10-Q 1 ktos-20220626.htm 10-Q ktos-20220626
000106925812/252022Q2FALSE61http://fasb.org/us-gaap/2022#PropertyPlantAndEquipmentAndFinanceLeaseRightOfUseAssetAfterAccumulatedDepreciationAndAmortizationhttp://fasb.org/us-gaap/2022#PropertyPlantAndEquipmentAndFinanceLeaseRightOfUseAssetAfterAccumulatedDepreciationAndAmortizationhttp://fasb.org/us-gaap/2022#OtherLiabilitiesCurrenthttp://fasb.org/us-gaap/2022#OtherLiabilitiesCurrenthttp://fasb.org/us-gaap/2022#OtherLiabilitiesNoncurrenthttp://fasb.org/us-gaap/2022#OtherLiabilitiesNoncurrent00010692582021-12-272022-06-2600010692582022-07-29xbrli:shares00010692582022-06-26iso4217:USD00010692582021-12-26iso4217:USDxbrli:shares0001069258us-gaap:ServiceMember2022-03-282022-06-260001069258us-gaap:ServiceMember2021-03-292021-06-270001069258us-gaap:ServiceMember2021-12-272022-06-260001069258us-gaap:ServiceMember2020-12-282021-06-270001069258us-gaap:ProductMember2022-03-282022-06-260001069258us-gaap:ProductMember2021-03-292021-06-270001069258us-gaap:ProductMember2021-12-272022-06-260001069258us-gaap:ProductMember2020-12-282021-06-2700010692582022-03-282022-06-2600010692582021-03-292021-06-2700010692582020-12-282021-06-270001069258us-gaap:NoncontrollingInterestMember2021-03-280001069258us-gaap:CommonStockMember2021-03-280001069258us-gaap:AdditionalPaidInCapitalMember2021-03-280001069258us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-03-280001069258us-gaap:RetainedEarningsMember2021-03-2800010692582021-03-280001069258us-gaap:AdditionalPaidInCapitalMember2021-03-292021-06-270001069258us-gaap:CommonStockMember2021-03-292021-06-270001069258us-gaap:NoncontrollingInterestMember2021-03-292021-06-270001069258us-gaap:RetainedEarningsMember2021-03-292021-06-270001069258us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-03-292021-06-270001069258us-gaap:NoncontrollingInterestMember2021-06-270001069258us-gaap:CommonStockMember2021-06-270001069258us-gaap:AdditionalPaidInCapitalMember2021-06-270001069258us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-06-270001069258us-gaap:RetainedEarningsMember2021-06-2700010692582021-06-270001069258us-gaap:NoncontrollingInterestMember2022-03-270001069258us-gaap:CommonStockMember2022-03-270001069258us-gaap:AdditionalPaidInCapitalMember2022-03-270001069258us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-03-270001069258us-gaap:RetainedEarningsMember2022-03-2700010692582022-03-270001069258us-gaap:AdditionalPaidInCapitalMember2022-03-282022-06-260001069258us-gaap:CommonStockMember2022-03-282022-06-260001069258us-gaap:NoncontrollingInterestMember2022-03-282022-06-260001069258us-gaap:RetainedEarningsMember2022-03-282022-06-260001069258us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-03-282022-06-260001069258us-gaap:NoncontrollingInterestMember2022-06-260001069258us-gaap:CommonStockMember2022-06-260001069258us-gaap:AdditionalPaidInCapitalMember2022-06-260001069258us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-06-260001069258us-gaap:RetainedEarningsMember2022-06-260001069258us-gaap:NoncontrollingInterestMember2020-12-270001069258us-gaap:CommonStockMember2020-12-270001069258us-gaap:AdditionalPaidInCapitalMember2020-12-270001069258us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-12-270001069258us-gaap:RetainedEarningsMember2020-12-2700010692582020-12-270001069258us-gaap:AdditionalPaidInCapitalMember2020-12-282021-06-270001069258us-gaap:CommonStockMember2020-12-282021-06-270001069258us-gaap:NoncontrollingInterestMember2020-12-282021-06-270001069258us-gaap:RetainedEarningsMember2020-12-282021-06-270001069258us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-12-282021-06-270001069258us-gaap:NoncontrollingInterestMember2021-12-260001069258us-gaap:CommonStockMember2021-12-260001069258us-gaap:AdditionalPaidInCapitalMember2021-12-260001069258us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-12-260001069258us-gaap:RetainedEarningsMember2021-12-260001069258us-gaap:AdditionalPaidInCapitalMember2021-12-272022-06-260001069258us-gaap:CommonStockMember2021-12-272022-06-260001069258us-gaap:NoncontrollingInterestMember2021-12-272022-06-260001069258us-gaap:RetainedEarningsMember2021-12-272022-06-260001069258us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-12-272022-06-260001069258ktos:KTTCORELLCMember2022-06-26xbrli:pure0001069258ktos:CTTIncMember2021-12-102021-12-300001069258ktos:CTTIncMember2021-12-102021-12-100001069258ktos:CTTIncMember2021-12-302021-12-300001069258ktos:CosmicAdvancedEngineeringSolutionsIncMember2021-12-272021-12-270001069258ktos:CosmicAdvancedEngineeringSolutionsIncMember2021-12-270001069258us-gaap:TradeNamesMemberktos:CosmicAdvancedEngineeringSolutionsIncMember2021-12-272021-12-270001069258ktos:ContractsAndBacklogMemberktos:CosmicAdvancedEngineeringSolutionsIncMember2021-12-272021-12-270001069258ktos:CosmicAdvancedEngineeringSolutionsIncMemberus-gaap:CustomerRelationshipsMember2021-12-272021-12-270001069258us-gaap:DevelopedTechnologyRightsMemberktos:CosmicAdvancedEngineeringSolutionsIncMember2021-12-272021-12-270001069258ktos:CosmicAdvancedEngineeringSolutionsIncMember2022-03-282022-06-260001069258ktos:CosmicAdvancedEngineeringSolutionsIncMember2021-12-272022-06-260001069258ktos:SouthernResearchEngineeringDivisionMember2022-03-092022-03-090001069258ktos:CosmicAdvancedEngineeringSolutionsIncMember2022-05-230001069258us-gaap:TradeNamesMemberktos:CosmicAdvancedEngineeringSolutionsIncMember2022-05-232022-05-230001069258ktos:ContractsAndBacklogMemberktos:CosmicAdvancedEngineeringSolutionsIncMember2022-05-232022-05-230001069258ktos:CosmicAdvancedEngineeringSolutionsIncMemberus-gaap:CustomerRelationshipsMember2022-05-232022-05-230001069258ktos:CosmicAdvancedEngineeringSolutionsIncMemberus-gaap:InProcessResearchAndDevelopmentMember2022-05-232022-05-230001069258us-gaap:DevelopedTechnologyRightsMemberktos:CosmicAdvancedEngineeringSolutionsIncMember2022-05-232022-05-230001069258ktos:SouthernResearchEngineeringDivisionMember2022-03-282022-06-260001069258ktos:CosmicAdvancedEngineeringSolutionsIncMember2022-05-232022-05-2300010692582022-06-272022-06-2600010692582022-12-262022-06-260001069258ktos:TforCMemberus-gaap:UnbilledRevenuesMember2022-06-260001069258ktos:TforCMemberus-gaap:UnbilledRevenuesMember2022-03-012022-03-310001069258ktos:KratosUnmannedSystemsMember2022-06-260001069258ktos:KratosGovernmentSolutionsMemberus-gaap:FixedPriceContractMember2022-03-282022-06-260001069258ktos:KratosGovernmentSolutionsMemberus-gaap:FixedPriceContractMember2021-03-292021-06-270001069258ktos:KratosGovernmentSolutionsMemberus-gaap:FixedPriceContractMember2021-12-272022-06-260001069258ktos:KratosGovernmentSolutionsMemberus-gaap:FixedPriceContractMember2020-12-282021-06-270001069258ktos:KratosGovernmentSolutionsMemberktos:CostPlusFeeContractMember2022-03-282022-06-260001069258ktos:KratosGovernmentSolutionsMemberktos:CostPlusFeeContractMember2021-03-292021-06-270001069258ktos:KratosGovernmentSolutionsMemberktos:CostPlusFeeContractMember2021-12-272022-06-260001069258ktos:KratosGovernmentSolutionsMemberktos:CostPlusFeeContractMember2020-12-282021-06-270001069258ktos:KratosGovernmentSolutionsMemberus-gaap:TimeAndMaterialsContractMember2022-03-282022-06-260001069258ktos:KratosGovernmentSolutionsMemberus-gaap:TimeAndMaterialsContractMember2021-03-292021-06-270001069258ktos:KratosGovernmentSolutionsMemberus-gaap:TimeAndMaterialsContractMember2021-12-272022-06-260001069258ktos:KratosGovernmentSolutionsMemberus-gaap:TimeAndMaterialsContractMember2020-12-282021-06-270001069258ktos:KratosGovernmentSolutionsMember2022-03-282022-06-260001069258ktos:KratosGovernmentSolutionsMember2021-03-292021-06-270001069258ktos:KratosGovernmentSolutionsMember2021-12-272022-06-260001069258ktos:KratosGovernmentSolutionsMember2020-12-282021-06-270001069258us-gaap:FixedPriceContractMemberktos:KratosUnmannedSystemsMember2022-03-282022-06-260001069258us-gaap:FixedPriceContractMemberktos:KratosUnmannedSystemsMember2021-03-292021-06-270001069258us-gaap:FixedPriceContractMemberktos:KratosUnmannedSystemsMember2021-12-272022-06-260001069258us-gaap:FixedPriceContractMemberktos:KratosUnmannedSystemsMember2020-12-282021-06-270001069258ktos:CostPlusFeeContractMemberktos:KratosUnmannedSystemsMember2022-03-282022-06-260001069258ktos:CostPlusFeeContractMemberktos:KratosUnmannedSystemsMember2021-03-292021-06-270001069258ktos:CostPlusFeeContractMemberktos:KratosUnmannedSystemsMember2021-12-272022-06-260001069258ktos:CostPlusFeeContractMemberktos:KratosUnmannedSystemsMember2020-12-282021-06-270001069258us-gaap:TimeAndMaterialsContractMemberktos:KratosUnmannedSystemsMember2022-03-282022-06-260001069258us-gaap:TimeAndMaterialsContractMemberktos:KratosUnmannedSystemsMember2021-03-292021-06-270001069258us-gaap:TimeAndMaterialsContractMemberktos:KratosUnmannedSystemsMember2021-12-272022-06-260001069258us-gaap:TimeAndMaterialsContractMemberktos:KratosUnmannedSystemsMember2020-12-282021-06-270001069258ktos:KratosUnmannedSystemsMember2022-03-282022-06-260001069258ktos:KratosUnmannedSystemsMember2021-03-292021-06-270001069258ktos:KratosUnmannedSystemsMember2021-12-272022-06-260001069258ktos:KratosUnmannedSystemsMember2020-12-282021-06-270001069258ktos:KratosGovernmentSolutionsMemberktos:UnitedStatesGovernmentMember2022-03-282022-06-260001069258ktos:KratosGovernmentSolutionsMemberktos:UnitedStatesGovernmentMember2021-03-292021-06-270001069258ktos:KratosGovernmentSolutionsMemberktos:UnitedStatesGovernmentMember2021-12-272022-06-260001069258ktos:KratosGovernmentSolutionsMemberktos:UnitedStatesGovernmentMember2020-12-282021-06-270001069258ktos:KratosGovernmentSolutionsMemberktos:NonUSGovernmentMember2022-03-282022-06-260001069258ktos:KratosGovernmentSolutionsMemberktos:NonUSGovernmentMember2021-03-292021-06-270001069258ktos:KratosGovernmentSolutionsMemberktos:NonUSGovernmentMember2021-12-272022-06-260001069258ktos:KratosGovernmentSolutionsMemberktos:NonUSGovernmentMember2020-12-282021-06-270001069258ktos:KratosGovernmentSolutionsMemberktos:USCommercialMember2022-03-282022-06-260001069258ktos:KratosGovernmentSolutionsMemberktos:USCommercialMember2021-03-292021-06-270001069258ktos:KratosGovernmentSolutionsMemberktos:USCommercialMember2021-12-272022-06-260001069258ktos:KratosGovernmentSolutionsMemberktos:USCommercialMember2020-12-282021-06-270001069258ktos:UnitedStatesGovernmentMemberktos:KratosUnmannedSystemsMember2022-03-282022-06-260001069258ktos:UnitedStatesGovernmentMemberktos:KratosUnmannedSystemsMember2021-03-292021-06-270001069258ktos:UnitedStatesGovernmentMemberktos:KratosUnmannedSystemsMember2021-12-272022-06-260001069258ktos:UnitedStatesGovernmentMemberktos:KratosUnmannedSystemsMember2020-12-282021-06-270001069258ktos:NonUSGovernmentMemberktos:KratosUnmannedSystemsMember2022-03-282022-06-260001069258ktos:NonUSGovernmentMemberktos:KratosUnmannedSystemsMember2021-03-292021-06-270001069258ktos:NonUSGovernmentMemberktos:KratosUnmannedSystemsMember2021-12-272022-06-260001069258ktos:NonUSGovernmentMemberktos:KratosUnmannedSystemsMember2020-12-282021-06-270001069258ktos:USCommercialMemberktos:KratosUnmannedSystemsMember2022-03-282022-06-260001069258ktos:USCommercialMemberktos:KratosUnmannedSystemsMember2021-03-292021-06-270001069258ktos:USCommercialMemberktos:KratosUnmannedSystemsMember2021-12-272022-06-260001069258ktos:USCommercialMemberktos:KratosUnmannedSystemsMember2020-12-282021-06-270001069258ktos:PublicSafetyAndSecurityMemberus-gaap:DiscontinuedOperationsDisposedOfBySaleMember2018-06-110001069258ktos:PublicSafetyAndSecurityMemberus-gaap:DiscontinuedOperationsDisposedOfBySaleMember2018-06-112022-06-260001069258ktos:PublicSafetyAndSecurityMemberus-gaap:DiscontinuedOperationsDisposedOfBySaleMember2021-12-272022-06-260001069258ktos:KratosGovernmentSolutionsMember2022-06-260001069258ktos:KratosGovernmentSolutionsMember2021-12-260001069258ktos:KratosUnmannedSystemsMember2021-12-260001069258us-gaap:CustomerRelationshipsMember2022-06-260001069258us-gaap:CustomerRelationshipsMember2021-12-260001069258ktos:ContractsAndBacklogMember2022-06-260001069258ktos:ContractsAndBacklogMember2021-12-260001069258us-gaap:DevelopedTechnologyRightsMember2022-06-260001069258us-gaap:DevelopedTechnologyRightsMember2021-12-260001069258us-gaap:TradeNamesMember2022-06-260001069258us-gaap:TradeNamesMember2021-12-260001069258us-gaap:InProcessResearchAndDevelopmentMember2022-06-260001069258us-gaap:InProcessResearchAndDevelopmentMember2021-12-260001069258us-gaap:TradeNamesMember2022-06-260001069258us-gaap:TradeNamesMember2021-12-260001069258ktos:StockOptionsAndStockAwardsMember2022-03-282022-06-260001069258ktos:StockOptionsAndStockAwardsMember2021-12-272022-06-260001069258us-gaap:RevolvingCreditFacilityMember2022-02-180001069258us-gaap:SeniorNotesMemberktos:SixPointFivePercentSeniorSecuredNotesDue2025Member2022-02-180001069258us-gaap:RevolvingCreditFacilityMemberktos:NewRevolvingCreditFacilityMember2022-02-182022-02-180001069258us-gaap:RevolvingCreditFacilityMemberktos:NewRevolvingCreditFacilityMember2022-02-180001069258us-gaap:SecuredDebtMemberktos:TermLoanAMember2022-02-182022-02-180001069258us-gaap:SecuredDebtMemberktos:TermLoanAMember2022-02-180001069258us-gaap:RevolvingCreditFacilityMemberktos:TermLoanAMember2022-02-182022-02-180001069258ktos:NewCreditFacilityMemberus-gaap:RevolvingCreditFacilityMember2022-02-182022-02-180001069258us-gaap:SeniorNotesMemberktos:SixPointFivePercentSeniorSecuredNotesDue2025Member2022-03-142022-03-140001069258us-gaap:SeniorNotesMember2022-03-140001069258us-gaap:SeniorNotesMember2022-03-142022-03-140001069258ktos:SwingLineLoanMemberktos:NewRevolvingCreditFacilityMember2022-02-180001069258us-gaap:LetterOfCreditMember2022-02-180001069258us-gaap:RevolvingCreditFacilityMember2022-02-182022-02-180001069258us-gaap:SecuredOvernightFinancingRateSofrOvernightIndexSwapRateMember2022-02-182022-02-180001069258us-gaap:SecuredOvernightFinancingRateSofrOvernightIndexSwapRateMembersrt:MinimumMember2022-02-182022-02-180001069258srt:MaximumMemberus-gaap:SecuredOvernightFinancingRateSofrOvernightIndexSwapRateMember2022-02-182022-02-180001069258us-gaap:BaseRateMembersrt:MinimumMember2022-02-182022-02-180001069258us-gaap:BaseRateMembersrt:MaximumMember2022-02-182022-02-180001069258ktos:FirstAndSecondYearMemberus-gaap:SecuredDebtMemberktos:TermLoanAMember2022-02-182022-02-180001069258us-gaap:SecuredDebtMemberktos:ThirdFourthAndFifthYearMemberktos:TermLoanAMember2022-02-182022-02-180001069258us-gaap:SecuredDebtMemberus-gaap:LineOfCreditMember2022-06-260001069258us-gaap:RevolvingCreditFacilityMemberus-gaap:LineOfCreditMember2022-06-260001069258us-gaap:LineOfCreditMember2022-06-260001069258us-gaap:LineOfCreditMemberus-gaap:SecuredDebtMember2022-06-260001069258us-gaap:SeniorNotesMemberktos:SixPointFivePercentSeniorSecuredNotesDue2025Member2017-11-300001069258us-gaap:RevolvingCreditFacilityMember2017-11-202017-11-200001069258us-gaap:RevolvingCreditFacilityMember2017-11-200001069258us-gaap:LetterOfCreditMember2017-11-200001069258ktos:SwingLineLoanMember2017-11-20ktos:segment0001069258us-gaap:ServiceMemberktos:KratosGovernmentSolutionsMember2022-03-282022-06-260001069258us-gaap:ServiceMemberktos:KratosGovernmentSolutionsMember2021-03-292021-06-270001069258us-gaap:ServiceMemberktos:KratosGovernmentSolutionsMember2021-12-272022-06-260001069258us-gaap:ServiceMemberktos:KratosGovernmentSolutionsMember2020-12-282021-06-270001069258ktos:KratosGovernmentSolutionsMemberus-gaap:ProductMember2022-03-282022-06-260001069258ktos:KratosGovernmentSolutionsMemberus-gaap:ProductMember2021-03-292021-06-270001069258ktos:KratosGovernmentSolutionsMemberus-gaap:ProductMember2021-12-272022-06-260001069258ktos:KratosGovernmentSolutionsMemberus-gaap:ProductMember2020-12-282021-06-270001069258us-gaap:ServiceMemberktos:KratosUnmannedSystemsMember2022-03-282022-06-260001069258us-gaap:ServiceMemberktos:KratosUnmannedSystemsMember2021-03-292021-06-270001069258us-gaap:ServiceMemberktos:KratosUnmannedSystemsMember2021-12-272022-06-260001069258us-gaap:ServiceMemberktos:KratosUnmannedSystemsMember2020-12-282021-06-270001069258us-gaap:ProductMemberktos:KratosUnmannedSystemsMember2022-03-282022-06-260001069258us-gaap:ProductMemberktos:KratosUnmannedSystemsMember2021-03-292021-06-270001069258us-gaap:ProductMemberktos:KratosUnmannedSystemsMember2021-12-272022-06-260001069258us-gaap:ProductMemberktos:KratosUnmannedSystemsMember2020-12-282021-06-270001069258ktos:KratosGovernmentSolutionsMemberus-gaap:OperatingSegmentsMember2022-03-282022-06-260001069258ktos:KratosGovernmentSolutionsMemberus-gaap:OperatingSegmentsMember2021-03-292021-06-270001069258ktos:KratosGovernmentSolutionsMemberus-gaap:OperatingSegmentsMember2021-12-272022-06-260001069258ktos:KratosGovernmentSolutionsMemberus-gaap:OperatingSegmentsMember2020-12-282021-06-270001069258us-gaap:OperatingSegmentsMemberktos:KratosUnmannedSystemsMember2022-03-282022-06-260001069258us-gaap:OperatingSegmentsMemberktos:KratosUnmannedSystemsMember2021-03-292021-06-270001069258us-gaap:OperatingSegmentsMemberktos:KratosUnmannedSystemsMember2021-12-272022-06-260001069258us-gaap:OperatingSegmentsMemberktos:KratosUnmannedSystemsMember2020-12-282021-06-270001069258us-gaap:CorporateNonSegmentMember2022-03-282022-06-260001069258us-gaap:CorporateNonSegmentMember2021-03-292021-06-270001069258us-gaap:CorporateNonSegmentMember2021-12-272022-06-260001069258us-gaap:CorporateNonSegmentMember2020-12-282021-06-270001069258ktos:FloridaTurbineTechnologiesInc.Member2019-02-270001069258ktos:KTTCORELLCMember2019-02-270001069258ktos:KTTCORELLCMember2019-02-272019-02-270001069258ktos:KTTCORELLCMember2022-06-130001069258ktos:KTTCORELLCMember2022-06-132022-06-130001069258ktos:KTTCORELLCMemberus-gaap:CommonStockMember2022-06-132022-06-130001069258ktos:KTTCORELLCMemberktos:KTTCORELLCMember2022-06-130001069258ktos:UnitedStatesGovernmentMember2022-03-282022-06-260001069258ktos:UnitedStatesGovernmentMember2021-03-292021-06-270001069258us-gaap:GovernmentContractsConcentrationRiskMemberktos:UnitedStatesGovernmentMemberus-gaap:SalesRevenueNetMember2022-03-282022-06-260001069258us-gaap:GovernmentContractsConcentrationRiskMemberktos:UnitedStatesGovernmentMemberus-gaap:SalesRevenueNetMember2021-03-292021-06-270001069258ktos:UnitedStatesGovernmentMember2021-12-272022-06-260001069258ktos:UnitedStatesGovernmentMember2020-12-282021-06-270001069258us-gaap:GovernmentContractsConcentrationRiskMemberktos:UnitedStatesGovernmentMemberus-gaap:SalesRevenueNetMember2021-12-272022-06-260001069258us-gaap:GovernmentContractsConcentrationRiskMemberktos:UnitedStatesGovernmentMemberus-gaap:SalesRevenueNetMember2020-12-282021-06-27
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended June 26, 2022
or 
        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________ 
Commission file number 001-34460
 
KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware13-3818604
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)

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

78681

(Zip Code)

(512238-9840
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.001 par valueKTOSThe NASDAQ Global Select Market
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ý  No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes ý  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
 
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes   No 
As of July 29, 2022, 125,943,599 shares of the registrant’s common stock were outstanding.


Table of Contents
KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
 
FORM 10-Q
 
FOR THE QUARTERLY PERIOD ENDED JUNE 26, 2022
 
INDEX
  Page
  
   
  
 
  
 
 
 
  
  
  
  
 
  
  
  
  
  
  
  
2

Table of Contents
PART I. FINANCIAL INFORMATION
Item 1.  Financial Statements.
KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 (in millions, except par value and number of shares)
 June 26, 2022
(Unaudited)December 26, 2021
Assets  
Current assets:  
Cash and cash equivalents$142.4 $349.4 
Accounts receivable, net100.6 93.9 
Unbilled receivables, net214.4 190.8 
Inventoried costs118.2 91.7 
Prepaid expenses12.2 9.8 
Other current assets36.5 22.5 
Total current assets624.3 758.1 
Property, plant and equipment, net212.2 168.3 
Operating lease right-of-use assets38.1 38.5 
Goodwill551.9 493.9 
Intangible assets, net64.9 43.2 
Other assets91.9 87.5 
Total assets$1,583.3 $1,589.5 
Liabilities and Stockholders Equity
  
Current liabilities:  
Accounts payable$58.2 $50.4 
Accrued expenses36.0 27.2 
Accrued compensation50.1 47.3 
Accrued interest0.3 1.5 
Billings in excess of costs and earnings on uncompleted contracts59.2 58.1 
Current portion of operating lease liabilities10.6 10.1 
Other current liabilities12.5 25.7 
Current liabilities of discontinued operations0.9 0.8 
Total current liabilities227.8 221.1 
Long-term debt, net of current portion293.8 296.7 
Operating lease liabilities, net of current portion31.5 32.7 
Other long-term liabilities82.9 76.2 
Long-term liabilities of discontinued operations1.4 2.5 
Total liabilities637.4 629.2 
Commitments and contingencies (Note 14)
Redeemable noncontrolling interest7.8 15.2 
Stockholders equity:
  
Preferred stock, $0.001 par value, 5,000,000 shares authorized, 0 shares outstanding at June 26, 2022 and December 26, 2021
  
Common stock, $0.001 par value, 195,000,000 shares authorized; 125,627,337 and 123,987,424 shares issued and outstanding at June 26, 2022 and December 26, 2021, respectively
  
Additional paid-in capital1,593.1 1,578.9 
Accumulated other comprehensive income 0.6 
Accumulated deficit(655.0)(634.4)
Total stockholders equity
938.1 945.1 
Total liabilities and stockholders equity
$1,583.3 $1,589.5 

The accompanying notes are an integral part of these condensed consolidated financial statements.
3

Table of Contents
KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
 (Unaudited)
 Three Months EndedSix Months Ended
 June 26, 2022June 27, 2021June 26, 2022June 27, 2021
Service revenues$78.8 $58.0 $146.7 $115.3 
Product sales145.4 147.1 273.7 284.0 
Total revenues224.2 205.1 420.4 399.3 
Cost of service revenues56.2 41.3 106.1 83.8 
Cost of product sales110.2 111.8 204.6 212.5 
Total costs166.4 153.1 310.7 296.3 
Gross profit57.8 52.0 109.7 103.0 
Selling, general and administrative expenses44.5 38.2 87.8 76.1 
Merger and acquisition expenses0.1 0.1 0.4 0.3 
Research and development expenses9.2 10.2 18.4 18.2 
Restructuring expenses and other5.9 0.2 6.2 0.2 
Operating income (loss)(1.9)3.3 (3.1)8.2 
Other expense:    
Interest expense, net(2.9)(5.7)(8.8)(11.6)
Loss on extinguishment of debt  (13.0) 
Other income, net  0.1 0.2 
Total other expense, net(2.9)(5.7)(21.7)(11.4)
Loss from continuing operations before income taxes(4.8)(2.4)(24.8)(3.2)
Provision (benefit) for income taxes from continuing operations0.5 (3.6)(3.8)(6.3)
Income (loss) from continuing operations(5.3)1.2 (21.0)3.1 
Discontinued operations:
Loss from discontinued operations before income taxes  (0.4)(0.3)(0.4)
Income tax benefit0.9 0.1 1.0 0.1 
Income (loss) from discontinued operations0.9 (0.3)0.7 (0.3)
Net income (loss)(4.4)0.9 (20.3)2.8 
Less: Net income (loss) attributable to noncontrolling interest0.3 (0.2)0.3 (0.2)
Net income (loss) attributable to Kratos$(4.7)$1.1 $(20.6)$3.0 
Basic income (loss) per common share attributable to Kratos:    
Income (loss) from continuing operations$(0.04)$0.01 $(0.17)$0.02 
Income (loss) from discontinued operations  0.01  
Net income (loss) per common share$(0.04)$0.01 $(0.16)$0.02 
Diluted income (loss) per common share attributable to Kratos:
Income (loss) from continuing operations$(0.04)$0.01 $(0.17)$0.02 
Income (loss) from discontinued operations  0.01  
Net income (loss) per common share$(0.04)$0.01 $(0.16)$0.02 
Weighted average common shares outstanding:
Basic126.4 124.7 126.2 124.4 
Diluted126.4 127.7 126.2 127.8 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

4

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

Three Months EndedSix Months Ended
June 26, 2022June 27, 2021June 26, 2022June 27, 2021
Net income (loss)$(4.4)$0.9 $(20.3)$2.8 
Change in cumulative translation adjustment(0.6)0.6 (0.6)0.8 
Comprehensive income (loss)(5.0)1.5 (20.9)3.6 
Less: Comprehensive income (loss) attributable to noncontrolling interest0.3 (0.2)0.3 (0.2)
Comprehensive income (loss) attributable to Kratos$(5.3)$1.7 $(21.2)$3.8 

The accompanying notes are an integral part of these condensed consolidated financial statements.
5

Table of Contents
KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the three months ended June 26, 2022 and June 27, 2021
(in millions)
(Unaudited)
Redeemable Noncontrolling InterestCommon StockAdditional Paid-In CapitalAccumulated Other Comprehensive IncomeAccumulated DeficitTotal Stockholders’ Equity
SharesAmounts
Balance, March 28, 2021$14.8 123.7 $ $1,557.9 $1.6 $(630.5)$929.0 
Stock-based compensation— — — 6.6 — — 6.6 
Restricted stock issued and related taxes
— 0.1 — (1.4)— — (1.4)
Net income (loss)(0.2)— — — — 1.1 1.1 
Other comprehensive income, net of tax— — — — 0.6 — 0.6 
Balance, June 27, 2021$14.6 123.8 $ $1,563.1 $2.2 $(629.4)$935.9 

Redeemable Noncontrolling InterestCommon StockAdditional Paid-In CapitalAccumulated Other Comprehensive IncomeAccumulated DeficitTotal Stockholders’ Equity
SharesAmounts
Balance, March 27, 2022$15.2 124.8 $ $1,582.0 $0.6 $(650.3)$932.3 
Stock-based compensation— — — 6.4 — — 6.3 
Restricted stock issued and related taxes
— 0.3 — (4.8)— — (4.7)
Issuance of common stock for acquisitions— 0.3 — 5.0 — — 5.0 
Net income (loss)0.3 — — — — (4.7)(4.7)
Other comprehensive loss, net of tax— — — — (0.6)— (0.6)
Changes in noncontrolling interest$(7.7)0.2 $— $4.5 $— $— 4.5 
Balance, June 26, 2022$7.8 125.6 $ $1,593.1 $ $(655.0)$938.1 













6

Table of Contents
KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the six months ended June 26, 2022 and June 27, 2021
(in millions)
(Unaudited)
Redeemable Noncontrolling InterestCommon StockAdditional Paid-In CapitalAccumulated Other Comprehensive IncomeAccumulated DeficitTotal Stockholders’ Equity
SharesAmounts
Balance, December 27, 2020$14.8 123.0 $ $1,556.3 $1.4 $(632.4)$925.3 
Stock-based compensation— — — 12.8 — — 12.8 
Issuance of common stock for employee stock purchase plan and stock options— 0.2 — 2.5 — — 2.5 
Restricted stock issued and related taxes— 0.6 — (8.5)— — (8.5)
Net income (loss)(0.2)— — — — 3.0 3.0 
Other comprehensive income, net of tax— — — — 0.8 — 0.8 
Balance, June 27, 2021$14.6 123.8 $ $1,563.1 $2.2 $(629.4)$935.9 
Redeemable Noncontrolling InterestCommon StockAdditional Paid-In CapitalAccumulated Other Comprehensive IncomeAccumulated DeficitTotal Stockholders’ Equity
SharesAmounts
Balance, December 26, 2021$15.2 124.0 $ $1,578.9 $0.6 $(634.4)$945.1 
Stock-based compensation— — — 13.3 — — 13.3 
Issuance of common stock for employee stock purchase plan and stock options— 0.2 — 2.9 — — 2.9 
Restricted stock issued and related taxes
— 0.9 — (11.5)— — (11.5)
Issuance of common stock for acquisitions
— 0.3 — 5.0 — — 5.0 
Net income (loss) 0.3 — — — — (20.6)(20.6)
Other comprehensive loss, net of tax— — — — (0.6)— (0.6)
Changes in noncontrolling interest(7.7)0.2 — 4.5 — — 4.5 
Balance, June 26, 2022$7.8 125.6 $ $1,593.1 $ $(655.0)$938.1 

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

7

Table of Contents
KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
Six Months Ended
June 26, 2022June 27, 2021
Operating activities: 
Net income (loss)$(20.3)$2.8 
Income (loss) from discontinued operations0.7 (0.3)
Income (loss) from continuing operations(21.0)3.1 
Adjustments to reconcile income (loss) from continuing operations to net cash provided by (used in) operating activities from continuing operations:  
Depreciation and amortization13.9 13.3 
Deferred income taxes0.4 (0.9)
Amortization of lease right-of-use assets5.3 4.5 
Stock-based compensation13.3 12.8 
Amortization of deferred financing costs0.4 0.5 
Loss on extinguishment of debt13.0  
Recovery of doubtful accounts (0.2)
Litigation related charges5.5  
Changes in assets and liabilities, net of acquisitions:  
Accounts receivable0.3 15.5 
Unbilled receivables(15.3)(7.9)
Inventoried costs(25.8)(6.8)
Prepaid expenses and other assets(13.2)(2.2)
Operating lease liabilities(5.5)(4.5)
Accounts payable5.6 5.8 
Accrued expenses7.7 (7.5)
Accrued compensation(1.3)(1.8)
Accrued interest(1.1) 
Billings in excess of costs and earnings on uncompleted contracts1.3 9.6 
Income tax receivable and payable(6.2)(6.1)
Other liabilities(6.8)(5.2)
Net cash provided by (used in) operating activities from continuing operations(29.5)22.0 
Investing activities:  
Cash paid for acquisitions, net of cash acquired(131.9)(6.2)
Proceeds from sale of assets0.1  
Capital expenditures(21.9)(20.5)
Net cash used in investing activities from continuing operations(153.7)(26.7)
Financing activities: 
Proceeds from the issuance of long-term debt200.0  
Debt issuance costs(3.2) 
Credit agreement borrowings100.0  
Repayment of debt(309.8) 
Payments under finance leases(0.6)(0.4)
Payments of employee taxes withheld from share-based awards(11.5)(8.5)
Proceeds from shares issued under equity plans2.9 2.5 
Net cash used in financing activities from continuing operations(22.2)(6.4)
Net cash used in continuing operations(205.4)(11.1)
Net operating cash flows of discontinued operations(0.4)(0.8)
Effect of exchange rate changes on cash, cash equivalents and restricted cash(1.2)(0.3)
Net decrease in cash, cash equivalents and restricted cash(207.0)(12.2)
Cash, cash equivalents and restricted cash at beginning of period349.4 381.5 
Cash, cash equivalents and restricted cash at end of period$142.4 $369.3 
Significant non-cash investing and financing activities:
Financing lease obligation incurred$9.1 $ 
Common stock issuance for purchase of noncontrolling interests$2.7 $ 
Common stock issuance for acquisition $5.0 $ 

The accompanying notes are an integral part of these condensed consolidated financial statements.
8

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

 The information as of June 26, 2022 and for the three and six months ended June 26, 2022 and June 27, 2021 is unaudited. The condensed consolidated balance sheet as of December 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 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 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 subsidiary, KTT CORE, Inc., a Delaware corporation formerly known as KTT CORE, LLC (“KTT Core”), which is 90.05% owned by the Company. All inter-company transactions have been eliminated in consolidation. Noncontrolling interest consists of the remaining 9.95% interest in KTT Core. See Note 12 for further information related to the redeemable noncontrolling interest.
 
(c)    Fiscal Year
 
The Company has a 52/53 week fiscal year ending on the last Sunday of the calendar year. The three month periods ended June 26, 2022 and June 27, 2021 consisted of 13-week periods. The six month periods ended June 26, 2022 and June 27, 2021 consisted of 26-week periods. There are 52 calendar weeks in the fiscal years ending on December 25, 2022 and December 26, 2021.
 
(d)    Accounting Estimates

There have been no significant changes in the Company’s accounting estimates for the six months ended June 26, 2022 as compared to the accounting estimates described in the Annual Report on Form 10-K.

(e)    Fair Value of Financial Instruments
 
The carrying amounts and the related estimated fair values of the Company’s long-term debt financial instruments not measured at fair value on a recurring basis at June 26, 2022 and December 26, 2021 are presented in Note 10. The carrying value of all other financial instruments, including cash equivalents, accounts receivable, unbilled receivables, accounts payable, accrued expenses, billings in excess of cost and earnings on uncompleted contracts, income taxes payable and short-term debt, approximated their estimated fair values at June 26, 2022 and December 26, 2021 due to the short-term nature of these instruments.

9

Table of Contents
Note 2. Acquisitions

CTT Inc.

On December 10, 2021, the Company acquired CTT Inc. (“CTT”), a company that designs, develops, and manufactures microwave application components and equipment primarily for customers in the defense industry. The purchase price was $22.0 million in cash. Approximately $6.3 million of the purchase price was paid on December 10, 2021, with the remaining $15.2 million of the purchase price paid on December 30, 2021. 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 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 the year ended December 26, 2021 would not have been materially different than the reported amounts. CTT is included in the Kratos Government 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. 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.

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

Accounts receivable $3.8 
Unbilled receivables4.0 
Other current assets0.1 
Property and equipment1.3 
Intangible assets10.0 
  Total identifiable net assets acquired19.2 
Total identifiable net liabilities assumed(9.6)
Goodwill28.4 
Net assets acquired, excluding cash$38.0 

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 a remaining useful life 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
10

Table of Contents
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 were $15.0 million and $0.1 million for the three months ended June 26, 2022, and $27.7 million and $0.3 million for the six months ended June 26, 2022, respectively.

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

Cash paid$39.5 
Less: Cash acquired(1.5)
Total consideration$38.0 

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 adjustments for working capital, potential earn-out consideration tied to revenue from certain in-development products, indebtedness and transaction expenses, and $5.0 million in Kratos common stock. SRI’s Engineering Division (SRE) is the market leader in assisting customers in the development, modeling, and deployment of advanced materials for extreme environments, including hypersonic, space, missile, missile defense, strategic deterrence, propulsion systems, and energy applications. SRE also specializes in Intelligence Surveillance and Reconnaissance (ISR) sensor development, electromechanical systems design and integration, aerospace engineering, materials engineering, artificial intelligence and machine learning, directed energy, RF systems design and integration, advanced manufacturing, and computational sciences. The acquisition established Kratos SRE, Inc., a new business within Kratos’ Defense and Rocket Support Services Division.

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

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

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

11

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

Accounts receivable $3.0 
Unbilled receivables9.6 
Inventory0.5 
Other current assets0.1 
Property and equipment23.0 
Other assets0.2 
Intangible assets15.0 
  Total identifiable net assets acquired51.4 
Total identifiable net liabilities assumed(1.1)
Goodwill29.2 
Net assets acquired, excluding cash$79.5 

Based on the Company’s preliminary estimate of fair value, as of May 23, 2022, net liabilities included $1.1 million of current liabilities. The identifiable intangible assets include trade names of $0.7 million with a remaining useful life of 5 years, contracts and backlog of $6.0 million with an estimated useful life of 2 years, customer relationships of $1.5 million with a remaining useful life of 10 years, in-process research and development of $1.5 million that will commence amortization at the completion of the development, and developed technology of $5.3 million with a remaining useful life of 7 years. The Company also established a deferred tax asset of $0.2 million for the difference between the financial statement basis and tax basis of the acquired assets of SRE and a corresponding decrease in goodwill. The goodwill recorded in this transaction is expected to be tax-deductible.

The amounts of revenue and operating income of SRE included in the Company’s condensed consolidated statement of operations for the three months ended June 26, 2022 were $4.1 million and $0.5 million, respectively.

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

Cash paid$74.5 
Common stock issued5.0 
Total consideration$79.5 

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 each contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. Once the contract is identified and determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract, determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC 606. The majority of the Company’s contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation based on the relative standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling price is the expected-cost-plus-margin approach, under which the Company
12

Table of Contents
forecasts the expected costs of satisfying a performance obligation and then adds an appropriate margin for that distinct good or service.

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

Remaining Performance Obligations

The Company calculates revenues from remaining performance obligations as the dollar value of the remaining performance obligations on executed contracts. On June 26, 2022, the Company had approximately $1,050.2 million of remaining performance obligations. The Company expects to recognize approximately 41% of the remaining performance obligations as revenue in fiscal year 2022, an additional 28% in 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.

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

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

As a result of the EAC process, any quarterly adjustments to revenues, cost of sales, and the related impact to operating income are recognized as necessary in the period they become known. These adjustments may result from positive program performance, and may result in an increase in operating income during the performance of individual performance obligations, if it is determined the Company will be successful in mitigating risks surrounding the technical, schedule and cost aspects of those performance obligations or realizing related opportunities. Likewise, these adjustments may result in a decrease in operating income if it is determined the Company will not be successful in mitigating these risks or realizing related opportunities. Changes in estimates of net sales, cost of sales, and the related impact to operating income are recognized
13

Table of Contents
quarterly on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current and prior periods. A significant change in one or more of these estimates could affect the profitability of one or more of the Company’s contracts. When estimates of total costs to be incurred on a performance obligation exceed total estimates of revenue to be earned, a provision for the entire loss on the performance obligation is recognized in the period the loss is determined. No cumulative catch-up adjustment on any one contract was material to the Company’s unaudited condensed consolidated financial statements for the three and six-month periods ended June 26, 2022, and June 27, 2021. Likewise, total cumulative catch-up adjustments were not material for the three and six-month periods ended June 26, 2022, and June 27, 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 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.

Net contract assets and liabilities are as follows (in millions):
June 26, 2022December 26, 2021Net Change
Contract assets$214.4 $190.8 $23.6 
Contract liabilities$59.2 $58.1 $1.1 
Net contract assets$155.2 $132.7 $22.5 

Contract assets increased $23.6 million during the six months ended June 26, 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 six months ended June 26, 2022. Contract liabilities increased $1.1 million during the six months ended June 26, 2022, primarily due to payments received in excess of revenue recognized on these performance obligations. For the three and six months ended June 26, 2022, the Company recognized revenue of $14.8 million and $36.0 million that was previously included in the contract liabilities that existed at December 26, 2021. For the three and six months ended June 27, 2021 the Company recognized revenue of $5.9 million and $22.9 million that was previously included in the contract liabilities that existed at December 27, 2020.

In November 2019, a large training solutions program was terminated for convenience (“T for C”) by the customer. Under a T for C, a contractor is entitled to seek specified costs through a termination settlement process including (1) the contract price for completed supplies and services accepted by the government but not previously paid for; (2) the cost incurred in the performance of work terminated plus a reasonable profit on those costs; and (3) its costs incurred in settling with subcontractors and preparing and settling the termination proposal. Under a T for C, the Company would not be able to collect the total withheld amounts until the settlement terms of the T for C have been negotiated and agreed to with the customer. At June 26, 2022, approximately $4.8 million in unbilled receivables remained outstanding on this project. In March 2022, the Company and the customer agreed to a settlement of $6.0 million for a portion of the amounts outstanding on this project,
14

Table of Contents
which was collected in July 2022. The remaining unbilled balance of $4.8 million is subject to negotiation and settlement with the customer.

The Company was also in dispute with an international customer in the Unmanned Systems (US) segment concerning the completion of certain system requirements and certain contractual milestones related to a contract the Company acquired with the acquisition of CEi in 2012. On June 30, 2022, the parties entered into a settlement agreement to resolve their dispute and to settle all claims and counterclaims, and are currently in the process of implementing the terms of the settlement agreement. The Company has recorded a $5.5 million litigation settlement charge included in restructuring expenses and other in the quarter ended June 26, 2022, with a remaining $5.6 million carrying value of assets on the balance sheet in inventory as of June 26, 2022 which are expected to be settled by the end of the year.

Disaggregation of Revenue

The following series of tables presents the Company’s revenue disaggregated by several categories. For the majority of contracts, revenue is recognized over time as work is performed on the contract. Revenue by contract type was as follows (in millions):
Three Months EndedSix Months Ended
June 26, 2022June 27, 2021June 26, 2022June 27, 2021
Kratos Government Solutions
Fixed price$119.9 $107.1 $221.2 $206.6 
Cost plus fee37.1 28.0 69.4 56.6 
Time and materials10.8 9.7 20.8 19.9 
Total Kratos Government Solutions167.8 144.8 311.4 283.1 
Unmanned Systems
Fixed price40.7 36.4 72.2 73.6 
Cost plus fee15.3 23.4 35.7 41.3 
Time and materials0.4 0.5 1.1 1.3 
Total Unmanned Systems56.4 60.3 109.0 116.2 
Total Revenues$224.2 $205.1 $420.4 $399.3 

15

Table of Contents
Revenue by customer was as follows (in millions):
Three Months EndedSix Months Ended
June 26, 2022June 27, 2021June 26, 2022June 27, 2021
Kratos Government Solutions
U.S. Government (1)
$104.2 $91.8 $193.7 $184.4 
International (2)
36.1 35.8 70.8 67.5 
U.S. Commercial and other customers27.5 17.2 46.9 31.2 
Total Kratos Government Solutions167.8 144.8 311.4 283.1 
Unmanned Systems
U.S. Government (1)
51.9 54.4 102.0 104.0 
International (2)
3.6 5.5 5.4 11.8 
U.S. Commercial and other customers0.9 0.4 1.6 0.4 
Total Unmanned Systems56.4 60.3 109.0 116.2 
Total Revenues$224.2 $205.1 $420.4 $