Revenue from the U.S. Government, which includes foreign military sales contracted through the U.S. Government, includes revenue from contracts for which the Company is the prime contractor as well as those for which the Company is a subcontractor and the ultimate customer is the U.S. Government. The KGS and US segments have substantial revenue from the U.S. Government. Sales to the U.S. Government amounted to approximately $118.2$185.5 million and $95.4$158.1 million, or 60%68% and 58%69% of total Kratos revenue, for the three months ended October 1, 20172023 and September 25, 2016,2022, respectively, and $325.9$524.4 million and $293.6$453.8 million, or 59%69% and 60%70% of total Kratos revenue, for the nine months ended October 1, 20172023 and September 25, 2016,2022, respectively.
In addition to commitments and obligations in the ordinary course of business, the Company is subject to various claims, pending and potential legal actions for damages, investigations relating to governmental laws and regulations and other matters arising out of the normal conduct of the Company’s business. The Company assesses contingencies to determine the degree of probability and range of possible loss for potential accrual in its unaudited condensed consolidated financial statements. An estimated loss contingency is accrued in the Company’sunaudited condensed consolidated financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Because litigation is
inherently unpredictable and unfavorable resolutions could occur, assessing litigation contingencies is highly subjective and requires judgments about future events. When evaluating contingencies, the Company may be unable to provide a meaningful estimate due to a number of factors, including but not limited to the procedural status of the matter in question, the presence of complex or novel legal theories, and the ongoing discovery and development of information important to the matters. In addition, damage amounts claimed in litigation against it may be unsupported, exaggerated or unrelated to possible outcomes and, as such, are not meaningful indicators of its potential liability. The Company regularly reviews contingencies to determine the adequacy of its accruals and related disclosures. The amount of ultimate loss may differ from these estimates. It is possible that cash flows or results of operations could be materially affected in any particular period by the unfavorable resolution of one or more of these contingencies. Whether any losses finally determined in any claim, action, investigation or proceeding could reasonably have a material effect on the Company’s business, financial condition, results of operations or cash flows will depend on a number of variables, including the timing and amount of such losses; the structure and type of any remedies; the monetary significance any such losses, damages or remedies may have on the Company’s condensed consolidated financial statements; and the unique facts and circumstances of the particular matter that may give rise to additional factors.
U.S. Government Cost Claims.Claims
The Company’s contracts with the DoD are subject to audit by the Defense Contract Audit Agency (“DCAA”). As a result of these audits, from time to time the Company is advised of claims concerning potential disallowed, overstated or disputed costs. For example, during the course of recent audits of the Company’s contracts, the DCAA is closely examining and questioning certain of the established and disclosed practices that it had previously audited and accepted. The Company’s personnel regularly scrutinizesscrutinize costs incurred and allocated to contracts with the U.S. Government for compliance with regulatory standards. On July 28, 2015, the Company received a determination letter from the Defense Contract Management Agency (“DCMA”) regarding what the DCMA believed were certain unallowable costs for one of the Company’s subsidiaries with respect to fiscal year 2007. In April 2016, the Company reached an agreement with the DCAA to settle matters related to unallowable costs for this subsidiary for fiscal years 2007 and 2008 for approximately $0.2 million. For those Company subsidiaries and fiscal years which have not yet been audited by the DCAA or for those audits which are in process which have not yet been completed by the DCAA, the Company cannot reasonably estimate the range of loss, if any, that may result from audits and reviews in which it is currently involved given the inherent difficulty in predicting regulatory action, fines and penalties, if any, and the various remedies and levels of judicial review available to the Company in the event of an adverse finding. As a result, the Company has not recorded any liability related to these matters.
The Company is subject to normal and routine litigation arising from the ordinary course and conduct of business and, at times, as a result of mergers, acquisitions and dispositions. Such disputes include, for example, commercial, employment, intellectual property, environmental, and securities matters. The aggregate amounts accrued related to these matters are not material to the total liabilities of the Company. The Company intends to defend itself in any such matters and does not currently believe that the outcome of any such matters will have a material adverse impact on the Company’s financial condition, results of
operations or cash flows. During
Table of the equity method of accounting to reflect ownership interests in 100% owned subsidiaries, which are eliminated upon consolidation.
Condensed Consolidating Balance Sheet October 1, 2017 (Unaudited) (in millions) |
| | | | | | | | | | | | | | | | | | | |
| Parent Company | | Subsidiary Guarantors on a Combined Basis | | Non-Guarantors on a Combined Basis | | Eliminations | | Consolidated |
Assets | | | | | | | | | |
Current Assets: | | | | | | | | | |
Cash and cash equivalents | $ | 233.0 |
| | $ | (2.2 | ) | | $ | 8.4 |
| | $ | — |
| | $ | 239.2 |
|
Accounts receivable, net | — |
| | 220.4 |
| | 23.8 |
| | — |
| | 244.2 |
|
Amounts due from affiliated companies | 227.6 |
| | — |
| | — |
| | (227.6 | ) | | — |
|
Inventoried costs | — |
| | 42.6 |
| | 20.2 |
| | — |
| | 62.8 |
|
Other current assets | 3.6 |
| | 14.3 |
| | 3.7 |
| | — |
| | 21.6 |
|
Total current assets | 464.2 |
| | 275.1 |
| | 56.1 |
| | (227.6 | ) | | 567.8 |
|
Property, plant and equipment, net | 1.9 |
| | 47.9 |
| | 6.9 |
| | — |
| | 56.7 |
|
Goodwill | — |
| | 442.6 |
| | 42.7 |
| | — |
| | 485.3 |
|
Intangible assets, net | — |
| | 17.9 |
| | 6.6 |
| | — |
| | 24.5 |
|
Investment in subsidiaries | 469.2 |
| | 67.9 |
| | — |
| | (537.1 | ) | | — |
|
Other assets | 0.4 |
| | 8.0 |
| | — |
| | — |
| | 8.4 |
|
Total assets | $ | 935.7 |
| | $ | 859.4 |
| | $ | 112.3 |
| | $ | (764.7 | ) | | $ | 1,142.7 |
|
Liabilities and Stockholders’ Equity | | | | | | | | | |
Current liabilities: | | | | | | | | | |
Accounts payable | $ | 1.9 |
| | $ | 43.0 |
| | $ | 5.7 |
| | $ | — |
| | $ | 50.6 |
|
Accrued expenses | 12.3 |
| | 36.9 |
| | 2.6 |
| | — |
| | 51.8 |
|
Accrued compensation | 3.5 |
| | 27.1 |
| | 3.1 |
| | — |
| | 33.7 |
|
Billings in excess of costs and earnings on uncompleted contracts | — |
| | 47.5 |
| | 3.6 |
| | — |
| | 51.1 |
|
Amounts due to affiliated companies | — |
| | 198.5 |
| | 29.1 |
| | (227.6 | ) | | — |
|
Other current liabilities | 0.6 |
| | 5.2 |
| | 4.7 |
| | — |
| | 10.5 |
|
Current liabilities of discontinued operations | 1.0 |
| | — |
| | 0.1 |
| | — |
| | 1.1 |
|
Total current liabilities | 19.3 |
| | 358.2 |
| | 48.9 |
| | (227.6 | ) | | 198.8 |
|
Long-term debt, net of current portion | 369.7 |
| | — |
| | — |
| | — |
| | 369.7 |
|
Other long-term liabilities | 11.0 |
| | 20.0 |
| | 7.5 |
| | — |
| | 38.5 |
|
Non-current liabilities of discontinued operations | 3.8 |
| | — |
| | — |
| | — |
| | 3.8 |
|
Total liabilities | 403.8 |
| | 378.2 |
| | 56.4 |
| | (227.6 | ) | | 610.8 |
|
Total stockholders’ equity | 531.9 |
| | 481.2 |
| | 55.9 |
| | (537.1 | ) | | 531.9 |
|
Total liabilities and stockholders’ equity | $ | 935.7 |
| | $ | 859.4 |
| | $ | 112.3 |
| | $ | (764.7 | ) | | $ | 1,142.7 |
|
Condensed Consolidating Balance Sheet December 25, 2016 (Unaudited) (in millions)
|
| | | | | | | | | | | | | | | | | | | |
| Parent Company | | Subsidiary Guarantors on a Combined Basis | | Non-Guarantors on a Combined Basis | | Eliminations | | Consolidated |
Assets | | | | | | | | | |
Current Assets: | | | | | | | | | |
Cash and cash equivalents | $ | 67.2 |
| | $ | (3.3 | ) | | $ | 5.2 |
| | $ | — |
| | $ | 69.1 |
|
Accounts receivable, net | — |
| | 197.9 |
| | 31.5 |
| | — |
| | 229.4 |
|
Amounts due from affiliated companies | 204.6 |
| | — |
| | — |
| | (204.6 | ) | | — |
|
Inventoried costs | — |
| | 37.2 |
| | 18.2 |
| | — |
| | 55.4 |
|
Other current assets | 6.3 |
| | 11.6 |
| | 1.3 |
| | — |
| | 19.2 |
|
Total current assets | 278.1 |
| | 243.4 |
| | 56.2 |
| | (204.6 | ) | | 373.1 |
|
Property, plant and equipment, net | 1.6 |
| | 41.7 |
| | 6.5 |
| | — |
| | 49.8 |
|
Goodwill | — |
| | 442.5 |
| | 42.9 |
| | — |
| | 485.4 |
|
Intangible assets, net | — |
| | 24.5 |
| | 8.1 |
| | — |
| | 32.6 |
|
Investment in subsidiaries | 458.0 |
| | 67.5 |
| | — |
| | (525.5 | ) | | — |
|
Other assets | 0.4 |
| | 7.3 |
| | — |
| | — |
| | 7.7 |
|
Total assets | $ | 738.1 |
| | $ | 826.9 |
| | $ | 113.7 |
| | $ | (730.1 | ) | | $ | 948.6 |
|
Liabilities and Stockholders’ Equity | | | | | | | | | |
Current liabilities: | | | | | | | | | |
Accounts payable | $ | 4.5 |
| | $ | 43.7 |
| | $ | 4.5 |
| | $ | — |
| | $ | 52.7 |
|
Accrued expenses | 5.6 |
| | 44.5 |
| | 3.5 |
| | — |
| | 53.6 |
|
Accrued compensation | 4.0 |
| | 31.2 |
| | 3.9 |
| | — |
| | 39.1 |
|
Billings in excess of costs and earnings on uncompleted contracts | — |
| | 38.9 |
| | 2.9 |
| | — |
| | 41.8 |
|
Amounts due to affiliated companies | — |
| | 174.6 |
| | 30.0 |
| | (204.6 | ) | | — |
|
Other current liabilities | 1.4 |
| | 4.1 |
| | 2.2 |
| | — |
| | 7.7 |
|
Current liabilities of discontinued operations | 1.5 |
| | — |
| | 0.1 |
| | — |
| | 1.6 |
|
Total current liabilities | 17.0 |
| | 337.0 |
| | 47.1 |
| | (204.6 | ) | | 196.5 |
|
Long-term debt, net of current portion | 430.2 |
| | — |
| | 0.8 |
| | — |
| | 431.0 |
|
Other long-term liabilities | 10.8 |
| | 19.9 |
| | 10.3 |
| | — |
| | 41.0 |
|
Non-current liabilities of discontinued operations | 3.7 |
| | — |
| | — |
| | — |
| | 3.7 |
|
Total liabilities | 461.7 |
| | 356.9 |
| | 58.2 |
| | (204.6 | ) | | 672.2 |
|
Total stockholders’ equity | 276.4 |
| | 470.0 |
| | 55.5 |
| | (525.5 | ) | | 276.4 |
|
Total liabilities and stockholders’ equity | $ | 738.1 |
| | $ | 826.9 |
| | $ | 113.7 |
| | $ | (730.1 | ) | | $ | 948.6 |
|
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss) Three Months Ended October 1, 2017 (Unaudited) (in millions) |
| | | | | | | | | | | | | | | | | | | |
| Parent Company | | Subsidiary Guarantors on a Combined Basis | | Non-Guarantors on a Combined Basis | | Eliminations | | Consolidated |
Service revenues | $ | — |
| | $ | 84.8 |
| | $ | 1.9 |
| | $ | — |
| | $ | 86.7 |
|
Product sales | — |
| | 99.3 |
| | 15.0 |
| | (4.8 | ) | | 109.5 |
|
Total revenues | — |
| | 184.1 |
| | 16.9 |
| | (4.8 | ) | | 196.2 |
|
Cost of service revenues | — |
| | 59.7 |
| | 1.1 |
| | — |
| | 60.8 |
|
Cost of product sales | — |
| | 80.2 |
| | 11.9 |
| | (4.8 | ) | | 87.3 |
|
Total costs | — |
| | 139.9 |
| | 13.0 |
| | (4.8 | ) | | 148.1 |
|
Gross profit | — |
| | 44.2 |
| | 3.9 |
| | — |
| | 48.1 |
|
Selling, general and administrative expenses | 2.3 |
| | 35.3 |
| | 3.2 |
| | — |
| | 40.8 |
|
Research and development expenses | — |
| | 4.2 |
| | — |
| | — |
| | 4.2 |
|
Operating income (loss) from continuing operations | (2.3 | ) | | 4.7 |
| | 0.7 |
| | — |
| | 3.1 |
|
Other income (expense): | | | | | | | | | |
Interest income (expense), net | (7.7 | ) | | — |
| | — |
| | — |
| | (7.7 | ) |
Other income (expense), net | — |
| | 0.1 |
| | 0.5 |
| | — |
| | 0.6 |
|
Total other income (expense), net | (7.7 | ) | | 0.1 |
| | 0.5 |
| | — |
| | (7.1 | ) |
Income (loss) from continuing operations before income taxes | (10.0 | ) | | 4.8 |
| | 1.2 |
| | — |
| | (4.0 | ) |
Provision (benefit) for income taxes from continuing operations | 0.3 |
| | (0.1 | ) | | — |
| | — |
| | 0.2 |
|
Income (loss) from continuing operations | (10.3 | ) | | 4.9 |
| | 1.2 |
| | — |
| | (4.2 | ) |
Loss from discontinued operations | (0.1 | ) | | — |
| | — |
| | — |
| | (0.1 | ) |
Equity in net income (loss) of subsidiaries | 6.1 |
| | 1.2 |
| | — |
| | (7.3 | ) | | — |
|
Net income (loss) | $ | (4.3 | ) | | $ | 6.1 |
| | $ | 1.2 |
| | $ | (7.3 | ) | | $ | (4.3 | ) |
Comprehensive income (loss) | $ | (4.5 | ) | | $ | 6.1 |
| | $ | 1.0 |
| | $ | (7.1 | ) | | $ | (4.5 | ) |
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss) Three Months Ended September 25, 2016 (Unaudited) (in millions) |
| | | | | | | | | | | | | | | | | | | |
| Parent Company | | Subsidiary Guarantors on a Combined Basis | | Non-Guarantors on a Combined Basis | | Eliminations | | Consolidated |
Service revenues | $ | — |
| | $ | 84.3 |
| | $ | 2.9 |
| | $ | — |
| | $ | 87.2 |
|
Product sales | — |
| | 67.8 |
| | 12.4 |
| | (2.0 | ) | | 78.2 |
|
Total revenues | — |
| | 152.1 |
| | 15.3 |
| | (2.0 | ) | | 165.4 |
|
Cost of service revenues | — |
| | 62.9 |
| | 1.8 |
| | — |
| | 64.7 |
|
Cost of product sales | — |
| | 67.7 |
| | 9.1 |
| | (2.0 | ) | | 74.8 |
|
Total costs | — |
| | 130.6 |
| | 10.9 |
| | (2.0 | ) | | 139.5 |
|
Gross profit | — |
| | 21.5 |
| | 4.4 |
| | — |
| | 25.9 |
|
Selling, general and administrative expenses | 0.2 |
| | 33.3 |
| | 2.2 |
| | — |
| | 35.7 |
|
Research and development expenses | — |
| | 3.1 |
| | 0.1 |
| | — |
| | 3.2 |
|
Operating income (loss) from continuing operations | (0.2 | ) | | (14.9 | ) | | 2.1 |
| | — |
| | (13.0 | ) |
Other income (expense): | | | | | | | | | |
Interest expense, net | (8.7 | ) | | — |
| | — |
| | — |
| | (8.7 | ) |
Other income (expense), net | — |
| | 0.1 |
| | — |
| | — |
| | 0.1 |
|
Total other income (expense), net | (8.7 | ) | | 0.1 |
| | — |
| | — |
| | (8.6 | ) |
Income (loss) from continuing operations before income taxes | (8.9 | ) | | (14.8 | ) | | 2.1 |
| | — |
| | (21.6 | ) |
Provision for income taxes from continuing operations | 0.1 |
| | 1.7 |
| | 0.1 |
| | — |
| | 1.9 |
|
Income (loss) from continuing operations | (9.0 | ) | | (16.5 | ) | | 2.0 |
| | — |
| | (23.5 | ) |
Loss from discontinued operations | — |
| | (0.1 | ) | | — |
| | — |
| | (0.1 | ) |
Equity in net income (loss) of subsidiaries | (14.6 | ) | | 2.0 |
| | — |
| | 12.6 |
| | — |
|
Net income (loss) | $ | (23.6 | ) | | $ | (14.6 | ) | | $ | 2.0 |
| | $ | 12.6 |
| | $ | (23.6 | ) |
Comprehensive income (loss) | $ | (23.7 | ) | | $ | (14.6 | ) | | $ | 1.9 |
| | $ | 12.7 |
| | $ | (23.7 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss) Nine Months Ended October 1, 2017 (Unaudited) (in millions) |
| Parent Company | | Subsidiary Guarantors on a Combined Basis | | Non-Guarantors on a Combined Basis | | Eliminations | | Consolidated |
Service revenues | $ | — |
| | $ | 253.5 |
| | $ | 9.8 |
| | $ | — |
| | $ | 263.3 |
|
Product sales | — |
| | 256.6 |
| | 40.8 |
| | (11.0 | ) | | 286.4 |
|
Total revenues | — |
| | 510.1 |
| | 50.6 |
| | (11.0 | ) | | 549.7 |
|
Cost of service revenues | — |
| | 182.3 |
| | 7.3 |
| | — |
| | 189.6 |
|
Cost of product sales | — |
| | 197.2 |
| | 33.3 |
| | (11.0 | ) | | 219.5 |
|
Total costs | — |
| | 379.5 |
| | 40.6 |
| | (11.0 | ) | | 409.1 |
|
Gross profit | — |
| | 130.6 |
| | 10.0 |
| | — |
| | 140.6 |
|
Selling, general and administrative expenses | 5.8 |
| | 105.4 |
| | 9.3 |
| | — |
| | 120.5 |
|
Research and development expenses | — |
| | 11.9 |
| | 0.8 |
| | — |
| | 12.7 |
|
Operating income (loss) from continuing operations | (5.8 | ) | | 13.3 |
| | (0.1 | ) | | — |
| | 7.4 |
|
Other income (expense): | | | | | | | | | |
Interest income (expense), net | (23.2 | ) | | 0.1 |
| | — |
| | — |
| | (23.1 | ) |
Loss on extinguishment of debt | (2.1 | ) | | — |
| | — |
| | — |
| | (2.1 | ) |
Other income (expense), net | — |
| | 0.2 |
| | 0.8 |
| | — |
| | 1.0 |
|
Total other income (expense), net | (25.3 | ) | | 0.3 |
| | 0.8 |
| | — |
| | (24.2 | ) |
Income (loss) from continuing operations before income taxes | (31.1 | ) | | 13.6 |
| | 0.7 |
| | — |
| | (16.8 | ) |
Provision for income taxes from continuing operations | 0.4 |
| | 2.8 |
| | 0.3 |
| | — |
| | 3.5 |
|
Income (loss) from continuing operations | (31.5 | ) | | 10.8 |
| | 0.4 |
| | — |
| | (20.3 | ) |
Loss from discontinued operations | (0.2 | ) | | — |
| | — |
| | — |
| | (0.2 | ) |
Equity in net income (loss) of subsidiaries | 11.2 |
| | 0.4 |
| | — |
| | (11.6 | ) | | — |
|
Net income (loss) | $ | (20.5 | ) | | $ | 11.2 |
| | $ | 0.4 |
| | $ | (11.6 | ) | | $ | (20.5 | ) |
Comprehensive income (loss) | $ | (20.6 | ) | | $ | 11.2 |
| | $ | 0.3 |
| | $ | (11.5 | ) | | $ | (20.6 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
Condensed Consolidating Statement of Operations and Comprehensive Income (Loss) Nine Months Ended September 25, 2016 (Unaudited) (in millions) |
| Parent Company | | Subsidiary Guarantors on a Combined Basis | | Non-Guarantors on a Combined Basis | | Eliminations | | Consolidated |
Service revenues | $ | — |
| | $ | 244.0 |
| | $ | 14.0 |
| | $ | — |
| | $ | 258.0 |
|
Product sales | — |
| | 195.8 |
| | 38.4 |
| | (5.6 | ) | | 228.6 |
|
Total revenues | — |
| | 439.8 |
| | 52.4 |
| | (5.6 | ) | | 486.6 |
|
Cost of service revenues | — |
| | 179.6 |
| | 9.8 |
| | — |
| | 189.4 |
|
Cost of product sales | — |
| | 165.9 |
| | 29.9 |
| | (5.6 | ) | | 190.2 |
|
Total costs | — |
| | 345.5 |
| | 39.7 |
| | (5.6 | ) | | 379.6 |
|
Gross profit | — |
| | 94.3 |
| | 12.7 |
| | — |
| | 107.0 |
|
Selling, general and administrative expenses | 4.0 |
| | 109.1 |
| | 7.0 |
| | — |
| | 120.1 |
|
Research and development expenses | — |
| | 9.9 |
| | 0.2 |
| | — |
| | 10.1 |
|
Operating income (loss) from continuing operations | (4.0 | ) | | (24.7 | ) | | 5.5 |
| | — |
| | (23.2 | ) |
Other income (expense): | | | | | | | | | |
Interest expense, net | (26.0 | ) | | (0.1 | ) | | — |
| | — |
| | (26.1 | ) |
Other income (expense), net | — |
| | (0.1 | ) | | 0.7 |
| | — |
| | 0.6 |
|
Total other income (expense), net | (26.0 | ) | | (0.2 | ) | | 0.7 |
| | — |
| | (25.5 | ) |
Income (loss) from continuing operations before income taxes | (30.0 | ) | | (24.9 | ) | | 6.2 |
| | — |
| | (48.7 | ) |
Provision for income taxes from continuing operations | 0.2 |
| | 6.4 |
| | 0.7 |
| | — |
| | 7.3 |
|
Income (loss) from continuing operations | (30.2 | ) | | (31.3 | ) | | 5.5 |
| | — |
| | (56.0 | ) |
Loss from discontinued operations | (0.1 | ) | | (0.1 | ) | | — |
| | — |
| | (0.2 | ) |
Equity in net income (loss) of subsidiaries | (25.9 | ) | | 5.5 |
| | — |
| | 20.4 |
| | — |
|
Net income (loss) | $ | (56.2 | ) | | $ | (25.9 | ) | | $ | 5.5 |
| | $ | 20.4 |
| | $ | (56.2 | ) |
Comprehensive income (loss) | $ | (56.4 | ) | | $ | (25.9 | ) | | $ | 5.3 |
| | $ | 20.6 |
| | $ | (56.4 | ) |
Condensed Consolidating Statement of Cash Flows Nine Months Ended October 1, 2017 (Unaudited) (in millions) |
| | | | | | | | | | | | | | | | | | | |
| Parent Company | | Subsidiary Guarantors on a Combined Basis | | Non-Guarantors on a Combined Basis | | Eliminations | | Consolidated |
Net cash provided by (used in) operating activities from continuing operations | $ | (15.3 | ) | | $ | (6.1 | ) | | $ | 4.7 |
| | $ | — |
| | $ | (16.7 | ) |
Investing activities: | | | | | | | | | |
Cash paid for acquisitions, net of cash acquired | — |
| | 0.2 |
| | — |
| | — |
| | 0.2 |
|
Investment in affiliated companies | (23.0 | ) | | — |
| | — |
| | 23.0 |
| | — |
|
Change in restricted cash | — |
| | 0.2 |
| | — |
| | — |
| | 0.2 |
|
Capital expenditures | (0.8 | ) | | (16.1 | ) | | (1.4 | ) | | — |
| | (18.3 | ) |
Net cash provided by (used in) investing activities from continuing operations | (23.8 | ) | | (15.7 | ) | | (1.4 | ) | | 23.0 |
| | (17.9 | ) |
Financing activities: | | | | | | | | | |
Extinguishment of long-term debt | (64.0 | ) | | — |
| | — |
| | — |
| | (64.0 | ) |
Repayment of debt | — |
| | — |
| | (0.8 | ) | | — |
| | (0.8 | ) |
Proceeds from the issuance of common stock | 268.0 |
| | — |
| | — |
| | — |
| | 268.0 |
|
Proceeds from the sale of employee stock purchase plan shares | 1.5 |
| | — |
| | — |
| | — |
| | 1.5 |
|
Financings from affiliated companies | — |
| | 23.0 |
| | — |
| | (23.0 | ) | | — |
|
Net cash provided by (used in) financing activities from continuing operations | 205.5 |
| | 23.0 |
| | (0.8 | ) | | (23.0 | ) | | 204.7 |
|
Net cash flows of continuing operations | 166.4 |
| | 1.2 |
| | 2.5 |
| | — |
| | 170.1 |
|
Net operating cash flows from discontinued operations | (0.1 | ) | | — |
| | — |
| | — |
| | (0.1 | ) |
Net investing cash flows from discontinued operations | (0.5 | ) | | — |
| | — |
| | — |
| | (0.5 | ) |
Effect of exchange rate changes on cash and cash equivalents | — |
| | — |
| | 0.6 |
| | — |
| | 0.6 |
|
Net increase in cash and cash equivalents | $ | 165.8 |
| | $ | 1.2 |
| | $ | 3.1 |
| | $ | — |
| | $ | 170.1 |
|
Condensed Consolidating Statement of Cash Flows Nine Months Ended September 25, 2016 (Unaudited) (in millions) |
| | | | | | | | | | | | | | | | | | | |
| Parent Company | | Subsidiary Guarantors on a Combined Basis | | Non-Guarantors on a Combined Basis | | Eliminations | | Consolidated |
Net cash provided by (used in) operating activities from continuing operations | $ | (12.0 | ) | | $ | 5.6 |
| | $ | (2.3 | ) | | $ | — |
| | $ | (8.7 | ) |
Investing activities: | | | | | | | | | |
Investment in affiliated companies | (1.0 | ) | | — |
| | — |
| | 1.0 |
| | — |
|
Change in restricted cash | — |
| | 0.1 |
| | — |
| | — |
| | 0.1 |
|
Capital expenditures | (0.5 | ) | | (3.2 | ) | | (1.4 | ) | | — |
| | (5.1 | ) |
Net cash provided by (used in) investing activities from continuing operations | (1.5 | ) | | (3.1 | ) | | (1.4 | ) | | 1.0 |
| | (5.0 | ) |
Financing activities: | | | | | | | | | |
Repayment of debt | — |
| | — |
| | (0.8 | ) | | — |
| | (0.8 | ) |
Proceeds from the sale of employee stock purchase plan shares | 2.1 |
| | — |
| | — |
| | — |
| | 2.1 |
|
Financing from affiliated companies | — |
| | 1.0 |
| | — |
| | (1.0 | ) | | — |
|
Net cash provided by (used in) financing activities from continuing operations | 2.1 |
| | 1.0 |
| | (0.8 | ) | | (1.0 | ) | | 1.3 |
|
Net cash flows of continuing operations | (11.4 | ) | | 3.5 |
| | (4.5 | ) | | — |
| | (12.4 | ) |
Net operating cash flows from discontinued operations | 0.3 |
| | (0.2 | ) | | — |
| | — |
| | 0.1 |
|
Net investing cash flows from discontinued operations | 4.3 |
| | — |
| | — |
| | — |
| | 4.3 |
|
Net increase (decrease) in cash and cash equivalents | $ | (6.8 | ) | | $ | 3.3 |
| | $ | (4.5 | ) | | $ | — |
| | $ | (8.0 | ) |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains “forward-looking statements” relating to our future financial performance, the market for our services and our expansion plans and opportunities. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of such terms or other comparable terminology. These forward-looking statements reflect our current beliefs, expectations and projections, are based on assumptions, and are subject to known and unknown risks and uncertainties that could cause our actual results or achievements to differ materially from any future results or achievements expressed in or implied by our forward-looking statements. Many of these factors are beyond our ability to control or predict. As a result, you should not place undue reliance on forward-looking statements. Important risks and uncertainties that could cause our actual results or achievements to differ materially from the results or achievements reflected in our forward-looking statements include, but are not limited to: changes or cutbacks in spending or the appropriation of funding by the federal government,Federal Government, including the U.S. Department of Defense (the “DoD”(“DoD”), which could cause delays, cancellations or reductions of key government contracts; bid protests; changes in the scope or timing of our projects; the timing, rescheduling or cancellation of significant customer contracts and agreements,agreements; failure by our subcontractors or suppliers to perform their contractual obligations; our failure to meet performance obligations; if the unmanned systems markets do not experience significant growth, or it the products we have developed or will develop do not become programs of record; if we cannot expand our customer base or if our products do not achieve broad acceptance which could impact our ability to achieve our anticipated level of growth; consolidation by or the loss of key customers; risks of adverse regulatory action or litigation; risks associated with debt leverage and the refinancing of outstanding debt;leverage; failure to successfully achieve our acquisition, integration, cost reduction or divestiture strategies; risks related to security breaches, cybersecurity attacks or other significant disruptions of our information systems; risks related to the new DoD CMMC requirement recently issued by the Pentagon; risks associated with pandemics, epidemics or other public health emergencies, such as the outbreak of coronavirus disease 2019 (“COVID-19”); risks related to unknown defects or errors in our products; risks relating to the ongoing conflict in Ukraine and the Israeli-Palestinian military conflict and the risks to our operations located in Israel; risks related to continued interest rate increases by the Federal Reserve; and competition in the marketplace, which could reduce revenues and profit margins, as well as the additional risks and uncertainties described in this Quarterly Report on Form 10-Q, in “Item 1A-Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 25, 20162022 filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 27, 201723, 2023 (the “Form 10-K”), and in other reports that we have filed with the SEC. These forward-looking statements reflect our views and assumptions only as of the date such forward-looking statements are made. Except as required by law, we assume no responsibility for updating any forward-looking statements, whether as a result of new information, future events or otherwise.
All references to “us,” “we,” “our,” the “Company” and “Kratos” refer to Kratos Defense & Security Solutions, Inc., a Delaware corporation, and its wholly owned subsidiaries.
Overview
We areKratos is a mid-size government contractor atTechnology Company in the forefront of the DoD’s Third Offset Strategy. We are a leadingDefense, National Security and Global markets. Kratos develops, rapidly brings to market and fields transformational technology, intellectual property and proprietary product and solutions company focused on the U.S. and its allies’ national security. A key element of our business plan is to make Company-funded investments related to key platforms, products, and systems, so that we own the related intellectual property. We are a demonstrated leader in innovation and rapidly designing, developing, demonstrating, and fielding leading technology productssoftware and systems, at an affordable cost. We
Through demonstrated and proven commercial and venture capital backed approaches, including proactive, internally funded research and streamlined development processes and by partnering with similar entrepreneurial entities, Kratos is focused on being first to market, well in advance of the competition, which is typically focused on and aligned with government funding cycles and the related extended development and fielding timelines. At Kratos, affordability is a technology, better is the enemy of good enough and ready today, and being first to market with relevant offerings is our key competitive advantage.
Kratos’ primary focus areas are an industry leader in high performance, jet powered, unmanned aerial drone target systems, used to test weapon systemsspace and to train the warfighter, and a provider of high performance unmanned combat aerial systems for force multiplication and amplification. We are also an industry leader in satellite communications, microwave electronics cyber security/products, cybersecurity/warfare, rocket, hypersonic and missile defense systems, turbine technologies, and combatCommand, Control, Communication, Computing, Combat, Intelligence Surveillance and Reconnaissance (“C5ISR”) Systems and training systems. We have primarily an engineering and technically oriented work force of approximately 2,900 employees with a significant number holding national security clearances. Substantially all of our work is performed at customer locations, in a secure facility or at a critical infrastructure location. Our primary end customers are national security related agencies and homeland security related agencies.solutions. We believe that our technology, intellectual property, proprietary products, and software and designed-in positions on our customers’ programs, platforms and systems, and our ability to rapidly develop, demonstrate and field affordable leading technology solutions ahead of the competition, gives us a competitive advantage and creates a high barrier to entry into our markets.
Our workforce is primarily engineering and technically oriented with a significant number of employees holding National Security clearances. Much of our work is performed at customer locations, or in secure manufacturing facilities and other secured facilities. Our primary end customers are defense and national security related agencies, communications and other global enterprises. Our entire organization is focused on executing our strategy of becomingbeing the disruptive, affordable, leading technology and intellectual property based companyproduct, software and system provider in our industry.markets.
Industry Update
On March 9, 2023, President Biden’s fiscal year 2024 budget request was submitted to Congress, initiating the 2024 defense budget authorization and appropriations legislative process. The following isrequest includes an update$886 billion proposed appropriation for national defense, of events relating towhich $842 billion would be for the U.S. political and economic environment since the filingDepartment of our Form 10-K and subsequent filings that we have made with the SEC, including our Quarterly Reports on Form 10-Q.
In March 2017, President Trump submitted a budget proposalDefense (“DoD”) base budget. The proposed legislation also caps national defense spending at $886 billion for fiscal year (FY) 20182024 and $895 billion for fiscal year 2025. On June 3, 2023, President Biden signed into law a bill to Congress. The proposal includes fundingsuspend the $31.4 trillion debt ceiling through January 1, 2025. On July 14, 2023, the U.S. House of $639 billionRepresentatives passed its version of a sweeping Bill setting Policy for the DoD, comprisingthe Fiscal 2024 National Defense Authorization Act (“NDAA”), at $886 billion. The vote of 219-210 was largely along party lines, a base budgetdeparture from the typical bipartisan support for a bill that has passed every year since 1961. The Senate passed its version of $574the NDAA Bill on July 27, 2023 at $866 billion and Overseas Contingency Operations / Global Warincluded several significant differences from the previously passed U.S. House of Representative Bill. The NDAA is one of the major pieces of legislation Congress passes annually. The NDAA is closely watched by industry and other stakeholders and related interests, as the NDAA typically determines the specific spending outlays and purchases of the Department of Defense and other National Security related Agencies.
The two chambers (i.e. the House and Senate) continue the legislative process on Terror (OCO/GWT) fundingthe fiscal year 2024 budget. Final passage of $65 billion. The requested FY 2018 funding level for the DoDFiscal 2024 NDAA is approximately $32 billion overanticipated before the FY 2017 funding level.end of this calendar year. Congress must approve or revise the President’s FY 2018 budget proposals through enactment ofwill also continue efforts to reschedule appropriations bills and other policy legislation, which would then require final Presidential approval.
In March 2017,conference agreements, but these actions depend on the debt ceiling was reached and the Treasury Department began taking “extraordinary measures” to finance the government.Senate calendar. On September 8, 2017,30, 2023, the President signed a bill increasing the debt ceiling to December 8, 2017. The bill also approved $15.25 billion in relief funds for the victims of Hurricane Harvey and Hurricane Irma. It included an extension of government spending to December 8, 2017 as well. Congress must approve a new debt ceiling and create a new budget by December 8, 2017.
On September 28, 2017, the Senate Budget Committee released the FY 2018 Senate Budget Resolution. The budget proposes $3.3 trillion in net policy savings over ten years, the result of $4.9 trillion of largely unspecified spending cuts and $1.6 trillion of tax cuts, in addition to $1.4 trillion of claimed savings due to increased economic growth. The Senate's resolution keeps defense spending at the budget cap levels outlined by the Budget Control Act. It cuts non-defense spending starting in 2019, cutting it by as much as $106 billion by 2027.
It is unclear whether an annual appropriations bill will be enacted for FY 2018 at the levels proposed by the President. On October 1, 2017, the government has once again begun its fiscal year operating under a continuing resolution, which is set to expire on December 8, 2017.
It is unclear when or if an annual appropriations bill will be enacted for FY 2018 or at what levels. Failure to enact appropriations or an additional Continuing Resolution Authorization by December 8, 2017 could result in(“CRA”) to continue funding the U.S Government at fiscal year 2023 levels through November 17, 2023, or if earlier, enactment of the Fiscal 2024 NDAA. Under such CRA, funding at amounts consistent with appropriated levels for fiscal year 2023 is available, subject to certain restrictions, but new contracts and program starts are not authorized. If Congress is not able to enact fiscal year 2024 appropriations bills or extend such CRA, the U.S Government would be subject to a government shutdown, of unknown duration. If a prolonged government shutdown were to occur, itwhich could result in program delays or, cancellations, payment issues and/or stop work ordersother disruptions.
The current budget environment, including Israel and Ukraine funding support, heightened levels of inflation, related supply chain disruption, and the appropriations process, continues to create significant short and long-term industry risks. Additionally, with the recent change of party in Congress in 2022, resulting with the Democrats controlling the Senate and the Presidency and the Republicans controlling the House of Representatives, considerable uncertainty exists regarding how future budgets, funding, timing and related program decisions will unfold, including the potential differing defense spending priorities of the Biden administration and of the Congress.
We believe continued budget pressures (which are expected), CRAs, (which are also expected), future Federal Government debt ceiling issues, or Federal Government shutdowns could have serious negative consequences for the security of our country and the defense industrial base, including the Company and the related customers, employees, suppliers, investors, and communities that rely on companies in the defense industrial base. It is likely that budget and program decisions made in such an uncertain environment would have long-term implications for our Company and the entire defense industry. Additionally, funding for certain programs, including those in which we currently participate, may be reduced, delayed or cancelled, and budget uncertainty or funding cuts globally could adversely affect the viability of our customers, partners, teammates, subcontractors, suppliers, and our employee base.
We believe that our business is well-positioned in areas that the DoD and other customers indicate are priorities for future defense spending, including those based on the 2022 National Security Strategy document, the 2023 U.S. National Security related budget and NDAA and the recently released fiscal 2024 National Security Budget request and NDAA, and also the related Future Years Defense Program or five year projection of the forces, resources and programs needed to support the DoD’s strategy and operations.
However, due to a divided Congress and Executive Branch, federal budgetary uncertainty, expected CRAs, potential budgetary restrictions or limitations, defense or other spending cuts, including the budgetary impacts of support for the conflicts in Israel and Ukraine, challenges in the appropriations process, the debt ceiling issue and ongoing fiscal debates, the short and long term impacts to the industry and to our business remain uncertain.
Such a challenging federal and DoD budgetary environment may negatively impact our customers, business and programs and could limithave a material adverse effect on our forecasts, estimates, financial position, results of operations and/or cash flows.
We continue to be affected by various unfavorable macroeconomic conditions including significant adverse supply chain disruptions that continue throughout the industry and for us, and related delays in the receipt and delivery of materials,
parts, supplies, etc., which in certain instances and for certain items is significant. In addition, inflation and the related increased costs of inputs needed to execute our business, including materials, parts, supplies, consultants, subcontractors, vendors, etc. have significantly increased our business costs and have significantly adversely impacted our operations, profit margins and financial forecasts.
Also, a shortage of qualified labor, and the cost of that labor for the Company and its labor base is a significant operational challenge for the Company. The cost of labor has increased significantly and current challenges in hiring, obtaining and retaining employees, including those employees requiring National Security clearances, is adversely impacting Kratos’ ability to performexecute its business. There is also a significant industry wide labor shortage, including in the Science, Technology, Engineering, and Math (STEM) discipline areas, and also including employees willing and/or able to obtain National Security clearances, and for high level manufacturing and production disciplines.
In addition, recent actions by the Federal Reserve to increase interest rates have impacted our interest expense on our U.S. Government contractsoutstanding debt borrowings and the U.S. Government’s abilityrelated cost of executing Kratos’ business. Each of these matters and issues are expected to make timely payments.continue for the foreseeable future and are expected to continue to adversely impact the Company’s operations, financial results and financial forecasts.
Reportable Segments
The Company currently operates in threetwo reportable segments:segments. The Kratos Government Solutions (“KGS”)KGS reportable segment is comprised of an aggregation of KGS operating segments, including our microwave electronicelectronics products, space, satellite communications, and cyber, training solutions, C5ISR/modular systems, turbine technologies, and defense and rocket support services operating segments. The Unmanned Systems (“US”)US reportable segment consists of our unmanned aerial, system and unmanned ground, unmanned seaborne and seabornecommand, control and communications system businesses. The Public Safety & Security (“PSS”) reportable segment provides independent integrated solutions for advanced homeland security, public safety, critical infrastructure, and security and surveillance systems for government and commercial applications.
We organize our business segments based primarily on the nature of the products, solutions and services offered. Transactions between segments are negotiated and accounted for under terms and conditions similar to other government and commercial contracts, and these intercompany transactions are eliminated in consolidation. For additional information regarding our reportable segments, see Note 811 of the Notes toaccompanying Condensed Consolidated Financial Statements. From a customer and solutions perspective, we view our business as an integrated whole, leveraging skills and assets wherever possible.
Key Financial Statement Concepts
There have been no changes to our key financial statement concepts for the nine months ended October 1, 2017. For a complete description of our business and a discussion of our critical accounting matters, please refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in the Form 10-K.
Comparison of Results for the Three Months Ended October 1, 20172023 to the Three Months Ended September 25, 20162022
Revenues. Revenues by operating segment for the three months ended October 1, 20172023 and September 25, 20162022 are as follows (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| October 1, 2023 | | September 25, 2022 | | $ change | | % change |
Kratos Government Solutions | | | | | | | |
Service revenues | $ | 104.4 | | | $ | 87.3 | | | $ | 17.1 | | | 19.6 | % |
Product sales | 113.5 | | | 91.3 | | | 22.2 | | | 24.3 | % |
Total Kratos Government Solutions | $ | 217.9 | | | $ | 178.6 | | | $ | 39.3 | | | 22.0 | % |
| | | | | | | |
Unmanned Systems | | | | | | | |
Service revenues | $ | 2.1 | | | $ | 1.3 | | | $ | 0.8 | | | 61.5 | % |
Product sales | 54.6 | | | 48.7 | | | 5.9 | | | 12.1 | % |
Total Unmanned Systems | 56.7 | | | 50.0 | | | 6.7 | | | 13.4 | % |
Total revenues | $ | 274.6 | | | $ | 228.6 | | | $ | 46.0 | | | 20.1 | % |
| | | | | | | |
Total service revenues | $ | 106.5 | | | $ | 88.6 | | | $ | 17.9 | | | 20.2 | % |
Total product sales | 168.1 | | | 140.0 | | | 28.1 | | | 20.1 | % |
Total revenues | $ | 274.6 | | | $ | 228.6 | | | $ | 46.0 | | | 20.1 | % |
|
| | | | | | | | | | | | | | |
| October 1, 2017 | | September 25, 2016 | | $ change | | % change |
Kratos Government Solutions | | | | | | | |
Service revenues | $ | 47.5 |
| | $ | 52.9 |
| | $ | (5.4 | ) | | (10.2 | )% |
Product sales | 67.9 |
| | 59.9 |
| | 8.0 |
| | 13.4 | % |
Total Kratos Government Solutions | 115.4 |
| | 112.8 |
| | 2.6 |
| | 2.3 | % |
Public Safety & Security service revenues | 39.2 |
| | 34.3 |
| | 4.9 |
| | 14.3 | % |
Unmanned Systems product sales | 41.6 |
| | 18.3 |
| | 23.3 |
| | 127.3 | % |
Total revenues | $ | 196.2 |
| | $ | 165.4 |
| | $ | 30.8 |
| | |
| | | | | | | |
Total service revenues | $ | 86.7 |
| | $ | 87.2 |
| | $ | (0.5 | ) | | (0.6 | )% |
Total product sales | 109.5 |
| | 78.2 |
| | 31.3 |
| | 40.0 | % |
Total revenues | $ | 196.2 |
| | $ | 165.4 |
| | $ | 30.8 |
| | 18.6 | % |
Revenues increased $30.8$46.0 million to $196.2$274.6 million for the three months ended October 1, 20172023 from $165.4$228.6 million for the three months ended September 25, 2016. The increase2022. Revenues in revenues wasour KGS segment increased $39.3 million primarily due to increased worka net increase of $19.7 million in our C5ISR, turbine technologies, microwave electronics products, defense and rocket support and training solutions businesses, and an increase of $19.6 million in our space and satellite communications and microwave products businesses offset by continued contraction in our legacy government services business within our KGS segment, an increase in our PSS segment of $4.9 million due primarily to a large security system deployment for a mass transportation authority and, to a lesser degree, to a new physical access control project for a large healthcare customer.business. Revenues in
our US segment increased due to an increase in shipments and production of certain of our unmanned aerial drone systems (“UAS”) primarily driven by the commencement of low rate initial production of our SSAT program and government funded work on certain new UAS initiatives.
Product sales increased $31.3$6.7 million to $109.5$56.7 million for the three months ended October 1, 20172023, primarily due to increased target drone activity as a result of timing of program contract awards and increased production volume as compared to the three months ended September 25, 2022.
Product sales increased $28.1 million to $168.1 million for the three months ended October 1, 2023 from $78.2$140.0 million for the three months ended September 25, 2016,2022, primarily as a result of an increase inincreased production and product shipments in our KGS segment and in our US segment. As a percentage of $8.0total consolidated revenues, product sales were 61.2% for the three months ended October 1, 2023 as compared to 61.2% for the three months ended September 25, 2022. Service revenues increased by $17.9 million to $106.5 million for the three months ended October 1, 2023 from $88.6 million for the three months ended September 25, 2022, primarily related to increased activity in our turbine technologies, and space and satellite business in our KGS segment.
Cost of Revenues. Cost of revenues increased $27.5 million to $201.2 million for the three months ended October 1, 2023 from $173.7 million for the three months ended September 25, 2022. The increase in cost of revenues was primarily related to increased activity in our turbine technologies, and space and satellite business in our KGS Segment.
Gross Margin. Gross margin increased to 26.7% for the three months ended October 1, 2023 from 24.0% for the three months ended September 25, 2022. Margins on services decreased to 25.8% for the three months ended October 1, 2023 from 26.5% for the three months ended September 25, 2022. Margins on products increased to 27.3% for the three months ended October 1, 2023 from 22.4% for the three months end September 25, 2022. Margins in the KGS segment increased to 27.9% for the three months ended October 1, 2023 from 24.7% for the three months ended September 25, 2022, primarily due to a more favorable mix of revenues. Margins in the US segment increased to 22.0% for the three months ended October 1, 2023 from 21.4% for the three months ended September 25, 2022, primarily due to a more favorable mix of products produced and shipped in the three months ended October 1, 2023.
Selling, General and Administrative (“SG&A”) Expenses. SG&A expenses increased $2.4 million to $50.9 million for the three months ended October 1, 2023 from $48.5 million for the three months ended September 25, 2022. As a percentage of revenues, SG&A decreased to 18.5% at October 1, 2023 from 21.2% at September 25, 2022.
Research and Development (“R&D”) Expenses. R&D expenses increased $0.7 million to $10.3 million for the three months ended October 1, 2023 from $9.6 million for the three months ended September 25, 2022, primarily due to increased development efforts in our space and satellite communications business. As a percentage of revenues, R&D decreased to 3.8% for the three months ended October 1, 2023 from 4.2% for the three months ended September 25, 2022. R&D expenses are made by the Company, typically in conjunction with our customers, for the Company to achieve a “first to market” position with our products or technology. We also invest in R&D expenses to achieve market leading “designed in” positions on major programs, platforms or systems.
Restructuring Expenses and Other. Restructuring expenses and other decreased to $0.0 million from $0.2 million for the three months ended October 1, 2023 and September 25, 2022, respectively.
Total Other Expense, Net. Total other expense, net increased to $5.4 million from $5.2 million for the three months ended October 1, 2023 and September 25, 2022, respectively. This increase in expense of $0.2 million was primarily related to an increase in interest expense of $1.3 million in the three months ended October 1, 2023 resulting from an increase in interest rates, partially offset by a decrease in expense of $1.0 million related to foreign transaction losses.
Provision (Benefit) for Income Taxes from Continuing Operations. The income tax expense from continuing operations for the three months ended October 1, 2023 was $3.8 million and $23.3the income tax benefit from continuing operations for the three months ended September 25, 2022 was $0.8 million. For the three months ended October 1, 2023 and September 25, 2022, the Company utilized the discrete effective tax rate method. The discrete method is applied when it is not possible to reliably estimate our full year effective tax rate due to significant permanent differences in relation to pre-tax book income, resulting in significant variability to our effective tax rate.
Comparison of Results for the Nine Months Ended October 1, 2023 to the Nine Months Ended September 25, 2022
Revenues. Revenues by operating segment for the nine months ended October 1, 2023 and September 25, 2022 are as follows (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| October 1, 2023 | | September 25, 2022 | | $ change | | % change |
Kratos Government Solutions | | | | | | | |
Service revenues | $ | 296.8 | | | $ | 231.3 | | | $ | 65.5 | | | 28.3 | % |
Product sales | 309.7 | | | 258.7 | | | 51.0 | | | 19.7 | % |
Total Kratos Government Solutions | $ | 606.5 | | | $ | 490.0 | | | $ | 116.5 | | | 23.8 | % |
Unmanned Systems | | | | | | | |
Service revenues | $ | 5.0 | | | $ | 4.0 | | | $ | 1.0 | | | 25.0 | % |
Product sales | 151.8 | | | 155.0 | | | (3.2) | | | (2.1) | % |
Total Unmanned Systems | 156.8 | | | 159.0 | | | (2.2) | | | (1.4) | % |
Total revenues | $ | 763.3 | | | $ | 649.0 | | | $ | 114.3 | | | 17.6 | % |
| | | | | | | |
Total service revenues | $ | 301.8 | | | $ | 235.3 | | | $ | 66.5 | | | 28.3 | % |
Total product sales | 461.5 | | | 413.7 | | | 47.8 | | | 11.6 | % |
Total revenues | $ | 763.3 | | | $ | 649.0 | | | $ | 114.3 | | | 17.6 | % |
| | | | | | | |
Revenues increased $114.3 million to $763.3 million for the nine months ended October 1, 2023 from $649.0 million for the nine months ended September 25, 2022. Revenues in our KGS segment increased $116.5 million, primarily due to the net increased contribution of $21.5 million in revenues from the recent acquisition of SRI’s Engineering Division (“SRE”), a net increase of $49.1 million in our C5ISR, turbine technologies, microwave electronics products, defense and rocket support and training solutions businesses, and an increase of $45.9 million in our space and satellite communications business. Revenues in our US segment decreased $2.2 million to $156.8 million for the nine months ended October 1, 2023 primarily due to a reduction in tactical drone based revenues as a result of timing of program contract awards, as compared to the nine months ended September 25, 2022.
Product sales increased $47.8 million to $461.5 million for the nine months ended October 1, 2023 from $413.7 million for the nine months ended September 25, 2022, primarily as a result of increased production activity in our KGS segment, offset partially by decreased volume in our US segment. As a percentage of total revenue, product sales were 55.8%60.5% for the threenine months ended October 1, 20172023 as compared to 47.3%63.7% for the threenine months ended September 25, 2016.2022. Service revenues decreasedincreased by $0.5$66.5 million to $86.7$301.8 million for the threenine months ended October 1, 20172023 from $87.2$235.3 million for the threenine months ended September 25, 2016.2022. The decreaseincrease was primarily related toa result of the decreaserecent Cosmic and SRE acquisitions as well as increased volume in revenues in our KGS segment, partially offset by an increase in service revenue in our PSS segment.the turbine technologies business.
Cost of Revenues.Revenues. Cost of revenues increased $8.6$82.2 million to $148.1$566.6 million for the threenine months ended October 1, 20172023 from $139.5$484.4 million for the threenine months ended September 25, 2016.2022. The increase in cost of revenues was primarily a result of the revenue changesincrease in revenues discussed above.
Gross Margin. Gross margin increased to 24.5% for the three months ended October 1, 2017 from 15.7% for the three months ended September 25, 2016. Margins on services increased to 29.9% for the three months ended October 1, 2017 from 25.8% for the three months ended September 25, 2016, due primarily to a more favorable mix of revenues. Margins on product sales increased to 20.3% for the three months ended October 1, 2017 from 4.3% for the three months ended September 25, 2016, due primarily to a loss accrual of $18.7 million that was recorded on the Low Cost Attritable Unmanned Aerial System Demonstration (“LCASD”) contract in our US segment during the three months ended September 25, 2016. Margins in the KGS segment decreased to 24.8% for the three months ended October 1, 2017 from 27.3% for the three months ended September 25, 2016, primarily as a result of a less favorable mix of revenues. Margins in the US segment increased to 20.4% for the three months ended October 1, 2017 from (77.6)% for the three months ended September 25, 2016, primarily due to the loss accrual on the LCASD contract recorded in the three months ended September 25, 2016. Margins in the PSS segment increased to 28.1% for the three months ended October 1, 2017 from 27.1% for the three months ended September 25, 2016, due primarily to a more favorable mix of revenues, as well as due to improved performance on certain integration projects.
Selling, General and Administrative (“SG&A”) Expenses. SG&A expense was $40.7 million for the three months ended October 1, 2017 and $35.5 million for the three months ended September 25, 2016. The increase was primarily driven by an increase in stock compensation expense of $1.7 million and due to the increase in revenues. As a percentage of revenues, SG&A decreased slightly to 20.7% at October 1, 2017 from 21.5% at September 25, 2016.
Research and Development (“R&D”) Expenses. R&D expenses were $4.2 million for the three months ended October 1, 2017 and $3.2 million for the three months ended September 25, 2016. As a percentage of revenues, R&D increased to 2.1% for the three months ended October 1, 2017 from 1.9% of revenues in the three months ended September 25, 2016. R&D expenditures are primarily related to investments we are making in conjunction with our customers, with the objectives of the Company’s products being the new platform for or “designed-in” to certain new long-term program opportunities and the Company owning certain intellectual property rights for products that support these programs as well as technology upgrades and refresh activities that are necessary for the next generation of our existing product lines specifically in our technology and satellite communications business.
Unused Office Space, Restructuring Expenses, and Other. The expense of $0.1 million for the three months ended October 1, 2017 was primarily due to employee termination costs related to personnel reduction actions taken in the third quarter of 2017. The expense of $0.2 million for the three months ended September 25, 2016 was primarily due to costs to move fixed assets and plant equipment from our closed modular systems facility.
Other Expense, Net. Other expense, net, decreased to $7.1 million from $8.6 million for the three months ended October 1, 2017 and September 25, 2016, respectively. The decrease in expense of $1.5 million is primarily related to a decrease in interest expense due to repurchases of our Notes (as defined below) that occurred in the fourth quarter of 2016 and the first quarter of 2017.
Provision for Income Taxes from Continuing Operations. Income tax expense from continuing operations for the three months ended October 1, 2017 and September 25, 2016 was $0.2 million and $1.9 million, respectively. For the three months ended October 1, 2017 and September 25, 2016, the expense was primarily a function of the estimated effective tax rate for the year. The estimated effective tax rate is driven by estimated foreign taxes, estimated federal and state taxes, permanent book/tax differences, tax amortization of intangible assets that have an indefinite life under accounting principles generally accepted in the U.S. (“GAAP”) and the projected income or loss for the year.
Loss from Discontinued Operations. The loss from discontinued operations was $0.1 million for the three months ended October 1, 2017. The loss from discontinued operations was $0.1 million for the three months ended September 25, 2016.
Comparison of Results for the Nine Months Ended October 1, 2017 to the Nine Months Ended September 25, 2016
Revenues. Revenues by operating segment for the nine months ended October 1, 2017 and2023 from 25.4% for the nine months ended September 25, 2016 are as follows (dollars in millions):
|
| | | | | | | | | | | | | | |
| October 1, 2017 | | September 25, 2016 | | $ change | | % change |
Kratos Government Solutions | | | | | | | |
Service revenues | $ | 149.4 |
| | $ | 163.1 |
| | $ | (13.7 | ) | | (8.4 | )% |
Product sales | 207.0 |
| | 178.3 |
| | 28.7 |
| | 16.1 | % |
Total Kratos Government Solutions | 356.4 |
| | 341.4 |
| | 15.0 |
| | 4.4 | % |
Public Safety & Security service revenues | 113.9 |
| | 94.9 |
| | 19.0 |
| | 20.0 | % |
Unmanned Systems product sales | 79.4 |
| | 50.3 |
| | 29.1 |
| | 57.9 | % |
Total revenues | $ | 549.7 |
| | $ | 486.6 |
| | $ | 63.1 |
| | |
| | | | | | | |
Total service revenues | $ | 263.3 |
| | $ | 258.0 |
| | $ | 5.3 |
| | 2.1 | % |
Total product sales | 286.4 |
| | 228.6 |
| | 57.8 |
| | 25.3 | % |
Total revenues | $ | 549.7 |
| | $ | 486.6 |
| | $ | 63.1 |
| | 13.0 | % |
Revenues increased $63.1 million2022. Margins on services decreased to $549.7 million24.7% for the nine months ended October 1, 20172023 from $486.6 million27.2% for the nine months ended September 25, 2016. The increase in revenues was primarily due to increased work in our satellite communications, training solutions and modular systems businesses within our KGS segment, an increase in our PSS business revenue of $19.0 million due primarily to a large security system deployment for a mass transportation authority and, to a lesser degree, to a new physical access control project for a large healthcare customer. Revenues in our US segment increased due to an increase in shipments and production of certain of our aerial drone systems and government funded work2022. Margins on certain new UAS initiatives.
Productproduct sales increased $57.8 million to $286.4 million26.5% for the nine months ended October 1, 20172023 from $228.6 million24.3% for the nine months ended September 25, 2016, primarily as a result of an increase2022. Margins in production and product shipments of $28.7 million in ourthe KGS segment and $29.1 million in our US segment. As a percentage of total revenue, product sales were 52.1%increased to 27.1% for the nine months ended October 1, 2017 as compared to 47.0%2023 from 26.9% for the nine months ended September 25, 2016. Service revenues increased by $5.3 million to $263.3 million for the nine months ended October 1, 2017 from $258.0 million for the nine months ended September 25, 2016. The increase was primarily related to the increase in revenues in our PSS segment.
Cost of Revenues. Cost of revenues increased $29.5 million to $409.1 million for the nine months ended October 1, 2017 from $379.6 million for the nine months ended September 25, 2016. The increase in cost of revenues was primarily a result of the revenue changes discussed above.
Gross margin increased to 25.6% for the nine months ended October 1, 2017 from 22.0% for the nine months ended September 25, 2016. Margins on services increased to 28.0% for the nine months ended October 1, 2017 from 26.6% for the nine months ended September 25, 2016, due primarily to a more favorable mix of revenues. Margins on product sales increased to 23.4% for the nine months ended October 1, 2017 from 16.8% for the nine months ended September 25, 2016,2022 primarily due to the loss accrual of $18.7 million that was recorded on the LCASD contract in our US segment during the nine months ended September 25, 2016. Margins in the KGS segment increased to 26.8% for the nine months ended October 1, 2017 from 26.1% for the nine months ended September 25, 2016, primarily as a result of a more favorable mix of revenues. Margins in the US segment increased to 19.3%20.7% for the nine months ended October 1, 20172023 from (16.5)%20.5% for the nine months ended September 25, 2016, primarily due to the LCASD loss accrual recorded during the nine months ended October 1, 2017. Margins in the PSS segment decreased to 26.3% for the nine months ended October 1, 2017 from 27.5% for the nine months ended September 25, 2016, due primarily to a less favorable mix of services performed, as well as due to improved performance on certain integration projects.2022.
SG&A Expenses.Expenses. SG&A expense was $120.0expenses were $146.0 million for the nine months ended October 1, 20172023 and $109.6$136.3 million for the nine months ended September 25, 2016. The increase was primarily driven by an increase in stock compensation expense of $2.6 million and due to the increase in revenues.2022. As a percentage of revenues, SG&A decreased to 21.8%19.1% at October 1, 20172023, from 22.5%21.0% at September 25, 2016, which is primarily due to the increase in revenue discussed above.2022.
R&D Expenses.Expenses. R&D expenses were $12.7$30.4 million for the nine months ended October 1, 20172023 and $10.1$28.0 million for the nine months ended September 25, 2016.2022, with the primary increases in expenses in ourspace and satellite communications
business. As a percentage of revenues, R&D increasedexpenses decreased to 2.3%4.0% for the nine months ended October 1, 20172023 from 2.1% of revenues in4.3% for the nine months ended September 25, 2016. R&D expenditures are primarily related to investments we are making in conjunction with our customers, with the objectives of the Company’s products being the new platform for or “designed-in” to certain new long-term program opportunities and the Company owning certain intellectual property rights for products that support these programs as well as technology upgrades and refresh activities that are necessary for the next generation of our existing product lines specifically in our technology and satellite communications business.2022.
Unused Office Space, Restructuring Expenses and Other. The expense of $0.5Other. Restructuring expenses and other decreased to $0.9 million for the nine months ended October 1, 2017 was primarily due to employee termination costs related to personnel reduction actions taken in the first and second quarters of 2017. The expense of $10.52023 from $6.4 million for the nine months ended September 25, 2016 was2022, primarily due to a $7.8 million charge that was recorded in the Company’s modular systems business as a result of the closure of one of its manufacturing facilities and the exit from certain lower margin product business lines, a $1.9$5.5 million litigation charge related to a litigationthe settlement of a contract dispute with an international customer in our PSS businessUS segment during the first quarter of 2016, and employee termination costs related to personnel reduction actions taken in the first quarter of 2016. The restructuring charge recorded in our modular systems business was comprised of $3.4 million related to fixed and intangible assets, $3.0 million related to exited product lines and $1.3 million related to excess facilities.nine months ended September 25, 2022.
Total Other Expense, Net. OtherNet. Total other expense, net decreased to $24.2 million from $25.5$15.9 million for the nine months ended October 1, 2017 and2023 from $26.9 million for the nine months ended September 25, 2016, respectively.2022. The decrease in other expense net, of $1.3$11.0 million iswas primarily related to the loss of $1.4 million and the realization of $0.4 million of unamortized issuance cost and $0.3 million of unamortized discount from the repurchase and extinguishment of $62.7 million of our Notes, which resulted in a $2.1$13.0 million loss on the extinguishment of debt inour Senior Secured Notes during the first quarter of 2017. This lossnine months ended September 25, 2022 which was partially offset by a reductionan increase in interest expense of $2.7$3.4 million due toduring the repurchases of the Notes that occurred in the fourth quarter of 2016 and the first quarter of 2017.nine months ended October 1, 2023 resulting from increased interest rates.
Provision (Benefit) for Income Taxes from Continuing Operations. IncomeOperations. The income tax expense from continuing operations for the nine months ended October 1, 20172023 was $6.9 million and the income tax benefit for the nine months ended September 25, 20162022 was $3.5 million and $7.3 million, respectively.$4.6 million. For the nine months ended October 1, 20172023 and September 25, 2016,2022, the expense was primarily a function ofCompany utilized the discrete effective tax rate method. The discrete method is applied when it is not possible to reliably estimate our full year effective tax rate due to significant permanent differences in relation to pre-tax book income, resulting in significant variability to our estimated effective tax rate forrate.
Backlog
On October 1, 2023, we had approximately $1,165.0 million of total backlog, of which $850.9 million was funded. We expect to recognize approximately 20% of the
year. The estimated effective tax rate is driven by estimated foreign taxes, estimated federal and state taxes, permanent book/tax differences, tax amortization of intangible assets that have remaining total backlog as revenue in fiscal year 2023, an indefinite life under GAAPadditional 47% in fiscal year 2024 and the projected income or loss for the year. The income tax expense for the nine months endedbalance thereafter. Our comparable total backlog balance as of September 25, 2016 includes a discrete tax expense2022, was approximately $1,068.9 million, of $1.9which $696.1 million related to an increase in uncertain tax positions.
Loss from Discontinued Operations. The loss from discontinued operations was $0.2 million for the nine months ended October 1, 2017. The loss from discontinued operations was $0.2 million for the nine months ended September 25, 2016.
funded. Backlog
As as of October 1, 2017 and2023 as compared to September 25, 2016,2022 has increased primarily as a result of contract awards in our backlog was approximately $798.9 millionSpace, Satellite, Cyber and $900.9 million, respectively, of which $586.2 million was funded in 2017Training, Turbine Technologies, Microwave Technologies and $582.4 million was funded in 2016. BacklogUnmanned Systems businesses.
Total backlog is our estimate of the amount of revenue we expectexpected to realizebe realized over the remaining life of awarded contracts and task orders that we have in hand as of the measurement date. Our totalTotal backlog consistscan include award fees, incentive fees, or other variable consideration estimated based on the most likely amount we expect to be entitled to receive, to the extent that it is probable that a significant reversal of cumulative revenue recognized will not occur. Total backlog can include both funded and unfunded backlog. future revenue under government contracts. Total backlog does not include orders for which neither party has performed and which each party has the unilateral right to terminate a wholly unperformed contract without compensating the other party. As such, total backlog generally does not include options for additional performance obligations which have not been executed unless they are considered a material right of the base agreement/contract. For indefinite delivery or indefinite quantity contracts, only awarded or funded task orders are included for backlog purposes.
We define funded backlog as estimated future revenue under government contracts and task orders for which funding has been appropriated by Congress and authorized for expenditure by the applicable agency, plus ouran estimate of the future revenue we expectexpected to realizebe realized from our commercial contracts that are under firm orders. Our fundedFunded backlog does not include the full potential value of our contracts because Congress often appropriates funds to be used by an agency for a particular program of a contract on a yearly or quarterly basis even though the contract may call for performance over a number of years. As a result, contracts typically are only partially funded at any point during their term, and all or some of the work to be performed under the contracts may remain unfunded unless and until Congress makes a subsequent appropriation and the procuring agency allocates funding to the contract.
Unfunded backlog reflects our estimate of future revenue under awarded government contracts and task orders for which either funding has not yet been appropriated or the expenditure has not yet been authorized. Our total backlog does not include estimates of revenue from government-wide acquisition contracts or General Services Administration schedules beyond awarded or funded task orders, but our unfunded backlog does include estimates of revenue beyond awarded or funded task orders for other types of indefinite delivery or indefinite quantity contracts based on our experience under such contracts and similar contracts. Unfunded backlog also includes priced options, which consist of the aggregate contract revenues expected to be earned as a result of a customer exercising an option period that has been specifically defined in the original contract award.
Contracts undertaken by us may extend beyond one year. Accordingly, portions are carried forward from one year to the next as part of backlog. Because many factors affect the scheduling of projects, no assurance can be given as to when or if revenue will be realized on projects included in our backlog. Although funded backlog represents only business that is considered to be firm, we cannot guarantee that cancellations or scope adjustments will not occur. The majority of funded backlog represents contracts with terms that would entitle us to all or a portion of our costs incurred and potential fees upon cancellation by the customer.
A significant number of the programs that Kratos’ systems, products and solutions support are multi-year/multi-decade in nature. Accordingly, based on historical customer usage or operational tempo, we have reasonable expectations or visibility of what ultimate orders for Kratos’ systems, products and solutions will be. We do not include these expected amounts in our backlog until a related contract award is received.
Management believes that year-to-year comparisons of backlog are not necessarily indicative of future revenues. The actual timing of receipt of revenues, if any, on projects included in backlog could change because many factors affect the scheduling of projects. In addition, cancellationcancellations or adjustments to contracts may occur. Backlog is typically subject to large variations from quarter-to-quarter as existing contracts are renewed or new contracts are awarded. Additionally, all U.S. Government contracts included in backlog, whether or not funded, may be terminated at the convenience of the U.S. Government.
Liquidity and Capital Resources
As of October 1, 2017,2023, we had cash and cash equivalents of $239.2$42.2 million compared with cash and cash equivalents of $69.1$81.3 million as of December 25, 2016,2022, which includes $8.4$25.5 million and $5.2$18.9 million, respectively, of cash and cash equivalents held by our foreign subsidiaries. We are not presently aware of any restrictions on the repatriation of these funds;funds, however, earnings of these foreign subsidiaries are essentially considered permanently invested in these foreign subsidiaries. If these funds were needed to fund our operations or satisfy obligations in the U.S.United States they could be repatriated, and their repatriation into the U.S.United States may cause us to incur additional U.S. income taxes or foreign withholding taxes. Any additional U.S. income taxes could be offset, in part or in whole, by foreign tax credits. The amount of such taxes and application of tax credits would be dependent on the income tax laws and other circumstances at the time these amounts are repatriated. Based on these variables, it is not practicable to determine the income tax liability that might be incurred if these earnings were to be repatriated. We do not currently intend to repatriate these earnings.
The carrying amount of ourOur total debt, including capital lease obligations, principal due on our Notes (as defined below), and other termlong-term debt decreased from $432.0$257.5 million at December 25, 20162022 to $370.7$243.7 million at October 1, 2017, due2023. Under the New Credit Facility, on February 18, 2022, we completed the refinancing of our outstanding $90 million revolving credit facility and $300 million of Senior Secured Notes, with a new 5-year $200 million Revolving Credit Facility and 5-year $200 million Term Loan A. As of October 1, 2023, the Company has made $6.3 million of principal payments on Term Loan A, and has net amounts outstanding of approximately $50.0 million under the new Revolving Credit Facility, with approximately $150.0 million remaining in borrowing capacity, less $13.7 million for outstanding letters of credit (as more fully described in Note 10 of the accompanying Condensed Consolidated Financial Statements).
On February 18, 2022, the proceeds of $300 million from the New Credit Facility, along with cash funded by us for the 3.25% call premium to redeem the Company’s outstanding Senior Secured Notes, plus accrued interest, was distributed to the trustee for redemption of $62.7the Senior Secured Notes. The redemption of the outstanding $300 million of ourSenior Secured Notes duringclosed on March 14, 2022, for an amount of cash equal to 103.25% of the nine monthsended October 1, 2017, in additionprincipal amount thereof plus accrued and unpaid interest thereon. We incurred a loss on the extinguishment of debt of $9.8 million related to the principal payment requiredcall premium on our ten-year term loan with a bank in Israel, offset partially by the amortization of the discount on ourSenior Secured Notes and the amortizationwrite-off of deferred financing costs.$3.2 million of unamortized debt issuance costs resulting in a total loss on extinguishment of debt of $13.0 million.
We use our operating cash flow to finance trade accounts receivable, fund necessary increases in inventory including increasing inventory stock levels and advance buys in larger lot sizes to gain pricing benefits where possible, in order to mitigate the impact of supply chain disruptions and price increases, utilize working capital to fund revenue growth, fund internal investments of engineering costs, fund capital expenditures, our internal R&Dresearch and product development investments and our ongoing operations, service our debt, enhance our security infrastructure, including cyber security infrastructure, and make strategic acquisitions. Financing trade accounts receivable is necessary because, on average, our customers do not pay us as quickly as we pay our vendors and employees for their goods and services sincebecause a number of our receivables are contractually billable and due to us only when certain contractual milestones are achieved. Financing increases in inventory balances isare necessary to fulfill shipment requirements to meet delivery schedules of our customers.customers, to fund advanced inventory purchases to mitigate supply chain disruptions, and to fund increased inventory levels related to revenue growth. These financing requirements have increased and have recently negatively impacted our operating cash flows due to actions we have taken to advance inventory purchases in an attempt to mitigate supply chain disruptions and to bolster our inventory levels. For the nine months ended October 1, 2023, approximately $23.7 million of operating cash flow was used to fund inventory purchases. Cash from continuing operations is primarily derived from our customer contracts in progress and associated changes in working capital components. Our days sales outstanding (“DSO”) have decreased to 113 days as of October 1, 2017 from 115134 days as of December 25, 2016.2022 to 117 days at October 1, 2023, primarily reflecting outstanding contractual billing milestones. Our DSOs can fluctuate from period to period, primarily as a resultare impacted by the achievement of certain contractual billing milestones that have not yet been attained, such as equipment shipments and deliveries on certain products, and for certain flight requirements that must be fulfilled on certain aerial target programs, or final billings which are not due until completion on certain of our large critical infrastructure deployment projects, and large training systems deliveries, and therefore we are unable to contractually bill for amounts outstanding related to those milestones at this time. In addition, we usedDespite the decreases in our working capital duringDSOs, net increases in our receivable balances of $32.6 million for the nine months ended October 1, 20172023 from the approximate 18 percent year over year revenue growth of the Company, have resulted in a use of operating cash flows reflecting the growth in our revenues in 2023.
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 build inventoryseek 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) and its costs incurred in settling with subcontractors and preparing and settling the termination proposal. However, we will 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 October 1, 2023, approximately $7.4$4.8 million in anticipationunbilled receivables remain outstanding on this project. In March 2022, we agreed, together with the customer, to a litigation settlement of future scheduled product deliveries.$6.0 million for a portion of the amounts outstanding on this project, which was collected in July 2022. The remaining unbilled balance of $4.8 million is subject to negotiation and settlement with the customer.
We were also in dispute with an international customer in our US segment concerning the completion of certain system requirements and contractual milestones related to a contract the Company acquired with the acquisition of CEi in 2012. In June 2022, the parties entered into a settlement agreement to resolve their dispute and to resolve all claims and counterclaims, and we are currently in the process of implementing the terms of the settlement agreement.The Company recorded a $5.5 million litigation settlement charge which is included in restructuring expenses and other in the year ended December 25, 2022.
A summary of our net cash provided by (used in)used in operating activities from continuing operations, investing activities from continuing operations, and financing activities from continuing operations and our cash flows from discontinued operations from our condensed consolidated statements of cash flows is as follows (in millions):
| | | | | | | | | | | |
| Nine Months Ended |
| October 1, 2023 | | September 25, 2022 |
Net cash used in operating activities from continuing operations | $ | (2.2) | | | $ | (32.3) | |
Net cash used in investing activities from continuing operations | (24.8) | | | (166.9) | |
Net cash used in financing activities from continuing operations | (12.1) | | | (21.4) | |
Net operating cash flows of discontinued operations | — | | | (0.3) | |
| | | |
|
| | | | | | | |
| Nine Months Ended |
| October 1, 2017 | | September 25, 2016 |
Net cash used in operating activities from continuing operations | $ | (16.7 | ) | | $ | (8.7 | ) |
Net cash used in investing activities from continuing operations | (17.9 | ) | | (5.0 | ) |
Net cash provided by financing activities from continuing operations | 204.7 |
| | 1.3 |
|
Net operating cash flows of discontinued operations | (0.1 | ) | | 0.1 |
|
Net investing cash flows of discontinued operations | (0.5 | ) | | 4.3 |
|
Net cash used in operating activities from continuing operations was $2.2 million for the nine months ended October 1, 2023. Net cash used in operating activities from continuing operations for the nine months ended October 1, 20172023 was positively impactedprimarily a result of the net loss of $3.2 million and changes in net working capital accounts of $51.9 million partially offset by decreasednoncash charges $53.1 million which includes stock compensation, depreciation and amortization. Net cash used in operating loss as compared toactivities from continuing operations was $32.3 million for the nine months ended September 25, 2016, offset by changes in2022 was primarily a result of the net loss of $28.3 million and the impact of working capital accounts, primarily reflecting requirements to fund ourrevenue growth. The net use in working capital accounts for the nine months ended October 1, 2017 includes approximately $6.1 million of internal development investments we are making related to the LCASD or “Valkyrie”. For fiscal 2017, we expect to spend $7.0 million to $10.0 million on internal product development efforts that are non-capital expenditures related to the LCASD program.
Net cash used in investing activities from continuing operations for the nine months ended October 1, 20172023 is comprised of $33.1 million in capital expenditures partially offset by receipt of $8.3 million of proceeds from the sale of Valkyries which consist primarilyhad been previously built as capital assets as they were produced ahead of investments in machinery, computer hardware and software and improvement of our physical properties in order to maintain suitable conditions in which to conduct our business, as well as expenditures related to internal capital investments to build company-owned capital aerial targets and related support equipment and tooling related to the Firejet, Valkyrie and UTAP-22 or “Mako” platforms for the nine months ended October 1, 2017.government contract award. During the nine months ended October 1, 2017,2023, capital expenditures of approximately $11.6$16.5 million were incurred in our US segment,business, primarily related to our unmanned combat targettactical initiative. We expect our capital expenditures for our fiscal 2017year 2023 to continue to be significant due primarily to the capital aerial targets and related support equipment and tooling thatfor investments we are building related to the Valkyrie and Mako platformsmaking, specifically in our US segment. Thesebusiness totaling approximately $20 to $25 million. The Company made the decision in the first quarter of 2023 to move forward with its second serial production run of 12 next generation Valkyries. The total estimated amount related to production of Valkyries and related equipment, ahead of government contract award, including the first and second production run, is $16 to $18 million of the estimated 2023 capital expenditures are expected to equal an aggregatefor the US business. The Company is currently producing or anticipates producing several versions of approximately $18.0 million to $23.0 million for fiscal 2017.the Valkyrie within the 24 unit production, based on routine communications with the customers, which mix and ultimate duration of the 24 Lot Build may change as a result. Net cash used in investing activities for the nine months ended September 25, 2016 is comprised of capital expenditures, which consist primarily of investment in machinery, computer hardware and software and improvement of our physical properties in order to maintain suitable conditions in which to conduct our business.
Net cash provided by financing activities from continuing operations for the nine months ended October 1, 2017 was primarily net proceeds of $268.0 million from equity offerings of approximately 28.0 million shares of common stock, partially
offset by $64.0 million used to retire approximately $62.7 million in principal amount of outstanding Notes. Net cash provided by financing activities from continuing operations for the nine months ended September 25, 20162022 is comprised of cash paid for acquisitions, net of cash acquired of $132.2 million, and $34.8 million in capital expenditures. Cash used for acquisitions included $74.0 million related to the acquisition of the assets of SRE, $37.5 million related to the acquisition of Cosmic, $15.3 million for the remaining purchase price due on the acquisition of CTT, and a $5.4 million payment due under the acquisition agreement for KTT Core, of which we purchased a controlling interest in February 2019.
Net cash used in financing activities from continuing operations was primarily$12.1 million for the nine months ended October 1, 2023, which included $3.8 million of principal payments on our $200 million Term Loan A and a $64.0 million payment (partially offset by a $54.0 million draw) on the new Revolving Credit Facility, payroll withholding taxes paid from vested restricted stock traded for taxes of $3.6 million and payments made on financing lease obligations of $1.2 million. These uses were partially offset by employee stock purchase plan receipts of $6.5 million. Net cash used in financing activities from continuing operations was $21.4 million for the nine months ended September 25, 2022, and included $309.8 million used to redeem our $300 million of Senior Secured Notes including the call premium of $9.8 million, debt issuance costs of $3.2 million, payroll withholding taxes paid from vested restricted stock traded for taxes of $12.3 million and payments made on
financing lease obligations of $1.0 million. These uses were partially offset by $300.0 million in proceeds from our New Credit Facility (partially offset by a $1.2 million principal payment on June 30, 2022) and employee stock purchase plan.plan receipts of $6.1 million.
The investingnet operating cash flow fromflows of discontinued operations for the nine months ended October 1, 2017 reflects2023 was a use of $0.0 million. The net operating cash usedflows of $0.5 million, primarily related to the discontinued operations of our former U.S. and U.K. Electronic Products Divisions (the “Herley Entities”). The investing cash flow from discontinued operations for the nine months ended September 25, 2016 reflects cash provided2022 was a use of $4.3 million, primarily related to the reimbursement of taxes related to the sale of the Herley Entities.$0.3 million.
Contractual Obligations and Commitments
7.00%New Credit Facility
Under the New Credit Facility, on February 18, 2022, the Company completed the refinancing of its outstanding $90 million revolving credit facility and $300 million Senior Secured Notes, due 2019
In May 2014, we refinanced our $625.0with a new 5-year $200 million of 10% Senior Secured Notes due in 2017 (the “10% Notes”) with $625.0Revolving Credit Facility and 5-year $200 million of newly issued 7.00% Senior Secured Notes due in 2019 (the “7% Notes”).Term Loan A. The net proceeds from the issuance of the 7% Notes was $618.5 million after an original issue discount of $6.5 million. WeCompany incurred debt issuance costs of $8.8$3.3 million associated with the 7%New Credit Facility. As of October 1, 2023, the Company has made $6.3 million of principal payments on Term Loan A. As of October 1, 2023, the Company has net amounts outstanding of approximately $50.0 million under the new Revolving Credit Facility, with approximately $150.0 million remaining in borrowing capacity, less $13.7 million for outstanding letters of credit.
On February 18, 2022, the proceeds of $300 million from the New Credit Facility along with cash funded by the Company for the 3.25% call premium to redeem the Company’s outstanding Senior Secured Notes, plus accrued interest, was distributed to the trustee for redemption of the Senior Secured Notes. We utilizedThe redemption of the net proceeds fromCompany’s outstanding $300 million 6.5% Senior Secured Notes due November 2025 closed on March 14, 2022, for an amount of cash equal to 103.25% of the principal amount thereof plus accrued and unpaid interest thereon. The Company incurred a loss on the extinguishment of debt of $9.8 million related to the call premium on the Senior Secured Notes and the write-off of $3.2 million of unamortized debt issuance costs resulting in a total loss on extinguishment of debt of $13.0 million.
The New Credit Facility is governed by a Credit Agreement (the “Credit Agreement”), which establishes the 5-year senior secured credit facility which is comprised of the $200 million Revolving Credit Facility (which includes sub-facilities for the incurrence of up to $10.0 million of swingline loans and the issuance of up to $50.0 million of Letters of Credit) and the 7% Notes, a $41.0$200 million draw on ourTerm Loan A. The Credit Agreement contemplates uncommitted incremental credit facilities of up to $200 million (which amount would be reduced by the aggregate amount of any and all incremental credit facilities actually established under the Credit Agreement) plus additional uncommitted incremental capacity subject to a limitation based on the Company’s pro forma total net leverage ratio (including any such additional uncommitted incremental capacity).
Borrowings under the revolving credit facility and the term loan credit facility may take the form of base rate loans or SOFR loans. Base rate loans under the Credit Agreement will bear interest at a rate per annum equal to the sum of the Applicable Margin (as defined below)in the Credit Agreement) from time to time in effect plus the highest of (i) the Agent’s(as defined in the Credit Agreement) prime lending rate, as in effect at such time, (ii) the Federal Funds Rate (as defined in the Credit Agreement), as well as cash from operationsin effect at such time, plus 0.50%, (iii) the Adjusted Term SOFR (as defined in the Credit Agreement) for a one-month tenor in effect on such day, plus 1.00% and (iv) 1.00%. SOFR loans will bear interest a rate per annum equal to extinguish the 10% Notes. We completed the offeringsum of the 7%Applicable Margin from time to time in effect plus the Adjusted Term SOFR for an Interest Period (as defined in the Credit Agreement) selected by the Company of one, three or six months. The Applicable Margin varies between 1.25% and 2.25% per annum for SOFR loans and between 0.25% and 1.25% per annum for base rate loans, and is based on the Company’s total net leverage ratio from time to time.
On April 28, 2023, the Company entered into an interest rate swap contract to hedge U.S. dollar-one month Term SOFR in order to fix the interest rate movements associated with the Company’s Term Loan A. The initial hedge amount was $195.0 million and amortizes in accordance with Term Loan A. The swap is at a fixed rate one-month term SOFR of 3.721% and settles monthly on the last day of each calendar month. The swap has an effective date of May 1, 2023 and terminates on May 1, 2026.
Mandatory amortization on the Term Loan A is 2.5% in each of the first and second years and 5.0% in each of the third, fourth and fifth years, with the remaining outstanding balance due at maturity. The Credit Agreement contains certain covenants, which include, but are not limited to, restrictions on indebtedness, liens, fundamental changes, restricted payments, asset sales, and investments, and places limits on various other payments. The Company was in compliance with the covenants contained in the Credit Agreement as of October 1, 2023.
6.5% Senior Secured Notes due 2025
In November 2017, the Company issued and sold $300 million aggregate principal amount of Senior Secured Notes due 2025 in a private placement conducted pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended (the “Act”). On October 16, 2014,amended. The Company incurred debt issuance costs of $6.6 million associated with the Company exchanged the outstanding 7% Notes for an equal amount of new 7.00%Senior Secured Notes. The Senior Secured Notes due in 2019 (the “Notes”) that had been registered under the Act. The terms of the Notes issued in the exchange offer were identical in all material respects to the terms of the 7% Notes, except the Notes issued in the exchange offer had been registered under the Act.
The Notes are governed by an Indenture, dated May 14, 2014 (the “Indenture”), among the Company, certain of the Company’s subsidiaries (each, a “Subsidiary Guarantor” and together, the “Subsidiary Guarantors”) and Wilmington Trust, National Association, as Trustee and Collateral Agent. A Subsidiary Guarantor can be released from its Guarantee (as defined in the Indenture) 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) if 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 Notes.
The holders of the Notes have 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 Notes have a second priority lien to our $110.0 million Credit Agreement.
We pay interest on the Notes semi-annually, in arrears, on May 15 and November 15 of each year.
The Notes include customary covenants and events of default as well as a consolidated fixed charge ratio of 2.0:1 for the incurrence of additional indebtedness. Negative covenants include, among other things, limitations on additional debt, liens, negative pledges, investments, dividends, stock repurchases, asset sales and affiliate transactions. Events of default include, among other events, non-performance of covenants, breach of representations, cross-default to other material debt, bankruptcy, insolvency, material judgments and changes in control. As of October 1, 2017, we were in compliance with the covenants contained in the Indenture governing the Notes.
We may redeem some or all of the Notes at 102.625% of the aggregate principal amount of such Notes if redeemed on or before May 15, 2018March 14, 2022.
Other Indebtedness
Credit and 100% of the aggregate principal amount of such Notes if redeemed on or after May 16, 2018, plus accrued and unpaid interest to the date of redemption.Security Agreement
The terms of the Indenture require that the net cash proceeds from asset dispositions be utilized to (i) repay or prepay amounts outstanding under our Credit Agreement unless such amounts are reinvested in similar collateral, (ii) make an investment in assets that replace the collateral of the Notes or (iii) a combination of both clauses (i) and (ii). To the extent there are any remaining net proceeds from the asset disposition after application of clauses (i) and (ii), such amounts are required to be utilized to repurchase Notes at par after 360 days following the asset disposition.
Following the sale of the Herley Entities, we paid down the $41.0 million outstanding under the Credit Agreement and repurchased $175.0 million of the Notes at par, in accordance with the terms of the Indenture. The total reacquisition price of
the Notes was $178.4 million including the write off of $1.8 million of unamortized issue costs, $1.4 million of unamortized discount, along with $0.2 million of legal fees, which resulted in a loss on extinguishment of debt of $3.4 million.
The Company reinvested all net proceeds remaining after the repurchase of the $175.0 million of Notes in replacement collateral under the Indenture within 360 days following the asset disposition, in accordance with the terms of the Indenture.
During the quarter ended December 25, 2016, the Company repurchased and extinguished $14.5 million of the outstanding Notes, which resulted in a gain of $0.4 million offset by $0.1 million of unamortized issuance cost and $0.1 million of unamortized discount resulting in a net gain of $0.2 million.
During the quarter ended March 26,On November 20, 2017, the Company repurchased and extinguished $62.7 million of the outstanding Notes, which resulted in a loss of $1.4 million and the realization of $0.4 million of unamortized issuance cost and $0.3 million of unamortized discount resulting in a net loss of $2.1 million.
As of October 1, 2017, there was $372.8 million in Notes outstanding.
Other Indebtedness
$110.0 Million Credit Agreement
On May 14, 2014, we entered into a $110.0 million Creditthe amended and restated credit and security agreement (the “Credit and Security Agreement, dated May 14, 2014 (the “Credit Agreement”), with the lenders from time to time party thereto, SunTrust Bank, as Agent (the “Agent”), PNC Bank, National Association, as Joint Lead Arranger and Documentation Agent, and SunTrust Robinson Humphrey, Inc., as Joint Lead Arranger and Sole Book Runner. The Credit Agreementwhich established a five-year senior secured revolving credit facility in the maximumaggregate principal amount of $110.0$90.0 million (subject to a potential increase of the maximumaggregate principal amount to $135.0$115.0 million, subject to the Agent’sagent’s and applicable lenders’ approval as described therein)approval), consisting of a subline for letters of credit in an amount not to exceed $50.0 million, as well as a swingline loan in an aggregate principal amount at any time outstanding not to exceed $10.0 million. The obligations under the Credit and Security Agreement are secured by (i) a first priority lien on our 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 Notes, on all of our other assets.
The Credit Agreement contains certain covenants, which include, but are not limited to, restrictions on indebtedness, liens, and investments, and limits on other various payments, as well as a financial covenant relating to a minimum fixed charge coverage ratio of 1.15:1 (as modified per the Third Amendment and the Fourth Amendment, as defined and discussed below). Events of default under the terms of the Credit Agreement include, but are not limited to: our failure to pay any principal of any loans in full when due and payable; our failure 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; our failure or the failure of any of our 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 us or any of our 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 our prospects or our ability to repay our 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 October 1, 2017, no event of default had occurred and we believe 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.
Borrowings under the Credit Agreement 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 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 London Interbank Offered Rate (“LIBOR”) 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 LIBOR. The applicable margin varies between 1.50% and 2.00% for base rate revolving loans and swingline loans and 2.50% and 3.00% for Eurodollar loans, and is based on several factors including our then-existing borrowing base and the lender’s total commitment amount and
revolving credit exposure. The calculation of our borrowing base takes into account several items relating to us and our subsidiaries, including, without limitation, amounts due and owing under billed and unbilled accounts receivables, then-held eligible raw materials inventory, work-in-process inventory, and applicable reserves.
On May 31, 2015, we entered into a third amendment (the “Third Amendment”) to the Credit Agreement. Under the terms of the Third Amendment, the definitions of certain terms of the Credit Agreement were modified, the disposition of the Herley Entities was approvedreplaced by the lenders, a minimum $175.0 million repurchase of the Notes by us was required, and the payment in full of the outstanding balance of theNew Credit Agreement was required. Additionally, the measurement of the fixed charge coverage ratio of 1.15:1 was modified as follows: (i) the fixed charge coverage ratio will not be measured as of the end of any quarterly reporting period ending after June 30, 2015, ifFacility on such date (a) there are no outstanding revolving loans or swingline loans and (b) the aggregate amount outstanding under letters of credit is less than or equal to $17.0 million; and (ii) as to any subsequent quarterly reporting period ending after June 30, 2015, and not covered by clause (i) above, a fixed charge coverage ratio of at least 1.05:1 must be maintained if the percentage of (a) outstanding revolving loans plus the sum of the outstanding swingline loans and outstanding letters of credit that are in excess of $17.0 million, to (b) the revolving credit commitment, minus the Herley Disposition Proceeds Reinvestment Reserve (as defined below) is greater than 0.00% but less than 15.00% or a fixed charge coverage ratio of at least 1.10:1 must be maintained if the aforementioned percentage is equal to or greater than 15.00% but less than 25.00%. In all other instances, a fixed charge coverage ratio of at least 1.15:1 must be maintained. For purposes of computing the fixed charge coverage ratio, the associated reduction in consolidated interest expense in connection with the repurchase of Notes with proceeds from the sale of the Herley Entities shall be deemed to have occurred on the first day of the most recently completed four quarterly reporting periods prior to the sale.February 18, 2022.
The terms of the Third Amendment also included the establishment of a reserve (the “Herley Disposition Proceeds Reinvestment Reserve”) that reduced the maximum $110.0 million total borrowing base on the Credit Agreement. With the sale of the Herley Entities, a $50.8 million reserve was established based upon the collateral carrying value under the Credit Agreement of the Herley Entities disposed. The reserve and therefore the maximum borrowing base were adjusted monthly for the subsequent cumulative reinvestment in similar collateral assets over a period not to have exceeded 360 days from the date of sale of the Herley Entities. As of October 1, 2017, there was no reserve on the maximum borrowings, resulting from a cumulative reinvestment in similar collateral assets since the sale of the Herley Entities in excess of the $50.8 million reserve established at the date of the sale of the Herley Entities. The Company made investments in assets that replaced the collateral, which reinstated the maximum facility to the full $110.0 million as of the end of the first quarter of 2016.
On August 20, 2015, we entered into a fourth amendment (the “Fourth Amendment”) to the Credit Agreement. Among other things, the Fourth Amendment provides for a modification of the Third Amendment as it relates to when the minimum fixed charge coverage ratio will be measured based upon our outstanding borrowings. Outstanding borrowings for purposes of computing the applicable minimum fixed charge coverage ratio exclude any letter of credit exposure outstanding of $17.0 million plus the amount of letters of credit outstanding for the divested Herley Entities for which a cash deposit has been placed in escrow by the buyer to cover the amount of such outstanding letters of credit, should the letters of credit be pulled.
As of October 1, 2017, there were no borrowings outstanding on the Credit Agreement and $9.2 million was outstanding on letters of credit, resulting in net borrowing base availability of $68.7 million. We were in compliance with the financial covenants of the Credit Agreement and its amendments as of October 1, 2017.
Debt Acquired in Acquisition
We assumed a $10.0 million ten-year term loan with a bank in Israel entered into on September 16, 2008 in connection with the acquisition of one of our wholly owned subsidiaries. The balance under the term loan as of October 1, 2017 was $1.0 million, and the loan is payable in quarterly installments of $0.3 million plus interest at LIBOR plus a margin of 1.5%. The loan agreement governing the term loan contains various covenants, including a minimum net equity covenant as defined in the loan agreement. We were in compliance with all covenants contained in this loan agreement as of October 1, 2017.
New Leases
On May 1, 2017, we entered into an office lease for our new corporate headquarters in San Diego, California (the “Lease”). The premises being rented consist of approximately 26,192 square feet of office space. The Lease has an initial term of 10 years and is anticipated to commence in October 2018. The Lease can be extended for one 5-year term, which must be exercised by giving written notice to the Landlord not earlier than 12 months and not later than 10 months prior to the expiration of the initial term. The base rent under the Lease is initially approximately $817,200 per year, escalating over the 10
years at approximately 3.0% per annum. In addition to the base rent, we will pay additional rent for our proportionate share of operating expenses, taxes, utilities and insurance expenses for the complex in which the premises are located.
On May 31, 2017, we entered into two lease agreements for office space consisting of approximately 61,000 square feet in an existing building (“Existing Building”) and 91,000 square feet in a new building that is to be constructed (“New Building”) in Colorado Springs, Colorado. The initial lease term for the Existing Building is from May 31, 2017 to May 31, 2032. Upon completion of the New Building, the lease for the New Building will terminate and the lease for the Existing Building will be amended and restated to cover the New Building and the Existing Building. The lease term for such amended and restated lease will be 15 years from the rent commencement date of the New Building.
The annual base rent for the Existing Building will be approximately $994,800, with an annual escalation of the lesser of 2% or the consumer price index, and such base rent will be adjusted at a later time based on building improvements funded by the Landlord. The annual base rent for the New Building will depend on the Landlord’s construction costs for the New Building, but the initial annual base rent for the New Building should not exceed approximately $1.9 million. In addition to the base rent, we will pay for taxes, utilities insurance, and maintenance expenses for the New Building and the Existing Building.
With the exception of the new leases described above, there were no other significant changes to our contractual obligations during the first nine months of fiscal 2017.
Other Liquidity Matters
We believe that our cash on hand, together with funds available under the Credit Agreement and cash expected to be generated from operating activities, will be sufficient to fund our anticipated working capital and other cash needs for at least the next 12 months.
As discussed below and in Part I, Item 1A, “Risk Factors” of theour Annual Report on Form 10-K, our quarterly and annual operating results have fluctuated in the past and may vary in the future due to a variety of factors, many of which are external to our control. If the conditions in our industry deteriorate or our customers cancel or postpone projects or if we are unable to sufficiently increase our revenues or further reduce our expenses, we may experience in the future, a significant long-term negative impact to our financial results and cash flows from operations. In such a situation, we could fall out of compliance with our financial and other covenants, which, if not waived, could limit our liquidity and capital resources.
Critical Accounting Principles and Estimates
The foregoing discussion of our financial condition and results of operations is based on the condensed consolidated financial statementsCondensed Consolidated Financial Statements included in this Quarterly Report.Report on Form 10-Q. The preparation of these condensed consolidated financial statementsCondensed Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, and the related disclosures of contingencies. We base these estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates.
There have been no significant changes to our “Critical Accounting Policies or Estimates” as compared to the significant accounting policies described in theour Annual Report on Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Since December 25, 2016,2022, there have been no material changes in the quantitative or qualitative aspects of our market
risk profile. For additional information regarding the Company’sour exposure to certain market risks, see “Item 7A. Quantitative
and Qualitative Disclosures About Market Risk” included in theour Annual Report on Form 10-K.
Item 4. Controls and Procedures.
Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any
controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures.
As required by Rule 13a-15(b) promulgated under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report.
Based on the foregoing, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of October 1, 2017.2023.
Changes in Internal Control Over Financial Reporting
We operate under the COSO (CommitteeCommittee of Sponsoring Organizations)Organizations 2013 Framework. There was no change in our internal control over financial reporting during the three months ended October 1, 20172023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 1014 of the Notes to the Condensed Consolidated Financial Statements contained within this Quarterly Report on Form 10-Q for a discussion of our legal proceedings.
Item 1A. Risk Factors.
In evaluating us and our common stock, we urge you to carefully consider the risks and other information in this Quarterly Report on Form 10-Q, as well as the risk factors disclosed in Item 1A1A. to Part I of theour Annual Report on Form 10-K, and other reports that we have filed with the SEC.Any of the risks discussed in such reports, as well as additional risks and uncertainties not currently known to us or that we currently deem immaterial, could materially and adversely affect our results of operations, financial condition or prospects. ThereDuring the period covered by this Quarterly Report on Form 10-Q, there have been no material changes in our risk factors as previously disclosed in the Form 10-K during the period covered by this Quarterly Report.disclosed.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.Rule 10b5-1 Trading Plans
During the fiscal quarter ended October 1, 2023, none of our directors or officers (as defined in Rule 16a-1 under the Exchange Act) adopted, modified or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 105b-1 trading arrangement" (as those terms are defined in Item 408 of Regulation S-K), except as described in the table below:
| | | | | | | | | | | | | | | | | | | | |
Name and Title | Action | Applicable Date | Expiration Date | Rule 10b5-1 Trading Arrangement? (Y/N)(1) | Aggregate Number of Securities Subject to Trading Arrangement |
Thomas Mills | Adopt | 8/16/2023 | 3/29/2024 | Y | 16,091 | |
President, C5ISR Division | (2) |
Deanna Lund | Modify | 8/18/2023 | 6/30/2025 | Y | 114,567 | |
Executive Vice President and Chief Financial Officer | (2) |
| | | | | | |
| | | | | | |
Phillip Carrai | Adopt | 9/15/2023 | 12/31/2024 | Y | 42,000 | |
President, Space, Training and Cyber Solutions Division | (2) |
(1)Denotes whether the trading arrangement is intended to satisfy the affirmative defense of Rule 10b5-1(c).
(2)This number represents the maximum number of shares of our common stock that may be sold pursuant to the trading arrangement. The number of shares actually sold will depend on the satisfaction of certain conditions set forth in the trading arrangement.
Item 6. Exhibits.
|
| | | | | | | | | | |
| | | | Incorporated by Reference | | |
Exhibit Number | | Exhibit Description | | Form | | Filing Date/ Period End Date | | Exhibit | | Filed- Furnished Herewith |
2.1#† | | | | 10-Q | | 08/06/2015 (001-34460) | | 2.4 | | |
3.1 | | | | 10-K | | 02/27/2017 (001-34460) | | 3.1 | | |
3.2 | | | | 10-K | | 02/27/2017 (001-34460) | | 3.2 | | |
4.1 | | | | 10-K | | 02/27/2017 (001-34460) | | 4.1 | | |
4.2 | | | | 8-K | | 05/15/2014 (001-34460) | | 4.1 | | |
4.3 | | | | 8-K | | 05/15/2014 (001-34460) | | 10.1 | | |
31.1 | | | | | | | | | | * |
31.2 | | | | | | | | | | * |
32.1 | | | | | | | | | | * |
32.2 | | | | | | | | | | * |
101 | | Financial statements from the Quarterly Report on Form 10-Q of Kratos Defense & Security Solutions, Inc. for the quarter ended October 1, 2017 formatted in XBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations and Comprehensive Loss, (iii) the Condensed Consolidated Statements of Cash Flows, (iv) the Notes to the Condensed Consolidated Financial Statements. | | | | | | | | * |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference | | |
Exhibit Number | | Exhibit Description | | Form | | Filing Date/ Period End Date | | Exhibit | | Filed- Furnished Herewith |
2.1 | | | | 10-Q | | 05/10/2018 (001-34460) | | 2.2 | | |
2.2** | | Purchase Agreement, dated February 27, 2019, by and among Kratos Defense & Security Solutions, Inc., Shirley Brostmeyer, (“SB”), Joseph Brostmeyer (“JB”), certain trusts established by SB, JB and members of their immediate family, and JB, as the Sellers Representative. | | 10-Q | | 05/08/2019 (001-34460) | | 2.3 | | |
3.1 | | | | 10-K | | 02/27/2017 (001-34460) | | 3.1 | | |
3.2 | | | | 10-K | | 02/27/2017 (001-34460) | | 3.2 | | |
4.1 | | | | 10-K | | 02/27/2017 (001-34460) | | 4.1 | | |
31.1 | | | | | | | | | | * |
31.2 | | | | | | | | | | * |
32.1 | | | | | | | | | | * |
32.2 | | | | | | | | | | * |
101.INS | | | | | | | | | | * |
101.SCH | | | | | | | | | | * |
101.CAL | | | | | | | | | | * |
101.DEF | | | | | | | | | | * |
101.LAB | | | | | | | | | | * |
101.PRE | | | | | | | | | | * |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | | | | | | | | * |
#** Certain schedules and exhibits referencedconfidential information contained in this document haveExhibit (indicated by asterisks) has been omitted in accordance with Item 601(b)(2)because it is both (i) not material and (ii) the type of Regulation S-K. A copyinformation that the registrant treats as private or confidential.
† This Exhibit has been filed separately with the Secretary of the Securities and Exchange Commission
without the redaction pursuant to a Confidential Treatment Request under Rule 24b-2 of the Securities
Exchange Act of 1934, as amended.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | KRATOS DEFENSE & SECURITY SOLUTIONS, INC. |
| | | |
| | | |
| | By: | /s/ ERIC M. DEMARCO |
| | | Eric M. DeMarco |
| | | Chief Executive Officer, President |
| | | (Principal Executive Officer) |
| | | |
| | | |
| | By: | /s/ DEANNA H. LUND, CPA |
| | | Deanna H. Lund |
| | | Executive Vice President, Chief Financial Officer |
| | | (Principal Financial Officer) |
| | | |
| | | |
| | KRATOS DEFENSE & SECURITY SOLUTIONS, INC. |
By: | | | |
| | | |
| | By: | /s/ ERIC M. DEMARCO |
| | | Eric M. DeMarco |
| | | Chief Executive Officer, President |
| | | (Principal Executive Officer) |
| | | |
| | | |
| | By: | /s/ DEANNA H. LUND, CPA |
| | | Deanna H. Lund |
| | | Executive Vice President, Chief Financial Officer |
| | | (Principal Financial Officer) |
| | | |
| | | |
| | By: | /s/ MARIA CERVANTES DE BURGREEN, CPA |
| | | Maria Cervantes de Burgreen |
| | | Vice President and Corporate Controller |
| | | (Principal Accounting Officer) |
Date: | November 2, 20172023 | | |