Discontinued Operations

6 Months Ended

Jun. 28, 2015

Discontinued Operations and Disposal Groups [Abstract]

Discontinued Operations

Discontinued Operations

On May 31, 2015, the Company entered into a Stock Purchase Agreement (the "Agreement") with Ultra Electronics Holdings plc, a public limited company formed under the laws of England and Wales and traded on the London Stock Exchange (“Ultra”), and Ultra Electronics Defense Inc. (“Buyer”), a Delaware corporation ultimately owned by Ultra, to sell the U.S. and U.K. operations of the Company's Electronics Products Division. According to the terms of the Agreement, the Company agreed to sell to Buyer all of the issued and outstanding capital stock of its 100% owned subsidiary Herley Industries, Inc. (“Herley”) and certain of Herley’s subsidiaries, including Herley-CTI, Inc., EW Simulation Technology, Ltd. and Stapor Research, Inc., for a purchase price of $260.0 million in cash to be paid at closing, less a $2.0 million escrow to satisfy any purchase price adjustments, and up to $5.0 million for taxes incurred as part of the transaction, subject to certain working capital adjustments currently estimated as a reduction of approximately $6.0 million. Under the terms of the agreement, a joint 338(h)10 election will be made for income tax purposes, providing a “step up” in tax basis to Ultra. The Company expects a taxable gain as a result of the Herley transaction which will result in utilization of a portion of the Company’s net operating losses. The Agreement also contains certain non competition and indemnification provisions. The Company expects to pay approximately $23.0 million in transaction-related costs, including $10.0 million in estimated federal and state income taxes related to the sale, resulting in net cash proceeds to the Company of approximately $236.0 million. The transaction is expected to close during our third fiscal quarter. In accordance with ASC 360-10-45-9, Property, Plant, and Equipment (Topic 360) and ASC 205-20-45-3 Presentation of Financial Statements (Topic 205), the Herley Entities have been classified as held for sale and reported in discontinued operations in the accompanying condensed consolidated financial statements for all periods presented.

The Company retained its microwave electronic products business located in Israel, which is part of its Electronic Products Division. In addition, the Company retained the unmanned systems electronics, avionics, and ground command and control business, which was formerly part of the Herley group of companies acquired by Kratos in 2010, but had been previously combined into the Company's Unmanned Systems Reportable Segment since 2013.

The following table presents the results of discontinued operations (in millions):

	Three Months Ended						Six Months Ended
	June 29, 2014			June 28, 2015			June 29, 2014			June 28, 2015
Revenue	$	25.1		$	22.3		$	51.4		$	47.8
Cost of sales	16.8			14.6			34.3			31.5
Selling, general and administrative expenses	5.9			5.5			11.8			11.6
Interest expense, net	4.1			3.4			8.4			6.9
Other net expense items that are not major	(0.3		)	(0.5		)	(0.3		)	(0.1		)
Loss from discontinued operations before income taxes	(1.4		)	(0.7		)	(2.8		)	(2.1		)
Income tax benefit (expense)	(0.4		)	1.6			(0.6		)	1.2
Income (loss) from discontinued operations	$	(1.8	)	$	0.9		$	(3.4	)	$	(0.9	)

Depreciation and amortization expense included in selling, general and administrative expenses were $1.6 million and $1.6 million for the three months ended June 29, 2014 and June 28, 2015, respectively and $3.4 million and $3.2 million for the six months ended June 29, 2014 and June 28, 2015, respectively.

Interest expense is included based on an allocation consistent with the expected minimum mandatory redemption of $175.0 million of the Company's 7% Senior Secured Notes and the estimated mandatory pay down of $41.0 million of outstanding borrowings on the Company's Credit Agreement that will be repaid upon the completion of the sale of the Herley Entities in accordance with the terms and conditions under the Indenture Agreement and Credit Agreement, respectively. Refer to Note 8 for further discussion.

During the six months ended June 28, 2015, the Company recorded an income tax benefit in discontinued operations of $1.2 million related to the release of valuation allowance of $1.7 million offset by foreign tax expense of $0.5 million. 

The following is a summary of the assets and liabilities of discontinued operations in the accompanying condensed consolidated balance sheets as of December 28, 2014 and June 28, 2015 (in millions):

	December 28, 2014		June 28, 2015
Cash and cash equivalents	$	1.2	$	2.7
Accounts receivable, net	30.7		29.8
Inventoried costs	20.6		20.1
Other current assets	1.3		1.1
Current assets of discontinued operations	$	53.8	$	53.7
Property, plant and equipment, net	$	21.0	$	20.1
Goodwill	113.0		113.0
Intangible assets, net	2.8		1.0
Other assets	0.2		0.2
Non-current assets of discontinued operations	$	137.0	$	134.3
Accounts payable	$	3.8	$	4.7
Accrued expenses	1.8		2.8
Accrued compensation	5.3		4.0
Billings in excess of cost and earnings on uncompleted contracts	2.5		3.9
Other current liabilities	1.2		0.7
Current liabilities of discontinued operations	$	14.6	$	16.1
Non-current liabilities of discontinued operations	$	0.5	$	0.6