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”). 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 currently expects to receive approximately $70 million of aggregate net cash proceeds from the Transaction, 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 $7.0 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 working capital adjustment. 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 sale of the PSS business once the aggregate net proceeds described above have been collected, excluding the impact of the final settlement and determination of the closing net working capital adjustment. 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 currently 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 consolidated financial statements for all periods presented.

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



	Year ended December 30, 2018			Year ended December 31, 2017			Year ended December 25, 2016
Revenue	$	44.2		$	149.9		$	127.1
Cost of sales	34.2			110.1			93.9
Selling, general and administrative expenses	16.7			33.6			33.8
Other net income (expense) items that are not major	2.7			(0.1		)	—
Income (loss) from discontinued operations before income taxes	(9.4		)	6.3			(0.6		)
Gain on disposal of discontinued operations before income taxes	—			—			—
Total gain (loss) of discontinued operations before income taxes	(9.4		)	6.3			(0.6		)
Income tax (benefit) expense	(1.8		)	2.1			2.3
Income (loss) from discontinued operations	$	(7.6	)	$	4.2		$	(2.9	)

Operating results for 2018 are through the date of divestiture of June 11, 2018. Revenue and operating results for the year ended December 30, 2018 reflect the performance on the contracts and working capital retained by the Company. Revenue and operating results for year ended December 30, 2018 were impacted by approximately $2.0 million of cost adjustments on certain security system deployment projects for a mass transit authority. Transaction expenses of $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 year ended December 30, 2018. Depreciation expense included in Selling, general and administrative expenses was $0.1 million, $0.3 million and $0.3 million for the years ended December 30, 2018, December 31, 2017, and December 25, 2016 respectively.

Intra-period tax allocation rules require the Company to allocate its provision for income taxes between continuing operations and other categories of earnings. Upon closing of the PSS sale, amounts historically carried as unrecognized tax benefits were reclassified to guarantor liability in accordance with ASC 460. As a result of the reclassification, the Company recorded a $2.1 million tax benefit in discontinued operations for the year ended December 30, 2018.

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



	December 30, 2018		December 31, 2017
Cash and cash equivalents	$	—	$	(0.9	)
Accounts receivable, net	8.2		56.0
Inventoried costs	—		1.5
Other current assets	0.1		2.0
Current assets of discontinued operations	$	8.3	$	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	0.4		4.7
Accrued compensation	$	—	$	4.6
Billings in excess of cost and earnings on uncompleted contracts	—		4.3
Other current liabilities	4.6		1.4
Current liabilities of discontinued operations	$	5.3	$	29.2
Other long-term liabilities of discontinued operations	$	6.4	$	6.0