Goodwill and Other Intangible Assets

12 Months Ended

Dec. 29, 2019

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.

The KGS reportable segment has five operating segments: Defense Rocket Support Services (“DRSS”), Microwave Electronics (“ME”), Space, Training and Cybersecurity Solutions (ST&C), Modular Systems (“MS”), and Kratos Turbine Technologies (“KTT”). 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 US reportable segment consists of its unmanned aerial system, unmanned ground, and unmanned seaborne system products.

The Company identified its reporting units to be the DRSS, ME, ST&C, MS, KTT and US operating segments. The Company tests goodwill for impairment by performing a qualitative assessment or using a two-step impairment process. If the Company chooses to perform a qualitative assessment and determines it is not more likely than not that the fair value of the reporting unit exceeds its carrying value, the two-step impairment process is then performed. For operations where the two-step process is used, the identification and measurement of impairment involves the estimation of the fair value of reporting units. If the fair value is determined to be less than the carrying value, a second step is performed to determine the amount of the impairment. When any impairment has occurred, a charge to operations is recorded. In order to test for potential impairment, the Company estimates the fair value of each of the 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 reporting units based upon comparable market prices and recent transactions and also validates the reasonableness of the implied multiples from the income approach.

In determining the fair value for the reporting units, where the two-step process is used, there are key assumptions relating to future expected cash flows, terminal growth rates, appropriate discount rates, market multiples, and the control premium a controlling shareholder could be expected to pay.

During the fourth quarter of 2017, as a result of the Company’s annual impairment test of the carrying value of its goodwill balances, the Company recorded an impairment charge of $24.2 million of the carrying value of the goodwill of its DRSS business reported in its KGS segment, which majority of business and revenue at the time included the Company’s legacy government services business. In 2010, the Company changed its strategy to focus on being a system, product, technology and intellectual property based company and deemphasized its legacy government services businesses which are no longer considered a core business. Over the past several years, similar to other businesses operating in the federal government technical services space, this business has been adversely impacted by competitive pressures and commoditization resulting from lower priced technically acceptable awards rather than awards based on best value or that are technologically or performance differentiated. Specifically, the Company lost two sizable five-year contract opportunities where Kratos was underbid on cost, which significantly impacted the expected future financial performance of this business. There was no impairment recognized for the years ended December 29, 2019 and December 30, 2018.

The carrying amounts of goodwill as of December 29, 2019 and December 30, 2018 by reportable segment are as follows (in millions):



	As of December 29, 2019
	US		KGS		Total
Gross value	$	111.1	$	597.8	$	708.9
Less accumulated impairment	13.8		239.5		253.3
Net	$	97.3	$	358.3	$	455.6





	As of December 30, 2018
	US		KGS		Total
Gross value	$	111.1	$	567.9	$	679.0
Less accumulated impairment	13.8		239.5		253.3
Net	$	97.3	$	328.4	$	425.7


(b)	Purchased Intangible Assets

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



	As of December 29, 2019							As of December 30, 2018
	Gross Value		Accumulated Amortization			Net Value		Gross Value		Accumulated Amortization			Net Value
Acquired finite-lived intangible assets:
Customer relationships	$	72.3	$	(53.3	)	$	19.0	$	52.6	$	(50.6	)	$	2.0
Contracts and backlog	32.0		(28.4		)	3.6		29.9		(26.4		)	3.5
Developed technology and technical know-how	25.0		(23.8		)	1.2		25.0		(21.3		)	3.7
Trade names	1.9		(1.6		)	0.3		1.4		(1.4		)	—
In-process research and development	8.5		—			8.5		—		—			—
Total finite-lived intangible assets	139.7		(107.1		)	32.6		108.9		(99.7		)	9.2
Indefinite-lived trade names	6.9		—			6.9		6.9		—			6.9
Total intangible assets	$	146.6	$	(107.1	)	$	39.5	$	115.8	$	(99.7	)	$	16.1

The aggregate amortization expense for finite-lived intangible assets was $7.4 million, $5.9 million and $10.4 million, for the years ended December 29, 2019, December 30, 2018, and December 31, 2017, respectively. The Company records all amortization expense in selling, general and administrative expenses.

The estimated future amortization expense of acquired intangible assets with finite lives as of December 29, 2019 is as follows (in millions):



Fiscal Year	Amount
2020	5.8
2021	3.7
2022	2.4
2023	2.4
2024	2.4
Thereafter	15.9
Total	$	32.6