, 2009, December 26, 2010, and December 25, 2011, respectively. The increase in intangible assets in 2011 was a result of the Company’s acquisitions (see Note 3).

Information about estimated amortization expense for intangible assets subject to amortization for the five years succeeding December 25, 2011, is as follows (in millions):

	Amortization Expense
2012	$	34.2
2013	18.3
2014	16.7
2015	11.0
2016	6.3
Thereafter	13.6
	$	100.1

- Definition

The entire disclosure for the aggregate amount of goodwill and a description of intangible assets, which may include (a) for amortizable intangible assets (also referred to as finite-lived intangible assets), the carrying amount, the amount of any significant residual value, and the weighted-average amortization period, (b) for intangible assets not subject to amortization (also referred to as indefinite-lived intangible assets), the carrying amount, and (c) the amount of research and development assets acquired and written off in the period, including the line item in the income statement in which the amounts written off are aggregated, if not readily apparent from the income statement. Also discloses (a) for amortizable intangibles assets in total and by major class, the gross carrying amount and accumulated amortization, the total amortization expense for the period, and the estimated aggregate amortization expense for each of the five succeeding fiscal years, (b) for intangible assets not subject to amortization the carrying amount in total and by major class, and (c) for goodwill, in total and for each reportable segment, the changes in the carrying amount of goodwill during the period (including the aggregate amount of goodwill acquired, the aggregate amount of impairment losses recognized, and the amount of goodwill included in the gain (loss) on disposal of a reporting unit). If any part of goodwill has not been allocated to a reportable segment, discloses the unallocated amount and the reasons for not allocating. For each impairment loss recognized related to an intangible asset (excluding goodwill), discloses: (a) a description of the impaired intangible asset and the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method for determining fair value, (c) the caption in the income statement or the statement of activities in which the impairment loss is aggregated, and (d) the segment in which the impaired intangible asset is reported. For each goodwill impairment loss recognized, discloses: (a) a description of the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method of determining the fair value of the associated reporting unit, and (c) if a recognized impairment loss is an estimate not finalized and the reasons why the estimate is not final. May also disclose the nature and amount of any significant adjustments made to a previous estimate of an impairment loss.

+ References + Details

Acquisitions

12 Months Ended

Dec. 25, 2011

Acquisitions

Acquisitions

Note 3. Acquisitions

SecureInfo Corporation

On November 15, 2011 the Company acquired SecureInfo Corporation (“SecureInfo”) for $18.7 million in cash which does not include an estimated $1.5 million in potential earn-out to be paid in the first half of 2012. The estimated amount for the additional consideration is expected to be paid in the first half of 2012. Upon completion of the SecureInfo transaction, the Company deposited $1.8 million of the purchase price (“the holdback”) into an escrow account as security for SecureInfo’s indemnification obligations as set forth in the SecureInfo purchase agreement. In addition, the SecureInfo purchase agreement provided that the purchase price would be (i) increased on a dollar for dollar basis if the working capital on the closing date (as defined in the SecureInfo purchase agreement) exceeded $2.2 million or (ii) decreased on a dollar for dollar basis if the working capital was less than $2.2 million. The SecureInfo working capital was $2.1 million and the Company and SecureInfo agreed to a working capital adjustment of $0.1 million.

Based in northern Virginia, SecureInfo is a cybersecurity company specializing in assisting defense, intelligence, civilian government and commercial customers to identify, understand, document, manage, mitigate and protect against cybersecurity risks while reducing information security costs and achieving compliance with applicable regulations, standards and guidance. SecureInfo offers strategic advisory, operational cybersecurity and cybersecurity risk management services and is a recognized leader in the rapidly evolving fields of cloud security, continuous monitoring and cybersecurity training. Customers include the Department of Defense, the Department of Homeland Security and large commercial customers, including market leading cloud computing service providers. SecureInfo is part of the Company’s KGS segment.

The SecureInfo transaction has been accounted for using the acquisition method of accounting which requires, among other things, that the assets acquired and liabilities assumed be recognized at their fair values as of the merger date. The following table summarizes the preliminary estimated fair values of major assets acquired and liabilities assumed (in millions):

Cash	$	1.4
Other assets	3.0
Property and equipment	0.1
Intangible assets	4.5
Goodwill	12.2
Total assets	21.2
Current liabilities	(0.9		)
Net assets acquired	$	20.3

The goodwill recorded in this transaction is not tax deductible.

As of November 15, 2011, the expected fair value of accounts receivable approximated the historical cost. The gross accounts receivable was $2.9 million, of which $0.0 million is not expected to be collectible.

The amounts of revenue and operating income of SecureInfo included in the Company’s consolidated statement of operations for the year ended December 25, 2011 was $1.9 million and $0.1 million, respectively.

Integral Systems, Inc.

On July 27, 2011, the Company acquired Integral in a cash and stock transaction valued at $241.1 million. The acquisition was completed with an aggregate cash payment of $131.4 million, the issuance of approximately 10.4 million shares of Kratos common stock valued at $108.7 million, and the issuance of replacement stock options with a fair value of $1.0 million.

To fund the cash portion of the acquisition, on July 27, 2011, the Company issued $115.0 million aggregate principal amount of 10% Senior Secured Notes due 2017. The notes were issued at a premium of 105%, for an effective interest rate of approximately 8.9%. The gross proceeds of approximately $120.8 million, which includes an approximate $5.8 million issuance premium and excludes accrued interest received of $1.8 million, were used to finance, in part, the cash portion of the purchase price for the acquisition of Integral, to refinance existing indebtedness of Integral and its subsidiaries, to pay certain severance payments in connection with the merger and to pay related fees and expenses. See Note 5 for a complete description of the Company’s debt.

As consideration for the acquisition of Integral, each Integral stockholder received (i) $5.00 in cash, without interest, and (ii) 0.588 shares of the Company’s common stock for each share of Integral common stock. In addition, upon completion of the merger (i) each outstanding Integral stock option with an exercise price less than $13.00 per share was, if the holder thereof had so elected in writing, cancelled in exchange for an amount in cash equal to the product of the total number of shares of Integral common stock subject to such in-the-money option, multiplied by the aggregate value of the excess, if any, of $13.00 over the exercise price per share subject to such option, less the amount of any tax withholding, (ii) each outstanding Integral stock option with an exercise price equal to or greater than $13.00 per share and each Integral in-the-money option the holder of which had not made the election described in (i) above, was converted into an option to purchase Company common stock, with the number of shares subject to such option adjusted to equal the number of shares of Integral common stock subject to such out-of-the-money option multiplied by 0.9559, rounded up to the nearest whole share, and the per share exercise price under each such option adjusted by dividing the per share exercise price under such option by 0.9559, rounded up to the nearest whole cent, and (iii) each outstanding share of restricted stock granted under an Integral equity plan or otherwise, whether vested or unvested, was cancelled and converted into the right to receive $13.00, less the amount of any tax withholding.

Integral is a global provider of products, systems and services for satellite command and control, telemetry and digital signal processing, data communications, enterprise network management and communications information assurance. Integral specializes in developing, managing and operating secure communications networks, both satellite and terrestrial, as well as systems and services to detect, characterize and geolocate sources of radio frequency interference. Integral’s customers include U.S. and foreign commercial, government, military and intelligence organizations. For almost 30 years, customers have relied on Integral to design and deliver innovative commercial-based products, solutions and services that are cost-effective and reduce delivery schedules and risk. Integral is part of the Company’s KGS segment.

The excess of the purchase price over the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed in the acquisition was allocated to goodwill. The value of the goodwill represents the value the Company expects to be created by Integral’s significant expertise with satellite operations, ground systems, signal processing and other areas of satellite command and control, and also advanced technologies for Unmanned Aerial Vehicles, situational awareness, remote management and numerous established electronic attack and electronic warfare platforms, tactical missile systems, and strategic deterrence systems.

The Integral transaction has been accounted for using the acquisition method of accounting which requires, among other things, that the assets acquired and liabilities assumed be recognized at their fair values as of the merger date. The following table summarizes the preliminary fair values of major assets acquired and liabilities assumed (in millions):

Cash	$	6.8
Accounts receivable	68.4
Inventoried costs	15.8
Deferred tax assets	36.4
Other assets	3.5
Property and equipment	12.9
Intangible assets	32.0
Goodwill	187.8
Total assets	363.6
Current liabilities	(84.5		)
Deferred tax liabilities	(19.5		)
Long-term liabilities	(18.5		)
Net assets acquired	$	241.1

The goodwill recorded in this transaction is not tax deductible.

As of July 27, 2011, the expected fair value of accounts receivable approximated the historical cost. The gross accounts receivable was $68.6 million, of which $0.2 million is not expected to be collectible. There was no contingent purchase consideration associated with the acquisition of Integral.

In June of 2012, the Company committed to a plan to sell certain lines of business associated with antennas, satellite-cased products and fly-away terminals of the non-core businesses acquired in the Integral acquisition. These operations were previously reported in the KGS segment, and in accordance with Topic 205, these businesses have been classified as held for sale and reported in discontinued operations in the accompanying consolidated financial statements.

The amounts of revenue and operating income of Integral included in the Company’s consolidated statement of operations for the year ended December 25, 2011 was $87.3 million and $7.1 million, respectively.

Herley Industries, Inc.

On March 25, 2011, the Company acquired approximately 13.2 million shares of Herley common stock representing approximately 94% of the total outstanding shares of Herley common stock in a tender offer to purchase all of the outstanding shares of Herley common stock. The fair value of the non-controlling interest related to Herley as of March 25, 2011 was $16.9 million, which represents the market trading price of $19.00 per share multiplied by the approximately 0.9 million shares that were not tendered as of March 25, 2011. On March 30, 2011, following purchases of the remaining non-controlling interest in a subsequent offering period, Herley became a wholly owned subsidiary of the Company. The shares of Herley common stock were purchased at a price of $19.00 per share. Accordingly, the Company paid approximately $245.5 million in cash consideration as of March 27, 2011 and as of April 15, 2011 had paid total aggregate cash consideration of $270.7 million in respect of the shares of Herley common stock and certain in-the-money options, which were exercised upon the change in control of Herley. In addition, upon completion of the acquisition, all unexercised options to purchase Herley common stock were assumed by the Company and converted into options to purchase Kratos common stock, entitling the holders thereof to receive 1.3495 shares of Kratos common stock for each share of Herley common stock underlying the options (“Herley Options”). The Company assumed each Herley Option in accordance with the terms (as in effect as of the date of the Herley Merger Agreement) of the applicable Herley equity plan and the option agreement pursuant to which such Herley Option was granted. The Herley Options are exercisable for an aggregate of approximately 0.8 million shares of the Company’s common stock. All Herley Options were fully vested upon the change in control and the fair value of the Herley Options assumed was $1.9 million. The total aggregate consideration for the purchase of Herley was $272.5 million. In addition, the Company assumed change in control obligations of $4.0 million related to the transaction, and transaction expenses of $11.1 million. The final payment related to the change in control payments of $0.6 million will be paid in the first quarter of 2012.

To fund the acquisition of Herley, on February 11, 2011, Kratos sold approximately 4.9 million shares of its common stock at a purchase price of $13.25 per share in an underwritten public offering. Kratos received gross proceeds of approximately $64.8 million and net proceeds of approximately $61.1 million after deducting underwriting fees and other offering expenses. Kratos used the net proceeds from this offering to fund a portion of the purchase price for the acquisition of Herley and for general corporate purposes. To fund the remaining purchase price, Kratos issued $285.0 million in aggregate principal amount of 10% Senior Secured Notes due 2017 at a premium of 107% through its wholly owned subsidiary, Acquisition Co. Lanza Parent (“Lanza”), on March 25, 2011, in an unregistered offering pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended (the “Securities Act”). On April 4, 2011, after the acquisition of Herley was complete, Lanza was merged with and into Kratos and all assets and liabilities of Lanza became assets and liabilities of Kratos. See Note 5 for a complete description of the Company’s debt.

Herley is a leading provider of microwave technologies for use in command and control systems, flight instrumentation, weapons sensors, radar, communication systems, electronic warfare and electronic attack systems. Herley has served the defense industry for approximately 45 years by designing and manufacturing microwave devices for use in high-technology defense electronics applications. It has established relationships, experience and expertise in the military electronics, electronic warfare and electronic attack industry. Herley’s products represent key components in the national security efforts of the U.S., as they are employed in mission-critical electronic warfare, electronic attack, electronic warfare threat and radar simulation, command and control network, and cyber warfare/cybersecurity applications. Herley is part of the Company’s KGS segment.

The excess of the purchase price over the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed in the acquisition was allocated to goodwill. The value of the goodwill represents the value the Company expects to be created by Herley’s significant expertise in numerous established electronic attack and electronic warfare platforms, tactical missile systems, and strategic deterrence systems which complement the Company’s existing business in manned and unmanned aircraft, missile systems and certain other programs.

The Herley transaction has been accounted for using the acquisition method of accounting which requires, among other things, that the assets acquired and liabilities assumed be recognized at their fair values as of the merger date. The following table summarizes the preliminary fair values of major assets acquired and liabilities assumed (in millions):

Cash	$	21.8
Accounts receivable	39.1
Inventoried costs	42.8
Deferred tax assets	17.3
Other assets	7.2
Property and equipment	34.2
Intangible assets	37.0
Goodwill	146.4
Total assets	345.8
Current liabilities	(40.8		)
Deferred tax liabilities	(16.8		)
Debt	(9.5		)
Long-term liabilities	(6.2		)
Net assets acquired	$	272.5

The goodwill recorded in this transaction is not tax deductible.

As of March 25, 2011, the expected fair value of accounts receivable approximated the historical cost. The gross accounts receivable was $39.3 million, of which $0.2 million is not expected to be collectible. There were no contingent liabilities associated with the acquisition of Herley. The Company initially recorded $47.9 million of inventory and $30.4 million in property and equipment. The Company decreased the value of acquired inventory to $42.8 million and increased the value of acquired property and equipment to $34.2 million based on its updated valuations during 2011.

The amounts of revenue and operating income of Herley included in the Company’s consolidated statement of operations for the year ended December 25, 2011 are $150.8 million and $12.7 million, respectively.

Henry Bros. Electronics, Inc.

On December 15, 2010, the Company acquired Henry Bros. Electronics, Inc. (“HBE”) in a cash merger for a purchase price of $56.6 million, of which $54.9 million was paid in cash and $1.7 million reflects the fair value of options to purchase common stock of HBE that were assumed by the Company and converted into options to purchase common stock of the Company. Upon completion of the merger, holders of HBE common stock received $8.20 in cash for each share of HBE common stock held by them immediately prior to the closing of the merger. In addition, upon completion of the merger, all options to purchase HBE common stock were assumed by the Company (the “HBE Options”) and converted into options to purchase common stock of the Company, entitling the holders thereof to receive 0.7715 shares of common stock of the Company for each share of HBE common stock underlying the HBE Options. The HBE Options are exercisable for an aggregate of approximately 0.4 million shares of common stock of the Company. The fair value of unvested HBE Options which are related to future service will be expensed as the service is performed over a weighted average vesting period of 2.5 years.

HBE is a leading provider of homeland security solutions, products, and system integration services, including the design, engineering and operation of command and control systems for the protection of strategic assets and critical infrastructure in the U.S. HBE also has particular expertise in the design, engineering, deployment and operation of specialized surveillance, thermal imaging, analytics, radar, and biometrics technology based security systems. Representative HBE programs and customers include Department of Defense (“DoD”) agencies, nuclear power generation facilities, state government and municipality related agencies, major national airports, major harbors, railways, tunnel systems, energy centers, power plants, and related infrastructure. HBE is part of the Company’s PSS segment.

HBE has been in business for over 50 years and has established relationships with manufacturing partners, industry colleagues, and customers demanding some of the most sophisticated security solutions available. The Company has a national footprint that includes offices in New York, New Jersey, Virginia, Maryland, Texas, Arizona, Colorado and California. The combination of the Company’s existing PSS businesses, with one of the leading homeland security solutions and high end security system design and engineering services providers in the industry today, strategically strengthens the Company’s overall capabilities and enhances its customer offerings and overall contract portfolio.

The excess of the purchase price over the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed in the acquisition was allocated to goodwill. The value of the goodwill represents the value the Company expects to be created by enabling it to strategically expand its strengths in the areas of homeland security solutions and will also enable the Company to realize significant cross selling opportunities, and increase its sales of higher margin, fixed price products.

The HBE transaction has been accounted for using the acquisition method of accounting which requires, among other things, that the assets acquired and liabilities assumed be recognized at their fair values as of the merger date. The following table summarizes the estimated fair values of major assets acquired and liabilities assumed (in millions):

Cash	$	2.0
Accounts receivable	27.7
Inventoried costs	1.2
Deferred tax assets	1.0
Other assets	0.8
Property and equipment	1.8
Intangible assets	18.6
Goodwill	33.0
Total assets	86.1
Current liabilities	(22.0		)
Deferred tax liabilities	(6.8		)
Long-term liabilities	(0.7		)
Net assets acquired	$	56.6

The goodwill recorded in this transaction is not tax deductible.

As of December 15, 2010, the expected fair value of accounts receivable approximated the historical cost. The gross accounts receivable was $28.6 million, of which $0.9 million is not expected to be collectible.

There were no contingent liabilities associated with the acquisition of HBE other than contingent liabilities of $0.4 million associated with HBE’s acquisition of Professional Security Technologies LLC (“PST”) in September 2010. The agreement with PST provides that the former shareholders of PST receive a 5% payment for achievement of revenue amounts from certain customers for the period from June 1, 2010 through December 31, 2012.

The amounts of revenue and operating income of HBE included in the Company’s consolidated statements of operations for the years ended December 26, 2010 and December 25, 2011 are $1.8 million and $0.2 million, and $77.2 million and $9.5 million, respectively.

Southside Container & Trailer, LLC

On December 7, 2010, the Company acquired Southside Container & Trailer, LLC (“SCT”) for $13.7 million of which $12.2 million in cash was paid at closing, $0.3 million was paid in March 2011 as SCT’s indemnification obligations as set forth in the applicable acquisition agreement (the “SCT Agreement”) were met and approximately $1.2 million of which represents the acquisition date fair value of additional performance based consideration.

SCT, which was founded in 2002 and headquartered in Walterboro, South Carolina, designs, engineers, manufactures and delivers various products, shelters and solutions used primarily by the war fighter and first responder in fulfilling their respective national security missions. Representative end customers and program locations include the U.S. Army, Marine Corps, Special Operations Command, Space and Naval Warfare Systems Center, Fort Bragg, Fort Lewis, Fort Bliss, Fort McGregor, Fort Irwin, Fort Stewart, the Border Patrol and the National Guard. SCT is known for its superior design, engineering, construction and on schedule and on budget delivery of cost effective products and solutions that meet critical and special mission national security, specialized warfighter and asymmetric warfare requirements. SCT is part of the KGS segment.

Pursuant to the terms of the SCT Agreement, upon achievement of certain earnings before interest, taxes, depreciation, and amortization (“EBITDA”) amounts in 2011, 2012 and 2013, the Company will pay the former stockholders of SCT certain additional performance-based consideration (“SCT Contingent Consideration”). The potential undiscounted amount of all future SCT Contingent Consideration that may be payable by the Company under the SCT Agreement is between zero and $3.5 million.

The fair value of the SCT Contingent Consideration of $1.2 million was estimated by applying the income approach, which is based on significant inputs that are not observable in the market, which Topic 820 refers to as Level 3 inputs. Key assumptions include a discount rate of 6.1%, a market participant cost of debt at the date of acquisition, and probability-adjusted levels for EBITDA. The fair value of the SCT Contingent Consideration was decreased by $0.1 million and recognized in earnings during the three month period ended September 25, 2011 and the $1.1 million balance as of December 25, 2011 is reflected in other long-term liabilities in the consolidated balance sheet.

The excess of the purchase price over the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed in the acquisition was allocated to goodwill. The value of the goodwill represents the value the Company expects to be created by enabling it to strategically expand its products and solutions that meet critical and special mission national security and asymmetric warfare requirements. It will also enable the Company to realize significant cross selling opportunities, and increase its sales of higher margin, fixed price products.

The SCT transaction has been accounted for using the acquisition method of accounting which requires, among other things, that the assets acquired and liabilities assumed be recognized at their fair values as of the merger date. The following table summarizes the estimated fair values of major assets acquired and liabilities assumed (in millions):

Cash	$	0.4
Accounts receivable	0.2
Other current assets	0.5
Property and equipment	2.8
Intangible assets	3.6
Goodwill	6.9
Total assets	14.4
Current liabilities	(0.7		)
Net assets acquired	$	13.7

The goodwill recorded in this transaction is tax deductible.

As of December 7, 2010, the expected fair value of accounts receivable approximated the historical cost. The gross accounts receivable was $0.2 million, all of which is expected to be collectible.

The amounts of revenue and operating income of SCT included in the Company’s consolidated statements of operations for the years ended December 26, 2010 and December 25, 2011 are $0.1 million and $0.0 million, and $8.8 million and $2.1 million, respectively.

DEI Services Corporation

On August 9, 2010, the Company acquired DEI Services Corporation (“DEI”), in a cash merger valued at approximately $14.0 million, of which $9.0 million was paid in cash at closing and approximately $5.0 million of which represented the acquisition date fair value of additional performance-based consideration.

Founded in 1996 and headquartered in Orlando, Florida, DEI designs, manufactures and markets full-scale training simulation products. In addition to the engineering and construction of physical simulators for air and ground military vehicles, DEI provides instructional design, courseware creation, learning application programming and other supporting services. Among DEI’s most successful products are training and simulation solutions for fixed-wing aircraft (including the Tiger, Harrier and Prowler aircraft), rotor-wing aircraft (including Blackhawk, Chinook and Sea Stallion helicopters) and Ground Combat Vehicles (including the M1 Abrams Main Battle Tank and M2 Bradley Fighting Vehicle). DEI is part of the KGS segment.

Pursuant to the terms of the agreement and plan of merger (the “DEI Agreement”), upon achievement of certain cash receipts, revenue, EBITDA and backlog amounts in 2010, 2011 and 2012, the Company will be obligated to pay certain additional contingent consideration (the “DEI Contingent Consideration”). The fair value of the DEI Contingent Consideration was originally estimated as $5.0 million by applying the income approach, which is based on significant inputs that are not observable in the market, which Topic 820 refers to as Level 3 inputs. Key assumptions include a discount rate of 5.8%, a market participant cost of debt at the date of acquisition, and probability-adjusted levels of cash receipts, revenue, EBITDA and backlog. The fair value of the DEI Contingent Consideration was increased by $0.4 million and recognized in earnings during the three month period ended September 25, 2011. The balance as of December 25, 2011 is $5.0 million and $2.5 million is reflected in other current liabilities and long-term liabilities, respectively, in the consolidated balance sheets. The Company paid $0.4 million in September 2010 and $2.5 million has been achieved for 2011 and is expected to be paid in March 2012, subject to potential reductions if certain cash receipts are not collected. As of December 25, 2011, the potential undiscounted amount of future DEI Contingent Consideration that may be payable by the Company under the DEI Agreement is between $2.5 million and $6.5 million which includes the amount expected to be paid in March 2012. The DEI Contingent Consideration will be reduced in the event certain anticipated cash receipts are not collected within agreed upon time periods, which could decrease the future payments by approximately $6.0 million.

The excess of the purchase price over the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed in the acquisition was allocated to goodwill. The value of the goodwill represents the value the Company expects to be created by enabling it to strategically expand the Company’s workforce learning, performance and training solutions to support the warfighter as well as its other defense, security and government customers.

The DEI transaction has been accounted for using the acquisition method of accounting which requires, among other things, that the assets acquired and liabilities assumed be recognized at their fair values as of the merger date. The following table summarizes the estimated fair values of major assets acquired and liabilities assumed as part of the DEI transaction (in millions):

Cash	$	—
Accounts receivable	6.9
Inventoried costs	1.0
Other current assets	0.1
Property and equipment	0.9
Intangible assets	3.4
Goodwill	8.4
Other assets	0.1
Total assets	20.8
Current liabilities	(5.2		)
Long-term liabilities	(0.3		)
Deferred tax liabilities	(1.3		)
Net assets acquired	$	14.0

The goodwill recorded in this transaction is not tax deductible.

As of August 9, 2010, the expected fair value of accounts receivable approximated the historical cost. The gross accounts receivable was $6.9 million, all of which is expected to be collectible.

The amounts of revenue and operating income of DEI included in the Company’s consolidated statements of operations for the years ended December 26, 2010 and December 25, 2011 are $6.7 million and $0.1 million, and $24.3 million and $4.9 million, respectively.

Gichner Holdings, Inc.

On May 19, 2010, the Company acquired Gichner Holdings, Inc. (“Gichner”) pursuant to the Stock Purchase Agreement (the “Gichner Agreement”), dated as of April 12, 2010, by and between the Company and the stockholders of Gichner, in cash for stock transaction valued at approximately $133.0 million. Gichner has manufacturing and operating facilities in Dallastown and York, Pennsylvania and Charleston, South Carolina, and is a manufacturer of tactical military products, combat support facilities, subsystems, modular systems and shelters primarily for the DoD and leading defense system providers. Representative programs for which Gichner provides products and solutions include the MQ—1C Sky Warrior, Gorgon Stare, MQ—8B Fire Scout and RQ—7 Shadow Unmanned Aerial Vehicles, the Command Post Platform and Joint Light Tactical Vehicles, Combat Tactical Vehicles, DDG-1000 Modular C5 Compartments and the Persistent Threat Detection System ISR Platform. Gichner is part of the KGS segment.

The excess of the purchase price over the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed in the acquisition was allocated to goodwill. The value of the goodwill represents the value the Company expects to be created by enabling it to strategically expand its strengths in the areas of weapons system sustainment; C5ISR; military preset/reset; and foreign military sales. It will also enable the Company to realize significant cross selling opportunities, pursue new and larger contracts and increase its sales of higher margin, fixed price products.

Upon completion of the Gichner transaction, the Company deposited $8.1 million of the purchase price (“the holdback”) into an escrow account as security for Gichner’s indemnification obligations as set forth in the Gichner Agreement. In addition, the Gichner Agreement provided that the purchase price would be (i) increased on a dollar for dollar basis if the working capital on the closing date (as defined in the Gichner Agreement) exceeded $17.5 million or (ii) decreased on a dollar for dollar basis if the working capital was less than $17.1 million. The Company and seller agreed to a working capital adjustment of $0.6 million and during 2011 the Company paid the holdback owed of $7.5 million.

The Gichner transaction has been accounted for using the acquisition method of accounting which requires, among other things, that the assets acquired and liabilities assumed be recognized at their fair values as of the merger date. Due to the working capital adjustment discussed above, the Company retrospectively recorded purchase price adjustments at the acquisition date to decrease current liabilities by $0.6 million and reduce net deferred tax assets by $0.4 million, resulting in a $0.2 million reduction to the original goodwill recorded of $68.4 million. The following table summarizes the fair values of major assets acquired and liabilities assumed, including the retrospective adjustments, as part of the Gichner transaction (in millions):

Cash	$	0.1
Accounts receivable	15.2
Inventoried costs	24.2
Other current assets	8.3
Property and equipment	19.0
Intangible assets	46.3
Goodwill	68.2
Other assets	1.8
Total assets	183.1
Current liabilities	(29.1		)
Other liabilities	(21.0		)
Net assets acquired	$	133.0

The goodwill recorded in this transaction is not tax deductible.

As of May 19, 2010, the expected fair value of accounts receivable approximated the historical cost. The gross accounts receivable was $15.6 million, of which $0.4 million is not expected to be collectible.

Gichner has two primary areas of contingent liabilities: environmental and uncertain tax liabilities. Additionally, Gichner is involved in various commercial disputes and employment matters. The majority of the contingent liabilities have been recorded at fair value in the allocation of acquired assets and liabilities or purchase price, aside from those pertaining to uncertainty in income taxes which are an exception to the fair value basis of accounting; however certain environmental matters that are inherently legal contingencies in nature are recorded at the probable and estimable amount. As of the acquisition date approximately $0.2 million has been recorded for probable and estimable environmental and employment liabilities.

The amounts of revenue and operating income of Gichner included in the Company’s consolidated statements of operations for the years ended December 26, 2010 and December 25, 2011 are $98.1 million and $4.8 million, and $131.5 million and $4.9 million, respectively.

In accordance with Topic 805 the allocation of the purchase price for the Company’s acquisitions of Herley, Integral and SecureInfo are subject to adjustment during the measurement period after the respective closing dates when additional information on asset and liability valuations become available. The above estimated fair values of assets acquired and liabilities assumed are provisional and are based on the information that was available as of the respective acquisition dates to estimate the fair value of assets acquired and liabilities assumed. Measurement period adjustments reflect new information obtained about facts and circumstances that existed as of the respective acquisition dates. The Company believes that current information available provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed but the Company is waiting for additional information necessary to finalize those fair values. The Company has not finalized its valuation of certain assets and liabilities recorded in connection with these transactions, including, intangible assets, inventory, property and equipment and deferred taxes. Thus, the provisional measurements recorded are subject to change and any changes will be recorded as adjustments to the fair value of those assets and liabilities and residual amounts will be allocated to goodwill. The final valuation adjustments may also require adjustment to the consolidated statements of operations.

The following tables summarize the fair value of identifiable intangible assets acquired for the SecureInfo, Integral, and Herley transactions and the weighted average amortization period of each class of intangible (in millions):

SecureInfo	Gross Value		Estimated Weighted Average Amortization Period (in years)
Customer contracts	$	4.0	3.0
Funded backlog	0.5		1.0
Total	$	4.5	2.8

Integral	Gross Value		Estimated Weighted Average Amortization Period (in years)
Trade name	$	0.6	4.4
Customer contracts	12.4		3.9
Funded backlog	19.0		1.4
Total	$	32.0	2.4

Herley	Gross Value		Estimated Weighted Average Amortization Period (in years)
Trade name	$	0.7	5.8
Customer contracts	20.2		4.5
Funded backlog	16.1		0.8
Total	$	37.0	2.9

Unaudited Pro Forma Financial Information

The following tables summarize supplemental statements of operations information on an unaudited pro forma basis as if the acquisitions of Gichner, DEI, SCT, HBE, Herley, Integral and SecureInfo had occurred on December 28, 2009, and include adjustments that were directly attributable to the transactions or were not expected to have a continuing impact on the Company. There are no material, nonrecurring pro forma adjustments directly attributable to the business combinations included in the reported pro forma revenue and earnings for 2010 or 2011. The pro forma results are for illustrative purposes only for the applicable periods and do not purport to be indicative of the actual results which would have occurred had the transactions been completed as of the beginning of the period, nor are they indicative of results of operations which may occur in the future (all amounts, except per share amounts are in millions):

Unaudited Pro forma Condensed Combined Statements of Operations Information

	Year Ended December 26, 2010			Year Ended December 25, 2011
Pro forma revenues	$	948.7		$	888.9
Pro forma net loss before tax	(74.3		)	(58.2		)
Pro forma net loss	(62.1		)	(60.2		)
Net income (loss) attributable to the registrant	14.6			(23.5		)
Basic and diluted pro forma loss per share	$	(1.80	)	$	(1.76	)

The pro forma results for the years ended December 26, 2010 and December 25, 2011 include $9.4 million, and $33.2 million of acquisition related expenses, respectively. The pro forma financial information also reflects pro forma adjustments for the additional amortization associated with finite lived intangible assets acquired, additional incremental interest expense, deferred financing costs related to the financing undertaken for the Integral, Herley and Gichner transactions, the change in stock compensation expense as a result of the exercise of stock options and restricted stock immediately prior to closing of the Integral, Herley and HBE transactions offset by stock-based compensation expense for stock options assumed, and the tax effect of the increased interest expense and intangible amortization. The weighted average common shares also reflect the issuance of 2.5 million shares in October 2010, 4.9 million shares in February 2011 for the HBE and Herley acquisitions and 10.5 million shares in July 2011 for the Integral acquisition. These adjustments are as follows (in millions):

	Years Ended
	December 26, 2010			December 25, 2011
Intangible amortization	$	39.9		$	14.8
Net change in stock compensation expense	(3.7		)	(3.7		)
Net change in interest expense	39.2			10.2
Net change in income tax expense (benefit)	(2.0		)	4.0
Increase in weighted average common shares outstanding for shares issued and not already included in the weighted average common shares outstanding	17.9			6.8

Contingent Acquisition Consideration

In connection with the acquisitions of SecureInfo, DEI and SCT, the Company agreed to make additional future payments to the seller’s contingent upon achievement of specific performance-based milestones by the acquired entities. Pursuant to the provisions of Topic 805, the Company will re-measure these liabilities each reporting period and record changes in the fair value in its consolidated statement of operations. Increases or decreases in the fair value of the contingent consideration liability can result from changes in discount periods and rates, as well as changes in the estimates on the achievement of the performance-based milestones.

A summary of contingent acquisition consideration as of December 26, 2010 and December 25, 2011 is summarized in the following table (in millions):

	SecureInfo		DEI			SCT			Total
Balance as of December 27, 2009	$	—	$	—		$	—		$	—
Fair value of contingent acquisition consideration assumed in acquisitions	—		5.0			1.2			6.2
Cash payments	—		(0.4		)	—			(0.4		)
Balance as of December 26, 2010	—		4.6			1.2			5.8
Fair value of contingent acquisition consideration assumed in acquisitions	1.5		—			—			1.5
Post-acquisition adjustments reflected in operating results	—		0.4			(0.1		)	0.3
Balance as of December 25, 2011	$	1.5	$	5.0		$	1.1		$	7.6

As of December 25, 2011 $4.0 million of the contingent acquisition consideration is reflected in other current liabilities and $3.6 million is in other long-term liabilities in the consolidated balance sheets.

- Definition

The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable).

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Emerging Issues Task Force (EITF)
-Number 88-16
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 2: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
-Number 141
-Paragraph 51, 52
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 3: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
-Number 141R
-Appendix F
-Paragraph F4
-Subparagraph e

Reference 4: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
-Number 141R
-Paragraph 67-73
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 5: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 805
-SubTopic 30
-Section 50
-Paragraph 1
-URI http://asc.fasb.org/extlink&oid=6911361&loc=d3e6927-128479

Reference 6: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 805
-SubTopic 10
-Section 50
-Paragraph 4
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Reference 7: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 805
-SubTopic 30
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Reference 8: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
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Reference 9: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
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-Section 50
-Paragraph 3
-URI http://asc.fasb.org/extlink&oid=6910749&loc=d3e4926-128472

Reference 10: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
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-URI http://asc.fasb.org/extlink&oid=6910749&loc=d3e4922-128472

Reference 11: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 805
-SubTopic 30
-Section 50
-Paragraph 2
-URI http://asc.fasb.org/extlink&oid=6911361&loc=d3e6996-128479

Reference 12: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 805
-SubTopic 10
-Section 50
-Paragraph 7
-URI http://asc.fasb.org/extlink&oid=6972119&loc=d3e1524-128463

Reference 13: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 805
-SubTopic 10
-Section 50
-Paragraph 2
-URI http://asc.fasb.org/extlink&oid=6972119&loc=d3e1392-128463

Reference 14: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 805
-SubTopic 30
-Section 50
-Paragraph 3
-URI http://asc.fasb.org/extlink&oid=6911361&loc=d3e7000-128479

Reference 15: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 805
-SubTopic 20
-Section 50
-Paragraph 1
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-Name Accounting Standards Codification
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Reference 18: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
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Reference 19: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 805
-SubTopic 10
-Section 50
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-URI http://asc.fasb.org/extlink&oid=6972119&loc=d3e1383-128463

+ Details

Debt

12 Months Ended

Dec. 25, 2011

Debt

Debt

Note 5. Debt

(a) Issuance of 10% Senior Secured Notes due 2017

On May 19, 2010, the Company entered into an Indenture with the guarantors set forth therein and Wilmington Trust FSB (“Wilmington Trust”), as trustee and collateral agent (the “Indenture”) to issue 10% Senior Secured Notes due 2017 (“Notes”). As of December 25, 2011, the Company has issued Notes of $625.0 million under this Indenture. These Notes have been used to fund acquisitions and for general corporate purposes. The holders of the Notes have a first priority lien on substantially all of the Company’s assets and the assets of the guarantors, except accounts receivable, inventory, deposit accounts, securities accounts, cash, securities and general intangibles (other than intellectual property) where the holders of the senior secured borrowings have a second priority lien to the $90.0 million credit facility described below.

The Company pays interest on the Notes semi-annually, in arrears, on June 1 and December 1 of each year. The Notes include customary covenants and events of default as well as a consolidated fixed charge ratio of 2.0:1.0 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. As of December 25, 2011, the Company was in compliance with the covenants contained in the indentures related to the Notes.

On or after June 1, 2014, the Company may redeem some or all of the Notes at 105% of the aggregate principal amount of such Notes through June 1, 2015, 102.5% of the aggregate principal amount of such Notes through June 1, 2016 and 100% of the aggregate principal amount of such Notes thereafter, plus accrued and unpaid interest to the date of redemption. Prior to June 1, 2013, the Company may redeem up to 35% of the aggregate principal amount of the Notes at 110% of the aggregate principal amount of the Notes, plus accrued and unpaid interest to the redemption date, with the net cash proceeds of certain equity offerings. In addition, the Company may, at its option, redeem some or all of the Notes at any time prior to June 1, 2014, by paying a “make whole” premium, plus accrued and unpaid interest, if any, to the date of redemption. The Company may also purchase outstanding Notes traded on the open market at any time.

The Notes were issued in three offerings.

$225 Million 10% Senior Secured Note Offering, May 2010

On May 19, 2010, the Company issued Notes in the aggregate principal amount of $225.0 million in an unregistered offering pursuant to Rule 144A and Regulation S under the Securities Act and on August 11, 2010, the Company completed an exchange offer for such Notes pursuant to a registration rights agreement entered into in connection with the issuance thereof. The proceeds were primarily used to finance the acquisitions of Gichner, DEI and SCT as well as to refinance the Company’s existing debt. (See Note 3).

$285 Million 10% Senior Secured Note Offering, March 2011

On March 25, 2011, the Company issued Notes in the aggregate principal amount of $285.0 million in an unregistered offering pursuant to Rule 144A and Regulation S under the Securities Act and received approximately $314.0 million in cash proceeds from the offering, which includes an approximate $20.0 million of issuance premiums and $9.0 million of accrued interest, which proceeds were used, together with cash contributions of $45.0 million from the Company, to finance the acquisition of all of the outstanding shares of common stock of Herley (see Note 3), to pay related fees and expenses and for general corporate purposes. The effective interest rate on this issuance was 8.5%. On July 29, 2011, the Company completed an exchange offer for these Notes pursuant to a registration rights agreement entered into in connection with this issuance.

$115 Million 10% Senior Secured Note Offering, July 2011

On July 27, 2011, the Company issued Notes in the aggregate principal amount of $115.0 million in an unregistered offering pursuant to Rule 144A and Regulation S under the Securities Act and received approximately $122.5 million in cash proceeds from the issuance of the Notes, which includes an approximate $5.8 million of issuance premiums and $1.7 million of accrued interest. These proceeds were used to finance, in part, the cash portion of the purchase price for the acquisition of Integral (see Note 3), to refinance existing indebtedness of Integral, to make certain severance payments in connection with the acquisition of Integral and to pay related fees and expenses. The effective interest rate on this issuance was 8.9%. On December 2, 2011, the Company completed an exchange offer for these Notes pursuant to a registration rights agreement entered into in connection with this issuance.

(b) Other Indebtedness

$90 Million Credit Facility

On July 27, 2011, concurrent with the completion of the offering of the $115.0 million in Notes, the Company entered into a credit and security agreement with KeyBank National Association (“KeyBank”), as lead arranger, sole book runner and administrative agent, and East West Bank and Bank of the West, as the lenders (the “2011 Credit Agreement”). The 2011 Credit Agreement amends and restates in its entirety the credit and security agreement, dated as of May 19, 2010, between the Company, KeyBank and the lenders named therein (as amended). The 2011 Credit Agreement establishes a five year senior secured revolving credit facility in the amount of $65.0 million (the “Amended Revolver”). The Amended Revolver is secured by a lien on substantially all of the Company’s assets and the assets of the guarantors thereunder, subject to certain exceptions and permitted liens. The Amended Revolver has a first priority lien on accounts receivable, inventory, deposit accounts, securities accounts, cash, securities and general intangibles (other than intellectual property). On all other assets, the Amended Revolver has a second priority lien junior to the lien securing the Notes.

Borrowings under the Amended Revolver are subject to mandatory prepayment upon the occurrence of certain events, including the issuance of certain securities, the incurrence of certain debt and the sale or other disposition of certain assets. The Amended Revolver includes customary affirmative and negative covenants and events of default, as well as a financial covenant relating to a minimum fixed charge coverage ratio of 1.25. Negative covenants include, among other limitations, 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 and insolvency, material judgments and changes in control.

On November 14, 2011, the Company entered into a First Amendment Agreement (the “Amendment Agreement”), with certain lenders and with KeyBank, which amended the 2011 Credit Agreement. Among other things, the Amendment Agreement: (i) increased the amount of the Amended Revolver from $65.0 million to $90.0 million; (ii) added to and modified the definitions of certain terms contained in the 2011 Credit Agreement; (iii) added PNC Bank, National Association as a lender under the 2011 Credit Agreement; and (iv) updated certain schedules to the 2011 Credit Agreement.

The Amended Revolver may be increased to $100.0 million. Any increase in the Amended Revolver is subject to the consent of KeyBank, identification of one or more additional lenders willing to advance the increased amount of the Amended Revolver, and compliance with covenants in the Notes. The amounts of borrowings that may be made under the Amended Revolver are based on a borrowing base and are comprised of specified percentages of eligible receivables, eligible unbilled receivables and eligible inventory. If the amount of borrowings outstanding under the Amended Revolver exceeds the borrowing base then in effect, the Company is required to repay such borrowings in an amount sufficient to eliminate such excess. The Amended Revolver includes $30.0 million of availability for letters of credit and $5.0 million of availability for swing line loans.

The Company may borrow funds under the Amended Revolver at a rate based either on LIBOR or a base rate established by KeyBank. Base rate borrowings bear interest at an applicable margin of 1.00% to 1.75% over the base rate (which will be the greater of the prime rate or 0.5% over the federal funds rate, with a floor of 1.0% over one month LIBOR). LIBOR rate borrowings will bear interest at an applicable margin of 3.00% to 3.75% over the LIBOR rate. The applicable margin for base rate borrowings and LIBOR borrowings will depend on the average monthly revolving credit availability. The Amended Revolver also has a commitment fee of 0.50% to 0.75%, depending on the average monthly revolving credit availability. As of December 25, 2011, there were no outstanding borrowings on the Amended Revolver and $21.3 million was outstanding on letters of credit resulting in net availability of $68.7 million. The Company was in compliance with the financial covenants as of December 25, 2011.

During 2010, the Company refinanced its previous revolving credit facilities and, as a result, the Company recorded interest charges of approximately $3.9 million in 2010 relating to the write-off of previously deferred financing costs.

Debt Acquired in Acquisition of Herley

The Company assumed a $10.0 million ten-year term loan with a bank in Israel that Herley entered into on September 16, 2008 in connection with the acquisition of one of its wholly owned subsidiaries. The balance as of December 25, 2011 was $6.8 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 contains various covenants including a minimum net equity covenant as defined in the loan agreement. The Company was in compliance with all covenants, including the minimum net equity covenant, as of December 25, 2011.

On October 19, 2001, Herley received $3.0 million in proceeds from the East Hempfield Township Industrial Development Authority Variable Rate Demand/Fixed Rate Revenue Bonds Series of 2001 (the “IDA Bonds”). The IDA Bonds were due in varying annual installments through October 1, 2021. Proceeds from the IDA Bonds were used for the construction of a 15,000 square foot expansion of Herley’s facilities in Lancaster, Pennsylvania, and for manufacturing equipment. The IDA Bonds were paid in full on May 2, 2011.

Notes Acquired in Acquisition of SYS

During 2010, convertible notes of approximately $1.0 million which were acquired as a result of the SYS acquisition were paid in full. In August of 2010, the Company paid-off approximately $0.5 million of the notes plus accrued interest in cash and holders of approximately $0.5 million of the notes elected to have their notes converted into approximately 45,000 shares of the Company’s common stock.

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 December 26, 2010 and December 25, 2011 are presented in the following table:

	As of December 26, 2010						As of December 25, 2011
$ in millions	Principal		Carrying Amount		Fair Value		Principal		Carrying Amount		Fair Value
Long-term debt	$	225.0	$	225.0	$	247.2	$	631.8	$	654.6	$	642.7

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) and it is the estimated amount the Company would have to pay to repurchase its debt, including any premium or discount attributable to the difference between the stated interest rate and market value of interest at the balance sheet date.

The net unamortized debt premium, of $22.8 million as of December 25, 2011, which is the difference between the carrying amount of $654.6 million and the principal amount of $631.8 million represented in the previous table, is being amortized to interest expense over the terms of the related debt.

Future maturities of long-term debt for each of the years ending 2012 through 2016 are $1.0 million per year.

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

+ References + Details

Income Taxes

12 Months Ended

Dec. 25, 2011

Income Taxes

Income Taxes

Note 8. Income Taxes

The following table summarizes the activity related to the Company’s unrecognized tax benefits (in millions):

	Total
Balance at December 28, 2008	$	12.8
Expiration of applicable statutes of limitations	(0.3		)
Foreign currency translation	0.1
Balance at December 27, 2009	12.6
Increases related to prior periods (acquired entities)	0.3
Increases related to current year tax positions	0.2
Expiration of applicable statutes of limitations	(0.7		)
Balance at December 26, 2010	12.4
Increases related to prior periods (acquired entities)	0.5
Increases related to current year tax positions	0.2
Expiration of applicable statutes of limitations	(0.6		)
Settlements with taxing authorities	(2.4		)
Balance at December 25, 2011	$	10.1

Included in the balance of unrecognized tax benefits at December 25, 2011, are $10.1 million of tax benefits that, if recognized, would affect the effective tax rate. Included in this amount is $7.2 million that would become a deferred tax asset if the tax benefit were recognized. As such, this benefit may be impacted by a corresponding valuation allowance depending upon the Company’s consolidated financial position at the time the benefits are recognized.

The Company recognizes interest and penalties related to unrecognized tax benefits in its provision for income taxes. For the years ended December 27, 2009, December 26, 2010 and December 25, 2011, the Company recorded $0.1 million, $0.1 million and $0.3 million, respectively, in interest or penalties. These amounts are netted by a benefit for interest and penalties related to the reversal of prior positions as noted above of $0.2 million, $0.4 million, and $0.4 million for the years ended December 27, 2009, December 26, 2010, and December 25, 2011, respectively. As of December 27, 2009, December 26, 2010, and December 25, 2011, the Company had recorded total interest and penalties of $0.7 million, $0.5 million, and $0.4 million, respectively.

The Company believes that it is reasonably possible that as much as $0.4 million of unrecognized tax benefits will expire within 12 months of December 25, 2011 due to the expiration of various applicable statutes of limitations.

The Company is subject to taxation in the U.S. and various states, local and foreign tax jurisdictions. The Company’s tax years for 2000 and forward are subject to examination by the U.S. and state tax authorities due to the existence of net operating loss carryforwards. Generally, the Company’s tax years for 2002 and forward are subject to examination by various foreign tax authorities.

In assessing the realizability of 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 its deferred tax assets, with the exception of an amount equal to its deferred tax liabilities which can be expected to reverse and certain foreign and separate state deferred tax assets. Management will continue to evaluate the necessity to maintain a valuation allowance against its deferred tax asset.

As of December 25, 2011 and December 26, 2010, the Company had $13.0 million and $0.0 million, respectively, of undistributed earnings attributable to foreign subsidiaries. It is the Company’s intention to permanently reinvest undistributed earnings of its foreign subsidiaries. The Company has not provided deferred U.S. income taxes or foreign withholding taxes on temporary differences resulting from earnings for certain foreign subsidiaries which are permanently reinvested outside the U.S. It is not practicable to determine the amount of unrecognized deferred tax liability associated with these temporary differences.

The components of income (loss) before incomes taxes and equity earnings are listed below:

	2009			2010		2011
Domestic	$	(37.3	)	$	1.9	$	(20.7	)
Foreign	—			—		(0.9		)
Total	$	(37.3	)	$	1.9	$	(21.6	)

The provision (benefit) for income taxes from continuing operations for the years ended December 27, 2009, December 26, 2010, and December 25, 2011 are comprised of the following (in millions):

	2009		2010			2011
Federal income taxes:
Current	$	0.0	$	0.1		$	(1.5	)
Deferred	1.0		1.6			0.6
Total Federal	1.0		1.7			(0.9		)
State and local income taxes
Current	0.0		(12.6		)	3.1
Deferred	0.0		(1.8		)	0.8
Total State and local	0.0		(14.4		)	3.9
Foreign income taxes:
Current	0.0		0.0			0.4
Deferred	0.0		0.0			(1.5		)
Total Foreign	0.0		0.0			(1.1		)
Total	$	1.0	$	(12.7	)	$	1.9

A reconciliation of total income tax provision (benefit) to the amount computed by applying the statutory federal income tax rate of 35% to income (loss) from continuing operations before income tax provision (benefit) for the years ended December 27, 2009, December 26, 2010 and December 25, 2011 is as follows (in millions):

	2009			2010			2011
Income tax expense (benefit) at federal statutory rate	$	(13.1	)	$	0.6		$	(7.6	)
State taxes, net of federal tax benefit and valuation allowance	1.0			1.9			3.1
Difference in tax rates between U.S. and foreign	—			—			(0.1		)
Release of foreign valuation allowance	—			—			(0.7		)
Increase (decrease) in federal valuation allowance	1.7			(2.3		)	4.7
Nondeductible expense	0.1			0.2			0.4
Decrease in reserve for uncertain tax positions	—			(0.2		)	(1.7		)
Transaction costs	—			0.7			2.3
Changes to indefinite life items and separate state deferred taxes	—			—			1.5
Impact of purchase accounting	—			(13.6		)	—
Nondeductible goodwill impairment charges	11.3			—			—
Total	$	1.0		$	(12.7	)	$	1.9

The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities as of December 26, 2010 and December 25, 2011 are as follows (in millions):

	2010			2011
Deferred tax assets:
Allowance for doubtful accounts	$	0.7		$	0.8
Sundry accruals	3.4			7.8
Vacation accrual	2.3			5.0
Stock-based compensation	4.1			4.9
Property and equipment, principally due to differences in depreciation	0.1			—
Payroll related accruals	—			2.3
Lease accruals	—			9.5
Investments	2.3			2.1
Net operating loss carryforwards	71.9			104.1
Tax credit carryforwards	0.3			3.5
Deferred revenue	0.2			1.5
Reserves and other	6.1			9.8
	91.4			151.3
Valuation allowance	(70.5		)	(98.8		)
Total deferred tax assets, net of allowance	20.9			52.5
Deferred tax liabilities:
Unearned revenue	(0.1		)	(15.4		)
Other intangibles	(28.1		)	(37.0		)
Property and equipment, principally due to differences in depreciation	(2.4		)	(10.1		)
Total deferred tax liabilities	(30.6		)	(62.8		)
Net deferred tax asset (liability)	$	(9.7	)	$	(10.0	)

At December 25, 2011, the Company had federal tax loss carryforwards of $269.4 million and various state tax loss carryforwards of $242.4 million including net operating losses resulting from stock options of approximately $14.4 million for federal and state, which if recognized would result in additional paid-in capital. The federal tax loss carryforwards expire beginning in 2019 through 2030, and the various state tax loss carryforwards expire beginning in 2012 through 2030. Federal and state tax laws impose restrictions on the utilization of net operating loss and tax credit carryforwards in the event of an “ownership change” for tax purposes as defined by Section 382 of the Internal Revenue Code. In March 2010, an “ownership change” occurred which will limit the utilization of the loss carryforwards. As a result, the Company’s federal annual utilization of NOL carryforwards will be limited to $28.1 million a year for the five years succeeding the ownership change and $11.6 million per year thereafter. If the entire limitation amount is not utilized in a year, any excess can be carried forward and utilized in future years. For the year ended December 25, 2011, 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. In addition, future equity offerings or acquisitions that have equity as a component of the purchase price could also result in an “ownership change”. If and when any other “ownership change” occurs, utilization of the NOL or other tax attributes may be further limited. As discussed elsewhere, deferred tax assets relating to the Federal and combined states net operating loss 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.

In assessing the realizability of 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. During fiscal 2011, the Company recorded a net increase in its valuation allowance of $28.3 million. Of this amount, a $29.3 million increase relates to current year acquisitions, and a $1.0 million decrease is related to a decrease in the deferred tax asset which does not impact the tax provision.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Regulation S-X (SX)
-Number 210
-Section 08
-Paragraph h
-Article 4

Reference 2: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
-Number 109
-Paragraph 136, 172
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 3: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
-Number 109
-Paragraph 43, 44, 45, 46, 47, 48, 49
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 4: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
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-Topic 740
-SubTopic 10
-Section 50
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-Name Accounting Standards Codification
-Topic 235
-SubTopic 10
-Section S99
-Paragraph 1
-Subparagraph (SX 210.4-08.(h))
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Reference 7: http://www.xbrl.org/2003/role/presentationRef
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+ Details

Discontinued Operations

12 Months Ended

Dec. 25, 2011

Discontinued Operations

Discontinued Operations

Note 9. Discontinued Operations

In 2007, the Company entered into a definitive agreement with an affiliate of Platinum Equity to sell the Company’s wireless deployment business. In accordance with the acquisition agreement, the Company came to an agreement with Platinum Equity on a working capital adjustment of $5.0 million. The Company made the final working capital payments of $2.8 million in 2009.

During the due diligence process related to the acquisition of SYS, senior management identified three business units of SYS which were non-core to Kratos’ base national security and public security businesses. These businesses provided video surveillance and information analysis products, digital broadcasting products and incident response management systems. In December 2008, after evaluating these businesses further, a decision was made to dispose of and sell all three business units. In accordance with Topic 205, these business units were classified as held for sale and reported in discontinued operations as of and for the year ended December 28, 2008. The Company recorded a $4.5 million impairment charge in the fourth quarter of 2008 primarily related to the impairment of goodwill allocated to these businesses. In the first quarter of 2009, all three of the businesses were sold for an aggregate cash consideration of approximately $0.4 million.

In addition, the plan to sell these businesses included a comprehensive assessment of personnel, relocation of personnel, facility consolidation and exit strategies for certain lines of business. The plan provided for approximately $2.0 million of restructuring costs associated with personnel, and additional costs of $0.6 million for facilities consolidation. The restructuring costs are primarily associated with the businesses sold and are accounted for in discontinued operations in the accompanying consolidated financial statements. As of December 25, 2011, approximately $2.0 million of severance costs and $0.6 million of facilities costs have been paid. In addition, the liability related to severance costs was reduced by approximately $0.1 million, to reflect a revised estimate, which was recognized in the net loss of discontinued operations. The remaining liabilities for severance and facilities are $0.1 million and $0.0 million, respectively, and are included in current liabilities of discontinued operations in the consolidated balance sheets. The following table shows a reconciliation of the beginning accrual to the remaining balance as of December 25, 2011 (in millions):

	Severance			Lease Termination			Total
Original accrual recorded in 2008	$	2.0		$	0.6		$	2.6
Payments in 2008	(0.2		)	(0.4		)	(0.6		)
Payments in 2009	(0.9		)	(0.1		)	(1.0		)
Payments in 2010	(0.7		)	(0.1		)	(0.8		)
Payments in 2011	(0.1		)	—			(0.1		)
Adjustments	(0.1		)	—			(0.1		)
Balance December 25, 2011	$	—		$	—		$	—

On June 24, 2009, as a result of the continued operating losses in the Southeast division of the PSS segment (the “Southeast Division”), the Company’s board of directors approved a plan to sell and dispose of the Southeast Division. In accordance with Topic 205, this business unit was classified as held for sale and reported in discontinued operations in the accompanying consolidated financial statements. The Company recorded a $2.0 million impairment charge in the second quarter of 2009 and an additional $0.2 million in the second quarter of 2010 related to management’s estimate of the fair value of the business. On August 2, 2010, the Company divested its Southeast Division for approximately $0.1 million cash consideration and the assumption of certain liabilities.

In June 2012, the Company committed to a plan to sell certain lines of business associated with antennas, satellite-cased products and fly-away terminals of the non-core businesses acquired in the Integral acquisition. These operations were previously reported in the KGS segment, and in accordance with Topic 205, these businesses have been classified as held for sale and reported in discontinued operations in the accompanying consolidated financial statements.

The following table presents the results of discontinued operations including gain and loss on disposals which is included in income (loss) before taxes (in millions):

	Year ended December 27, 2009			Year ended December 26, 2010			Year ended December 25, 2011
Revenue	$	5.9		$	2.2		$	9.2
Loss before taxes	(3.8		)	(0.9		)	(1.3		)
Benefit for income taxes	(0.6		)	(0.8		)	(0.6		)
Net loss	$	(3.2	)	$	(0.1	)	$	(0.7	)

Following is a summary of the assets and liabilities of discontinued operations as of December 26, 2010 and December 25, 2011 (in millions):

	December 26, 2010		December 25, 2011
Accounts receivable, net	$	0.3	$	5.3
Inventoried costs	—		4.0
Other current assets	0.2		0.4
Current assets of discontinued operations	$	0.5	$	9.7
Property and equipment, net	—		0.6
Goodwill	—		1.5
Other assets	—		0.3
Long-term assets of discontinued operations	$	0.5	$	2.4
Accrued expenses and accounts payable	1.7		3.0
Billings in excess of costs and earnings on uncompleted contracts	—		1.5
Other current liabilities	0.4		1.8
Current liabilities of discontinued operations	$	2.1	$	6.3
Long-term unrecognized tax benefits	0.6		—
Other long-term liabilities	0.8		0.5
Long-term liabilities of discontinued operations	$	1.4	$	0.5

- Definition

The entire disclosure for the facts and circumstances leading to the completed or expected disposal, manner and timing of disposal, the gain (loss) recognized in the income statement and the income statement caption that includes that gain (loss), amounts of revenues and pretax profit or loss reported in discontinued operations, the segment in which the disposal group was reported, and the classification (whether sold or classified as held for sale) and carrying value of the assets and liabilities comprising the disposal group. Includes all disposal groups, including those classified as components of the entity (discontinued operations).

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
-Number 144
-Paragraph 43-48
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 2: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
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-Topic 360
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Reference 3: http://www.xbrl.org/2003/role/presentationRef
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-Section 45
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-Name Accounting Standards Codification
-Topic 205
-SubTopic 20
-Section 45
-Paragraph 4
-URI http://asc.fasb.org/extlink&oid=6892542&loc=d3e1012-107759

Reference 7: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 205
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-Name Accounting Standards Codification
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-Publisher FASB
-Name Accounting Standards Codification
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Reference 10: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 205
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+ Details

Stockholders' Equity

12 Months Ended

Dec. 25, 2011

Stockholders' Equity

Stockholders' Equity

Note 11. Stockholders’ Equity

(a) Common Stock

On December 1, 2011, the Company repurchased in the open market from an institutional investor 2,000,000 shares of its common stock for $5.45 per share, in a block transaction in compliance with legal requirements.

On July 27, 2011, in connection with the acquisition of Integral, the Company issued approximately 10.4 million shares of its common stock to shareholders of Integral. See Note 3 for a complete description of this transaction.

On February 11, 2011, the Company sold approximately 4.9 million shares of its common stock at a purchase price of $13.25 per share in an underwritten public offering. The Company received gross proceeds of approximately $64.8 million. After deducting underwriting and other offering expenses, the Company received approximately $61.1 million in net proceeds.

On October 12, 2010, the Company sold approximately 2.5 million shares of its common stock at a purchase price of $10.20 per share in an underwritten public offering. The Company received gross proceeds of approximately $25.8 million. After deducting underwriting fees and other offering expenses, the Company received approximately $24.7 million in net proceeds. The Company used the net proceeds from this transaction to fund the purchase price for the acquisition of HBE. See Note 3 for a complete description of this transaction.

On September 10, 2009, the Company completed a 1-for-10 reverse split of its common stock which was approved at the Company’s Annual Meeting on June 4, 2009. The reverse split reduced the number of shares of the Company’s common stock outstanding from 156,274,383 to 15,627,031. Proportional adjustments were made to the Company’s stock options and other equity incentive awards, equity compensation plans, and convertible notes. The total number of authorized shares of the Company’s capital stock was not affected by the reverse stock split.

On September 2, 2009, the Company sold 2.6 million shares of its common stock to institutional investors at a purchase price of $7.20 in a registered direct public offering. The Company received gross proceeds of $18.7 million. After deducting placement agent fees and other offering expenses, the Company received $17.5 million in net proceeds. The Company used the net proceeds from this transaction to repay existing indebtedness.

(b) Preferred Stock

On March 8, 2011, all of the 10,000 shares of the previously issued and outstanding shares of Series B Convertible Preferred Stock (“Preferred Stock”) were redeemed for 100,000 shares of common stock. Prior to the redemption, the Preferred Stock had a total liquidation preference of $5.0 million. In accordance with Topic 260, the Preferred Stock was considered a participating security for purposes of computing basic earnings per share prior to redemption.

(c) Stock Option Plans and Restricted Stock Unit Plans

The board of directors (“Board”) may grant equity-based awards to selected employees, directors and consultants of the Company pursuant to its existing equity incentive plans. In July 2004, the Board resolved that all future stock option grants under the Company’s equity incentive plans would be non-statutory stock options, until such further determination by the Board. In February 2005, the Board approved the 2005 Equity Incentive Plan (“2005 Plan”). The 2005 Plan was subsequently approved by a majority of the Company’s stockholders on May 18, 2005. In March 10, 2011, the Board approved the 2011 Equity Incentive Plan (“2011 Plan”). The 2011 Plan was subsequently approved by a majority of the Company’s stockholders on May 27, 2011. Each of the 2005 Plan and the 2011 Plan permits the Board to issue a wide-variety of awards, including restricted stock units, restricted stock, stock appreciation rights, stock options and deferred stock units. If any shares covered by an award under the 2005 Plan or 2011 Plan are not purchased or are forfeited, or if an award otherwise is terminated, cancelled or retired, such shares are again made available for awards under the 2005 Plan and 2011 Plan. As of December 25, 2011, there are approximately 502,000 and 2 million shares reserved for issuance for future grant under the 2005 Plan and 2011 Plan, respectively. The Board may amend or terminate the 2005 Plan or 2011 Plan at any time. Certain amendments, including an increase in the share reserve, require stockholder approval. Generally, options and restricted stock units outstanding vest over periods not exceeding ten years. If the Company were to grant stock options, they would be granted with a per share exercise price not less than the fair market value of the Company’s common stock on the date of grant, and generally would be exercisable for up to ten years from the grant date.

Integral Stock Option Plans. All outstanding options to purchase shares of Integral common stock that were not canceled and exchanged for a cash payment upon completion of the Integral merger, were assumed by the Company and converted into options to purchase shares of the Company’s common stock (with the number of shares subject to each such option and the exercise price applicable to each such option adjusted based on the applicable exchange ratio) (the “Assumed Options”). The Company assumed each such stock option in accordance with the terms and conditions of the applicable Integral option plan and stock option agreement, subject to the adjustments described in the preceding sentence. On February 20, 2012, the Board confirmed (i) the assumption of Integral’s 2008 Stock Incentive Plan (the “2008 Plan”), pursuant to NASDAQ Rule 5635, which provides that shares available under certain plans acquired in mergers and other acquisitions may be used for certain post-transaction grants without further stockholder approval and (ii) an amendment to the 2008 Plan, in order to permit the future grant of awards, including restricted stock unit awards, by the Company pursuant to the plan. The 2008 Plan was approved by Integral’s Board of directors in December 2007 and by Integral’s stockholders in February 2008. The terms and conditions of specific awards are set at the discretion of the Board. As of February 20, 2012, there are approximately 984,000 shares of the Company’s common stock available for issuance under the 2008 Plan. An additional approximately 48,000 shares of the Company’s common stock, which are currently subject to outstanding Assumed Options, may also become issuable pursuant to the 2008 Plan under certain circumstances. The shares of common stock available for issuance under the 2008 Plan may be used to grant awards, including stock options, stock appreciation rights, restricted stock and restricted stock units, to any employee, director or consultant who was not an employee, director or consultant of the Company prior to the consummation of the Integral merger. The Board may amend or terminate the 2008 Plan at any time. However, certain amendments, including an increase in the share reserve, would require stockholder approval.

Herley Stock Option Plans. All outstanding options to purchase shares of Herley common stock that were not canceled and exchanged for a cash payment upon completion of the Herley merger, were assumed by the Company and converted into options to purchase shares of the Company’s common stock (with the number of shares subject to each such option and the exercise price applicable to each such option adjusted based on the applicable exchange ratio). The Company assumed each such stock option in accordance with the terms and conditions of the applicable Herley option plan and stock option agreement, subject to the adjustments described in the preceding sentence. On February 20, 2012, the Board confirmed (i) the assumption of Herley’s 2010 Stock Plan (the “2010 Plan”), pursuant to NASDAQ Rule 5635, and (ii) an amendment to the 2010 Plan, in order to permit the future grant of awards, including restricted stock unit awards, by the Company pursuant to the plan. The 2010 Plan was approved by Herley’s Board of directors in January 2010 and by Herley’s stockholders in March 2010.The terms and conditions of specific awards are set at the discretion of the Board. As of February 20, 2012, there are approximately 503,000 shares of the Company’s common stock available for issuance under the 2010 Plan. These shares are available to grant awards, including stock options, shares of common stock and restricted stock units, to any employee, director or consultant who was not an employee, director or consultant of the Company prior to the consummation of the Herley merger. The Board of the Company may amend or terminate the 2010 Plan at any time. However, certain amendments, including an increase in the share reserve, would require stockholder approval.

Henry Bros. Electronics Stock Option Plans. HBE’s stock option and stock incentive plans acquired in connection with the Company’s acquisition of HBE were terminated on December 15, 2010, and no further grants may be made under these plans after such date. Award grants that were outstanding under these plans on December 15, 2010 will continue to be governed by their existing terms and may be exercised for shares of the Company’s common stock at any time prior to the expiration of the option term or any earlier termination of those options in connection with the option holder’s cessation of service with the Company. Stock options granted under these plans were incentive stock options, may generally be exercised from one to ten years after the date of grant and generally vest equally over three to five years. Certain of these options had change in control provisions that accelerated the vesting of the options.

Digital Fusion Inc. Stock Option and Stock Incentive Plans. DFI’s stock option and stock incentive plans acquired in connection with the Company’s acquisition of DFI were terminated on December 24, 2008, and no further grants may be made under these plans after such date. Award grants that were outstanding under these plans on December 24, 2008 will continue to be governed by their existing terms and may be exercised for shares of the Company’s common stock at any time prior to the expiration of the ten-year option term or any earlier termination of those options in connection with the option holder’s cessation of service with the Company. Stock options granted under these plans included incentive stock options or non-statutory stock options. All non-statutory options vest upon change in control and were 100% vested on December 24, 2008. With respect to incentive stock options, the qualified stock option plans provide that the exercise price of each such option must be at least equal to 100% of the fair market value of its common stock on the date of grant. Stock options granted under these plans may generally be exercised from one to ten years after the date of grant. Certain of these options had change in control provisions that extended the exercise period for grants for two years from the transaction closing date. Awards granted under these plans generally vest equally over three years; however, in connection with the Company’s acquisition of DFI the plans were amended to include immediate vesting of all unvested grants upon any future change in control of the Company. DFI also had certain options granted outside of its qualified stock option plans. These non-qualified “out of plan” stock options expire 10 years from grant date.

On January 10, 2007, the Compensation Committee of the Board approved a form of Restricted Stock Unit Agreement (an RSU Agreement) to govern the issuance of restricted stock units (“RSU”) to executive officers under the Company’s 2005 Plan. On November 14, 2011, the Compensation Committee of the Board approved a form of RSU Agreement to govern the issuance of RSUs to executive officers under the Company’s 2011 Plan. Each RSU represents the right to receive a share of common stock (a “Share”) on the vesting date. Unless and until the RSUs vest, the Employee will have no right to receive Shares under such RSUs. Prior to actual distribution of Shares pursuant to any vested RSUs, such RSUs will represent an unsecured obligation of the Company, payable (if at all) only from the general assets of the Company. The RSUs that may be awarded to executive officers under an RSU Agreement will vest according to vesting schedules specified in the notice of grant accompanying each grant. The Company recognizes compensation expense on a straight-line basis over the vesting periods based on the market price of the Company’s stock on the grant date. The awards granted in 2009, 2010, and 2011 had vesting periods ranging from one to 10 years; 5 to 10 years; and 2 to 10 years, respectively. Some of the grants for these years have accelerated vesting occurring upon change of control or termination. Upon exercise of the RSU, the Company issues new shares of common stock.

The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model and the weighted average assumptions (annualized percentages) included in the following table. Awards with graded vesting are recognized using the straight-line method with the following assumptions:

	2009	2010	2011
Expected life:(1)
Stock options	10.0 years	1.4 years	2.2 years
Risk-free interest rate(2)	2.8% - 3.7%	0.1% - 3.6%	0.1% - 3.4%
Volatility(3)	59.2% - 63.3%	28.4% - 73.8%	29.3% - 65.3%
Forfeiture rate(4)	19.9%	16.3%	16.3%
Dividend yield(5)	—	—	—

(1) In 2009 and 2011, no unvested options were granted and the expected life was equal to the life of the option. In 2010, all unvested options related to the acquisition of HBE. HBE used the simplified method for calculating the expected life of the option and the Company used this method for calculating the expected life of the options assumed.

(2) The risk-free interest rate is based on U.S. Treasury yields in effect at the time of grant with a term equal to the expected term of the options.

(3) In 2009, 2010, and 2011, the Company estimated implied volatility based upon trailing volatility.

(4) Forfeitures are estimated at the time of grant based upon historical information. Forfeitures will be revised, if necessary, in subsequent periods if actual forfeitures differ from estimates. In 2010, the estimated forfeitures for the HBE options were based upon the historical information of HBE option holders.

(5) The Company has no history or expectation of paying dividends on its common stock.

A summary of the status of the Company’s stock option plan as of December 25, 2011 and changes in options outstanding under the plan for the year ended December 25, 2011 is as follows:

	Number of Options		Weighted- Average Exercise Price per Share		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
	(000’s)					(000’s)
Options outstanding at December 26, 2010	1,449		$	23.99	3.3	$	4,419
Granted	1,217		$	16.98
Exercised	(225	)	$	5.08
Forfeited or expired	(670	)	$	15.74
Options outstanding at December 25, 2011	1,771		$	24.69	2.6	$	219
Options exercisable at December 25, 2011	1,728		$	25.14	2.6	$	208

As of December 25, 2011, there was $0.3 million of total unrecognized stock-based compensation expense related to nonvested options which is expected to be recognized over a remaining weighted-average vesting period of 1.9 years.

During the years ended December 27, 2009, December 26, 2010, and December 25, 2011 the following values relate to the grants and exercises under the Company’s option plans:

	2009		2010		2011
Weighted average grant date fair value of options granted	$	5.69	$	6.08	$	2.38
Total intrinsic value of options exercised (in thousands)	$	105	$	818	$	1,832

Additional information about stock options outstanding at December 25, 2011 with exercise prices less than and greater than $6.22 per share, the stock price at December 23, 2011, the last trading day of the period, follows:

	Exercisable			Unexercisable			Total
Stock Options	Number of Shares (000’s)	Weighted Average Exercise Price		Number of Shares (000’s)	Weighted Average Exercise Price		Number of Shares (000’s)	Weighted Average Exercise Price
Less than $6.22	146	$	4.80	25	$	5.78	171	$	4.94
Above $6.22	1,582	$	27.02	18	$	8.08	1,600	$	26.81
Total outstanding	1,728	$	25.14	43	$	6.72	1,771	$	24.69

The following table summarizes the Company’s Restricted Stock Unit activity:

	Restricted Stock Units (000’s)		Weighted- Average Grant Date Fair Value
Nonvested balance at December 26, 2010	755		$	15.43
Grants	539		$	12.38
Vested	(68	)	$	12.28
Forfeitures	(15	)	$	12.78
Nonvested balance at December 25, 2011	1,211		$	11.47

As of December 25, 2011, there was $12.4 million of total unrecognized stock-based compensation expense related to nonvested restricted stock units which is expected to be recognized over a remaining weighted-average vesting period of 5.0 years. The fair value of RSU awards that vested in 2009, 2010, and 2011 was $0.2 million, $0.9 million, and $0.8 million, respectively.

(d) Employee Stock Purchase Plan

In August 1999, the Board approved the 1999 Employee Stock Purchase Plan (“Purchase Plan”). A total of 1,310 thousand shares of Common Stock have been authorized for issuance under the Purchase Plan. The Purchase Plan qualifies as an employee stock purchase plan within the meaning of Section 423 of the Internal Revenue Service Code. Unless otherwise determined by the Compensation Committee of the Board, all employees are eligible to participate in the Purchase Plan so long as they are employed by the Company (or a subsidiary designated by the Board) for at least 20 hours per week and were customarily employed by the Company (or a subsidiary designated by the Board) for at least 5 months per calendar year.

Employees who actively participate in the Purchase Plan are eligible to have up to 15% of their earnings for each purchase period withheld pursuant to the Purchase Plan. The amount that is withheld is used at various purchase dates within the offering period to purchase shares of Common Stock. The price paid for Common Stock at each such purchase date is equal to the lower of 85% of the fair market value of the Common Stock at the commencement date of that offering period or 85% of the fair market value of the Common Stock on the relevant purchase date. Employees are also able to end their participation in the offering at any time during the offering period, and participation ends automatically upon termination of employment. From the Purchase Plan’s inception through December 25, 2011, the cumulative number of shares of Common Stock that have been issued under the Purchase Plan is 495,000 and approximately 813,000 shares were available for future issuance. During fiscal 2010 and 2011, approximately 88,000 and 93,196 shares were issued under the plans at an average price of $8.08 and $9.47, respectively.

The fair value of Kratos’ Purchase Plan shares for 2011 was estimated using the Black-Scholes option pricing model. The assumptions and resulting fair values of options granted for 2010 and 2011 were as follows:

	Offering Periods January 1 to December 31, 2010	Offering Periods January 1 to December 31 2011
Expected term (in years)(1)	0.5	0.5
Risk-free interest rate(2)	0.20% - 0.22%	0.10% - 0.19%
Expected volatility(3)	42.7% - 56.8%	28.5% - 43.6%
Expected dividend yield(4)	0%	0%
Weighted average grant-date fair value per share	$2.97	$3.05

(1) The expected term is equivalent to the offering period.

(2) The risk-free interest rate is based on U.S. Treasury yields in effect at the time of grant with a term equal to the expected term.

(3) The Company estimated implied volatility based upon trailing volatility.

(4) The Company has no history or expectation of paying dividends on its common stock.

As of December 25, 2011, there was no material unrecognized compensation expense related to the Employee Stock Purchase Plan.

(e) Stockholder Rights Agreement

On December 16, 2004, the Company entered into a Stockholder Rights Agreement (the “Rights Agreement”). Under the terms of the Rights Agreement, initially, the rights (“Rights”) will attach to all certificates representing shares of outstanding Company common stock and no separate rights certificates will be distributed. Subject to the provisions of the Rights Agreement, the Rights will separate from the Company common stock and the distribution date will occur upon the earlier of (i) ten business days following a public announcement that a person or group of affiliated or associated persons has acquired or obtained the right to acquire beneficial ownership of 15% or more of the then-outstanding common stock (an Acquiring Person), or (ii) ten business days (or such later date as may be determined by action of the Board) prior to such time as any person becomes an Acquiring Person following the commencement of a tender offer or exchange offer that would result in a person or group becoming an Acquiring Person. An Acquiring Person does not include certain persons specified in the Rights Agreement.

On December 16, 2004, the Board authorized and declared a dividend of one right (a Right) to purchase one one-hundredth of a share of the Company’s Series C Preferred Stock (Series C Preferred) for each outstanding share of common stock, par value $0.001, to stockholders of record as of the close of business December 27, 2004. Each Right entitles the registered holder, subject to the terms of the Rights Agreement, to purchase from the Company one one-hundredth of a share of Series C Preferred Stock at a purchase price of $54.00, subject to adjustment.

The Rights are not exercisable until the distribution date and will expire at the close of business on the tenth anniversary of the Rights Agreement unless earlier redeemed or exchanged by the Company.

- Definition

The entire disclosure for shareholders' equity, comprised of portions attributable to the parent entity and noncontrolling interest, if any, including other comprehensive income (as applicable). Including, but not limited to: (1) balances of common stock, preferred stock, additional paid-in capital, other capital and retained earnings; (2) accumulated balance for each classification of other comprehensive income and total amount of comprehensive income; (3) amount and nature of changes in separate accounts, including the number of shares authorized and outstanding, number of shares issued upon exercise and conversion, and for other comprehensive income, the adjustments for reclassifications to net income; (4) rights and privileges of each class of stock authorized; (5) basis of treasury stock, if other than cost, and amounts paid and accounting treatment for treasury stock purchased significantly in excess of market; (6) dividends paid or payable per share and in the aggregate for each class of stock for each period presented; (7) dividend restrictions and accumulated preferred dividends in arrears (in aggregate and per share amount); (8) retained earnings appropriations or restrictions, such as dividend restrictions; (9) impact of change in accounting principle, initial adoption of new accounting principle and correction of an error in previously issued financial statements; (10) shares held in trust for Employee Stock Ownership Plan (ESOP); (11) deferred compensation related to issuance of capital stock; (12) note received for issuance of stock; (13) unamortized discount on shares; (14) description, terms, and number of warrants or rights outstanding; (15) shares under subscription and subscription receivables, effective date of new retained earnings after quasi-reorganization and deficit eliminated by quasi-reorganization and, for a period of at least ten years after the effective date, the point in time from which the new retained dates; and (16) retroactive effective of subsequent change in capital structure.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
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-Name Accounting Principles Board Opinion (APB)
-Number 12
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Reference 2: http://www.xbrl.org/2003/role/presentationRef
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-Chapter 1
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+ Details

Segment Information

12 Months Ended

Dec. 25, 2011

Segment Information

Segment Information

Note 14. Segment Information

The Company operates in two principal business segments: Kratos Government Solutions and Public Safety & Security. The KGS segment provides products, solutions and services primarily for mission critical national security priorities. KGS customers primarily include national security related agencies, the DoD, intelligence agencies and classified agencies. The PSS segment provides independent integrated solutions for advanced homeland security, public safety, critical infrastructure, and security and surveillance systems for government and commercial applications. PSS customers are in the critical infrastructure, power generation, power transport, nuclear energy, financial, IT, healthcare, education, transportation and petro-chemical industries, as well as certain government and military customers.

The Company organizes its business segments based on the nature of the products and services offered. Transactions between segments are generally negotiated and accounted for under terms and conditions similar to other government and commercial contracts and these intercompany transactions are eliminated in consolidation. 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 of the business segments is reconciled to the corresponding consolidated amount. The reconciling item “corporate activities” 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 operating segments, and other miscellaneous corporate activities.

Revenues, operating income (loss) and assets disclosed below provided by the Company’s segments for the years ended December 27, 2009, December 26, 2010, and December 2, 2011, are as follows (in millions):

	2009			2010			2011
Revenues:
Kratos Government Solutions	$	304.3		$	372.2		$	601.7
Public Safety & Security	30.2			36.3			112.2
Total revenues	$	334.5		$	408.5		$	713.9
Depreciation and amortization:
Kratos Government Solutions	$	7.5		$	12.3		$	45.7
Public Safety & Security	0.8			0.6			2.3
Total depreciation and amortization	$	8.3		$	12.9		$	48.0
Operating income (loss) from continuing operations:
Kratos Government Solutions	$	(23.6	)	$	25.1		$	35.4
Public Safety & Security	(1.4		)	1.8			9.9
Corporate activities	(2.0		)	(3.8		)	(15.8		)
Total operating income (loss) from continuing operations	$	(27.0	)	$	23.1		$	29.5

Revenue from foreign subsidiaries was approximately $37.3 million or 5% of total revenue for the year ended December 25, 2011. There were no revenues from foreign subsidiaries for the years ended December 26, 2010 or December 27, 2009.

Amounts related to corporate activities were impacted by the following items in 2009, 2010 and 2011.

In 2009, the Company reached an agreement with the plaintiffs to settle the outstanding 2004 and 2007 derivative lawsuits. This resulted in a benefit in 2009 of $0.2 million as a result of the reduction in the estimated accrual related to this litigation offset by expenses related to government inquiries by the Department of Justice (“DOJ”) related to the Company’s historical stock option granting practices which was completed in 2009. In addition, in 2009, there was an expense of $0.6 million which was a result of a change in the Company’s excess facility accrual due to the consolidation of space at its corporate headquarters following the sale of the SYS commercial businesses and a cancellation of a sublease of one of its tenants due to financial difficulties.

In 2010, the Company reached a settlement with one of its directors’ and officers’ insurance carriers to cover costs related to its completed stock options and DOJ investigations. The settlement received, net of legal expenses was a $1.4 million benefit. This benefit was offset by expenses of $3.1 million related to merger and acquisition activities.

In 2010 and 2011, the Company had merger and acquisition expenses of approximately $3.1 million and $12.5 million, respectively.

	2010		2011
Assets:
Kratos Government Solutions	$	406.5	$	1,028.8
Public Safety & Security	98.1		88.6
Discontinued operations	0.5		12.1
Corporate activities	30.6		86.5
Total assets	$	535.7	$	1,216.0

The increase in assets in the KGS segment is primarily attributable to the acquisitions of Herley and Integral. The increase in assets in corporate activities is primarily due to an increase in cash and cash equivalents from the sale of $285.0 million and $115.0 million of Notes and the issuance of common stock during the year ended December 25, 2011, partially offset by the cash paid for the acquisitions of Herley and Integral. See Notes 3, 5 and 11. Assets of foreign subsidiaries were $0 and $47.2 million as of December 26, 2010 and December 25, 2011, respectively.

- Definition

The entire disclosure for reporting segments including data and tables. Reportable segments include those that meet any of the following quantitative thresholds a) it's reported revenue, including sales to external customers and intersegment sales or transfers is 10 percent or more of the combined revenue, internal and external, of all operating segments b) the absolute amount of its reported profit or loss is 10 percent or more of the greater, in absolute amount of 1) the combined reported profit of all operating segments that did not report a loss or 2) the combined reported loss of all operating segments that did report a loss c) its assets are 10 percent or more of the combined assets of all operating segments.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Statement of Financial Accounting Standard (FAS)
-Number 131
-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 2: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
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+ Details

Quarterly Financial Data (Unaudited)

12 Months Ended

Dec. 25, 2011

Quarterly Financial Data (Unaudited)

Quarterly Financial Data (Unaudited)

Note 16. Quarterly Financial Data (Unaudited)

The following financial information reflects all normal and recurring adjustments that are, in the opinion of management, necessary for a fair statement of the results of the interim periods. Summarized quarterly data for the years ended December 26, 2010 and December 25, 2011, is as follows (in millions, except per share data):

Quarterly Results in 2010

	First Quarter		Second Quarter			Third Quarter			Fourth Quarter
Fiscal year 2010
Revenues	$	68.7	$	99.1		$	119.9		$	120.8
Gross profit	$	15.2	$	19.9		$	24.4		$	24.8
Operating income from continuing operations	$	3.6	$	4.5		$	8.4		$	6.6
Provision (benefit) for income taxes	$	0.3	$	(11.7	)	$	(1.1	)	$	(0.2	)
Net income	$	0.2	$	10.7		$	3.2		$	0.4
Net income per common share:
Basic	$	0.02	$	0.67		$	0.20		$	0.02
Diluted	$	0.02	$	0.65		$	0.19		$	0.02

The quarterly increases in revenues and expenses are a result of the Company’s acquisitions. See Note 3.

During the second, third and fourth quarters, the Company incurred $1.1 million, $0.4 million and $1.6 million, respectively of expenses related to the Company’s acquisitions during those quarters.

In the second and third quarters, the benefit for income taxes of $12.2 million and $1.3 million, respectively, was a result of the release of valuation allowances against the Company’s deferred tax assets as a result of deferred tax liabilities that were established as the result of the Company’s acquisitions.

In the third quarter of 2010, the Company reached a settlement with one of its directors’ and officers’ insurance carriers to cover costs related to its completed stock options and DOJ investigations. The settlement received, net of legal expenses, was a $1.4 million benefit.

As a result of the impact of the issuance of 2.5 million shares in October 2010 on the Company’s quarterly and yearly weighted average basic and diluted shares outstanding, the sum of 2010 quarterly income per share does not equal the Company’s 2010 income per share. See Note 11.

Quarterly Results in 2011

	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
Fiscal year 2011
Revenues	$	122.8		$	171.1		$	206.6		$	213.4
Gross profit	$	27.4		$	45.4		$	59.0		$	59.4
Operating income from continuing operations	$	1.4		$	8.7		$	9.7		$	9.7
Provision (benefit) for income taxes	$	(1.2	)	$	0.9		$	1.6		$	0.6
Net loss	$	(3.5	)	$	(5.2	)	$	(6.9	)	$	(8.6	)
Net loss per common share:
Basic	$	(0.17	)	$	(0.22	)	$	(0.22	)	$	(0.25	)
Diluted	$	(0.17	)	$	(0.22	)	$	(0.22	)	$	(0.25	)

The quarterly increases in revenues and expenses are a result of the Company’s acquisitions. See Note 3.

During the first, second, third and fourth quarters, the Company incurred $5.8 million, $1.8 million, $3.7 million and $1.2 million, respectively of expenses related to the Company’s acquisitions during those quarters. Also included in the first, second, third, and fourth quarter is amortization of purchased intangibles of $3.4 million, $9.2 million, $11.9 million and $13.5 million, respectively. Certain of the lives of the intangible assets are relatively short in nature, ranging from 10 to 16 months. See Note 3.

As a result of the impact of the issuance of 4.9 million shares in February 2011 for the Herley acquisition and 10.4 million shares in July 2011 for the Integral acquisition, and the buyback of 2.0 million shares in November 2011 on the Company’s quarterly and yearly weighted average basic and diluted shares outstanding, the sum of 2011 quarterly loss per share does not equal the Company’s 2011 loss per share. See Note 3 and 11.

- Definition

The entire disclosure for the quarterly financial data in the annual financial statements. The disclosure may include a tabular presentation of financial information for each fiscal quarter for the current and previous year, including revenues, gross profit, income or loss before extraordinary items and earnings per share data. It also includes an indication if the information in the note is unaudited, comments on the aggregate effect of year-end adjustments, and an explanation of matters or transactions that affect comparability or are pertinent to an understanding of the information furnished.

+ References + Details

Condensed Consolidating Financial Statements

12 Months Ended

Dec. 25, 2011

Condensed Consolidating Financial Statements

Condensed Consolidating Financial Statements

Note 17. Condensed Consolidating Financial Statements

The Company has $625.0 million in outstanding Notes (See Note 5). The Notes are guaranteed by all of the Company’s 100% owned domestic subsidiaries (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 limiting cash transfers from Subsidiary Guarantors through 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, for 2011. In 2010, all Non-Guarantor Subsidiaries were minor and as a result condensed consolidating financial statements are not required for 2010. The consolidating financial information below follows the same accounting policies as described in the consolidated financial statements, except for the use of the equity method of accounting to reflect ownership interests in wholly-owned subsidiaries, which are eliminated upon consolidation.

Condensed Consolidating Balance Sheet

December 25, 2011

	Parent Company		Subsidiary Guarantors on a Combined Basis		Non- Guarantor Subsidiaries on a Combined Basis		Eliminations			Consolidated
Assets
Current Assets:
Cash and cash equivalents	$	52.6	$	2.8	$	14.2	$	—		$	69.6
Accounts receivable, net	—		225.4		19.9		—			245.3
Amounts due from affiliated companies	446.2		—		—		(446.2		)	—
Inventoried costs	—		64.2		12.4		—			76.6
Other current assets	6.7		18.4		4.4		—			29.5
Total current assets	505.5		310.8		50.9		(446.2		)	421.0
Property, plant and equipment, net	1.2		62.2		9.1		—			72.5
Goodwill	—		550.2		21.4		—			571.6
Intangible assets, net	—		119.8		4.8		—			124.6
Investment in subsidiaries	460.1		20.5		—		(480.6		)	—
Amounts due from affiliated companies	—		26.0		—		(26.0		)	—
Other assets	21.7		4.0		0.6		—			26.3
Total assets	$	988.5	$	1,093.5	$	86.8	$	(952.8	)	$	1,216.0
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	8.5	$	37.5	$	2.8	$	—		$	48.8
Accrued expenses	2.3		45.1		3.3		—			50.7
Accrued compensation	3.7		33.3		2.8		—			39.8
Billings in excess of costs and earnings on uncompleted contracts	—		34.3		1.9		—			36.2
Deferred income tax liability	—		8.5		—		—			8.5
Amounts due to affiliated companies	—		414.5		31.7		(446.2		)	—
Other current liabilities	5.9		21.7		2.2		—			29.8
Total current liabilities	20.4		594.9		44.7		(446.2		)	213.8
Long-term debt, net of current portion	647.8		—		5.8		—			653.6
Amounts due to affiliated companies	—		—		26.0		(26.0		)	—
Deferred income tax liability	—		2.5		—		—			2.5
Other long-term liabilities	7.7		23.8		2.0		—			33.5
Total liabilities	675.9		621.2		78.5		(472.2		)	903.4
Total stockholders’ equity	312.6		472.3		8.3		(480.6		)	312.6
Total liabilities and stockholders’ equity	$	988.5	$	1,093.5	$	86.8	$	(952.8	)	$	1,216.0

Condensed Consolidating Statement of Operations and Comprehensive Income

For the Year Ended December 25, 2011

	Parent Company			Subsidiary Guarantors on a Combined Basis			Non- Guarantor Subsidiaries on a Combined Basis			Eliminations			Consolidated
Service revenues	$	—		$	349.3		$	1.7		$	—		$	351.0
Product sales	—			327.4			46.9			(11.4		)	362.9
Total revenues	—			676.7			48.6			(11.4		)	713.9
Cost of service revenues	—			259.2			1.5			—			260.7
Cost of product sales	—			242.5			30.9			(11.4		)	262.0
Total costs	—			501.7			32.4			(11.4		)	522.7
Gross profit	—			175.0			16.2			—			191.2
Selling, general and administrative expenses	15.9			122.3			14.9			—			153.1
Research and development expenses	—			7.9			0.7			—			8.6
Operating income (loss) from continuing operations	(15.9		)	44.8			0.6			—			29.5
Other income (expense):
Interest expense, net	(50.8		)	0.1			(0.4		)	—			(51.1		)
Other income, net	0.3			0.4			(0.7		)	—			—
Total other income and expense, net	(50.5		)	0.5			(1.1		)	—			(51.1		)
Income (loss) from continuing operations before income taxes	(66.4		)	45.3			(0.5		)	—			(21.6		)
Provision (benefit) for income taxes from continuing operations	—			3.0			(1.1		)	—			1.9
Income (loss) from continuing operations	(66.4		)	42.3			0.6			—			(23.5		)
Income (loss) from discontinued operations	—			(0.8		)	0.1			—			(0.7		)
Equity in net income (loss) of subsidiaries	42.2			0.5			—			(42.7		)	—
Net income (loss)	$	(24.2	)		42.0		$	0.7		$	(42.7	)	$	(24.2	)
Comprehensive income (loss)	$	(24.4	)	$	41.7		$	0.8		$	(42.5	)	$	(24.4	)

Condensed Consolidating Statement of Cash Flows

For the Year Ended December 25, 2011

	Parent Company			Subsidiary Guarantors on a Combined Basis			Non- Guarantor Subsidiaries on a Combined Basis			Eliminations		Consolidated
Net cash provided by (used in) operating activities	$	(55.1	)	$	60.5		$	(0.2	)	$	—	$	5.2
Investing activities:
Cash paid for acquisitions, net of cash acquired	(421.0		)	18.0			11.9			—		(391.1		)
Decrease in restricted cash	1.4			1.6			—			—		3.0
Capital expenditures	(0.2		)	(6.3		)	(1.0		)	—		(7.5		)
Net cash provided by (used in) investing activities from continuing operations	(419.8		)	13.3			10.9			—		(395.6		)
Financing activities:
Proceeds from the issuance of long-term debt	425.7			—			—			—		425.7
Issuance of common stock, net of issuance proceeds	61.1			—			—			—		61.1
Purchase of treasury stock	(10.9		)	—			—			—		(10.9		)
Debt issuance costs	(22.1		)	—			—			—		(22.1		)
Repayment of debt	—			(2.6		)	(0.8		)	—		(3.4		)
Financing from affiliated companies	63.6			(68.6		)	5.0			—		—
Other, net	2.0			—			—			—		2.0
Net cash provided by (used in) financing activities from continuing operations	519.4			(71.2		)	4.2			—		452.4
Net cash flows of continuing operations	44.5			2.6			14.9			—		62.0
Net operating cash flows from discontinued operations	—			(2.2		)	(0.5		)	—		(2.7		)
Effect of exchange rate changes on cash and cash equivalents	—			(0.3		)	(0.2		)	—		(0.5		)
Net increase in cash and cash equivalents	$	44.5		$	0.1		$	14.2		$	—	$	58.8

Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Millions	Dec. 25, 2011	Dec. 26, 2010
Consolidated Balance Sheets
Series B Convertible Preferred Stock, shares authorized	5,000,000	5,000,000
Series B Convertible Preferred Stock, par value (in dollars per share)	$ 0.001	$ 0.001
Series B Convertible Preferred Stock, shares outstanding	0	10,000
Series B Convertible Preferred Stock, liquidation preference (in dollars)		$ 5.0
Common stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common stock, shares authorized	195,000,000	195,000,000
Common stock, shares issued	32,421,135	18,616,023
Common stock, shares outstanding	32,421,135	18,616,023

Consolidated Statements of Operations (Parenthetical)	12 Months Ended
Consolidated Statements of Operations (Parenthetical)	Dec. 25, 2011 USD ($)
Consolidated Statements of Operations
Change in cumulative translation adjustment tax portion	$ 0
Postretirement benefit reserve adjustment tax portion	$ 0