Discontinued Operations

On February 28, 2018, the Company entered into a Stock Purchase Agreement to sell the operations of Kratos Public Safety & Security Solutions, Inc., a Delaware corporation and wholly owned subsidiary of the Company (“PSS”), to Securitas Electronic Security, Inc., a Delaware corporation (“Buyer”). On June 11, 2018, the Company completed the sale of all of the issued and outstanding capital stock of PSS to Buyer for a purchase price of $69 million in cash, subject to a net working capital adjustment at closing (the “Transaction”). The Company expects to receive approximately $70 million of net cash proceeds from the Transaction, subject to a net working capital adjustment, after taking into account amounts to be paid by the Company pursuant to a negotiated transaction services agreement between the Company and Buyer, receipt by the Company of approximately $7 million in net working capital to be retained by the Company, and associated transaction fees and expenses. The Company currently expects that the net working capital retained by the Company will be collected by the first half of 2019 once certain legacy projects are completed and the project close-out process has been completed. The Company incurred approximately $2.7 million of transaction related costs, which has been reflected in the loss from discontinued operations in the periods incurred. The Company currently expects to recognize a net break-even on the Transaction once the aggregate net proceeds described above have been collected. Any changes or adjustments to the expected net proceeds will be reflected in future periods.

The terms of the Indenture (as defined below) for the Company’s 6.5% Notes (as defined below) require that the net cash proceeds from asset dispositions (within 360 days from the date of any such sale) be either utilized to (i) repay or prepay amounts outstanding under the Credit Agreement (as defined below) unless such amounts are reinvested in similar collateral, (ii) permanently reduce other secured indebtedness and equally and ratably reduce obligations under the 6.5% Notes through open market purchases of 6.5% Notes at or above par, (iii) make an investment in assets that replace the collateral for the 6.5% Notes or (iv) a combination of (i), (ii) and (iii). To the extent there are any remaining net proceeds from such asset disposition after application of (i), (ii) and (iii), such amounts are required to be utilized to repurchase the 6.5% Notes at par.

The Company intends to utilize the net proceeds from the Transaction to fund growth initiatives by making investments in similar collateral in accordance with the terms of the Indenture.

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), PSS and its subsidiaries have been reported in discontinued operations in the accompanying condensed consolidated financial statements for all periods presented.

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



	Three Months Ended						Nine Months Ended
	September 30, 2018			October 1, 2017			September 30, 2018			October 1, 2017
Revenue	$	0.9		$	39.2		$	44.0		$	113.9
Cost of sales	0.4			28.1			33.8			83.9
Selling, general and administrative expenses	—			8.2			16.6			25.6
Other (income) expense, net	—			—			2.7			(0.1		)
Income (loss) from discontinued operations before income taxes	0.5			2.9			(9.1		)	4.5
Gain on disposal of discontinued operations before income taxes	—			—			—			—
Total gain (loss) on discontinued operations before income taxes	0.5			2.9			(9.1		)	4.5
Income tax benefit (expense)	(0.2		)	(1.3		)	2.0			(2.1		)
Income (loss) from discontinued operations	$	0.3		$	1.6		$	(7.1	)	$	2.4

Operating results for 2018 are through the date of divestiture of June 11, 2018. Revenue and operating results for the three months ended September 30, 2018 reflect the performance on the contracts and working capital retained by the Company. Revenue and operating results for the nine months ended September 30, 2018 were impacted by approximately $1.8 million and $2.0 million, respectively, of cost adjustments on certain security system deployment projects for a mass transit authority. Transaction expenses of $0.0 million and $2.7 million, primarily comprised of investment advisory fees, legal fees, and other direct transaction expenses related to the Transaction, were included in Other (income) expense, net for the three and nine months ended September 30, 2018, respectively. Depreciation expense included in Selling, general and administrative expenses was $0.0 million and $0.1 million for the three months ended September 30, 2018 and October 1, 2017, respectively, and $0.1 million and $0.2 million for the nine months ended September 30, 2018 and October 1, 2017, respectively.

The following is a summary of the assets and liabilities of discontinued operations in the accompanying condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017 (in millions):



	September 30, 2018		December 31, 2017
Cash and cash equivalents	$	—	$	(0.9	)
Accounts receivable, net and unbilled receivables, net	7.9		56.0
Inventoried costs	—		1.5
Other current assets	0.3		2.0
Current assets of discontinued operations	$	8.2	$	58.6

Property, plant and equipment, net	$	—	$	3.0
Goodwill	—		35.6
Other assets	—		0.2
Non-current assets of discontinued operations	$	—	$	38.8

Accounts payable	$	0.3	$	14.2
Accrued expenses	1.1		4.7
Accrued compensation	—		4.6
Billings in excess of cost and earnings on uncompleted contracts	—		4.3
Other current liabilities	5.6		1.4
Current liabilities of discontinued operations	$	7.0	$	29.2

Non-current liabilities of discontinued operations	$	6.3	$	6.0