UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended ~~September 26, 2021~~March 27, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission file number 001-34460

KRATOS DEFENSE & SECURITY SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)


Delaware			13-3818604
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

1 Chisholm Trail, Suite 3200

Round Rock, TX 78681

(512) 238-9840

(Address, including zip code, and telephone number, including

area code, of registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 par value	KTOS	The NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	ý	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of ~~October~~April 29, ~~2021, 123,986,345~~2022, 124,997,920 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 ~~SEPTEMBER 26, 2021~~MARCH 27, 2022

INDEX


		Page
	PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets at ~~September 26, 2021~~March 2 7 , 202 2 (unaudited) and December ~~27, 2020~~2 6 , 20 2 1	43

	Condensed Consolidated Statements of Operations for the Three ~~and~~ ~~Nine~~Months Ended ~~September~~ 2 6 ~~, 2021 and~~ ~~September~~March 2 7 , ~~2020~~202 2 and Mar ch 2 8 , 202 1 (unaudited)	54

	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three ~~and~~ ~~Nine~~Months Ended ~~September~~ 2 6 ~~, 2021 and~~ ~~September~~March 2 7 , ~~2020~~202 2 and March 2 8 , 202 1 (unaudited)	65

	Condensed Consolidated Statements of Stockholders’ Equity for the Three ~~and~~ ~~Nine~~Months Ended ~~September~~ 2 6 ~~, 2021 and~~ ~~September~~March 2 7 , ~~2020~~202 2 and March 2 8 , 202 1 (unaudited)	76

	Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September~~ 2 6 ~~, 2021 and~~ ~~September~~March 2 7 , ~~2020~~202 2 and March 2 8 , 202 1 (unaudited)	97

	Notes to Condensed Consolidated Financial Statements (unaudited)	108

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2623

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3631

Item 4.	Controls and Procedures	3632

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	3833

Item 1A.	Risk Factors	3833

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3833

Item 3.	Defaults Upon Senior Securities	3833

Item 4.	Mine Safety Disclosures	3833

Item 5.	Other Information	3833

Item 6.	Exhibits	3934

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

~~Table of Contents~~

KRATOS DEFENSE & SECURITY SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except par value and number of shares)


		September 26, 2021					March 27, 2022
		(Unaudited)		December 27, 2020			(Unaudited)		December 26, 2021
Assets	Assets					Assets
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	369.9	$	380.8	Cash and cash equivalents	$	254.4	$	349.4
Restricted cash		—		0.7

Accounts receivable, net	Accounts receivable, net	85.4		95.3		Accounts receivable, net	65.9		93.9
Unbilled receivables, net	Unbilled receivables, net	189.3		177.0		Unbilled receivables, net	214.8		190.8
Inventoried costs	Inventoried costs	90.9		81.2		Inventoried costs	107.1		91.7
Prepaid expenses	Prepaid expenses	11.7		12.0		Prepaid expenses	11.1		9.8
Other current assets	Other current assets	25.4		17.8		Other current assets	34.6		22.5

Total current assets	Total current assets	772.6		764.8		Total current assets	687.9		758.1
Property, plant and equipment, net	Property, plant and equipment, net	158.8		143.8		Property, plant and equipment, net	173.5		168.3
Operating lease right-of-use assets	Operating lease right-of-use assets	38.8		42.9		Operating lease right-of-use assets	39.6		38.5
Goodwill	Goodwill	483.7		483.9		Goodwill	522.9		493.9
Intangible assets, net	Intangible assets, net	39.3		43.0		Intangible assets, net	51.5		43.2
Other assets	Other assets	84.6		84.4		Other assets	90.1		87.5

Total assets	Total assets	$	1,577.8	$	1,562.8	Total assets	$	1,565.5	$	1,589.5
Liabilities and Stockholders’ Equity	Liabilities and Stockholders’ Equity					Liabilities and Stockholders’ Equity
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	43.6	$	55.4	Accounts payable	$	51.7	$	50.4
Accrued expenses	Accrued expenses	28.7		34.7		Accrued expenses	34.2		27.2
Accrued compensation	Accrued compensation	51.3		48.1		Accrued compensation	56.7		47.3
Accrued interest	Accrued interest	6.4		1.5		Accrued interest	0.2		1.5
Billings in excess of costs and earnings on uncompleted contracts	Billings in excess of costs and earnings on uncompleted contracts	57.7		34.0		Billings in excess of costs and earnings on uncompleted contracts	49.7		58.1

Current portion of operating lease liabilities	Current portion of operating lease liabilities	9.2		8.9		Current portion of operating lease liabilities	10.5		10.1
Other current liabilities	Other current liabilities	10.6		11.9		Other current liabilities	9.2		25.7
Current liabilities of discontinued operations	Current liabilities of discontinued operations	3.1		3.1		Current liabilities of discontinued operations	1.1		0.8
Total current liabilities	Total current liabilities	210.6		197.6		Total current liabilities	213.3		221.1
Long-term debt		296.5		301.0
Long-term debt, net of current portion						Long-term debt, net of current portion	295.0		296.7

Operating lease liabilities, net of current portion	Operating lease liabilities, net of current portion	34.0		38.6		Operating lease liabilities, net of current portion	33.3		32.7
Other long-term liabilities	Other long-term liabilities	77.3		83.0		Other long-term liabilities	73.9		76.2
Long-term liabilities of discontinued operations	Long-term liabilities of discontinued operations	2.5		2.5		Long-term liabilities of discontinued operations	2.5		2.5
Total liabilities	Total liabilities	620.9		622.7		Total liabilities	618.0		629.2
Commitments and contingencies (Note 15)		0		0
Commitments and contingencies (Note 14)						Commitments and contingencies (Note 14)	0		0
Redeemable noncontrolling interest	Redeemable noncontrolling interest	15.1		14.8		Redeemable noncontrolling interest	15.2		15.2
Stockholders’ equity:	Stockholders’ equity:					Stockholders’ equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized, 0 shares outstanding at September 26, 2021 and December 27, 2020		—		—
Common stock, $0.001 par value, 195,000,000 shares authorized; 123,986,345 and 123,047,147 shares issued and outstanding at September 26, 2021 and December 27, 2020, respectively		—		—
Preferred stock, $0.001 par value, 5,000,000 shares authorized, 0 shares outstanding at March 27, 2022 and December 26, 2021						Preferred stock, $0.001 par value, 5,000,000 shares authorized, 0 shares outstanding at March 27, 2022 and December 26, 2021	—		—
Common stock, $0.001 par value, 195,000,000 shares authorized; 124,825,355 and 123,987,424 shares issued and outstanding at March 27, 2022 and December 26, 2021, respectively						Common stock, $0.001 par value, 195,000,000 shares authorized; 124,825,355 and 123,987,424 shares issued and outstanding at March 27, 2022 and December 26, 2021, respectively	—		—
Additional paid-in capital	Additional paid-in capital	1,572.3		1,556.3		Additional paid-in capital	1,582.0		1,578.9
Accumulated other comprehensive income	Accumulated other comprehensive income	1.3		1.4		Accumulated other comprehensive income	0.6		0.6
Accumulated deficit	Accumulated deficit	(631.8)		(632.4)		Accumulated deficit	(650.3)		(634.4)
Total stockholders’ equity	Total stockholders’ equity	941.8		925.3		Total stockholders’ equity	932.3		945.1
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	1,577.8	$	1,562.8	Total liabilities and stockholders’ equity	$	1,565.5	$	1,589.5

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

Table of Contents

KRATOS DEFENSE & SECURITY SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)

(Unaudited)


		Three Months Ended				Nine Months Ended					Three Months Ended
		September 26, 2021		September 27, 2020		September 26, 2021		September 27, 2020			March 27, 2022		March 28, 2021
Service revenues	Service revenues	$	51.6	$	67.6	$	166.9	$	194.1	Service revenues	$	67.9	$	57.3
Product sales	Product sales	149.0		134.4		433.0		347.2		Product sales	128.3		136.9
Total revenues	Total revenues	200.6		202.0		599.9		541.3		Total revenues	196.2		194.2
Cost of service revenues	Cost of service revenues	35.5		50.5		119.3		141.9		Cost of service revenues	49.9		42.5
Cost of product sales	Cost of product sales	104.5		94.4		317.0		250.5		Cost of product sales	94.4		100.7
Total costs	Total costs	140.0		144.9		436.3		392.4		Total costs	144.3		143.2
Gross profit	Gross profit	60.6		57.1		163.6		148.9		Gross profit	51.9		51.0
Selling, general and administrative expenses	Selling, general and administrative expenses	41.8		36.3		117.9		107.2		Selling, general and administrative expenses	43.3		37.9
Merger and acquisition expenses	Merger and acquisition expenses	0.3		0.1		0.6		1.5		Merger and acquisition expenses	0.3		0.2
Research and development expenses	Research and development expenses	8.0		7.7		26.2		19.4		Research and development expenses	9.2		8.0
Restructuring expenses and other	Restructuring expenses and other	—		0.3		0.2		0.5		Restructuring expenses and other	0.3		—
Operating income		10.5		12.7		18.7		20.3
Operating income (loss)										Operating income (loss)	(1.2)		4.9
Other expense:	Other expense:									Other expense:
Interest expense, net	Interest expense, net	(5.9)		(5.9)		(17.5)		(16.9)		Interest expense, net	(5.9)		(5.9)

Loss on extinguishment of debt										Loss on extinguishment of debt	(13.0)		—
Other income, net	Other income, net	—		0.8		0.2		0.6		Other income, net	0.1		0.2
Total other expense, net	Total other expense, net	(5.9)		(5.1)		(17.3)		(16.3)		Total other expense, net	(18.8)		(5.7)
Income from continuing operations before income taxes		4.6		7.6		1.4		4.0
Provision (benefit) for income taxes from continuing operations		5.7		5.0		(0.6)		1.8
Loss from continuing operations before income taxes										Loss from continuing operations before income taxes	(20.0)		(0.8)
Benefit for income taxes from continuing operations										Benefit for income taxes from continuing operations	(4.3)		(2.7)
Income (loss) from continuing operations	Income (loss) from continuing operations	(1.1)		2.6		2.0		2.2		Income (loss) from continuing operations	(15.7)		1.9
Discontinued operations:	Discontinued operations:									Discontinued operations:
Loss from discontinued operations before income taxes	Loss from discontinued operations before income taxes	(1.0)		(0.2)		(1.4)		(1.0)		Loss from discontinued operations before income taxes	(0.3)		—
Income tax benefit	Income tax benefit	0.2		—		0.3		0.2		Income tax benefit	0.1		—
Loss from discontinued operations	Loss from discontinued operations	(0.8)		(0.2)		(1.1)		(0.8)		Loss from discontinued operations	(0.2)		—
Net income (loss)	Net income (loss)	(1.9)		2.4		0.9		1.4		Net income (loss)	(15.9)		1.9
Less: Net income (loss) attributable to noncontrolling interest		0.5		—		0.3		(0.1)
Less: Net income attributable to noncontrolling interest										Less: Net income attributable to noncontrolling interest	—		—
Net income (loss) attributable to Kratos	Net income (loss) attributable to Kratos	$	(2.4)	$	2.4	$	0.6	$	1.5	Net income (loss) attributable to Kratos	$	(15.9)	$	1.9
Basic income (loss) per common share attributable to Kratos:	Basic income (loss) per common share attributable to Kratos:									Basic income (loss) per common share attributable to Kratos:
Income (loss) from continuing operations	Income (loss) from continuing operations	$	(0.01)	$	0.02	$	0.01	$	0.02	Income (loss) from continuing operations	$	(0.12)	$	0.02
Loss from discontinued operations	Loss from discontinued operations	(0.01)		—		(0.01)		(0.01)		Loss from discontinued operations	—		—
Net income (loss) per common share	Net income (loss) per common share	$	(0.02)	$	0.02	$	—	$	0.01	Net income (loss) per common share	$	(0.12)	$	0.02
Diluted income (loss) per common share attributable to Kratos:	Diluted income (loss) per common share attributable to Kratos:									Diluted income (loss) per common share attributable to Kratos:
Income (loss) from continuing operations	Income (loss) from continuing operations	$	(0.01)	$	0.02	$	0.01	$	0.02	Income (loss) from continuing operations	$	(0.12)	$	0.01
Loss from discontinued operations	Loss from discontinued operations	(0.01)		—		(0.01)		(0.01)		Loss from discontinued operations	—		—
Net income (loss) per common share	Net income (loss) per common share	$	(0.02)	$	0.02	$	—	$	0.01	Net income (loss) per common share	$	(0.12)	$	0.01

Weighted average common shares outstanding:	Weighted average common shares outstanding:									Weighted average common shares outstanding:
Basic	Basic	124.9		123.1		124.6		112.9		Basic	125.9		124.1
Diluted	Diluted	124.9		126.4		127.9		115.9		Diluted	125.9		127.7

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

Table of Contents

KRATOS DEFENSE & SECURITY SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in millions, except per share amounts)

(Unaudited)


		Three Months Ended				Nine Months Ended					Three Months Ended
		September 26, 2021		September 27, 2020		September 26, 2021		September 27, 2020			March 27, 2022		March 28, 2021
Net income (loss)	Net income (loss)	$	(1.9)	$	2.4	$	0.9	$	1.4	Net income (loss)	$	(15.9)	$	1.9
Change in cumulative translation adjustment	Change in cumulative translation adjustment	(0.9)		0.9		(0.1)		0.8		Change in cumulative translation adjustment	—		0.2
Comprehensive income (loss)	Comprehensive income (loss)	(2.8)		3.3		0.8		2.2		Comprehensive income (loss)	(15.9)		2.1
Less: Comprehensive income (loss) attributable to noncontrolling interest		0.5		—		0.3		(0.1)
Less: Comprehensive income attributable to noncontrolling interest										Less: Comprehensive income attributable to noncontrolling interest	—		—
Comprehensive income (loss) attributable to Kratos	Comprehensive income (loss) attributable to Kratos	$	(3.3)	$	3.3	$	0.5	$	2.3	Comprehensive income (loss) attributable to Kratos	$	(15.9)	$	2.1

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

Table of Contents

KRATOS DEFENSE & SECURITY SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the three months ended ~~September 26,~~March 27, 2022 and March 28, 2021 ~~and September 27, 2020~~

(in millions)

(Unaudited)


		Redeemable Noncontrolling Interest		Common Stock			Additional Paid-In Capital				Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit					Total Stockholders’ Equity					Redeemable Noncontrolling Interest				Common Stock						Additional Paid-In Capital			Accumulated Other Comprehensive Income		Accumulated Deficit				Total Stockholders’ Equity
				Shares	Amounts										Total Stockholders’ Equity	Redeemable Noncontrolling Interest	Shares					Amounts					Additional Paid-In Capital		Accumulated Other Comprehensive Income	Accumulated Deficit					Total Stockholders’ Equity
Balance, June 28, 2020		$	14.9	122.5	$	—			$	1,537.9			$	(0.5)			$			(712.9)					$	824.5
Balance, December 27, 2020																					Balance, December 27, 2020			$	14.8							123.0				$	—	$	1,556.3	$	1.4	$	(632.4)	$	925.3
Stock-based compensation	Stock-based compensation	—		—	—		5.0				—		—					5.0			Stock-based compensation		—					—			—			6.2			—		—				6.2
Issuance of common stock for employee stock purchase plan and stock options	Issuance of common stock for employee stock purchase plan and stock options	—		0.2	—		2.7				—		—					2.7			Issuance of common stock for employee stock purchase plan and stock options		—				0.2			—			2.5			—		—				2.5
Restricted stock issued and related taxes	Restricted stock issued and related taxes	—		—	—		(0.1)				—		—					(0.1)			Restricted stock issued and related taxes		—				0.5			—			(7.1)			—		—				(7.1)
Issuance of common stock for cash		—		—	—		(0.1)				—		—					(0.1)

Net income	Net income	—		—	—		—				—		2.4					2.4			Net income		—				—			—			—			—		1.9				1.9
Other comprehensive income, net of tax	Other comprehensive income, net of tax	—		—	—		—				0.9		—					0.9			Other comprehensive income, net of tax		—				—			—			—			0.2		—				0.2

Balance, September 27, 2020		$	14.9	122.7	$	—	$	1,545.4			$	0.4	$	(710.5)				$	835.3
Balance, March 28, 2021																					Balance, March 28, 2021		$	14.8			123.7			$	—		$	1,557.9		$	1.6	$	(630.5)			$	929.0

Redeemable Noncontrolling Interest Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income Accumulated Deficit Total Stockholders’ Equity
Shares Amounts
Balance, June 27, 2021 $ 14.6 123.8 $ — $ 1,563.1 $ 2.2 $ (629.4) $ 935.9
Stock-based compensation — — — 6.4 — — 6.4
Issuance of common stock for employee stock purchase plan and stock options — 0.2 — 3.4 — — 3.4
Restricted stock issued and related taxes — — — (0.6) — — (0.6)
Net income (loss) 0.5 — — — — (2.4) (2.4)
Other comprehensive loss, net of tax — — — — (0.9) — (0.9)
Balance, September 26, 2021 $ 15.1 124.0 $ — $ 1,572.3 $ 1.3 $ (631.8) $ 941.8


	Redeemable Noncontrolling Interest		Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income		Accumulated Deficit		Total Stockholders’ Equity
			Shares	Amounts
Balance, December 26, 2021	$	15.2	124.0	$	—	$	1,578.9	$	0.6	$	(634.4)	$	945.1
Stock-based compensation	—		—	—		7.0		—		—		7.0
Issuance of common stock for employee stock purchase plan and stock options	—		0.2	—		2.9		—		—		2.9
Restricted stock issued and related taxes	—		0.6	—		(6.8)		—		—		(6.8)

Net loss	—		—	—		—		—		(15.9)		(15.9)

Balance, March 27, 2022	$	15.2	124.8	$	—	$	1,582.0	$	0.6	$	(650.3)	$	932.3

Table of Contents

~~KRATOS DEFENSE & SECURITY SOLUTIONS, INC.~~

~~CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY~~

~~For the nine months ended September 26, 2021 and September 27, 2020~~

~~(in millions)~~

~~(Unaudited)~~

Redeemable Noncontrolling Interest Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity
Shares Amounts
Balance, December 29, 2019 $ 15.0 106.6 $ — $ 1,286.5 $ (0.4) $ (712.0) $ 574.1
Stock-based compensation — — — 14.5 — — 14.5
Issuance of common stock for employee stock purchase plan and stock options — 0.4 — 5.3 — — 5.3
Restricted stock issued and related taxes — 0.2 — (1.3) — — (1.3)
Issuance of common stock for cash — 15.5 — 240.4 — — 240.4
Net income (loss) (0.1) — — — — 1.5 1.5
Other comprehensive income, net of tax — — — — 0.8 — 0.8
Balance, September 27, 2020 $ 14.9 122.7 $ — $ 1,545.4 $ 0.4 $ (710.5) $ 835.3

Redeemable Noncontrolling Interest Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income Accumulated Deficit Total Stockholders’ Equity
Shares Amounts
Balance, December 27, 2020 $ 14.8 123.0 $ — $ 1,556.3 $ 1.4 $ (632.4) $ 925.3
Stock-based compensation — — — 19.2 — — 19.2
Issuance of common stock for employee stock purchase plan and stock options — 0.4 — 5.9 — — 5.9
Restricted stock issued and related taxes — 0.6 — (9.1) — — (9.1)
Net income 0.3 — — — — 0.6 0.6
Other comprehensive loss, net of tax — — — — (0.1) — (0.1)
Balance, September 26, 2021 $ 15.1 124.0 $ — $ 1,572.3 $ 1.3 $ (631.8) $ 941.8

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

~~Table of Contents~~

KRATOS DEFENSE & SECURITY SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(Unaudited)


		Nine Months Ended					Three Months Ended
		September 26, 2021		September 27, 2020			March 27, 2022		March 28, 2021
Operating activities:	Operating activities:					Operating activities:
Net income		$	0.9	$	1.4
Net income (loss)						Net income (loss)	$	(15.9)	$	1.9
Loss from discontinued operations	Loss from discontinued operations	(1.1)		(0.8)		Loss from discontinued operations	(0.2)		—
Income from continuing operations		2.0		2.2
Adjustments to reconcile income from continuing operations to net cash provided by operating activities from continuing operations:
Income (loss) from continuing operations						Income (loss) from continuing operations	(15.7)		1.9
Adjustments to reconcile income (loss) from continuing operations to net cash provided by (used in) operating activities from continuing operations:						Adjustments to reconcile income (loss) from continuing operations to net cash provided by (used in) operating activities from continuing operations:
Depreciation and amortization	Depreciation and amortization	19.4		18.5		Depreciation and amortization	7.0		6.3
Deferred income taxes	Deferred income taxes	(0.7)		(0.3)		Deferred income taxes	—		0.1
Amortization of lease right-of-use assets	Amortization of lease right-of-use assets	6.7		7.3		Amortization of lease right-of-use assets	2.6		2.2
Stock-based compensation	Stock-based compensation	19.2		14.5		Stock-based compensation	7.0		6.2
Amortization of deferred financing costs	Amortization of deferred financing costs	0.7		0.7		Amortization of deferred financing costs	0.3		0.2

Loss on extinguishment of debt						Loss on extinguishment of debt	13.0		—

Provision for (recovery of) doubtful accounts		(0.2)		0.2
Recovery of doubtful accounts						Recovery of doubtful accounts	—		(0.1)

Changes in assets and liabilities, net of acquisitions:	Changes in assets and liabilities, net of acquisitions:					Changes in assets and liabilities, net of acquisitions:
Accounts receivable	Accounts receivable	10.1		6.4		Accounts receivable	31.9		9.8
Unbilled receivables	Unbilled receivables	(12.2)		(12.3)		Unbilled receivables	(19.8)		(1.8)
Inventoried costs	Inventoried costs	(6.8)		(4.8)		Inventoried costs	(15.3)		(4.2)
Prepaid expenses and other assets	Prepaid expenses and other assets	(5.1)		(15.8)		Prepaid expenses and other assets	(9.5)		(2.0)
Operating lease liabilities	Operating lease liabilities	(6.7)		(8.0)		Operating lease liabilities	(2.7)		(2.2)
Accounts payable	Accounts payable	(10.5)		(1.7)		Accounts payable	1.3		(2.0)
Accrued expenses	Accrued expenses	(6.0)		(4.9)		Accrued expenses	6.1		(2.7)
Accrued compensation	Accrued compensation	3.3		6.5		Accrued compensation	5.6		6.2

Accrued interest	Accrued interest	4.8		4.8		Accrued interest	(1.3)		4.9
Billings in excess of costs and earnings on uncompleted contracts	Billings in excess of costs and earnings on uncompleted contracts	23.8		(2.7)		Billings in excess of costs and earnings on uncompleted contracts	(8.3)		7.1
Income tax receivable and payable	Income tax receivable and payable	(2.5)		(1.4)		Income tax receivable and payable	(4.9)		(2.2)
Other liabilities	Other liabilities	(4.7)		9.9		Other liabilities	(5.2)		(5.0)
Net cash provided by operating activities from continuing operations		34.6		19.1
Net cash provided by (used in) operating activities from continuing operations						Net cash provided by (used in) operating activities from continuing operations	(7.9)		22.7
Investing activities:	Investing activities:					Investing activities:
Cash paid for acquisitions, net of cash acquired	Cash paid for acquisitions, net of cash acquired	(6.2)		(43.9)		Cash paid for acquisitions, net of cash acquired	(58.5)		(5.1)
Proceeds from insurance		4.5		—
Proceeds from sale of assets		—		0.1

Capital expenditures	Capital expenditures	(33.4)		(23.0)		Capital expenditures	(10.8)		(9.6)
Net cash used in investing activities from continuing operations	Net cash used in investing activities from continuing operations	(35.1)		(66.8)		Net cash used in investing activities from continuing operations	(69.3)		(14.7)
Financing activities:	Financing activities:					Financing activities:
Proceeds from the issuance of long-term debt	Proceeds from the issuance of long-term debt	—		4.8		Proceeds from the issuance of long-term debt	200.0		—

Debt issuance costs						Debt issuance costs	(3.2)		—

Proceeds from the issuance of common stock, net of issuance costs		—		240.4

Credit agreement borrowings						Credit agreement borrowings	100.0		—
Repayment of debt	Repayment of debt	(5.1)		(0.7)		Repayment of debt	(309.8)		—
Payments under finance leases	Payments under finance leases	(0.7)		(0.5)		Payments under finance leases	(0.3)		(0.2)
Payments of employee taxes withheld from share-based awards	Payments of employee taxes withheld from share-based awards	(9.1)		(1.3)		Payments of employee taxes withheld from share-based awards	(6.8)		(7.1)
Proceeds from shares issued under equity plans	Proceeds from shares issued under equity plans	5.9		5.3		Proceeds from shares issued under equity plans	2.9		2.5

Net cash provided by (used in) financing activities from continuing operations		(9.0)		248.0
Net cash flows of continuing operations		(9.5)		200.3
Net cash used in financing activities from continuing operations						Net cash used in financing activities from continuing operations	(17.2)		(4.8)
Net cash provided by (used in) continuing operations						Net cash provided by (used in) continuing operations	(94.4)		3.2
Net operating cash flows of discontinued operations	Net operating cash flows of discontinued operations	(1.1)		2.1		Net operating cash flows of discontinued operations	0.1		(0.5)

Effect of exchange rate changes on cash, cash equivalents and restricted cash	Effect of exchange rate changes on cash, cash equivalents and restricted cash	(1.0)		0.4		Effect of exchange rate changes on cash, cash equivalents and restricted cash	(0.7)		(0.6)
Net increase (decrease) in cash, cash equivalents and restricted cash	Net increase (decrease) in cash, cash equivalents and restricted cash	(11.6)		202.8		Net increase (decrease) in cash, cash equivalents and restricted cash	(95.0)		2.1
Cash, cash equivalents and restricted cash at beginning of period	Cash, cash equivalents and restricted cash at beginning of period	381.5		172.6		Cash, cash equivalents and restricted cash at beginning of period	349.4		381.5
Cash, cash equivalents and restricted cash at end of period	Cash, cash equivalents and restricted cash at end of period	$	369.9	$	375.4	Cash, cash equivalents and restricted cash at end of period	$	254.4	$	383.6

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

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KRATOS DEFENSE & SECURITY SOLUTIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Summary of Significant Accounting Policies

All references to the “Company” and “Kratos” refer to Kratos Defense & Security Solutions, Inc., a Delaware corporation, and its subsidiaries.

(a) Basis of Presentation

The information as of ~~September 26, 2021~~March 27, 2022 and for the three ~~and nine~~ months ended ~~September 26,~~March 27, 2022 and March 28, 2021 ~~and September 27, 2020~~ is unaudited. The condensed consolidated balance sheet as of December ~~27, 2020~~26, 2021 was derived from the Company’s audited consolidated financial statements at that date. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods presented. The results have been prepared in accordance with the instructions to Form 10-Q and do not necessarily include all information and footnotes necessary for presentation in accordance with accounting principles generally accepted in the U.S. (“GAAP”). These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes included in the Company’s audited annual consolidated financial statements for the fiscal year ended December ~~27, 2020,~~26, 2021, included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on February ~~25, 2021~~22, 2022 (the “Form 10-K”). Interim operating results are not necessarily indicative of operating results expected in subsequent periods or for the year as a whole.

(b) Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company, its 100% owned subsidiaries and its majority owned ~~subsidiaries, FTT Inc. and FTT~~subsidiary, KTT Core, ~~(each as defined below), each of~~ which is 80.1% ~~owned.~~owned by the Company. All inter-company transactions have been eliminated in consolidation. Noncontrolling interest consists of the remaining 19.9% interest in ~~FTT Inc. and FTT~~KTT Core. See Note 12 for further information related to the redeemable noncontrolling interest.

The Company has a 52/53 week fiscal year ending on the last Sunday of the calendar year. The three month periods ended ~~September 26,~~March 27, 2022 and March 28, 2021 ~~and September 27, 2020~~ consisted of 13-week ~~periods. The nine month periods ended September 26, 2021 and September 27, 2020 consisted of 39-week~~ periods. There are 52 calendar weeks in the fiscal years ending on December ~~26, 2021~~25, 2022 and December ~~27, 2020.~~26, 2021.

(d) Accounting Estimates

There have been no significant changes in the Company’s accounting estimates for the ~~nine~~three months ended ~~September 26, 2021~~March 27, 2022 as compared to the accounting estimates described in the Annual Report on Form 10-K.

(e) Accounting Standards Updates

In ~~December 2019,~~October 2021, the ~~Financial Accounting Standards Board (“FASB”)~~FASB issued ASU ~~No. 2019-12~~2021-08 (“ASU ~~2019-12”~~2021-08”),~~Income taxes~~ Business Combinations (Topic ~~740)~~805): ~~Simplifying the~~ Accounting for ~~Income Taxes~~Contract Assets and Contract Liabilities from Contracts with Customers, which requires entities to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 2014-09, Revenue from Contracts with Customers (Topic 606). ~~ASU 2019-12,~~The update will generally result in an ~~effort to reduce~~entity recognizing contract assets and contract liabilities at amounts consistent with those recorded by the ~~complexity in accounting for income taxes, removes certain exceptions for measuring intraperiod tax allocations, foreign subsidiary equity method investments and interim period tax losses. ASU 2019-12~~acquiree immediately before the acquisition date rather than at fair value. The new standard is effective on a prospective basis for fiscal years beginning after December 15, ~~2020.~~2022, with early adoption permitted. The Company has adopted ~~ASU 2019-12~~the new standard effective December ~~28, 2020.~~26, 2021. The ~~implementation~~adoption of ~~this guidance~~the new standard did not have ~~a material effect~~an impact on ~~its unaudited condensed~~the Company’s consolidated financial statements.

(f) Fair Value of Financial Instruments

The carrying amounts and the related estimated fair values of the Company’s long-term debt financial instruments not measured at fair value on a recurring basis at ~~September~~March 27, 2022 and December 26, 2021 ~~and December 27, 2020~~ are presented in Note 10. The carrying

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value of all other financial instruments, including cash equivalents, accounts receivable, unbilled receivables, accounts

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payable, accrued expenses, billings in excess of cost and earnings on uncompleted contracts, income taxes payable and short-term debt, approximated their estimated fair values at ~~September~~March 27, 2022 and December 26, 2021 ~~and December 27, 2020~~ due to the short-term nature of these instruments.

Note 2. Acquisitions

~~Technical Directions,~~CTT Inc.

On ~~February 24, 2020,~~December 10, 2021, the Company acquired ~~Technical Directions,~~CTT Inc. (“~~TDI”~~CTT”), a ~~turbine technology~~ company ~~focused on tactical unmanned aerial drones, missile~~that designs, develops, and ~~other systems~~manufactures microwave application components and equipment primarily for ~~approximately $10.5~~customers in the defense industry. The purchase price was $22.0 million in cash, subject to adjustments for transaction expenses, indebtedness, cash on hand, and post-closing working capital adjustments. ~~Working capital adjustments of $0.3~~Approximately $6.3 million ~~were settled in the third quarter of 2020.~~The operating results of the acquisition have been included in the Company’s results of operations from the effective acquisition date. Had the acquisition occurred as of December 30, 2019, net sales, net income from consolidated operations, net income attributable to Kratos, and basic and diluted net income per share attributable to Kratos on a pro forma basis for the nine months ended September 27, 2020 would not have been materially different than the reported amounts. TDI is included in the Kratos Unmanned Systems (“US”) segment.

~~Optimized Performance Machining, Inc.~~

On April 17, 2020, the Company acquired Optimized Performance Machining, Inc. (“OPM”), a company that primarily operates in the industrial machinery and equipment repair business industry for approximately $1.8 million in cash, subject to adjustments for transaction expenses, indebtedness, cash on hand, and post-closing working capital adjustments. Working capital adjustments of $0.03 million were settled in the third quarter of 2020.The operating results of the acquisition have been included in the Company’s results of operations from the effective acquisition date. Had the acquisition occurred as of December 30, 2019, net sales, net income from consolidated operations, net income attributable to Kratos, and basic and diluted net income per share attributable to Kratos on a pro forma basis for the nine months ended September 27, 2020 would not have been materially different than the reported amounts. OPM is included in the Kratos US segment.

~~CPI ASC Signal Division, Inc.~~

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

~~The excess~~ of the purchase price ~~over~~was paid on December 10, 2021, with the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed in the acquisition was allocated to goodwill. The goodwill represents the value the Company expects to be created by integrating ASC Signal’s existing business with Kratos’ related products and customers.

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

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~~measurements. The following table summarizes the allocation~~remaining $15.2 million of the purchase price ~~over the estimated fair values of the major assets acquired and liabilities assumed (in millions):~~


~~Accounts receivable~~	$	~~5.7~~
~~Unbilled receivables~~	~~0.9~~
~~Inventoried costs~~	~~10.4~~
~~Other current assets~~	~~1.8~~
~~Property and equipment~~	~~10.0~~
~~Intangible assets~~	~~4.3~~
~~Goodwill~~	~~10.8~~
~~Total identifiable net assets acquired~~	~~43.9~~
~~Total identifiable net liabilities assumed~~	~~(11.0)~~
~~Net assets acquired, excluding cash~~	$	~~32.9~~

Based on the Company’s estimate of fair value, as of June 30, 2020, net liabilities included $9.1 million of current liabilities. The identifiable intangible assets include trade names of $0.1 million with a remaining useful life of 1 year, customer relationships of $2.0 million with remaining useful lives of 5 years, and developed technology of $2.2 million with a remaining useful life of 7 years. The Company also established a deferred tax liability of $1.1 million for the difference between the financial statement basis and tax basis of the acquired assets of ASC Signal and a corresponding increase in goodwill. The goodwill recorded in this transaction is not expected to be tax-deductible.

The amounts of revenue and operating income of ASC Signal included in the Company’s condensed consolidated statement of operations for the nine months ended September 26, 2021 were $28.7 million and $1.0 million, respectively.

~~A summary of the consideration~~ paid ~~for the acquired ownership in ASC Signal is as follows:~~


~~Cash paid~~	$	~~34.9~~
~~Less: Cash acquired~~	~~(2.0)~~
~~Total consideration~~	$	~~32.9~~

~~Pro Forma Financial Information~~

~~The following tables summarize the supplemental condensed consolidated statements of operations information on an unaudited pro forma basis as if the acquisition of ASC Signal occurred~~ on December 30, 2019 and include adjustments that were directly attributable to the foregoing transaction. There are no material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenues and loss. The pro forma results are for illustrative purposes only for the applicable period and do not purport to be indicative of the actual results that would have occurred had the transaction been completed as of the beginning of the period, nor are they indicative of results of operations that may occur in the future.

~~For the nine months ended September 27, 2020 (all amounts, except per share amounts, are in millions):~~


~~Pro forma revenues~~	$	~~559.1~~
~~Pro forma net loss before tax~~	$	~~(0.7)~~
~~Pro forma net loss~~	$	~~(3.4)~~

~~Basic pro forma loss per share~~	$	~~(0.03)~~
~~Diluted pro forma loss per share~~	$	~~(0.03)~~

5~~-D Systems, Inc.~~

On November 18, 2020, the Company acquired 5-D Systems, Inc. (“5-D Systems”), a leading National Security Solutions provider and industry-leading provider of high-performance, jet-powered unmanned aerial systems for an aggregate

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of approximately $10.0 million. The purchase price was $5.0 million in cash, subject to adjustments for transaction expenses, indebtedness, cash on hand, and post-closing working capital adjustments, and 250,374 shares of common stock (with a value of approximately $5.0 million).2021. The allocation of the total consideration for this acquisition to the tangible and identifiable intangible assets acquired and liabilities assumed is preliminary until the Company obtains final information regarding their fair values. However, the Company does not expect any adjustment to such allocations to be material to the Company's consolidated financial statements. The operating results of the acquisition have been included in the Company’s results of operations from the effective acquisition date. The amount of net sales and earnings of CTT included in the condensed consolidated statement of operations for the year ended December 26, 2021 are not material. Had the acquisition occurred as of December ~~30, 2019,~~28, 2020, net sales, net income from consolidated operations, net income attributable to Kratos, and basic and diluted net income per share attributable to Kratos on a pro forma basis for ~~nine months~~the year ended ~~September 27, 2020~~December 26, 2021 would not have been materially different than the reported amounts. ~~5-D Systems~~CTT is included in the Kratos USGovernment Solutions (KGS) segment.

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 $37.5 million in cash, subject to adjustments for transaction expenses, indebtedness, cash on hand, and working capital adjustments. Cosmic focuses on radio frequency, 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 allocation of the total consideration for this acquisition to the tangible and identifiable intangible assets acquired and liabilities assumed is preliminary until the Company obtains final information regarding their fair values. However, the Company does not expect any adjustment to such allocations to be material to the Company's consolidated financial statements. The operating results of the acquisition have been included in the Company’s results of operations from the effective acquisition date. Cosmic is included in the KGS segment.

The excess of the purchase price over the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed in the acquisition was allocated to goodwill. The goodwill represents the value the Company expects to be created by 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.

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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 receivables	4.0
Other current assets	0.1
Property and equipment	1.3
Intangible assets	10.0
Total identifiable net assets acquired	19.2
Total identifiable net liabilities assumed	(9.6)
Goodwill	28.6
Net assets acquired, excluding cash	$	38.2

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 $1.5 million with a remaining useful life of 5 years, backlog of $3.0 million with an estimated useful life of 2 years, customer relationships of $2.5 million with remaining useful lives of 10 years, and developed technology of $3.0 million with a remaining useful life of 10 years. The Company also established a deferred tax liability of $2.9 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 amounts of revenue and operating loss of Cosmic included in the Company’s condensed consolidated statement of operations for the three months ended March 27, 2022 were $12.7 million and $0.2 million, respectively.

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


Cash paid	$	39.5
Less: Cash acquired	(1.3)
Total consideration	$	38.2

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 $80.0 million, comprised of $75.0 million in cash, subject to any working capital adjustments, and $5.0 million in Kratos common stock. Southern Research’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 will establish Kratos SRE, a new business unit within Kratos’ Defense and Rocket Support Services Division. Closing is subject to certain conditions, which are expected to be satisfied during the second quarter of 2022.

Note 3. Revenue Recognition

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

To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in ~~the~~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

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contract is identified and determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract, ~~and~~ determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

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

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

Remaining Performance Obligations

The Company calculates revenues from remaining performance obligations as the dollar value of the remaining performance obligations on executed contracts. On ~~September 26, 2021,~~March 27, 2022, the Company had approximately ~~$839.1~~$982.1 million of remaining performance obligations. The Company expects to recognize approximately ~~24%~~50% of the remaining performance obligations as revenue in ~~2021,~~fiscal year 2022, an additional ~~44%~~20% in ~~2022,~~fiscal year 2023, 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.

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

Contracts are often modified to account for changes in contract specifications and requirements. Contract modifications are considered to exist when the modification either creates new or changes the existing enforceable rights and

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

As a result of the EAC process, any quarterly adjustments to revenues, cost of sales, and the related impact to operating income are recognized as necessary in the period they become known. These adjustments may result from positive program performance, and may result in an increase in operating income during the performance of individual performance obligations, if it is determined the Company will be successful in mitigating risks surrounding the technical, schedule and cost aspects of those performance obligations or realizing related opportunities. Likewise, these adjustments may result in a decrease in operating income if it is determined the Company will not be successful in mitigating these risks or realizing related opportunities. Changes in estimates of net sales, cost of sales, and the related impact to operating income are recognized quarterly on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current and prior periods. A significant change in one or more of these estimates could affect the profitability of one or more of the Company’s contracts. When estimates of total costs to be incurred on a performance obligation exceed total estimates of revenue to be earned, a provision for the entire loss on the performance obligation is recognized in the period the loss is determined. No cumulative catch-up adjustment on any one contract was material to the Company’s unaudited condensed consolidated financial statements for the ~~three and nine-month~~three-month periods ended ~~September 26, 2021,~~March 27, 2022, and ~~September 27, 2020.~~March 28, 2021. Likewise, total cumulative catch-up adjustments were not material for the ~~three and nine-month~~three-month periods ended ~~September 26, 2021,~~March 27, 2022, and ~~September 27, 2020.~~March 28, 2021.

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~~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):


		September 26, 2021		December 27, 2020		Net Change			March 27, 2022		December 26, 2021		Net Change
Contract assets	Contract assets	$	189.3	$	177.0	$	12.3	Contract assets	$	214.8	$	190.8	$	24.0
Contract liabilities	Contract liabilities	$	57.7	$	34.0	$	23.7	Contract liabilities	$	49.7	$	58.1	$	(8.4)
Net contract assets	Net contract assets	$	131.6	$	143.0	$	(11.4)	Net contract assets	$	165.1	$	132.7	$	32.4

Contract assets increased ~~$12.3~~$24.0 million during the ~~nine~~three months ended ~~September 26, 2021,~~March 27, 2022, primarily due to the recognition of revenue related to the satisfaction or partial satisfaction of performance obligations for which the Company has not yet billed the customers. There were no significant impairment losses related to any receivables or contract assets arising from the Company’s contracts with customers during the ~~nine~~three months ended ~~September 26, 2021.~~March 27, 2022. Contract liabilities ~~increased $23.7~~decreased $8.4 million during the ~~nine~~three months ended ~~September 26, 2021,~~March 27, 2022, primarily due to ~~payments received~~revenue recognized in excess of ~~revenue recognized~~payments

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received on these performance obligations. For the three ~~and nine~~ months ended ~~September~~March 27, 2022 the Company recognized revenue of $21.2 million that was previously included in the contract liabilities that existed at December 26, 2021. For the three months ended March 28, 2021 the Company recognized revenue of ~~$1.8~~$17.0 million ~~and $24.6 million, respectively,~~ that was previously included in the contract liabilities that existed at December 27, 2020. For the three and nine months ended September 27, 2020 the Company recognized revenue of $3.5 million and $23.5 million, respectively, that was previously included in the contract liabilities that existed at December 29, 2019.

In November 2019, a large training solutions program was terminated for convenience (“T for C”) by the customer. Under a T for C, a contractor is entitled to seek specified costs through a termination settlement process including (1) the contract price for completed supplies and services accepted by the government but not previously paid for; (2) the cost incurred in the performance of work terminated plus a reasonable profit on those costs; and (3) its costs incurred in settling with subcontractors and preparing and settling the termination proposal. Under a T for C, the Company would not be able to collect the total withheld amounts until the settlement terms of the T for C have been negotiated and agreed to with the customer. At ~~September 26, 2021,~~March 27, 2022, approximately ~~$8.2~~$10.8 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 is expected to be collected in the third quarter of 2022. The remaining unbilled balance of $4.8 million is subject to negotiation and settlement with the customer. In addition, the Company is currently in dispute with an international customer in the USUnmanned Systems (US) segment over approximately $10.0 million in unbilled receivables outstanding as of ~~September 26, 2021.~~March 27, 2022. The dispute with the international customer concerns the completion of certain system requirements and certain contractual milestones. The Company alleges breach of contract, as well as other claims against the customer, and seeks damages and other equitable relief. The customer has asserted counterclaims seeking liquidated damages and additional relief. Management has evaluated the present facts of the matters and performed a reassessment of the contractual amounts due and has determined that no adjustment to previously recognized revenue, or the corresponding unbilled receivables, is necessary at ~~September 26, 2021.~~

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March 27, 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 Ended				Nine Months Ended					Three Months Ended
		September 26, 2021		September 27, 2020		September 26, 2021		September 27, 2020			March 27, 2022		March 28, 2021
Kratos Government Solutions	Kratos Government Solutions									Kratos Government Solutions
Fixed price	Fixed price	$	109.8	$	113.3	$	316.4	$	315.9	Fixed price	$	101.3	$	99.5
Cost plus fee	Cost plus fee	19.6		27.7		76.2		62.9		Cost plus fee	32.3		28.6
Time and materials	Time and materials	9.9		7.5		29.8		25.0		Time and materials	10.0		10.2
Total Kratos Government Solutions	Total Kratos Government Solutions	139.3		148.5		422.4		403.8		Total Kratos Government Solutions	143.6		138.3
Unmanned Systems	Unmanned Systems									Unmanned Systems
Fixed price	Fixed price	41.2		39.6		114.8		95.5		Fixed price	31.5		37.2
Cost plus fee	Cost plus fee	19.6		12.9		60.9		39.8		Cost plus fee	20.4		17.9
Time and materials	Time and materials	0.5		1.0		1.8		2.2		Time and materials	0.7		0.8
Total Unmanned Systems	Total Unmanned Systems	61.3		53.5		177.5		137.5		Total Unmanned Systems	52.6		55.9
Total Revenues	Total Revenues	$	200.6	$	202.0	$	599.9	$	541.3	Total Revenues	$	196.2	$	194.2

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Revenue by customer was as follows (in millions):


		Three Months Ended				Nine Months Ended					Three Months Ended
		September 26, 2021		September 27, 2020		September 26, 2021		September 27, 2020			March 27, 2022		March 28, 2021
Kratos Government Solutions	Kratos Government Solutions									Kratos Government Solutions
U.S. Government (1)	U.S. Government (1)	$	86.4	$	98.7	$	270.8	$	273.4	U.S. Government (1)	$	89.5	$	92.6
International (2)	International (2)	34.9		34.5		102.4		87.4		International (2)	34.7		31.7
U.S. Commercial and other customers	U.S. Commercial and other customers	18.0		15.3		49.2		43.0		U.S. Commercial and other customers	19.4		14.0
Total Kratos Government Solutions	Total Kratos Government Solutions	139.3		148.5		422.4		403.8		Total Kratos Government Solutions	143.6		138.3
Unmanned Systems	Unmanned Systems									Unmanned Systems
U.S. Government (1)	U.S. Government (1)	57.3		46.6		161.3		125.4		U.S. Government (1)	50.1		49.6
International (2)	International (2)	3.6		6.5		15.4		11.4		International (2)	1.8		6.3
U.S. Commercial and other customers	U.S. Commercial and other customers	0.4		0.4		0.8		0.7		U.S. Commercial and other customers	0.7		—
Total Unmanned Systems	Total Unmanned Systems	61.3		53.5		177.5		137.5		Total Unmanned Systems	52.6		55.9
Total Revenues	Total Revenues	$	200.6	$	202.0	$	599.9	$	541.3	Total Revenues	$	196.2	$	194.2

(1) Sales to the U.S. Government include sales from contracts for which the Company is the prime contractor, as well as those for which the

Company is a subcontractor and the ultimate customer is the U.S. Government. Each of the Company’s segments derives substantial revenue

from the U.S. Government. These sales include foreign military sales contracted through the U.S. Government.

(2) International sales include sales from contracts for which the Company is the prime contractor, as well as those for which the Company is a

subcontractor and the ultimate customer is an international customer. These sales include direct sales with governments outside the U.S. and

commercial sales with customers outside the U.S.

Note 4. Discontinued Operations

On February 28, 2018, the Company entered into a Stock Purchase Agreement to sell the operations of Kratos Public Safety & Security Solutions, Inc., a Delaware corporation and wholly owned subsidiary of the Company (“PSS”), to Securitas Electronic Security, Inc., a Delaware corporation (“Buyer”). On June 11, 2018, the Company completed the sale of all of the issued and outstanding capital stock of PSS to Buyer for a purchase price of $69 million in cash, subject to a closing net working capital adjustment (the “Transaction”). To date, the Company has received approximately ~~$70~~$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

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transaction services agreement between the Company and the Buyer, receipt of approximately ~~$6.9~~$7.3 million in net working capital retained by the Company, and associated transaction fees and expenses, ~~excluding~~including the impact of the final settlement and determination of the closing net working capital ~~adjustment. The Company~~adjustment and litigation which was settled with the Buyer ~~are currently~~ in ~~a dispute regarding~~ the ~~closing net working capital adjustment. The amount in dispute is approximately $8 million. The Company has recorded an approximate net break-even on the sale~~fourth quarter of ~~the PSS business which includes the aggregate net proceeds described above that have been collected, excluding the impact~~2021 and first quarter of ~~the final settlement and determination of the closing net working capital adjustment. The resolution of the ongoing dispute will be recorded in future periods when resolved.~~2022, respectively.

Note 5. Goodwill and Intangible Assets

(a) Goodwill

The carrying amounts of goodwill as of ~~September~~March 27, 2022 and December 26, 2021 ~~and December 27, 2020~~ by reportable segment are as follows (in millions):


		As of September 26, 2021							As of March 27, 2022
		KGS		US		Total			KGS		US		Total
Gross value	Gross value	$	609.6	$	127.4	$	737.0	Gross value	$	648.3	$	127.9	$	776.2
Less accumulated impairment	Less accumulated impairment	239.5		13.8		253.3		Less accumulated impairment	239.5		13.8		253.3
Net	Net	$	370.1	$	113.6	$	483.7	Net	$	408.8	$	114.1	$	522.9

As of December 27, 2020
KGS US Total
Gross value $ 609.6 $ 127.6 $ 737.2
Less accumulated impairment 239.5 13.8 253.3
Net $ 370.1 $ 113.8 $ 483.9

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	As of December 26, 2021
	KGS		US		Total
Gross value	$	619.3	$	127.9	$	747.2
Less accumulated impairment	239.5		13.8		253.3
Net	$	379.8	$	114.1	$	493.9

(b) Purchased Intangible Assets

The following table sets forth information for finite-lived and indefinite-lived intangible assets (in millions):


		As of September 26, 2021						As of December 27, 2020							As of March 27, 2022						As of December 26, 2021
		Gross Value		Accumulated Amortization		Net Value		Gross Value		Accumulated Amortization		Net Value			Gross Value		Accumulated Amortization		Net Value		Gross Value		Accumulated Amortization		Net Value
Acquired finite-lived intangible assets:	Acquired finite-lived intangible assets:													Acquired finite-lived intangible assets:
Customer relationships	Customer relationships	$	75.3	$	(57.1)	$	18.2	$	75.3	$	(55.7)	$	19.6	Customer relationships	$	79.0	$	(58.2)	$	20.8	$	76.5	$	(57.6)	$	18.9
Contracts and backlog	Contracts and backlog	33.4		(32.7)		0.7		33.4		(31.0)		2.4		Contracts and backlog	37.9		(33.8)		4.1		34.9		(33.1)		1.8
Developed technology and technical know-how	Developed technology and technical know-how	29.9		(25.7)		4.2		29.9		(25.3)		4.6		Developed technology and technical know-how	34.4		(26.1)		8.3		31.4		(25.8)		5.6
Trade names	Trade names	2.0		(2.0)		—		2.0		(1.9)		0.1		Trade names	4.2		(2.1)		2.1		2.7		(2.0)		0.7
In-process research and development	In-process research and development	9.4		(0.1)		9.3		9.4		—		9.4		In-process research and development	9.5		(0.2)		9.3		9.5		(0.2)		9.3

Total finite-lived intangible assets	Total finite-lived intangible assets	150.0		(117.6)		32.4		150.0		(113.9)		36.1		Total finite-lived intangible assets	165.0		(120.4)		44.6		155.0		(118.7)		36.3
Indefinite-lived trade names	Indefinite-lived trade names	6.9		—		6.9		6.9		—		6.9		Indefinite-lived trade names	6.9		—		6.9		6.9		—		6.9
Total intangible assets	Total intangible assets	$	156.9	$	(117.6)	$	39.3	$	156.9	$	(113.9)	$	43.0	Total intangible assets	$	171.9	$	(120.4)	$	51.5	$	161.9	$	(118.7)	$	43.2

Consolidated amortization expense related to intangible assets subject to amortization was ~~$1.1~~$1.7 million and ~~$1.7~~$1.4 million for the three months ended ~~September 26,~~March 27, 2022 and March 28, 2021, ~~and September 27, 2020, respectively, and $3.7 million and $5.4 million for the nine months ended September 26, 2021 and September 27, 2020,~~ respectively.

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Note 6. Inventoried Costs

Inventoried costs, consisted of the following components (in millions):


		September 26, 2021		December 27, 2020			March 27, 2022		December 26, 2021
Raw materials	Raw materials	$	55.2	$	47.3	Raw materials	$	66.6	$	58.5
Work in process	Work in process	31.1		30.1		Work in process	34.9		28.5
Finished goods	Finished goods	4.6		3.8		Finished goods	5.6		4.7

Total inventoried costs	Total inventoried costs	$	90.9	$	81.2	Total inventoried costs	$	107.1	$	91.7

Note 7. Net Income (Loss) per Common Share

The Company calculates net income (loss) per share in accordance with FASB ASC Topic 260, Earnings per Share (Topic 260). Under Topic 260, basic net income (loss) per common share attributable to the Kratos shareholders is calculated by dividing net income (loss) attributable to Kratos by the weighted-average number of common shares outstanding during the reporting period. Diluted net income (loss) per common share 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 ~~0.2~~1.2 million for the three months ended ~~September 26, 2021.~~March 27, 2022.

Note 8. Leases

The Company leases certain facilities, office space, vehicles and equipment. Lease assets and lease liabilities are recognized at the commencement of an arrangement where it is determined at inception that a lease exists. Lease assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are initially recognized based on the present value of lease

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payments over the lease term calculated using an incremental borrowing rate generally applicable to the location of the lease asset, unless the implicit rate is readily determinable. Lease assets also include any upfront lease payments made and exclude lease incentives. Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised. The Company has operating lease arrangements with lease and non-lease components. The non-lease components in these arrangements are not significant when compared to the lease components. For all operating leases, the Company accounts for the lease and non-lease components as a single component.

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

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

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The components of lease expense were as follows (in millions):


		Three Months Ended				Nine Months Ended					Three Months Ended
		September 26, 2021		September 27, 2020		September 26, 2021		September 27, 2020			March 27, 2022		March 28, 2021
Amortization of right of use assets - finance leases	Amortization of right of use assets - finance leases	$	0.6	$	0.6	$	1.7	$	1.6	Amortization of right of use assets - finance leases	$	0.7	$	0.5
Interest on lease liabilities - finance leases	Interest on lease liabilities - finance leases	0.7		0.6		2.0		1.9		Interest on lease liabilities - finance leases	0.7		0.6
Operating lease cost	Operating lease cost	2.6		2.7		8.3		9.1		Operating lease cost	3.3		2.9
Short-term lease cost	Short-term lease cost	0.2		0.2		0.6		0.6		Short-term lease cost	0.2		0.2
Variable lease cost (cost excluded from lease payments)	Variable lease cost (cost excluded from lease payments)	—		—		0.1		0.1		Variable lease cost (cost excluded from lease payments)	—		—
Sublease income	Sublease income	—		(0.1)		(0.1)		(1.1)		Sublease income	—		—
Total lease cost	Total lease cost	$	4.1	$	4.0	$	12.6	$	12.2	Total lease cost	$	4.9	$	4.2

The components of leases on the balance sheet were as follows (in millions):


		September 26, 2021		December 27, 2020			March 27, 2022		December 26, 2021
Operating Leases:	Operating Leases:					Operating Leases:
Operating lease right-of-use assets	Operating lease right-of-use assets	$	38.8	$	42.9	Operating lease right-of-use assets	$	39.6	$	38.5
Current portion of operating lease liabilities	Current portion of operating lease liabilities	$	9.2	$	8.9	Current portion of operating lease liabilities	$	10.5	$	10.1
Operating lease liabilities, net of current portion	Operating lease liabilities, net of current portion	$	34.0	$	38.6	Operating lease liabilities, net of current portion	$	33.3	$	32.7
Finance leases:	Finance leases:					Finance leases:
Property, plant and equipment, net	Property, plant and equipment, net	$	39.6	$	36.5	Property, plant and equipment, net	$	38.3	$	39.0
Other current liabilities	Other current liabilities	$	1.2	$	0.9	Other current liabilities	$	1.2	$	1.2
Other long-term liabilities	Other long-term liabilities	$	43.5	$	38.8	Other long-term liabilities	$	42.9	$	43.2

Cash paid for amounts included in the measurement of lease liabilities was as follows (in millions):


		Three Months Ended				Nine Months Ended					Three Months Ended
		September 26, 2021		September 27, 2020		September 26, 2021		September 27, 2020			March 27, 2022		March 28, 2021
Finance lease - cash paid for interest	Finance lease - cash paid for interest	$	0.7	$	0.6	$	2.0	$	1.9	Finance lease - cash paid for interest	$	0.7	$	0.6
Finance lease - financing cash flows	Finance lease - financing cash flows	$	0.3	$	0.2	$	0.7	$	0.5	Finance lease - financing cash flows	$	0.3	$	0.2
Operating lease - operating cash flows (fixed payments)	Operating lease - operating cash flows (fixed payments)	$	2.9	$	2.9	$	8.7	$	10.2	Operating lease - operating cash flows (fixed payments)	$	3.4	$	2.8

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Other supplemental noncash information (in millions):

Three Months Ended Nine Months Ended
September 26, 2021 September 27, 2020 September 26, 2021 September 27, 2020
Operating lease liabilities arising from obtaining right-of-use assets $ 2.2 $ 3.8 $ 4.1 $ 4.8
Finance lease liabilities arising from obtaining right-of-use assets $ 5.8 $ 0.8 $ 5.8 $ 1.2
September 26, 2021 September 27, 2020
Weighted-average remaining lease term (in years):
Operating leases 4.88 5.36
Finance leases 16.38 18.01
Weighted-average discount rate:
Operating leases 6.50 % 6.50 %
Finance leases 6.51 % 6.52 %

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	Three Months Ended
		March 27, 2022			March 28, 2021
Operating lease liabilities arising from obtaining right-of-use assets		$	3.7		$	0.2
Finance lease liabilities arising from obtaining right-of-use assets		$	—		$	—

		March 27, 2022			March 28, 2021
Weighted-average remaining lease term (in years):
Operating leases		4.50			5.28
Finance leases		15.91			17.44

Weighted-average discount rate:
Operating leases		6.48		%	6.50		%
Finance leases		6.51		%	6.52		%

The maturity of lease liabilities is (in millions):


		Operating Leases		Finance Leases			Operating Leases		Finance Leases
2021 (1)		$	3.0	$	1.0
2022		11.4		4.1
2022 (1)						2022 (1)	$	9.8	$	3.0
2023	2023	10.9		4.1		2023	12.4		4.1
2024	2024	8.9		4.2		2024	9.8		4.2
2025	2025	7.3		4.2		2025	8.3		4.2
2026						2026	4.9		4.3
Thereafter	Thereafter	9.0		57.1		Thereafter	5.3		52.8
Total lease payments	Total lease payments	50.5		74.7		Total lease payments	50.5		72.6
Less: imputed interest	Less: imputed interest	(7.3)		(30.0)		Less: imputed interest	(6.7)		(28.5)
Total present value of lease liabilities	Total present value of lease liabilities	$	43.2	$	44.7	Total present value of lease liabilities	$	43.8	$	44.1
(1) Excludes the nine months ended September 26, 2021.
(1) Excludes the three months ended March 27, 2022.						(1) Excludes the three months ended March 27, 2022.

Note 9. Income Taxes

A reconciliation of the total income tax provision (benefit) to the amount computed by applying the statutory federal income tax rate of 21% to income from continuing operations before income taxes for the three ~~and nine~~ months ended ~~September 26,~~March 27, 2022 and March 28, 2021 ~~and September 27, 2020~~ is as follows (in millions):

For the Three Months Ended For the Nine Months Ended
September 26,
2021 September 27,
2020 September 26,
2021 September 27,
2020
Income tax expense at federal statutory rate $ 1.0 $ 1.6 $ 0.3 $ 0.8
State and foreign taxes, net of federal tax benefit and valuation allowance 2.1 1.9 0.6 1.2
Release of valuation allowance due to acquisitions — (0.1) — (1.0)
Nondeductible expenses and other 3.2 2.5 1.0 1.2
Impact of deferred tax liabilities for indefinite-lived assets — 1.1 — 0.5
Increase in reserves for uncertain tax positions 0.4 2.2 0.5 1.2
Stock compensation - excess tax benefits (0.1) — (2.7) —
Federal impact of research & development tax credits (0.9) — (0.3) —
Decrease in federal valuation allowance — (4.2) — (2.1)
Provision (benefit) for income taxes from continuing operations $ 5.7 $ 5.0 $ (0.6) $ 1.8


	For the Three Months Ended
	March 27, 2022		March 28, 2021
Income tax benefit at federal statutory rate	$	(4.2)	$	(0.2)



Nondeductible expenses and other	1.0		(0.2)


Stock compensation - excess tax benefits	(0.9)		(2.4)
Federal impact of research & development tax credits	(0.2)		0.1

Benefit for income taxes from continuing operations	$	(4.3)	$	(2.7)

~~During the fourth quarter of 2020,~~

The Company calculates its interim income tax provision in accordance with ASC Topic 270, “Interim Reporting,” and ASC Topic 740, “Accounting for Income Taxes.” Historically, the Company ~~evaluated all available evidence, both positive and negative,~~calculated the provision for income taxes during the interim reporting periods by applying an estimate of the annual effective tax rate for the full fiscal year to ~~determine whether, based on~~“ordinary” income or loss (pretax income or loss excluding unusual or infrequently occurring discrete items) for the ~~weight of that evidence, a valuation allowance for deferred tax assets was still needed. Evidence evaluated by the~~reporting period. The Company included, but was not limited to, the fact that it was in a three-year cumulative income position and no longer had cumulative losses in recent years, the results and trend of pretax book income from core operations, and its forecast of taxable income for 2021 and beyond. As a result, the Company had determined that ~~it is more likely than not that sufficient taxable~~since small changes in estimated “ordinary” income ~~will exist to realize the majority of its U.S. deferred tax assets and reversed a~~would result in significant portion of the valuation allowance previously recorded against those deferred tax assets as of December 27, 2020. The remaining valuation allowance on the Company’s U.S. deferred tax assets relates primarily to state net operating loss and capital loss carryforwards the Company estimates are not more likely than not to be utilized in future periods.

In assessing the Company’s ability to realize deferred tax assets, management considers, on a periodic basis, whether it is more likely than not that some portion or all of its deferred tax assets will not be realized. In making this assessment, the Company has concluded that positive evidence continues to outweigh the negative evidence as of September 26, 2021.

~~Federal and state income tax laws impose restrictions on the utilization of net operating loss (“NOL”) and tax credit carryforwards~~changes in the event that an “ownership change” occurs for tax purposes, as defined by Section 382 of the Internal Revenue Code of 1986, as amended (“Section 382”). In general, an ownership change occurs when shareholders owning 5% or more of a “loss corporation” (a corporation entitled to use NOLs or other loss carryovers) have increased their ownership of

2017

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~~stock in such corporation by more than 50 percentage points during any three-year period. The~~estimated annual ~~base Section 382 limitation is calculated by multiplying~~effective tax rate, 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. Ashistorical method would not provide a ~~result, the Company’s federal annual utilization of NOL carryforwards was limited to $27.0 million a year~~reliable estimate for the ~~five years succeeding~~three ended March 27, 2022. Therefore, a discrete effective tax rate method was used to calculate taxes for 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~~three months ended September 26, 2021, there was no impact of such limitations on the income tax provision, since the amount of taxable income did not exceed the annual limitation amount. However, future equity offerings or acquisitions that have equity as a component of the purchase price could also cause an “ownership change.” If and when any other “ownership change” occurs, utilization of the NOLs or other tax attributes may be further limited.

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 2015 and later are subject to examination by various foreign tax authorities as well.March 27, 2022.

As of December ~~27, 2020,~~26, 2021, the Company had ~~$25.4~~$25.9 million of unrecognized tax benefits that, if recognized, would impact the Company’s effective income tax rate. During the ~~nine~~three months ended ~~September 26, 2021~~March 27, 2022 unrecognized tax benefits increased by $0.1 million relating to various current year tax positions.

The Company recognizes interest and penalties related to unrecognized tax benefits in its provision for income taxes. For each of the ~~nine~~three months ended ~~September 26,~~March 27, 2022 and March 28, 2021, ~~and September 27, 2020,~~ the Company recorded an expense for interest and penalties of ~~$0.5 million and $0.3 million, respectively.~~$0.1 million. For the ~~nine~~three months ended ~~September 26,~~March 27, 2022 and March 28, 2021, ~~and September 27, 2020,~~ there was no material benefit recorded related to the removal of interest and penalties. The Company believes that it is reasonably possible that as much as ~~$0.3~~$0.5 million of the liabilities for uncertain tax positions will expire within the next twelve months due to the expiration of various applicable statutes of limitations.

Note 10. Debt

(a) ~~Issuance~~New Credit Facility

On February 18, 2022, the Company completed the refinancing of its outstanding $90 million revolving credit facility and $300 million 6.5% Senior Secured Notes ~~due 2025~~

~~In November 2017,~~ (the ~~Company issued~~“Senior Secured Notes”), with a new 5-year $200 million Revolving Credit Facility and ~~sold $300~~5-year $200 million ~~aggregate principal amount of 6.5% Senior Secured Notes due 2025 (the “6.5% Notes”) in a private placement conducted pursuant to Rule 144A and Regulation S under~~Term Loan A (collectively, the ~~Securities Act of 1933, as amended.~~“New Credit Facility”). The Company incurred debt issuance costs of ~~$6.6~~$3.2 million associated with the ~~6.5%~~New Credit Facility. The Company has drawn approximately $200 million under the Term Loan A and $100 million on the new Revolving Credit Facility, with $100 million remaining in borrowing capacity, less approximately $13.2 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 ~~Company utilized the net proceeds from the sale~~redemption of the ~~6.5% Notes, as well as cash from an equity offering to extinguish the previously~~Company’s outstanding ~~7.00%~~$300 million 6.5% Senior Secured Notes due ~~2019 (the “7% Notes”). The total reacquisition price~~November 2025 closed on March 14, 2022, for an amount of cash equal to 103.25% of the ~~7% Notes was $385.2~~principal amount thereof plus accrued and unpaid interest thereon. The Company incurred a loss on the extinguishment of debt of $9.8 million ~~including a $12.0 million~~related to the call premium on the Senior Secured Notes and ~~$0.3~~the write-off of $3.2 million of ~~accrued interest.~~unamortized debt issuance costs, resulting in a total loss on extinguishment of debt of $13.0 million.

The ~~6.5% Notes are~~New Credit Facility is governed by ~~the Indenture, dated as of November 20, 2017~~a Credit Agreement (the ~~“Indenture”~~“Credit Agreement”), ~~among~~which establishes the Company, the Company’s existing and future domestic subsidiaries parties thereto (the “Subsidiary Guarantors”) and Wilmington Trust, National Association, as trustee and collateral agent. A Subsidiary Guarantor can be released from its guarantee if (a) all5-year senior secured credit facility which is comprised of the ~~capital stock issued~~$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 $200 million Term Loan A. The Credit Agreement contemplates uncommitted incremental credit facilities of up to $200 million (which amount would be reduced by ~~such Subsidiary Guarantor or all or substantially all~~the aggregate amount of the assets of such Subsidiary Guarantor are sold or otherwise disposed of; (b) the Company designates such Subsidiary Guarantor as an Unrestricted Subsidiary (as defined in the Indenture); (c) the Company exercises its legal defeasance option or its covenant defeasance option; or (d) upon satisfaction and discharge of the Indenture or payment in full in cash of the principal of, premium, if any and ~~accrued and unpaid interest on the 6.5% Notes.~~

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

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

The 6.5% Notes are redeemable by the Company, in whole or in part, at the respective redemption prices specified in the Indenture. The Company may also be required to make an offer to purchase the 6.5% Notes upon a change of control and certain sales of its assets.

The Indenture contains covenants limiting, among other things, the Company’s ability and the Subsidiary Guarantors’ ability to: (a) pay dividends on or make distributions or repurchase or redeem the Company’s capital stock or make other restricted payments; (b) incurAgreement) plus additional debt and guarantee debt; (c) prepay, redeem or repurchase certain debt; (d) issue certain preferred stock or similar equity securities; (e) make loans and investments; (f) sell assets; (g) incur liens; (h) consolidate, merge, sell or otherwise dispose of all or substantially all of the Company’s assets; (i) enter into transactions with affiliates; and (j) enter into agreements restricting the Company’s ability and certain of its subsidiaries’ ability to pay dividends. These covenants areuncommitted incremental capacity subject to a ~~number of exceptions. As of September 26, 2021,~~limitation based on the ~~Company was in compliance with the covenants contained in the Indenture governing the 6.5% Notes.~~

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

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

~~As of September 26, 2021, there was $300.0 million of 6.5% Notes outstanding.~~

~~(b) Other Indebtedness~~

~~Credit and Security Agreement~~

On November 20, 2017, the Company entered into an amended and restated credit and security agreement (as amended, the “Credit Agreement”), with the lenders named therein, SunTrust Bank, as Agent (the “Agent”), and SunTrust Robinson Humphrey, Inc., as Lead Arranger and Sole Book Runner. The Credit Agreement established a five-year senior secured revolving credit facility in the aggregate principal amount of $90.0 million (subject to a potential increase of the aggregate principal amount to $115.0 million, subject to the Agent’s and applicable lenders’ approval), 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.additional uncommitted incremental capacity).

Borrowings under the revolving credit facility and the term loan credit facility may take the form of a base rate ~~revolving loan, Eurodollar revolving loan~~loans or ~~swingline loan.~~Secured Overnight Financing Rate (“SOFR”) loans. Base rate ~~revolving~~ loans ~~and swingline loans~~under the Credit Agreement will bear interest at a rate per annum equal to the sum of the Applicable Margin (as defined in the Credit Agreement) from time to time in effect plus the highest of (i) the Agent’s prime lending rate, as in effect at such time, (ii) the ~~federal funds rate,~~Federal Funds Rate (as defined in the Credit Agreement), as in effect at such time, plus 0.50% ~~per annum and~~, (iii) the Adjusted ~~LIBO Rate~~Term SOFR (as defined in the Credit Agreement) ~~determined at~~for a one-month tenor in effect on such ~~time for an interest period of one month,~~day, plus 1.00% ~~per annum. Eurodollar revolving~~and (iv) 1.00%. SOFR loans will bear interest at a rate per annum equal to the sum of the Applicable Margin from time to time in effect plus the Adjusted ~~LIBO Rate.~~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 ~~1.00%-1.50%~~1.25% and 2.25% per annum for SOFR loans and between 0.25% and 1.25% per annum for base rate ~~revolving loans and swingline loans and 2.00%-2.50% for Eurodollar~~ loans, and is based on ~~several factors including~~ the Company’s ~~then-existing borrowing base and the lenders’~~ total ~~commitment amount and revolving credit exposure. The calculation of the Company’s borrowing base takes into account several items relating~~net leverage ratio from time to the Company and its subsidiaries, including amounts due and owing under billed and unbilled accounts receivable, then held eligible raw materials inventory, work-in-process inventory, and applicable reserves.time.

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 March 27, 2022.

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~~The measurement of a minimum fixed charge coverage ratio is required to be measured if Excess Availability, as~~

~~defined in the Credit Agreement, is less than fifty percent of the lesser of the Borrowing Base or the Total Commitment~~

~~Amount, each as defined in the Credit Agreement.~~(b) 6.5% Senior Secured Notes due 2025

AsIn November 2017, the Company issued and sold $300 million aggregate principal amount of ~~September 26, 2021, there were no borrowings outstanding on~~6.5% Senior Secured Notes due 2025, or the ~~Credit Agreement~~Senior Secured Notes, in a private placement conducted pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended. The Company incurred debt issuance costs of $6.6 million ~~was outstanding on letters of credit, resulting in net borrowing base availability of $62.6 million. The Company was in compliance~~associated with the ~~financial covenants of the Credit Agreement and its amendments as of September 26, 2021.~~Senior Secured Notes. The Senior Secured Notes were redeemed on March 14, 2022.

~~Israel Debt~~(c) Other Indebtedness

~~During August 2020,~~Credit and Security Agreement

On November 20, 2017, the Company entered into ~~2 5-year term loans with 2 banks~~an amended and restated credit and security agreement (the “Credit and Security Agreement”), which established a five-year senior secured revolving credit facility in ~~Israel representing~~the aggregate principal amount of $90.0 million (subject to a potential increase of the aggregate principal amount to $115.0 million, subject to the agent’s and applicable lenders’ approval), 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 ~~of approximately $5.1~~at any time outstanding not to exceed $10.0 million. ~~These loans were subsidized~~The Credit and Security Agreement was replaced by the State of Israel as part of a COVID-19 relief package with interest at Israeli NIS prime interest, plus a margin of 1.5%. The first year of interest was paid by the State of Israel with subsequent interest and principal payments due monthly, commencing in August 2021. The Company repaid the outstanding balances of these loans in August 2021.

~~5-D Systems Loan~~

In connection with the acquisition of 5-D Systems, the Company assumed a loan in the amount of approximately $0.5 million with an interest rate of 1.0% that had been obtained under the Small Business Administration Paycheck Protection Program as part of a COVID-19 relief package. Payment of interest and principal was due monthly with the balance due in AprilNew Credit Facility on February 18, 2022. ~~The sellers of 5-D Systems applied for forgiveness of this loan and the application was accepted and the loan was forgiven in July 2021.~~

Fair Value of Long-term Debt

Carrying amounts and the related estimated fair values of the Company’s ~~long-term debt financial instruments~~Senior Secured Notes not measured at fair value on a recurring basis at ~~September~~December 26, 2021 ~~and December 27, 2020~~ are presented in the following table:


		As of September 26, 2021						As of December 27, 2020							As of December 26, 2021
$ in millions	$ in millions	Principal		Carrying Amount		Fair Value		Principal		Carrying Amount		Fair Value		$ in millions	Principal		Carrying Amount		Fair Value
Total long-term debt including current portion	Total long-term debt including current portion	$	300.0	$	296.5	$	310.5	$	305.6	$	301.5	$	319.6	Total long-term debt including current portion	$	300.0	$	296.7	$	308.3

The fair value of the Company’s ~~long-term debt~~Senior Secured Notes was based upon actual trading activity (Level 1, Observable inputs -quoted prices in active markets).

As of ~~September~~December 26, 2021, the difference between the carrying amount of ~~$296.5~~$296.7 million and the principal amount of $300.0 million presented in the above table ~~above~~ is the unamortized debt issuance costs of ~~$3.5~~$3.3 million, which ~~are~~were being accreted to interest expense over the term of the related debt. ~~As of December 27, 2020, the difference between the carrying amount of $301.5 million~~The Senior Secured Notes were redeemed on March 14, 2022.

Term Loan and Revolving Credit Debt

Long-term debt and the current period interest rates were as follows (in millions):


	Three Months Ended
	March 27, 2022
Term Loan A	$	200.0
Revolving credit facility	100.0
Total debt	300.0
Less current portion	(3.7)
Total long-term debt, less current portion	296.3
Less long-term unamortized debt issuance costs - term loans	(1.3)
Total long-term debt, net of unamortized debt issuance costs - term loans	$	295.0
Unamortized debt issuance costs - revolving credit facility	$	1.5
Current period interest rate	2.2		%

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Future long-term debt principal ~~amount of $305.6 million presented in the above table also related to the same unamortized debt issuance costs of $4.1 million.~~payments at March 27, 2022 were as follows (in millions):


2022	$	3.7
2023	5.0
2024	8.8
2025	10.0
2026	10.0
2027	162.5
	$	200.0

Note 11. Segment Information

The Company operates in 2 reportable segments. The KGS reportable segment is comprised of an aggregation of KGS operating business units, including the Company’s microwave electronic products, space and satellite communications, training and cybersecurity, C5ISR/modular systems, turbine technologies and defense and rocket support services operating segments. The US reportable segment consists of the Company’s unmanned aerial, unmanned ground, unmanned seaborne and command, control and communications system business. The KGS and US 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 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. In the following table, total operating income from continuing operations of the reportable business segments is reconciled to the corresponding consolidated amount. The reconciling item Corporate activities

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includes costs for certain stock-based compensation programs (including stock-based compensation costs for stock options, 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.

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Revenues, depreciation and amortization, and operating income generated by the Company’s reportable segments for the three ~~and nine~~ month periods ended ~~September 26,~~March 27, 2022 and March 28, 2021 ~~and September 27, 2020~~ are as follows (in millions):


		Three Months Ended				Nine Months Ended					Three Months Ended
		September 26, 2021		September 27, 2020		September 26, 2021		September 27, 2020			March 27, 2022		March 28, 2021
Revenues:	Revenues:									Revenues:
Kratos Government Solutions	Kratos Government Solutions									Kratos Government Solutions
Service revenues	Service revenues	$	50.5	$	67.6	$	163.3	$	194.1	Service revenues	$	66.8	$	56.1
Product sales	Product sales	88.8		80.9		259.1		209.7		Product sales	76.8		82.2
Total Kratos Government Solutions	Total Kratos Government Solutions	139.3		148.5		422.4		403.8		Total Kratos Government Solutions	143.6		138.3

Unmanned Systems	Unmanned Systems									Unmanned Systems
Service revenues	Service revenues	1.1		—		3.6		—		Service revenues	1.1		1.2
Product sales	Product sales	60.2		53.5		173.9		137.5		Product sales	51.5		54.7
Total Unmanned Systems	Total Unmanned Systems	61.3		53.5		177.5		137.5		Total Unmanned Systems	52.6		55.9
Total revenues	Total revenues	$	200.6	$	202.0	$	599.9	$	541.3	Total revenues	$	196.2	$	194.2
Depreciation & amortization:
Depreciation and amortization:										Depreciation and amortization:
Kratos Government Solutions	Kratos Government Solutions	$	4.3	$	4.5	$	13.2	$	13.6	Kratos Government Solutions	$	5.1	$	4.4

Unmanned Systems	Unmanned Systems	1.8		1.7		6.2		4.9		Unmanned Systems	1.9		1.9
Total depreciation and amortization	Total depreciation and amortization	$	6.1	$	6.2	$	19.4	$	18.5	Total depreciation and amortization	$	7.0	$	6.3
Operating income from continuing operations:
Operating income (loss) from continuing operations:										Operating income (loss) from continuing operations:
Kratos Government Solutions	Kratos Government Solutions	$	14.6	$	14.1	$	27.6	$	31.1	Kratos Government Solutions	$	5.6	$	7.1

Unmanned Systems	Unmanned Systems	2.6		3.7		10.9		5.2		Unmanned Systems	0.5		4.2

Corporate activities	Corporate activities	(6.7)		(5.1)		(19.8)		(16.0)		Corporate activities	(7.3)		(6.4)
Total operating income from continuing operations		$	10.5	$	12.7	$	18.7	$	20.3
Total operating income (loss) from continuing operations										Total operating income (loss) from continuing operations	$	(1.2)	$	4.9

Note 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 ~~FTT~~KTT CORE, LLC, a Delaware limited liability company (“~~FTT~~KTT Core” ~~and, together with FTT Inc. and their respective subsidiaries, “FTT”~~), 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 ~~FTT Inc. and FTT~~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 ~~FTT Inc., FTT~~KTT Core and ~~each of their respective~~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.

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 of ~~September 26, 2021,~~March 27, 2022, no adjustment of the carrying value of the redeemable noncontrolling interest was required.

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~~Note 13. Stockholders’ Equity – Common Stock~~

On June 23, 2020, the Company sold 15,525,000 shares of its common stock at a public offering price of $16.25 per share in an underwritten public offering. The Company received gross proceeds of approximately $252.3 million. After deducting underwriting fees and other offering expenses, the Company received approximately $240.4 million in net proceeds. The Company expects to use the net proceeds for general corporate purposes, including for potential strategic “tuck-in” acquisitions, to further position the Company for projected growth from new and anticipated increased production and to facilitate its long-term strategy.

Note ~~14.~~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

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U.S. Government. Sales to the U.S. Government amounted to approximately ~~$143.7~~$139.6 million and ~~$145.3~~$142.2 million, or ~~72%~~71% and ~~72%~~73% of total Kratos revenue, for the three months ended ~~September 26,~~March 27, 2022 and March 28, 2021, ~~and September 27, 2020, respectively, and $432.1 million and $398.8 million, or 72% and 74% of total Kratos revenue, for the nine months ended September 26, 2021 and September 27, 2020,~~ respectively.

Note ~~15.~~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 unaudited condensed consolidated financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable and unfavorable resolutions could occur, assessing litigation contingencies is highly subjective and requires judgments about future events. When evaluating contingencies, the Company may be unable to provide a meaningful estimate due to a number of factors, including but not limited to the procedural status of the matter in question, the presence of complex or novel legal theories, and the ongoing discovery and development of information important to the matters. In addition, damage amounts claimed in litigation against it may be unsupported, exaggerated or unrelated to possible outcomes and, as such, are not meaningful indicators of its potential liability. The Company regularly reviews contingencies to determine the adequacy of its accruals and related disclosures. The amount of ultimate loss may differ from these estimates. It is possible that cash flows or results of operations could be materially affected in any particular period by the unfavorable resolution of one or more of these contingencies. Whether any losses finally determined in any claim, action, investigation or proceeding could reasonably have a material effect on the Company’s business, financial condition, results of operations or cash flows will depend on a number of variables, including the timing and amount of such losses; the structure and type of any remedies; the monetary significance any such losses, damages or remedies may have on the 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

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 scrutinizes costs incurred and allocated to contracts with the U.S. Government for compliance with regulatory standards. 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 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.

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Other Litigation 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.

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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,”), 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; 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; 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 COVID-19;risks related to unknown defects or errors in our products; 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 ~~27, 2020~~26, 2021 filed with the U.S. Securities and Exchange Commission (the “SEC”) on February ~~25, 2021~~22, 2022 (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 subsidiaries.

Overview

Kratos is a government contractor at the forefront of the DoD’s recapitalization of strategic weapon systems to address peer and near peer threats and the DoD’s related Rapid Innovation Initiatives. Kratos is a leading technology, intellectual property, proprietary product and system company focused on the U.S. and its allies’ national security. Kratos is a recognized industry leader in the rapid development, demonstration and fielding of disruptive, transformative and high technology systems and products at an affordable cost. At Kratos, affordability is a technology. Kratos’ primary focus areas are unmanned systems, space and satellite communications, microwave electronics, cybersecurity/warfare, rocket, hypersonic and missile defense systems, turbine technologies, and Command, Control, Communication, Computing, Combat, Intelligence Surveillance and Reconnaissance (“C5ISR”) Systems and training systems. We believe that our technology, intellectual property, proprietary products and designed-in positions on our customers’ programs, platforms and systems, and our ability to rapidly develop, demonstrate and field affordable leading technology systems 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 a secure manufacturing facility. Our primary end customers are national security related agencies. Our entire organization is focused on executing our strategy of being the leading technology and intellectual property based product and system company in our industry.

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Industry Update

In May 2021, the Biden administration released a $6.011 trillion federal budget proposal for the U.S. Government’s 2022 fiscal year (“FY”) that begins on October 1, ~~2021,~~2021. The budget proposal includes $753 billion in National Security funding, an increase of ~~1.6 percent~~1.6% over FY 2021, of which $715 billion is for the DoD. The 2022 National Security request amounts to a slight decrease for the Pentagon when adjusted for inflation, and is also slightly below the previous administration’s $722 billion FY 2022 request for the DoD. This is the first budget over the past decade that is not restricted by the discretionary spending caps under the Budget Control Act of 2011. The FY 2022 proposal also ends the “off-budget” funding pool known as the Overseas Contingency Operations, or ~~OCO,~~(“OCO”) account. A five-year Future Years Defense Program strategic priority

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spending plan that is typically submitted annually along with that year’s annual budget request ~~has~~was not ~~been~~ submitted at this time. The FY 2022 National Security budget includes a focus on research and development for new technologies to address peer and near peer threats, including ~~specifically~~ China. The FY 2022 budget request prioritizes defense research and development, test and evaluation funding to invest in breakthrough technologies that are also focused on innovation and the development of next generation defense capabilities. The FY 2022 budget request also supports the DoD’s plan to divest legacy systems and programs in order to redirect the related resources to innovation, new technology and new programs, platforms and systems.

The budget environment, including COVID-19 spending increases proposed by the Biden administration, and uncertainty surrounding the debt ceiling and the appropriations process, remain significant short and long-term risks. Considerable uncertainty exists regarding how future budget and program decisions will unfold, including the defense spending priorities of the ~~Administration~~Biden administration and Congress.

To avert a government shutdown, on September 30, 2021, one day before the start of the U.S. Government’s FY 2022, President Biden signed H.R. 5305,a Continuing Resolution (“CR” )), into law. The CR ~~continues~~continued funding of most current programs and activities at FY 2021 government funding levels through December 3, ~~2021,~~ 2021(i.e. a Continuing Resolution Authorization (“CRA”)). While a CRA temporarily allows continued funding of contracts and programs at prior fiscal year levels, a CRA also restricts new contract and program starts and restricts planned increases on existing production and other contracts, presenting resource allocation challenges for the Government ~~customer~~ and placing limitations on future planned program budgets. Congress subsequently passed three additional CRs extending through March, 15, 2022.

On ~~October 14, 2021~~March 15, 2022, President Biden signed ~~legislation temporarily raising~~into law the ~~U.S. Government’s borrowing limits by $480 Billion. The~~Fiscal Year 2022 National Security Budget of $782 billion, a 5.6% increase ~~in borrowing limit~~over the previous year. On March 28, 2022, the Biden administration submitted to Congress a proposed fiscal year 2023 Budget Request of $813.3 Billion for National Security, $773 million of which is ~~expected to keep~~for the ~~US Federal Government funded through early December, 2021. If an annual appropriations bill for fiscal 2022 is not timely enacted, we may face another government shutdown~~Department of unknown duration. If a prolonged CRA and/or government shutdown of the DoD were to occur, it could result in program cancellations, disruptions and/or stop work orders and could limit the U.S. Government’s ability to effectively progress programs and to make timely payments, and our ability to perform on our U.S. Government contracts and successfully compete for new work.Defense.

We believe continued budget pressures, CRAs, Federal Government debt ceiling issues, or Federal Government shutdowns would have serious negative consequences for the security of our country, the defense industrial base, including the Company and the customers, employees, suppliers, investors, and communities that rely on companies in the defense industrial base. It is likely 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 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 partners, teammates, subcontractors and suppliers, and our employee base. While we believe that our business is well-positioned in areas that the DoD and other customers indicate are priorities for future defense spending, including in the ~~2018 and 2020~~2022 National Defense Strategy, ~~documents,~~which was submitted to Congress in March 2022, the short and long-term impact of federal budgetary uncertainty, CRAs, the BCA or similar budgetary restrictions or limitations, other defense spending cuts, challenges in the appropriations process, the debt ceiling and the ongoing fiscal debates remain uncertain. Such a challenging federal and DoD budgetary environment may negatively impact our business and programs and could have a material adverse effect on our forecasts, estimates, financial position, results of operations and/or cash flows.

The nature of our operations ~~expose~~exposes us to risks associated with pandemics, epidemics or other public health emergencies, such as the outbreak of COVID-19. In March 2020, the World Health Organization categorized COVID-19 as a pandemic, and the ~~President of the United States~~Trump administration declared the COVID-19 outbreak a national emergency. The COVID-19 outbreak has resulted in governments around the world, including the U.S. Government and the DoD, implementing measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business curtailments, school closures, and other measures. In addition, governments and central banks in several parts of the world have enacted fiscal and monetary stimulus measures to counteract the impacts of COVID-19.

We are a company operating in a “critical infrastructure industry”, as defined by the U.S. Department of Homeland Security. Consistent with federal guidelines and with state and local orders to date, we ~~currently continue~~have continued to operate, including our international operations. Notwithstanding our continued operations, COVID-19 has had and is currently expected to continue to have negative impacts on certain of our operations, workforce, supply chain, vendors, transportation networks and customers,

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which have reduced certain of our sales and our margins, including as a result of preventative and precautionary measures that we, our suppliers, other businesses and governments are taking. The COVID-19 outbreak is a widespread public health crisis that is adversely affecting the economies and financial markets globally. Any resulting economic downturn could adversely affect demand for our products. The progression of ~~this matter~~COVID-19 could also negatively impact our business or results of operations through the temporary closure of our operating locations or those of our customers or suppliers.

The ability of our employees, our suppliers’ and our customers’ employees to work may be significantly impacted by individuals contracting or being exposed to COVID-19, or as a result of the control measures noted above, which may significantly hamper our production and operations, including throughout the supply chain. On March 27, 2020, the

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Coronavirus Aid, Relief and Economic Security Act, a $2 trillion economic relief bill, was signed into law. Subsequently, on March 11, 2021, the American Rescue Plan Act, a $1.9 trillion economic stimulus bill was enacted. ~~We are continuing to evaluate the impact of these two budget packages including related stimulus and economic relief actions on our business.~~

Since the end of the first quarter of 2020, COVID-19 has continued to impact our customers, markets and operations, including supply chain disruptions, delays of certain supplier deliveries, difficulties gaining access to certain locations, difficulties gaining access to customers, including instances related to previously scheduled drone and rocket system flights, demonstrations and exercises, and decreased demand requirements of certain of our commercial aero, power and satcom customers. ~~Importantly, COVID-19~~Additionally, customer and contractor-related travel and social distancing restrictions have delayed a number of our target drone, tactical drone and rocket system programs, missions and ~~exercises.~~exercises, and has delayed delivery and execution on certain of our international commercial satcom projects. Despite progress in vaccination efforts, global economic activity remains uncertain and cannot be predicted with confidence. Further, in the first half of 2021, a new Delta variant of COVID-19 began to spread globally and caused an increase in COVID-19 cases in many places in the United States. In November 2021, a new Omicron variant, which appears to be the most transmissible variant to date, was detected, which has since caused an increase in COVID-19 cases in multiple countries, including the United States. Public health officials and medical professionals have warned that COVID-19 cases may continue to spike due to the Delta variant and/or the Omicron or other variants, particularly if vaccination rates do not quickly increase or if additional, potent disease variants emerge. It is unclear how long the resurgence due to Delta or the resurgence due to Omicron will last, how severe the Delta resurgence or Omicron resurgence will be, and what safety measures governments will impose in response to the Delta resurgence or Omicron resurgence. The extent to which COVID-19 may further impact our business depends on future developments, which are highly uncertain and unpredictable, including new information concerning the severity of the outbreak and the effectiveness of actions globally to contain or mitigate its effects. Notably, a new Delta variant of COVID-19, which appears to be the most transmissible variant to date, has begun to spread globally. The impact of the Delta variant, or any additional or new variants, cannot be predicted at this time, and could depend on numerous factors, including vaccination rates among the population, the effectiveness of COVID-19 vaccines against the Delta variant and the response by governmental bodies and regulators.

While we currently do not expect ~~this matter~~COVID-19 to have a material impact on our results of operations, cash flows and financial position, the current level of uncertainty over the economic, business and operational impacts of COVID-19, including the impact on employee absenteeism, vendor and supply chain and other resources, means the related financial impact cannot be reasonably estimated at this time. Our Condensed Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations reflect estimates and assumptions made by management as of ~~September 26, 2021.~~March 27, 2022. Events and changes in circumstances arising after ~~September 26, 2021,~~March 27, 2022, including those resulting from the continuing impacts of COVID-19, will be reflected in management’s estimates for future periods.

On September 9, 2021 President Biden signed an Executive Order requiring all employees of federal contractors to be fully vaccinated for COVID-19 by December 8, 2021, unless exempted for certain limited medical or religious exceptions. The Company is endeavoring to comply with this Executive Order, which also applies to substantially all of the Company’s employees, vendors, suppliers, partners, customers, subcontractors and consultants. At this time, the Company does not believe that the Biden Executive Order will have a material impact on our results of operations, cash flows and financial position. However, if the Executive Order were to result in significant attrition of our employees, or similar disruptions to the Company’s supply chain, such matters could have an adverse impact on our Revenues or Costs.

Reportable Segments

The Company currently operates in two reportable segments. The ~~Kratos Government Solutions (“KGS”)~~KGS reportable segment is comprised of an aggregation of KGS operating segments, including our microwave electronic products, space and satellite communications, training and cybersecurity, 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, unmanned ground, unmanned seaborne and command, control and communications system businesses.

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 11 of the accompanying Condensed Consolidated Financial Statements. From a customer and solutions perspective, we view our business as an integrated whole, leveraging skills and assets wherever possible.

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Comparison of Results for the Three Months Ended ~~September 26, 2021~~March 27, 2022 to the Three Months Ended ~~September 27, 2020~~March 28, 2021

Revenues. Revenues by operating segment for the three months ended ~~September 26,~~March 27, 2022 and March 28, 2021 ~~and September 27, 2020~~ are as follows (dollars in millions):


		September 26, 2021		September 27, 2020		$ change		% change			March 27, 2022		March 28, 2021		$ change		% change
Kratos Government Solutions	Kratos Government Solutions									Kratos Government Solutions
Service revenues	Service revenues	$	50.5	$	67.6	$	(17.1)	(25.3)	%	Service revenues	$	66.8	$	56.1	$	10.7	19.1	%
Product sales	Product sales	88.8		80.9		7.9		9.8	%	Product sales	76.8		82.2		(5.4)		(6.6)	%
Total Kratos Government Solutions	Total Kratos Government Solutions	139.3		148.5		(9.2)		(6.2)	%	Total Kratos Government Solutions	143.6		138.3		5.3		3.8	%

Unmanned Systems	Unmanned Systems									Unmanned Systems
Service revenues	Service revenues	1.1		$	—	$	1.1	—	%	Service revenues	1.1		$	1.2	$	(0.1)	—	%
Product sales	Product sales	60.2		53.5		6.7		12.5	%	Product sales	51.5		54.7		(3.2)		(5.9)	%
Total Unmanned Systems	Total Unmanned Systems	61.3		53.5		7.8		14.6	%	Total Unmanned Systems	52.6		55.9		(3.3)		(5.9)	%
Total revenues	Total revenues	$	200.6	$	202.0	$	(1.4)	(0.7)	%	Total revenues	$	196.2	$	194.2	$	2.0	1.0	%

Total service revenues	Total service revenues	$	51.6	$	67.6	$	(16.0)	(23.7)	%	Total service revenues	$	67.9	$	57.3	$	10.6	18.5	%
Total product sales	Total product sales	149.0		134.4		14.6		10.9	%	Total product sales	128.3		136.9		(8.6)		(6.3)	%
Total revenues	Total revenues	$	200.6	$	202.0	$	(1.4)	(0.7)	%	Total revenues	$	196.2	$	194.2	$	2.0	1.0	%

Revenues ~~decreased $1.4~~increased $2.0 million to ~~$200.6~~$196.2 million for the three months ended ~~September 26, 2021~~March 27, 2022 from ~~$202.0~~$194.2 million for the three months ended ~~September 27, 2020.~~March 28, 2021. Revenues in our KGS segment ~~decreased $9.2~~increased $5.3 million due to the contribution of $14.7 million in revenues from the recent acquisitions of Cosmic and CTT, and an increase of $1.3 million in our space and satellite communications businesses, which is net of an adverse impact of $7.1 million primarily ~~due~~related to ~~a $6.2 million reduction of legacy government services revenues, a $5.5~~supply chain delays and disruptions in our commercial satellite business, partially offset by an $8.3 million reduction related to an international training contract and ~~decreases~~a decrease in our C5ISR and microwave electronics businesses of approximately $7.1 million, offset partially by increases in our space and satellite communications businesses, including the CPI ASC Signal Division, Inc. (“ASC Signal”) acquired business of approximately ~~$10.7~~$2.7 million. Revenues in our US segment ~~increased $7.8~~decreased $3.3 million to ~~$61.3~~$52.6 million for the three months ended ~~September 26, 2021,~~March 27, 2022, primarily due to ~~work performed~~a reduction in volume based upon production and build cycles on ~~our AFSAT 167 production contracts and Valkyrie programs.~~the SSAT 177 program as compared to the three months ended March 28, 2021.

Product sales ~~increased $14.6~~decreased $8.6 million to ~~$149.0~~$128.3 million for the three months ended ~~September 26, 2021~~March 27, 2022 from ~~$134.4~~$136.9 million for the three months ended ~~September 27, 2020,~~March 28, 2021, primarily as a result of ~~increased~~decreased production in our US segment and our space and satellite ~~business, as well as higher turbine technologies product sales (which were partially offset by lower turbine technologies service revenue).~~business. As a percentage of total revenue, product sales were ~~74.3%~~65.4% for the three months ended ~~September 26, 2021~~March 27, 2022 as compared to ~~66.5%~~70.5% for the three months ended ~~September 27, 2020.~~March 28, 2021. Service revenues ~~decreased~~increased by ~~$16.0~~$10.6 million to ~~$51.6~~$67.9 million for the three months ended ~~September 26, 2021~~March 27, 2022 from ~~$67.6~~$57.3 million for the three months ended ~~September 27, 2020. The decrease was~~March 28, 2021, primarily ~~related to lower revenues in our legacy government services business, training solutions and commercial turbine technologies service revenue~~ as ~~noted above.~~a result of the recent Cosmic acquisition.

Cost of ~~Revenues.~~Revenues. Cost of revenues ~~decreased $4.9~~increased $1.1 million to ~~$140.0~~$144.3 million for the three months ended ~~September 26, 2021~~March 27, 2022 from ~~$144.9~~$143.2 million for the three months ended ~~September 27, 2020.~~March 28, 2021. The ~~decrease~~increase in cost of revenues was primarily a result of the ~~decrease~~increase in revenues.

Gross Margin. Gross margin increased to ~~30.2%~~26.5% for the three months ended ~~September 26, 2021~~March 27, 2022 from ~~28.3%~~26.3% for the three months ended ~~September 27, 2020.~~March 28, 2021. Margins on services increased to ~~31.2%~~26.5% for the three months ended ~~September 26, 2021~~March 27, 2022 from ~~25.3%~~25.8% for the three months ended ~~September 27, 2020,~~March 28, 2021, due primarily to a more favorable mix of revenues. Margins on products ~~increased to 29.9%~~remained the same at 26.4% for the three months ended ~~September 26, 2021 from 29.8% for the three months ended September~~March 27, ~~2020.~~2022 and March 28, 2021. Margins in the KGS segment increased to ~~34.3%~~28.6% for the three months ended ~~September 26, 2021~~March 27, 2022 from ~~30.7%~~28.2% for the three months ended ~~September 27, 2020,~~March 28, 2021, primarily due to a more favorable mix of revenues. Margins in the US segment decreased to ~~20.9%~~20.5% for the three months ended ~~September 26, 2021~~March 27, 2022 from 21.5% for the three months ended ~~September 27, 2020,~~March 28, 2021, primarily due to a less favorable mix of products produced and shipped in the three months ended ~~September 26, 2021.~~March 27, 2022.

Selling, General and Administrative (“SG&A”) ~~Expenses.~~Expenses. SG&A expense increased ~~$5.5~~$5.4 million to ~~$41.8~~$43.3 million for the three months ended ~~September 26, 2021~~March 27, 2022 from ~~$36.3~~$37.9 million for the three months ended ~~September 27, 2020.~~March 28, 2021. As a percentage of revenues, SG&A increased to ~~20.8%~~22.1% at ~~September 26, 2021~~March 27, 2022 from ~~18.0%~~19.5% at ~~September 27, 2020.~~March 28, 2021. Included in SG&A was ~~an increase~~the impact of ~~$1.4~~the recent CTT and Cosmic acquisitions.

Research and Development (“R&D”) Expenses. R&D expenses increased $1.2 million ~~of stock compensation expense from $5.0~~to $9.2 million for the three months ended ~~September~~March 27, ~~2020 to $6.4~~2022 from $8.0 million for the three months ended ~~September 26, 2021.~~March 28, 2021, primarily due to increased development efforts in our Unmanned Systems business. As a percentage of revenues, R&D increased to 4.7% for the three

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~~Research and Development (“R&D”) Expenses. R&D expenses increased $0.3 million to $8.0 million~~months ended March 27, 2022 from 4.1% for the three months ended September 26, 2021 from $7.7 million for the three months ended September 27, 2020. As a percentage of revenues, R&D increased to 4.0% for the three months ended September 26, 2021 from 3.8% for the three months ended September 27, 2020.March 28, 2021. 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~~increased to ~~$0.0~~$0.3 million from ~~$0.3~~$0.0 million for the three months ended ~~September 26,~~March 27, 2022 and March 28, 2021, ~~and September 27, 2020,~~ respectively.

Total Other Expense, Net. Total other expense, net increased to ~~$5.9~~$18.8 million from ~~$5.1~~$5.7 million for the three months ended ~~September 26,~~March 27, 2022 and March 28, 2021, ~~and September 27, 2020,~~ respectively. The increase in expense of $13.1 million was primarily related to the $13.0 million loss on the extinguishment of our Senior Secured Notes.

~~Provision~~Benefit for Income Taxes from Continuing Operations. The income tax ~~expense~~benefit from continuing operations for the three months ended ~~September 26,~~March 27, 2022 and March 28, 2021 ~~and September 27, 2020~~ was ~~$5.7~~$4.3 million and ~~$5.0~~$2.7 million, respectively. For the three months ended ~~September 26,~~March 27, 2022, the Company has 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. For the three months ended March 28, 2021, the income tax expense was 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, and the projected income or loss for the year.

Loss from Discontinued Operations. The loss from discontinued operations was ~~$0.8~~$0.2 million for the three months ended ~~September 26, 2021,~~March 27, 2022, primarily reflecting costs related to the ~~ongoing closing~~settlement of the working capital dispute with the buyer of the Kratos Public Safety & Security Solutions, Inc. (“PSS”) business, and ~~$0.2~~$0.0 million for the three months ended ~~September 27, 2020.~~

~~Comparison of Results for the Nine Months Ended September 26, 2021 to the Nine Months Ended September 27, 2020~~

~~Revenues. Revenues by operating segment for the nine months ended September 26, 2021 and September 27, 2020 are as follows (dollars in millions):~~

September 26, 2021 September 27, 2020 $ change % change
Kratos Government Solutions
Service revenues $ 163.3 $ 194.1 $ (30.8) (15.9) %
Product sales 259.1 209.7 49.4 23.6 %
Total Kratos Government Solutions 422.4 403.8 18.6 4.6 %
Unmanned Systems
Service revenues 3.6 — 3.6 — %
Product sales 173.9 137.5 36.4 26.5 %
Total Unmanned Systems 177.5 137.5 40.0 29.1 %
Total revenues $ 599.9 $ 541.3 $ 58.6 10.8 %
Total service revenues $ 166.9 $ 194.1 $ (27.2) (14.0) %
Total product sales 433.0 347.2 85.8 24.7 %
Total revenues $ 599.9 $ 541.3 $ 58.6 10.8 %

Revenues increased $58.6 million to $599.9 million for the nine months ended September 26, 2021 from $541.3 million for the nine months ended September 27, 2020. Revenues in our KGS segment increased $18.6 million, primarily due to the increase in revenue of approximately $18.6 million from ASC Signal, which we acquired in June 2020.Also included in the KGS segment are increased revenues in our space and satellite business (excluding ASC Signal) of $19.1 million, offset by reductions in our training business of $16.7 million and reductions of $2.2 million in our C5ISR business. Revenues in our US segment increased $40.0 million to $177.5 million for the nine months ended September 26, 2021 primarily due to work performed on our SSAT 177, AFSAT 167 and Valkyrie programs, and due to contributions of approximately $3.6 million from the 5-D Systems, Inc. (“5-D Systems”) acquisition.

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Product sales increased $85.8 million to $433.0 million for the nine months ended September 26, 2021 from $347.2 million for the nine months ended September 27, 2020, primarily as a result of increased production activity in our US segment, microwave products, space and satellite business, including the ASC Signal acquisition, and higher turbine technologies product sales (which were offset by lower commercial turbine technologies service revenue). As a percentage of total revenue, product sales were 72.2% for the nine months ended September 26, 2021 as compared to 64.1% for the nine months ended September 27, 2020. Service revenues decreased by $27.2 million to $166.9 million for the nine months ended September 26, 2021 from $194.1 million for the nine months ended September 27, 2020. The decrease was primarily related to lower turbine technologies service revenue (which was offset by higher turbine technologies product sales as noted above), reductions in our training solutions business, as well as impacts resulting from COVID-19.

~~Cost of Revenues~~. Cost of revenues increased $43.9 million to $436.3 million for the nine months ended September 26, 2021 from $392.4 million for the nine months ended September 27, 2020. The increase in cost of revenues was primarily a result of the increase in product sales discussed above.

Gross margin decreased to 27.3% for the nine months ended September 26, 2021 from 27.5% for the nine months ended September 27, 2020. Margins on services increased to 28.5% for the nine months ended September 26, 2021 from 26.9% for the nine months ended September 27, 2020. Margins on product sales decreased to 26.8% for the nine months ended September 26, 2021 from 27.9% for the nine months ended September 27, 2020, primarily due to a less favorable mix of certain programs with an increase in developmental programs. Margins in the KGS segment remained the same at 29.9% for the nine months ended September 26, 2021 and September 27, 2020. Margins in the US segment increased to 21.1% for the nine months ended September 26, 2021 from 20.6% for the nine months ended September 27, 2020, primarily due to a more favorable mix of products produced and shipped during the nine months ended September 26, 2021.

~~SG&A Expenses~~. SG&A expense was $117.9 million for the nine months ended September 26, 2021 and $107.2 million for the nine months ended September 27, 2020. As a percentage of revenues, SG&A decreased to 19.7% at September 26, 2021 from 19.8% at September 27, 2020.Included in SG&A was an increase of $4.7 million of stock compensation expense from $14.5 million for the nine months ended September 27, 2020 to $19.2 million for the nine months ended September 26,March 28, 2021.

~~R&D Expenses~~. R&D expenses were $26.2 million for the nine months ended September 26, 2021 and $19.4 million for the nine months ended September 27, 2020, with the primary increases in expenses being in our space and satellite communications business. As a percentage of revenues, R&D increased to 4.4% for the nine months ended September 26, 2021 from 3.6% for the nine months ended September 27, 2020.

~~Restructuring Expenses and Other~~. Restructuring expenses and other decreased to $0.2 million for the nine months ended September 26, 2021 from $0.5 million for the nine months ended September 27, 2020. These expenses are primarily employee termination costs related to personnel reduction actions taken in each period.

~~Total Other Expense, Net. Total other expense, net, increased to $17.3 million from $16.3 million for the nine months ended September 26, 2021 and September 27, 2020, respectively~~.

~~Provision (Benefit) for Income Taxes from Continuing Operations~~. The income tax benefit from continuing operations for the nine months ended September 26, 2021 was $0.6 million and the income tax expense from continuing operations for the nine months ended September 27, 2020 was $1.8 million. For the nine months ended September 26, 2021, a $2.7 million tax benefit was recorded resulting from the federal and state impact of stock-based compensation related to restricted stock units. The remaining $2.1 million expense was 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, and the projected income or loss for the year.

~~Loss from Discontinued Operations.~~ The loss from discontinued operations was $1.1 million for the nine months ended September 26, 2021 and $0.8 million for the nine months ended September 27, 2020, primarily reflecting the work performed in relation to outstanding tasks on legacy projects retained by us following the sale of PSS, as well as costs related to the ongoing closing net working capital adjustment dispute with the buyer of the PSS business.

Backlog

On ~~September 26, 2021,~~March 27, 2022, we had approximately ~~$839.1~~$982.1 million of total backlog, of which ~~$618.0~~$685.7 million was funded. We expect to recognize approximately ~~24%~~50% of the remaining total backlog as revenue in ~~2021,~~fiscal year 2022, an additional ~~44%~~20% in ~~2022~~fiscal year 2023 and the balance thereafter. Our comparable total backlog balance as of ~~September 27, 2020,~~March 28, 2021, was approximately ~~$873.1~~$892.9 million of which ~~$579.3~~$620.7 million was funded.

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Total backlog is our estimate of the amount of revenue expected to be realized over the remaining life of awarded contracts and task orders that we have in hand as of the measurement date. Total backlog can 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 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 an estimate of the future revenue expected to be realized from commercial contracts that are under firm orders. Funded 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 subsequent appropriation and the procuring agency allocates funding to the contract.

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 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

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of what ultimate orders for Kratos’ systems, products and solutions will be. We do not include these expected amounts in its backlog until a related contract award is received.

Management believes that year-to-year comparisons of backlog are not necessarily indicative of future revenues. The actual timing of receipt of revenues, if any, on projects included in backlog could change because many factors affect the scheduling of projects. In addition, cancellations 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 ~~September 26, 2021,~~March 27, 2022, we had cash and cash equivalents of ~~$369.9~~$254.4 million compared with cash and cash equivalents of ~~$380.8~~$349.4 million as of December ~~27, 2020,~~26, 2021, which includes ~~$38.0~~$26.1 million and ~~$29.2~~$29.4 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, 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 foreign withholding taxes. We do not currently intend to repatriate these earnings.

Our total long-term debt ~~including principal due on our 6.5% Notes (as defined below), net of issuance costs decreased~~increased from ~~$301.5~~$296.7 million at December ~~27, 2020~~26, 2021 to ~~$296.5~~$298.4 million at ~~September 26, 2021, due to~~March 27, 2022. Under the ~~amortization~~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. We incurred debt issuance costs ~~during~~of $3.2 million associated with the ~~nine months ended September 26, 2021~~New Credit Facility. We have drawn approximately $200 million under the Term Loan A and $100 million on the new Revolving Credit Facility, with $100 million remaining in borrowing capacity, less $13.2 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 the Senior Secured Notes. The redemption of the outstanding $300 million of Senior Secured Notes 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. We 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.

We use our operating cash flow to finance trade accounts receivable, fund necessary increases in inventory, fund internal investments of engineering costs, fund capital expenditures, our internal research and development investments and our ongoing operations, service our debt, 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 ~~since~~because a number of our receivables are contractually billable and

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due to us only when certain contractual milestones are achieved. Financing increases in inventory balances is necessary to fulfill shipment requirements to meet delivery schedules of our customers. These financing requirements have increased recently due to actions we have taken to advance inventory levels in an attempt to mitigate supply chain disruptions and to bolster our inventory levels. 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~~increased from ~~133~~128 days as of December ~~27, 2020~~26, 2021 to ~~125~~130 days at ~~September 26, 2021,~~March 27, 2022, primarily reflecting ~~the achievement of certain~~outstanding contractual billing milestones. Our DSOs are impacted by the achievement of contractual billing milestones 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 projects, and therefore we are unable to contractually bill for amounts outstanding related to those milestones at this time.

In November 2019, a large training solutions program was terminated for convenience, (“or T for ~~C”)~~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) 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 ~~September 26, 2021,~~March 27, 2022, approximately ~~$8.2~~$10.8 million in unbilled receivables remain outstanding on this project. In March 2022, the Company and the

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customer agreed to a settlement of $6.0 million for a portion of the amounts outstanding on this project, which is expected to be collected in the third quarter of 2022. The remaining unbilled balance of $4.8 million is subject to negotiation and settlement with the customer. In addition, we are currently in dispute with an international customer in our US segment over approximately $10.0 million in unbilled receivables outstanding as of ~~September 26, 2021.~~March 27, 2022. The dispute concerns the completion of certain system requirements and contractual milestones. ~~The~~

~~Company alleges~~We allege breach of contract, as well as other claims against the customer and ~~seeks~~seek damages and other equitable relief. The customer has asserted counterclaims seeking liquidated damages and additional relief. We have evaluated the present facts of the matters and performed a reassessment of the contractual amounts due, as well as the claims asserted by each of the

parties, and have determined that no adjustment to previously recognized revenue, or the corresponding unbilled receivables, is necessary at ~~September 26, 2021.~~March 27, 2022.

A summary of our net cash provided by (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):


	Three Months Ended
	March 27, 2022		March 28, 2021
Net cash provided by (used in) operating activities from continuing operations	$	(7.9)	$	22.7
Net cash used in investing activities from continuing operations	(69.3)		(14.7)
Net cash used in financing activities from continuing operations	(17.2)		(4.8)
Net operating cash flows of discontinued operations	0.1		(0.5)

Nine Months Ended
September 26, 2021 September 27, 2020
Net cash provided by operating activities from continuing operations $ 34.6 $ 19.1
Net cash used in investing activities from continuing operations (35.1) (66.8)
Net cash provided by (used in) financing activities from continuing operations (9.0) 248.0
Net operating cash flows of discontinued operations (1.1) 2.1

Net cash used by operating activities from continuing operations was $7.9 million for the three months ended March 27, 2022, primarily as a result of the net loss of $15.9 million which was offset by the call premium on the redemption of the Senior Secured Notes of $9.8 million and the write-off of the $3.2 million of unamortized debt issuance costs. Net cash used by operating activities from continuing operations for the three months ended March 27, 2022 included the funding of inventory of $15.3 million, related to the bolstering of inventory levels in an attempt to mitigate supply chain disruptions. Net cash provided by operating activities from continuing operations ~~increased by $15.5 million to $34.6~~was $22.7 million for the ~~nine~~three months ended ~~September 26,~~March 28, 2021, ~~compared to $19.1~~primarily a result of the net income of $1.9 million, for the nine months ended September 27, 2020. Net cash provided by operating activities from continuing operations for the nine months ended September 26, 2021 was impacted by a decrease in income from continuing operations of $0.2 million to $2.0 million compared to income from continuing operations of $2.2 million for the nine months ended September 27, 2020. This decrease was offset by increases in stock compensation, depreciation, amortization and other noncash charges of ~~$4.2~~$14.9 million to $45.1 million for the nine months ended September 26, 2021 compared to $40.9 million the nine months ended September 27, 2020, as well as a reduction in changes in net working capital accounts of $11.5 million to $12.5 million for the nine months ended September 26, 2021 as compared toand changes of ~~$24.0~~$5.9 million in net working capital ~~accounts for the nine months ended September 27, 2020.~~accounts.

Net cash used in investing activities from continuing operations for the ~~nine~~three months ended ~~September 26, 2021~~March 27, 2022 is comprised of cash paid for acquisitions, net of cash acquired of $58.5 million, and $10.8 million in capital expenditures. Cash used for acquisitions included $37.7 million related to the acquisition of Cosmic Advanced Engineering Solutions, Inc., $15.8 million for the remaining purchase price due on the CTT Inc. acquisition, and a $5.0 million payment due under the acquisition agreement for ~~80.1% of Florida Turbine Technologies Inc. and 80.1% of FTT CORE, LLC (the “FTT acquisition agreement”), and capital expenditures,~~KTT Core, which ~~were partially offset by insurance proceeds.~~we purchased in February 2019. Capital expenditures ~~for the nine months ended September 26, 2021~~ consist primarily 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, including enhancements for secure facilities required for contracts we have been awarded or expected to be awarded, and include investments we are making to build capital aerial targets and related support equipment. Net cash used in investing activities from continuing operations for the ~~nine~~three months ended ~~September 27, 2020~~March 28, 2021 is comprised of ~~the acquisitions of ASC Signal, Technical Directions, Inc. and Optimized Performance Machining, Inc.,~~ a payment due under the ~~FTT~~KTT Core acquisition agreement, and capital expenditures, which consist primarily 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. During the ~~nine~~three months ended ~~September 26, 2021,~~March 27, 2022, capital expenditures of approximately ~~$20.9~~$5.4 million were incurred in our US business, primarily related to our unmanned combat target initiative. We expect our capital expenditures for our

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calendar year ~~2021~~2022 to continue to be significant for investments we are making, specifically in our US business totaling approximately $30 to $33 million, including approximately ~~$25~~$20 million for capital aerial targets and related support equipment.

Net cash used in financing activities from continuing operations was ~~$9.0~~$17.2 million for the ~~nine~~three months ended ~~September 26, 2021~~March 27, 2022 and ~~consisted primarily~~included $309.8 million used to redeem our $300 million of ~~repayment~~Senior Secured Notes including the call premium of ~~our Israel~~$9.8 million, debt issuance costs of ~~$5.1~~$3.2 million, payroll withholding taxes paid from vested restricted stock traded for taxes of ~~$9.1~~$6.8 million and payments made on financing lease obligations of ~~$0.7~~$0.3 million. These uses were partially offset by $300.0 million ~~offset by~~in proceeds from our New Credit Facility and employee stock purchase plan receipts of ~~$5.9~~$2.9 million. Net cash provided by financing activities from continuing operations was ~~$248.0~~$4.8 million for the ~~nine~~three months ended ~~September 27, 2020~~March 28, 2021 and consisted primarily of ~~net proceeds~~payroll withholding tax paid from vested restricted stock traded for taxes of ~~$240.4~~$7.1 million ~~from our equity offering~~and payments made on financing lease obligations of ~~approximately 15.5~~$0.2 million ~~shares~~offset by employee stock purchase plan receipts of ~~common stock.~~$2.5 million.

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The net operating cash flows of discontinued operations for the ~~nine~~three months ended ~~September 26, 2021~~March 27, 2022 was ~~a use of $1.1~~$0.1 million. The net operating cash flows of discontinued operations for the ~~nine~~three months ended ~~September 27, 2020~~March 28, 2021 was ~~$2.1~~a use of $0.5 million and was substantially related to approximately ~~$3.1~~$0.4 million ~~that was collected on amounts due related~~used to ~~the legacy projects retained by us following the sale our PSS business unit partially offset by the loss from operations~~pay outstanding liabilities from our discontinued PSS business ~~unit of $0.8 million.~~unit.

Contractual Obligations and Commitments

~~Issuance~~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, with a new 5-year $200 million Revolving Credit Facility and 5-year $200 million Term Loan A. The Company incurred debt issuance costs of $3.2 million associated with the New Credit Facility. The Company has drawn approximately $200 million under the Term Loan A and $100 million on the new Revolving Credit Facility, with $100 million remaining in borrowing capacity, less $13.2 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. The redemption of the Company’s outstanding $300 million 6.5% Senior Secured Notes due ~~2025~~

In November ~~2017, we issued and sold $300 million aggregate~~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 ~~6.5%~~debt of $9.8 million related to the call premium on the Senior Secured Notes ~~due 2025 (the “6.5% Notes”) in a private placement conducted pursuant to Rule 144A~~ and ~~Regulation S under~~ the ~~Securities Act~~write-off of ~~1933, as amended. We incurred~~$3.2 million of unamortized debt issuance costs resulting in a total loss on extinguishment of ~~$6.6 million associated with the 6.5% Notes. We utilized the net proceeds from the sale~~debt of the 6.5% Notes, as well as cash from an equity offering to extinguish the previously outstanding 7.00% Senior Secured Notes due 2019 (the “7% Notes”). The total reacquisition price of the 7% Notes was $385.2 million, including a $12.0 million call premium, and $0.3 million of accrued interest.$13.0 million.

The ~~6.5% Notes are~~New Credit Facility is governed by the ~~Indenture, dated as of November 20, 2017 (the “Indenture”), among~~“Credit Agreement, which establishes the Company, our existing and future domestic subsidiaries parties thereto (the “Subsidiary Guarantors”) and Wilmington Trust, National Association, as trustee and collateral agent. A Subsidiary Guarantor can be released from its guarantee if (a) all5-year senior secured credit facility which is comprised of the ~~capital stock issued~~$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 $200 million Term Loan A. The Credit Agreement contemplates uncommitted incremental credit facilities of up to $200 million (which amount would be reduced by ~~such Subsidiary Guarantor or all or substantially all~~the aggregate amount of the assets of such Subsidiary Guarantor are sold or otherwise disposed of; (b) we designate such Subsidiary Guarantor as an Unrestricted Subsidiary (as defined in the Indenture); (c) we exercise our legal defeasance option or our covenant defeasance option; or (d) upon satisfaction and discharge of the Indenture or payment in full in cash of the principal of, premium, if any and ~~accrued and unpaid interest on the 6.5% Notes.~~

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

~~The 6.5% Notes are redeemable by the Company, in whole or in part, at the respective redemption prices specified in~~

~~the Indenture. We may also be required to make an offer to purchase the 6.5% Notes upon a change of control and certain sales~~

~~of our assets.~~

The Indenture contains covenants limiting, among other things, our ability and the Subsidiary Guarantors’ ability to: (a) pay dividends on or make distributions or repurchase or redeem our capital stock or make other restricted payments; (b) incurAgreement) plus additional debt and guarantee debt; (c) prepay, redeem or repurchase certain debt; (d) issue certain preferred stock or similar equity securities; (e) make loans and investments; (f) sell assets; (g) incur liens; (h) consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; (i) enter into transactions with affiliates; and (j) enter into agreements restricting

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~~our ability and certain of its subsidiaries’ ability to pay dividends. These covenants are~~uncommitted incremental capacity subject to a ~~number of exceptions. As of September 26, 2021, we were in compliance with~~limitation based on the ~~covenants contained in the Indenture governing the 6.5% Notes.~~

~~As of September 26, 2021, there was $300.0 million of 6.5% Notes outstanding.~~

~~Other Indebtedness~~

~~Credit and Security Agreement~~

On November 20, 2017, we entered into an amended and restated credit and security agreement (as amended, the “Credit Agreement”), with the lenders from time to time party thereto, SunTrust Bank, as Agent (the “Agent”), PNC Bank, National Association (“PNC Bank”), as Joint Lead Arranger and Documentation Agent, and SunTrust Robinson Humphrey, Inc. (“SunTrust”), as Joint Lead Arranger and Sole Book Runner. The Credit Agreement established a five-year senior secured revolving credit facility in the aggregate principal amount of $90.0 million (subject to a potential increase of the aggregate principal amount to $115.0 million, subject to the Agent’s and applicable lenders’ approval as described therein), consisting of a subline for letters of credit in an amount not to exceed $50.0 million, as well as a swingline loan in an aggregate principal amount at any time outstanding not to exceed $10.0 million. The obligations under the Credit Agreement are secured by (i) a first priority lien on 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 our 6.5% Notes, on all of our other assets.additional uncommitted incremental capacity).

Borrowings under the revolving credit facility and the term loan credit facility may take the form of a base rate ~~revolving loan, Eurodollar revolving loan~~loans or ~~swingline loan.~~SOFR loans. Base rate ~~revolving~~ loans ~~and swingline loans~~under the Credit Agreement will bear interest at a rate per annum equal to the sum of the Applicable Margin (as defined in the Credit Agreement) from time to time in effect plus the highest of (i) the Agent’s prime lending rate, as in effect at such time, (ii) the ~~federal funds rate,~~Federal Funds Rate (as defined in the Credit Agreement), as in effect at such time, plus 0.50% ~~per annum and~~, (iii) the Adjusted ~~LIBO Rate~~Term SOFR (as defined in the Credit Agreement) ~~determined at~~for a one-month tenor in effect on such ~~time for an interest period of one month,~~day, plus 1.00% ~~per annum. Eurodollar revolving~~and (iv) 1.00%. SOFR loans will bear interest at a rate per annum equal to the sum of the Applicable Margin from time to time in effect plus the Adjusted ~~LIBO Rate.~~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 ~~1.00%-1.50%~~1.25% and 2.25% per annum for SOFR loans and between 0.25% and 1.25% per annum for base rate ~~revolving loans and swingline loans and 2.00%-2.50% for Eurodollar~~ loans, and is based on ~~several factors including our then-existing borrowing base and~~ the ~~lenders’~~Company’s total ~~commitment amount and revolving credit exposure. The calculation of our borrowing base takes into account several items relating~~net leverage ratio from time to ~~us and our subsidiaries, including amounts due and owing under billed and unbilled accounts receivable, then held eligible raw materials inventory, work-in-process inventory, and applicable reserves.~~time.

~~As of September 26, 2021, there were no borrowings outstanding~~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 ~~$6.6 million~~investments, and places limits on various other payments. The Company was ~~outstanding on letters of credit, resulting in net borrowing base availability of $62.6 million. We were~~ in compliance with the ~~financial~~ covenants ofcontained in the Credit Agreement as of ~~September 26, 2021.~~March 27, 2022.

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 Company incurred debt issuance costs of $6.6 million associated with the Senior Secured Notes. The Senior Secured Notes were redeemed on March 14, 2022.

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Other Indebtedness

Credit and Security Agreement

On November 20, 2017, the Company entered into the Credit and Security Agreement, which established a five-year senior secured revolving credit facility in the aggregate principal amount of $90.0 million (subject to a potential increase of the aggregate principal amount to $115.0 million, subject to the agent’s and applicable lenders’ approval), 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 Credit and Security Agreement was replaced by the New Credit Facility on February 18, 2022.

Israel Debt

During August 2020, wethe Company entered into two 5-year term loans with two banks in Israel representing an aggregate principal amount of approximately $5.1 million. These loans were subsidized by the State of Israel as part of a COVID-19 relief package with interest at Israeli NIS prime interest, plus a margin of 1.5%. The first year of interest was paid by the State of Israel with subsequent interest and principal payments due monthly, commencing in August 2021.We The Company repaid all amounts outstanding under this debt in the third quarter of fiscal year 2021.

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5-D Systems Loan

In connection with the acquisition of 5-D Systems, wethe Company assumed a loan in the amount of approximately $0.5 million with an interest rate of 1.0% that had been obtained under the Small Business Administration Paycheck Protection Program as part of a COVID-19 relief package. Payment of interest and principal was due monthly with the balance due in April 2022. The sellers of 5-D Systems applied for forgiveness of this loan, ~~and~~ the application was accepted and the loan was forgiven in July 2021.

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 ~~the~~our 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 Statements included in this Quarterly ~~Report.~~Report on Form 10-Q. The preparation of these Condensed 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 ~~the~~our Annual Report on Form 10-K.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Since December ~~27, 2020,~~26, 2021, there have been no material changes in the quantitative or qualitative aspects of our market risk profile. For additional information regarding ~~the Company’s~~our exposure to certain market risks, see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” included in ~~the~~our Annual Report on Form 10-K.

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Item 4. Controls and Procedures.

Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures.

As required by Rule 13a-15(b) promulgated under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report.

Based on the foregoing, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of ~~September 26, 2021.~~March 27, 2022.

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Changes in Internal Control Over Financial Reporting

We operate under the ~~COSO (Committee~~Committee of Sponsoring ~~Organizations)~~Organizations 2013 Framework. There was no change in our internal control over financial reporting during the three months ended ~~September 26, 2021~~March 27, 2022 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 1514 of the Notes to Condensed Consolidated Financial Statements contained within this Quarterly Report 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 1A. to Part I of ~~the~~our 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. During the period covered by this Quarterly Report on Form 10-Q, there have been no material changes in our risk factors as previously disclosed.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

3833

Table of Contents

Item 6. Exhibits.

Incorporated by
Reference

Exhibit
Number

Exhibit Description

Form

Filing Date/
Period End
Date

Exhibit

Filed-
Furnished
Herewith

Exhibit
Number

Exhibit Description

Form

Filing Date/
Period End
Date

Exhibit

Filed-
Furnished
Herewith

2.1

Stock Purchase Agreement, dated February 28, 2018, among Kratos Defense & Security Solutions, Inc., Kratos Public Safety & Security Solutions, Inc. and Securitas Electronic Security, Inc.

10-Q

05/10/2018
(001-34460)

2.2

2.1

Stock Purchase Agreement, dated February 28, 2018, among Kratos Defense & Security Solutions, Inc., Kratos Public Safety & Security Solutions, Inc. and Securitas Electronic Security, Inc.

10-Q

05/10/2018
(001-34460)

2.2

2.2**

Purchase Agreement, dated February 27, 2019, by and among Kratos Defense & Security Solutions, Inc., Shirley Brostmeyer, (“SB”), Joseph Brostmeyer (“JB”), certain trusts established by SB, JB and members of their immediate family, and JB, as the Sellers Representative.

10-Q

05/08/2019
(001-34460)

2.3

2.2**

10-Q

05/08/2019
(001-34460)

2.3

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

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

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

Specimen Stock Certificate.

10-K

02/27/2017
(001-34460)

4.1

4.2

Indenture, dated as of November 20, 2017, among Kratos Defense & Security Solutions, Inc., as Issuer, the Guarantors party thereto, and Wilmington Trust, National Association, as Trustee and Collateral Agent.

8-K

11/21/2017
(001-34460)

4.1

4.3

First Supplemental Indenture, dated as of December 21, 2017, among Kratos Defense & Security Solutions, Inc., as Issuer, the Guarantor as party thereto, and Wilmington Trust, National Association, as Trustee.

10-K

02/28/2018
(001-34460)

4.5

10.1*#

Credit Agreement, dated as of February 18, 2022, among Kratos Defense and Security Solutions, Inc., as Borrower, the lenders from time to time party hereto, and Truist Bank, as Administrative Agent.

8-K

2/22/2022
(001-34460)

10.1

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002.

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

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.

32.1

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.

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.INS

XBRL Instance Document-the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.INS

XBRL Instance Document-the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH

XBRL Taxonomy Extension Schema Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

3934

Table of Contents

Incorporated by
Reference

Exhibit
Number

Exhibit Description

Form

Filing Date/
Period End
Date

Exhibit

Filed-
Furnished
Herewith

~~101.DEF~~

~~XBRL Taxonomy Extension Definition Linkbase Document~~

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

* Certain confidential portions of the exhibit have been redacted from the filed version of the exhibit and are marked with a [***]. The Company agrees to furnish supplementally to the Securities and Exchange Commission an unredacted copy of the exhibit upon request.

** Certain confidential information contained in this Exhibit has been omitted because it is both (i) not material and (ii) the type of information that the registrant treats as private or confidential.

# Certain schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company hereby undertakes to supplementally furnish copies of any omitted schedules and exhibits to the Securities and Exchange Commission upon request.

Table of Contents

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)


		By:	/s/ MARIA CERVANTES DE BURGREEN, CPA
			Maria Cervantes de Burgreen
			Vice President and Corporate Controller
			(Principal Accounting Officer)
Date:	~~November 3, 2021~~May 5, 2022

4136


	For the Three Months Ended				For the Nine Months Ended
	September 26, 2021		September 27, 2020		September 26, 2021		September 27, 2020
Income tax expense at federal statutory rate	$	1.0	$	1.6	$	0.3	$	0.8
State and foreign taxes, net of federal tax benefit and valuation allowance	2.1		1.9		0.6		1.2
Release of valuation allowance due to acquisitions	—		(0.1)		—		(1.0)

Nondeductible expenses and other	3.2		2.5		1.0		1.2
Impact of deferred tax liabilities for indefinite-lived assets	—		1.1		—		0.5
Increase in reserves for uncertain tax positions	0.4		2.2		0.5		1.2
Stock compensation - excess tax benefits	(0.1)		—		(2.7)		—
Federal impact of research & development tax credits	(0.9)		—		(0.3)		—
Decrease in federal valuation allowance	—		(4.2)		—		(2.1)
Provision (benefit) for income taxes from continuing operations	$	5.7	$	5.0	$	(0.6)	$	1.8