Table of Contents

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

FORM 10-Q
 
ý☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended October 1, 20172023
or 
¨☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from __________ to __________ 
Commission file number 001-34460
 
KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
(Exact name of Registrantregistrant as specified in its charter)
Delaware13-3818604
(State or other jurisdiction of

incorporation or organization)
(I.R.S. Employer Identification No.)

1 Chisholm Trail, Suite 300
Round Rock, TX
(Address of principal executive offices)

78681

(Zip Code)
4820 Eastgate Mall, Suite 200
San Diego, CA 92121
(858) 812-7300(512) 238-9840
(Address, including zip code, andRegistrant’s telephone number, including area code)
area code,
Securities registered pursuant to Section 12(b) of Registrant’s principal executive offices)
the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.001 par valueKTOSThe NASDAQ Global Select Market
 
Indicate by check mark whether the registrant:registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ý  No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes ý  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Act.
Large accelerated filerýAccelerated filer☐
Non-accelerated filer☐Smaller reporting company☐
Large accelerated filer o
Accelerated filer ý
Non-accelerated filer o
Smaller reporting company o
(Do not check if a smaller reporting company)
Emerging growth companyo
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  Yes o  No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o☐  No ý☒
As of October 27, 2017, 103,297,5252023, 128,938,622 shares of the registrant’s common stock were outstanding.


Table of Contents
KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
 
FORM 10-Q
 
FOR THE QUARTERLY PERIOD ENDED OCTOBER 1, 20172023
 
INDEX
Page
PART I. FINANCIAL INFORMATION
3
3
4
Page
Item 1.
Financial Statements
3
Condensed Consolidated Balance Sheets at October 1, 2017 and December 25, 2016 (unaudited)
3
Condensed Consolidated Statements of Operations and Comprehensive LossIncome (Loss) for the Three and Nine Months Ended October1 2017, 2023 and September 25, 2016 25, 2022 (unaudited)
45
6
58
69
2726
3735
3735
PART II. OTHER INFORMATION
3837
3837
3837
3837
3837
38
39

2
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PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements.
KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except par value and number of shares)
(Unaudited)
 October 1, 2023
(Unaudited)December 25, 2022
Assets  
Current assets:  
Cash and cash equivalents$42.2 $81.3 
Accounts receivable, net128.2 105.7 
Unbilled receivables, net223.7 222.8 
Inventoried costs150.1 125.5 
Prepaid expenses18.3 11.9 
Other current assets41.9 35.4 
Total current assets604.4 582.6 
Property, plant and equipment, net227.3 213.1 
Operating lease right-of-use assets50.6 47.4 
Goodwill558.2 558.2 
Intangible assets, net50.7 55.2 
Other assets99.6 95.0 
Total assets$1,590.8 $1,551.5 
Liabilities and Stockholders’ Equity
  
Current liabilities:  
Accounts payable$57.4 $57.3 
Accrued expenses40.3 33.8 
Accrued compensation55.2 52.2 
Accrued interest1.8 1.5 
Billings in excess of costs and earnings on uncompleted contracts79.4 62.1 
Current portion of operating lease liabilities12.1 10.8 
Other current liabilities15.9 15.6 
Current liabilities of discontinued operations0.9 0.9 
Total current liabilities263.0 234.2 
Long-term debt, net of current portion234.2 250.2 
Operating lease liabilities, net of current portion43.0 40.8 
Other long-term liabilities76.8 77.4 
Long-term liabilities of discontinued operations1.1 1.4 
Total liabilities618.1 604.0 
Commitments and contingencies (Note 14)
Redeemable noncontrolling interest19.3 11.2 
Stockholders’ equity:
  
Preferred stock, $0.001 par value, 5,000,000 shares authorized, 0 shares outstanding at October 1, 2023 and December 25, 2022— — 
Common stock, $0.001 par value, 195,000,000 shares authorized; 128,072,596 and 125,985,306 shares issued and outstanding at October 1, 2023 and December 25, 2022, respectively— — 
Additional paid-in capital1,633.5 1,608.4 
Accumulated other comprehensive income (loss)2.5 (0.8)
Accumulated deficit(682.6)(671.3)
Total stockholders’ equity
953.4 936.3 
Total liabilities and stockholders’ equity
$1,590.8 $1,551.5 

The accompanying notes are an integral part of these condensed consolidated financial statements.
3
 October 1, 2017 December 25, 2016
Assets 
  
Current assets: 
  
Cash and cash equivalents$239.2
 $69.1
Restricted cash0.2
 0.5
Accounts receivable, net244.2
 229.4
Inventoried costs62.8
 55.4
Prepaid expenses11.6
 8.9
Other current assets9.8
 9.8
Total current assets567.8
 373.1
Property, plant and equipment, net56.7
 49.8
Goodwill485.3
 485.4
Intangible assets, net24.5
 32.6
Other assets8.4
 7.7
Total assets$1,142.7
 $948.6
Liabilities and Stockholders’ Equity
 
  
Current liabilities: 
  
Accounts payable$50.6
 $52.7
Accrued expenses41.8
 50.0
Accrued compensation33.7
 39.1
Accrued interest10.0
 3.6
Billings in excess of costs and earnings on uncompleted contracts51.1
 41.8
Other current liabilities10.5
 7.7
Current liabilities of discontinued operations1.1
 1.6
Total current liabilities198.8
 196.5
Long-term debt, net of current portion369.7
 431.0
Other long-term liabilities38.5
 41.0
Non-current liabilities of discontinued operations3.8
 3.7
Total liabilities610.8
 672.2
Commitments and contingencies

 

Stockholders’ equity:
 
  
Preferred stock, $0.001 par value, 5,000,000 shares authorized, 0 shares outstanding at October 1, 2017 and December 25, 2016—
 —
Common stock, $0.001 par value, 195,000,000 shares authorized; 103,295,733 and 73,945,533 shares issued and outstanding at October 1, 2017 and December 25, 2016, respectively—
 —
Additional paid-in capital1,232.2
 956.2
Accumulated other comprehensive loss(1.8) (1.7)
Accumulated deficit(698.5) (678.1)
Total stockholders’ equity
531.9
 276.4
Total liabilities and stockholders’ equity
$1,142.7
 $948.6
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KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
(Unaudited)
 Three Months EndedNine Months Ended
 October 1, 2023September 25, 2022October 1, 2023September 25, 2022
Service revenues$106.5 $88.6 $301.8 $235.3 
Product sales168.1 140.0 461.5 413.7 
Total revenues274.6 228.6 763.3 649.0 
Cost of service revenues79.0 65.1 227.2 171.2 
Cost of product sales122.2 108.6 339.4 313.2 
Total costs201.2 173.7 566.6 484.4 
Gross profit73.4 54.9 196.7 164.6 
Selling, general and administrative expenses50.9 48.5 146.0 136.3 
Merger and acquisition expenses— 0.2 — 0.6 
Research and development expenses10.3 9.6 30.4 28.0 
Restructuring expenses and other— 0.2 0.9 6.4 
Operating income (loss)12.2 (3.6)19.4 (6.7)
Other expense:    
Interest expense, net(5.1)(4.1)(15.5)(12.9)
Loss on extinguishment of debt— — — (13.0)
Other expense, net(0.3)(1.1)(0.4)(1.0)
Total other expense, net(5.4)(5.2)(15.9)(26.9)
Income (loss) from continuing operations before income taxes6.8 (8.8)3.5 (33.6)
Provision (benefit) for income taxes from continuing operations3.8 (0.8)6.9 (4.6)
Income (loss) from continuing operations3.0 (8.0)(3.4)(29.0)
Discontinued operations:
Income (loss) from discontinued operations before income taxes— — — (0.3)
Income tax benefit— — 0.2 1.0 
Income from discontinued operations— — 0.2 0.7 
Net income (loss)3.0 (8.0)(3.2)(28.3)
Less: Net income attributable to noncontrolling interest4.6 — 8.1 0.3 
Net loss attributable to Kratos$(1.6)$(8.0)$(11.3)$(28.6)
Basic and diluted loss per common share attributable to Kratos:    
Loss from continuing operations$(0.01)$(0.06)$(0.09)$(0.23)
Income from discontinued operations— — — — 
Loss per common share$(0.01)$(0.06)$(0.09)$(0.23)
Basic and diluted weighted average common shares outstanding129.6 127.2 129.3 126.5 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


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

 Three Months Ended Nine Months Ended
 October 1, 2017 September 25, 2016 October 1, 2017 September 25, 2016
Service revenues$86.7
 $87.2
 $263.3
 $258.0
Product sales109.5
 78.2
 286.4
 228.6
Total revenues196.2
 165.4
 549.7
 486.6
Cost of service revenues60.8
 64.7
 189.6
 189.4
Cost of product sales87.3
 74.8
 219.5
 190.2
Total costs148.1
 139.5
 409.1
 379.6
Gross profit48.1
 25.9
 140.6
 107.0
Selling, general and administrative expenses40.7
 35.5
 120.0
 109.6
Research and development expenses4.2
 3.2
 12.7
 10.1
Unused office space, restructuring expenses, and other0.1
 0.2
 0.5
 10.5
Operating income (loss) from continuing operations3.1
 (13.0) 7.4
 (23.2)
Other income (expense): 
  
    
Interest expense, net(7.7) (8.7) (23.1) (26.1)
Loss on extinguishment of debt—
 —
 (2.1) —
Other income, net0.6
 0.1
 1.0
 0.6
Total other expense, net(7.1) (8.6) (24.2) (25.5)
Loss from continuing operations before income taxes(4.0) (21.6) (16.8) (48.7)
Provision for income taxes from continuing operations0.2
 1.9
 3.5
 7.3
Loss from continuing operations(4.2) (23.5) (20.3) (56.0)
Discontinued operations       
Loss from operations of discontinued component—
 (0.1) (0.1) (0.1)
Income tax expense(0.1) —
 (0.1) (0.1)
Loss from discontinued operations(0.1) (0.1) (0.2) (0.2)
Net loss$(4.3) $(23.6) $(20.5) $(56.2)
Basic and diluted loss per common share: 
  
    
Loss from continuing operations$(0.05) $(0.39) $(0.24) $(0.93)
Loss from discontinued operations—
 —
 —
 (0.01)
Net loss per common share$(0.05) $(0.39) $(0.24) $(0.94)
        
Basic and diluted weighted average common shares outstanding90.5
 60.5
 85.0
 60.0
Comprehensive Loss       
Net loss (from above)$(4.3) $(23.6) $(20.5) $(56.2)
Change in cumulative translation adjustment(0.2) (0.1) (0.1) (0.2)
Comprehensive loss$(4.5) $(23.7) $(20.6) $(56.4)
Three Months EndedNine Months Ended
October 1, 2023September 25, 2022October 1, 2023September 25, 2022
Net income (loss)$3.0 $(8.0)$(3.2)$(28.3)
Change in unrealized cash flow hedge (net of taxes of $0.5 million and $1.1 million for the three and nine month periods ended October 1, 2023, respectively)1.4 — 3.2 — 
Change in cumulative translation adjustment(1.8)(3.7)0.1 (4.3)
Comprehensive income (loss)2.6 (11.7)0.1 (32.6)
Less: Comprehensive income attributable to noncontrolling interest4.6 — 8.1 0.3 
Comprehensive loss attributable to Kratos$(2.0)$(11.7)$(8.0)$(32.9)

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

5

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KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the three months ended October 1, 2023 and September 25, 2022
(in millions)
(Unaudited)
Redeemable Noncontrolling InterestCommon StockAdditional Paid-In CapitalAccumulated Other Comprehensive LossAccumulated DeficitTotal Stockholders’ Equity
SharesAmounts
Balance, June 26, 2022$7.8 125.6 $— $1,593.1 $— $(655.0)$938.1 
Stock-based compensation— — — 6.6 — — 6.6 
Issuance of common stock for employee stock purchase plan and stock options— 0.3 — 3.2 — — 3.2 
Restricted stock issued and related taxes— — — (0.8)— — (0.8)
Net loss— — — — — (8.0)(8.0)
Other comprehensive loss, net of tax— — — — (3.7)— (3.7)
Balance, September 25, 2022$7.8 125.9 $— $1,602.1 $(3.7)$(663.0)$935.4 

Redeemable Noncontrolling InterestCommon StockAdditional Paid-In CapitalAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal Stockholders’ Equity
SharesAmounts
Balance, June 25, 2023$14.7 127.6 $— $1,623.7 $2.9 $(681.0)$945.6 
Stock-based compensation— — — 6.4 — — 6.4 
Issuance of common stock for employee stock purchase plan and stock options— 0.5 — 3.6 — — 3.6 
Restricted stock issued and related taxes— — — (0.2)— — (0.2)
Gain on interest rate swap contract— — — — 1.4 — 1.4 
Net income (loss)4.6 — — — — (1.6)(1.6)
Other comprehensive loss, net of tax— — — — (1.8)— (1.8)
Balance, October 1, 2023$19.3 128.1 $— $1,633.5 $2.5 $(682.6)$953.4 

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








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KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the nine months ended October 1, 2023 and September 25, 2022
(in millions)
(Unaudited)
Redeemable Noncontrolling InterestCommon StockAdditional Paid-In CapitalAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal Stockholders’ Equity
SharesAmounts
Balance, December 26, 2021$15.2 124.0 $— $1,578.9 $0.6 $(634.4)$945.1 
Stock-based compensation— — — 19.9 — — 19.9 
Issuance of common stock for employee stock purchase plan and stock options— 0.4 — 6.1 — — 6.1 
Restricted stock issued and related taxes— 1.0 — (12.3)— — (12.3)
Issuance of common stock for acquisitions— 0.3 — 5.0 — — 5.0 
Net income (loss)0.3 — — — — (28.6)(28.6)
Other comprehensive loss, net of tax— — — — (4.3)— (4.3)
Changes in noncontrolling interest(7.7)0.2 — 4.5 — — 4.5 
Balance, September 25, 2022$7.8 125.9 $— $1,602.1 $(3.7)$(663.0)$935.4 
Redeemable Noncontrolling InterestCommon StockAdditional Paid-In CapitalAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal Stockholders’ Equity
SharesAmounts
Balance, December 25, 2022$11.2 126.0 $— $1,608.4 $(0.8)$(671.3)$936.3 
Stock-based compensation— — — 19.0 — — 19.0 
Issuance of common stock for employee stock purchase plan and stock options— 0.8 — 6.5 — — 6.5 
Restricted stock issued and related taxes— 0.5 — (3.6)— — (3.6)
Gain on interest rate swap contract— — — — 3.2 — 3.2 
Net income (loss)8.1 — — — — (11.3)(11.3)
Other comprehensive income, net of tax— — — — 0.1 — 0.1 
Changes in noncontrolling interest— 0.8 — 3.2 — — 3.2 
Balance, October 1, 2023$19.3 128.1 $— $1,633.5 $2.5 $(682.6)$953.4 

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






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KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
Nine Months Ended
October 1, 2023September 25, 2022
Operating activities: 
Net loss$(3.2)$(28.3)
Income from discontinued operations0.2 0.7 
Loss from continuing operations(3.4)(29.0)
Adjustments to reconcile loss from continuing operations to net cash used in operating activities from continuing operations:  
Depreciation and amortization24.0 22.8 
Deferred income taxes0.1 0.3 
Amortization of lease right-of-use assets8.5 7.8 
Stock-based compensation19.0 19.9 
Amortization of deferred financing costs0.5 0.6 
Loss on extinguishment of debt— 13.0 
Provision for doubtful accounts1.0 — 
Litigation related charges— 5.5 
Changes in assets and liabilities, net of acquisitions:  
Accounts receivable(23.5)17.0 
Unbilled receivables(9.1)(18.2)
Inventoried costs(23.7)(28.0)
Prepaid expenses and other assets(15.7)(17.4)
Operating lease liabilities(8.2)(7.7)
Accounts payable(0.6)1.0 
Accrued expenses6.4 1.1 
Accrued compensation3.1 3.0 
Accrued interest0.3 (1.2)
Billings in excess of costs and earnings on uncompleted contracts17.4 (10.6)
Income tax receivable and payable1.9 (8.3)
Other liabilities(0.2)(3.9)
Net cash used in operating activities from continuing operations(2.2)(32.3)
Investing activities:  
Cash paid for acquisitions, net of cash acquired— (132.2)
Proceeds from sale of assets8.3 0.1 
Capital expenditures(33.1)(34.8)
Net cash used in investing activities from continuing operations(24.8)(166.9)
Financing activities: 
Proceeds from the issuance of long-term debt— 200.0 
Borrowing under credit facility54.0 100.0 
Redemption of Senior Secured Notes— (309.8)
Repayment under credit facility and term loan(67.8)(1.2)
Debt issuance costs— (3.2)
Payments under finance leases(1.2)(1.0)
Payments of employee taxes withheld from share-based awards(3.6)(12.3)
Proceeds from shares issued under equity plans6.5 6.1 
Net cash used in financing activities from continuing operations(12.1)(21.4)
Net cash used in continuing operations(39.1)(220.6)
Net operating cash flows of discontinued operations— (0.3)
Effect of exchange rate changes on cash, cash equivalents and restricted cash— (3.3)
Net decrease in cash, cash equivalents and restricted cash(39.1)(224.2)
Cash, cash equivalents and restricted cash at beginning of period81.3 349.4 
Cash, cash equivalents and restricted cash at end of period$42.2 $125.2 
 Nine Months Ended
 October 1, 2017 September 25, 2016
Operating activities: 
  
Net loss$(20.5) $(56.2)
Loss from discontinued operations0.2
 0.2
Loss from continuing operations(20.3) (56.0)
Adjustments to reconcile loss from continuing operations to net cash used in operating activities from continuing operations: 
  
Depreciation and amortization17.0
 17.3
Stock-based compensation6.8
 4.2
Deferred income taxes1.9
 3.2
Amortization of deferred financing costs1.0
 1.2
Amortization of discount on Senior Secured Notes0.6
 0.7
Loss on extinguishment of debt2.1
 —
Provision for doubtful accounts0.1
 0.3
Litigation related charges—
 1.7
Provision for non-cash restructuring charges—
 7.7
Changes in assets and liabilities, net of acquisitions: 
  
Accounts receivable(14.9) (3.3)
Inventoried costs(4.9) (8.5)
Prepaid expenses and other assets(6.2) 2.0
Accounts payable(1.6) (1.4)
Accrued expenses(8.7) 11.9
Accrued compensation(5.5) (3.9)
Advance payments received on contracts(0.5) 2.7
Accrued interest6.5
 7.8
Billings in excess of costs and earnings on uncompleted contracts9.2
 0.3
Income tax receivable and payable1.3
 0.8
Other liabilities(0.6) 2.6
Net cash used in operating activities from continuing operations(16.7) (8.7)
Investing activities: 
  
Cash paid for acquisitions, net of cash acquired0.2
 —
Change in restricted cash0.2
 0.1
Capital expenditures(19.0) (5.1)
Proceeds from sale of assets0.7
 —
Net cash used in investing activities from continuing operations(17.9) (5.0)
Financing activities:   
Extinguishment of long-term debt(64.0) —
Proceeds from the issuance of common stock268.0
 —
Repayment of debt(0.8) (0.8)
Proceeds from exercise of restricted stock units, employee stock options, and employee stock purchase plan1.5
 2.1
Net cash provided by financing activities from continuing operations204.7
 1.3
Net cash flows of continuing operations170.1
 (12.4)
Net operating cash flows of discontinued operations(0.1) 0.1
Net investing cash flows of discontinued operations(0.5) 4.3
Effect of exchange rate changes on cash and cash equivalents0.6
 —
Net increase (decrease) in cash and cash equivalents170.1
 (8.0)
Cash and cash equivalents at beginning of period69.1
 28.5
Cash and cash equivalents at end of period$239.2
 $20.5

Significant non-cash investing and financing activities:
Financing lease obligation incurred$0.1 $9.1 
Common stock issuance for purchase of noncontrolling interests$10.7 $2.7 
Common stock issuance for acquisition$— 5.0 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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

(a)Basis of Presentation

 The information as of October 1, 20172023 and for the three and nine months ended October 1, 20172023 and September 25, 20162022 is unaudited. The condensed consolidated balance sheet as of December 25, 20162022 was derived from the Company’s audited consolidated financial statements at that date. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods presented. The results have been prepared in accordance with the instructions to Form 10-Q and do not necessarily include all information and footnotes necessary for presentation in accordance with accounting principles generally accepted in the U.S. (“GAAP”). These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes included in the Company’s audited annual consolidated financial statements for the fiscal year ended December 25, 2016,2022, included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 27, 201723, 2023 (the “Form 10-K”). Interim operating results are not necessarily indicative of operating results expected in subsequent periods or for the year as a whole.


(b)    Principles of Consolidation
(b)Principles of Consolidation
 
The condensed consolidated financial statements include the accounts of the Company, and its 100% owned subsidiaries forand its majority owned subsidiary, KTT CORE, Inc., a Delaware corporation formerly known as KTT CORE, LLC (“KTT Core”), which allis 90.05% owned by the Company. All inter-company transactions have been eliminated in consolidation. Noncontrolling interest consists of the remaining 9.95% interest in KTT Core. See Note 12 for further information related to the redeemable noncontrolling interest.
 
(c)Fiscal Year
(c)    Fiscal Year
 
The Company has a 52/53 week fiscal year ending on the last Sunday of the calendar year, with interim fiscal periods ending on the last Sunday of each calendar quarter.year. The three month periods ended October 1, 2023 and September 25, 2022 consisted of 14-week and 13-week periods, respectively. The nine month periods ended October 1, 20172023 and September 25, 20162022 consisted of 14-week and 13-week periods and 40-week and 39-week periods, respectively. There are 53 calendar weeks in the fiscal year ending on December 31, 20172023 and 52 calendar weeks in the fiscal year ended on ending December 25, 2016.2022.
 
(d)    Accounting Estimates


There have been no significant changes in the Company’s accounting estimates for the three and nine months ended October 1, 20172023 as compared to the accounting estimates described in the Form 10-K.


(e)    Accounting Standards UpdatesFair Value of Financial Instruments

In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-09 (“ASU 2017-09”), Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 was issued to provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments in this ASU are effective for annual periods beginning after December 15, 2017. The Company does not expect thatuses forward exchange contracts to manage foreign currency risks associated with certain transactions, specifically forecasted materials and salaries paid in foreign currencies. The Company also has entered into an interest rate swap contract in order to mitigate the standard will have a material effectexposure to interest rate movements associated with the Company’s Term Loan A. These derivative instruments are measured at fair value using observable market inputs such as interest rates. Based on its consolidated financial statements and will apply this guidance to applicable transactions afterthese inputs, the adoption date.

In January 2017, the FASB issued ASU 2017-04 (“ASU 2017-04”), Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 amends the guidance to simplify the subsequent measurement of goodwill by removing Stepderivative instruments are classified within Level 2 of the goodwill impairment test. Instead, an entity should perform its annual, or interim, goodwill impairment test by comparingvaluation hierarchy. At October 1, 2023, the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. ASU 2017-04 is effective for annual reporting periods beginning after December 15, 2019, with early adoption permitted. The Company is

currently evaluating the impact of the new guidancederivative instruments were included in other current assets, other assets, and timing of adoption, but does not expect that the standard will have a material impact on its consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16 (“ASU 2016-16”), Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16 requires that entities recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather than when the asset is sold to an outside party. ASU 2016-16 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods. Early adoption is permitted as of the beginning of an annual reporting period (as of the first interim period if an entity issues interim financial statements). ASU 2016-16 requires adoption on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company early adopted this standard on December 26, 2016. The adoption of this guidance did not have a material impactcurrent liabilities on the Company’s consolidated financial statements.Company's Condensed Consolidated Balance Sheets.

In August 2016, the FASB issued ASU 2016-15 (“ASU 2016-15”), Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The objective of ASU 2016-15 is to reduce existing diversity in practice by addressing eight specific cash flow issues related to how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. If early adopted, an entity must adopt all of the amendments in the same period. The Company does not believe that the adoption of this guidance will have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02 (“ASU 2016-02”), Leases. ASU 2016-02 requires that lessees recognize assets and liabilities for the rights and obligations underlying leases with a lease term of more than one year. The amendments in this ASU are effective for annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU 2016-02 on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers. ASU 2014-09 establishes a broad principle that would require an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The FASB has also issued several updates to ASU 2014-09. The new standard supersedes GAAP guidance on revenue recognition and requires the use of more estimates and judgments than the present standards. It also requires additional disclosures. ASU 2014-09 may be applied either retrospectively or through the use of a modified-retrospective method. The full retrospective method requires companies to recast each prior reporting period presented as if the new guidance had always existed. Under the modified retrospective method, companies would recognize the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings at the date of initial application. The Company plans to adopt the new revenue standard effective January 1, 2018, through the use of the modified-retrospective method.

The Company commenced a detailed analysis of the impact of ASU 2014-09 in 2016, by evaluating its impact on selected contracts at each of the Company’s business segments. With this baseline understanding, the Company developed a project plan to evaluate the contracts across all the business segments, spent significant effort in education of both management and other employees on the effects of the new guidance and assessed the internal control structure in order to adopt the ASU on January 1, 2018. ASU 2014-09 also requires expanded disclosure regarding the nature, timing, and uncertainty of revenue, cash flow and customer contract balances, including how and when performance obligations are satisfied and the relationship between revenue recognized and changes in contract balances during a reporting period. The Company has evaluated these disclosure requirements and is incorporating the collection of relevant data into its quarterly processes. The Company also designed and implemented specific controls based on the evaluation of the impact of ASU 2014-09, including the calculation of the cumulative effect of adopting ASU 2014-09. Although the Company does not expect significant changes to its accounting systems or controls upon adoption of ASU 2014-09, it has modified certain of its current controls to incorporate the revisions that it has made to its accounting policies and practices. The Company’s management has periodically briefed the Audit Committee on progress made towards adoption.

Based upon an assessment of material active contracts, the Company does not expect the impact on the results of operations or cash flows upon adoption or in the periods after adoption to be material. Under ASU 2014-09, revenue is recognized as control transfers to the customer. As such, revenue for the Company’s contracts will generally be recognized over time using the cost-to-cost method, which is consistent with the revenue recognition model currently in use for the majority of contracts. For those contracts where revenue is currently recognized as units are delivered, in most cases the accounting for those contracts will change under ASU 2014-09 such that revenue will be recognized as costs are incurred. This change will generally result in an acceleration of revenue as compared with the current revenue recognition method for those contracts.

The Company expects the cumulative effect of adopting ASU 2014-09 to result in an increase in revenue of less than $3 million and an increase in operating income of less than $2 million. These changes principally reflect the impact of converting contracts currently applying the units-of-delivery method to the cost-to-cost method of accounting. The Company will adopt the new revenue guidance effective January 1, 2018, by recognizing the cumulative effect of adoption as an increase in unbilled accounts receivable, a reduction in inventoried costs, an increase in advance payments and amounts in excess of costs incurred and a net decrease in accumulated deficit as of January 1, 2018. The Company will continue the evaluation of ASU 2014-09 (including how it may impact new contracts received as well as new or emerging interpretations of the standard) through the date of adoption.

(f)Fair Value of Financial Instruments
The carrying amounts and the related estimated fair values of the Company’s long-term debt financialderivative instruments not measured at fair value on a recurring basis at October 1, 2017 and December 25, 20162023, are presented in Note 7. 15.
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The carrying value of all other financial instruments, including cash equivalents, accounts receivable, unbilled receivables, accounts payable, accrued expenses, billings in excess of cost and earnings on uncompleted contracts, income taxes payable and long and short-term debt, approximated their estimated fair values at October 1, 20172023 and December 25, 20162022 due to the short-term nature of these instruments.



Note 2. Acquisitions

Cosmic Advanced Engineered Solutions, Inc.

On December 27, 2021, Kratos Integral Holdings, LLC entered into a Stock Purchase Agreement to acquire Cosmic Advanced Engineered Solutions, Inc. (“Cosmic”) from the Carol L. Zanmiller Living Trust and the John G. Hutchens Living Trust for $37.9 million in cash (including a $0.4 million holdback which was subsequently settled). Cosmic focuses on radio frequency (“RF”), terrestrial, and space-based communication solutions, including digital signals processing and geolocation analysis. In addition, Cosmic provides overhead persistent infrared for missile defense systems and embedded cyber solutions to U.S. government agencies. On December 27, 2021, the acquisition was completed following the satisfaction of all closing conditions, including receipt of regulatory approval from all required government authorities. The operating results of the acquisition have been included in the Company’s results of operations from the effective acquisition date. Cosmic is included in the Kratos Government Solutions (“KGS”) segment.

The excess of the purchase price over the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed in the acquisition was allocated to goodwill. The goodwill represents the value the Company expects to be created by integrating Cosmic’s existing business with Kratos’ related products and customers.

The transaction has been accounted for using the acquisition method of accounting, which requires, among other things, that the identifiable assets acquired and the liabilities assumed be recognized at their fair values as of the acquisition date. The fair value measurements are based primarily on significant inputs not observable in the marketplace and thus represent Level 3 measurements.

The following table summarizes the allocation of the purchase price over the estimated fair values of the major assets acquired and liabilities assumed (in millions):

Accounts receivable$3.8 
Unbilled receivables4.1 
Other current assets0.1 
Property and equipment1.3 
Intangible assets8.5 
  Total identifiable net assets acquired17.8 
Total identifiable net liabilities assumed(9.1)
Goodwill29.2 
Net assets acquired, excluding cash$37.9 

Based on the Company’s estimate of fair value, as of December 27, 2021, net liabilities included $6.7 million of current liabilities. The identifiable intangible assets include trade names of $0.6 million with a remaining useful life of 5 years, backlog of $1.7 million with an estimated useful life of 1 year, customer relationships of $4.4 million with a remaining useful life of 10 years, and developed technology of $1.8 million with a remaining useful life of 5 years. The Company also established a deferred tax liability of $2.4 million for the difference between the financial statement basis and tax basis of the acquired assets of Cosmic and a corresponding increase in goodwill. The goodwill recorded in this transaction is not expected to be tax-deductible.

The value of customer relationships was estimated using the multi-period excess earnings method (“MPEEM”), an income approach (Level 3), which converts projected revenues and costs into cash flows. To reflect the fact that certain other assets contribute to the cash flows generated, the returns for these contributory assets were removed to arrive at estimated cash flows solely attributable to the acquired customer relationships, which were discounted at a rate of 11% to determine the fair value. The value of backlog was also valued using MPEEM. The value of developed technology was estimated using the relief-
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from-royalty method, an income approach (Level 3), which estimates the cost savings that accrue to the owner of the intangible asset that would otherwise be payable as royalties or license fees on revenues earned through the use of the asset. A royalty rate of 11% was applied to the projected revenues associated with the intangible asset to determine the amount of savings in order to determine the fair value.

A summary of the consideration paid for the acquired ownership in Cosmic is as follows (in millions):

Cash paid$39.4 
Less: Cash acquired(1.5)
Total consideration$37.9 

Southern Research Engineering Division

On March 9, 2022, the Company executed an Asset Purchase Agreement to acquire the assets of the Engineering Division of Southern Research Institute (“SRI”), an Alabama non-profit corporation, for a purchase price of approximately $79.4 million, comprised of $74.4 million in cash, subject to adjustments for working capital, potential earn-out consideration tied to revenue from certain in-development products, indebtedness and transaction expenses, and $5.0 million in Kratos common stock. SRI’s Engineering Division (“SRE”) is the market leader in assisting customers in the development, modeling, and deployment of advanced materials for extreme environments, including hypersonic, space, missile, missile defense, strategic deterrence, propulsion systems, and energy applications. SRE also specializes in Intelligence Surveillance and Reconnaissance (“ISR”) sensor development, electromechanical systems design and integration, aerospace engineering, materials engineering, artificial intelligence and machine learning, directed energy, RF systems design and integration, advanced manufacturing, and computational sciences. The acquisition established Kratos SRE, Inc., a new business within Kratos’ Defense and Rocket Support Services Division.

On May 23, 2022, the acquisition was completed following the satisfaction of all closing conditions, including receipt of necessary approval from all required government authorities. The operating results of the acquisition have been included in the Company’s results of operations from the effective acquisition date.

The excess of the purchase price over the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed in the acquisition was allocated to goodwill. The goodwill represents the value the Company expects to be created by integrating SRE’s existing business with Kratos’ related products and customers.

The transaction has been accounted for using the acquisition method of accounting, which requires, among other things, that the identifiable assets acquired and the liabilities assumed be recognized at their fair values as of the acquisition date. The fair value measurements are based primarily on significant inputs not observable in the marketplace and thus represent Level 3 measurements.

The following table summarizes the preliminary allocation of the purchase price over the estimated fair values of the major assets acquired and liabilities assumed (in millions):

Accounts receivable$2.9 
Unbilled receivables11.1 
Inventory0.5 
Other current assets0.2 
Property and equipment22.8 
Other assets0.2 
Intangible assets10.8 
  Total identifiable net assets acquired48.5 
Total identifiable net liabilities assumed(3.4)
Goodwill34.3 
Net assets acquired, excluding cash$79.4 

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Based on the Company’s estimate of fair value, as of May 23, 2022, net liabilities included $2.5 million of current liabilities. The identifiable intangible assets include trade names of $0.5 million with a remaining useful life of 5 years, contracts and backlog of $2.5 million with an estimated useful life of 3 years, in-process research and development of $7.3 million that will commence amortization at the completion of the development and developed technology of $0.5 million with a remaining useful life of 3 years. The Company also established a deferred tax asset of $0.2 million for the difference between the financial statement basis and tax basis of the acquired assets of SRE and a corresponding decrease in goodwill. The goodwill recorded in this transaction is expected to be tax-deductible.

The value of backlog was estimated using MPEEM, an income approach (Level 3), which converts projected revenues and costs into cash flows. To reflect the fact that certain other assets contribute to the cash flows generated, the returns for these contributory assets were removed to arrive at estimated cash flows solely attributable to the acquired backlog, which were discounted at a rate of 6.4% to determine the fair value. The value of developed technology was estimated using the relief-from-royalty method, an income approach (Level 3), which estimates the cost savings that accrue to the owner of the intangible asset that would otherwise be payable as royalties or license fees on revenues earned through the use of the asset. A royalty rate was applied to the projected revenues associated with the intangible asset to determine the amount of savings, which was at a rate of 11% to determine the fair value. The value of in-process research and development was also estimated using the relief-from-royalty method. A royalty rate of 12% was applied to the projected revenues associated with the intangible asset to determine the amount of savings in order to determine the fair value.

The amounts of revenue and operating income of SRE included in the Company’s condensed consolidated statements of operations were $13.0 million and $1.4 million for the three months ended October 1, 2023, respectively, and $38.1 million and $2.8 million for the nine months ended October 1, 2023, respectively. The amounts of revenue and operating income of SRE included in the Company’s condensed consolidated statements of operations were $12.5 million and $0.2 million for the three months ended September 25, 2022, and $16.6 million and $0.7 million for the nine months ended September 25, 2022, respectively.

A summary of the consideration paid for the acquired assets is as follows (in millions):

Cash paid$74.4 
Common stock issued5.0 
Total consideration$79.4 

Pro Forma Financial Information (Unaudited)

The following tables summarize the supplemental condensed consolidated statements of operations information on an unaudited pro forma basis as if the acquisition of SRE occurred on December 26, 2021 and include adjustments that were directly attributable to the foregoing transactions. There are no material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and income (loss). The pro forma results are for illustrative purposes only for the applicable period and do not purport to be indicative of the actual results that would have occurred had the transaction been completed as of the beginning of the period, nor are they indicative of results of operations that may occur in the future.

For the nine month period ended September 25, 2022 (all amounts, except per share amounts, are in millions):
Nine Months Ended
September 25, 2022
Pro forma revenues$666.0 
Pro forma net loss before tax$(32.5)
Pro forma net loss$(27.5)
Basic pro forma loss per share$(0.22)
Diluted pro forma loss per share$(0.22)

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Note 3. Revenue Recognition

The Company has adopted the FASB ASU 2014-09, Revenue from Contracts with Customers, and the related amendments, which are codified into Accounting Standards Codification (“ASC”) 606 (“ASC 606”). To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in each contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. Once the contract is identified and determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract, determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

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

For the majority of contracts, the Company satisfies the underlying performance obligations over time as the customer obtains control or receives benefits as work is performed on the contract. The Company generally recognizes revenue over time as work is performed on long-term contracts because of the continuous transfer of control to the customer. For U.S. government contracts, this continuous transfer of control to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay for costs incurred plus a reasonable profit and take control of any work in process. Similarly, for non-U.S. government contracts, the customer typically controls the work in process as evidenced either by contractual termination clauses or by our rights to payment of the transaction price associated with work performed to date on products or services that do not have an alternative use to the Company. As a result, under ASC 606, revenue is recognized over time using the cost-to-cost method (cost incurred relative to total estimated cost at completion).

Remaining Performance Obligations

The Company calculates revenues from remaining performance obligations as the dollar value of the remaining performance obligations on executed contracts. On October 1, 2023, the Company had approximately $1,165.0 million of remaining performance obligations. The Company expects to recognize approximately 20% of the remaining performance obligations as revenue in fiscal year 2023, an additional 47% in fiscal year 2024, and the balance thereafter.

Contract Estimates

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

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

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

As a result of the EAC process, any quarterly adjustments to revenues, cost of sales, and the related impact to operating income are recognized as necessary in the period they become known. These adjustments may result from positive program performance, and may result in an increase in operating income during the performance of individual performance obligations, if it is determined the Company will be successful in mitigating the risks surrounding the technical, schedule and cost aspects of those performance obligations or realizing related opportunities. Likewise, these adjustments may result in a decrease in operating income if it is determined the Company will not be successful in mitigating these risks or realizing related opportunities. Changes in estimates of net sales, cost of sales, and the related impact to operating income are recognized quarterly on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current and prior periods. A significant change in one or more of these estimates could affect the profitability of one or more of the Company’s contracts. When estimates of total costs to be incurred on a performance obligation exceed total estimates of revenue to be earned, a provision for the entire loss on the performance obligation is recognized in the period the loss is determined. No cumulative catch-up adjustment on any one contract was material to the Company’s unaudited condensed consolidated financial statements for the three and nine-month periods ended October 1, 2023, and September 25, 2022. Likewise, total cumulative catch-up adjustments were not material for the three and nine-month periods ended October 1, 2023, and September 25, 2022.

Contract Assets and Liabilities

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

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

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

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Net contract assets and liabilities are as follows (in millions):
October 1, 2023December 25, 2022Net Change
Contract assets$223.7 $222.8 $0.9 
Contract liabilities$79.4 $62.1 $17.3 
Net contract assets$144.3 $160.7 $(16.4)

Contract assets increased $0.9 million during the nine months ended October 1, 2023, primarily due to higher unbilled receivables, net during the nine months ended October 1, 2023. There were no significant impairment losses related to any receivables or contract assets arising from the Company’s contracts with customers during the nine months ended October 1, 2023. Contract liabilities increased $17.3 million during the nine months ended October 1, 2023, primarily due to payments received in excess of revenue recognized on these performance obligations. For the three and nine months ended October 1, 2023, the Company recognized revenue of $9.5 million and $43.1 million that was previously included in the contract liabilities that existed at December 25, 2022. For the three and nine months ended September 25, 2022 the Company recognized revenue of $6.6 million and $42.6 million that was previously included in the contract liabilities that existed at December 26, 2021.

In November 2019, a large training solutions program was terminated for convenience (“T for C”) by the customer. Under a T for C, a contractor is entitled to seek specified costs through a termination settlement process including (1) the contract price for completed supplies and services accepted by the government but not previously paid for; (2) the cost incurred in the performance of work terminated plus a reasonable profit on those costs; and (3) its costs incurred in settling with subcontractors and preparing and settling the termination proposal. Under a T for C, the Company would not be able to collect the total withheld amounts until the settlement terms of the T for C have been negotiated and agreed to with the customer. At October 1, 2023, approximately $4.8 million in unbilled receivables remained outstanding on this project. In March 2022, the Company and the customer agreed to a settlement of $6.0 million for a portion of the amounts outstanding on this project, which was collected in July 2022. The remaining unbilled receivable balance of $4.8 million is subject to negotiation and settlement with the customer.

The Company was also in dispute with an international customer in the Unmanned Systems (“US”) segment concerning the completion of certain system requirements and certain contractual milestones related to a contract the Company acquired with the acquisition of Composite Engineering Inc. in 2012. On June 30, 2022, the parties entered into a settlement agreement to resolve their dispute and to settle all claims and counterclaims, and 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.

Disaggregation of Revenue

The following series of tables presents the Company’s revenue disaggregated by several categories. For the majority of contracts, revenue is recognized over time as work is performed on the contract. Revenue by contract type was as follows (in millions):
Three Months EndedNine Months Ended
October 1, 2023September 25, 2022October 1, 2023September 25, 2022
Kratos Government Solutions
Fixed price$155.2 $125.1 $414.7 $346.3 
Cost plus fee49.5 43.3 155.1 112.7 
Time and materials13.2 10.2 36.7 31.0 
Total Kratos Government Solutions217.9 178.6 606.5 490.0 
Unmanned Systems
Fixed price42.4 33.6 118.3 105.8 
Cost plus fee11.4 14.9 30.0 50.6 
Time and materials2.9 1.5 8.5 2.6 
Total Unmanned Systems56.7 50.0 156.8 159.0 
Total Revenues$274.6 $228.6 $763.3 $649.0 

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Revenue by customer was as follows (in millions):
Three Months EndedNine Months Ended
October 1, 2023September 25, 2022October 1, 2023September 25, 2022
Kratos Government Solutions
U.S. Government (1)
$132.1 $114.6 $376.1 $308.3 
International (2)
52.2 39.8 145.1 110.6 
U.S. Commercial and other customers33.6 24.2 85.3 71.1 
Total Kratos Government Solutions217.9 178.6 606.5 490.0 
Unmanned Systems
U.S. Government (1)
53.4 43.5 148.3 145.5 
International (2)
2.1 5.9 6.4 11.3 
U.S. Commercial and other customers1.2 0.6 2.1 2.2 
Total Unmanned Systems56.7 50.0 156.8 159.0 
Total Revenues$274.6 $228.6 $763.3 $649.0 
(1)Sales to the U.S. Government include sales from contracts for which the Company is the prime contractor, as well as those for which the
Company is a subcontractor and the ultimate customer is the U.S. Government. Each of the Company’s segments derives substantial revenue
from the U.S. Government. These sales include foreign military sales contracted through the U.S. Government.

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

Note 4. Discontinued Operations

On February 28, 2018, the Company entered into a Stock Purchase Agreement to sell the operations of Kratos Public Safety & Security Solutions, Inc., a Delaware corporation and wholly owned subsidiary of the Company (“PSS”), to Securitas Electronic Security, Inc., a Delaware corporation (“Buyer”). On June 11, 2018, the Company completed the sale of all of the issued and outstanding capital stock of PSS to Buyer for a purchase price of $69 million in cash, subject to a closing net working capital adjustment (the “Transaction”). To date, the Company has received approximately $68.7 million of aggregate net cash proceeds from the Transaction, after taking into account amounts that were paid by the Company pursuant to a negotiated transaction services agreement between the Company and the Buyer, receipt of approximately $7.3 million in net working capital retained by the Company, and associated transaction fees and expenses, including the impact of the final settlement and determination of the closing net working capital adjustment and litigation which was settled with the Buyer in the fourth quarter of 2021 and first quarter of 2022, respectively.

Note 5. Goodwill and Intangible Assets
 
(a)Goodwill
(a)    Goodwill
 
The carrying amounts of goodwill as of October 1, 20172023 and December 25, 20162022 by reportable segment are as follows (in millions):
KGSUSTotal
Gross value$683.6 $127.9 $811.5 
Less accumulated impairment239.5 13.8 253.3 
Net$444.1 $114.1 $558.2 
 As of October 1, 2017
 Kratos Government Solutions Public Safety & Security Unmanned Systems Total
Gross value$567.7
 $53.9
 $111.1
 $732.7
Less accumulated impairment215.3
 18.3
 13.8
 247.4
Net$352.4
 $35.6
 $97.3
 $485.3




16
 As of December 25, 2016
 Kratos Government Solutions Public Safety & Security Unmanned Systems Total
Gross value567.8
 53.9
 111.1
 732.8
Less accumulated impairment215.3
 18.3
 13.8
 247.4
Net$352.5
 35.6
 97.3
 485.4
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(b)    Purchased Intangible Assets
 
The following table sets forth information for finite-lived and indefinite-lived intangible assets (in millions):
 As of October 1, 2023As of December 25, 2022
 Gross
Value		Accumulated
Amortization		Net
Value		Gross
Value		Accumulated
Amortization		Net
Value
Acquired finite-lived intangible assets:    
Customer relationships$80.9 $(62.1)$18.8 $80.9 $(60.1)$20.8 
Contracts and backlog39.1 (37.6)1.5 39.1 (36.3)2.8 
Developed technology and technical know-how33.7 (27.9)5.8 33.7 (27.0)6.7 
Trade names3.8 (2.6)1.2 3.8 (2.3)1.5 
In-process research and development16.8 (0.3)16.5 16.8 (0.3)16.5 
Total finite-lived intangible assets174.3 (130.5)43.8 174.3 (126.0)48.3 
Indefinite-lived trade names6.9 — 6.9 6.9 — 6.9 
Total intangible assets$181.2 $(130.5)$50.7 $181.2 $(126.0)$55.2 
 As of October 1, 2017 As of December 25, 2016
 Gross
Value		 Accumulated
Amortization		 Net
Value		 Gross
Value		 Accumulated
Amortization		 Net
Value
Acquired finite-lived intangible assets: 
  
    
  
  
Customer relationships$53.7
 $(48.9) $4.8
 $53.7
 $(44.9) $8.8
Contracts and backlog30.8
 (25.2) 5.6
 30.8
 (23.7) 7.1
Developed technology and technical know-how25.0
 (17.9) 7.1
 25.2
 (15.7) 9.5
Trade names1.4
 (1.3) 0.1
 1.4
 (1.1) 0.3
Total finite-lived intangible assets110.9
 (93.3) 17.6
 111.1
 (85.4) 25.7
Indefinite-lived trade names6.9
 —
 6.9
 6.9
 —
 6.9
Total intangible assets$117.8
 $(93.3) $24.5
 $118.0
 $(85.4) $32.6


Consolidated amortization expense related to intangible assets subject to amortization was $7.9$1.5 million and $7.9$3.0 million for the three months ended October 1, 2023 and September 25, 2022, respectively, and $4.5 million and $6.3 million for the nine months ended October 1, 20172023 and September 25, 2016,2022, respectively.


Note 3.6. Inventoried Costs
 
Inventoried costs, consisted of the following components (in millions):
 
October 1,
2017		 December 25,
2016		 October 1, 2023December 25, 2022
Raw materials$33.0
 $31.9
Raw materials$74.5 $73.6 
Work in process26.9
 22.1
Work in process70.9 50.8 
Finished goods2.2
 1.4
Finished goods4.7 1.1 
Supplies and other2.0
 1.8
Subtotal inventoried costs64.1
 57.2
Less: Customer advances and progress payments(1.3) (1.8)
Total inventoried costs$62.8
 $55.4
Total inventoried costs$150.1 $125.5 
 


Note 4. Stockholders’ Equity
A summary of the changes in stockholders’ equity is provided below (in millions):
 For the Nine Months Ended
 October 1, 2017 September 25, 2016
Stockholders’ equity at beginning of period$276.4
 $254.2
Comprehensive loss: 
  
Net loss(20.5) (56.2)
Change in cumulative translation adjustment(0.1) (0.2)
Total comprehensive loss(20.6) (56.4)
Exercise of stock options and warrants0.4
 —
Stock-based compensation6.8
 4.2
Issuance of common stock for cash267.8
 —
Issuance of common stock for employee stock purchase plan3.1
 2.6
Restricted stock units traded for taxes(2.0) (0.5)
Stockholders’ equity at end of period$531.9
 $204.1

The components of accumulated other comprehensive loss are as follows (in millions):

 October 1, 2017 September 25, 2016
Cumulative translation adjustment$(1.2) $(0.8)
Post-retirement benefit reserve adjustment net of tax expense(0.6) (0.8)
Total accumulated other comprehensive loss$(1.8) $(1.6)

There were no reclassifications from accumulated other comprehensive loss to net loss for the nine months ended October 1, 2017 and September 25, 2016.

Common stock issued by the Company for the nine months ended October 1, 2017 and September 25, 2016 was as follows (in millions):
 For the Nine Months Ended
 October 1, 2017 September 25, 2016
Shares outstanding at beginning of the period73.9
 59.1
Stock issued for cash28.0
 —
Stock issued for employee stock purchase plan, stock options and restricted stock units exercised1.4
 1.4
Shares outstanding at end of the period103.3
 60.5
Note 5.7. Net Loss PerIncome (Loss) per Common Share
 
The Company calculates net lossincome (loss) per share in accordance with FASB Accounting Standards CodificationASC Topic 260, Earnings per Share (“Topic 260”). Under Topic260, basic net lossincome (loss) per common share attributable to the Kratos shareholders is calculated by dividing net lossincome (loss) attributable to Kratos by the weighted-average number of common shares outstanding during the reporting period. Diluted net lossincome (loss) per common share reflects the effects of potentially dilutive securities.


Shares from stock options and awards, excluded from the calculation of diluted net loss per share because their inclusion would have been anti-dilutive, were 0.10.9 million and 0.20.9 million for the three and nine months ended October 1, 2017,2023, respectively, and 1.21.9 million and 1.41.5 million for the three and nine months ended September 25, 2016,2022, respectively.
 

Note 6.8. Leases

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

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

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

    The components of lease expense were as follows (in millions):
Three Months EndedNine Months Ended
October 1, 2023September 25, 2022October 1, 2023September 25, 2022
Amortization of right of use assets - finance leases$0.8 $0.8 $2.3 $2.1 
Interest on lease liabilities - finance leases0.8 0.8 2.3 2.2 
Operating lease cost3.7 3.1 10.4 9.7 
Short-term lease cost0.3 0.2 0.8 0.6 
Variable lease cost (cost excluded from lease payments)— — 0.1 0.1 
Total lease cost$5.6 $4.9 $15.9 $14.7 

The components of leases on the balance sheet were as follows (in millions):
October 1, 2023December 25, 2022
Operating leases:
Operating lease right-of-use assets$50.6 $47.4 
Current portion of operating lease liabilities$12.1 $10.8 
Operating lease liabilities, net of current portion$43.0 $40.8 
Finance leases:
Property, plant and equipment, net
$44.1 $45.8 
Other current liabilities
$1.6 $1.7 
Other long-term liabilities
$49.5 $49.9 

Cash paid for amounts included in the measurement of lease liabilities was as follows (in millions):
Three Months EndedNine Months Ended
October 1, 2023September 25, 2022October 1, 2023September 25, 2022
Finance lease - cash paid for interest$0.8 $0.8 $2.3 $2.2 
Finance lease - financing cash flows$0.4 $0.4 $1.2 $1.0 
Operating lease - operating cash flows (fixed payments)$3.7 $3.2 $10.3 $10.0 
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Other supplemental noncash information (in millions):
Three Months EndedNine Months Ended
October 1, 2023September 25, 2022October 1, 2023September 25, 2022
Operating lease liabilities arising from obtaining right-of-use assets$5.4 $6.9 $11.8 $11.9 
Finance lease liabilities arising from obtaining right-of-use assets$— $— $0.1 $9.1 
October 1, 2023September 25, 2022
Weighted-average remaining lease term (in years):
Operating leases4.754.91
Finance leases14.8015.44
Weighted-average discount rate:
Operating leases5.04 %5.51 %
Finance leases6.41 %6.02 %

The maturity of lease liabilities is (in millions):
Operating LeasesFinance Leases
2023 (1)
$3.8 $1.2 
202414.5 4.8 
202512.8 5.0 
202610.9 5.0 
20279.8 5.1 
Thereafter9.9 59.5 
Total lease payments61.7 80.6 
Less: imputed interest(6.6)(29.5)
Total present value of lease liabilities$55.1 $51.1 
(1) Excludes the nine months ended October 1, 2023.

Note 9. Income Taxes

TheA reconciliation of the total income tax benefit from continuing operationsprovision (benefit) to the amount computed by applying the statutory federal income tax rate of 35%21% to lossincome (loss) from continuing operations before income taxes to the income tax provision for the three and nine months ended October 1, 20172023 and September 25, 2016 was2022 is as follows (in millions):
 For the Three Months EndedFor the Nine Months Ended
 October 1,
2023		September 25,
2022		October 1,
2023		September 25,
2022
Income tax expense (benefit) at federal statutory rate$1.4 $(1.8)$0.7 $(7.0)
Nondeductible expenses and other2.8 1.4 6.3 3.9 
Stock compensation - excess tax shortfalls (benefits)(0.2)(0.2)0.5 (0.8)
Federal impact of research & development tax credits(0.2)(0.2)(0.6)(0.7)
Provision (benefit) for income taxes from continuing operations$3.8 $(0.8)$6.9 $(4.6)

 For the Three Months Ended For the Nine Months Ended
 October 1,
2017		 September 25,
2016		 October 1,
2017		 September 25,
2016
Income tax benefit at federal statutory rate$(1.4) $(7.5) $(5.9) $(17.0)
State and foreign taxes, net of federal tax benefit and valuation allowance0.2
 0.5
 0.6
 1.9
Nondeductible expenses and other(0.5) 0.1
 0.5
 0.8
Impact of deferred tax liabilities for indefinite-lived assets(0.6) 1.2
 2.2
 3.5
Increase in reserves for uncertain tax positions0.6
 0.2
 0.7
 1.9
Increase in federal valuation allowance1.9
 7.4
 5.4
 16.2
Total income tax provision$0.2
 $1.9
 $3.5
 $7.3

In assessingThe Company calculates its interim income tax provision in accordance with ASC Topic 270, “Interim Reporting,” and ASC Topic 740, “Accounting for Income Taxes.” Prior to 2022, the Company’s ability to realize deferred tax assets, management considers, on a periodic basis, whether it is more likely than not that some portion or allCompany calculated the provision for income taxes during the interim reporting periods by applying an estimate of the deferredannual effective tax assets will not be realized. As such, management hasrate for the full fiscal year to “ordinary” income or loss (pretax income or loss excluding unusual or infrequently occurring discrete items) for the reporting period. The Company determined that it is appropriatesince small changes in estimated “ordinary” income would result in significant changes in the
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estimated annual effective tax rate, the historical method used prior to maintain2022 would not provide a full valuation allowance against the Company’s U.S. federal, combined state and certain foreign deferred tax assets, with the exception of an amount equal to its deferred tax liabilities, which can be expected to reverse over a definite life.
Federal and state income tax laws impose restrictions on the utilization of net operating losses (“NOLs”) and tax credit carryforwards in the event that an “ownership change” occursreliable estimate for tax purposes, as defined by Section 382 of the Internal Revenue Code of 1986, as amended (“Section 382”). In general, an ownership change occurs when shareholders owning 5% or more of a “loss corporation” (a corporation entitled to use NOLs or other loss carryovers) have increased their ownership of stock in such corporation by more than 50 percentage points during any three-year period. The annual base Section 382 limitation is calculated by multiplying the loss corporation’s value at the time of the ownership change by the greater of the long-term tax-exempt rate determined by the Internal Revenue Service in the month of the ownership change or the two preceding months. This base limitation is subject to adjustments, including an increase for built-in gains recognized in the five-year period after the ownership change.
In March 2010, an “ownership change” occurred that will limit the utilization of NOL carryforwards. In July 2011, another “ownership change” occurred. The March 2010 ownership change limitation is more restrictive. In prior years, the Company acquired corporations with NOL carryforwards at the date of acquisition (“Acquired NOLs”). The Acquired NOLs are subject to separate limitations that may further restrict the use of Acquired NOLs. As a result, the Company’s federal annual utilization of NOL carryforwards was limited to $27.0 million a year for the five years succeeding the March 2010 ownership change and $11.6 million for each year thereafter subject to separate limitations for Acquired NOLs. If the entire limitation amount is not utilized in a year, the excess can be carried forward and utilized in future years.
For the nine months ended October 1, 2017, such limitations did not impact2023 and September 25, 2022. Therefore, a discrete effective tax rate method was used to calculate taxes for the income tax provision, since the amount of taxable income did not exceed the annual limitation amount. However, future equity offerings or acquisitions that have equity as a component of the purchase price could also cause an “ownership change.” Ifnine months ended October 1, 2023 and when any other “ownership change” occurs, utilization of the NOLs or other tax attributes may be further limited.
As discussed elsewhere, deferred tax assets relating to the NOLs and credit carryforwards are offset by a full valuation allowance. In addition, utilization of state tax loss carryforwards is dependent upon sufficient taxable income apportioned to the states.
The Company is subject to taxation in the U.S. and various state and foreign tax jurisdictions. The Company’s tax years for 2000 and later are subject to examination by the U.S. and state tax authorities due to the existence of the NOL carryforwards. Generally, the Company’s tax years for 2002 and later are subject to examination by various foreign tax authorities as well.

September 25, 2022.
As of December 25, 2016,October 1, 2023, the Company had $18.6$25.1 million of unrecognized tax benefits. Included in the balance of unrecognized tax benefits at October 1, 2023 are $22.6 million that, if recognized, would impact the Company’s effective income tax rate, subject to possible offset by an increase in the deferred tax asset valuation allowance. During the nine months ended October 1, 2017, unrecognized tax benefits increased by $0.2 million relating to various current year and prior positions.rate.


The Company recognizes interest and penalties related to unrecognized tax benefits in its provision for income taxes. For the nine months ended October 1, 20172023 and September 25, 2016, a $0.4 million2022, the Company recorded an expense and $0.8 million expense, respectively, were recorded related tofor interest and penalties related to unrecognized tax benefits.of $0.2 million and $0.3 million, respectively. For the nine months ended October 1, 20172023 and September 25, 2016,2022, there was no material benefit recorded related to the removal of interest and penalties. The Company believes that it is reasonably possible that as much as $1.0$0.1 million of the liabilities for uncertain tax positions will expire within the next twelve months of October 1, 2017 due to the expiration of various applicable statutes of limitation.limitations.


On August 16, 2022, the Inflation Reduction Act of 2022 (“IRA”), was signed into law. Among other things, the IRA imposes a 15% corporate alternative minimum tax for tax years beginning after December 31, 2022, levies a 1% excise tax on net stock purchases after December 31, 2022, and provides tax incentives to promote clean energy. The IRA is not expected to have a material impact on our results of operations or financial position.

Note 7.10. Debt
 
(a)Issuance of 7.00% Senior Secured Notes due 2019
(a) New Credit Facility
In May 2014,
On February 18, 2022, the Company refinancedcompleted the refinancing of its $625.0outstanding $90 million of 10%revolving credit facility and $300 million 6.5% Senior Secured Notes due in 2017 (the “10%“Senior Secured Notes”), with $625.0a new 5-year $200 million of newly issued 7.00% Senior Secured Notes due in 2019 (the “7% Notes”Revolving Credit Facility and 5-year $200 million Term Loan A (collectively, the “New Credit Facility”). The net proceeds from the issuance of the 7% Notes was $618.5 million after an original issue discount of $6.5 million. The Company incurred debt issuance costs of $8.8$3.3 million associated with the 7%New Credit Facility. As of October 1, 2023, the Company made $6.3 million in 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 approximately $13.7 million of letters of credit outstanding.

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. The redemption of the Company’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 utilizedincurred a loss on the net proceeds fromextinguishment 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 itsTerm 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 Secured Overnight Financing Rate (“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 cashin 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 at a rate per annum equal to the sum of the Applicable Margin from operationstime to extinguishtime in effect plus the 10% Notes.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.
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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 completedwas in compliance with the offeringcovenants contained in the Credit Agreement as of October 1, 2023.

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 of 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. Refer to Note 15 for further discussion of the 7%accounting treatment of the swap arrangement.

Term Loan and Revolving Credit Debt

Term loan and revolving credit debt and the current period interest rates are as follows (in millions):
October 1, 2023December 25, 2022
Term Loan A$193.7$197.5
Revolving credit facility50.060.0
Total debt243.7257.5
Less current portion8.76.3
Total long-term debt, less current portion235.0251.2
Less long-term unamortized debt issuance costs - term loans0.81.0
Total long-term debt, net of unamortized debt issuance costs - term loans$234.2$250.2
Unamortized debt issuance costs - revolving credit facility$0.8$1.0
Current period interest rate7.7 %6.4 %

Future long-term debt principal payments at October 1, 2023 were as follows (in millions):

2023$2.5 
20248.7 
202510.0 
202610.0 
2027212.5 
$243.7 

(b) 6.5% Senior Secured Notes due 2025

In November 2017, the Company issued and sold $300 million aggregate principal amount of 6.5% Senior Secured Notes due 2025 (the “Senior Secured Notes”), 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) (a) if 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) if 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 the $110.0 million Credit Agreement.

The Company pays 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, the Company was in compliance with the covenants contained in the Indenture governing the Notes.

The Company 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, 2018 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.March 14, 2022.


The terms of the Indenture require that the net cash proceeds from asset dispositions be utilized to (i) repay or prepay amounts outstanding under the 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 its U.S. and U.K. Electronic Products Divisions (the “Herley Entities”) the Company paid down $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 in accordance with the terms of 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 gain on extinguishment of debt of $0.2 million.

During the quarter ended March 26, 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 loss on extinguishment of debt of $2.1 million.

As of October 1, 2017, there was $372.8 million in Notes outstanding.

(b)(c)    Other Indebtedness

$110.0 MillionCredit and Security Agreement


On May 14, 2014,November 20, 2017, the Company entered into a $110.0 million Creditan 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 maximum principal amount to $135.0 million, subject to the Agent’s and applicable lenders’ approval as described therein), consisting of a subline for letters of credit in an amount not to exceed $50.0$50.0 million,, as well as a swingline loan in an aggregate principal amount at any time outstanding not to exceed $10.0 million. The obligations under the Credit Agreement are secured by (i) a first priority lien on the Company’s accounts receivable, inventory, deposit accounts, securities accounts, cash, securities and general intangibles (other than intellectual property) and (ii) a second priority lien, junior to the lien securing the Notes, on all of the Company’s other assets.

$10.0 million. The Credit and Security 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: failure of the Company to pay any principal of any loans in full when due and payable; failure of the Company to pay any interest on any loan or any fee or other amount payable under the Credit Agreement within three business days after the date when due and payable; failure of the Company or any of its subsidiaries to comply with certain covenants and agreements, subject to applicable grace periods and/or notice requirements; any representation, warranty or statement made in or pursuant to the Credit Agreement or any related writing or any other material information furnishedwas replaced by the Company or anyNew Credit Facility on February 18, 2022.

21
Table of its subsidiaries to the Agent or the lenders proving to be false or erroneous; and the occurrence of an event or condition having or reasonably likely to have a material adverse effect, which includes a material adverse effect on the business, operations, condition (financial or otherwise) or prospects of the Company or the ability of the Company to repay its obligations. Where an event of default arises from certain bankruptcy events, the commitments will automatically and immediately terminate and the principal of, and interest then outstanding on, all of the loans will become immediately due and payable. Subject to certain notice requirements and other conditions, upon the occurrence of an event of default, including the occurrence of a condition having or reasonably likely to have a material adverse effect, commitments may be terminated and the principal of, and interest then outstanding on, all of the loans may become immediately due and payable. At October 1, 2017, no event of default had occurred and the Company believes that events or conditions having a material adverse effect, giving rise to an acceleration of any amounts outstanding under the Credit Agreement, have not occurred and the likelihood of such events or conditions occurring is remote.Contents

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 the Company’s then-existing borrowing base and the lender’s total commitment amount and revolving credit exposure. The calculation of the Company’s borrowing base takes into account several items relating to the Company and its subsidiaries, including, 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, the Company 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 approved by the lenders, a minimum $175.0 million repurchase of the Notes by the Company was required, and the payment in full of the outstanding balance of the 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, if 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.

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, the Company 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 the Company’s 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 outstanding on letters of credit, resulting in net borrowing base availability of $68.7 million. The Company was in compliance with the financial covenants of the Credit Agreement and its amendments as of October 1, 2017.

Debt Acquired in Acquisition
The Company has 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 its 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. The Company was in compliance with all covenants contained in this loan agreement as of October 1, 2017.

Fair Value of Long-term Debt
Carrying amounts and the related estimated fair values of the Company’s long-term debt financial instruments not measured at fair value on a recurring basis at October 1, 2017 and December 25, 2016 are presented in the following table:
  As of October 1, 2017 As of December 25, 2016
$ in millions Principal Carrying
Amount		 Fair Value Principal Carrying
Amount		 Fair Value
Total long-term debt including current portion $373.8
 $370.7
 $383.1
 $437.3
 $432.0
 $423.6
The fair value of the Company’s long-term debt was based upon actual trading activity (Level 1, Observable inputs -quoted prices in active markets).

 As of October 1, 2017, the difference between the carrying amount of $370.7 million and the principal amount of $373.8 million presented in the table above is the net unamortized original issue discount of $1.4 million and the unamortized debt issuance costs of $1.7 million, which are being accreted to interest expense over the term of the related debt. As of December 25, 2016, the difference between the carrying amount of $432.0 million and the principal amount of $437.3 million presented in the previous table is the net unamortized original issue discount of $2.4 million and the unamortized debt issuance costs of $2.9 million, which are being accreted to interest expense over the term of the related debt.

Note 8.11. Segment Information
 
The Company operates in threetwo reportable segments. The Kratos Government Solutions (“KGS”)KGS reportable segment is comprised of an aggregation of KGS operating segments,business units, including the Company’s microwave electronicelectronics products, space, satellite communications, and cyber, training solutions, C5ISR/modular systems, turbine technologies and defense and rocket support systems operating segments. The Unmanned Systems (“US”)US reportable segment consists of itsthe Company’s unmanned aerial, system and unmanned ground, unmanned seaborne and seabornecommand, control and communications system businesses.business. The KGS and US reportable segments provide products, solutions and services for mission critical national security programs. KGS and US customers primarily include national security related agencies, the U.S. Department of Defense (the “DoD”), intelligence agencies and classified agencies, and to a lesser degree, international government agencies and domestic and international commercial customers. 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. PSS customers include those in the critical infrastructure, power generation, power transport, nuclear energy, financial, IT, healthcare, education, transportation and petro-chemical industries, as well as certain government customers.


The Company organizes its reportable segments based on the nature of the products, solutions and services offered. Transactions between segments are generally negotiated and accounted for under terms and conditions similar to other government and commercial contracts. This presentation is consistent with the Company’s operating structure. In the following table, total operating income (loss) from continuing operations of the reportable business segments is reconciled to the corresponding consolidated amount. The reconciling item “unallocated corporate expense, net”Corporate activities includes costs for certain stock-based compensation programs (including stock-based compensation costs for stock options, the employee stock purchase plan and restricted stock units), the effects of items not considered part of management’s evaluation of segment operating performance, merger and acquisition expenses, corporate costs not allocated to the segments, and other miscellaneous corporate activities.


During the nine months ended September 25, 2016, the PSS reportable segment recorded a $1.9 million charge related to a litigation settlement of a contract dispute and the KGS reportable segment recorded a $7.8 million charge as a result of the decision to close one of its manufacturing facilities and exit certain lower margin product business lines. The operating loss for the US segment for the three and nine months ended September 25, 2016 includes an $18.7 million loss accrual recorded on the Low Cost Attritable Unmanned Aerial System Demonstration cost share contract awarded in July 2016.


 Revenues, depreciation and amortization, and operating income (loss) generated by the Company’s reportable segments for the three and nine month periods ended October 1, 20172023 and September 25, 20162022 are as follows (in millions):
 Three Months EndedNine Months Ended
 October 1, 2023September 25, 2022October 1, 2023September 25, 2022
Revenues:   
Kratos Government Solutions
Service revenues$104.4 $87.3 $296.8 $231.3 
Product sales113.5 91.3 309.7 258.7 
Total Kratos Government Solutions$217.9 $178.6 $606.5 $490.0 
Unmanned Systems
Service revenues2.1 1.3 5.0 4.0 
Product sales54.6 48.7 151.8 155.0 
Total Unmanned Systems56.7 50.0 156.8 159.0 
Total revenues$274.6 $228.6 $763.3 $649.0 
Depreciation and amortization:
Kratos Government Solutions$6.0 $7.0 $17.8 $17.1 
Unmanned Systems2.2 1.9 6.2 5.7 
Total depreciation and amortization$8.2 $8.9 $24.0 $22.8 
Operating income (loss):    
Kratos Government Solutions$15.9 $3.3 $35.2 $18.4 
Unmanned Systems2.6 (0.1)3.2 (4.6)
Corporate activities(6.3)(6.8)(19.0)(20.5)
Total operating income (loss)$12.2 $(3.6)$19.4 $(6.7)

The Unmanned Systems operating loss for the nine months ended September 25, 2022 includes a $5.5 million litigation settlement charge related to the resolution of a dispute with an international customer, for which the contractual arrangement was entered into in March 2011, prior to Kratos’ acquisition of Composite Engineering Inc. (“CEi”).

22
 Three Months Ended Nine Months Ended
 October 1, 2017 September 25, 2016 October 1, 2017 September 25, 2016
Revenues: 
      
Kratos Government Solutions       
Service revenues$47.5
 $52.9
 $149.4
 $163.1
Product sales67.9
 59.9
 207.0
 178.3
Total Kratos Government Solutions115.4
 112.8
 356.4
 341.4
Public Safety & Security       
Service revenues39.2
 34.3
 113.9
 94.9
Product sales—
 —
 —
 —
Total Public Safety & Security39.2
 34.3
 113.9
 94.9
Unmanned Systems       
Service revenues—
 —
 —
 —
Product sales41.6
 18.3
 79.4
 50.3
Total Unmanned Systems41.6
 18.3
 79.4
 50.3
Total revenues$196.2
 $165.4
 $549.7
 $486.6
Depreciation & amortization:       
Kratos Government Solutions$3.5
 $3.6
 $10.7
 $11.3
Public Safety & Security0.1
 0.1
 0.3
 0.4
Unmanned Systems2.4
 1.9
 6.0
 5.6
Total depreciation and amortization$6.0
 $5.6
 $17.0
 $17.3
Operating income (loss) from continuing operations: 
  
    
Kratos Government Solutions$1.7
 $7.7
 $17.0
 $10.4
Public Safety & Security2.5
 0.8
 2.8
 (1.7)
Unmanned Systems1.7
 (20.4) (5.1) (27.6)
Unallocated corporate expense, net(2.8) (1.1) (7.3) (4.3)
Total operating income (loss) from continuing operations$3.1
 $(13.0) $7.4
 $(23.2)

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Note 9.12.    Redeemable Noncontrolling Interest

On February 27, 2019, the Company acquired 80.1% of the issued and outstanding shares of capital stock of Florida Turbine Technologies Inc., a Florida corporation (“FTT Inc.”), and 80.1% of the membership interests in KTT Core, a Delaware limited liability company, for an aggregate purchase price of approximately $60 million. On February 18, 2022, the capital stock of FTT Inc. was conveyed to KTT Core for organizational purposes such that FTT Inc. is now a wholly owned subsidiary of KTT Core. In connection with the Company’s acquisition of FTT Inc., and KTT Core, (i) beginning in January 2024, the holders (the “Holders”) of the minority interests in KTT Core (the “Minority Interests”) will have an annual right (the “Put Right”) to sell all of the Minority Interests to the Company at a purchase price based on a specified multiple of the trailing 12 months EBITDA of KTT Core and its subsidiaries (the “Acquired Companies”), subject to adjustment as set forth in the Exchange Agreement entered into by and among the Company, the Acquired Companies and the Holders, as amended on February 18, 2022 (the “Exchange Agreement”) (provided, however, that following certain events, including a change of control, the Put Right will be accelerated and the Minority Interest Purchase Price (as defined in the Exchange Agreement) will be a specified increased multiple of the trailing 12 months EBITDA of the Acquired Companies); and (ii) beginning in January 2025, the Company will have an annual right to purchase all of the Minority Interests from the Holders at the Minority Interest Purchase Price.

On June 13, 2022, the Company entered into an Equity Purchase Agreement (the “Equity Purchase Agreement”) to acquire an additional 9.95% (the “Purchased Shares”) of the issued and outstanding shares of capital stock of KTT Core (together with its wholly-owned subsidiaries including FTT Inc.), a majority owned subsidiary of the Company, for an aggregate estimated purchase price of approximately $6.4 million, to be paid in shares of Kratos common stock. Pursuant to the Equity Purchase Agreement, the Company paid consideration of $2.7 million, paid in 190,258 shares of its common stock, based upon Kratos’ trading price on the date of distribution. Following the closing of the transactions contemplated by the Equity Purchase Agreement, the Company owned 90.05% of KTT Core. On April 7, 2023, the final aggregate purchase price, as updated to reflect the actual 2022 operating results and to reflect the market price of Kratos common stock on the day of issuance, was determined and 828,128 shares of Kratos common stock were issued to the Holders of the minority interest with a value of $10.7 million.

The Put Right and annual purchase right of the Holders and the Company, respectively, remain available under the Exchange Agreement as to the remaining 9.95% minority interest in KTT Core.

The Company adjusts the carrying value of such redeemable noncontrolling interest based on an allocation of subsidiary earnings based on ownership interest. Redeemable noncontrolling interest is recorded outside of permanent equity at the higher of its carrying value or management’s estimate of the amount (the “Redemption Amount”) that the Company could be required to pay in connection with the Put Right. Adjustments to the Redemption Amount will have a corresponding effect on net income per share attributable to Kratos shareholders. As a result of the Company’s acquisition of an additional 9.95% of the issued and outstanding shares of capital stock of KTT Core, the carrying value of the redeemable noncontrolling interest was adjusted. As of December 25, 2022, the estimated Redemption Amount of the redeemable noncontrolling interest was $11.2 million. For the three and nine months ended September 25, 2022 there was no adjustment to the carrying value of the redeemable noncontrolling interest. The Company recorded an increase of $4.2 million and $7.1 million in the carrying value of the redeemable noncontrolling interest to the estimated Redemption Amount for the three and nine months ended October 1, 2023, respectively.

Note 13. Significant Customers
 
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.
 
Note 10.14. Commitments and Contingencies
 
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
23
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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.


Legal and Regulatory Matters
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.


Other Litigation Matters.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

Note 15. Derivative Financial Instruments
The Company’s derivative portfolio consists of forward exchange contracts used to manage foreign currency risks and an interest rate swap contract to hedge U.S. dollar-one month Term SOFR in order to mitigate the exposure to interest rate movements associated with the Company’s Term Loan A. Derivative financial instruments are recognized on the Condensed Consolidated Balance Sheets as either assets or liabilities and are measured at fair value.

Forward Contracts

Changes in the fair values of the foreign currency exchange contracts are recorded each period in earnings. As of October 1, 2023, the Company did not use hedge accounting for its foreign currency exchange contracts. The notional value of the Company’s foreign currency exchange contracts at October 1, 2023, was $15.5 million. At October 1, 2023, the fair value amounts of the foreign currency exchange contracts were a $0.1 million asset and a $0.4 million liability. The net loss from these forward exchange contracts was $0.1 million and $0.2 million for the three and nine months ended SeptemberOctober 1, 2023, respectively, and is included in other expense. The notional value of the Company’s foreign currency exchange contracts at December 25, 2016,2022, was $10.2 million. At December 25, 2022, the fair value amounts of the foreign currency exchange contracts were a $0.1 million asset and a $0.3 million liability.

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Cash Flow Hedge

On April 28, 2023, the Company recordedentered into an interest rate swap contract with an initial notional amount of $195.0 million to manage the variability of cash flows associated with the Term Loan A. The interest rate swap contract matures on May 1, 2026 and requires periodic interest rate settlements. The swap is at a chargefixed SOFR of $1.9 million related to a litigation settlement3.721% and settles monthly on the last day of a contract dispute in the PSS segment.

Note 11. Condensed Consolidating Financial Statements

each calendar month. The Company has $372.8designated the interest rate swap contract as a cash flow hedge and assesses the hedge effectiveness both at the onset of the hedge and at regular intervals throughout the life of the derivative. Changes in fair value (gains and losses) related to derivative financial instruments that qualify as cash flow hedges are deferred in Accumulated Other Comprehensive Income (Loss) (“AOCI”) until the underlying transaction is reflected in earnings. The net gain reclassed from AOCI from the interest rate swap reflected in earnings was $0.8 million in outstanding Notes (see and $1.2 million for the three and nine months ended October 1, 2023, respectively, and is recorded as an offset to interest expense. The Company did not have any interest rate swap contracts on December 25, 2022.

The fair value of this derivative represents the discounted value of the expected future discounted cash flows for the interest rate swap, based on the amortization schedule and the current forward curve for the remaining term of the contract, as of the date of each reporting period (in millions):

 October 1, 2023December 25, 2022
 Notional ValueFair ValueNotional ValueFair Value
Interest rate swap contract designated as a cash flow hedge, net of taxes$195.0 $3.2 $— $— 
Note 7). The Notes are guaranteed by16.     Subsequent Events

On October 3, 2023, the Subsidiary Guarantors and are collateralized by the assets ofCompany entered into an agreement to acquire all of the Company’s 100% owned subsidiaries. The Notes are fullyoutstanding equity securities of aerial target drone designer Sierra Technical Services, Inc. (“STS”) pursuant to which the Company (i) issued 866,026 shares of Kratos common stock valued at $12.8 million on October 3, 2023 and unconditionally guaranteed on a joint(ii) agreed to issue up to an additional 979,038 shares of Kratos common stock valued at $14.5 million pursuant to certain holdback and several basis byearn-out provisions, in each Subsidiary Guarantor and the Company. There are no contractual restrictions with respectcase, to the Notes limiting cash transfers from Subsidiary Guarantors by dividends, loans or advancesformer stockholders of STS. The initial accounting for the business combination was incomplete at the time of issuance of these financial statements and as a result it is impracticable to provide full disclosure of required financial information at the Company. The Notes are not guaranteed byfiling date. Additional disclosures related to this transaction will be included in the Company’s foreign subsidiaries (the “Non-Guarantor Subsidiaries”).

The following tables present condensed consolidating financial statementsForm 10-K for the parent company, the Subsidiary Guarantors and the Non-Guarantor Subsidiaries, respectively. The condensed consolidating financial information below follows the same accounting policies as described in the condensed consolidated financial statements, except for the useyear ending December 31, 2023.
25
Table of the equity method of accounting to reflect ownership interests in 100% owned subsidiaries, which are eliminated upon consolidation.


Contents
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 companies227.6
 —
 —
 (227.6) —
  Inventoried costs—
 42.6
 20.2
 —
 62.8
  Other current assets3.6
 14.3
 3.7
 —
 21.6
    Total current assets464.2
 275.1
 56.1
 (227.6) 567.8
Property, plant and equipment, net1.9
 47.9
 6.9
 —
 56.7
Goodwill—
 442.6
 42.7
 —
 485.3
Intangible assets, net—
 17.9
 6.6
 —
 24.5
Investment in subsidiaries469.2
 67.9
 —
 (537.1) —
Other assets0.4
 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 expenses12.3
 36.9
 2.6
 —
 51.8
Accrued compensation3.5
 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 liabilities0.6
 5.2
 4.7
 —
 10.5
Current liabilities of discontinued operations1.0
 —
 0.1
 —
 1.1
    Total current liabilities19.3
 358.2
 48.9
 (227.6) 198.8
Long-term debt, net of current portion369.7
 —
 —
 —
 369.7
Other long-term liabilities11.0
 20.0
 7.5
 —
 38.5
Non-current liabilities of discontinued operations3.8
 —
 —
 —
 3.8
    Total liabilities403.8
 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 companies204.6
 —
 —
 (204.6) —
  Inventoried costs—
 37.2
 18.2
 —
 55.4
  Other current assets6.3
 11.6
 1.3
 —
 19.2
    Total current assets278.1
 243.4
 56.2
 (204.6) 373.1
Property, plant and equipment, net1.6
 41.7
 6.5
 —
 49.8
Goodwill—
 442.5
 42.9
 —
 485.4
Intangible assets, net—
 24.5
 8.1
 —
 32.6
Investment in subsidiaries458.0
 67.5
 —
 (525.5) —
Other assets0.4
 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 expenses5.6
 44.5
 3.5
 —
 53.6
  Accrued compensation4.0
 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 liabilities1.4
 4.1
 2.2
 —
 7.7
Current liabilities of discontinued operations1.5
 —
 0.1
 —
 1.6
    Total current liabilities17.0
 337.0
 47.1
 (204.6) 196.5
Long-term debt, net of current portion430.2
 —
 0.8
 —
 431.0
Other long-term liabilities10.8
 19.9
 10.3
 —
 41.0
Non-current liabilities of discontinued operations3.7
 —
 —
 —
 3.7
    Total liabilities461.7
 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
 $—
 $86.7
Product sales—
 99.3
 15.0
 (4.8) 109.5
  Total revenues—
 184.1
 16.9
 (4.8) 196.2
Cost of service revenues—
 59.7
 1.1
 —
 60.8
Cost of product sales—
 80.2
 11.9
 (4.8) 87.3
  Total costs—
 139.9
 13.0
 (4.8) 148.1
  Gross profit—
 44.2
 3.9
 —
 48.1
Selling, general and administrative expenses2.3
 35.3
 3.2
 —
 40.8
Research and development expenses—
 4.2
 —
 —
 4.2
  Operating income (loss) from continuing operations(2.3) 4.7
 0.7
 —
 3.1
Other income (expense):         
  Interest income (expense), net(7.7) —
 —
 —
 (7.7)
  Other income (expense), net—
 0.1
 0.5
 —
 0.6
  Total other income (expense), net(7.7) 0.1
 0.5
 —
 (7.1)
Income (loss) from continuing operations before income taxes(10.0) 4.8
 1.2
 —
 (4.0)
Provision (benefit) for income taxes from continuing operations0.3
 (0.1) —
 —
 0.2
Income (loss) from continuing operations(10.3) 4.9
 1.2
 —
 (4.2)
Loss from discontinued operations(0.1) —
 —
 —
 (0.1)
Equity in net income (loss) of subsidiaries6.1
 1.2
 —
 (7.3) —
Net income (loss)$(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
 $—
 $87.2
Product sales—
 67.8
 12.4
 (2.0) 78.2
  Total revenues—
 152.1
 15.3
 (2.0) 165.4
Cost of service revenues—
 62.9
 1.8
 —
 64.7
Cost of product sales—
 67.7
 9.1
 (2.0) 74.8
  Total costs—
 130.6
 10.9
 (2.0) 139.5
  Gross profit—
 21.5
 4.4
 —
 25.9
Selling, general and administrative expenses0.2
 33.3
 2.2
 —
 35.7
Research and development expenses—
 3.1
 0.1
 —
 3.2
  Operating income (loss) from continuing operations(0.2) (14.9) 2.1
 —
 (13.0)
Other income (expense):         
  Interest expense, net(8.7) —
 —
 —
 (8.7)
  Other income (expense), net—
 0.1
 —
 —
 0.1
  Total other income (expense), net(8.7) 0.1
 —
 —
 (8.6)
Income (loss) from continuing operations before income taxes(8.9) (14.8) 2.1
 —
 (21.6)
Provision for income taxes from continuing operations0.1
 1.7
 0.1
 —
 1.9
Income (loss) from continuing operations(9.0) (16.5) 2.0
 —
 (23.5)
Loss from discontinued operations—
 (0.1) —
 —
 (0.1)
Equity in net income (loss) of subsidiaries(14.6) 2.0
 —
 12.6
 —
Net income (loss)$(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
 $—
 $263.3
Product sales—
 256.6
 40.8
 (11.0) 286.4
Total revenues—
 510.1
 50.6
 (11.0) 549.7
Cost of service revenues—
 182.3
 7.3
 —
 189.6
Cost of product sales—
 197.2
 33.3
 (11.0) 219.5
Total costs—
 379.5
 40.6
 (11.0) 409.1
Gross profit—
 130.6
 10.0
 —
 140.6
Selling, general and administrative expenses5.8
 105.4
 9.3
 —
 120.5
Research and development expenses—
 11.9
 0.8
 —
 12.7
  Operating income (loss) from continuing operations(5.8) 13.3
 (0.1) —
 7.4
Other income (expense):         
Interest income (expense), net(23.2) 0.1
 —
 —
 (23.1)
Loss on extinguishment of debt(2.1) —
 —
 —
 (2.1)
Other income (expense), net—
 0.2
 0.8
 —
 1.0
Total other income (expense), net(25.3) 0.3
 0.8
 —
 (24.2)
Income (loss) from continuing operations before income taxes(31.1) 13.6
 0.7
 —
 (16.8)
Provision for income taxes from continuing operations0.4
 2.8
 0.3
 —
 3.5
Income (loss) from continuing operations(31.5) 10.8
 0.4
 —
 (20.3)
Loss from discontinued operations(0.2) —
 —
 —
 (0.2)
Equity in net income (loss) of subsidiaries11.2
 0.4
 —
 (11.6) —
Net income (loss)$(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
 $—
 $258.0
Product sales—
 195.8
 38.4
 (5.6) 228.6
Total revenues—
 439.8
 52.4
 (5.6) 486.6
Cost of service revenues—
 179.6
 9.8
 —
 189.4
Cost of product sales—
 165.9
 29.9
 (5.6) 190.2
Total costs—
 345.5
 39.7
 (5.6) 379.6
Gross profit—
 94.3
 12.7
 —
 107.0
Selling, general and administrative expenses4.0
 109.1
 7.0
 —
 120.1
Research and development expenses—
 9.9
 0.2
 —
 10.1
  Operating income (loss) from continuing operations(4.0) (24.7) 5.5
 —
 (23.2)
Other income (expense):         
Interest expense, net(26.0) (0.1) —
 —
 (26.1)
Other income (expense), net—
 (0.1) 0.7
 —
 0.6
Total other income (expense), net(26.0) (0.2) 0.7
 —
 (25.5)
Income (loss) from continuing operations before income taxes(30.0) (24.9) 6.2
 —
 (48.7)
Provision for income taxes from continuing operations0.2
 6.4
 0.7
 —
 7.3
Income (loss) from continuing operations(30.2) (31.3) 5.5
 —
 (56.0)
Loss from discontinued operations(0.1) (0.1) —
 —
 (0.2)
Equity in net income (loss) of subsidiaries(25.9) 5.5
 —
 20.4
 —
Net income (loss)$(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 stock268.0
 —
 —
 —
 268.0
Proceeds from the sale of employee stock purchase plan shares1.5
 —
 —
 —
 1.5
Financings from affiliated companies—
 23.0
 —
 (23.0) —
Net cash provided by (used in) financing activities from continuing operations205.5
 23.0
 (0.8) (23.0) 204.7
Net cash flows of continuing operations166.4
 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) $—
 $(8.7)
Investing activities:         
Investment in affiliated companies(1.0) —
 —
 1.0
 —
Change in restricted cash—
 0.1
 —
 —
 0.1
Capital expenditures(0.5) (3.2) (1.4) —
 (5.1)
Net cash provided by (used in) investing activities from continuing operations(1.5) (3.1) (1.4) 1.0
 (5.0)
Financing activities:         
Repayment of debt—
 —
 (0.8) —
 (0.8)
Proceeds from the sale of employee stock purchase plan shares2.1
 —
 —
 —
 2.1
Financing from affiliated companies—
 1.0
 —
 (1.0) —
Net cash provided by (used in) financing activities from continuing operations2.1
 1.0
 (0.8) (1.0) 1.3
Net cash flows of continuing operations(11.4) 3.5
 (4.5) —
 (12.4)
Net operating cash flows from discontinued operations0.3
 (0.2) —
 —
 0.1
Net investing cash flows from discontinued operations4.3
 —
 —
 —
 4.3
Net increase (decrease) in cash and cash equivalents$(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.

26
Table of Contents

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,
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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, 2023September 25, 2022$ change% change
Kratos Government Solutions
Service revenues$104.4 $87.3 $17.1 19.6 %
Product sales113.5 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 sales54.6 48.7 5.9 12.1 %
Total Unmanned Systems56.7 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 sales168.1 140.0 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 sales67.9
 59.9
 8.0
 13.4 %
Total Kratos Government Solutions115.4
 112.8
 2.6
 2.3 %
Public Safety & Security service revenues39.2
 34.3
 4.9
 14.3 %
Unmanned Systems product sales41.6
 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 sales109.5
 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
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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.

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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, 2023September 25, 2022$ change% change
Kratos Government Solutions
Service revenues$296.8 $231.3 $65.5 28.3 %
Product sales309.7 258.7 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 sales151.8 155.0 (3.2)(2.1)%
Total Unmanned Systems156.8 159.0 (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 sales461.5 413.7 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 sales207.0
 178.3
 28.7
 16.1 %
Total Kratos Government Solutions356.4
 341.4
 15.0
 4.4 %
Public Safety & Security service revenues113.9
 94.9
 19.0
 20.0 %
Unmanned Systems product sales79.4
 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 sales286.4
 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
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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.
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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
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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, 2023September 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 operations204.7
 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
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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.
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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
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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.
 
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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.


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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 TitleActionApplicable DateExpiration Date
Rule 10b5-1 Trading Arrangement? (Y/N)(1)
Aggregate Number of Securities Subject to Trading Arrangement
Thomas MillsAdopt8/16/20233/29/2024Y16,091
President, C5ISR Division(2)
Deanna LundModify8/18/20236/30/2025Y114,567
Executive Vice President and Chief Financial Officer(2)
Phillip CarraiAdopt9/15/202312/31/2024Y42,000
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.

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Item 6.  Exhibits.
 
    
Incorporated by
Reference
  
Exhibit
Number
 Exhibit Description Form 
Filing Date/
Period End
Date
 Exhibit 
Filed-
Furnished
Herewith
2.1#† 
Stock Purchase Agreement, dated May 31, 2015, among Kratos Defense & Security Solutions, Inc., Herley Industries, Inc., Ultra Electronics Defense Inc. and Ultra Electronics Holdings plc.
 10-Q 
08/06/2015
(001-34460)
 2.4  
3.1 
Amended and Restated Certificate of Incorporation of Kratos Defense & Security Solutions, Inc., as amended.
 10-K 
02/27/2017
(001-34460)
 3.1  
3.2 
Second Amended and Restated Bylaws of Kratos Defense & Security Solutions, Inc., as amended.
 10-K 
02/27/2017
(001-34460)
 3.2  
4.1 
Specimen Stock Certificate.
 10-K 
02/27/2017
(001-34460)
 4.1  
4.2 
Indenture, dated as of May 14, 2014, among Kratos Defense & Security Solutions, Inc., as Issuer, the Guarantors party thereto, and Wilmington Trust, National Association, as Trustee and Collateral Agent (including the Form of 7.00% Senior Secured Notes due 2019).
 8-K 
05/15/2014
(001-34460)
 4.1  
4.3 
Registration Rights Agreement, dated as of May 14, 2014, among Kratos Defense & Security Solutions, Inc., as Issuer, the Guarantors party thereto, and SunTrust Robinson Humphrey, Inc., as Representative of the Initial Purchasers.
 8-K 
05/15/2014
(001-34460)
 10.1  
31.1 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
       *
31.2 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
       *
32.1 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Eric M. DeMarco.
       *
32.2 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Deanna Lund.
       *
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 DescriptionFormFiling Date/
Period End
Date		ExhibitFiled-
Furnished
Herewith
2.110-Q05/10/2018
(001-34460)		2.2
2.2**10-Q05/08/2019
(001-34460)		2.3
3.110-K02/27/2017
(001-34460)		3.1 
3.210-K02/27/2017
(001-34460)		3.2 
4.110-K02/27/2017
(001-34460)		4.1 
31.1*
31.2   *
32.1   *
32.2   *
101.INS   *
101.SCH*
101.CAL*
101.DEF*
101.LAB*
101.PRE*
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)*

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#**    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.


40
Table of any omitted schedule and/or exhibit will be furnished supplementally to the Securities and Exchange Commission upon request.Contents

†    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.
 
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

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