Goodwill and Intangible Assets

12 Months Ended

Dec. 30, 2012

Goodwill and Intangible Assets Disclosure [Abstract]


(a)	Goodwill

The Company performs its annual impairment test for goodwill in accordance with 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 its annual and, if necessary, interim impairment assessments, 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 (See note 10). 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.

As a result of the Company's decision in June 2012 to dispose of certain non-core businesses acquired in the Integral acquisition in July 2011, the Company allocated $1.5 million of goodwill to discontinued operations, which resulted in an impairment charge (see Note 9). 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% at that time.

During the fourth quarter, the KGS reporting unit was impacted by continued declining market valuations and the economic uncertainty in the U.S. defense industry. If Congress is unable to agree on a budget that conforms with the Budget Control Act of 2011 requirements, it calls for additional substantial defense spending reductions through sequestration. Congress and the President could not agree on budgetary, tax and spending issues, and as a result a FY 2013 budget was not passed and a six-month continuing resolution that funded the U.S. Government through March 27, 2013 was passed. These events significantly increased the likelihood of the sequester occurring which has negative consequences for the defense industry. In addition, as Congress and the Administration could not come to an agreement on terms of a possible national fiscal approach, they also failed to address other fiscal matters such as the debt ceiling which is currently expected to be reached during the first half of 2013. These events negatively impacted the Company's estimate of the fair value of the KGS reporting unit resulting in the book value of KGS exceeding its fair value in step one of the impairment test.

The Company performed the second step of the goodwill impairment test to measure the amount of the impairment loss, if any, of the KGS reporting unit. The second step of the test requires the allocation of the reporting unit's fair value to its assets and liabilities, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill is less than the carrying value, the difference is recorded as an impairment loss. Based on the results of the step two analysis, the Company recorded an $82.0 million goodwill impairment in 2012.

As of December 30, 2012, the goodwill of the PSS and KGS reporting units were $35.6 million and $560.9 million, respectively. As of December 30, 2012 the fair value of the PSS reporting unit substantially exceeded its carrying value.

The changes in the carrying amount of goodwill for the years ended December 25, 2011 and December 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	2.6		104.3			106.9
Impairments	—		(82.0		)	(82.0		)
Balance as of December 30, 2012	$	35.6	$	560.9		$	596.5

The accumulated impairment losses as of December 30, 2012 were $247.4 million, of which $229.1 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 acquired finite-lived intangible assets subject to amortization (in millions):



	As of December 25, 2011							As of December 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	$	(36.2	)	$	61.5
Contracts and backlog	60.1		(39.6		)	20.5		80.0		(64.3		)	15.7
Developed technology and technical know-how	22.1		(4.1		)	18.0		22.1		(6.4		)	15.7
Trade names	2.6		(0.8		)	1.8		6.1		(1.2		)	4.9
Favorable operating lease	1.8		(0.3		)	1.5		1.8		(0.4		)	1.4
Total	$	164.7	$	(64.6	)	$	100.1	$	207.7	$	(108.5	)	$	99.2

In addition to the acquired finite-lived intangible assets listed in the table above, the Company has $24.5 million and $6.9 million of indefinite-lived intangible assets consisting of trade names at December 25, 2011 and December 30, 2012, respectively. The Company reviews intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Impairment losses, where identified, are determined as the excess of the carrying value over the estimated fair value of the long-lived asset. The recoverability of the carrying value of assets held for use is assessed based on a review of projected undiscounted cash flows. Prior to conducting step one of the 2012 goodwill impairment test, certain of the long-lived assets were assessed for recoverability. The Company made the decision to minimize the use of the CMCI and HBE trade names as part of its overall branding strategy which resulted in a revised fair value of $6.9 million for such trade names, with a remaining useful life of two years, and an impairment of $14.6 million in 2012. The impairment related to the KGS and PSS reporting units were $1.7 million and $12.9 million, respectively.

The aggregate amortization expense for finite-lived intangible assets was $9.2 million, $38.0 million and $43.9 million for the years ended December 26, 2010, December 25, 2011, and December 30, 2012, respectively. The increase in intangible assets in 2011 and 2012 was a result of the Company's acquisitions (see Note 3).

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



Fiscal Year	Amount
2013	36.2
2014	21.7
2015	14.4
2016	9.7
2017	8.2
Thereafter	9.0
Total	$	99.2

- 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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