Goodwill and Intangible Assets (Notes)

9 Months Ended

Sep. 30, 2012

Goodwill and Intangible Assets Disclosure [Abstract]


(a)	Goodwill

The Company performs its annual impairment test for goodwill in accordance with ASC Topic 350, Intangibles-Goodwill and Other (“Topic 350”) as of the last day of each fiscal year or when evidence of potential impairment exists.

The Company assesses goodwill for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment, referred to as a component. The Company determines its reporting units by first identifying its operating segments, and then assessing whether any components of these segments constitute a business for which discrete financial information is available and where segment management regularly reviews the operating results of that component. The Company aggregates components within an operating segment that have similar economic characteristics. For the annual and, if necessary, interim impairment assessment, the Company identified its reporting units to be its KGS and PSS operating segments.

In order to test for potential impairment, the Company estimates the fair value of each of its reporting units based on a comparison and weighting of the income approach, specifically the discounted cash flow method and the market approach, which estimates the fair value of the Company's reporting units based upon comparable market prices and recent transactions and also validates the reasonableness of the implied multiples from the income approach. The Company reconciles the fair value of its reporting units to its market capitalization by calculating its market capitalization based upon an average of its stock price prior to and subsequent to the date the Company performs its analysis and assuming a control premium. The Company uses these methodologies to determine the fair value of its reporting units for comparison to their corresponding book values because there are no observable inputs available, a Level 3 measurement. If the book value exceeds the estimated fair value for a reporting unit a potential impairment is indicated, and Topic 350 prescribes the approach for determining the impairment amount, if any.

In accordance with Topic 350, as a result of the Company's decision in June 2012 to dispose of certain non-core businesses acquired in the Integral acquisition, the Company allocated $1.5 million of goodwill to discontinued operations, which resulted in an impairment charge (see Note 8). The Company then tested the goodwill remaining in the KGS reporting unit. The fair value of the KGS reporting unit exceeded its carrying value by 7.4% Considering the relatively small excess of fair value over carrying value for the KGS reporting unit and given the current market conditions and continued economic uncertainty in the U.S. defense industry as a result of the Budget Control Act of 2011 (the "Budget Control Act"), the fair value of the KGS reporting unit may deteriorate, resulting in an impairment of the goodwill in that unit. Due to continual changes in market and general business conditions, the Company cannot predict whether, and to what extent, its goodwill and long-lived intangible assets may be impaired in future periods. Any resulting impairment loss could harm the Company's profitability and financial condition.

The changes in the carrying amount of goodwill for the nine months ended September 30, 2012 are as follows (in millions):



	Public Safety & Security		Kratos Government Solutions			Total
Balance as of December 25, 2011	$	33.0	$	539.0		$	572.0
Retrospective adjustments	—		(0.4		)	(0.4		)
Balance as of December 25, 2011 after retrospective adjustments	33.0		538.6			571.6
Additions due to business combinations	3.8		103.1			106.9
Balance as of September 30, 2012	$	36.8	$	641.7		$	678.5

The accumulated impairment losses as of December 25, 2011 and September 30, 2012 were $165.4 million, of which $147.1 million was associated with the KGS segment and $18.3 million was associated with the PSS segment.


(b)	Purchased Intangible Assets

The following table sets forth information for finite-lived intangible assets subject to amortization (in millions):



	As of December 25, 2011							As of September 30, 2012
	Gross Value		Accumulated Amortization			Net Value		Gross Value		Accumulated Amortization			Net Value
Acquired finite-lived intangible assets:
Customer relationships	$	78.1	$	(19.8	)	$	58.3	$	97.7	$	(31.7	)	$	66.0
Contracts and backlog	60.1		(39.6		)	20.5		80.0		(58.0		)	22.0
Developed technology and technical know-how	22.1		(4.1		)	18.0		22.1		(5.8		)	16.3
Trade names	2.6		(0.8		)	1.8		3.1		(1.1		)	2.0
Favorable operating lease	1.8		(0.3		)	1.5		1.8		(0.4		)	1.4
Total	$	164.7	$	(64.6	)	$	100.1	$	204.7	$	(97.0	)	$	107.7

In addition to the finite-lived intangible assets listed in the table above, the Company has $24.5 million of indefinite-lived intangible assets consisting of trade names at both December 25, 2011 and September 30, 2012.

Consolidated amortization expense related to intangible assets subject to amortization was $11.9 million and $13.0 million for the three months ended September 25, 2011 and September 30, 2012, respectively, and $24.5 million and $32.4 million for the nine months ended September 25, 2011 and September 30, 2012, respectively.

The estimated future amortization expense of purchased intangible assets with finite lives as of September 30, 2012 is as follows (in millions):



Fiscal Year	Amount
2012 (remaining three months)	$	11.6
2013	34.7
2014	20.2
2015	14.4
2016	9.7
Thereafter	17.1
Total	$	107.7

- Definition

The entire disclosure for the aggregate amount of goodwill and a description of intangible assets, which may include (a) for amortizable intangible assets (also referred to as finite-lived intangible assets), the carrying amount, the amount of any significant residual value, and the weighted-average amortization period, (b) for intangible assets not subject to amortization (also referred to as indefinite-lived intangible assets), the carrying amount, and (c) the amount of research and development assets acquired and written off in the period, including the line item in the income statement in which the amounts written off are aggregated, if not readily apparent from the income statement. Also discloses (a) for amortizable intangibles assets in total and by major class, the gross carrying amount and accumulated amortization, the total amortization expense for the period, and the estimated aggregate amortization expense for each of the five succeeding fiscal years, (b) for intangible assets not subject to amortization the carrying amount in total and by major class, and (c) for goodwill, in total and for each reportable segment, the changes in the carrying amount of goodwill during the period (including the aggregate amount of goodwill acquired, the aggregate amount of impairment losses recognized, and the amount of goodwill included in the gain (loss) on disposal of a reporting unit). If any part of goodwill has not been allocated to a reportable segment, discloses the unallocated amount and the reasons for not allocating. For each impairment loss recognized related to an intangible asset (excluding goodwill), discloses: (a) a description of the impaired intangible asset and the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method for determining fair value, (c) the caption in the income statement or the statement of activities in which the impairment loss is aggregated, and (d) the segment in which the impaired intangible asset is reported. For each goodwill impairment loss recognized, discloses: (a) a description of the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method of determining the fair value of the associated reporting unit, and (c) if a recognized impairment loss is an estimate not finalized and the reasons why the estimate is not final. May also disclose the nature and amount of any significant adjustments made to a previous estimate of an impairment loss.

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