August
12, 2009
Via EDGAR
U.S.
Securities and Exchange Commission
Division
of Corporation Finance
100 F
Street, NE
Mail Stop
3720
Washington D.C. 20549
Attn: Melissa
Hauber, Senior Staff Accountant
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Re:
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Kratos
Defense & Securities Solutions, Inc.
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Form
10-K for Fiscal Year Ended December 28, 2008
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Filed
March 10, 2009
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Form
10-Q for Fiscal Quarter Ended March 29, 2009
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File
No. 0-27231
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Dear
Ladies and Gentlemen:
On behalf of
Kratos Defense & Security Solutions (the “Company” or “Kratos”), we are
providing this letter in response to the follow up comment raised in the letter
dated August 11, 2009 (the “ Comment Letter ”) from the staff (the “ Staff ”) of
the Securities and Exchange Commission to Ms. Deanna H. Lund, Chief
Financial Officer of the Company. Set forth below are the Company’s responses to
the Staff’s comments. To facilitate your review, the Staff comment, as set forth
in the Comment Letter, is reprinted in italics, numbered to correspond with the
paragraph number assigned in the Comment Letter, and is followed by the
corresponding response from the Company.
Form 10-Q for Fiscal Quarter
ended June 28, 2009
Management’s Discussion and
Analysis of Financial Condition and Results of Operations, page
31
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1.
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We
note your response to prior comment 3. It appears that the
conversion of your work as a prime contractor under certain awards to that
of a subcontractor may represent a known trend that will affect your
operating results. If so, please expand your disclosure in
future filings to more clearly discuss the nature of this trend and its
expected impact on your financial statements. In addition,
clarify whether these changes in expected cash flows were the primary
drivers in the impairment charge taken at December 28, 2008. If
not, disclose the reason for this impairment charge and discuss how your
assumptions differed from the previous annual impairment
test.
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The expected
conversion of our work as a prime contractor under certain awards to that of a
subcontractor relates primarily to the comparison
of our revenues on a pro forma basis after considering recent acquisitions to
the revenues reported in the periods subsequent to the
acquisitions.
To address
the potential impact on our revenues in future periods, we will provide the
following disclosure in our future filings:
Certain of
the contract awards that were legacy small business awards to businesses which
we acquired may result in a reduction of revenues when these contracts are
completed and recompeted and awarded to us as a subcontractor rather than as a
prime contractor. We believe that the expected impact to our revenues
will not be material related to this conversion.
To address
the Staff’s comment regarding the primary drivers in the impairment charge taken
at December 28, 2008, we will provide the following additional disclosure in our
future filings:
The
impairment charge is primarily driven by adverse equity market conditions that
caused a decrease in current market multiples and our average stock price as of
December 28, 2008, compared with the impairment test performed as of
December 31, 2007. In our analysis, we use the income
approach and validate its reasonableness by considering our market
capitalization based upon an average of our stock price for a period prior to
and subsequent to the date we perform our analysis. The average market price of
our stock as of December 28, 2008 was $1.29 which equates to a 45% drop in our
average stock price and corresponding market capitalization from December 31,
2007 which had an average stock price of $2.35. We reconcile the fair value of
our reporting units which is calculated using the income approach to our market
capitalization. As a result of this reconciliation, it was noted that investors
were requiring a higher rate of return, and therefore, our discount factor which
is based upon an estimated market participant weighted average cost of capital
(WACC) increased 250 basis points from 11.5% in our year end impairment test in
2007 compared to 14% in our year end impairment test in 2008. This
change was the key factor contributing to the $105.8 million impairment charge
that we recorded in the fourth quarter of 2008.
* * * *
In addition,
the Company hereby acknowledges that:
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the Company is responsible for the adequacy and accuracy of the disclosure in the filings;
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staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filings; and
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the Company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.
If you have
any questions with respect to the foregoing, please contact me at (858)
812-7322.
Regards,
/s/ Deanna H.
Lund
Deanna H.
Lund
Executive
Vice President, Chief Financial Officer
cc: Donald
Williams, Grant Thornton
Scott M. Stanton, Morrison &
Foerster