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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended March 28, 2021
or 
        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________ 
Commission file number 001-34460
 
KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware13-3818604
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
1 Chisholm Trail, Suite 3200
Round Rock, TX 78681
(512238-9840
(Address, including zip code, and telephone number, including
area code, of registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.001 par valueKTOSThe NASDAQ Global Select Market
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ý  No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes ý  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
 
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes   No 
As of April 30, 2021, 123,789,957 shares of the registrant’s common stock were outstanding.


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KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
 
FORM 10-Q
 
FOR THE QUARTERLY PERIOD ENDED MARCH 28, 2021
 
INDEX
  Page
  
   
  
 
  
 
 
 
  
  
  
  
 
  
  
  
  
  
  
  
2

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PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements.
3

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KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 (in millions, except par value and number of shares)
 March 28, 2021
(Unaudited)December 27, 2020
Assets  
Current assets:  
Cash and cash equivalents$383.6 $380.8 
Restricted cash 0.7 
Accounts receivable, net85.7 95.3 
Unbilled receivables, net178.9 177.0 
Inventoried costs85.7 81.2 
Prepaid expenses13.5 12.0 
Other current assets21.2 17.8 
Total current assets768.6 764.8 
Property, plant and equipment, net146.9 143.8 
Operating lease right-of-use assets40.8 42.9 
Goodwill483.7 483.9 
Intangible assets, net41.6 43.0 
Other assets83.6 84.4 
Total assets$1,565.2 $1,562.8 
Liabilities and Stockholders Equity
  
Current liabilities:  
Accounts payable$51.9 $55.4 
Accrued expenses32.0 34.7 
Accrued compensation54.2 48.1 
Accrued interest6.4 1.5 
Billings in excess of costs and earnings on uncompleted contracts41.1 34.0 
Current portion of operating lease liabilities8.9 8.9 
Other current liabilities13.0 11.9 
Current liabilities of discontinued operations2.7 3.1 
Total current liabilities210.2 197.6 
Long-term debt300.3 301.0 
Operating lease liabilities, net of current portion36.4 38.6 
Other long-term liabilities72.0 83.0 
Long-term liabilities of discontinued operations2.5 2.5 
Total liabilities621.4 622.7 
Commitments and contingencies (Note 15)
Redeemable noncontrolling interest14.8 14.8 
Stockholders equity:
  
Preferred stock, $0.001 par value, 5,000,000 shares authorized, 0 shares outstanding at March 28, 2021 and December 27, 2020
  
Common stock, $0.001 par value, 195,000,000 shares authorized; 123,738,251 and 123,047,147 shares issued and outstanding at March 28, 2021 and December 27, 2020, respectively
  
Additional paid-in capital1,557.9 1,556.3 
Accumulated other comprehensive loss1.6 1.4 
Accumulated deficit(630.5)(632.4)
Total stockholders equity
929.0 925.3 
Total liabilities and stockholders equity
$1,565.2 $1,562.8 

The accompanying notes are an integral part of these condensed consolidated financial statements.
4

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KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
 (Unaudited)
 Three Months Ended
 March 28, 2021March 29, 2020
Service revenues$57.3 $63.6 
Product sales136.9 105.3 
Total revenues194.2 168.9 
Cost of service revenues42.5 45.2 
Cost of product sales100.7 77.9 
Total costs143.2 123.1 
Gross profit51.0 45.8 
Selling, general and administrative expenses37.9 34.9 
Merger and acquisition expenses0.2 0.4 
Research and development expenses8.0 5.7 
Restructuring expenses and other 0.1 
Operating income4.9 4.7 
Other expense:  
Interest expense, net(5.9)(5.4)
Other income (expense), net0.2 (0.5)
Total other expense, net(5.7)(5.9)
Loss from continuing operations before income taxes(0.8)(1.2)
Benefit for income taxes from continuing operations(2.7)(1.4)
Income from continuing operations1.9 0.2 
Loss from discontinued operations (0.4)
Net income (loss)1.9 (0.2)
Less: Net income attributable to noncontrolling interest  
Net income (loss) attributable to Kratos$1.9 $(0.2)
Basic income per common share attributable to Kratos:  
Income from continuing operations$0.02 $ 
Loss from discontinued operations  
Net income per common share$0.02 $ 
Diluted income per common share attributable to Kratos:
Income from continuing operations$0.01 $ 
Loss from discontinued operations  
Net income per common share$0.01 $ 
Weighted average common shares outstanding:
Basic124.1 107.2 
Diluted127.7 110.1 
 
The accompanying notes are an integral part of these consolidated financial statements.

5

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KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions, except per share amounts)
 (Unaudited)

Three Months Ended
March 28, 2021March 29, 2020
Net income (loss)$1.9 $(0.2)
Change in cumulative translation adjustment0.2 0.2 
Comprehensive income2.1  
Less: Comprehensive income attributable to noncontrolling interest  
Comprehensive income attributable to Kratos$2.1 $ 

The accompanying notes are an integral part of these consolidated financial statements.
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KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the three months ended March 28, 2021 and March 29, 2020
(in millions)
(Unaudited)
Redeemable Noncontrolling InterestCommon StockAdditional Paid-In CapitalAccumulated Other Comprehensive LossAccumulated DeficitTotal Stockholders’ Equity
SharesAmounts
Balance, December 29, 2019$15.0 106.6 $ $1,286.5 $(0.4)$(712.0)$574.1 
Stock-based compensation— — — 4.7 — — 4.7 
Issuance of common stock for employee stock purchase plan, options and warrants
— 0.2 — 2.6 — — 2.6 
Restricted stock issued and related taxes— 0.2 — (1.2)— — (1.2)
Net loss — — — — (0.2)(0.2)
Other comprehensive income, net of tax— — — — 0.2 — 0.2 
Balance, March 29, 202015.0 107.0 $ $1,292.6 $(0.2)$(712.2)$580.2 
Redeemable Noncontrolling InterestCommon StockAdditional Paid-In CapitalAccumulated Other Comprehensive IncomeAccumulated DeficitTotal Stockholders’ Equity
SharesAmounts
Balance, December 27, 2020$14.8 123.0 $ $1,556.3 $1.4 $(632.4)$925.3 
Stock-based compensation— — — 6.2 — — 6.2 
Issuance of common stock for employee stock purchase plan, options and warrants
— 0.2 — 2.5 — — 2.5 
Restricted stock issued and related taxes
— 0.5 — (7.1)— — (7.1)
Net income — — — — 1.9 1.9 
Other comprehensive income, net of tax— — — — 0.2 — 0.2 
Balance, March 28, 2021$14.8 123.7 $ $1,557.9 $1.6 $(630.5)$929.0 

The accompanying notes are an integral part of these condensed consolidated financial statements.
7

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KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
Three Months Ended
March 28, 2021March 29, 2020
Operating activities: 
Net income (loss)$1.9 $(0.2)
Loss from discontinued operations (0.4)
Income from continuing operations1.9 0.2 
Adjustments to reconcile income from continuing operations to net cash provided by operating activities from continuing operations:  
Depreciation and amortization6.3 6.3 
Deferred income taxes0.1 (1.0)
Amortization of lease right-of-use assets2.2 2.9 
Stock-based compensation6.2 4.7 
Amortization of deferred financing costs0.2 0.2 
Provision for doubtful accounts(0.1)0.3 
Changes in assets and liabilities, net of acquisitions:  
Accounts receivable9.8 6.6 
Unbilled receivables(1.8)(1.5)
Inventoried costs(4.2)(1.5)
Prepaid expenses and other assets(2.0)(6.8)
Operating lease liabilities(2.2)(3.4)
Accounts payable(2.0)(9.6)
Accrued expenses(2.7)(4.4)
Accrued compensation6.2 3.7 
Accrued interest4.9 4.9 
Billings in excess of costs and earnings on uncompleted contracts7.1 3.4 
Income tax receivable and payable(2.2)(0.9)
Other liabilities(5.0)(0.1)
Net cash provided by operating activities from continuing operations22.7 4.0 
Investing activities:  
Cash paid for acquisitions, net of cash acquired(5.1)(14.2)
Capital expenditures(9.6)(6.4)
Net cash used in investing activities from continuing operations(14.7)(20.6)
Financing activities: 
Payments under finance leases(0.2)(0.1)
Payments of employee taxes withheld from share-based awards(7.1)(1.2)
Proceeds from shares issued under equity plans2.5 2.6 
Net cash provided by (used in) financing activities from continuing operations(4.8)1.3 
Net cash flows of continuing operations3.2 (15.3)
Net operating cash flows of discontinued operations(0.5)1.3 
Effect of exchange rate changes on cash, cash equivalents and restricted cash(0.6) 
Net increase (decrease) in cash, cash equivalents and restricted cash2.1 (14.0)
Cash, cash equivalents and restricted cash at beginning of period381.5 172.6 
Cash, cash equivalents and restricted cash at end of period$383.6 $158.6 

The accompanying notes are an integral part of these condensed consolidated financial statements.
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KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(Unaudited)
 
Note 1. Summary of Significant Accounting Policies
 
All references to the “Company” and “Kratos” refer to Kratos Defense & Security Solutions, Inc., a Delaware corporation, and its subsidiaries.
 
(a)    Basis of Presentation

 The information as of March 28, 2021 and for the three months ended March 28, 2021 and March 29, 2020 is unaudited. The condensed consolidated balance sheet as of December 27, 2020 was derived from the Company’s audited consolidated financial statements at that date. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods presented. The results have been prepared in accordance with the instructions to Form 10-Q and do not necessarily include all information and footnotes necessary for presentation in accordance with accounting principles generally accepted in the U.S. (“GAAP”). These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes included in the Company’s audited annual consolidated financial statements for the fiscal year ended December 27, 2020, included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 25, 2021 (the “Form 10-K”). Interim operating results are not necessarily indicative of operating results expected in subsequent periods or for the year as a whole.

(b)    Principles of Consolidation
 
The condensed consolidated financial statements include the accounts of the Company, its 100% owned subsidiaries and its majority owned subsidiaries, FTT Inc. and FTT Core (each as defined below), each of which is 80.1% owned. All inter-company transactions have been eliminated in consolidation. Noncontrolling interest consists of the remaining 19.9% interest in FTT Inc. and FTT Core. See Note 12 for further information related to the redeemable noncontrolling interest.
 
(c)    Fiscal Year
 
The Company has a 52/53 week fiscal year ending on the last Sunday of the calendar year. The three month periods ended March 28, 2021 and March 29, 2020 consisted of 13-week periods. There are 52 calendar weeks in the fiscal years ending on December 26, 2021 and December 27, 2020.
 
(d)    Accounting Estimates

There have been no significant changes in the Company’s accounting estimates for the three months ended March 28, 2021 as compared to the accounting estimates described in the Form 10-K.

(e)    Accounting Standards Updates

In December 2019, the FASB issued ASU No. 2019-12 (“ASU 2019-12”), Income taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12, in an effort to reduce the complexity in accounting for income taxes, removes certain exceptions for measuring intraperiod tax allocations, foreign subsidiary equity method investments and interim period tax losses. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020. The Company adopted ASU 2019-12 effective December 28, 2020. The implementation of this guidance did not have a material effect on its unaudited condensed consolidated financial statements.

(f)    Fair Value of Financial Instruments
 
The carrying amounts and the related estimated fair values of the Company’s long-term debt financial instruments not measured at fair value on a recurring basis at March 28, 2021 and December 27, 2020 are presented in Note 10. The carrying value of all other financial instruments, including cash equivalents, accounts receivable, unbilled receivables, accounts payable, accrued expenses, billings in excess of cost and earnings on uncompleted contracts, income taxes payable and short-term debt,
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approximated their estimated fair values at March 28, 2021 and December 27, 2020 due to the short-term nature of these instruments.

Note 2. Acquisitions

Technical Directions, Inc.

On February 24, 2020, the Company acquired Technical Directions, Inc. (“TDI”), a turbine technology company focused on tactical unmanned aerial drones, missile and other systems for approximately $10.5 million in cash, subject to adjustments for transaction expenses, indebtedness, cash on hand, and post-closing working capital adjustments. Working capital adjustments of $0.3 million were settled in the third quarter of 2020. The operating results of the acquisition have been included in the Company’s results of operations from the effective acquisition date. Had the acquisition occurred as of December 30, 2019, net sales, net loss from consolidated operations, net loss attributable to Kratos, and basic and diluted net loss per share attributable to Kratos on a pro forma basis for the three months ended March 29, 2020 would not have been materially different than the reported amounts. TDI is included in the Kratos Unmanned Systems (“US”) segment.

Optimized Performance Machining, Inc.

On April 17, 2020, the Company acquired Optimized Performance Machining, Inc.(“OPM”), a company that primarily operates in the industrial machinery and equipment repair business industry for approximately $1.8 million in cash, subject to adjustments for transaction expenses, indebtedness, cash on hand, and post-closing working capital adjustments. Working capital adjustments of $0.03 million were settled in the third quarter of 2020. The operating results of the acquisition have been included in the Company’s results of operations from the effective acquisition date. Had the acquisition occurred as of December 30, 2019, net sales, net loss from consolidated operations, net income attributable to Kratos, and basic and diluted net loss per share attributable to Kratos on a pro forma basis for the three months ended March 29, 2020 would not have been materially different than the reported amounts. OPM is included in the Kratos US segment.

CPI ASC Signal Division, Inc.

On June 15, 2020, Kratos Integral Holdings, LLC entered into a Stock Purchase Agreement to acquire CPI ASC Signal Division, Inc. (“ASC Signal”) from Communications & Power Industries LLC for approximately $35 million in cash, subject to adjustments for transaction expenses, indebtedness, cash on hand, and working capital adjustments. ASC Signal is a manufacturer of high-performance, highly engineered antenna systems for satellite communications, radar, electronic warfare, and high frequency applications. On June 30, 2020, the acquisition was completed following the satisfaction of all closing conditions, including receipt of regulatory approval from all required government authorities. The adjustments for transaction expenses, indebtedness, cash on hand and working capital were settled by the parties in January 2021, resulting in a net payment due to the Company of approximately $1.4 million. ASC Signal is included in the KSTC Division of the Kratos Government Solutions (“KGS”) segment.

The excess of the purchase price over the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed in the acquisition was allocated to goodwill. The goodwill represents the value the Company expects to be created by integrating ASC Signal’s existing business with Kratos’ related products and customers.

The transaction has been accounted for using the acquisition method of accounting, which requires, among other things, that the assets acquired and the liabilities assumed be recognized at their fair values as of the acquisition date. The fair value measurements are based primarily on significant inputs not observable in the marketplace and thus represent Level 3
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measurements. The following table summarizes the allocation of the purchase price over the estimated fair values of the major assets acquired and liabilities assumed (in millions):
Accounts receivable $5.7 
Unbilled receivables0.9 
Inventoried costs10.4 
Other current assets1.8 
Property and equipment10.0 
Intangible assets4.3 
Goodwill10.8 
  Total identifiable net assets acquired43.9 
Total identifiable net liabilities assumed(11.0)
Net assets acquired, excluding cash$32.9 

Based on the Company’s estimate of fair value, as of June 30, 2020, net liabilities included $9.1 million of current liabilities. The identifiable intangible assets include trade names of $0.1 million with a remaining useful life of 1 year, customer relationships of $2.0 million with remaining useful lives of 5 years, and developed technology of $2.2 million with a remaining useful life of 7 years. The Company also established a deferred tax liability of $1.1 million for the difference between the financial statement basis and tax basis of the acquired assets of ASC Signal and a corresponding increase in goodwill. The goodwill recorded in this transaction is not expected to be tax-deductible.

The amounts of revenue and operating income of ASC Signal included in the Company's condensed consolidated statement of operations for the three months ended March 28, 2021 were $8.6 million and $0.1 million, respectively.

A summary of the consideration paid for the acquired ownership in ASC Signal is as follows:
Cash paid$34.9 
Less: Cash acquired(2.0)
Total consideration$32.9 

Pro Forma Financial Information

The following tables summarize the supplemental condensed consolidated statements of operations information on an unaudited pro forma basis as if the acquisition of ASC Signal occurred on December 30, 2019 and include adjustments that were directly attributable to the foregoing transactions. There are no material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings (loss). The pro forma results are for illustrative purposes only for the applicable period and do not purport to be indicative of the actual results that would have occurred had the transaction been completed as of the beginning of the period, nor are they indicative of results of operations that may occur in the future.

For the three months ended March 29, 2020 (all amounts, except per share amounts, are in millions):
Pro forma revenues$179.1 
Pro forma net loss before tax$(5.2)
Pro forma net loss$(4.3)
Basic pro forma loss per share$(0.04)
Diluted pro forma loss per share$(0.04)

5-D Systems, Inc.

On November 18, 2020, the Company acquired 5-D Systems, Inc. (“5-D Systems”), a leading National Security Solutions provider and industry-leading provider of high-performance, jet-powered unmanned aerial systems for an aggregate
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of approximately $10.0 million. The purchase price was $5.0 million in cash, subject to adjustments for transaction expenses, indebtedness, cash on hand, and post-closing working capital adjustments, and 250,374 shares of common stock (with a value of approximately $5.0 million). The allocation of the total consideration for this acquisition to the tangible and identifiable intangible assets acquired and liabilities assumed is preliminary until the Company obtains final information regarding their fair values. However, the Company does not expect any adjustment to such allocations to be material to the Company's consolidated financial statements. The operating results of the acquisition have been included in the Company’s results of operations from the effective acquisition date. Had the acquisition occurred as of December 30, 2019, net sales, net loss from consolidated operations, net loss attributable to Kratos, and basic and diluted net income per share attributable to Kratos on a pro forma basis for three months ended March 29, 2020 would not have been materially different than the reported amounts. 5-D Systems is included in the Kratos US segment.

Note 3. Revenue Recognition

Effective January 1, 2018, the Company adopted the Financial Accounting Standards Board (“FASB”) ASU 2014-09, Revenue from Contracts with Customers, and the related amendments, which are codified into Accounting Standards Codification (“ASC”) 606 (“ASC 606”).

To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. Once the contract is identified and determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC 606. The majority of the Company’s contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation based on the relative standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling price is the expected-cost-plus-margin approach, under which the Company forecasts the expected costs of satisfying a performance obligation and then adds an appropriate margin for that distinct good or service.
For the majority of contracts, the Company satisfies the underlying performance obligations over time as the customer obtains control or receives benefits as work is performed on the contract. As a result, under ASC 606 revenue is recognized over a time using the cost-to-cost method (cost incurred relative to total estimated cost at completion).

Remaining Performance Obligations

The Company calculates revenues from remaining performance obligations as the dollar value of the remaining performance obligations on executed contracts. On March 28, 2021, the Company had approximately $892.9 million of remaining performance obligations. The Company expects to recognize approximately 49% of the remaining performance obligations as revenue in 2021, an additional 18% in 2022, and the balance thereafter.

Contract Estimates

Due to the nature of the work required to be performed on many performance obligations, the estimation of total revenue and cost at completion is complex, subject to many variables and requires significant judgment. On a quarterly basis, the Company conducts its contract cost Estimate at Completion (“EAC”) process by reviewing the progress and execution of outstanding performance obligations within its contracts. As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities and the related changes in estimates of revenues and costs. The risks and opportunities include management’s judgment about the ability and cost to achieve the schedule (e.g., the number and type of milestone events), technical requirements (e.g., a newly-developed product versus a mature product) and other contract requirements. Management must make assumptions and estimates regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation (e.g., to estimate increases in wages and prices for materials and related support cost allocations), execution by subcontractors, the availability and timing of funding from customers and overhead cost rates, among other variables.
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In addition, certain of the Company’s long-term contracts contain award fees, incentive fees, or other provisions that can either increase or decrease the transaction price. These variable amounts generally are awarded upon achievement of certain performance metrics, program milestones or cost targets and can be based upon customer discretion. Variable consideration is estimated at the most likely amount to which the Company is expected to be entitled. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information (historical, current and forecasted) that is reasonably available.

Contracts are often modified to account for changes in contract specifications and requirements. Contract modifications are considered to exist when the modification either creates new or changes the existing enforceable rights and obligations. Most of the Company’s contract modifications are for goods or services that are not distinct from the existing contract due to the significant integration service provided in the context of the contract and are accounted for as if they were part of that existing contract. The effect of a contract modification on the transaction price, and the measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.

As a result of the EAC process, any quarterly adjustments to revenues, cost of sales, and the related impact to operating income are recognized as necessary in the period they become known. These adjustments may result from positive program performance, and may result in an increase in operating income during the performance of individual performance obligations, if it is determined the Company will be successful in mitigating risks surrounding the technical, schedule and cost aspects of those performance obligations or realizing related opportunities. Likewise, these adjustments may result in a decrease in operating income if it is determined the Company will not be successful in mitigating these risks or realizing related opportunities. Changes in estimates of net sales, cost of sales and the related impact to operating income are recognized quarterly on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current and prior periods. A significant change in one or more of these estimates could affect the profitability of one or more of the Company’s contracts. When estimates of total costs to be incurred on a performance obligation exceed total estimates of revenue to be earned, a provision for the entire loss on the performance obligation is recognized in the period the loss is determined. No cumulative catch-up adjustment on any one contract was material to the Company’s unaudited condensed consolidated financial statements for the three-month periods ended March 28, 2021, and March 29, 2020. Likewise, total cumulative catch-up adjustments were not material for the three-month periods ended March 28, 2021, and March 29, 2020.

Contract Assets and Liabilities

For each of the Company’s contracts, the timing of revenue recognition, customer billings, and cash collections results in a net contract asset or liability at the end of each reporting period. Fixed-price contracts are typically billed to the customer either using progress payments, whereby amounts are billed monthly as costs are incurred or work is completed, or performance based payments, which are based upon the achievement of specific, measurable events or accomplishments defined and valued at contract inception. Cost-type contracts are typically billed to the customer on a monthly or semi-monthly basis.

Contract assets consist of unbilled receivables, primarily related to long-term contracts where revenue recognized under the cost-to-cost method exceeds amounts billed to customers. Unbilled receivables are classified as current assets and, in accordance with industry practice, include amounts that may be billed and collected beyond one year due to the long term nature of many of the Company’s contracts. Accumulated contract costs in unbilled receivables include direct production costs, factory and engineering overhead, production tooling costs, and, for government contracts, recovery of allowable general and administrative expenses. Unbilled receivables also include certain estimates of variable consideration described above. The Company’s contracts that give rise to contract assets are not considered to include a significant financing component as the payment terms are intended to protect the customer in the event the Company does not perform on its obligations under the contract.

Contract liabilities include advance payments and billings in excess of revenue recognized. Certain customers make advance payments prior to the satisfaction of the Company’s performance obligations on the contract. These amounts are recorded as contract liabilities until such performance obligations are satisfied, either over time as costs are incurred or at a point in time when deliveries are made. The Company’s contracts that give rise to contract liabilities do not include a significant financing component as the underlying advance payments received are generally utilized to pay for contract costs within a one-year period or are used to ensure the customer meets contractual requirements.

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Net contract assets and liabilities are as follows (in millions):
March 28, 2021December 27, 2020Net Change
Contract assets$178.9 $177.0 $1.9 
Contract liabilities$41.1 $34.0 $7.1 
Net contract assets$137.8 $143.0 $(5.2)

Contract assets increased $1.9 million during the three months ended March 28, 2021, primarily due to the recognition of revenue related to the satisfaction or partial satisfaction of performance obligations for which the Company has not yet billed the customers. There were no significant impairment losses related to any receivables or contract assets arising from the Company’s contracts with customers during the three months ended March 28, 2021. Contract liabilities increased $7.1 million during the three months ended March 28, 2021, primarily due to payments received in excess of revenue recognized on these performance obligations. For the three months ended March 28, 2021 the Company recognized revenue of $17.0 million that was previously included in the contract liabilities that existed at December 27, 2020. For the three months ended March 29, 2020 the Company recognized revenue of $14.3 million that was previously included in the contract liabilities that existed at December 29, 2019.

In November 2019, a large training solutions program was terminated for convenience (“T for C”) by the customer. Under a T for C, a contractor is entitled to seek specified costs through a termination settlement process including (1) the contract price for completed supplies and services accepted by the government but not previously paid for; (2) the cost incurred in the performance of work terminated plus a reasonable profit on those costs; and (3) its costs incurred in settling with subcontractors and preparing and settling the termination proposal. Under a T for C, the Company would not be able to collect the total withheld amounts until the settlement terms of the T for C have been negotiated and agreed to with the customer. At March 28, 2021, approximately $11.5 million in unbilled receivables remained outstanding on this project. In addition, the Company is currently in dispute with an international customer in the US segment over approximately $10.0 million in unbilled receivables outstanding as of March 28, 2021. The dispute with the international customer concerns the completion of certain system requirements and certain contractual milestones. The Company alleges breach of contract, as well as other claims against the customer, and seeks damages and other equitable relief. The customer has asserted counterclaims seeking liquidated damages and additional relief. Management has evaluated the present facts of the matters and performed a reassessment of the contractual amounts due and has determined that no adjustment to previously recognized revenue, or the corresponding unbilled receivables, is necessary at March 28, 2021.
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Disaggregation of Revenue

The following series of tables presents the Company’s revenue disaggregated by several categories. For the majority of contracts, revenue is recognized over time as work is performed on the contract. Revenue by contract type was as follows (in millions):
Three Months Ended
March 28, 2021March 29, 2020
Kratos Government Solutions
Fixed price$99.5 $104.4 
Cost plus fee28.6 14.4 
Time and materials10.2 8.1 
Total Kratos Government Solutions138.3 126.9 
Unmanned Systems
Fixed price37.2 27.3 
Cost plus fee17.9 14.1 
Time and materials0.8 0.6 
Total Unmanned Systems55.9 42.0 
Total Revenues$194.2 $168.9 

Revenue by customer was as follows (in millions):
Three Months Ended
March 28, 2021March 29, 2020
Kratos Government Solutions
U.S. Government (1)
$92.6 $84.7 
International (2)
31.7 28.0 
U.S. Commercial and other customers14.0 14.2 
Total Kratos Government Solutions138.3 126.9 
Unmanned Systems
U.S. Government (1)
49.6 39.4 
International (2)
6.3 2.4 
U.S. Commercial and other customers 0.2 
Total Unmanned Systems55.9 42.0 
Total Revenues$194.2 $168.9 
(1) Sales to the U.S. Government include sales from contracts for which the Company is the prime contractor, as well as those for which the
Company is a subcontractor and the ultimate customer is the U.S. Government. Each of the Company’s segments derives substantial revenue
from the U.S. Government. These sales include foreign military sales contracted through the U.S. Government.

(2) International sales include sales from contracts for which the Company is the prime contractor, as well as those for which the Company is a
subcontractor and the ultimate customer is an international customer. These sales include direct sales with governments outside the U.S. and
commercial sales with customers outside the U.S.

Note 4. 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 closing net working capital adjustment (the “Transaction”). To date, the Company has received approximately $70 million of aggregate net cash proceeds from the Transaction, after taking into account amounts that were paid by the Company pursuant to a negotiated
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transaction services agreement between the Company and the Buyer, receipt of approximately $6.9 million in net working capital retained by the Company, and associated transaction fees and expenses, excluding the impact of the final settlement and determination of the closing net working capital adjustment. The Company and the Buyer are currently in a dispute regarding the closing net working capital adjustment. The amount in dispute is approximately $8 million. The Company has recorded a net break-even on the sale of the PSS business which includes the aggregate net proceeds described above that have been collected, excluding the impact of the final settlement and determination of the closing net working capital adjustment. The resolution of the ongoing dispute will be recorded in future periods when resolved.

Note 5. Goodwill and Intangible Assets
 
(a)    Goodwill
 
    The carrying amounts of goodwill as of March 28, 2021 and December 27, 2020 by reportable segment are as follows (in millions):
As of March 28, 2021
KGSUSTotal
Gross value$609.6 $127.4 $737.0 
Less accumulated impairment239.5 13.8 253.3 
Net$370.1 $113.6 $483.7 

As of December 27, 2020
KGSUSTotal
Gross value$609.6 $127.6 $737.2 
Less accumulated impairment239.5 13.8 253.3 
Net$370.1 $113.8 $483.9 

(b)    Purchased Intangible Assets
 
The following table sets forth information for finite-lived and indefinite-lived intangible assets (in millions): 
 As of March 28, 2021As of December 27, 2020
 Gross
Value
Accumulated
Amortization
Net
Value
Gross
Value
Accumulated
Amortization
Net
Value
Acquired finite-lived intangible assets:    
Customer relationships$75.3 $(56.2)$19.1 $75.3 $(55.7)$19.6 
Contracts and backlog33.4 (31.7)1.7 33.4 (31.0)2.4 
Developed technology and technical know-how29.9 (25.4)4.5 29.9 (25.3)4.6 
Trade names2.0 (2.0) 2.0 (1.9)0.1 
In-process research and development9.4  9.4 9.4  9.4 
Total finite-lived intangible assets150.0 (115.3)34.7 150.0 (113.9)36.1 
Indefinite-lived trade names6.9 — 6.9 6.9 — 6.9 
Total intangible assets$156.9 $(115.3)$41.6 $156.9 $(113.9)$43.0 

Consolidated amortization expense related to intangible assets subject to amortization was $1.4 million and $1.9 million for the three months ended March 28, 2021 and March 29, 2020, respectively.

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Note 6. Inventoried Costs
 
Inventoried costs, consisted of the following components (in millions):
 
 March 28, 2021December 27, 2020
Raw materials$54.2 $47.3 
Work in process27.0 30.1 
Finished goods4.5 3.8 
Total inventoried costs$85.7 $81.2 
 
Note 7. Net Income (Loss) per Common Share
 
The Company calculates net income (loss) per share in accordance with FASB Accounting Standards Codification Topic 260, Earnings per Share (Topic 260). Under Topic 260, basic net income (loss) per common share attributable to the Kratos shareholders is calculated by dividing net income (loss) attributable to Kratos by the weighted-average number of common shares outstanding during the reporting period. Diluted net income (loss) per common share reflects the effects of potentially dilutive securities.

Shares from stock options and awards, excluded from the calculation of diluted net income per share because their inclusion would have been anti-dilutive, were 0.0 million for the three months ended March 28, 2021, and 0.9 million for the three months ended March 29, 2020.
 
Note 8. Leases

The Company leases certain facilities, office space, vehicles and equipment. Lease assets and lease liabilities are recognized at the commencement of an arrangement where it is determined at inception that a lease exists. Lease assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using an incremental borrowing rate generally applicable to the location of the lease asset, unless the implicit rate is readily determinable. Lease assets also include any upfront lease payments made and exclude lease incentives. Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised. The Company has operating lease arrangements with lease and non-lease components. The non-lease components in these arrangements are not significant when compared to the lease components. For all operating leases, the Company accounts for the lease and non-lease components as a single component.

Variable lease payments are generally expensed as incurred. Leases with an initial term of 12 months or less are not recorded on the balance sheet, and the expense for these short-term leases is recognized on a straight-line basis over the lease term.

The depreciable life of lease assets and leasehold improvements is limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.

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    The components of lease expense were as follows (in millions):
Three Months Ended
March 28, 2021March 29, 2020
Amortization of right of use assets - finance leases$0.5 $0.5 
Interest on lease liabilities - finance leases0.6 0.6 
Operating lease cost 2.9 3.5 
Short-term lease cost0.2 0.2 
Variable lease cost (cost excluded from lease payments)  
Sublease income (0.8)
Total lease cost
$4.2 $4.0 

The components of leases on the balance sheet were as follows (in millions):
March 28, 2021December 27, 2020
Operating Leases:
Operating lease right-of-use assets
$40.8 $42.9 
Current portion of operating lease liabilities
$8.9 $8.9 
Operating lease liabilities, net of current portion
$36.4 $38.6 
Finance leases:
Property, plant and equipment, net
$35.0 $36.5 
Other current liabilities
$0.9 $0.9 
Other long-term liabilities
$38.6 $38.8 

Cash paid for amounts included in the measurement of lease liabilities was as follows (in millions):
Three Months Ended
March 28, 2021March 29, 2020
Finance lease - cash paid for interest$0.6 $0.6 
Finance lease - financing cash flows$0.2 $0.1 
Operating lease - operating cash flows (fixed payments)$2.8 $4.1 

Other supplemental noncash information (in millions):
Three Months Ended
March 28, 2021March 29, 2020
Operating lease liabilities arising from obtaining right-of-use assets$0.2 $0.5 
Finance lease liabilities arising from obtaining right-of-use assets$ $0.4 
Weighted-average remaining lease term (in years):
Operating leases
5.285.74
Finance leases
17.4418.67
Weighted-average discount rate:
Operating leases
6.50 %6.50 %
Finance leases
6.52 %6.52 %
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The maturity of lease liabilities is (in millions):
Operating LeasesFinance Leases
2021 (1)
$8.8 $2.6 
202210.6 3.5 
202310.3 3.5 
20248.2 3.5 
20257.1 3.6 
Thereafter8.7 51.3 
Total lease payments53.7 68.0 
Less: imputed interest(8.4)(28.5)
Total present value of lease liabilities$45.3 $39.5 
(1) Excludes the three months ended March 28, 2021.

Note 9. Income Taxes

A reconciliation of the total income tax benefit to the amount computed by applying the statutory federal income tax rate of 21% to income from continuing operations before income taxes for the three months ended March 28, 2021 and March 29, 2020 is as follows (in millions):
 For the Three Months Ended
 March 28,
2021
March 29,
2020
Income tax at federal statutory rate$(0.2)$(0.3)
State and foreign taxes, net of federal tax benefit and valuation allowance (0.3)
Release of valuation allowance due to acquisitions (0.9)
Nondeductible expenses and other(0.2)(0.1)
Decrease in reserves for uncertain tax positions (0.2)
Stock compensation - excess tax benefits(2.4) 
Federal impact of research & development tax credits0.1  
Increase in federal valuation allowance 0.4 
Benefit for income taxes from continuing operations$(2.7)$(1.4)
During the fourth quarter of 2020, the Company evaluated all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance for deferred tax assets was still needed. Evidence evaluated by the Company included, but was not limited to, the fact that it is now in a three-year cumulative income position and no longer has cumulative losses in recent years, the results and trend of pretax book income from core operations, and its forecast of taxable income for 2021 and beyond. As a result, the Company had determined that it is more likely than not that sufficient taxable income will exist to realize the majority of its U.S. deferred tax assets and reversed a significant portion of the valuation allowance previously recorded against those deferred tax assets as of December 27, 2020. The remaining valuation allowance on the Company’s U.S. deferred tax assets relates primarily to state net operating loss and capital loss carryforwards the Company estimates are not more likely than not to be utilized in future periods.
In assessing the Company’s ability to realize deferred tax assets, management considers, on a periodic basis, whether it is more likely than not that some portion or all of its deferred tax assets will not be realized. In making this assessment, the Company has concluded that positive evidence, continues to outweigh the negative evidence as of March 28, 2021.
Federal and state income tax laws impose restrictions on the utilization of net operating loss (“NOL”) and tax credit carryforwards in the event that an “ownership change” occurs for tax purposes, as defined by Section 382 of the Internal Revenue Code of 1986, as amended (“Section 382”). In general, an ownership change occurs when shareholders owning 5% or more of a “loss corporation” (a corporation entitled to use NOLs or other loss carryovers) have increased their ownership of stock in such corporation by more than 50 percentage points during any three-year period. The annual base Section 382 limitation is calculated by multiplying the loss corporation’s value at the time of the ownership change by the greater of the long-term tax-exempt rate determined by the Internal Revenue Service in the month of the ownership change or the two
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preceding months. This base limitation is subject to adjustments, including an increase for built-in gains recognized in the five-year period after the ownership change.
In March 2010, an “ownership change” occurred that will limit the utilization of NOL carryforwards. In July 2011, another “ownership change” occurred. The March 2010 ownership change limitation is more restrictive. In prior years, the Company acquired corporations with NOL carryforwards at the date of acquisition (“Acquired NOLs”). The Acquired NOLs are subject to separate limitations that may further restrict the use of Acquired NOLs. As a result, the Company’s federal annual utilization of NOL carryforwards was limited to $27.0 million a year for the five years succeeding the March 2010 ownership change and $11.6 million for each year thereafter subject to separate limitations for Acquired NOLs. If the entire limitation amount is not utilized in a year, the excess can be carried forward and utilized in future years.
For the three months ended March 28, 2021, there was no impact of such limitations on the income tax provision, since the amount of taxable income did not exceed the annual limitation amount. However, future equity offerings or acquisitions that have equity as a component of the purchase price could also cause an “ownership change.” If and when any other “ownership change” occurs, utilization of the NOLs or other tax attributes may be further limited.
The Company is subject to taxation in the U.S. and various state and foreign tax jurisdictions. The Company’s tax years for 2000 and later are subject to examination by the U.S. and state tax authorities due to the existence of the NOL carryforwards. Generally, the Company’s tax years for 2015 and later are subject to examination by various foreign tax authorities as well.
As of December 27, 2020, the Company had $25.4 million of unrecognized tax benefits that, if recognized, would impact the Company’s effective income tax rate. No material changes were recorded to unrecognized tax benefits during the three months ended March 28, 2021.

The Company recognizes interest and penalties related to unrecognized tax benefits in its provision for income taxes. For the three months ended March 28, 2021 and March 29, 2020, the Company recorded an expense for interest and penalties of $0.1 million and $0.1 million, respectively. For the three months ended March 28, 2021 and March 29, 2020, there was no material benefit recorded related to the removal of interest and penalties. The Company believes that it is reasonably possible that as much as $0.3 million of the liabilities for uncertain tax positions will expire within the next twelve months due to the expiration of various applicable statutes of limitations.

Note 10. Debt
 
(a)    Issuance of 6.5% Senior Secured Notes due 2025

In November 2017, the Company issued and sold $300 million aggregate principal amount of 6.5% Senior Secured Notes due 2025 (the “6.5% Notes”) in a private placement conducted pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended. The Company incurred debt issuance costs of $6.6 million associated with the 6.5% Notes. The Company utilized the net proceeds from the sale of the 6.5% Notes, as well as cash from an equity offering to extinguish the previously outstanding 7.00% Senior Secured Notes due 2019 (the “7% Notes”). The total reacquisition price of the 7% Notes was $385.2 million, including a $12.0 million call premium, and $0.3 million of accrued interest.

The 6.5% Notes are governed by the Indenture, dated as of November 20, 2017 (the “Indenture”), among the Company, the Company’s existing and future domestic subsidiaries parties thereto (the “Subsidiary Guarantors”) and Wilmington Trust, National Association, as trustee and collateral agent. A Subsidiary Guarantor can be released from its guarantee if (a) all of the capital stock issued by such Subsidiary Guarantor or all or substantially all of the assets of such Subsidiary Guarantor are sold or otherwise disposed of; (b) the Company designates such Subsidiary Guarantor as an Unrestricted Subsidiary (as defined in the Indenture); (c) the Company exercises its legal defeasance option or its covenant defeasance option; or (d) upon satisfaction and discharge of the Indenture or payment in full in cash of the principal of, premium, if any, and accrued and unpaid interest on the 6.5% Notes.

The 6.5% Notes bear interest at a rate of 6.5% per year from the date of original issuance or from the most recent payment date on which interest has been paid or provided for. Interest on the 6.5% Notes is payable in arrears on May 30 and November 30 of each year, beginning on May 30, 2018. The 6.5% Notes are fully and unconditionally guaranteed by the Subsidiary Guarantors.

The 6.5% Notes and the guarantees (as set forth in the Indenture) are the Company’s senior secured obligations and are equal in right of payment with all other senior obligations of the Subsidiary Guarantors’ existing and future secured debt to the
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extent of the assets securing that secured debt. The Company’s obligations under the 6.5% Notes are secured by a first priority lien on substantially all of the Company’s assets and the assets of the Subsidiary Guarantors, except with respect to accounts receivable, inventory, deposit accounts, securities accounts, cash, securities and general intangibles (other than intellectual property), on which the holders of the 6.5% Notes have a second priority lien, junior to the lien securing the Company’s obligations under the Credit Agreement (as defined below).

The 6.5% Notes are redeemable by the Company, in whole or in part, at the respective redemption prices specified in the Indenture. The Company may also be required to make an offer to purchase the 6.5% Notes upon a change of control and certain sales of its assets.

The Indenture contains covenants limiting, among other things, the Company’s ability and the Subsidiary Guarantors’ ability to: (a) pay dividends on or make distributions or repurchase or redeem the Company’s capital stock or make other restricted payments; (b) incur additional debt and guarantee debt; (c) prepay, redeem or repurchase certain debt; (d) issue certain preferred stock or similar equity securities; (e) make loans and investments; (f) sell assets; (g) incur liens; (h) consolidate, merge, sell or otherwise dispose of all or substantially all of the Company’s assets; (i) enter into transactions with affiliates; and (j) enter into agreements restricting the Company’s ability and certain of its subsidiaries’ ability to pay dividends. These covenants are subject to a number of exceptions. As of March 28, 2021, the Company was in compliance with the covenants contained in the Indenture governing the 6.5% Notes.

The terms of the Indenture require that the net cash proceeds from asset dispositions be either utilized to (i) repay or prepay amounts outstanding under the Credit Agreement unless such amounts are reinvested in similar collateral, (ii) permanently reduce other indebtedness, (iii) make an investment in assets that replace the collateral of the 6.5% Notes or (iv) a combination of (i), (ii) and (iii). To the extent there are any remaining net proceeds from the 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 Indenture also provides for events of default which, if any such event occurs, would permit or require the principal, premium, if any, interest, if any, and any other monetary obligations on all the then-outstanding 6.5% Notes to become or to be declared due and payable immediately.

As of March 28, 2021, there was $300.0 million of 6.5% Notes outstanding.

(b)    Other Indebtedness

Credit and Security Agreement

On November 20, 2017, the Company entered into an amended and restated credit and security agreement (as amended the “Credit Agreement”), with the lenders named therein, SunTrust Bank, as Agent (the “Agent”), and SunTrust Robinson Humphrey, Inc., as Lead Arranger and Sole Book Runner. The Credit Agreement established a five-year senior secured revolving credit facility in the aggregate principal amount of $90.0 million (subject to a potential increase of the aggregate principal amount to $115.0 million, subject to the Agent’s and applicable lenders’ approval), consisting of a subline for letters of credit in an amount not to exceed $50.0 million, as well as a swingline loan in an aggregate principal amount at any time outstanding not to exceed $10.0 million.

Borrowings under the revolving credit facility may take the form of a base rate revolving loan, Eurodollar revolving loan or swingline loan. Base rate revolving loans and swingline loans will bear interest at a rate per annum equal to the sum of the Applicable Margin (as defined in the Credit Agreement) from time to time in effect plus the highest of (i) the Agent’s prime lending rate, as in effect at such time, (ii) the federal funds rate, as in effect at such time, plus 0.50% per annum and (iii) the Adjusted LIBO Rate (as defined in the Credit Agreement) determined at such time for an interest period of one month, plus 1.00% per annum. Eurodollar revolving loans will bear interest at a rate per annum equal to the sum of the Applicable Margin from time to time in effect plus the Adjusted LIBO Rate. The Applicable Margin varies between 1.00%-1.50% for base rate revolving loans and swingline loans and 2.00%-2.50% for Eurodollar loans, and is based on several factors including the Company’s then-existing borrowing base and the lenders’ total commitment amount and revolving credit exposure. The calculation of the Company’s borrowing base takes into account several items relating to the Company and its subsidiaries, including amounts due and owing under billed and unbilled accounts receivable, then held eligible raw materials inventory, work-in-process inventory, and applicable reserves.

The measurement of a minimum fixed charge coverage ratio is required to be measured if Excess Availability, as
defined in the Credit Agreement, is less than fifty percent of the lesser of the Borrowing Base or the Total Commitment
Amount, each as defined in the Credit Agreement.
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As of March 28, 2021, there were no borrowings outstanding on the Credit Agreement and $5.9 million was outstanding on letters of credit, resulting in net borrowing base availability of $68.6 million. The Company was in compliance with the financial covenants of the Credit Agreement and its amendments as of March 28, 2021.

Israel Debt

During August 2020, the Company entered into two 5-year term loans with two banks in Israel representing an aggregate principal amount of approximately $5.0 million. These loans were subsidized by the State of Israel as part of a COVID-19 relief package with interest at Israeli NIS prime interest, plus a margin of 1.5%. The first year of interest is paid by the State of Israel with subsequent interest and principal payments due monthly, commencing in August 2021.

5-D Systems Loan

In connection with the acquisition of 5-D Systems, the Company assumed a loan in the amount of approximately $0.5 million with an interest rate of 1.0% that had been obtained under the Small Business Administration Paycheck Protection Program as part of a COVID-19 relief package. Payment of interest and principal is due monthly with the balance due in April 2022. The sellers of 5-D Systems have applied for forgiveness of this loan and, as part of the purchase of 5-D Systems by the Company, have agreed to indemnify Kratos in the event the application for forgiveness of the loan is not accepted.

Fair Value of Long-term Debt
 
Carrying amounts and the related estimated fair values of the Company’s long-term debt financial instruments not measured at fair value on a recurring basis at March 28, 2021 and December 27, 2020 are presented in the following table:
 
 As of March 28, 2021As of December 27, 2020
$ in millionsPrincipalCarrying
Amount
Fair ValuePrincipalCarrying
Amount
Fair Value
Total long-term debt including current portion$305.5 $301.6 $320.2 $305.6 $301.5 $319.6 

The fair value of the Company’s long-term debt was based upon actual trading activity (Level 1, Observable inputs -quoted prices in active markets).

 As of March 28, 2021, the difference between the carrying amount of $301.6 million and the principal amount of $305.5 million presented in the table above is the unamortized debt issuance costs of $3.9 million, which are being accreted to interest expense over the term of the related debt. As of December 27, 2020, the difference between the carrying amount of $301.5 million and the principal amount of $305.6 million presented in the above table also related to the same unamortized debt issuance costs of $4.1 million.

Note 11. Segment Information
 
The Company operates in two reportable segments. The KGS reportable segment is comprised of an aggregation of KGS operating business units, including the Company’s microwave electronic products, space, training and cybersecurity, C5ISR/modular systems, turbine technologies and defense and rocket support services operating segments. The US reportable segment consists of the Company’s unmanned aerial, unmanned ground, unmanned seaborne and command, control and communications system business. The KGS and US segments provide products, solutions and services for mission critical national security programs. KGS and US customers primarily include national security related agencies, the U.S. Department of Defense (the “DoD”), intelligence agencies and classified agencies, and to a lesser degree, international government agencies and domestic and international commercial customers.

The Company organizes its reportable segments based on the nature of the products, solutions and services offered. Transactions between segments are generally negotiated and accounted for under terms and conditions similar to other government and commercial contracts. In the following table total operating income from continuing operations of the reportable business segments is reconciled to the corresponding consolidated amount. The reconciling item Corporate activities includes costs for certain stock-based compensation programs (including stock-based compensation costs for stock options, employee stock purchase plan and restricted stock units), the effects of items not considered part of management’s evaluation of segment operating performance, merger and acquisition expenses, corporate costs not allocated to the segments, and other miscellaneous corporate activities.
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 Revenues, depreciation and amortization, and operating income generated by the Company’s reportable segments for the three month periods ended March 28, 2021 and March 29, 2020 are as follows (in millions): 
 Three Months Ended