Goodwill and Other Intangible Assets

12 Months Ended

Dec. 27, 2015

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 its fiscal October 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.

In determining the fair value for the reporting units, there are key assumptions relating to future operating performance and revenue growth. If the actual operating performance and financial results are not consistent with our assumptions, an impairment in our $483.4 million goodwill and $36.5 million intangible assets could occur in future periods. Market factors that could impact our ability to successfully develop new products include the successful completion of certain unmanned system platforms, and the successful acceptance of new unmanned system platforms, including from a political and budgetary standpoint. For example, the US reporting unit fair value includes assumptions that the development of the high performance Unmanned Combat Aerial System (“UCAS”) product is successful and we are awarded future contracts for the UCAS product and other new tactical aerial systems. Additionally, the US reporting unit fair value assumes that we will receive follow on orders for the Sub-Sonic Aerial Target (“SSAT”), which is currently under contract with the US Navy.

The KGS reportable segment has four operating segments: Defense Rocket Support Services (“DRSS”), Microwave Electronics (“ME”), Technical and Training Solutions (“TTS”), and Modular Systems (“MS”). All of the KGS operating segments provide technology based defense solutions, involving products and services, primarily for mission critical U.S. National Security priorities, with the primary focus relating to the nation’s Command, Control, Communications, Computing, Combat Systems, Intelligence, Surveillance and Reconnaissance requirements. The PSS reportable business segment provides integrated solutions for advanced homeland security, public safety, critical infrastructure security, and security and surveillance systems for government, industrial and commercial customers. The US reportable segment consists of our unmanned aerial system and unmanned ground and seaborne system businesses.

Concurrent with the sale on August 21, 2015 of the U.S. and U.K. operations of its Electronic Products Division to Ultra Electronics Holdings plc (see Note 8) the Company changed the name of its Electronic Products Division to the Microwave Electronics Division (“ME”). In the second quarter of 2015, as a result of the pending disposition of the Herley Entities, the Company performed a valuation analysis to apportion the carrying value of the goodwill of its EP reportable unit to the retained ME products business and the Herley Entities which were subsequently sold. As a result, the KGS reportable segment is comprised of an aggregation of Kratos’ Government Solutions operating segments, including our microwave products, satellite communications, modular systems and rocket support operating segments. The Company identified its reporting units to be the DRSS, ME, TTS, MS, US and PSS operating segments, which were tested for potential impairment in the fiscal year 2015 annual test.

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 based upon the last business day of fiscal October and assumes a control premium. The Company uses this methodology 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 9 of these Notes to Consolidated Financial Statements). 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.

The Company concluded that its goodwill was not impaired at December 27, 2015.

The carrying amounts of goodwill as of December 28, 2014 and December 27, 2015 by reportable segment are as follows (in millions):



	PSS		US		KGS		Total
Gross value	$	53.9	$	111.1	$	565.8	$	730.8
Less accumulated impairment	18.3		13.8		215.3		247.4
Net	$	35.6	$	97.3	$	350.5	$	483.4


(b)	Purchased Intangible Assets

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



	As of December 28, 2014							As of December 27, 2015
	Gross Value		Accumulated Amortization			Net Value		Gross Value		Accumulated Amortization			Net Value
Acquired finite-lived intangible assets:
Customer relationships	$	84.1	$	(58.2	)	$	25.9	$	83.7	$	(67.1	)	$	16.6
Contracts and backlog	72.1		(69.4		)	2.7		71.3		(69.4		)	1.9
Developed technology and technical know-how	23.1		(10.9		)	12.2		23.1		(13.3		)	9.8
Trade names	5.3		(4.6		)	0.7		5.3		(4.9		)	0.4
Favorable operating lease	1.8		(0.7		)	1.1		1.8		(0.9		)	0.9
Total finite-lived intangible assets	186.4		(143.8		)	42.6		185.2		(155.6		)	29.6
Indefinite-lived trade names	6.9		—			6.9		6.9		—			6.9
Total intangible assets	$	193.3	$	(143.8	)	$	49.5	$	192.1	$	(155.6	)	$	36.5

The aggregate amortization expense for finite-lived intangible assets was $32.8 million, $19.1 million and $13.0 million for the years ended December 29, 2013, December 28, 2014, and December 27, 2015, respectively. The Company records all amortization expense in selling, general and administrative expenses in the Consolidated Statements of Operations and Comprehensive Income (Loss).

The estimated future amortization expense of acquired intangible assets with finite lives as of December 27, 2015 is as follows (in millions):



Fiscal Year	Amount
2016	$	10.8
2017	9.4
2018	4.3
2019	3.5
2020	1.5
Thereafter	0.1
Total	$	29.6

- 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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