Document
false--12-27Q120200001069258P5YP3Y0.0010.00119500000019500000010663550810696082810663550810696082810000000115000000.1990.8010.0010.0015000000500000000100000 0001069258 2019-12-30 2020-03-29 0001069258 2020-05-01 0001069258 2019-12-29 0001069258 2020-03-29 0001069258 2018-12-31 2019-03-31 0001069258 us-gaap:ServiceMember 2019-12-30 2020-03-29 0001069258 us-gaap:ServiceMember 2018-12-31 2019-03-31 0001069258 us-gaap:ProductMember 2019-12-30 2020-03-29 0001069258 us-gaap:ProductMember 2018-12-31 2019-03-31 0001069258 us-gaap:CommonStockMember 2018-12-30 0001069258 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-12-30 0001069258 us-gaap:AdditionalPaidInCapitalMember 2019-03-31 0001069258 us-gaap:CommonStockMember 2019-03-31 0001069258 us-gaap:AdditionalPaidInCapitalMember 2018-12-31 2019-03-31 0001069258 us-gaap:RetainedEarningsMember 2018-12-31 2019-03-31 0001069258 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-03-31 0001069258 us-gaap:CommonStockMember 2018-12-31 2019-03-31 0001069258 us-gaap:RetainedEarningsMember 2019-03-31 0001069258 2018-12-30 0001069258 2019-03-31 0001069258 us-gaap:RetainedEarningsMember 2018-12-30 0001069258 us-gaap:AdditionalPaidInCapitalMember 2018-12-30 0001069258 us-gaap:NoncontrollingInterestMember 2018-12-30 0001069258 us-gaap:NoncontrollingInterestMember 2018-12-31 2019-03-31 0001069258 us-gaap:NoncontrollingInterestMember 2019-03-31 0001069258 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-12-30 2020-03-29 0001069258 us-gaap:NoncontrollingInterestMember 2019-12-29 0001069258 us-gaap:AdditionalPaidInCapitalMember 2020-03-29 0001069258 us-gaap:RetainedEarningsMember 2020-03-29 0001069258 us-gaap:AdditionalPaidInCapitalMember 2019-12-30 2020-03-29 0001069258 us-gaap:RetainedEarningsMember 2019-12-29 0001069258 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2020-03-29 0001069258 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-12-29 0001069258 us-gaap:CommonStockMember 2019-12-29 0001069258 us-gaap:NoncontrollingInterestMember 2020-03-29 0001069258 us-gaap:RetainedEarningsMember 2019-12-30 2020-03-29 0001069258 us-gaap:AdditionalPaidInCapitalMember 2019-12-29 0001069258 us-gaap:CommonStockMember 2020-03-29 0001069258 us-gaap:CommonStockMember 2019-12-30 2020-03-29 0001069258 ktos:FloridaTurbineTechnologiesInc.Member 2020-03-29 0001069258 ktos:FTTCoreLLCMember 2020-03-29 0001069258 ktos:FTTIncMember 2019-12-30 2020-03-29 0001069258 ktos:FTTIncMember 2019-02-27 2019-02-27 0001069258 ktos:FTTIncMember us-gaap:TradeNamesMember 2019-02-27 2019-02-27 0001069258 ktos:FTTIncMember us-gaap:CustomerRelationshipsMember 2019-02-27 2019-02-27 0001069258 ktos:FTTCoreLLCMember 2019-02-27 0001069258 ktos:FTTIncMember 2019-02-27 0001069258 ktos:FTTIncMember us-gaap:CommonStockMember 2019-12-30 2020-03-29 0001069258 ktos:FTTIncMember ktos:ContractsAndBacklogMember 2019-02-27 2019-02-27 0001069258 ktos:FTTIncMember 2018-12-31 2019-03-31 0001069258 ktos:TechnicalDirectionsInc.Member 2020-02-24 2020-02-24 0001069258 ktos:FTTIncMember us-gaap:CommonStockMember 2019-02-27 2019-02-27 0001069258 ktos:FloridaTurbineTechnologiesInc.Member 2019-02-27 0001069258 2019-02-27 0001069258 ktos:FTTIncMember us-gaap:InProcessResearchAndDevelopmentMember 2019-02-27 2019-02-27 0001069258 ktos:KratosGovernmentSolutionsMember 2018-12-31 2019-03-31 0001069258 ktos:UnitedStatesGovernmentMember ktos:KratosUnmannedSystemsMember 2019-12-30 2020-03-29 0001069258 ktos:NonUSGovernmentMember ktos:KratosUnmannedSystemsMember 2018-12-31 2019-03-31 0001069258 ktos:USCommercialMember ktos:KratosUnmannedSystemsMember 2019-12-30 2020-03-29 0001069258 ktos:UnitedStatesGovernmentMember ktos:KratosUnmannedSystemsMember 2018-12-31 2019-03-31 0001069258 ktos:KratosGovernmentSolutionsMember 2019-12-30 2020-03-29 0001069258 ktos:NonUSGovernmentMember ktos:KratosUnmannedSystemsMember 2019-12-30 2020-03-29 0001069258 ktos:UnitedStatesGovernmentMember ktos:KratosGovernmentSolutionsMember 2019-12-30 2020-03-29 0001069258 ktos:USCommercialMember ktos:KratosGovernmentSolutionsMember 2019-12-30 2020-03-29 0001069258 ktos:NonUSGovernmentMember ktos:KratosGovernmentSolutionsMember 2018-12-31 2019-03-31 0001069258 ktos:USCommercialMember ktos:KratosGovernmentSolutionsMember 2018-12-31 2019-03-31 0001069258 ktos:UnitedStatesGovernmentMember ktos:KratosGovernmentSolutionsMember 2018-12-31 2019-03-31 0001069258 ktos:KratosUnmannedSystemsMember 2019-12-30 2020-03-29 0001069258 ktos:KratosUnmannedSystemsMember 2018-12-31 2019-03-31 0001069258 ktos:USCommercialMember ktos:KratosUnmannedSystemsMember 2018-12-31 2019-03-31 0001069258 ktos:NonUSGovernmentMember ktos:KratosGovernmentSolutionsMember 2019-12-30 2020-03-29 0001069258 2021-01-01 2019-12-30 2020-03-29 0001069258 ktos:TforCMember us-gaap:UnbilledRevenuesMember 2020-03-29 0001069258 ktos:InternationalCustomerMember us-gaap:UnbilledRevenuesMember 2020-03-29 0001069258 2020-03-30 2019-12-30 2020-03-29 0001069258 us-gaap:TimeAndMaterialsContractMember ktos:KratosUnmannedSystemsMember 2018-12-31 2019-03-31 0001069258 ktos:CostPlusFeeContractMember ktos:KratosGovernmentSolutionsMember 2019-12-30 2020-03-29 0001069258 us-gaap:FixedPriceContractMember ktos:KratosGovernmentSolutionsMember 2019-12-30 2020-03-29 0001069258 ktos:CostPlusFeeContractMember ktos:KratosUnmannedSystemsMember 2018-12-31 2019-03-31 0001069258 ktos:CostPlusFeeContractMember ktos:KratosUnmannedSystemsMember 2019-12-30 2020-03-29 0001069258 us-gaap:TimeAndMaterialsContractMember ktos:KratosGovernmentSolutionsMember 2018-12-31 2019-03-31 0001069258 us-gaap:FixedPriceContractMember ktos:KratosGovernmentSolutionsMember 2018-12-31 2019-03-31 0001069258 us-gaap:TimeAndMaterialsContractMember ktos:KratosUnmannedSystemsMember 2019-12-30 2020-03-29 0001069258 us-gaap:FixedPriceContractMember ktos:KratosUnmannedSystemsMember 2019-12-30 2020-03-29 0001069258 us-gaap:FixedPriceContractMember ktos:KratosUnmannedSystemsMember 2018-12-31 2019-03-31 0001069258 us-gaap:TimeAndMaterialsContractMember ktos:KratosGovernmentSolutionsMember 2019-12-30 2020-03-29 0001069258 ktos:CostPlusFeeContractMember ktos:KratosGovernmentSolutionsMember 2018-12-31 2019-03-31 0001069258 ktos:InternationalCustomerMember us-gaap:UnbilledRevenuesMember 2019-12-29 0001069258 ktos:TforCMember us-gaap:UnbilledRevenuesMember 2019-12-29 0001069258 us-gaap:DiscontinuedOperationsDisposedOfBySaleMember ktos:HerleyIndustriesIncMember 2020-03-29 0001069258 us-gaap:DiscontinuedOperationsDisposedOfBySaleMember ktos:HerleyIndustriesIncMember 2019-12-29 0001069258 us-gaap:DisposalGroupHeldforsaleNotDiscontinuedOperationsMember ktos:PublicSafetyAndSecurityMember 2018-06-11 2018-06-11 0001069258 us-gaap:DisposalGroupHeldforsaleNotDiscontinuedOperationsMember ktos:PublicSafetyAndSecurityMember 2018-06-11 0001069258 us-gaap:DiscontinuedOperationsDisposedOfBySaleMember ktos:HerleyIndustriesIncMember 2018-12-31 2019-03-31 0001069258 us-gaap:DiscontinuedOperationsDisposedOfBySaleMember ktos:HerleyIndustriesIncMember 2019-12-30 2020-03-29 0001069258 ktos:KratosGovernmentSolutionsMember 2020-03-29 0001069258 ktos:KratosUnmannedSystemsMember 2020-03-29 0001069258 ktos:KratosGovernmentSolutionsMember 2019-12-29 0001069258 ktos:KratosUnmannedSystemsMember 2019-12-29 0001069258 us-gaap:TradeNamesMember 2019-12-29 0001069258 ktos:ContractsAndBacklogMember 2020-03-29 0001069258 us-gaap:CustomerRelationshipsMember 2020-03-29 0001069258 ktos:ContractsAndBacklogMember 2019-12-29 0001069258 us-gaap:DevelopedTechnologyRightsMember 2020-03-29 0001069258 us-gaap:DevelopedTechnologyRightsMember 2019-12-29 0001069258 us-gaap:InProcessResearchAndDevelopmentMember 2020-03-29 0001069258 us-gaap:TradeNamesMember 2020-03-29 0001069258 us-gaap:TradeNamesMember 2020-03-29 0001069258 us-gaap:TradeNamesMember 2019-12-29 0001069258 us-gaap:InProcessResearchAndDevelopmentMember 2019-12-29 0001069258 us-gaap:CustomerRelationshipsMember 2019-12-29 0001069258 ktos:StockOptionsAndStockAwardsMember 2019-12-30 2020-03-29 0001069258 ktos:StockOptionsAndStockAwardsMember 2018-12-31 2019-03-31 0001069258 2010-03-31 0001069258 2010-03-01 2010-03-31 0001069258 ktos:SixPointFivePercentSeniorSecuredNotesDue2025Member us-gaap:SeniorNotesMember 2017-11-30 0001069258 ktos:SevenPercentSeniorNotesDue2019Member us-gaap:SeniorNotesMember 2017-11-01 2017-11-30 0001069258 ktos:SixPointFivePercentSeniorSecuredNotesDue2025Member us-gaap:SeniorNotesMember 2020-03-29 0001069258 us-gaap:RevolvingCreditFacilityMember us-gaap:LondonInterbankOfferedRateLIBORMember 2019-12-30 2020-03-29 0001069258 ktos:SevenPercentSeniorNotesDue2019Member us-gaap:SeniorNotesMember 2017-11-30 0001069258 us-gaap:RevolvingCreditFacilityMember us-gaap:FederalFundsEffectiveSwapRateMember 2019-12-30 2020-03-29 0001069258 ktos:SixPointFivePercentSeniorSecuredNotesDue2025Member us-gaap:DebtInstrumentRedemptionPeriodTwoMember us-gaap:SeniorNotesMember 2017-11-01 2017-11-30 0001069258 ktos:SixPointFivePercentSeniorSecuredNotesDue2025Member us-gaap:DebtInstrumentRedemptionPeriodOneMember us-gaap:SeniorNotesMember 2017-11-01 2017-11-30 0001069258 srt:MaximumMember us-gaap:RevolvingCreditFacilityMember us-gaap:EurodollarMember 2019-12-30 2020-03-29 0001069258 us-gaap:LetterOfCreditMember 2017-11-20 0001069258 us-gaap:RevolvingCreditFacilityMember 2020-03-29 0001069258 us-gaap:RevolvingCreditFacilityMember 2017-11-20 0001069258 srt:MinimumMember us-gaap:RevolvingCreditFacilityMember us-gaap:BaseRateMember 2019-12-30 2020-03-29 0001069258 srt:MinimumMember us-gaap:RevolvingCreditFacilityMember us-gaap:EurodollarMember 2019-12-30 2020-03-29 0001069258 srt:MaximumMember us-gaap:RevolvingCreditFacilityMember us-gaap:BaseRateMember 2019-12-30 2020-03-29 0001069258 ktos:SwingLineLoanMember 2017-11-20 0001069258 us-gaap:LetterOfCreditMember 2020-03-29 0001069258 us-gaap:RevolvingCreditFacilityMember 2017-11-20 2017-11-20 0001069258 us-gaap:ProductMember ktos:KratosGovernmentSolutionsMember 2018-12-31 2019-03-31 0001069258 us-gaap:OperatingSegmentsMember ktos:KratosUnmannedSystemsMember 2018-12-31 2019-03-31 0001069258 us-gaap:ServiceMember ktos:KratosGovernmentSolutionsMember 2018-12-31 2019-03-31 0001069258 us-gaap:CorporateNonSegmentMember 2019-12-30 2020-03-29 0001069258 us-gaap:ServiceMember ktos:KratosGovernmentSolutionsMember 2019-12-30 2020-03-29 0001069258 us-gaap:ProductMember ktos:KratosGovernmentSolutionsMember 2019-12-30 2020-03-29 0001069258 us-gaap:CorporateNonSegmentMember 2018-12-31 2019-03-31 0001069258 us-gaap:OperatingSegmentsMember ktos:KratosUnmannedSystemsMember 2019-12-30 2020-03-29 0001069258 us-gaap:OperatingSegmentsMember ktos:KratosGovernmentSolutionsMember 2019-12-30 2020-03-29 0001069258 us-gaap:OperatingSegmentsMember ktos:KratosGovernmentSolutionsMember 2018-12-31 2019-03-31 0001069258 ktos:UnitedStatesGovernmentMember us-gaap:SalesRevenueNetMember us-gaap:GovernmentContractsConcentrationRiskMember 2019-12-30 2020-03-29 0001069258 ktos:UnitedStatesGovernmentMember 2018-12-31 2019-03-31 0001069258 ktos:UnitedStatesGovernmentMember 2019-12-30 2020-03-29 0001069258 ktos:UnitedStatesGovernmentMember us-gaap:SalesRevenueNetMember us-gaap:GovernmentContractsConcentrationRiskMember 2018-12-31 2019-03-31 iso4217:USD xbrli:shares xbrli:shares xbrli:pure iso4217:USD ktos:segment

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

FORM 10-Q
 
      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended March 29, 2020
or 
        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________ 
Commission file number 001-34460
 
 
KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware
13-3818604
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
10680 Treena St., Suite 600
San Diego, CA 92131
(858812-7300
(Address, including zip code, and telephone number, including
area code, of registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.001 par value
KTOS
The NASDAQ Global Select Market

 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ý  No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes ý  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
 
 
 
 
Non-accelerated filer
Smaller reporting company
 
 
 
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes   No 
As of May 1, 2020, 106,978,328 shares of the registrant’s common stock were outstanding.
 



KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
 
FORM 10-Q
 
FOR THE QUARTERLY PERIOD ENDED MARCH 29, 2020
 
INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements.
KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 (in millions, except par value and number of shares)
 
March 29, 2020
 
 
 
(Unaudited)
 
December 29, 2019
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
158.6

 
$
172.6

Accounts receivable, net
78.3

 
85.0

Unbilled receivables, net
181.0

 
179.4

Inventoried costs
62.7

 
61.1

Prepaid expenses
14.0

 
9.4

Other current assets
14.5

 
11.4

Current assets of discontinued operations
1.2

 
3.3

Total current assets
510.3

 
522.2

Property, plant and equipment, net
119.6

 
116.9

Operating lease right-of-use assets
39.8

 
42.1

Goodwill
463.3

 
455.6

Intangible assets, net
41.0

 
39.5

Other assets
9.3

 
9.7

Total assets
$
1,183.3

 
$
1,186.0

Liabilities and Stockholders Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
44.3

 
$
53.8

Accrued expenses
28.4

 
32.7

Accrued compensation
40.9

 
37.1

Accrued interest
6.4

 
1.6

Billings in excess of costs and earnings on uncompleted contracts
38.3

 
34.3

Current portion of operating lease liabilities
8.7

 
9.9

Other current liabilities
10.1

 
10.0

Current liabilities of discontinued operations
3.0

 
3.3

Total current liabilities
180.1

 
182.7

Long-term debt
295.3

 
295.1

Operating lease liabilities, net of current portion
36.0

 
37.6

Other long-term liabilities
73.9

 
78.7

Long-term liabilities of discontinued operations
2.8

 
2.8

Total liabilities
588.1

 
596.9

Commitments and contingencies (Note 14)


 


Redeemable noncontrolling interest
15.0

 
15.0

Stockholders equity:
 

 
 

Preferred stock, $0.001 par value, 5,000,000 shares authorized, 0 shares outstanding at March 29, 2020 and December 29, 2019

 

Common stock, $0.001 par value, 195,000,000 shares authorized; 106,960,828 and 106,635,508 shares issued and outstanding at March 29, 2020 and December 29, 2019, respectively

 

Additional paid-in capital
1,292.6

 
1,286.5

Accumulated other comprehensive loss
(0.2
)
 
(0.4
)
Accumulated deficit
(712.2
)
 
(712.0
)
Total stockholders equity
580.2

 
574.1

Total liabilities and stockholders equity
$
1,183.3

 
$
1,186.0

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

3


KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in millions, except per share amounts)
 (Unaudited)
 
Three Months Ended
 
March 29, 2020
 
March 31, 2019
Service revenues
$
63.6

 
$
62.6

Product sales
105.3

 
97.8

Total revenues
168.9

 
160.4

Cost of service revenues
45.2

 
42.0

Cost of product sales
77.9

 
73.5

Total costs
123.1

 
115.5

Gross profit
45.8

 
44.9

Selling, general and administrative expenses
34.9

 
31.5

Merger and acquisition expenses
0.4

 
1.2

Research and development expenses
5.7

 
3.9

Restructuring expenses and other
0.1

 
0.1

Operating income from continuing operations
4.7

 
8.2

Other expense:
 

 
 

Interest expense, net
(5.4
)
 
(5.5
)
Other expense, net
(0.5
)
 
(0.5
)
Total other expense, net
(5.9
)
 
(6.0
)
Income (loss) from continuing operations before income taxes
(1.2
)
 
2.2

Benefit for income taxes from continuing operations
(1.4
)
 
(1.5
)
Income from continuing operations
0.2

 
3.7

Discontinued operations:
 
 
 
Loss from operations of discontinued component
(0.4
)
 
(0.5
)
Income tax expense

 
(0.1
)
Loss from discontinued operations
(0.4
)
 
(0.6
)
Net income (loss)
(0.2
)
 
3.1

Less: Net income attributable to noncontrolling interest

 

Net income (loss) attributable to Kratos
$
(0.2
)
 
$
3.1

Basic income (loss) per common share attributable to Kratos:
 

 
 

Income from continuing operations
$

 
$
0.04

Loss from discontinued operations

 
(0.01
)
Net income per common share
$

 
$
0.03

Diluted income (loss) per common share attributable to Kratos:
 
 
 
Income from continuing operations
$

 
$
0.03

Loss from discontinued operations

 

Net income per common share
$

 
$
0.03

 
 
 
 
Weighted average common shares outstanding:
 
 
 
Basic
107.2

 
104.9

Diluted
110.1

 
107.8

Comprehensive Income
 
 
 
Net income (loss) (from above)
$
(0.2
)
 
$
3.1

Change in cumulative translation adjustment
0.2

 

Comprehensive income

 
3.1

Less: Comprehensive income attributable to noncontrolling interest

 

Comprehensive income attributable to Kratos
$

 
$
3.1

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

4



KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the three months ended March 31, 2019 and March 29, 2020
(in millions)
(Unaudited)

 
 
Redeemable Noncontrolling Interest
 
Common Stock
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Loss
 
Accumulated Deficit
 
Total Stockholders’ Equity
 
 
 
Shares
 
Amounts
 
 
 
 
Balance, December 30, 2018
 
$

 
103.8

 
$

 
$
1,244.5

 
$
(0.7
)
 
$
(724.5
)
 
$
519.3

Stock-based compensation
 

 

 

 
2.6

 

 

 
2.6

Issuance of common stock for employee stock purchase plan, options and warrants
 

 
0.2

 

 
1.7

 

 

 
1.7

Restricted stock issued and related taxes
 

 
0.1

 

 
(0.8
)
 

 

 
(0.8
)
Issuance of common stock for acquisitions
 

 
1.8

 

 
27.0

 

 

 
27.0

Net income
 

 

 

 

 

 
3.1

 
3.1

Changes in noncontrolling interest
 
15.0

 

 

 

 

 

 

Balance, March 31, 2019
 
$
15.0

 
105.9

 
$

 
$
1,275.0

 
$
(0.7
)
 
$
(721.4
)
 
$
552.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Redeemable Noncontrolling Interest
 
Common Stock
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Loss
 
Accumulated Deficit
 
Total Stockholders’ Equity
 
 
 
Shares
 
Amounts
 
 
 
 
Balance, December 29, 2019
 
$
15.0

 
106.6

 
$

 
$
1,286.5

 
$
(0.4
)
 
$
(712.0
)
 
$
574.1

Stock-based compensation
 

 

 

 
4.7

 

 

 
4.7

Issuance of common stock for employee stock purchase plan, options and warrants
 

 
0.2

 

 
2.6

 

 

 
2.6

Restricted stock issued and related taxes
 

 
0.2

 

 
(1.2
)
 

 

 
(1.2
)
Net loss
 

 

 

 

 

 
(0.2
)
 
(0.2
)
Other comprehensive income, net of tax
 

 

 

 

 
0.2

 

 
0.2

Balance, March 29, 2020
 
$
15.0

 
107.0

 
$

 
$
1,292.6

 
$
(0.2
)
 
$
(712.2
)
 
$
580.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


5



KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
 
Three Months Ended
 
March 29, 2020
 
March 31, 2019
Operating activities:
 

 
 
Net income (loss)
$
(0.2
)
 
$
3.1

Loss from discontinued operations
(0.4
)
 
(0.6
)
Income from continuing operations
0.2

 
3.7

Adjustments to reconcile income from continuing operations to net cash provided by operating activities from continuing operations:
 

 
 

Depreciation and amortization
6.3

 
5.1

Amortization of lease right-of-use assets
2.9

 
3.7

Stock-based compensation
4.7

 
2.6

Deferred income taxes
(1.0
)
 
(3.4
)
Amortization of deferred financing costs
0.2

 
0.2

Provision for doubtful accounts
0.3

 

Changes in assets and liabilities, net of acquisitions:
 

 
 

Accounts receivable
6.6

 
(9.0
)
Unbilled receivables
(1.5
)
 
19.7

Inventoried costs
(1.5
)
 
(10.8
)
Prepaid expenses and other assets
(6.8
)
 
(1.1
)
Operating lease liabilities
(3.4
)
 
2.8

Accounts payable
(9.6
)
 
(0.8
)
Accrued expenses
(4.4
)
 
(2.7
)
Accrued compensation
3.7

 
3.1

Advance payments received on contracts

 
0.1

Accrued interest
4.9

 
4.9

Billings in excess of costs and earnings on uncompleted contracts
3.4

 
3.0

Income tax receivable and payable
(0.9
)
 
1.4

Other liabilities
(0.1
)
 
(6.5
)
Net cash provided by operating activities from continuing operations
4.0

 
16.0

Investing activities:
 

 
 

Cash paid for acquisitions, net of cash acquired
(14.2
)
 
(17.6
)
Capital expenditures
(6.4
)
 
(4.0
)
Net cash used in investing activities from continuing operations
(20.6
)
 
(21.6
)
Financing activities:
 
 
 

Payments under finance leases
(0.1
)
 
(0.1
)
Proceeds from exercise of restricted stock units, employee stock options, and employee stock purchase plan
1.4

 
0.9

Net cash provided by financing activities from continuing operations
1.3

 
0.8

Net cash flows of continuing operations
(15.3
)
 
(4.8
)
Net operating cash flows of discontinued operations
1.3

 
0.3

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 
(0.1
)
Net decrease in cash, cash equivalents and restricted cash
(14.0
)
 
(4.6
)
Cash, cash equivalents and restricted cash at beginning of period
172.6

 
183.0

Cash, cash equivalents and restricted cash at end of period
$
158.6

 
$
178.4


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

6


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

 The information as of March 29, 2020 and for the three months ended March 29, 2020 and March 31, 2019 is unaudited. The condensed consolidated balance sheet as of December 29, 2019 was derived from the Company’s audited consolidated financial statements at that date. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods presented. The results have been prepared in accordance with the instructions to Form 10-Q and do not necessarily include all information and footnotes necessary for presentation in accordance with accounting principles generally accepted in the U.S. (“GAAP”). These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes included in the Company’s audited annual consolidated financial statements for the fiscal year ended December 29, 2019, included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 24, 2020 (the “Form 10-K”). Interim operating results are not necessarily indicative of operating results expected in subsequent periods or for the year as a whole.

(b)
Principles of Consolidation
 
The condensed consolidated financial statements include the accounts of the Company, its 100% owned subsidiaries and its majority owned subsidiaries, FTT Inc. and FTT Core, each of which is 80.1% owned. All inter-company transactions have been eliminated in consolidation. Noncontrolling interest consists of the remaining 19.9% interest in FTT Inc. and FTT Core. See Note 12 for further information related to the redeemable noncontrolling interest.
 
(c)
Fiscal Year
 
The Company has a 52/53 week fiscal year ending on the last Sunday of the calendar year. The three month periods ended March 29, 2020 and March 31, 2019 consisted of 13-week periods. There are 52 calendar weeks in the fiscal years ending on December 27, 2020 and December 29, 2019.
 
(d)    Accounting Estimates

There have been no significant changes in the Company’s accounting estimates for the three months ended March 29, 2020 as compared to the accounting estimates described in the Form 10-K.

(e)    Accounting Standards Updates


In June 2016, the FASB issued ASU 2016-13 (“ASU 2016-13”), Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The main objective of this update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company has adopted ASU 2016-13 effective December 30, 2019. The implementation of this guidance did not have a material impact on its unaudited condensed consolidated financial statements.


7


(f)
Fair Value of Financial Instruments
 
The carrying amounts and the related estimated fair values of the Company’s long-term debt financial instruments not measured at fair value on a recurring basis at March 29, 2020 and December 29, 2019 are presented in Note 10. The carrying value of all other financial instruments, including cash equivalents, accounts receivable, unbilled receivables, accounts payable, accrued expenses, billings in excess of cost and earnings on uncompleted contracts, income taxes payable and short-term debt, approximated their estimated fair values at March 29, 2020 and December 29, 2019 due to the short-term nature of these instruments.

Note 2. Acquisitions

FTT Entities

On February 27, 2019, the Company acquired 80.1% of the issued and outstanding shares of capital stock of Florida Turbine Technologies Inc., a Florida corporation (“FTT Inc.”), and 80.1% of the membership interests in FTT CORE, LLC, a Delaware limited liability company (“FTT Core” and, together with FTT Inc. and their respective subsidiaries, “FTT”), for an aggregate purchase price of approximately $60 million. The purchase price was $33 million in cash, with approximately $17.7 million paid at close and approximately $15.3 million to be paid over a three-year period, subject to adjustments for transaction expenses, indebtedness, cash on hand, certain amounts payable or potentially payable to employees of FTT and post-closing working capital adjustments, and 1,825,406 shares of common stock (with a value of approximately $27 million). During the quarter ended March 29, 2020, approximately $4.7 million of the remaining purchase price was paid.

FTT is a leading turbomachinery design and manufacturing company specializing in engineering, development, and testing of gas turbines, propulsion components, engine and other systems for military and commercial applications. FTT is now the Kratos Turbine Technologies Division (the “KTT Division”), which is focused on the development and production of small, affordable, high-performance jet engines for the next generation of tactical weapon systems and tactical jet unmanned aerial systems. The KTT Division is included in 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 goodwill represents the value the Company expects to be created by enabling it to accelerate FTT’s small engine development programs, and facilitate integration of these leading-edge engine solutions with evolving Kratos tactical systems.

Simultaneously with the execution of the Purchase Agreement among the Company and the Sellers (as defined in such agreement) (the “Purchase Agreement”) and completion of the acquisition, the Company, FTT Inc., FTT Core and the Sellers entered into an exchange agreement (the “Exchange Agreement”) pursuant to which, among other things, (i) FTT Core was converted into a Delaware corporation, (ii) beginning in January 2024, the Holders (as defined in the Exchange Agreement) will have an annual right (the “Put Right”) to sell all of the minority interests in FTT Inc. and FTT Core (the “Minority Interests”) to the Company at a purchase price based on a specified multiple of the trailing 12 months EBITDA of FTT Inc., FTT Core and each of their respective subsidiaries (the “Acquired Companies”), subject to adjustment as set forth in the Exchange Agreement (the “Minority Interest Purchase Price”) (provided, however, that following certain events, including a change of control, the Put Right will be accelerated and the Minority Interest Purchase Price will be a specified increased multiple of the trailing 12 months EBITDA of the Acquired Companies), and (iii) beginning in January 2025, the Company will have an annual right to purchase all of the Minority Interests from the Holders at the Minority Interest Purchase Price.

8


The transaction has been accounted for using the acquisition method of accounting, which requires, among other things, that the assets acquired, the liabilities assumed, and the noncontrolling interest be recognized at their fair values as of the acquisition date. The fair value measurements are based primarily on significant inputs not observable in the marketplace and thus represent Level 3 measurements. The following table summarizes the allocation of the purchase price over the estimated fair values of the major assets acquired, liabilities assumed, and noncontrolling interest (in millions):

Accounts receivable
 
$
8.1

Unbilled receivables
 
4.9

Inventoried costs
 
7.8

Other current assets
 
2.1

Property and equipment
 
5.7

Intangible assets
 
30.8

Goodwill
 
23.0

  Total identifiable net assets acquired
 
82.4

Total identifiable net liabilities assumed
 
(7.5
)
  Net assets before noncontrolling interest
 
74.9

Noncontrolling interest
 
(14.9
)
  Net assets acquired, excluding cash
 
$
60.0

 
 
 


As of February 27, 2019, net liabilities included $7.5 million of current liabilities. There was no contingent purchase consideration associated with the acquisition of an 80.1% majority interest in FTT. The identifiable intangible assets include customer relationships of $19.7 million with a useful life of 13 years, in-process research and development of $8.5 million that will commence amortization at the completion of the development project, backlog of $2.1 million with a useful life of two years, and trade name of $0.5 million with a useful life of two years. The Company also established a deferred tax liability of $7.0 million for the increase in the financial statement basis of the acquired assets of FTT and a corresponding increase in goodwill. The goodwill recorded in this transaction is not expected to be tax-deductible.

The amounts of revenue and operating income of FTT included in the Company's condensed consolidated statement of operations for the three months ended March 31, 2019 were $4.2 million and $0.1 million, respectively. Included in the merger and acquisition expenses for the three months ended March 31, 2019 were transaction expenses of $1.2 million related to the acquisition of FTT.

A summary of the consideration paid for the acquired ownership in FTT is as follow:
Cash paid
 
$
20.7

Deferred purchase consideration
 
15.3

Common stock issued
 
27.0

 
 
63.0

Less: Cash acquired
 
(3.0
)
Total consideration
 
$
60.0

 
 
 


Pro Forma Financial Information

The following tables summarize the supplemental condensed consolidated statements of operations information on an unaudited pro forma basis as if the acquisition of FTT occurred on December 31, 2018 and include adjustments that were directly attributable to the foregoing transactions. There are no material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The pro forma results are for illustrative purposes only for the applicable period and do not purport to be indicative of the actual results that would have occurred had the transaction been completed as of the beginning of the period, nor are they indicative of results of operations that may occur in the future:


9


For the three months ended March 31, 2019 (all amounts, except per share amounts, are in millions):
Pro forma revenues
$
168.5

Pro forma net income before tax
$
1.3

Pro forma net income
$
2.2

Pro forma net income attributable to Kratos
$
2.4

 
 
Basic pro forma income per share attributable to Kratos
$
0.02

Diluted pro forma income per share attributable to Kratos
$
0.02

 
 


The weighted average common shares used to calculate income per share also reflects the issuance of 1,825,406 shares of our common stock in conjunction with the acquisition. Comparable amounts for the three months ended March 29, 2020 are not presented as the results for FTT for the quarter were fully included in the condensed consolidated financial statements.

Technical Directions, Inc.

On February 24, 2020, the Company acquired Technical Directions, Inc.(“TDI”), a turbine technology company focused on tactical unmanned aerial drones, missile and other systems for approximately $10.5 million in cash, subject to adjustments for transaction expenses, indebtedness, cash on hand, and post-closing working capital adjustments. The allocation of the total consideration for this acquisition to the tangible and identifiable intangible assets acquired and liabilities assumed is preliminary until the Company obtains final information regarding their fair values. However, the Company does not expect any adjustment to such allocations to be material to the Company's unaudited condensed consolidated financial statements. The operating results of the acquisition have been included in the Company’s results of operations from the effective acquisition date. The amount of net sales and earnings of TDI included in the condensed consolidated statement of operations for the three months ended March 29, 2020 are not material. Had the acquisition occurred as of December 29, 2019, net sales, net income from consolidated operations, net income attributable to Kratos, and basic and diluted net income per share attributable to Kratos on a pro forma basis for the three months ended March 29, 2020 would not have been materially different than the reported amounts.

Note 3. Revenue Recognition

The Company recognizes revenue in accordance with Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”). Under ASC 606 revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration that the Company expects to be entitled to receive in exchange for these goods or services.

To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. Once the contract is identified and determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

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

10



Remaining Performance Obligations

The Company calculates revenues from remaining performance obligations as the dollar value of the remaining performance obligations on executed contracts. On March 29, 2020, the Company had approximately $646.8 million of remaining performance obligations. The Company expects to recognize approximately 54% of the remaining performance obligations as revenue in 2020, an additional 22% by 2021, and the balance thereafter.

Contract Estimates

Due to the nature of the work required to be performed on many performance obligations, the estimation of total revenue and cost at completion is complex, subject to many variables and requires significant judgment. On a quarterly basis, the Company conducts its contract cost Estimate at Completion (“EAC”) process by reviewing the progress and execution of outstanding performance obligations within its contracts. As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities and the related changes in estimates of revenues and costs. The risks and opportunities include management’s judgment about the ability and cost to achieve the schedule (e.g., the number and type of milestone events), technical requirements (e.g., a newly-developed product versus a mature product) and other contract requirements. Management must make assumptions and estimates regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation (e.g., to estimate increases in wages and prices for materials and related support cost allocations), execution by subcontractors, the availability and timing of funding from customers and overhead cost rates, among other variables.

In addition, certain of the Company’s long-term contracts contain award fees, incentive fees, or other provisions that can either increase or decrease the transaction price. These variable amounts generally are awarded upon achievement of certain performance metrics, program milestones or cost targets and can be based upon customer discretion. Variable consideration is estimated at the most likely amount to which the Company is expected to be entitled. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information (historical, current and forecasted) that is reasonably available.

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

As a result of the EAC process, any quarterly adjustments to revenues, cost of sales, and the related impact to operating income are recognized as necessary in the period they become known. These adjustments may result from positive program performance, and may result in an increase in operating income during the performance of individual performance obligations, if it is determined the Company will be successful in mitigating risks surrounding the technical, schedule and cost aspects of those performance obligations or realizing related opportunities. Likewise, these adjustments may result in a decrease in operating income if it is determined the Company will not be successful in mitigating these risks or realizing related opportunities. Changes in estimates of net sales, cost of sales and the related impact to operating income are recognized quarterly on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current and prior periods. A significant change in one or more of these estimates could affect the profitability of one or more of the Company’s contracts. When estimates of total costs to be incurred on a performance obligation exceed total estimates of revenue to be earned, a provision for the entire loss on the performance obligation is recognized in the period the loss is determined. No cumulative catch-up adjustment on any one contract was material to the Company’s unaudited condensed consolidated financial statements for the three-month periods ended March 29, 2020, and March 31, 2019. Likewise, total cumulative catch-up adjustments were not material for the three-month periods ended March 29, 2020, and March 31, 2019.

Contract Assets and Liabilities

For each of the Company’s contracts, the timing of revenue recognition, customer billings, and cash collections results in a net contract asset or liability at the end of each reporting period. Fixed-price contracts are typically billed to the customer

11


either using progress payments, whereby amounts are billed monthly as costs are incurred or work is completed, or performance based payments, which are based upon the achievement of specific, measurable events or accomplishments defined and valued at contract inception. Cost-type contracts are typically billed to the customer on a monthly or semi-monthly basis.

Contract assets consist of unbilled receivables, primarily related to long-term contracts where revenue recognized under the cost-to-cost method exceeds amounts billed to customers. Unbilled receivables are classified as current assets and, in accordance with industry practice, include amounts that may be billed and collected beyond one year due to the long term nature of many of the Company’s contracts. Accumulated contract costs in unbilled receivables include direct production costs, factory and engineering overhead, production tooling costs, and, for government contracts, recovery of allowable general and administrative expenses. Unbilled receivables also include certain estimates of variable consideration described above. The Company’s contracts that give rise to contract assets are not considered to include a significant financing component as the payment terms are intended to protect the customer in the event the Company does not perform on its obligations under the contract.

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

Net contract assets and liabilities are as follows (in millions):
 
March 29, 2020
 
December 29, 2019
 
Net Change
Contract assets
$
181.0

 
$
179.4

 
$
1.6

Contract liabilities
$
38.3

 
$
34.3

 
$
4.0

Net contract assets
$
142.7

 
$
145.1

 
$
(2.4
)


Contract assets increased $1.6 million during the year ended March 29, 2020, primarily due to the recognition of revenue related to the satisfaction or partial satisfaction of performance obligations during the quarter ended March 29, 2020, for which the Company has not yet billed the customers. There were no significant impairment losses related to any receivables or contract assets arising from the Company’s contracts with customers during the three months ended March 29, 2020. Contract liabilities increased $4.0 million during the quarter ended March 29, 2020, primarily due to payments received in excess of revenue recognized on these performance obligations. For the three months ended March 29, 2020 and March 31, 2019 the Company recognized revenue of $14.3 million and $15.9 million, respectively, that was previously included in the beginning balance of contract liabilities.

In November 2019, a large training solutions program was terminated for convenience (“T for C”) by the customer. Under a T for C, a contractor is entitled to seek specified costs through a termination settlement process including (1) the contract price for completed supplies and services accepted by the government but not previously paid for; (2) the cost incurred in the performance of work terminated plus a reasonable profit on those costs; and (3) its costs incurred in settling with subcontractors and preparing and settling the termination proposal. Under a T for C, the Company would not be able to collect the total withheld amounts until the settlement terms of the T for C have been negotiated and agreed to with the customer. At March 29, 2020 and December 29, 2019, approximately $11.5 million in unbilled receivables remained outstanding on this project. In addition, the Company is currently in dispute with an international customer in the US segment over approximately $10.0 million in unbilled receivables outstanding as of March 29, 2020 and December 29, 2019. The dispute concerns the completion of certain system requirements and certain contractual milestones. Although there could be a delay in billing and collecting amounts due to the Company under the aforementioned contracts, management has evaluated the present facts of the matters and performed a reassessment of the contractual amounts due and has determined that no adjustment to previously recognized revenue, or the corresponding unbilled receivables, is necessary at March 29, 2020.

12



Disaggregation of Revenue

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

Three Months Ended
 
March 29, 2020

March 31, 2019
Kratos Government Solutions
 
 
 
Fixed price
$
104.4

 
$
109.1

Cost plus fee
14.4

 
9.2

Time and materials
8.1

 
7.2

Total Kratos Government Solutions
126.9

 
125.5

Unmanned Systems
 
 
 
Fixed price
27.3

 
27.2

Cost plus fee
14.1

 
7.4

Time and materials
0.6

 
0.3

Total Unmanned Systems
42.0

 
34.9

Total Revenues
$
168.9

 
$
160.4


Revenue by customer was as follows (in millions):
 
Three Months Ended
 
March 29, 2020

March 31, 2019
Kratos Government Solutions
 
 
 
U.S. Government (1)
$
84.7

 
$
86.8

International (2)
28.0

 
24.9

U.S. Commercial and other customers
14.2

 
13.8

Total Kratos Government Solutions
126.9

 
125.5

Unmanned Systems
 
 
 
U.S. Government (1)
39.4

 
30.1

International (2)
2.4

 
4.5

U.S. Commercial and other customers
0.2

 
0.3

Total Unmanned Systems
42.0

 
34.9

Total Revenues
$
168.9

 
$
160.4



(1) Sales to the U.S. Government include sales from contracts for which the Company is the prime contractor, as well as those for which the
Company is a subcontractor and the ultimate customer is the U.S. Government. Each of the Company’s segments derives substantial revenue
from the U.S. Government. These sales include foreign military sales contracted through the U.S. Government.

(2) International sales include sales from contracts for which the Company is the prime contractor, as well as those for which the Company is a
subcontractor and the ultimate customer is an international customer. These sales include direct sales with governments outside the U.S. and
commercial sales with customers outside the U.S.

Note 4. Discontinued Operations

On February 28, 2018, the Company entered into a Stock Purchase Agreement to sell the operations of Kratos Public Safety & Security Solutions, Inc., a Delaware corporation and wholly owned subsidiary of the Company (“PSS”), to Securitas Electronic Security, Inc., a Delaware corporation (“Buyer”). On June 11, 2018, the Company completed the sale of all of the issued and outstanding capital stock of PSS to Buyer for a purchase price of $69 million in cash, subject to a closing net

13


working capital adjustment (the “Transaction”). The Company and the Buyer are currently in a dispute regarding the closing net working capital adjustment. The amount in dispute is approximately $8 million.

To date, the Company has collected approximately $5.6 million of the retained net working capital. The Company currently expects that the remaining net working capital retained by the Company will be collected during 2020 once certain legacy projects are completed and the project close-out process has been completed. The Company currently expects to recognize a net approximate break-even on the sale of the PSS business once the aggregate net proceeds described above have been collected, excluding the impact of the final settlement and determination of the closing net working capital adjustment. Any changes or adjustments to the expected net proceeds will be reflected in future periods.

The following table presents the results of discontinued operations (in millions):
 
Three Months Ended
 
March 29, 2020

March 31, 2019
Revenue
$

 
$
0.1

Cost of sales
0.1

 
0.5

Selling, general and administrative expenses
0.3

 
0.1

Loss from discontinued operations before income taxes
(0.4
)
 
(0.5
)
Income tax expense

 
(0.1
)
Loss from discontinued operations
$
(0.4
)

$
(0.6
)


Revenue and operating results for the three months ended March 29, 2020 and March 31, 2019 reflected the performance on contracts, and working capital retained by the Company.

The following is a summary of the assets and liabilities of discontinued operations in the accompanying condensed consolidated balance sheets as of March 29, 2020 and December 29, 2019 (in millions):
 
March 29, 2020
 
December 29, 2019
Accounts receivable, net
$
1.2

 
$
3.3

Current assets of discontinued operations
$
1.2

 
$
3.3

 
 
 
 
Accounts payable
$
0.2

 
$
0.2

Accrued expenses
0.1

 
0.3

Other current liabilities
2.7

 
2.8

Current liabilities of discontinued operations
$
3.0

 
$
3.3

Other long-term liabilities of discontinued operations
$
2.8

 
$
2.8




14


Note 5. Goodwill and Intangible Assets
 
(a)
Goodwill
 
The carrying amounts of goodwill as of March 29, 2020 and December 29, 2019 by reportable segment are as follows (in millions):
 
As of March 29, 2020
 
Kratos Government Solutions
 
Unmanned Systems
 
Total
Gross value
$
597.8

 
$
118.8

 
$
716.6

Less accumulated impairment
239.5

 
13.8

 
253.3

Net
$
358.3

 
$
105.0

 
$
463.3

 
 
 
 
 
 


 
As of December 29, 2019
 
Kratos Government Solutions
 
Unmanned Systems
 
Total
Gross value
$
597.8

 
$
111.1

 
$
708.9

Less accumulated impairment
239.5

 
13.8

 
253.3

Net
$
358.3

 
$
97.3

 
$
455.6

 
 
 
 
 
 


(b)    Purchased Intangible Assets
 
The following table sets forth information for finite-lived and indefinite-lived intangible assets (in millions): 
 
As of March 29, 2020
 
As of December 29, 2019
 
Gross
Value
 
Accumulated
Amortization
 
Net
Value
 
Gross
Value
 
Accumulated
Amortization
 
Net
Value
Acquired finite-lived intangible assets:
 

 
 

 
 
 
 

 
 

 
 
Customer relationships
$
73.0

 
$
(54.0
)
 
$
19.0

 
$
72.3

 
$
(53.3
)
 
$
19.0

Contracts and backlog
32.7

 
(29.0
)
 
3.7

 
32.0

 
(28.4
)
 
3.6

Developed technology and technical know-how
26.4

 
(24.4
)
 
2.0

 
25.0

 
(23.8
)
 
1.2

Trade names
1.9

 
(1.7
)
 
0.2

 
1.9

 
(1.6
)
 
0.3

In-process research and development
9.2

 

 
9.2

 
8.5

 

 
8.5

Total finite-lived intangible assets
143.2

 
(109.1
)
 
34.1

 
139.7

 
(107.1
)
 
32.6

Indefinite-lived trade names
6.9

 

 
6.9

 
6.9

 

 
6.9

Total intangible assets
$
150.1

 
$
(109.1
)
 
$
41.0

 
$
146.6

 
$
(107.1
)
 
$
39.5



Consolidated amortization expense related to intangible assets subject to amortization was $1.9 million and $1.5 million for the three months ended March 29, 2020 and March 31, 2019, respectively.


15


Note 6. Inventoried Costs
 
Inventoried costs, consisted of the following components (in millions):
 
 
March 29, 2020
 
December 29, 2019
Raw materials
$
43.5

 
$
39.1

Work in process
17.4

 
20.3

Finished goods
1.8

 
1.7

Total inventoried costs
$
62.7

 
$
61.1


 
Note 7. Net Income (Loss) per Common Share
 
The Company calculates net income (loss) per share in accordance with FASB Accounting Standards Codification Topic 260, Earnings per Share (Topic 260). Under Topic 260, basic net income (loss) per common share attributable to the Kratos shareholders is calculated by dividing net income (loss) attributable to Kratos by the weighted-average number of common shares outstanding during the reporting period. Diluted net income (loss) per common share attributable to the Kratos shareholders reflects the effects of potentially dilutive securities. The dilutive impact of potentially dilutive common shares is determined by applying the treasury stock method.

Shares from stock options and awards, excluded from the calculation of diluted net income (loss) per share because their inclusion would have been anti-dilutive, were 0.9 million for the three months ended March 29, 2020, and 0.0 million for the three months ended March 31, 2019.
 
Note 8. Leases

The Company leases certain facilities, office space, vehicles and equipment. Lease assets and lease liabilities are recognized at the commencement of an arrangement where it is determined at inception that a lease exists. Lease assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using an incremental borrowing rate generally applicable to the location of the lease asset, unless the implicit rate is readily determinable. Lease assets also include any upfront lease payments made and exclude lease incentives. Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised. The Company has operating lease arrangements with lease and non-lease components. The non-lease components in these arrangements are not significant when compared to the lease components. For all operating leases, the Company accounts for the lease and non-lease components as a single component.

Variable lease payments are generally expensed as incurred. Leases with an initial term of 12 months or less are not recorded on the balance sheet, and the expense for these short-term leases is recognized on a straight-line basis over the lease term.

The depreciable life of lease assets and leasehold improvements is limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.



16


The components of lease expense were as follows (in millions):
 
Three Months Ended
 
March 29, 2020
 
March 31, 2019
Amortization of right of use assets - finance leases
$
0.5

 
$
0.5

Interest on lease liabilities - finance leases
0.6

 
0.6

Operating lease cost (cost resulting from lease payments)
3.5

 
3.0

Short-term lease cost
0.2

 
0.1

Variable lease cost (cost excluded from lease payments)

 

Sublease income
(0.8
)
 
(0.8
)
Total lease cost
$
4.0

 
$
3.4

 
 
 
 


The components of leases on the balance sheet were as follows (in millions):
 
March 29, 2020
 
December 29, 2019
Operating Leases:
 
 
 
Operating lease right-of-use assets
$
39.8

 
$
42.1

Current portion of operating lease liabilities
$
8.7

 
$
9.9

Operating lease liabilities, net of current portion
$
36.0

 
$
37.6

Finance leases:
 
 
 
Property, plant and equipment, net
$
37.9

 
$
38.1

Other current liabilities
$
0.7

 
$
0.6

Other long-term liabilities
$
38.6

 
$
38.4



Cash paid for amounts included in the measurement of lease liabilities was as follows (in millions):
 
Three Months Ended
 
March 29, 2020
 
March 31, 2019
Finance lease - cash paid for interest
$
0.6

 
$
0.6

Finance lease - financing cash flows
$
0.1

 
$
0.1

Operating lease - operating cash flows (fixed payments)
$
4.1

 
$
3.3


Other supplemental noncash information (in millions):
 
Three Months Ended
 
March 29, 2020
 
March 31, 2019
Operating lease liabilities arising from obtaining right-of-use assets, including impact of ASC 842 adoption
$
0.5

 
$
41.2

Finance lease liabilities arising from obtaining right-of-use assets, including impact of ASC 842 adoption
$
0.4

 
$
39.6

 
 
 
 
Weighted-average remaining lease term (in years):
 
 
 
Operating leases
5.74

 
5.10

Finance leases
18.67

 
19.60

 
 
 
 
Weighted-average discount rate:
 
 
 
Operating leases
6.50
%
 
6.50
%
Finance leases
6.52
%
 
6.53
%



17


The maturity of lease liabilities is (in millions):
 
Operating Leases
 
Finance Leases
2020 (1)
$
8.6

 
$
2.4

2021
10.1

 
3.2

2022
8.7

 
3.3

2023
8.3

 
3.4

2024
6.3

 
3.3

Thereafter
11.6

 
54.5

Total lease payments
53.6

 
70.1

Less: imputed interest
(8.9
)
 
(30.8
)
Total present value of lease liabilities
$
44.7

 
$
39.3

(1) Excludes the three months ended March 29, 2020.
 
 
 




Note 9. Income Taxes

On March 27, 2020, the President signed into law the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), which, along with earlier issued IRS guidance, provides for the deferral of certain taxes. The CARES Act, among other things, removed the 80% limitation on the utilization of net operating losses in tax years 2018-2020, and contains numerous other provisions which may benefit the Company. The Company will continue to assess the impact of the CARES Act, as well as any ongoing government guidance related to COVID-19 that may be issued.

A reconciliation of the income tax expense (benefit) from continuing operations computed by applying the statutory federal income tax rate of 21% to income from continuing operations before income taxes to the provision for income taxes from continuing operations for the three months ended March 29, 2020 and March 31, 2019 was as follows (in millions):
 
For the Three Months Ended
 
March 29,
2020
 
March 31,
2019
Income tax expense (benefit) at federal statutory rate
$
(0.3
)
 
$
0.5

State and foreign taxes, net of federal tax benefit and valuation allowance
(0.3
)
 
0.2

Release of valuation allowance due to acquisitions
(0.9
)
 
(3.4
)
Nondeductible expenses and other
(0.1
)
 
0.1

Impact of deferred tax liabilities for indefinite-lived assets

 
0.1

Increase (decrease) in reserves for uncertain tax positions
(0.2
)
 
1.6

Increase (decrease) in federal valuation allowance
0.4

 
(0.6
)
Benefit for income taxes from continuing operations
$
(1.4
)
 
$
(1.5
)
 
 
 
 


In assessing the Company’s ability to realize deferred tax assets, management considers, on a periodic basis, whether it is more likely than not that some portion or all of its deferred tax assets will not be realized. In making this assessment, the Company has concluded that negative evidence, including cumulative losses in recent years, continues to outweigh the positive evidence. Accordingly, the Company has maintained a full valuation allowance against the Company’s U.S. federal, combined state and certain foreign net deferred tax assets. However, given the Company’s more recent earnings history, management believes that it is possible that within the next 12 months, sufficient positive evidence may become available to allow management to reach a conclusion that a significant portion of the valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain deferred tax assets with a potential corresponding decrease to income tax expense for the period the release is recorded. The exact timing and amount of the valuation allowance release would be predicated on the basis of the level of profitability that the Company is able to actually achieve and believes that it would sustain.

18


Federal and state income tax laws impose restrictions on the utilization of net operating loss (“NOL”) and tax credit carryforwards in the event that an “ownership change” occurs for tax purposes, as defined by Section 382 of the Internal Revenue Code of 1986, as amended (“Section 382”). In general, an ownership change occurs when shareholders owning 5% or more of a “loss corporation” (a corporation entitled to use NOLs or other loss carryovers) have increased their ownership of stock in such corporation by more than 50 percentage points during any three-year period. The annual base Section 382 limitation is calculated by multiplying the loss corporation’s value at the time of the ownership change by the greater of the long-term tax-exempt rate determined by the Internal Revenue Service in the month of the ownership change or the two preceding months. This base limitation is subject to adjustments, including an increase for built-in gains recognized in the five-year period after the ownership change.
In March 2010, an “ownership change” occurred that will limit the utilization of NOL carryforwards. In July 2011, another “ownership change” occurred. The March 2010 ownership change limitation is more restrictive. In prior years, the Company acquired corporations with NOL carryforwards at the date of acquisition (“Acquired NOLs”). The Acquired NOLs are subject to separate limitations that may further restrict the use of Acquired NOLs. As a result, the Company’s federal annual utilization of NOL carryforwards was limited to $27.0 million a year for the five years succeeding the March 2010 ownership change and $11.6 million for each year thereafter subject to separate limitations for Acquired NOLs. If the entire limitation amount is not utilized in a year, the excess can be carried forward and utilized in future years.
For the three months ended March 29, 2020, there was no impact of such limitations on the income tax provision, since the amount of taxable income did not exceed the annual limitation amount. However, future equity offerings or acquisitions that have equity as a component of the purchase price could also cause an “ownership change.” If and when any other “ownership change” occurs, utilization of the NOLs or other tax attributes may be further limited.
As discussed elsewhere, deferred tax assets relating to the NOL and credit carryforwards are offset by a full valuation allowance. In addition, utilization of state tax loss carryforwards is dependent upon sufficient taxable income apportioned to the states.
The Company is subject to taxation in the U.S. and various state and foreign tax jurisdictions. The Company’s tax years for 2000 and later are subject to examination by the U.S. and state tax authorities due to the existence of the NOL carryforwards. Generally, the Company’s tax years for 2002 and later are subject to examination by various foreign tax authorities as well.
During 2018 the Company was notified by the Internal Revenue Service that its federal income tax return for the calendar year ending December 27, 2015 had been selected for examination. In February of 2020, the Company received notification from the IRS that the examination was completed with no changes to the taxes reported.
As of December 29, 2019, the Company had $24.0 million of unrecognized tax benefits that, if recognized, would impact the Company’s effective income tax rate, subject to possible offset by a change in the deferred tax asset valuation allowance. During the three months ended March 29, 2020, unrecognized tax benefits decreased by $0.3 million.

The Company recognizes interest and penalties related to unrecognized tax benefits in its provision for income taxes. For the three months ended March 29, 2020 and March 31, 2019, the Company recorded an expense for interest and penalties of $0.1 million. For the three months ended March 29, 2020 and March 31, 2019, there was no material benefit recorded related to the removal of interest and penalties. The Company believes that it is reasonably possible that as much as $0.1 million of the liabilities for uncertain tax positions will expire within the next twelve months due to the expiration of various applicable statutes of limitations.

Note 10. Debt
 
(a)    Issuance of 6.5% Senior Secured Notes due 2025

In November 2017, the Company issued and sold $300 million aggregate principal amount of 6.5% Senior Secured Notes due 2025 (the “6.5% Notes”) in a private placement conducted pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended. The Company incurred debt issuance costs of $6.6 million associated with the 6.5% Notes. The Company utilized the net proceeds from the sale of the 6.5% Notes, as well as cash from its recent equity offering to extinguish its outstanding 7.00% Senior Secured Notes due in 2019 (the “7% Notes”). The total reacquisition price of the 7% Notes was $385.2 million, including a $12.0 million call premium, and $0.3 million of accrued interest.


19


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

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

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

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

The Indenture contains covenants limiting, among other things, the Company’s ability and the Subsidiary Guarantors’ ability to: (a) pay dividends on or make distributions or repurchase or redeem the Company’s capital stock or make other restricted payments; (b) incur additional debt and guarantee debt; (c) prepay, redeem or repurchase certain debt; (d) issue certain preferred stock or similar equity securities; (e) make loans and investments; (f) sell assets; (g) incur liens; (h) consolidate, merge, sell or otherwise dispose of all or substantially all of the Company’s assets; (i) enter into transactions with affiliates; and (j) enter into agreements restricting the Company’s ability and certain of its subsidiaries’ ability to pay dividends. These covenants are subject to a number of exceptions. As of March 29, 2020, the Company was in compliance with the covenants contained in the Indenture governing the 6.5% Notes.

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

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

As of March 29, 2020, there was $300.0 million of 6.5% Notes outstanding.

(b)    Other Indebtedness

Credit and Security Agreement

On November 20, 2017, the Company entered into an amended and restated credit and security agreement (the “Credit Agreement”), with the lenders from time to time party thereto, SunTrust Bank, as Agent (the “Agent”), PNC Bank, National Association (“PNC Bank”), as Joint Lead Arranger and Documentation Agent, and SunTrust Robinson Humphrey, Inc.

20


(“SunTrust”), as Joint Lead Arranger and Sole Book Runner. The Credit Agreement established a five-year senior secured revolving credit facility in the aggregate principal amount of $90.0 million (subject to a potential increase of the aggregate principal amount to $115.0 million, subject to the Agent’s and applicable lenders’ approval as described therein), consisting of a subline for letters of credit in an amount not to exceed $50.0 million, as well as a swingline loan in an aggregate principal amount at any time outstanding not to exceed $10.0 million. The obligations under the Credit Agreement are secured by (i) a first priority lien on the Company’s accounts receivable, inventory, deposit accounts, securities accounts, cash, securities and general intangibles (other than intellectual property) and (ii) a second priority lien, junior to the lien securing the Company’s 6.5% Notes, on all of the Company’s other assets.

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

The Credit Agreement contains certain covenants, which include, but are not limited to, restrictions on indebtedness, liens, and investments, and limits on other various payments, as well as a financial covenant relating to a minimum fixed charge coverage ratio. Events of default under the terms of the Credit Agreement include, but are not limited to: failure of the Company to pay any principal of any loans in full when due and payable; failure of the Company to pay any interest on any loan or any fee or other amount payable under the Credit Agreement within three business days after the date when due and payable; failure of the Company or any of its subsidiaries to comply with certain covenants and agreements, subject to applicable grace periods and/or notice requirements; any representation, warranty or statement made in or pursuant to the Credit Agreement or any related writing or any other material information furnished by the Company or any of its subsidiaries to the Agent or the lenders proving to be false or erroneous; and the occurrence of an event or condition having or reasonably likely to have a material adverse effect, which includes a material adverse effect on the business, operations, condition (financial or otherwise) or prospects of the Company or the ability of the Company to repay its obligations. Where an event of default arises from certain bankruptcy events, the commitments will automatically and immediately terminate and the principal of, and interest then outstanding on, all of the loans will become immediately due and payable. Subject to certain notice requirements and other conditions, upon the occurrence of an event of default, including the occurrence of a condition having or reasonably likely to have a material adverse effect, commitments may be terminated and the principal of, and interest then outstanding on, all of the loans may become immediately due and payable. As of March 29, 2020, no event of default had occurred and the Company believes that events or conditions having a material adverse effect, giving rise to an acceleration of any amounts outstanding under the Credit Agreement, have not occurred and the likelihood of such events or conditions occurring is remote.

The measurement of a minimum fixed charge coverage ratio under the Credit Agreement was modified in November 2017 to require measurement if Excess Availability (as defined in the Credit Agreement) is less than 50% of the lesser of the borrowing base or the total commitment amount.

On June 11, 2018, the Company entered into a first amendment (the “First Amendment”) to the amended and restated Credit Agreement. Among other things, the First Amendment permitted the sale of the PSS business, provided that certain conditions, including application of the proceeds in accordance with the terms of documents governing the Company’s outstanding indebtedness, were satisfied.

As of March 29, 2020, there were no borrowings outstanding on the Credit Agreement and $5.7 million was outstanding on letters of credit, resulting in net borrowing base availability of <