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Table of Contents
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 June 27, 2021
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)
Delaware13-3818604
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
1 Chisholm Trail, Suite 3200
Round Rock, TX 78681
(512238-9840
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.001 par valueKTOSThe 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 (§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 July 30, 2021, 123,957,536 shares of the registrant’s common stock were outstanding.


Table of Contents
KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
 
FORM 10-Q
 
FOR THE QUARTERLY PERIOD ENDED JUNE 27, 2021
 
INDEX
  Page
  
   
  
 
  
 
 
 
  
  
  
  
 
  
  
  
  
  
  
  
2

Table of Contents
PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements.
3

Table of Contents
KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 (in millions, except par value and number of shares)
 June 27, 2021
(Unaudited)December 27, 2020
Assets  
Current assets:  
Cash and cash equivalents$369.3 $380.8 
Restricted cash 0.7 
Accounts receivable, net80.0 95.3 
Unbilled receivables, net185.0 177.0 
Inventoried costs90.7 81.2 
Prepaid expenses13.4 12.0 
Other current assets30.3 17.8 
Total current assets768.7 764.8 
Property, plant and equipment, net145.5 143.8 
Operating lease right-of-use assets40.1 42.9 
Goodwill483.7 483.9 
Intangible assets, net40.4 43.0 
Other assets83.9 84.4 
Total assets$1,562.3 $1,562.8 
Liabilities and Stockholders Equity
  
Current liabilities:  
Accounts payable$59.9 $55.4 
Accrued expenses27.2 34.7 
Accrued compensation46.2 48.1 
Accrued interest1.5 1.5 
Billings in excess of costs and earnings on uncompleted contracts43.5 34.0 
Current portion of operating lease liabilities9.3 8.9 
Other current liabilities11.8 11.9 
Current liabilities of discontinued operations2.7 3.1 
Total current liabilities202.1 197.6 
Long-term debt300.3 301.0 
Operating lease liabilities, net of current portion35.3 38.6 
Other long-term liabilities71.6 83.0 
Long-term liabilities of discontinued operations2.5 2.5 
Total liabilities611.8 622.7 
Commitments and contingencies (Note 15)
Redeemable noncontrolling interest14.6 14.8 
Stockholders equity:
  
Preferred stock, $0.001 par value, 5,000,000 shares authorized, 0 shares outstanding at June 27, 2021 and December 27, 2020
  
Common stock, $0.001 par value, 195,000,000 shares authorized; 123,807,616 and 123,047,147 shares issued and outstanding at June 27, 2021 and December 27, 2020, respectively
  
Additional paid-in capital1,563.1 1,556.3 
Accumulated other comprehensive income2.2 1.4 
Accumulated deficit(629.4)(632.4)
Total stockholders equity
935.9 925.3 
Total liabilities and stockholders equity
$1,562.3 $1,562.8 

The accompanying notes are an integral part of these condensed consolidated financial statements.
4

Table of Contents
KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
 (Unaudited)
 Three Months EndedSix Months Ended
 June 27, 2021June 28, 2020June 27, 2021June 28, 2020
Service revenues$58.0 $62.9 $115.3 $126.5 
Product sales147.1 107.5 284.0 212.8 
Total revenues205.1 170.4 399.3 339.3 
Cost of service revenues41.3 46.2 83.8 91.4 
Cost of product sales111.8 78.2 212.5 156.1 
Total costs153.1 124.4 296.3 247.5 
Gross profit52.0 46.0 103.0 91.8 
Selling, general and administrative expenses38.2 36.0 76.1 70.9 
Merger and acquisition expenses0.1 1.0 0.3 1.4 
Research and development expenses10.2 6.0 18.2 11.7 
Restructuring expenses and other0.2 0.1 0.2 0.2 
Operating income3.3 2.9 8.2 7.6 
Other expense:    
Interest expense, net(5.7)(5.6)(11.6)(11.0)
Other income (expense), net 0.3 0.2 (0.2)
Total other expense, net(5.7)(5.3)(11.4)(11.2)
Loss from continuing operations before income taxes(2.4)(2.4)(3.2)(3.6)
Benefit for income taxes from continuing operations(3.6)(1.8)(6.3)(3.2)
Income (loss) from continuing operations1.2 (0.6)3.1 (0.4)
Discontinued operations:
Loss from discontinued operations before income taxes (0.4)(0.4)(0.4)(0.8)
Income tax benefit0.1 0.2 0.1 0.2 
Loss from discontinued operations(0.3)(0.2)(0.3)(0.6)
Net income (loss)0.9 (0.8)2.8 (1.0)
Less: Net loss attributable to noncontrolling interest(0.2)(0.1)(0.2)(0.1)
Net income (loss) attributable to Kratos$1.1 $(0.7)$3.0 $(0.9)
Basic income (loss) per common share attributable to Kratos:    
Income (loss) from continuing operations$0.01 $(0.01)$0.02 $ 
Loss from discontinued operations   (0.01)
Net income (loss) per common share$0.01 $(0.01)$0.02 $(0.01)
Diluted income (loss) per common share attributable to Kratos:
Income (loss) from continuing operations$0.01 $(0.01)$0.02 $ 
Loss from discontinued operations   (0.01)
Net income (loss) per common share$0.01 $(0.01)$0.02 $(0.01)
Weighted average common shares outstanding:
Basic124.7 108.3 124.4 107.8 
Diluted127.7 108.3 127.8 107.8 
 
The accompanying notes are an integral part of these consolidated financial statements.

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KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions, except per share amounts)
 (Unaudited)

Three Months EndedSix Months Ended
June 27, 2021June 28, 2020June 27, 2021June 28, 2020
Net income (loss)$0.9 $(0.8)$2.8 $(1.0)
Change in cumulative translation adjustment0.6 (0.3)0.8 (0.1)
Comprehensive income (loss)1.5 (1.1)3.6 (1.1)
Less: Comprehensive loss attributable to noncontrolling interest(0.2)(0.1)(0.2)(0.1)
Comprehensive income (loss) attributable to Kratos$1.7 $(1.0)$3.8 $(1.0)

The accompanying notes are an integral part of these consolidated financial statements.
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KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the three months ended June 27, 2021 and June 28, 2020
(in millions)
(Unaudited)
Redeemable Noncontrolling InterestCommon StockAdditional Paid-In CapitalAccumulated Other Comprehensive LossAccumulated DeficitTotal Stockholders’ Equity
SharesAmounts
Balance, March 29, 2020$15.0 107.0 $ $1,292.6 $(0.2)$(712.2)$580.2 
Stock-based compensation— — — 4.8 — — 4.8 
Issuance of common stock for cash— 15.5 — 240.5 — — 240.5 
Net loss(0.1)— — — — (0.7)(0.7)
Other comprehensive loss, net of tax— — — — (0.3)— (0.3)
Balance, June 28, 2020$14.9 122.5 $ $1,537.9 $(0.5)$(712.9)$824.5 
Redeemable Noncontrolling InterestCommon StockAdditional Paid-In CapitalAccumulated Other Comprehensive IncomeAccumulated DeficitTotal Stockholders’ Equity
SharesAmounts
Balance, March 28, 2021$14.8 123.7 $ $1,557.9 $1.6 $(630.5)$929.0 
Stock-based compensation— — — 6.6 — — 6.6 
Restricted stock issued and related taxes
— 0.1 — (1.4)— — (1.4)
Net income (loss)(0.2)— — — — 1.1 1.1 
Other comprehensive income, net of tax— — — — 0.6 — 0.6 
Balance, June 27, 2021$14.6 123.8 $ $1,563.1 $2.2 $(629.4)$935.9 













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KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the six months ended June 27, 2021 and June 28, 2020
(in millions)
(Unaudited)
Redeemable Noncontrolling InterestCommon StockAdditional Paid-In CapitalAccumulated Other Comprehensive LossAccumulated DeficitTotal Stockholders’ Equity
SharesAmounts
Balance, December 29, 2019$15.0 106.6 $ $1,286.5 $(0.4)$(712.0)$574.1 
Stock-based compensation— — — 9.5 — — 9.5 
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)
Issuance of common stock for cash— 15.5 — 240.5 — — 240.5 
Net loss(0.1)— — — — (0.9)(0.9)
Other comprehensive loss, net of tax— — — — (0.1)— (0.1)
Balance, June 28, 2020$14.9 122.5 $ $1,537.9 $(0.5)$(712.9)$824.5 
Redeemable Noncontrolling InterestCommon StockAdditional Paid-In CapitalAccumulated Other Comprehensive IncomeAccumulated DeficitTotal Stockholders’ Equity
SharesAmounts
Balance, December 27, 2020$14.8 123.0 $ $1,556.3 $1.4 $(632.4)$925.3 
Stock-based compensation— — — 12.8 — — 12.8 
Issuance of common stock for employee stock purchase plan, options and warrants
— 0.2 — 2.5 — — 2.5 
Restricted stock issued and related taxes
— 0.6 — (8.5)— — (8.5)
Net income (loss)(0.2)— — — — 3.0 3.0 
Other comprehensive income, net of tax— — — — 0.8 — 0.8 
Balance, June 27, 2021$14.6 123.8 $ $1,563.1 $2.2 $(629.4)$935.9 

The accompanying notes are an integral part of these condensed consolidated financial statements.
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KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
Six Months Ended
June 27, 2021June 28, 2020
Operating activities: 
Net income (loss)$2.8 $(1.0)
Loss from discontinued operations(0.3)(0.6)
Income (loss) from continuing operations3.1 (0.4)
Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities from continuing operations:  
Depreciation and amortization13.3 12.3 
Deferred income taxes(0.9)(1.1)
Amortization of lease right-of-use assets4.5 5.3 
Stock-based compensation12.8 9.5 
Amortization of deferred financing costs0.5 0.5 
Provision for (recovery of) doubtful accounts(0.2)0.2 
Changes in assets and liabilities, net of acquisitions:  
Accounts receivable15.5 24.7 
Unbilled receivables(7.9)(6.8)
Inventoried costs(6.8)(4.5)
Prepaid expenses and other assets(2.2)(10.8)
Operating lease liabilities(4.5)(6.0)
Accounts payable5.8 (9.1)
Accrued expenses(7.5)(4.2)
Accrued compensation(1.8)1.4 
Billings in excess of costs and earnings on uncompleted contracts9.6 (0.5)
Income tax receivable and payable(6.1)(3.0)
Other liabilities(5.2)3.3 
Net cash provided by operating activities from continuing operations22.0 10.8 
Investing activities:  
Cash paid for acquisitions, net of cash acquired(6.2)(15.5)
Proceeds from sale of assets 0.1 
Capital expenditures(20.5)(14.1)
Net cash used in investing activities from continuing operations(26.7)(29.5)
Financing activities: 
Proceeds from the issuance of common stock, net of issuance costs 240.5 
Repayment of debt (0.1)
Payments under finance leases(0.4)(0.3)
Payments of employee taxes withheld from share-based awards(8.5)(1.2)
Proceeds from shares issued under equity plans2.5 2.6 
Net cash provided by (used in) financing activities from continuing operations(6.4)241.5 
Net cash flows of continuing operations(11.1)222.8 
Net operating cash flows of discontinued operations(0.8)1.7 
Effect of exchange rate changes on cash, cash equivalents and restricted cash(0.3)0.1 
Net increase (decrease) in cash, cash equivalents and restricted cash(12.2)224.6 
Cash, cash equivalents and restricted cash at beginning of period381.5 172.6 
Cash, cash equivalents and restricted cash at end of period$369.3 $397.2 

The accompanying notes are an integral part of these condensed consolidated financial statements.
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KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(Unaudited)
 
Note 1. Summary of Significant Accounting Policies
 
All references to the “Company” and “Kratos” refer to Kratos Defense & Security Solutions, Inc., a Delaware corporation, and its subsidiaries.
 
(a)    Basis of Presentation

 The information as of June 27, 2021 and for the three and six months ended June 27, 2021 and June 28, 2020 is unaudited. The condensed consolidated balance sheet as of December 27, 2020 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 27, 2020, included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 25, 2021 (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 as defined below), 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 June 27, 2021 and June 28, 2020 consisted of 13-week periods. The six month periods ended June 27, 2021 and June 28, 2020 consisted of 26-week periods. There are 52 calendar weeks in the fiscal years ending on December 26, 2021 and December 27, 2020.
 
(d)    Accounting Estimates

There have been no significant changes in the Company’s accounting estimates for the six months ended June 27, 2021 as compared to the accounting estimates described in the Form 10-K.

(e)    Accounting Standards Updates

In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2019-12 (“ASU 2019-12”), Income taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12, in an effort to reduce the complexity in accounting for income taxes, removes certain exceptions for measuring intraperiod tax allocations, foreign subsidiary equity method investments and interim period tax losses. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020. The Company adopted ASU 2019-12 effective December 28, 2020. The implementation of this guidance did not have a material effect on its unaudited condensed consolidated financial statements.

(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 June 27, 2021 and December 27, 2020 are presented in Note 10. The carrying value of all other financial instruments, including cash equivalents, accounts receivable, unbilled receivables, accounts payable,
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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 June 27, 2021 and December 27, 2020 due to the short-term nature of these instruments.

Note 2. Acquisitions

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. Working capital adjustments of $0.3 million were settled in the third quarter of 2020. The operating results of the acquisition have been included in the Company’s results of operations from the effective acquisition date. Had the acquisition occurred as of December 30, 2019, net sales, net loss from consolidated operations, net loss attributable to Kratos, and basic and diluted net loss per share attributable to Kratos on a pro forma basis for the six months ended June 28, 2020 would not have been materially different than the reported amounts. TDI is included in the Kratos Unmanned Systems (“US”) segment.

Optimized Performance Machining, Inc.

On April 17, 2020, the Company acquired Optimized Performance Machining, Inc. (“OPM”), a company that primarily operates in the industrial machinery and equipment repair business industry for approximately $1.8 million in cash, subject to adjustments for transaction expenses, indebtedness, cash on hand, and post-closing working capital adjustments. Working capital adjustments of $0.03 million were settled in the third quarter of 2020. The operating results of the acquisition have been included in the Company’s results of operations from the effective acquisition date. Had the acquisition occurred as of December 30, 2019, net sales, net loss from consolidated operations, net loss attributable to Kratos, and basic and diluted net loss per share attributable to Kratos on a pro forma basis for the six months ended June 28, 2020 would not have been materially different than the reported amounts. OPM is included in the Kratos US segment.

CPI ASC Signal Division, Inc.

On June 15, 2020, Kratos Integral Holdings, LLC entered into a Stock Purchase Agreement to acquire CPI ASC Signal Division, Inc. (“ASC Signal”) from Communications & Power Industries LLC for approximately $35 million in cash, subject to adjustments for transaction expenses, indebtedness, cash on hand, and working capital adjustments. ASC Signal is a manufacturer of high-performance, highly engineered antenna systems for satellite communications, radar, electronic warfare, and high frequency applications. On June 30, 2020, the acquisition was completed following the satisfaction of all closing conditions, including receipt of regulatory approval from all required government authorities. The adjustments for transaction expenses, indebtedness, cash on hand and working capital were settled by the parties in January 2021, resulting in a net payment due to the Company of approximately $1.4 million. ASC Signal is included in the Kratos Space, Training and Cyber, (“KSTC”) Division of the Kratos Government Solutions (“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 integrating ASC Signal’s existing business with Kratos’ related products and customers.

The transaction has been accounted for using the acquisition method of accounting, which requires, among other things, that the assets acquired and the liabilities assumed 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
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measurements. The following table summarizes the allocation of the purchase price over the estimated fair values of the major assets acquired and liabilities assumed (in millions):

Accounts receivable $5.7 
Unbilled receivables0.9 
Inventoried costs10.4 
Other current assets1.8 
Property and equipment10.0 
Intangible assets4.3 
Goodwill10.8 
  Total identifiable net assets acquired43.9 
Total identifiable net liabilities assumed(11.0)
Net assets acquired, excluding cash$32.9 

Based on the Company’s estimate of fair value, as of June 30, 2020, net liabilities included $9.1 million of current liabilities. The identifiable intangible assets include trade names of $0.1 million with a remaining useful life of 1 year, customer relationships of $2.0 million with remaining useful lives of 5 years, and developed technology of $2.2 million with a remaining useful life of 7 years. The Company also established a deferred tax liability of $1.1 million for the difference between the financial statement basis and tax basis of the acquired assets of ASC Signal 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 ASC Signal included in the Company's condensed consolidated statement of operations for the six months ended June 27, 2021 were $20.4 million and $0.7 million, respectively.

A summary of the consideration paid for the acquired ownership in ASC Signal is as follows:
Cash paid$34.9 
Less: Cash acquired(2.0)
Total consideration$32.9 

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 ASC Signal occurred on December 30, 2019 and include adjustments that were directly attributable to the foregoing transaction. There are no material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenues and loss. 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.

For the six months ended June 28, 2020 (all amounts, except per share amounts, are in millions):
Pro forma revenues$357.1 
Pro forma net loss before tax$(8.3)
Pro forma net loss$(5.9)
Pro forma net loss attributable to Kratos$(5.8)
Basic pro forma loss per share attributable to Kratos$(0.05)
Diluted pro forma loss per share attributable to Kratos$(0.05)

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5-D Systems, Inc.

On November 18, 2020, the Company acquired 5-D Systems, Inc. (“5-D Systems”), a leading National Security Solutions provider and industry-leading provider of high-performance, jet-powered unmanned aerial systems for an aggregate of approximately $10.0 million. The purchase price was $5.0 million in cash, subject to adjustments for transaction expenses, indebtedness, cash on hand, and post-closing working capital adjustments, and 250,374 shares of common stock (with a value of approximately $5.0 million). 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 consolidated financial statements. The operating results of the acquisition have been included in the Company’s results of operations from the effective acquisition date. Had the acquisition occurred as of December 30, 2019, net sales, net loss from consolidated operations, net loss attributable to Kratos, and basic and diluted net loss per share attributable to Kratos on a pro forma basis for six months ended June 28, 2020 would not have been materially different than the reported amounts. 5-D Systems is included in the Kratos US segment.

Note 3. Revenue Recognition

Effective January 1, 2018, the Company adopted the FASB ASU 2014-09, Revenue from Contracts with Customers, and the related amendments, which are codified into Accounting Standards Codification (“ASC”) 606 (“ASC 606”).

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 the 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.
For the majority of contracts, the Company satisfies the underlying performance obligations over time as the customer obtains control or receives benefits as work is performed on the contract. As a result, under ASC 606 revenue is recognized over a time using the cost-to-cost method (cost incurred relative to total estimated cost at completion).

Remaining Performance Obligations

The Company calculates revenues from remaining performance obligations as the dollar value of the remaining performance obligations on executed contracts. On June 27, 2021, the Company had approximately $865.6 million of remaining performance obligations. The Company expects to recognize approximately 39% of the remaining performance obligations as revenue in 2021, an additional 27% in 2022, 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
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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 and six-month periods ended June 27, 2021, and June 28, 2020. Likewise, total cumulative catch-up adjustments were not material for the three and six-month periods ended June 27, 2021, and June 28, 2020.

Contract Assets and Liabilities

For each of the Company’s contracts, the timing of revenue recognition, customer billings, and cash collections results in a net contract asset or liability at the end of each reporting period. Fixed-price contracts are typically billed to the customer either using progress payments, whereby amounts are billed monthly as costs are incurred or work is completed, or performance based payments, which are based upon the achievement of specific, measurable events or accomplishments defined and valued at contract inception. Cost-type contracts are typically billed to the customer on a monthly or semi-monthly basis.

Contract assets consist of unbilled receivables, primarily related to long-term contracts where revenue recognized under the cost-to-cost method exceeds amounts billed to customers. Unbilled receivables are classified as current assets and, in accordance with industry practice, include amounts that may be billed and collected beyond one year due to the long term nature of many of 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
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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):
June 27, 2021December 27, 2020Net Change
Contract assets$185.0 $177.0 $8.0 
Contract liabilities$43.5 $34.0 $9.5 
Net contract assets$141.5 $143.0 $(1.5)

Contract assets increased $8.0 million during the six months ended June 27, 2021, primarily due to the recognition of revenue related to the satisfaction or partial satisfaction of performance obligations 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 six months ended June 27, 2021. Contract liabilities increased $9.5 million during the six months ended June 27, 2021, primarily due to payments received in excess of revenue recognized on these performance obligations. For the three and six months ended June 27, 2021 the Company recognized revenue of $5.9 million and $22.9 million, respectively, that was previously included in the contract liabilities that existed at December 27, 2020. For the three and six months ended June 28, 2020 the Company recognized revenue of $5.7 million and $20.0 million, respectively, that was previously included in the contract liabilities that existed at December 29, 2019.

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 June 27, 2021, 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 June 27, 2021. The dispute with the international customer concerns the completion of certain system requirements and certain contractual milestones. The Company alleges breach of contract, as well as other claims against the customer, and seeks damages and other equitable relief. The customer has asserted counterclaims seeking liquidated damages and additional relief. 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 June 27, 2021.
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Disaggregation of Revenue

The following series of tables presents the Company’s revenue disaggregated by several categories. For the majority of contracts, revenue is recognized over time as work is performed on the contract. Revenue by contract type was as follows (in millions):
Three Months EndedSix Months Ended
June 27, 2021June 28, 2020June 27, 2021June 28, 2020
Kratos Government Solutions
Fixed price$107.1 $98.2 $206.6 $202.6 
Cost plus fee28.0 20.8 56.6 35.2 
Time and materials9.7 9.4 19.9 17.5 
Total Kratos Government Solutions144.8 128.4 283.1 255.3 
Unmanned Systems
Fixed price36.4 28.6 73.6 55.9 
Cost plus fee23.4 12.8 41.3 26.9 
Time and materials0.5 0.6 1.3 1.2 
Total Unmanned Systems60.3 42.0 116.2 84.0 
Total Revenues$205.1 $170.4 $399.3 $339.3 

Revenue by customer was as follows (in millions):
Three Months EndedSix Months Ended
June 27, 2021June 28, 2020June 27, 2021June 28, 2020
Kratos Government Solutions
U.S. Government (1)
$91.8 $90.0 $184.4 $174.7 
International (2)
35.8 24.9 67.5 52.9 
U.S. Commercial and other customers17.2 13.5 31.2 27.7 
Total Kratos Government Solutions144.8 128.4 283.1 255.3 
Unmanned Systems
U.S. Government (1)
54.4 39.4 104.0 78.8 
International (2)
5.5 2.5 11.8 4.9 
U.S. Commercial and other customers0.4 0.1 0.4 0.3 
Total Unmanned Systems60.3 42.0 116.2 84.0 
Total Revenues$205.1 $170.4 $399.3 $339.3 
(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 working capital adjustment (the “Transaction”). To date, the Company has received approximately $70 million of aggregate net cash proceeds from the Transaction, after taking into account amounts that were paid by the Company pursuant to a negotiated
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transaction services agreement between the Company and the Buyer, receipt of approximately $6.9 million in net working capital retained by the Company, and associated transaction fees and expenses, excluding the impact of the final settlement and determination of the closing net working capital adjustment. 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. The Company has recorded a net break-even on the sale of the PSS business which includes the aggregate net proceeds described above that have been collected, excluding the impact of the final settlement and determination of the closing net working capital adjustment. The resolution of the ongoing dispute will be recorded in future periods when resolved.

Note 5. Goodwill and Intangible Assets
 
(a)    Goodwill
 
    The carrying amounts of goodwill as of June 27, 2021 and December 27, 2020 by reportable segment are as follows (in millions):
As of June 27, 2021
KGSUSTotal
Gross value$609.6 $127.4 $737.0 
Less accumulated impairment239.5 13.8 253.3 
Net$370.1 $113.6 $483.7 

As of December 27, 2020
KGSUSTotal
Gross value$609.6 $127.6 $737.2 
Less accumulated impairment239.5 13.8 253.3 
Net$370.1 $113.8 $483.9 

(b)    Purchased Intangible Assets
 
The following table sets forth information for finite-lived and indefinite-lived intangible assets (in millions): 
 As of June 27, 2021As of December 27, 2020
 Gross
Value
Accumulated
Amortization
Net
Value
Gross
Value
Accumulated
Amortization
Net
Value
Acquired finite-lived intangible assets:    
Customer relationships$75.3 $(56.7)$18.6 $75.3 $(55.7)$19.6 
Contracts and backlog33.4 (32.2)1.2 33.4 (31.0)2.4 
Developed technology and technical know-how29.9 (25.5)4.4 29.9 (25.3)4.6 
Trade names2.0 (2.0) 2.0 (1.9)