Goodwill and Other Intangible Assets


(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 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 US reportable segment consists of its unmanned aerial system, unmanned ground, and unmanned seaborne system businesses.

The Company identified its reporting units to be the DRSS, ME, TTS, MS, and US operating segments. 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). 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 adopted ASU 2017-04 which amends the guidance to simplify the subsequent measurement of goodwill by removing Step 2 of the goodwill impairment test. This new guidance requires an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value.

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 the Company’s assumptions, an impairment of the remaining balance in its $425.7 million goodwill could occur in future periods. Market factors that could impact the Company’s 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 the Company is awarded future contracts for the UCAS product and other new tactical aerial systems. Additionally, the US reporting unit fair value assumes that the Company will receive follow on orders for the Sub-Sonic Aerial Target, which is currently under contract with the U.S. Navy.

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 includes 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 year ended December 30, 2018.

The carrying amounts of goodwill as of December 30, 2018 and December 31, 2017 by reportable segment are as follows (in millions):



	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 30, 2018							As of December 31, 2017
	Gross Value		Accumulated Amortization			Net Value		Gross Value		Accumulated Amortization			Net Value
Acquired finite-lived intangible assets:
Customer relationships	$	52.6	$	(50.6	)	$	2.0	$	52.6	$	(49.1	)	$	3.5
Contracts and backlog	29.9		(26.4		)	3.5		29.9		(24.8		)	5.1
Developed technology and technical know-how	25.0		(21.3		)	3.7		25.0		(18.6		)	6.4
Trade names	1.4		(1.4		)	—		1.4		(1.3		)	0.1
Total finite-lived intangible assets	108.9		(99.7		)	9.2		108.9		(93.8		)	15.1
Indefinite-lived trade names	6.9		—			6.9		6.9		—			6.9
Total intangible assets	$	115.8	$	(99.7	)	$	16.1	$	115.8	$	(93.8	)	$	22.0

The aggregate amortization expense for finite-lived intangible assets was $5.9 million, $10.4 million and $10.5 million, for the years ended December 30, 2018, December 31, 2017, and December 25, 2016, 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 30, 2018 is as follows (in millions):



Fiscal Year	Amount
2019	$	5.1
2020	3.0
2021	1.1
Total	$	9.2