Litigation that may be brought by or against us could cause us to incur significant expenditures and distract our management from the operation of our business. Furthermore, there can be no assurance that we would prevail in such litigation or resolve such litigation on terms favorable to us, which may adversely affect our financial results and operations. See Note 14 of the Notes to Consolidated Financial Statements contained within this Annual Report on Form 10-K for a further discussion of our legal proceedings.

Natural disasters or severe weather conditions could disrupt our business and result in loss of revenue or higher expenses.

Our business depends on maintaining operations at our facilities and being able to operate at our customer facilities and project locations. A serious, prolonged interruption or damage due to power outage, telecommunications outage, terrorist attack, earthquake, hurricane, fire, flood or other natural disaster, or other interruption could have a material adverse effect on our business and financial results. While we insure against certain business interruption risks, such insurance may not adequately compensate us for any losses incurred as a result of natural or other disasters.

Risks Related to Our Common Stock

Some of our contracts with the U.S. Government are classified, which may limit investor insight into portions of our business.

We derive a portion of our revenues from programs with the U.S. Government that are subject to security restrictions (classified programs) that preclude the dissemination of information that is classified for ~~national security~~National Security purposes. We are limited in our ability to provide details about these classified programs, their risks or any disputes or claims relating to such programs. As a result, investors and others might have less insight into our classified programs than our other businesses and, therefore, less ability to fully evaluate the risks related to our classified business.

~~The market price of our common stock may be volatile.~~

The price of our stock has been in the past, and will continue to be, subject to fluctuations as a result of a number of factors, most of which we cannot control, including: failure of our operating results to meet market or analysts’ expectations; general fluctuations in the stock market; actual or anticipated fluctuations in our operating results based on reduced and/or delayed government spending or the threat thereof; fluctuations in the stock prices of companies in our industry; changes in earnings estimated by securities analysts or our ability to meet those estimates; rumors or dissemination of false information; litigation and government inquiries; political and/or military events associated with current worldwide conflicts; and domestic and foreign economic conditions. Such volatility has had a significant effect on the market prices of many companies’ securities for reasons unrelated to their operating performance and, in the past, has led to securities class action litigation. Securities litigation against us could result in substantial costs and a diversion of our management’s attention and resources, which could have an adverse effect on our business.

~~Your percentage of ownership in us may be diluted in the future.~~

As with any publicly traded company, your percentage ownership in us may be diluted in the future because of equity issuances for acquisitions, capital market transactions or otherwise, including equity awards that we expect will be granted to our directors, officers and employees.

~~Future sales of our common stock could cause the market price for our common stock to decline~~.

We cannot predict the effect, if any, that market sales of shares of our common stock or the availability of shares of our common stock for sale will have on the market price of our common stock prevailing from time to time. Sales of substantial amounts of shares of our common stock in the public market, or the perception that those sales will occur, could cause the market price of our common stock to decline or be depressed.

~~Table of Contents~~

In the future, we may issue our securities if we need to raise capital in connection with a capital expenditure, working capital requirement or acquisition. The amount of shares of our common stock issued in connection with a capital expenditure, working capital requirement or acquisition could constitute a material portion of our then-outstanding shares of common stock. Any perceived excess in the supply of our shares in the market could negatively impact our share price and any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to you.

We do not expect to pay any cash dividends or buyback any Kratos stock for the foreseeable future.

We have not declared any cash dividends since becoming a public company. We currently intend to retain any future earnings to finance the growth and development of the business and, therefore, we do not anticipate that we will pay any cash dividends on shares of our common stock in the foreseeable future. We also do not expect to buy back any of our common stock for the foreseeable future. In addition, our ability to pay dividends and buyback Kratos stock is restricted by ~~both the Indenture and the~~our Credit Agreement. Any determination to pay dividends or stock buybacks in the future will be at the discretion of our board of directors and will be dependent upon our future financial condition, results of operations, ~~and~~ capital requirements, legal restrictions general business conditions and other relevant factors as determined by our ~~board.~~board of directors. See “Dividend ~~policy.~~Policy.”

Certain provisions in our amended and restated certificate of incorporation and second amended and restated bylaws, as amended, and of Delaware law, may prevent or delay an acquisition of our Company, which could decrease the trading price of our common stock.

Our amended and restated certificate of incorporation, our second amended and restated bylaws, as amended, and Delaware law contain provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive to the raider and to encourage prospective acquirers to negotiate with our board of directors rather than to attempt a hostile takeover. These provisions include, among others:

•the inability of our stockholders to call a special meeting;

•rules regarding how stockholders may present proposals or nominate directors for election at stockholder meetings;

~~meetings;~~

•the right of our board of directors to issue preferred stock without stockholder approval;

•a super-majority requirement to amend our certificate of incorporation or bylaws; and

•the ability of our directors, and not stockholders, to fill vacancies on our board of directors.

Delaware law also imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock.

We believe these provisions may help protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our board of directors and by providing our board of directors with more time to assess any acquisition proposal. These provisions are not intended to make our Company immune from takeovers. In addition, although we believe these provisions collectively provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with our board, they would apply even if the offer may be considered beneficial by some stockholders. These provisions may also frustrate or prevent any attempts by our stockholders to replace or remove our current management team by making it more difficult for stockholders to replace members of our board, which is responsible for appointing the members of our management.

General Risk Factors

The market price of our common stock may be volatile.

The market price of our common stock has been in the past, and will continue to be, subject to fluctuations as a result of a number of factors, most of which we cannot control, including: failure of our operating results to meet market or analysts’ expectations; general fluctuations in the stock market; actual or anticipated fluctuations in our operating results based on reduced and/or delayed government spending or the threat thereof; fluctuations in the stock prices of companies in our industry; changes in earnings estimated by securities analysts or our ability to meet those estimates; rumors or dissemination of false information; short selling of our common stock; litigation and government inquiries; political and/or military events associated with current worldwide conflicts; and domestic and foreign economic conditions. Such volatility has had a significant effect on the market prices of many companies’ securities for reasons unrelated to their operating performance and, in the past, has led to securities class action litigation. Securities litigation against us could result in substantial costs and a diversion of our management’s attention and resources, which could have an adverse effect on our business.

Your percentage of ownership in us may be diluted in the future.

Future sales of our common stock could cause the market price for our common stock to decline.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results

or prevent fraud.

Effective internal controls are necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports, our operating results could be misstated, our reputation may be harmed and the market price of our common stock could be negatively affected. Our management has concluded that there are no material weaknesses in our internal controls over financial reporting as of December 31, 2023. However, although we continue to devote substantial time and resources to the documentation and testing of our controls, there can be no assurance that our controls over financial processes and reporting will be effective in the future or that material weaknesses or significant deficiencies in our internal controls will not be discovered in the future. Any failure to remediate any future material weaknesses or implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results, cause us to fail to meet our reporting obligations or result in material misstatements in our consolidated financial statements or other public disclosures. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.

Litigation may distract us from operating our business, and adverse judgments or settlements could adversely affect our

financial results and operations.

Litigation that may be brought by or against us could cause us to incur significant expenditures and distract our management from the operation of our business. Furthermore, there can be no assurance that we would prevail in such litigation or resolve such litigation on terms favorable to us, which may adversely affect our financial results and operations. See Note 15 of the Notes to Consolidated Financial Statements contained within this Annual Report for a further discussion of our legal proceedings.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and any trading volume could decline.

The trading market for our securities depends in part on the research and reports that industry or financial analysts publish about us or our business. We do not influence or control the reporting of these analysts. If one or more of the analysts who do cover us downgrade or provide a negative outlook on our Company or our industry, or the stock of any of our competitors, the price of our common stock could decline. If one or more of these analysts ceases coverage of our Company, we could lose visibility in the market, which in turn could cause the price of our common stock to decline.

Item 1B. Unresolved Staff Comments.

None.

Item 1C. Cybersecurity.

Risk Management and Strategy

We have developed and implemented a cybersecurity risk management program intended to protect the confidentiality, integrity, and availability of our critical systems and information. Our cybersecurity risk management program includes a cybersecurity incident response plan (“IRP”). The purpose of the IRP is to provide a structured and systematic incident response process for all Information Security Incidents that affect any of our or our subsidiaries’ information technology systems, network, or data, including data of ours and our subsidiaries held, or IT services provided by, third-party vendors or other service providers.

We developed and maintain our program as required by applicable laws and regulations, including without limitation Cybersecurity Maturity Model Certification (CMMC) and 17 CFR Part 229.

Our cybersecurity risk management program is integrated into our overall enterprise risk management program, and shares common methodologies, reporting channels and governance processes that apply across our global enterprise risk management program to other legal, compliance, strategic, operational, and financial risk areas.

We have designated our Chief Information Officer (CIO) to implement and maintain the IRP. Our CIO has over 20 years of experience in the field of cybersecurity and is responsible for the management of our cybersecurity and data privacy program. Among other information security duties, the CIO is responsible for:

•implementing the IRP,

•identifying and managing an incident response team (“IRT”) principally responsible for managing (1) our cybersecurity risk assessment processes, (2) our security controls, and (3) our response to cybersecurity incidents,

•coordinating IRT activities, including developing, maintaining, and following appropriate procedures to respond to, appropriately escalate, make decisions regarding, and document identified cybersecurity incidents,

•conducting post-incident reviews to gather feedback on identified cybersecurity incident response procedures and address any identified gaps in security measures,

•providing training and conducting periodic exercises to promote employee and stakeholder preparedness and awareness of the IRP, and

•reviewing the IRP at least annually, or whenever there is a material change in our business practices that may reasonably affect its cybersecurity incident response procedures.

Our cybersecurity risk management program includes:

•risk assessments designed to help identify material cybersecurity risks to our critical systems, information, products, services, and our broader enterprise IT environment including risks associated with ransomware;

•the use of external service providers, where appropriate, to assess, test or otherwise assist with aspects of our security controls;

•cybersecurity awareness training of our employees, incident response personnel, and senior management;

•a cybersecurity incident response plan that includes procedures for responding to cybersecurity incidents; and

•a third-party risk management process for service providers, suppliers, and vendors.

We have developed processes to identify and oversee risks from cybersecurity threats associated with our third-party service providers, which includes the information security team assisting with and assessing cybersecurity robustness during vendor onboarding as well as risk-based monitoring of vendors on an ongoing basis.

We have not identified risks from known cybersecurity threats, including as a result of any prior cybersecurity incidents, that have materially affected or are reasonably likely to materially affect us, including our operations, business strategy, results of operations, or financial condition.

Governance

Our Board considers cybersecurity risk as part of its risk oversight function and oversees management’s implementation of our cybersecurity risk management program.

The Board receives regular reports from management on our cybersecurity risks. In addition, management updates the Board, as necessary, regarding any material cybersecurity incidents, as well as any incidents with lesser impact potential.

Board members receive presentations on cybersecurity topics from our CIO, internal security staff or external experts as part of the Board’s continuing education on topics that impact public companies.

Our management team is responsible for assessing and managing our material risks from cybersecurity threats. Our CIO regularly informs our management team of all aspects related to cybersecurity risks and incidents. This is designed to ensure that the highest levels of management are kept abreast of the cybersecurity posture and potential risks facing the Company. The team has primary responsibility for our overall cybersecurity risk management program and supervises both our internal cybersecurity personnel and our retained cybersecurity consultants.

Our management team supervises efforts to prevent, detect, mitigate, and remediate cybersecurity risks and incidents through various means, which may include briefings from internal security personnel; threat intelligence and other information obtained from governmental, public or private sources, including external consultants engaged by us; and alerts and reports produced by security tools deployed in the IT environment.

Impact of Cybersecurity Risks on Business Strategy, Results of Operations or Financial Condition

Cybersecurity threats, such as threats of attacks from computer hackers, cyber criminals, nation-state actors and other malicious internet-based activity, continue to increase. Cybersecurity threats also include threats of attacks involving social engineering and cyber extortion to induce customers, contractors, business partners, third-party service providers, employees and other third parties to disclose information, transfer funds or unwittingly provide access to systems or data.

We believe that our current preventative actions and response activities provide adequate measures of protection against security breaches and generally reduce our cybersecurity risks. However, cybersecurity threats are constantly evolving, are becoming more frequent and more sophisticated and are being made by groups of individuals with a wide range of expertise and motives, which increases the difficulty of detecting and successfully defending against them. While we have implemented measures to safeguard our operational and technology systems and have established a culture of continuous learning, monitoring and improvement, the evolving nature of cybersecurity attacks and vulnerabilities means that these protections may not always be effective. In the ordinary course of our business, we have experienced and expect to continue to experience cyber-based attacks and other attempts to compromise our information systems, although none, to our knowledge, has had a material adverse effect on our business, financial condition or results of operations. While we do not believe cybersecurity threats are reasonably likely to affect us, our business strategy, our results of operations or our financial conditions, like all companies, we face a risks of such threats, the consequences of which could be material. See Item 1A – Risk Factors – Risks Related to Our Operations – “Cybersecurity breaches or disruptions of our information technology systems could negatively impact our operations,” above. In addition, given the constant and evolving threat of cyber-based attacks, we incur significant costs in an effort to detect and prevent security breaches and incidents, and these costs may increase in the future.

Item 2. Properties.

At December 31, ~~2017~~,2023, we owned or leased approximately ~~1.6~~2.2 million square feet of floor space at 5864 separate locations, primarily in the U.S., for manufacturing, warehousing, research and development, administration and various other uses. At December 31, ~~2017~~,2023, we also leased ~~to third parties 141,451 square feet~~approximately 106 acres of land, which included 98 acres in Ontario, Canada which is used by our ~~leased facilities, and had vacant floor space of 23,991 square feet.~~Kratos ASC Signal business. We continually evaluate our current and future space capacity in relation to

current and projected future staffing levels. We maintain our properties in good operating condition and believe that the productive capacity of our properties is adequate to meet current contractual requirements and those for the foreseeable future.

~~Table of Contents~~

We have major operations at the following locations:

Kratos Government Solutions: Birmingham and Huntsville, AL; San Diego, and San Jose, CA; Colorado Springs and Englewood, CO; Jupiter and Orlando, FL; Baltimore and Lanham, MD; Bristow, OK; Dallastown, PA; Plano, TX; and Alexandria and Chantilly, VA. Locations outside the U.S. include Australia, Canada, France, Germany, Israel, Norway, and the United Kingdom.

Unmanned Systems: Huntsville, AL; McClellan, Roseville, Sacramento, and ~~Sacramento,~~Tehachapi, CA; ~~and~~ Fort Walton Beach, ~~FL.~~FL; Oxford, MI; Oklahoma City, OK; and Arlington and Round Rock, TX.

~~Public Safety and Security: Fullerton, CA; Newport, DE; Chicago, IL; Indianapolis, IN; Fairlawn, NJ; and Houston, TX.~~

Corporate and other locations: San Diego, ~~CA.~~CA and Round Rock, TX.

The following is a summary of our floor space at December 31, ~~2017:~~2023:


Square feet (in thousands)	Owned	Leased	Total
Kratos Government Solutions	619	1,022	1,641
Unmanned Systems	35	458	493

Corporate (includes San Diego, operations of KGS and US segments)	—	26	26
Total	654	1,506	2,160

Square feet (in thousands) Owned Leased Total
Kratos Government Solutions 417
724
1,141
Unmanned Systems 20
204
224
Public Safety and Security —
153
153
Corporate (includes San Diego operations of KGS, US and PSS segments) —
34
34
Total 437
1,115
1,552

See Note 56 of the Notes to Consolidated Financial Statements contained within this Annual Report ~~on Form 10-K~~ for information regarding commitments under leases.

Item 3. Legal Proceedings.

See Note 1415 of the Notes to Consolidated Financial Statements contained within this Annual Report ~~on Form 10-K~~ for a ~~further~~ discussion of our legal proceedings.

Item 4. Mine Safety Disclosures.

None.

PART II

Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

Our common stock is listed on the NASDAQ Global Select Market and is traded under the symbol “KTOS”.

~~Table of Contents~~

~~The following table sets forth the high and low intraday sales prices for our common stock for the periods indicated, as reported by NASDAQ:~~

High Low
Year Ended December 31, 2017:
Fourth Quarter $ 13.75
$ 9.71
Third Quarter $ 13.93
$ 10.64
Second Quarter $ 11.63
$ 7.37
First Quarter $ 9.19
$ 6.83
Year Ended December 25, 2016:
Fourth Quarter $ 8.22
$ 5.23
Third Quarter $ 7.58
$ 3.75
Second Quarter $ 5.58
$ 3.87
First Quarter $ 4.70
$ 2.80

Holders of Record

On February ~~23, 2018, the closing sale price of our common stock as reported by the NASDAQ Global Select Market was $12.31 per share. On February 23, 2018,~~9, 2024, there were ~~373~~295 shareholders of record of our common stock.

Dividend Policy

We have not declared any cash dividends since becoming a public company. We currently intend to retain any future earnings to finance the growth and development of the business and, therefore, do not anticipate paying any cash dividends in the foreseeable future. In addition, our ability to pay dividends is restricted by ~~both the Indenture and the~~our Credit Agreement, ~~each~~ as discussed in the section entitled “Liquidity and Capital Resources” in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 45 of the Notes to Consolidated Financial Statements contained within this Annual Report. Any future determination to pay cash dividends will be at the discretion of our board of directors and will be dependent upon our future financial condition, results of operations and capital requirements, general business conditions and other relevant factors as determined by our board of directors.

~~Table of Contents~~

Performance Graph

The following performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act of 1934 as amended (the “Exchange Act”), except to the extent that we specifically incorporate it by reference into such filing.

The following performance graph presents a comparison of the five year cumulative stockholder return on our common stock against the cumulative total return of a broad equity market index, the Russell 2000 Stock Index, and ~~two~~one customized peer ~~groups~~group consisting of the companies listed below, for the period commencing December 31, ~~2012~~2018 and ending December 31, ~~2017.~~2023. The performance graph assumes an initial investment of $100 in our common stock and in each of the Russell 2000 Stock Index and the peer ~~groups,~~group, and further assumes that all dividends were reinvested and all returns are market-cap weighted. The historical information set forth below is not necessarily indicative of future stock price performance.



	COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
			Among Kratos Defense & Security Solutions, Inc., the Russell 2000 Index, ~~Old~~ and Peer Group ~~(1), and New Peer Group (2)~~



	*$100 invested on 12/31/1218 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.

~~(1)~~

The companies included in the Company’s Old Peer Group are: AAR Corp., AeroVironment Inc., Arotech Corp., Comtech Telecommunications Corp., CPI Aerostructures Inc., Ducommun Inc., Frequency Electronics Inc., and Sparton Corp. IRobot Corp., which was included in the peer group used in preparing the Performance Graph contained in the Company’s 2016 annual report on Form 10-K, has been excluded because full year standalone performance is not available for such company through 2017.


~~(2)~~	The companies included in the Company’s New Peer Group are: AAR Corp., Aerojet Rocketdyne Holdings Inc., AeroVironment Inc., Arotech Corp., Comtech Telecommunications Corp., CPI Aerostructures Inc., Ducommun Inc., Frequency Electronics Inc. and Sparton Corp.

~~Table of Contents~~

The companies included in the Company’s Peer Group are: AAR Corp, AeroVironment Inc., Comtech Telecommunications Corp., CPI Aerostructures Inc., Ducommun Inc., Frequency Electronics Inc., and Mercury Systems Inc.

Recent Sales of Unregistered Securities; Use of Proceeds

None.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

Item 6. ~~Selected Financial Data.~~Reserved

The following selected consolidated financial data should be read in conjunction with our Consolidated Financial Statements and related notes thereto and with Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained within this Annual Report. Our historical results are not necessarily indicative of operating results to be expected in the future.

Amounts in millions except per share amounts

December 31,
2017
December 25,
2016 December 27,
2015 December 28,
2014 December 29,
2013
Consolidated Statements of Operations Data:
Revenues $ 751.9
$ 668.7
$ 657.1
$ 763.0
$ 844.1
Gross profit 197.3
153.6
161.8
179.4
204.5
Operating income (loss) (5.8 ) (18.6 ) (4.5 ) 5.3
18.2
Provision (benefit) for income taxes (8.2 ) 8.1
(11.4 ) 3.9
1.1
Loss from continuing operations (42.6 ) (60.4 ) (33.2 ) (75.7 ) (29.5 )
Income (loss) from discontinued operations (0.1 ) (0.1 ) 53.0
(2.3 ) (7.7 )
Net income (loss) $ (42.7 ) $ (60.5 ) $ 19.8
$ (78.0 ) $ (37.2 )
Loss from continuing operations per common share:
Basic $ (0.48 ) $ (0.99 ) $ (0.56 ) $ (1.31 ) $ (0.52 )
Diluted $ (0.48 ) $ (0.99 ) $ (0.56 ) $ (1.31 ) $ (0.52 )
Income (loss) from discontinued operations per common share:
Basic $ —
$ —
$ 0.90
$ (0.04 ) $ (0.13 )
Diluted $ —
$ —
$ 0.90
$ (0.04 ) $ (0.13 )
Net income (loss) per common share:
Basic $ (0.48 ) $ (0.99 ) $ 0.34
$ (1.35 ) $ (0.65 )
Diluted $ (0.48 ) $ (0.99 ) $ 0.34
$ (1.35 ) $ (0.65 )
Weighted average shares:
Basic 89.5
61.3
58.7
57.6
56.8
Diluted 89.5
61.3
58.7
57.6
56.8

December 31,
2017 December 25,
2016 December 27,
2015 December 28,
2014 December 29,
2013
Consolidated Balance Sheet Data:
Cash and cash equivalents $ 129.6
$ 69.1
$ 28.5
$ 33.5
$ 54.2
Working capital 282.4
176.6
148.0
147.1
174.9
Total assets 1,024.0
948.6
903.3
1,131.2
1,201.6
Short-term debt 0.8
1.0
1.0
1.1
1.3
Long-term debt 293.5
431.0
444.1
655.4
613.9
Long-term debt premium —
—
—
—
14.5
Total stockholders’ equity $ 511.5
$ 276.4
$ 254.2
$ 224.3
$ 295.8

~~Table of Contents~~

We incurred acquisition-related expenses of $0.2 million for fiscal 2014 and a benefit of $3.8 million related to acquisition items for fiscal 2013. The 2014 Consolidated Statement of Operations Data includes a loss on extinguishment of debt of $39.1 million related to the refinance of the $625.0 million 10% Senior Secured Notes due in 2017 (the “10% Notes”) with the $625.0 million 7.00% Senior Secured Notes due in 2019 (the “7% Notes”). The 2014 Consolidated Balance Sheet Data reflects the refinancing of the 10% Notes with the 7% Notes. The net proceeds of the 7% Notes was $618.5 million after an original issue discount of $6.5 million. We utilized the net proceeds from the 7% Notes, a $41.0 million draw on the Credit Agreement, as well as cash from operations to extinguish the 10% Notes.

The 2015 Consolidated Statement of Operations Data includes an $80.8 million gain on the disposal of discontinued operations before taxes and a loss of $3.4 million on extinguishment of debt. The 2015 Consolidated Balance Sheet Data includes repayment of $41.0 million outstanding on our Credit Agreement and the repurchase of $175.0 million of our 7% Notes at par.

The 2016 Consolidated Balance Sheet Data includes our equity offering of 13.4 million shares of common stock, which generated net proceeds of $76.2 million and our use of $14.1 million of the net proceeds from the offering to buy back and redeem approximately $14.5 million of our 7% Notes. The 2016 Consolidated Statement of Operations Data and Consolidated Balance Sheet Data were impacted by an $18.7 million loss accrual recorded in 2016 on the LCASD cost share contract, which is expected to be incurred by us over the period of performance of the contract, and was incurred in order to retain the intellectual property rights for the new LCASD platform.

The 2017 Consolidated Statement of Operations Data and Consolidated Balance Sheet Data includes a $24.2 million impairment of the carrying value of the goodwill of our Defense Rocket Support Services reporting unit within its KGS Segment and a $17.3 million loss on extinguishment of debt related to the refinancing of the remaining $372.8 million outstanding balance of the 7% Notes. The 2017 Consolidated Balance Sheet Data also includes our equity offerings of approximately 28.0 million shares of common stock, which generated net proceeds of $269.1 million and our use of $64.0 million of the net proceeds from the offering to buy back and redeem approximately $62.7 million of our 7% Notes. The 2017 Consolidated Balance Sheet Data also reflects the refinancing of the remaining $372.8 million of our 7% Notes with $300.0 million of 6.5% Notes. We incurred debt issuance costs of $6.6 million associated with the new 6.5% Notes. We utilized the net proceeds from the 6.5% Notes, along with cash of $89.7 million to extinguish the 7% Notes.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

In addition to historical information, the following discussion contains forward-looking statements that are subject to risks and uncertainties. Our actual results may differ substantially from those expressed in or implied by any forward-looking statements herein due to a number of factors, including but not limited to the risks and uncertainties described in this Item 7, in Item 1A “Risk Factors” and elsewhere in this Annual Report. These forward-looking statements reflect our views and assumptions only as of the date such forward-looking statements are made. Except as required by law, we assume no responsibility for updating any forward-looking statements, whether as a result of new information, future events or otherwise.

The following discussion should be read in conjunction with our audited Consolidated Financial Statements and the related notes and other financial information appearing elsewhere in this Annual Report and other reports and filings made with the SEC. For discussion related to changes in financial condition and the results of operations for fiscal year 2022-related items, refer to Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 25, 2022, which was filed with the Securities and Exchange Commission on February 23, 2023.

Overview

Kratos is a ~~government contractor at~~technology, products, system and software company addressing the ~~forefront of the DoD’s Third Offset Strategy~~defense, national security, and ~~Rapid Innovation Initiatives.~~commercial markets. Kratos makes true internally funded research, development, capital and other investments, to rapidly develop, produce and field solutions that address our customers’ mission critical needs and requirements. At Kratos, affordability is a technology, and we seek to utilize proven, leading edge approaches and technology, not unproven bleeding edge approaches or technology, with Kratos’ approach designed to reduce cost, schedule and risk, and enable us to be first to market with cost effective solutions. We believe that Kratos is known as an innovative disruptive change agent in the industry, a ~~leading technology, intellectual property, proprietary product~~company that is an expert in designing products and systems up front for successful rapid, large quantity, low cost future manufacturing which is a value add competitive differentiator for our large traditional prime system ~~company focused on~~integrator partners and also to our government and commercial customers. Kratos intends to pursue program and contract opportunities as the ~~U.S.~~prime or lead contractor when we believe that our probability of win is high and ~~its allies’ national security.~~any investment required by Kratos is within our capital resource comfort level. We intend to partner and team with a ~~recognized industry leader in the rapid development, demonstration~~large, traditional system integrator when our assessment of probability of win is greater or required investment is beyond Kratos’ comfort level. Kratos’ primary business areas include, virtualized ground systems for satellites and ~~fielding of high technology~~space vehicles including software for command & control (C2) and telemetry, tracking and control (TT&C), jet powered unmanned aerial drone systems, hypersonic vehicles and rocket systems, propulsion systems for drones, missiles, loitering munitions, supersonic systems, space craft and launch systems, C5ISR and microwave electronic products for missile, radar, missile defense, space, satellite, counter UAS, directed energy, communication and other systems, and ~~products at an affordable cost. Kratos’ primary focus areas are unmanned systems, satellite communications, microwave electronics, cyber security/warfare,~~virtual & augmented reality training systems ~~missile defense and combat systems.~~ for the warfighter.

We believe that our technology, intellectual property, proprietary products, reputation and designed-in positions on our customers’ programs, platforms and systems, ~~providing~~and our ability to rapidly develop, demonstrate and field affordable leading technology systems gives us ~~with sole and single source positions with our offerings is~~ a competitive advantage and creates a high barrier to entry into our markets. Our ~~work force~~workforce is primarily engineering and technically oriented ~~and highly skilled~~ with a significant number of employees holding National Security clearances. Much of our work is performed at customer locations, facilities and sites, or in secure manufacturing and other facilities. Our primary end customers are National Security related agencies and large national ~~security clearances.~~and global commercial enterprises and entities. Our entire organization is focused on executing our strategy of ~~becoming~~being the leading technology and intellectual property based product and system company and being “first to market” in each of our ~~industry.~~industry leading core competency areas.

Our primary end customers are U.S. Government agencies, including the DoD, intelligence agencies, and other national and homeland security related agencies. We also conduct business with local, state and foreign governments and

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domestic and international commercial customers. In fiscal ~~2017, 2016~~2023, 2022 and ~~2015,~~2021, we generated ~~60%~~69%, ~~60%~~69% and ~~61%~~70%, respectively, of our total revenues from contracts with the U.S. Government (including all branches of the U.S. ~~military)~~military and including FMS), either as a prime contractor or a subcontractor. We believe our stable customer base, strong customer relationships, intellectual property, specialized and differentiated products, broad array of contract vehicles, “designed in” positions on strategic ~~national security~~National Security platforms, our targeted investments in strategic growth areas, large employee base possessing specialized skills, security clearances, specialized manufacturing facilities and equipment, extensive list of past performance qualifications, and significant management and operational capabilities position us for success.

~~We were incorporated in the state of New York on December 19, 1994 and began operations in March 1995. We reincorporated in the state of Delaware in 1998.~~

Industry Background

~~In May 2017,~~On March 9, 2023, President Biden’s fiscal year 2024 budget request was submitted to Congress, initiating the 2024 defense budget authorization and appropriations legislative process. The request includes an $886 billion proposed appropriation for national defense, of which $842 billion would be for the U.S. Department of Defense (“DoD”) base budget. The proposed legislation also caps national defense spending at $886 billion for fiscal year 2024 and $895 billion for fiscal year 2025. On June 3, 2023, President Biden signed into law a bill to suspend the ~~FY 2017 Consolidated Appropriations Act. In total for FY 2017, Congress appropriated $524 billion in base discretionary funding~~$31.4 trillion debt ceiling through January 1, 2025.

On July 14, 2023, the U.S. House of Representatives passed its version of a sweeping Bill setting Policy for the DoD, ~~consistent with~~ the ~~BCA.~~Fiscal 2024 National Defense Authorization Act (“NDAA”), at $886 billion. The vote of 219-210 was largely along party lines, a departure from the typical bipartisan support for a bill that has passed every year since 1961. The Senate passed its version of the NDAA Bill on July 27, 2023 at $886 billion and included several significant differences from the previously passed U.S. House of Representative Bill. The NDAA is one of the major pieces of legislation Congress passes annually. The NDAA is closely watched by industry and other stakeholders and related interests, as the NDAA typically determines the specific spending outlays and purchases of the Department of Defense and other National Security related Agencies.

The two chambers of the legislative branch of the U.S. federal government (i.e. the House and Senate) continue the legislative process on the fiscal year 2024 budget. Congress is also ~~appropriated approximately $68 billion in OCO funding~~expected to continue efforts to reschedule appropriations bills and ~~approximately $15 billion in additional DoD appropriations.~~

~~In May 2017,~~conference agreements, but these actions depend on the Senate calendar. On January 19, 2024, President released a revised FY 2018 budget request, which seeks $575 billion for the DoD’s base budget, approximately $52 billion above the statutory caps provided for in the BCA. The President’s budget request also seeks an additional $65 billion in OCO funding for expeditionary needs, not capped by the BCA. On September 8, 2017, the PresidentBiden signed a continuing resolution authorization (“CRA”) to continue funding the U.S Government. Under the bill, funding for agencies overseeing agriculture, veterans affairs, energy, transportation and housing runs through March 1, 2024. Funding for the rest of the federal government now runs through March 8, 2024, or if earlier, enactment of the Fiscal 2024 NDAA. Under such CRA, funding at amounts consistent with appropriated levels for fiscal year 2023 is available, subject to certain restrictions, but new contracts and program starts are not authorized. If Congress is not able to enact fiscal year 2024 appropriations bills or extend such CRA, the U.S government would be subject to a shutdown, which ~~generally funded the government at FY 2017~~could result in program delays or, cancellations, payment issues and/or other disruptions.

The current budget environment, including Israel and Ukraine funding support, heightened levels through December 8, 2017. The continuing resolution was extended to December 22, 2017 and further extended to January 19, 2018. As Congress did not enact appropriations legislation or a new continuing resolution by January 19, 2018, on January 20, 2018, the U.S. Government temporarily shut down. On January 22, 2018, a fourth continuing resolution was enacted, which funds the government through February 8, 2018.

~~On February 9, 2018, the Congress approved~~of inflation, related supply chain disruption, and the ~~President signed~~appropriations process, continues to create significant short and long-term industry risks. Additionally, with the ~~Bipartisan~~recent change of party in Congress in 2022, resulting with the Democrats controlling the Senate and the Presidency and the Republicans controlling the House of Representatives, considerable uncertainty exists regarding how future budgets, funding, timing and related program decisions will unfold, including the potential differing defense spending priorities of the Biden administration and of the Congress.

We believe continued budget pressures (which are expected), CRAs, (which are also expected), future Federal Government debt ceiling issues, or Federal Government shutdowns could have serious negative consequences for the security of our country and the defense industrial base, including the Company and the related customers, employees, suppliers, investors, and communities that rely on companies in the defense industrial base. It is likely that budget and program decisions made in such an uncertain environment would have long-term implications for our Company and the entire defense industry. Additionally, funding for certain programs, including those in which we currently participate, may be reduced, delayed or cancelled, and budget uncertainty or funding cuts globally could adversely affect the viability of our customers, partners, teammates, subcontractors, suppliers, and our employee base.

We believe that our business is well-positioned in areas that the DoD and other customers indicate are priorities for future defense spending, including those based on the 2022 National Security Strategy document, the 2023 U.S. National Security related budget and NDAA and the recently released fiscal 2024 National Security Budget ~~Act~~request and NDAA, and also the related Future Years Defense Program or five year projection of ~~2018,~~the forces, resources and programs needed to support the DoD’s strategy and operations.

However, due to a divided Congress and Executive Branch, federal budgetary uncertainty, expected CRAs, potential budgetary restrictions or limitations, defense or other spending cuts, including the budgetary impacts of support for the conflicts in Israel and Ukraine, challenges in the appropriations process, the debt ceiling issue and ongoing fiscal debates, the short and long term impacts to the industry and to our business remain uncertain.

Such a challenging federal and DoD budgetary environment may negatively impact our customers, business and programs and could have a material adverse effect on our forecasts, estimates, financial position, results of operations and/or cash flows.

We continue to be affected by various unfavorable macroeconomic conditions including significant adverse supply chain disruptions that continue throughout the industry and for us, and related delays in the receipt and delivery of materials, parts, supplies, etc., which ~~provides that:~~in certain instances and for certain items is significant. In addition, inflation and the related increased costs of inputs needed to execute our business, including materials, parts, supplies, consultants, subcontractors, vendors, etc. have significantly increased our business costs and have significantly adversely impacted our operations, profit margins and financial forecasts.

~~spending limits created~~

Also, a shortage of qualified labor, and the cost of that labor for the Company and its labor base is a significant operational challenge for the Company. The cost of labor has increased significantly and current challenges in hiring, obtaining

and retaining employees, including those employees requiring National Security clearances, is adversely impacting Kratos’ ability to execute its business. There is also a significant industry wide labor shortage, including in the Science, Technology, Engineering, and Math (STEM) discipline areas, and also including employees willing and/or able to obtain National Security clearances, and for high level manufacturing and production disciplines.

In addition, recent actions by the ~~BCA will be increased by approximately $300 billion over the next two years;~~

~~defense spending will be increased by $80 billion in the current FY and by $85 billion next year,~~Federal Reserve to ~~approximately $700 billion and $705 billion, respectively;~~

~~domestic spending will be increased by $63 billion this year and by $68 billion next year; and~~

~~Congress will suspend the~~increase interest rates have impacted our interest expense on our outstanding debt ~~limit through March 2019, putting the next debt limit vote past the 2018 midterm elections.~~

~~The Congress~~borrowings and the ~~President also executed a fifth continuing resolution authorization through March 23, 2018,~~related cost of executing Kratos’ business. Each of these matters and issues are expected to ~~provide congressional appropriators~~continue for the ~~time required to appropriately document~~foreseeable future and ~~allocate the authorized spending.~~

~~The federal budget and debt ceiling~~ are expected to continue to adversely impact the Company’s operations, financial results and financial forecasts.

Our Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations reflect estimates and assumptions made by management as of December 31, 2023. Events and changes in circumstances arising after December 31, 2023, including those resulting from the continuing impacts of the current unfavorable macroeconomic climate, will be ~~the subject of considerable debate, which could have a significant impact on defense spending broadly and the company’s programs~~reflected in ~~particular in the future.~~management’s estimates for future periods.

If a prolonged government shutdown were to occur, it could result in program cancellations and/or stop work orders and could limit our ability to perform on our U.S. Government contracts and the U.S. Government’s ability to make timely payments.

Current Reporting Segments

We operate in ~~three~~two reportable segments. The KGS reportable segment is comprised of an aggregation of KGS operating segments, including its microwave electronic products, space, satellite ~~communications,~~and cyber, training ~~systems,~~ solutions, C5ISR/modular systems, turbine technologies and defense and rocket support ~~services.~~services operating segments. The US reportable segment consists of our unmanned aerial, unmanned ground and unmanned seaborne system ~~businesses. The PSS reportable segment provides independent integrated~~products. Our KGS and US segments provide products, solutions and services for ~~advanced homeland security, public safety,~~mission critical ~~infrastructure,~~National Security programs. KGS and ~~security~~US customers primarily include National Security related agencies, the DoD, intelligence agencies and ~~surveillance systems for~~classified agencies, and to a lesser degree, international government agencies and domestic and international commercial ~~applications.~~customers. We organize our ~~business~~operating segments based primarily on the nature of the products, solutions and services offered. For additional information regarding our reportable segments, see Note 1314 of the Notes to Consolidated Financial Statements. From a customer and solutions perspective, we view our business as an integrated whole, leveraging skills and assets wherever possible.

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~~Discontinued Operations~~

On August 21, 2015, we completed the sale of the U.S. and U.K. operations of our Electronic Products Division to Ultra Electronics Holdings plc (“Ultra”), a public limited company formed under the laws of England and Wales and traded on the London Stock Exchange, and Ultra Electronics Defense Inc. (the “Buyer”), a Delaware corporation ultimately owned by Ultra (the “Transaction”). Pursuant to the terms of that certain Stock Purchase Agreement dated May 31, 2015, by and among the Company, Ultra and the Buyer, we sold to the Buyer all of the issued and outstanding capital stock of our wholly owned subsidiary Herley Industries, Inc. (“Herley”) and certain of Herley’s subsidiaries, including Herley-CTI, Inc., EW Simulation Technology, Ltd. and Stapor Research, Inc. (collectively, the “Herley Entities”), for $260.0 million and $5.0 million for taxes incurred as part of the Transaction, less a $2.0 million escrow to satisfy any purchase price adjustments and a working capital adjustment of approximately $8.3 million.

In November 2015, the Company and Ultra settled the working capital adjustment at $8.1 million, and the net cash position at closing, resulting in a net payment to the Company of $2.7 million. This represents the payment from escrow to us of $2.0 million, as well as the payment from Ultra of $0.7 million, reflecting the difference in the estimated working capital and actual working capital and the net cash position at the close of the Transaction. In December 2015, we submitted to Ultra for reimbursement the maximum $5.0 million for taxes incurred as part of the Transaction, which was reimbursed in January 2016.

~~For additional information regarding discontinued operations, see Note 8 of the Notes to Consolidated Financial Statements.~~

Key Financial Statement Concepts

As of December 31, ~~2017~~,2023, we consider the following factors to be important in understanding our financial statements.

~~KGS’ and US’~~Our business with the U.S. Government and prime contractors is generally performed under fixed-price, cost reimbursable, or time and materials contracts. Cost reimbursable contracts for the U.S. Government provide for reimbursement of costs plus the payment of a fee. Some cost reimbursable contracts include award and incentive fees that are awarded based on performance on the contract. Under time and materials contracts, we are reimbursed for labor hours at negotiated hourly billing rates and reimbursed for travel and other direct expenses at actual costs plus applied general and administrative expenses. ~~In accounting for our~~

For the majority of contracts, we satisfy the underlying performance obligations over time as the customer obtains control or receives benefits as work is performed on the contract. We generally recognize revenue over time as we perform on long-term contracts ~~for production~~because of ~~products and services provided~~continuous transfer of control to the customer. For U.S. ~~Government~~government contracts, this continuous transfer of control to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and ~~provided~~take control of any work in process. Similarly, for non-U.S. government contracts, the customer typically controls the work in process as evidenced either by contractual termination clauses or by our rights to our PSS segment customers under fixed-price contracts, we utilize both cost-to-cost and units delivered measures under the percentage-of-completion method of accounting in accordance with the provisionspayment of the ~~Financial Accounting Standards Board~~ ~~(“FASB”)~~ ~~Accounting Standards Codification~~ ~~(“ASC”)~~ ~~Topic 605, Revenue Recognition (“Topic 605”). Under~~transaction price associated with work performed to date on products or services that do not have an alternative use to the ~~units delivered measure of~~Company. As a result, under ASC 606 revenue is recognized over time using the ~~percentage-of-completion~~cost-to-cost method of accounting, sales are recognized as the units are accepted by the customer generally using sales values for units in accordance with the contract terms. We estimate profit as the difference between total estimated revenue and(cost incurred relative to total estimated cost ofat completion).

In accordance with ASC 606, we evaluate whether a contract ~~and recognize that profit over the life~~with a customer exists by evaluating a number of the contract based on deliveries or as computed on the basis of the estimated final average unit costs plus profit. We classify contract revenues as product sales or service revenues depending upon the predominant attributes of the relevant underlying contracts.

~~We consider the following factors when determining if~~criteria including whether collection of ~~a receivable~~consideration is reasonably ~~assured:~~assured; comprehensive collection history; results of our communications with customers; the current financial position of the customer; and the relevant economic conditions in the customer’s country. If we have had no prior experience with the customer, we may review reports from various credit organizations to ensure that the customer has a history of paying its creditors in a reliable and effective manner. If the financial condition of our customers were to deteriorate and adversely affect their financial ability to make payments, ~~additional~~ allowances would be required. Additionally, on certain contracts whereby we perform services for a prime/general contractor, a specified percentage of the invoiced trade accounts receivable may be retained by the customer until we complete the project. We periodically review all retainages for collectability and record allowances for doubtful accounts when deemed appropriate, based on our assessment of the associated risks.

We monitor our policies and procedures with respect to our contracts on a regular basis to ensure consistent application under similar terms and conditions as well as compliance with all applicable government regulations. In addition, costs incurred and allocated to contracts with the U.S. Government are routinely audited by the DCAA.

We manage and assess the performance of our businesses based on our performance on individual contracts and programs obtained generally from government ~~organizations with consideration given to our Critical Accounting Principles and Estimates discussed below.~~organizations. Due to the Federal Acquisition Regulation rules that govern our business, most types of costs are allowable, and we do not focus on individual cost groupings (such as cost of sales or general and administrative costs) as much

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as we do on total contract costs, which are a key factor in determining contract operating income. As a result, in evaluating our operating performance, we look primarily at changes in sales and service revenues and operating income, including the effects of significant changes in operating income. Changes in contract revenue and cost estimates are reviewed on a contract-by-contract basis and are revised periodically throughout the life of the contract such that adjustments to profit resulting from revisions are made cumulative to the date of the revision in accordance with accounting principles generally accepted in the U.S. (“GAAP”). Significant management judgments and estimates, including the estimated costs to complete the project, which determine the project’s percentage complete, must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of our revenue for any period if management makes different judgments or utilizes different estimates.

Results of Operations

Comparison of Results for the Year Ended December 31, ~~2017~~2023 to the Year Ended December 25, ~~2016~~2022

Revenues. Revenues by reportable segment for the years ended December 31, ~~2017~~2023 and December 25, ~~2016~~2022 are as follows (in millions):


	2023		2022		$ Change		% Change
Kratos Government Solutions
Service revenues	$	395.9	$	320.0	$	75.9	23.7	%
Product sales	429.0		356.6		72.4		20.3	%
Total Kratos Government Solutions	824.9		676.6		148.3		21.9	%




Unmanned Systems
Service revenues	6.7		5.2		1.5		28.8	%
Product sales	205.5		216.5		(11.0)		(5.1)	%
Total Unmanned Systems	212.2		221.7		(9.5)		(4.3)	%
Total revenues	$	1,037.1	$	898.3	$	138.8	15.5	%

Total service revenues	$	402.6	$	325.2	$	77.4	23.8	%
Total product sales	634.5		573.1		61.4		10.7	%
Total revenues	$	1,037.1	$	898.3	$	138.8	15.5	%

2017 2016 $ Change % Change
Kratos Government Solutions
Service revenues $ 196.5
$ 221.0
$ (24.5 ) (11.1 )%
Product sales 283.8
244.8
39.0
15.9 %
Total Kratos Government Solutions 480.3
465.8
14.5
3.1 %
Public Safety & Security - service revenues 149.9
127.1
22.8
17.9 %
Unmanned Systems - product sales 121.7
75.8
45.9
60.6 %
Total revenues $ 751.9
$ 668.7
$ 83.2
12.4 %

Total service revenues $ 346.4
$ 348.1
$ (1.7 ) (0.5 )%
Total product sales 405.5
320.6
84.9
26.5 %
Total revenues $ 751.9
$ 668.7
$ 83.2
12.4 %

Revenues increased ~~$83.2~~$138.8 million to ~~$751.9 million in 2017 from $668.7 million in 2016. The increase in revenues was the result of increased revenues of $14.5 million~~ in our KGS segment primarily resulting from increased shipments and work performed in our satellite communications business of approximately $14.1 million, our simulation and training systems business of approximately $16.1 million and our specialized ground equipment products business of $4.4 million. These increases were offset by a reduction in our government services business of approximately $19.2 million, which has been impacted by continued commoditization and price competiveness in the government services industry due to contract awards on a LPTA basis rather than on a best value basis. Increased revenues of $45.9 million in our US segment resulted from recent contract awards in unmanned combat aerial systems which includes the commencement in July 2017 of low rate initial production of our SSAT/177 aerial targets for the U.S. Navy, as well as an increase in shipments of other unmanned aerial target systems. Increased revenues in our PSS segment of $22.8 million were driven by security system and related communication equipment integration under a security system deployment for a mass transit authority in a large metropolitan area.

~~Product sales increased $84.9 million to $405.5~~$1,037.1 million for the year ended December 31, ~~2017~~2023 from ~~$320.6~~$898.3 million for the year ended December 25, ~~2016,~~2022. Revenues in our KGS segment increased $148.3 million primarily due to a full year contribution of revenues from the acquisition of the Southern Research Institute’s Engineering Division (“SRE”), which increased $26.4 million, increased revenues in our space, satellite, training solutions and cyber business of $64.0 million, increases in our C5ISR, turbine technologies, and microwave electronics products businesses of $65.4 million, partially offset by an $7.5 million reduction of revenues in our defense and rocket support services. Revenues in our US segment decreased $9.5 million primarily due to a reduction in our tactical drone-based revenues, as compared to the twelve months ended December 25, 2022 offset with the contribution of $6.4 million in revenues from the recent acquisition of Sierra Technical Services, Inc. (“STS”).

Product sales increased $61.4 million to $634.5 million for the year ended December 31, 2023 from $573.1 million for the year ended December 25, 2022, primarily as a result of ~~the increase in product shipments due to the factors discussed above~~increased production activity in our KGS ~~and~~segment, offset partially by decreased volume in our US ~~segments.~~segment. As a percentage of total revenue, product sales were ~~53.9%~~61.2% for the year ended December 31, ~~2017,~~2023, as compared to ~~47.9%~~63.8% for the year ended December 25, ~~2016.~~2022. Service revenues ~~decreased~~increased by ~~$1.7~~$77.4 million to ~~$346.4~~$402.6 million for the year ended December 31, ~~2017,~~2023, from ~~$348.1~~$325.2 million for the year ended December 25, ~~2016,~~2022. The increase was primarily ~~due to~~a result of the ~~decline in our legacy government services business discussed previously, offset for the most part by the increase~~recent SRE acquisition, as well as increased volume in the ~~PSS segment discussed previously.~~turbine technologies and space, satellite, training and cyber businesses.

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throughout the life of the contract such that adjustments to profit resulting from revisions are made cumulative to the date of the revision. Significant management judgments and estimates, including the estimated costs to complete projects, which determine the project’s percentage of completion, must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of our revenue for any period if management makes different judgments or utilizes different estimates. During the reporting periods contained herein, we did experience revenue and margin adjustments on certain projects based on the aforementioned factors, but the effect of such adjustments, both positive and negative, when evaluated in total were determined to be immaterial to our Consolidated Financial Statements.

Cost of revenues. Cost of revenues increased to ~~$554.6~~$768.5 million for the year ended December 31, ~~2017,~~2023, from ~~$515.1~~$672.3 million for the year ended December 25, ~~2016.~~2022. The ~~$39.5~~$96.2 million increase in cost of revenues was primarily a result of ~~increased~~the overall increase in revenue discussed above.

Gross margin percentage increased to ~~26.2%~~25.9% for the year ended December 31, ~~2017,~~2023, compared to ~~23.0%~~25.2% for the year ended December 25, ~~2016.~~2022. Margins on services ~~increased~~decreased to ~~28.6%~~24.7% for the year ended December 31, ~~2017~~2023, from 26.5% for the year ended December 25, ~~2016,~~2022. Margins on product sales increased to 26.7% for the year ended December 31, 2023, as compared to 24.4% for the year ended December 25, 2022. Margins in the KGS segment increased to 27.2% for the year ended December 31, 2023, from 26.8% for the year ended December 25, 2022. This change was primarily due ~~primarily~~ to a more favorable mix of revenues ~~and due to the impact of cost reduction actions that we took in 2016 in our modular systems business. Margins on product sales increased~~ for the year ended December 31, 2017, as compared to December 25, 2016 to 24.3% from 19.1%, respectively, primarily as a result of a change in the mix of products sold, and the ramp in production in our US segment as we have commenced low rate initial production on our SSAT/177 program for the U.S. Navy. In addition, the 2016 gross profit and gross margin included an $18.7 million loss accrual recorded on the LCASD cost share contract incurred in order to retain the intellectual property rights for the new LCASD platform. Margins in the KGS segment increased to 27.6% for the year ended December 31, 2017 from 26.3% for the year ended December 25, 2016, primarily as a result of change in the mix of products sold.2023. Margins in the US segment increased to ~~20.5%~~20.7% for the year ended December 31, ~~2017~~2023 from ~~(2.9)%~~20.1% for the year ended December 25, ~~2016, which reflects the ramp~~2022. primarily due to a more favorable mix of products produced and shipped in low rate initial production, the increase in revenues and the effect from the $18.7 million loss accrual recorded on the LCASD cost share contract during 2016. Margins in the PSS segment increased to 26.6% for the year ended December 31, 2017 from 26.1% for the year ended December 25, 2016 as a result of a more favorable mix of revenues, resulting from the strategic shift in focus on smaller sized, higher margin projects and only selectively bidding on larger sized lower margin projects, the completion of certain lower margin projects, as well as the impact of cost reduction actions that were taken during the year ended December 31, 2017, offset partially by the impact of approximately $4.1 million in unexpected cost growth recorded during 2016 on several large long-term security integration projects which are either completed or nearing completion.2023.

Selling, general and administrative expenses (SG&A). SG&A increased ~~$14.3~~$15.3 million to ~~$160.6~~$197.8 million for the year ended December 31, ~~2017,~~2023, from ~~$146.3~~$182.5 million for the year ended December 25, ~~2016. The increase was~~2022, primarily ~~the result of~~reflecting the increase in ~~revenues described previously.~~revenues. As a percentage of revenues, SG&A decreased to ~~21.4%~~19.1% for ~~fiscal 2017~~the year ended December 31, 2023 from ~~21.9%~~20.3% for ~~fiscal 2016. Excluding amortization of intangibles of $10.4~~the year ended December 25, 2022 due primarily to the increase in revenues in the year ended December 31, 2023.

Research and development (R&D) expenses. R&D expenses were $38.4 million for the year ended December 31, ~~2017,~~2023 and ~~amortization of intangibles of $10.5~~$38.6 million for the year ended December 25, ~~2016, SG&A decreased slightly as~~2022, with the primary increases in expenses in ourspace and satellite communications business, offset by a ~~percentage of revenues to 20.0% from 20.3% for the year ended December 31, 2017 and December 25, 2016, respectively.~~

~~Internal research and development (IR&D) expenses.~~ ~~IR&D expenses increased to $17.8 million for the year ended December 31, 2017 from $13.9 million for the year ended December 25, 2016.~~net reduction in our unmanned systems business. As a percentage of revenues, IRR&D ~~increased~~decreased to ~~2.4%~~3.7% of revenues for the year ended December 31, ~~2017~~2023, from ~~2.1%~~4.3% of revenues for the year ended December 25, ~~2016. IR~~2022. R&D ~~expenditures~~expenses are ~~primarily related to investments we are making~~made by the Company, typically in conjunction with our customers, ~~and prospective customers,~~for the Company to achieve a “first to market” position with ~~the objectives of~~ our products ~~being the new platform for~~ or technology. We also invest in R&D expenses to achieve market leading “designed in”and “first to ~~certain new long term program opportunities~~market” positions on major programs, platforms or systems.

Restructuring expenses and ~~our owning certain intellectual property rights for products that support these programs primarily in our unmanned systems~~other. Restructuring expenses and microwave electronic businesses as well as technology upgrades and refresh activities that are necessary for the next generation of our existing product lines primarily in our satellite communications business.

~~Merger and acquisition related items.~~ ~~Merger and acquisition related items~~other decreased to ~~$0.0~~$0.9 million for the year ended December 31, ~~2017,~~2023 from ~~$1.9~~$6.8 million infor the year ended December 25, ~~2016. The decrease was~~2022, primarily as a result of ~~a $1.9~~the $5.5 million charge related to the litigation settlement of a ~~contract~~ dispute with an international customer in our ~~PSS business~~US segment during the ~~first quarter~~year ended December 25, 2022.

Total other expense, net. Other expense, net, decreased to $20.0 million from $30.1 million for the years ended December 31, 2023 and December 25, 2022, respectively. The decrease in other expense, net, of ~~2016.~~$10.1 million was primarily related to the $13.0 million loss on the extinguishment of our $300 million 6.5% Senior Secured Notes due November 2025 (“Senior Secured Notes”) during the year ended December 25, 2022, which was partially offset by a $2.8 million increase in interest expense for the year ended December 31, 2023due to increased interest rates.

~~Unused office space and other restructuring.~~Provision for income taxes from continuing operations. The ~~expense~~Company recorded an income tax provision of ~~$0.5~~$8.9 million for the year ended December 31, ~~2017, was related to employee termination costs associated with personal reduction actions taken during the year. The expense~~2023, and an income tax provision of ~~$10.1~~$1.4 million for the year ended December 25, ~~2016, was due~~2022. The income tax provision for 2022 includes a $4.9 million expense related to ~~a $9.2 million charge that was recorded~~the increase in the Company’s ~~modular systems business as a result of the closure of one of its manufacturing facilities, as well as, the exit from certain lower margin product business lines and employee termination costs~~valuation allowance on U.S. deferred tax assets related to ~~personnel reduction actions taken in the first quarter of 2016.~~certain state Net Operating Losses, capital loss carryforwards and federal research and development credits.

Income from discontinued operations. The ~~restructuring charge recorded in our modular systems business~~income from discontinued operations was ~~comprised of $4.9 million related to fixed and~~

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intangible assets, of which $1.4 million was recorded in the fourth quarter of 2016 reflecting the write-down to estimated fair value of one of its facilities, $3.0 million related to exited product lines and $1.3 million related to excess facilities.

~~Impairment of goodwill.~~ ~~Impairment of goodwill includes a charge of $24.2~~$0.2 million for the year ended December 31, 2017 resulting from the annual impairment test of the carrying value of the goodwill balance of our DRSS reporting unit within the KGS segment. The majority of this business includes our legacy government services business, which we deemphasized2023 and no longer considered a core business area in 2010. The expected future performance for the DRSS reporting unit has been adversely impacted by competitive pressures and commoditization resulting from lower priced technically acceptable awards rather than awards based on best value. Specifically, we were recently notified of losses on two sizable five year contract opportunities, which has significantly impacted the expected future financial performance of the DRSS business.

~~Other expense, net.~~ ~~Other expense, net increased to $45.0 million from $33.7 million for the years ended December 31, 2017 and December 25, 2016, respectively. The increase in expense of $11.3 million~~ was ~~primarily related to a $17.3 million loss on the extinguishment of the 7% Notes in 2017, a reduction in net interest of $6.1 million to $28.6 million for the year ended December 31, 2017 from $34.7~~$0.9 million for the year ended December 25, ~~2016~~2022, in each case primarily as a result of a gain from the release of an indemnification liability due to the lapse of the statute of limitations associated with a potential tax liability that was recorded in 2019 from the sale of PSS.

For a comparison of the Company’s ~~repurchase and extinguishment~~results of ~~approximately $77.2 million of our 7% Notes since~~operations for the ~~fourth quarter of 2016.~~

~~Provision (benefit) for income taxes from continuing operations.~~ ~~The provision for income taxes from continuing operations changed to a benefit of $8.2 million on a loss from continuing operations before income taxes of $50.8 million for the~~fiscal year ended December ~~31, 2017 from an expense~~26, 2021 to the fiscal year ended December 25, 2022, see Item 7, Management’s Discussion and Analysis of ~~$8.1 million~~Financial Condition and Results of Operations in the Company’s Annual Report on ~~a loss of $52.3 million from continuing operations before income taxes~~Form 10-K for the year ended December 25, ~~2016. The tax benefit for the year ended December 31, 2017~~2022, which was primarily comprised of foreign and state taxes offset by a decrease in the indefinite life deferred tax liability as a result of enactment of the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”). We have not completed our accounting for the tax effects of enactment of the 2017 Tax Act. We have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax for certain foreign earnings and recognized a provisional tax benefit of $13.2 million in accordance with Staff Accounting Bulletin No. 118. The benefit is included as a component of income tax expense from continuing operations. Taxable income from the one-time transition tax was offset by taxable operating losses generated in the tax year ended December 31, 2017.

Effective January 1, 2018, the 2017 Tax Act requires the acceleration of revenue for tax purposes for certain types of revenue. The new rules require that we do not defer revenue on our unbilled accounts receivable later than the amounts are recognized in revenue for book purposes. This change impacts several accounting methods previously used by us and is expected to result in an acceleration of taxability of such revenue beginning in 2018 as compared with prior U.S. tax laws. Additionally, future interest deductions of the company will be limited to 30% of tax adjusted EBITDA through 2021.

~~Income (loss) from discontinued operations.~~ ~~There was no significant activity for the year ended December 31, 2017. The loss from discontinued operations was $0.1 million for each of the years ended December 31, 2017, and December 25, 2016.~~

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~~Comparison of Results for the Year Ended December 25, 2016 to the Year Ended December 27, 2015~~

~~Revenues.~~ ~~Revenues by reportable segment for the years ended December 25, 2016 and December 27, 2015 are as follows (in millions):~~

2016 2015 $ Change % Change
Kratos Government Solutions
Service revenues $ 221.0
$ 209.5
$ 11.5
5.5 %
Product sales 244.8
236.6
8.2
3.5 %
Total Kratos Government Solutions 465.8
446.1
19.7
4.4 %
Public Safety & Security - service revenues 127.1
144.7
—
(17.6 ) (12.2 )%
Unmanned Systems - product sales 75.8
66.3
9.5
14.3 %
Total revenues $ 668.7
$ 657.1
$ 11.6
1.8 %

Total service revenues $ 348.1
$ 354.2
$ (6.1 ) (1.7 )%
Total product sales 320.6
302.9
17.7
5.8 %
Total revenues $ 668.7
$ 657.1
$ 11.6
1.8 %

Revenues increased $11.6 million to $668.7 million in 2016 from $657.1 million in 2015. The increase in revenues was the result of increased revenues of $19.7 million in our KGS segment primarily resulting from increased shipments and work performed in our satellite communications business of approximately $21.1 million, our simulation and training business of approximately $6.7 million and our ballistic missile target businesses of approximately $8.6 million, offset by a reduction in shipments of our specialized ground equipment products resulting primarily from delays in contract awards of $11.8 million and other reductions primarily in our government services business, which includes our weapons reset business, of approximately $4.9 million. Increased revenues of $9.5 million in our US segment resulted from recent contract awards in unmanned combat aerial systems and unmanned aerial target systems as well as an increase in shipments of unmanned aerial target systems. Declines in our PSS segment of $17.6 million were primarily the result of our change in strategic direction in the fourth quarter of 2014 to capture higher margin work and only selectively bid on larger security integration projects that traditionally generate lower margins, coupledfiled with the impact of approximately $4.1 million in unexpected cost growth recorded during 2016 which negatively impacted our revenues. This unexpected cost growth is primarily related to several large long-term security integration projects which are nearing completion in 2017.U.S. Securities and Exchange Commission on February 23, 2023.

Product sales increased $17.7 million to $320.6 million for the year ended December 25, 2016, from $302.9 million for the year ended December 27, 2015, primarily as a result of the increase in product shipments due to the factors discussed above in our KGS and US segments. As a percentage of total revenue, product revenues were 47.9% for the year ended December 25, 2016 as compared to 46.1% for the year ended December 27, 2015. Service revenues decreased by $6.1 million to $348.1 million for the year ended December 25, 2016 from $354.2 million for the year ended December 27, 2015. The decrease was primarily related to the change in strategic direction and the completion of larger security installation projects in our PSS segment, offset partially by increases in our KGS segment as discussed above.

As described in our “Critical Accounting Principles and Estimates” below and in the Notes to Consolidated Financial Statements contained within this Annual Report, we utilize both the cost-to-cost and units delivered measures under the percentage-of-completion method of accounting for recognizing revenue as provided for in Topic 605. When revenue is calculated using the percentage-of-completion method, total costs incurred to date are compared to total estimated costs to complete the contract. These estimates are reviewed monthly on a contract-by-contract basis, and are revised periodically throughout the life of the contract such that adjustments to profit resulting from revisions are made cumulative to the date of the revision. Significant management judgments and estimates, including the estimated costs to complete projects, which determine the project’s percentage of completion, must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of our revenue for any period if management makes different judgments or utilizes different estimates. During the reporting periods contained herein, we did experience revenue and margin adjustments on certain projects based on the aforementioned factors, but the effect of such adjustments, both positive and negative, when evaluated in total, were determined to be immaterial to our Consolidated Financial Statements.

~~Cost of revenues.~~ Cost of revenues increased to $515.1 million for the year ended December 25, 2016 from $495.3 million for the year ended December 27, 2015. The $19.8 million increase in cost of revenues was primarily a result of

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increased revenue discussed above, as well as an $18.7 million loss accrual recorded in 2016 on the LCASD cost share contract, which is expected to be incurred by us over the period of performance of the contract, and was incurred in order to retain the intellectual property rights for the new LCASD platform. Cost of revenues was also impacted by approximately $4.1 million in unexpected cost growth on PSS projects recorded during 2016 which negatively impacted our revenues. This unexpected cost growth is primarily related to several large long-term security integration projects which are nearing completion in 2017.

Gross margin percentage decreased to 23.0% for the year ended December 25, 2016 compared to 24.6% for the year ended December 27, 2015. Margins on services increased to 26.5% for the year ended December 25, 2016 from 24.8% for the year ended December 27, 2015, due primarily to a more favorable mix of revenues. Margins on product sales decreased for the year ended December 25, 2016 as compared to December 27, 2015 to 19.1% from 24.5%, respectively, primarily as a result of a change in the mix of products sold. Margins in the KGS segment increased to 26.3% for the year ended December 25, 2016 from 25.4% for the year ended December 27, 2015, primarily as a result of change in the mix of products sold. Margins in the US segment decreased to (2.9)% for the year ended December 25, 2016, from 16.3% for the year ended December 27, 2015, reflecting an $18.7 million loss accrual recorded on the LCASD cost share contract, which is expected to be incurred by the Company over the period of performance of the contract, and was incurred in order to retain the intellectual property rights for the new LCASD platform. Margins in the PSS segment increased slightly to 26.1% for the year ended December 25, 2016, from 26.0% for the year ended December 27, 2015, as a result of a more favorable mix of revenues, resulting from the strategic shift in focus on smaller sized, higher margin projects and only selectively bidding on larger sized lower margin projects, the completion of certain lower margin projects, as well as the impact of cost reduction actions that were taken during the year ended December 25, 2016, offset partially by the impact of approximately $4.1 million in unexpected cost growth recorded during 2016 on several large long-term security integration projects, which are nearing completion.

~~Selling, general and administrative expenses (SG&A).~~ SG&A decreased $4.4 million to $146.3 million for the year ended December 25, 2016, from $150.7 million for the year ended December 27, 2015. The decrease was primarily the result of a $2.5 million reduction of amortization of intangibles in 2016, as a result of certain intangible assets being fully amortized, as well as cost reduction actions taken by us, offset partially by increased discretionary investments to pursue business opportunities in the unmanned tactical aircraft market. As a percentage of revenues, SG&A decreased to 21.9% for fiscal 2016 from 22.9% for fiscal 2015. Excluding amortization of intangibles of $10.5 million for the year ended December 25, 2016 and amortization of intangibles of $13.0 million for the year ended December 27, 2015, SG&A decreased as a percentage of revenues to 20.3% from 21.0% for the year ended December 25, 2016 and December 27, 2015, respectively, due primarily to the cost reduction actions we have taken and the increased leverage on our public company infrastructure costs as revenues expand.

~~Internal research and development (IR&D) expenses.~~ IR&D expenses decreased to $13.9 million for the year ended December 25, 2016, from $16.2 million for the year ended December 27, 2015. As a percentage of revenues, IR&D decreased to 2.1% of revenues for the year ended December 25, 2016, from 2.5% of revenues for the year ended December 27, 2015. IR&D expenditures are primarily related to investments we are making in conjunction with our customers and prospective customers, with the objectives of our products being the new platform for, or “designed-in” to, certain new long term program opportunities and our owning certain intellectual property rights for products that support these programs primarily in our unmanned systems and microwave electronic businesses, as well as technology upgrades and refresh activities that are necessary for the next generation of our existing product lines primarily in our satellite communications business.

~~Merger and acquisition related items.~~ Merger and acquisition related items increased to $1.9 million for the year ended December 25, 2016, from $0.1 million in the year ended December 27, 2015. The increase was primarily a result of a $1.9 million charge related to the settlement of a contract dispute in our PSS business during the first quarter of 2016.

~~Unused office space and other restructuring.~~ The expense of $10.1 million for the year ended December 25, 2016, was due to a $9.2 million charge that was recorded in our modular systems business as a result of the closure of one of its manufacturing facilities, as well as, the exit from certain lower margin product business lines and employee termination costs related to personnel reduction actions taken in the first quarter of 2016. The restructuring charge recorded in our modular systems business was comprised of $4.9 million related to fixed and intangible assets, of which $1.4 million was recorded in the fourth quarter of 2016 reflecting the write-down to estimated fair value of one of its facilities, $3.0 million related to exited product lines and $1.3 million related to excess facilities. The benefit of $0.7 million for the year ended December 27, 2015 was due to a reduction in the liability for unused office space at our Columbia, Maryland facility resulting from the execution of a recent sublease arrangement, partially offset by an impairment of leasehold improvements, office furniture and equipment at that location, and employee termination costs related to personnel reduction actions taken during the year.

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~~Other expense, net.~~ Other expense, net decreased to $33.7 million from $40.1 million for the years ended December 25, 2016 and December 27, 2015, respectively. The decrease in expense of $6.4 million was primarily related to a $3.4 million loss on the extinguishment of the 10% Notes in the third quarter of 2015, a reduction in interest expense of $1.3 million as a result of the redemption of $175.0 million of our 7% Notes and the repayment of $41.0 million of outstanding borrowings under our Credit Agreement in the third quarter of 2015 which both occurred as a result of our divestiture of the Herley Entities.

~~Provision (benefit) for income taxes from continuing operations.~~ The provision for income taxes from continuing operations changed to an expense of $8.1 million on a loss from continuing operations before income taxes of $52.3 million for the year ended December 25, 2016, from a benefit of $11.4 million on a loss of $44.6 million from continuing operations before income taxes for the year ended December 27, 2015. The expense for the year ended December 25, 2016 was primarily comprised of a provision for foreign and state taxes increased by the change in the indefinite life deferred tax liability. The benefit for the year ended December 27, 2015 was primarily due to the intra-period allocation rules in ASC Topic 740, Income ~~Taxes.~~ Intra-period allocation rules require us to allocate its provision for income taxes between continuing operations and other categories of earnings, such as discontinued operations. In periods in which there is a pre-tax loss from continuing operations and pre-tax income in other categories of earnings, such as discontinued operations, the Company must allocate the tax provision to other categories of earnings. A related tax benefit is then recorded in continuing operations. See Note 7 of Notes to Consolidated Financial Statements for a further discussion of our income taxes.

~~Income (loss) from discontinued operations.~~ There was no significant activity for the year ended December 25, 2016. The loss from discontinued operations was $0.1 million for the year ended December 25, 2016, compared to income of $53.0 million for the year ended December 27, 2015, which included the gain on sale of the Herley Entities of $80.8 million which occurred on August 21, 2015. The income for the year ended December 27, 2015 also reflects interest expense allocated to discontinued operations of $9.1 million. For additional information, see Note 8 of the Notes to the Consolidated Financial Statements.

Liquidity and Capital Resources

As of December 31, ~~2017~~,2023, we had cash and cash equivalents of ~~$129.6~~$72.8 million compared with cash and cash equivalents of ~~$69.1~~$81.3 million as of December 25, ~~2016~~,2022, which includes ~~$10.7~~$44.1 million and ~~$5.2~~$18.9 million, respectively, of cash and cash equivalents held by our foreign subsidiaries. We are not presently aware of any restrictions on the repatriation of these ~~funds,~~funds; however, earnings of these foreign subsidiaries are essentially considered permanently invested in these foreign subsidiaries. If these funds were needed to fund our operations or satisfy obligations in the U.S. they could be repatriated, and their repatriation into the U.S. may cause us to incur additional foreign withholding taxes. We do not currently intend to repatriate these earnings.

~~During 2017,~~

Our total long-term debt, decreased by $30.0 million to $227.5 million as of December 31, 2023 from $257.5 million as of December 25, 2022. On February 18, 2022, we ~~sold approximately 28.0 million shares~~completed the refinancing of our ~~common stock in underwritten public offerings, raising net proceeds of approximately $269.1~~then-outstanding $90 million ~~after deducting underwriting fees~~revolving credit facility and ~~other offering expenses. During the quarter ended March 26, 2017, we repurchased and extinguished $62.7~~$300 million of the outstanding 7% Notes, which resulted in a loss of $1.4 million and the realization of $0.4 million of unamortized issuance cost and $0.3 million of unamortized discount resulting in a net loss of $2.1 million.

On November 20, 2017, we issued and sold $300 million aggregate principal amount of 6.5% Notes in a private placement pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended. The proceeds from the 6.5% Notes were used to redeem our existing 7% Senior Secured Notes, ~~due 2019 (“7% Notes”)~~with a new 5-year $200 million Revolving Credit Facility and 5-year $200 million Term Loan Aissued pursuant to ~~pay all fees and expenses, including premium and unpaid interest, if any, related thereto.~~the 2022 Credit Facility. We incurred debt issuance costs of ~~$6.6~~$3.3 million associated with the 2022 Credit Facility. We drew approximately $200 million under the Term Loan A and $100 million on the new ~~6.5% Notes. We utilized~~Revolving Credit Facility at the ~~net proceeds from the sale~~time of the ~~6.5% Notes, as well as cash from our recent equity offering to extinguish the outstanding 7% Notes.~~

~~The total reacquisition price~~refinancing transaction (as more fully described in Note 5 of the 7% Notes was $385.2 million, including a $12.0 million call premium, and $0.3 million of accrued interest. During 2017, we decreased long term indebtedness by $135.5 million utilizing cash on hand and the proceeds from the 6.5% Notes, resulting in a loss on extinguishment of debt of $17.3 million during 2017.accompanying Consolidated Financial Statements).

~~Our total debt, including principal due on the 6.5% Notes, other term debt, and debt issuance costs of $6.5 million, decreased by $137.7 million to $294.3 million as~~As of December 31, ~~2017 from $432.0~~2023, we have $192.5 million asoutstanding on the Term Loan A and net borrowings of ~~December 25, 2016. The decrease~~$35.0 million outstanding on the Revolving Credit Facility, with $165.0 million remaining in ~~total debt was due to the buy back, redemption and retirement~~borrowing capacity, less approximately $10.2 million for outstanding letters of ~~approximately $435.5 million of 7% Notes which occurred during 2017, offset by the issuance of $300 million of 6.5% Notes, in addition to the principal payment required on~~credit.

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~~our ten-year term loan with a bank in Israel, offset partially by the amortization of the discount on our 7% Notes and the amortization of deferred financing costs.~~

We use our operating cash flow to finance trade accounts receivable, fund necessary increases in inventory ~~which may include leaning forward~~and internal investments related to ~~procure long-lead materials for certain of our unmanned systems programs at our customer’s requests, prior to receipt of customer contractual funding documents,~~non-recurring engineering and software development, fund capital expenditures, fund our IR&D investments and our ongoing operations, service our debt and make strategic acquisitions. Financing trade accounts receivable is necessary because, on average, our customers do not pay us as quickly as we pay our vendors and employees for their goods and services since a number of our receivables are contractually billable and due to us only when certain contractual milestones are ~~achieved.~~achieved, certain of which are not achieved until final shipment and acceptance of our products. Financing increases in inventory balances is necessary to fulfill shipment requirements to meet delivery schedules of our customers. Cash from continuing operations is primarily derived from our customer contracts in progress and associated changes in working capital components. Our days sales outstanding (“DSO”) have ~~increased~~decreased to ~~121~~116 days as of December 31, ~~2017~~2023 from ~~115~~134 days as of December 25, ~~2016.~~2022. Our DSOs ~~can fluctuate from period to period, primarily as a result~~are impacted by the achievement of ~~certain~~ contractual billing milestones, ~~that have not yet been attained,~~ such as equipment shipments and deliveries on certain products, and for certain flight requirements that must be fulfilled on certain aerial target programs, or final billings which are not due until completion on certain ~~of our large critical infrastructure deployment~~ projects, ~~and large training systems deliveries,~~ and therefore we are unable to contractually bill for amounts outstanding related to those milestones at this time.

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) the costs incurred in settling with subcontractors and preparing and settling the termination proposal. However, we will 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 December 31, 2023, approximately $4.8 million in unbilled receivables remain outstanding on this project, which is subject to negotiation and settlement with the customer.

A summary of our net cash ~~used in~~provided by (used in) operating activities from continuing operations from our Consolidated Statements of Cash Flows is as follows (in millions):

Year Ended
December 31, 2017 December 25, 2016 December 27, 2015
Net cash used in operating activities from continuing operations $ (27.0 ) $ (12.4 ) $ (29.7 )


	Year Ended
	December 31, 2023		December 25, 2022
Net cash provided by (used in) operating activities from continuing operations	$	65.2	$	(25.6)

Our net cash provided by operating activities from continuing operations was $65.2 million for the year ended December 31, 2023, primarily as a result of the net income from continuing operations of $2.2 million and noncash charges of $74.2 million partially offset by changes in net working capital accounts of $11.2 million, which included customer advanced payments reflected as an increase in Billings in Excess of Costs of $28.4 million. Net cash used in operating activities from continuing operations was ~~impacted by interest expense we paid related to our senior secured notes. We paid $28.3~~$25.6 million ~~$32.4~~for the year ended December 25, 2022, primarily as a result of net loss from continuing operations of $34.1 million, and $43.8 million in interest expense in 2017, 2016, and 2015, respectively. Cash used in operating activities in 2017 and 2016 was also negatively impacted by reduced operating income which reflected discretionary investments we have made in internally funded research and development of $17.8 million in 2017, $13.9 million in 2016 and $16.2 million in 2015, contract development costs on new platforms in our US segment, and increased SG&A expenditures primarily related to business capture pursuits in the tactical unmanned aircraft systems initiatives, as well as changes in working capital ~~accounts. The net use~~requirements of $74.9 million, including increases in ~~working capital accounts for 2017 includes approximately $7.7 million of~~receivables and inventory balances reflecting advance payments to mitigate supply chain disruptions, and internal ~~development product development~~ investments ~~that are non-capital expenditures~~ we are making ~~related to the LCASD or “Valkyrie”.~~in certain rocket motors and software products of approximately $16.7 million, partially offset by noncash charges of $83.4 million.

Our net cash used in investing activities from continuing operations is summarized as follows (in millions):


	Year Ended
	December 31, 2023		December 25, 2022
Investing activities:
Cash paid for acquisitions, net of cash acquired	$	0.3	$	(132.2)
Proceeds from sale of assets	8.3		0.2


Capital expenditures	(52.4)		(45.4)
Net cash used in investing activities from continuing operations	$	(43.8)	$	(177.4)

Year Ended
December 31, 2017 December 25, 2016 December 27, 2015
Investing activities:

Cash paid for acquisitions, net of cash acquired $ —
$ (5.1 ) $ —
Proceeds from sale of assets 0.7
0.1
0.9
Change in restricted cash —
0.3
4.7
Capital expenditures (26.5 ) (9.2 ) (11.3 )
Net cash used in investing activities from continuing operations $ (25.8 ) $ (13.9 ) $ (5.7 )

Net cash used in investing activities ~~was primarily driven by~~from continuing operations for year ended December 31, 2023 is comprised of $52.4 million in capital expenditures partially offset by the receipt of $8.3 million of proceeds from the sale of Valkyries which had been previously booked as capital assets as they were produced ahead of government contract award and $0.3 million cash acquired related to the acquisition of STS.Net cash used in ~~2017, 2016,~~investing activities from continuing operations for the year ended December 25, 2022 was comprised of $74.0 million related to the acquisition of SRE, $37.5 million related to the acquisition of Cosmic, $15.3 million for the remaining purchase price due on the acquisition of CTT, and ~~2015,~~a $5.4 million payment due under the acquisition agreement for KTT Core, of which ~~reflects investments~~ we ~~made for certain machinery, test equipment, demonstration units and Company-owned aircraft~~purchased a controlling interest in February 2019. During the year ended December 31, 2023, capital expenditures of approximately $25.1 million were incurred in our US business, primarily related to our unmanned ~~aerial systems business, and to a lesser degree, investments we made in~~combat target initiative. We expect our ~~microwave electronic products business, and our satellite communications business. The 2017~~ capital expenditures ~~included approximately $13.2 million related~~for our fiscal year 2024 to continue to be significant for investments we are making, including in our US ~~segment~~business totaling approximately $28 to ~~build Company-owned tactical aircraft~~$32 million, including approximately $18 to $22 million for capital aerial targets and related ~~equipment related to the LCASD and UTAP-22 or Mako platforms. In addition, we~~support equipment.

Our net cash used ~~$5.1 million during the fourth quarter of 2016 to fund a strategic initial investment~~ in ~~a satellite signal monitoring, signal intelligence and location identification technology and~~

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product line to enhance our existing satellite communications business offering. An initial purchase price holdback of $0.9 million to provide security for potential indemnification obligations, less any indemnification claims, will be payable in July 2018, in cash or shares of common stock, at our option. In addition, an earn-out of $2.0 million, payable in cash or shares of common stock, at our option, will be payable in July 2018. As of December 31, 2017, the earn-out criteria had been achieved.

~~Cash provided by (used in)~~ financing activities from continuing operations is summarized as follows (in millions):


	Year Ended
	December 31, 2023		December 25, 2022
Financing activities:
Proceeds from the issuance of long-term debt	$	—	$	200.0



Borrowings under credit facility	69.0		100.0
Redemption of Senior Secured Notes	—		(309.8)
Repayments under credit facility, term loan and other debt	(101.0)		(42.5)
Payments of employee taxes withheld from share-based awards	(3.7)		(12.5)
Debt issuance costs	—		(3.3)
Payments under finance leases	(1.5)		(1.4)
Proceeds from shares issued under equity plans	6.5		6.2

Net cash used in financing activities from continuing operations	$	(30.7)	$	(63.3)

Year Ended
December 31, 2017 December 25, 2016 December 27, 2015
Financing activities:
Proceeds from the issuance of long-term debt $ 300.0
$ —
$ —
Extinguishment of long-term debt (448.8 ) (14.1 ) (175.0 )
Proceeds from the issuance of common stock 269.1
76.2
—
Cash paid for contingent acquisition consideration —
—
(1.1 )
Repayment under credit facility (1.0 ) (1.0 ) (42.0 )
Debt issuance costs (6.6 ) —
—
Proceeds from the exercise of restricted stock units, employee stock options, and employee stock purchase plan 1.5
2.0
3.4
Other (0.8 ) —
—
Net cash provided by (used in) financing activities from continuing operations $ 113.4
$ 63.1
$ (214.7 )

Net cash provided by financing activities for the year ended December 31, 2017 included $269.1 million in net proceeds from the equity offerings we completed in the first and fourth quarters of 2017 and $300.0 million in proceeds from the issuance of our 6.5% Notes. The net proceeds from the issuance of our 6.5% Notes along with approximately $155.1 million from the proceeds from the equity offerings was used to buy back and redeem approximately $435.5 million of our 7% Notes. Net cash flows provided by financing activities for the year ended December 25, 2016 included $76.2 million in net proceeds from the equity offering we completed in the fourth quarter of 2016, $14.1 million of which was used to buy back and redeem approximately $14.5 million of our Notes. Net cash flows used in financing activities from continuing operations was $30.7 million for the year ended December ~~27, 2015 was primarily due~~31, 2023, which included $5.0 million of principal payments on our $200 million Term Loan A, a $94.0 million payment (partially offset by a $69.0 million draw) on the new Revolving Credit Facility, and a $2.0 million payment to settle debt acquired related to the ~~repurchase~~STS acquisition, payroll withholding taxes paid from vested restricted stock traded for taxes of ~~$175.0~~$3.7 million and payments made on financing lease obligations of ~~our 7% Notes and the repayment~~$1.5 million. These uses were partially offset by employee stock purchase plan receipts of ~~$41.0~~$6.5 million. Net cash used in financing activities from continuing operations was $63.3 million ~~outstanding on our Credit Agreement.~~

~~Cash provided by (used in) discontinued operations is summarized as follows (in millions):~~

Year Ended
December 31, 2017 December 25, 2016 December 27, 2015
Net operating cash flows provided by discontinued operations $ —
$ 0.1
$ 2.8
Net investing cash flows provided by (used in) discontinued operations (0.6 ) 4.0
242.5

The operating cash flow provided by discontinued operations for the year ended December 27, 2015 is substantially related to Herley Industries, Inc. and certain of Herley’s subsidiaries. The investing cash flow provided by discontinued operations for the year ended December 25, ~~2016 reflects~~2022, which included $309.8 million used to redeem our $300 million of Senior Secured Notes including the ~~reimbursement~~call premium of $9.8 million, debt issuance costs of $3.3 million, payroll withholding taxes paid from vested restricted stock traded for taxes of $12.5 million and payments made on financing lease obligations of $1.4 million. These uses were partially offset by $300 million in proceeds from our 2022 Credit Facility (partially offset by $2.5 million of principal payments on our $200 million Term Loan A and a $40 million payment on the ~~Buyer~~new Revolving Credit Facility) and employee stock purchase plan receipts of $6.2 million.

2022 Credit Facility

On February 18, 2022, the ~~Herley Entities received in 2016.~~Company completed the refinancing of its then-outstanding $90 million revolving credit facility and Senior Secured Notes, with the 2022 Credit Facility. The ~~investing cash flow provided by discontinued operations for~~Company incurred debt issuance costs of $3.3 million

associated with the 2022 Credit Facility. During the year ended December ~~27, 2015 reflects~~31, 2023, the Company made $5.0 million of principal payments on Term Loan A. As of December 31, 2023, the Company has net borrowings of approximately $35.0 million outstanding on the new Revolving Credit Facility, with $165.0 million remaining in borrowing capacity, less approximately $10.2 million of letters of credit outstanding.

On February 18, 2022, the proceeds of $300 million from the 2022 Credit Facility, along with cash ~~provided of $243.2 million which is related~~funded by the Company for the 3.25% call premium to redeem the Company’s outstanding Senior Secured Notes, plus accrued interest, was distributed to the ~~sale~~trustee for redemption of the ~~Herley Entities, net~~Senior Secured Notes. The redemption of ~~related transaction expenses.~~

the Company’s then-outstanding $300 million 6.5% Senior Secured Notes due ~~2025~~

In November ~~2017, we issued and sold $300 million aggregate principal~~2025 closed on March 14, 2022, for an amount of ~~6.5% Senior Secured Notes due 2025 (the “6.5% Notes”) in a private placement conducted pursuant~~cash equal to Rule 144A and Regulation S under the Securities Act of 1933, as amended (the “Act”). The net proceeds from the issuance of the 6.5% Notes were $295.5 million after expenses of $4.5 million. We utilized the net proceeds from the sale of the 6.5% Notes, as well as cash from our recent equity offering to extinguish our outstanding 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.

~~Table of Contents~~

The 6.5% Notes are governed by the Indenture, dated as of November 20, 2017 (the “Indenture”), among the Company, our existing and future domestic subsidiaries parties thereto (the “Subsidiary Guarantors”) and Wilmington Trust, National Association, as trustee and collateral agent (in such capacity, the “2017 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) we designate such Subsidiary Guarantor as an Unrestricted Subsidiary; (c) we exercise our legal defeasance option or our 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, the “Guarantees”) are our 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 extent of the assets securing that secured debt. Our obligations under the 6.5% Notes are secured by a first priority lien on substantially all of our 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 our obligations under the Credit Agreement.

The 6.5% Notes will be redeemable, in whole or in part, at any time on or after November 30, 2020 at the respective redemption prices specified in the Indenture. In addition, we may redeem up to 40% of the 6.5% Notes before November 30, 2020 with the net proceeds of certain equity offerings. We may also redeem some or all of the 6.5% Notes before November 30, 2020 at a redemption price of 100%103.25% of the principal amount thereof plus accrued and unpaid interest ~~to, but excluding, the redemption date, if any, plus~~thereon. The Company incurred a ~~“make whole” premium. In addition, during each 12-month period commencing~~loss on the ~~issue date and ending~~extinguishment of debt of $9.8 million related to the call premium on ~~or prior to November 30, 2020, we may redeem up to 10% of~~ the original aggregate principal amount of the 6.5% Notes issued under the Indenture at a redemption price of 103.000% of the principal amount thereof, plus accrued and unpaid interest, to, but excluding, the date of redemption, if any. We may also be required to make an offer to purchase the 6.5% Notes upon a change of control and certain sales of our assets.

The Indenture contains covenants limiting, among other things, our 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 our assets; (i) enter into transactions with affiliates; and (j) enter into agreements restricting our ability and certain of our subsidiaries’ ability to pay dividends. These covenants are subject to a number of exceptions. As of December 31, 2017, we were 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 (iii) 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 6.5% Notes at par.

The Indenture also provides for events of default which, if any of them 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.

7% Senior Secured Notes ~~due 2019~~

~~In May 2014, we refinanced our $625.0 million in outstanding 10% Notes with $625.0~~and the write-off of $3.2 million of ~~newly issued 7% Notes. The net proceeds from the issuance of the 7% Notes was $618.5 million after an original issue discount of $6.5 million. We incurred~~unamortized debt issuance costs, of $8.8 million associated with the new 7% Notes. We utilized the net proceeds from the 7% Notes, a $41.0 million draw on our Credit Agreement discussed below, as well as cash from operations to extinguish the 10% Notes. The total reacquisition price of the 10% Notes was $661.5 million, including a $31.2 million early termination fee, the write-off of $15.5 million of unamortized issue costs, $12.9 million of unamortized premium, along with $5.3 million of additional interest while in escrow, which resulted in a loss on extinguishment of $39.1 million. On October 16, 2014, we exchanged the outstanding 7% Notes for an equal amount of 7% Notes that had been registered under the Act.

~~Table of Contents~~

The 7% Notes were governed by the Indenture, dated May 14, 2014, among the Company, all of the Company’s 100% owned domestic subsidiaries, as the Subsidiary Guarantors and Wilmington Trust, National Association, as Trustee and Collateral Agent. We paid interest on the 7%Notes semi-annually, in arrears, on May 15 and November 15 of each year. The 7% Notes included customary covenants and events of default as well as a consolidated fixed charge ratio of 2.0:1 for the incurrence of additional indebtedness. Negative covenants include, among other things, limitations on additional debt, liens, negative pledges, investments, dividends, stock repurchases, asset sales and affiliate transactions. Events of default include, among other events, non-performance of covenants, breach of representations, cross-default to other material debt, bankruptcy, insolvency, material judgments and changes in control.

Following the sale of the U.S. and U.K. Electronic Products Division (see Note 8 of the Notes to Consolidated Financial Statements), on September 22, 2015, we repurchased $175.0 million of the 7% Notes at par, in accordance with the Indenture and on August 21, 2015 paid down the $41.0 million outstanding on the $110.0 million Credit Agreement. The total reacquisition price of the 7% Notes was $178.4 million including the write off of $1.8 million of unamortized issue costs, $1.4 million of unamortized discount, along with $0.2 million of legal fees, which resulted in a loss on extinguishment of $3.4 million. The Company reinvested all net proceeds remaining after the repurchase of the $175.0 million of 7% Notes in replacement collateral under the Indenture within 360 days following the asset disposition, in accordance with the terms of the Indenture.

During the year ended December 25, 2016, we repurchased and extinguished $14.5 million of the outstanding 7% Notes which resulted in a gain of $0.4 million offset by $0.1 million of unamortized issuance cost and $0.1 million of unamortized discount resulting in a ~~net gain of $0.2 million, in accordance with the terms of the Indenture.~~

~~During the year ended December 31, 2017, we redeemed and extinguished the remaining $435.5 million of outstanding 7% Notes as of December 25, 2016, which resulted in a~~total loss on extinguishment of debt of ~~$13.4 million and the realization of $2.3 million of unamortized issuance cost and $1.6 million of unamortized discount, resulting in~~$13.0 million.

The 2022 Credit Facility is governed by a ~~loss on extinguishment of debt of $17.3 million..~~

~~Other Indebtedness~~

Credit ~~and Security~~ Agreement

~~On May 14, 2014, we entered into a $110.0 million Credit and Security Agreement, dated May 14, 2014 (as amended from time to time,~~ (the “Credit Agreement”), ~~with~~dated February 18, 2022, by and among the Company, the lenders from time to time party thereto ~~SunTrust~~(the “Lenders”), the Issuing Banks party thereto (as defined in the Credit Agreement) and Truist Bank, in its capacity as ~~Agent (the “Agent”), PNC Bank, National Association,~~administrative agent for the Lenders, and as ~~Joint Lead Arranger~~an issuing bank and ~~Documentation Agent,~~as the swing line lender, which establishes the 5-year senior secured credit facility which is comprised of the $200 million Revolving Credit Facility (which includes sub-facilities for the incurrence of up to $10.0 million of swingline loans and ~~SunTrust Robinson Humphrey, Inc., as Joint Lead Arranger~~the issuance of up to $50.0 million of Letters of Credit) and ~~Sole Book Runner.~~the $200 million Term Loan A. The Credit Agreement ~~established a five-year senior secured revolving~~contemplates uncommitted incremental credit ~~facility in~~facilities of up to $200 million (which amount would be reduced by the ~~maximum~~aggregate amount of ~~$110.0 million (subject to a potential increase of the maximum principal amount to $135.0 million, subject to the Agent’s~~any and ~~applicable lenders’ approval as described therein), consisting of a subline for letters of~~all incremental 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. The obligations~~facilities actually established under the Credit Agreement are secured by a first priority lien on our accounts receivable, inventory, deposit accounts, securities accounts, cash, securities and general intangibles (other than intellectual property). The obligations under the Credit Agreement are secured by a second priority lien, junior to the lien securing our senior secured notes, on all of our other assets.

The Credit Agreement contains certain covenants, which include, but are not limited to, restrictions on indebtedness, liens, and investments, and limits on other various payments, as well as a financial covenant relatingAgreement) plus additional uncommitted incremental capacity subject to a minimum fixed charge coverage ratio. Events of default under the terms of the Credit Agreement include, but are not limited to: failure of the Company to pay any principal of any loans in full when due and payable; failure of the Company to pay any interest on any loan or any fee or other amount payable under the Credit Agreement within three business days after the date when due and payable; failure of the Company or any of its subsidiaries to comply with certain covenants and agreements, subject to applicable grace periods and/or notice requirements; any representation, warranty or statement made in or pursuant to the Credit Agreement or any related writing or any other material information furnished by us or any of our subsidiaries to the Agent or the lenders proving to be false or erroneous; and the occurrence of an event or condition having or reasonably likely to have a material adverse effect, which includes a material adverse effectlimitation based on the business, operations, condition (financial or otherwise) or our prospects or our ability to repay our obligations. Where an event of default arises from certain bankruptcy events, the commitments will automatically and immediately terminate and the principal of, and interest then outstanding on, all of the loans will become immediately due and payable. Subject to certain notice requirements and other conditions, upon the occurrence of an event of default, including the occurrence of a condition having or reasonably likely to have a materialCompany’s pro forma total net leverage ratio (including any such additional uncommitted incremental capacity).

~~Table of Contents~~

adverse effect, commitments may be terminated and the principal of, and interest then outstanding on, all of the loans may become immediately due and payable. As of December 31, 2017, no event of default had occurred and we believe that events or conditions having a material adverse effect, giving rise to an acceleration of any amounts outstanding under the Credit Agreement, have not occurred and the likelihood of such events or conditions occurring is remote.

On May 31, 2015, we entered into a third amendment (the “Third Amendment”) to the Credit Agreement. Under the terms of the Third Amendment, the definitions of certain terms of the Credit Agreement were modified, the disposition of the Herley Entities was approved by the lenders, a minimum $175.0 million repurchase of the 7% Notes by the Company was required, and the payment in full of the outstanding balance of the Credit Agreement was required. Additionally, the measurement of the fixed charge coverage ratio of 1.15:1 was modified as follows: (i) the fixed charge coverage ratio will not be measured as of the end of any quarterly reporting period ending after June 30, 2015, if on such date (a) there are no outstanding revolving loans or swingline loans and (b) the aggregate amount outstanding under letters of credit is less than or equal to $17.0 million; and (ii) as to any subsequent quarterly reporting period ending after June 30, 2015, and not covered by (i) above, a fixed charge coverage ratio of at least 1.05:1 must be maintained if the percentage of (a) outstanding revolving loans plus the sum of the outstanding swingline loans and outstanding letters of credit that are in excess of $17.0 million, to (b) the revolving credit commitment, minus the Herley Disposition Proceeds Reinvestment Reserve, as defined below, is greater than 0.00% but less than 15.00% or a fixed charge coverage ratio of at least 1.10:1 must be maintained if the aforementioned percentage is equal to or greater than 15.00% but less than 25.00%. In all other instances, a fixed charge coverage ratio of 1.15:1 must be maintained. For purposes of computing the fixed charge coverage ratio, the associated reduction in consolidated interest expense in connection with the repurchase of 7% Notes with proceeds from the sale of the Herley Entities shall be deemed to have occurred on the first day of the most recently completed four quarterly reporting periods prior to the sale.

On August 20, 2015, we entered into a fourth amendment (the “Fourth Amendment”) to the Credit Agreement. Among other things, the Fourth Amendment provides for a modification of the Third Amendment as it relates to when the minimum fixed charge coverage ratio will be measured based upon outstanding borrowings. Outstanding borrowings for purposes of computing the applicable minimum fixed charge coverage ratio exclude any letter of credit exposure outstanding of $17.0 million plus the amount of letters of credit outstanding for the divested Herley Entities for which a cash deposit was placed in escrow by the Buyer to cover the amount of such outstanding letters of credit, should the letters of credit be pulled.

On November 20, 2017, we entered into an amended and restated Credit Agreement with the lenders from time to time party thereto, the Agent, PNC Bank, National Association, as Joint Lead Arranger and Documentation Agent, and SunTrust Robinson Humphrey, Inc., as Joint Lead Arranger and Sole Book Runner. As amended and restated, the Credit Agreement establishes 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 SunTrust’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 and the term loan credit facility may take the form of a base rate ~~revolving loan, Eurodollar revolving loan~~loans or ~~swing line loan.~~Secured Overnight Financing Rate (“SOFR”) loans. Base rate ~~revolving~~ loans ~~and swing line loans~~under the Credit Agreement 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 (as defined in the Credit Agreement) prime lending rate, as in effect at such time, (ii) the ~~federal funds rate,~~Federal Funds Rate (as defined in the Credit Agreement), as in effect at such time, plus 0.50% ~~per annum and~~, (iii) the Adjusted ~~LIBO Rate~~Term SOFR (as defined in the Credit Agreement) ~~determined at~~for a one-month tenor in effect on such ~~time for an interest period of one month,~~day, plus 1.00% ~~per annum. Eurodollar revolving~~and (iv) 1.00%. SOFR 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.~~Term SOFR for an Interest Period (as defined in the Credit Agreement) selected by the Company of one, three or six months. The Applicable Margin varies between ~~1.00%-1.50%~~1.25% and 2.25% per annum for SOFR loans and between 0.25% and 1.25% per annum for base rate ~~revolving loans and swing line loans and 2.00%-2.50% for Eurodollar~~ loans, and is based on ~~several factors including our then-existing borrowing base~~the Company’s total net leverage ratio from time to time.

Mandatory amortization on the Term Loan A is 2.5% in each of the first and second years and 5.0% in each of the ~~lenders’ total commitment amount~~third, fourth and ~~revolving credit exposure.~~fifth years, with the remaining outstanding balance due at maturity. The calculation of our borrowing base takes into account several items relating to us and our subsidiaries, including amounts due and owing under billed and unbilled accounts receivables, then held eligible raw materials inventory, work-in-process inventory, and applicable reserves.

~~The measurement of a minimum fixed charge coverage ratio was modified in the November 2017 amended and restated~~ Credit Agreement contains certain covenants, which include, but are not limited to, ~~be 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.~~

~~As of December 31, 2017, there were no borrowings outstanding~~restrictions on ~~the Credit Agreement~~indebtedness, liens, fundamental changes, restricted payments, asset sales, and ~~$9.5 million~~investments, and places limits on various other payments. The Company was ~~outstanding on letters of credit, resulting in net borrowing base availability of $65.8 million. We were~~ in compliance with the ~~financial~~ covenants ofcontained in the Credit Agreement as of December 31, ~~2017.~~2023.

On April 28, 2023, the Company entered into an interest rate swap contract to hedge U.S. dollar-one month Term SOFR in order to fix the interest rate movements associated with the Company’s Term Loan A. The initial hedge amount was $195.0 million and amortizes in accordance with Term Loan A. The swap is at a fixed rate one-month term SOFR of 3.721% and settles monthly on the last day of each calendar month. The swap has an effective date of May 1, 2023 and terminates on May 1, 2026.

Other Liquidity Matters

The following is a discussion of how we expect to fund our short- and long-term liquidity needs from known contractual and other obligations.

The majority of our revenue is derived from contracts and programs that can span several years. We enter into agreements with suppliers and subcontractors for goods and services in support of these contracts and programs with payment terms that are generally aligned with the payment terms from our customers. In some instances, we require advance payments or deposits from our customers, which help fund our purchase commitments and reduce the risk of customer performance.

~~Table~~

As of ~~Contents~~

~~Table of Contents~~

KRATOS DEFENSE & SECURITY SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF ~~STOCKHOLDERS’ EQUITY~~COMPREHENSIVE INCOME (LOSS)

Years ended December 31, ~~2017,~~2023, December 25, ~~2016,~~2022, and December ~~27, 2015~~26, 2021

(in ~~millions)~~millions, except per share amounts)

Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity
Shares Amounts
Balance, December 28, 2014 57.8
$ —
$ 863.4
$ (1.7 ) $ (637.4 ) $ 224.3
Stock-based compensation —
—
6.4
—
—
6.4
Issuance of common stock for employee stock purchase plan, options and warrants 0.9
—
4.0
—
—
4.0
Restricted stock issued and related taxes 0.4
—
(0.6 ) —
—
(0.6 )
Net income —
—
—
—
19.8
19.8
Other comprehensive income, net of tax —
—
—
0.3
—
0.3
Balance, December 27, 2015 59.1
—
873.2
(1.4 ) (617.6 ) 254.2
Stock-based compensation —
—
5.1
—
—
5.1
Issuance of common stock for cash 13.4
—
75.8
—
—
75.8
Issuance of common stock for employee stock purchase plan, options and warrants 0.8
—
2.6
—
—
2.6
Restricted stock issued and related taxes 0.6
—
(0.5 ) —
—
(0.5 )
Net loss —
—
—
—
(60.5 ) (60.5 )
Other comprehensive loss, net of tax —
—
—
(0.3 ) —
(0.3 )
Balance, December 25, 2016 73.9
—
956.2
(1.7 ) (678.1 ) 276.4
Stock-based compensation —
—
7.8
—
—
7.8
Issuance of common stock for cash 28.0
—
268.2
—
—
268.2
Issuance of common stock for employee stock purchase plan, options and warrants 0.7
—
3.5
—
—
3.5
Restricted stock issued and related taxes 0.7
—
(2.0 ) —
—
(2.0 )
Net loss —
—
—
—
(42.7 ) (42.7 )
Other comprehensive income, net of tax —
—
—
0.3
—
0.3
Balance, December 31, 2017 103.3
$ —
$ 1,233.7
$ (1.4 ) $ (720.8 ) $ 511.5



	2023		2022		2021
Net income (loss)	$	2.4	$	(33.2)	$	(1.6)
Other comprehensive loss:
Change in unrealized cash flow hedge (net of taxes of $0.2 million, at December 31, 2023).	0.7		—		—
Change in cumulative translation adjustment	1.9		(2.3)		(0.8)
Postretirement benefit reserve adjustment net of tax income (expense)	(0.1)		0.9		—
Other comprehensive income (loss), net of tax	2.5		(1.4)		(0.8)
Comprehensive income (loss)	4.9		(34.6)		(2.4)
Less: Comprehensive income attributable to noncontrolling interest	11.3		3.7		0.4
Comprehensive loss attributable to Kratos	$	(6.4)	$	(38.3)	$	(2.8)

The accompanying notes are an integral part of these Consolidated Financial Statements.

F-6

~~Table of Contents~~

KRATOS DEFENSE & SECURITY SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~STOCKHOLDERS’ EQUITY

Years ended December 31, ~~2017,~~2023, December 25, ~~2016,~~2022, and December ~~27, 2015~~26, 2021

(in millions)


	Redeemable Noncontrolling Interest		Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
			Shares	Amounts
Balance, December 27, 2020	$	14.8	123.0	$	—	$	1,556.3	$	1.4	$	(632.4)	$	925.3

Stock-based compensation	—		—	—		25.8		—		—		25.8

Issuance of common stock for employee stock purchase plan, options and warrants	—		0.4	—		5.9		—		—		5.9
Restricted stock issued and related taxes	—		0.6	—		(9.1)		—		—		(9.1)

Net income (loss)	0.4		—	—		—		—		(2.0)		(2.0)
Other comprehensive loss, net of tax	—		—	—		—		(0.8)		—		(0.8)

Balance, December 26, 2021	15.2		124.0	—		1,578.9		0.6		(634.4)		945.1

Stock-based compensation	—		—	—		26.3		—		—		26.3

Issuance of common stock for employee stock purchase plan, options and warrants	—		0.5	—		6.2		—		—		6.2
Restricted stock issued and related taxes	—		1.0	—		(12.5)		—		—		(12.5)
Issuance of common stock	—		0.3	—		5.0		—		—		5.0
Net income (loss)	3.7		—	—		—		—		(36.9)		(36.9)
Other comprehensive loss, net of tax	—		—	—		—		(1.4)		—		(1.4)
Acquisition of noncontrolling interest	(7.7)		0.2	—		4.5		—		—		4.5
Balance, December 25, 2022	11.2		126.0	—		1,608.4		(0.8)		(671.3)		936.3

Stock-based compensation	—		—	—		25.3		—		—		25.3

Issuance of common stock for employee stock purchase plan, options and warrants	—		0.8	—		6.5		—		—		6.5
Restricted stock issued and related taxes	—		0.7	—		(3.7)		—		—		(3.7)
Issuance of common stock for acquisitions	—		1.0	—		14.8		—		—		14.8
Gain on interest rate swap contract								0.7				0.7
Net income (loss)	11.3		—	—		—		—		(8.9)		(8.9)
Other comprehensive income, net of tax	—		—	—		—		1.8		—		1.8
Acquisition of noncontrolling interest	—		0.8	—		3.2		—		—		3.2
Balance, December 31, 2023	$	22.5	129.3	$	—	$	1,654.5	$	1.7	$	(680.2)	$	976.0

2017 2016 2015
Operating activities:

Net income (loss) $ (42.7 ) $ (60.5 ) $ 19.8
Income (loss) from discontinued operations (0.1 ) (0.1 ) 53.0
Loss from continuing operations (42.6 ) (60.4 ) (33.2 )
Adjustments to reconcile loss from continuing operations to net cash used in operating activities from continuing operations:

Depreciation and amortization 22.5
22.8
25.5
Deferred income taxes (10.2 ) 4.7
0.9
Stock-based compensation 7.8
5.1
6.1
Goodwill impairment charge 24.2
—
—
Loss (gain) on extinguishment of debt 17.3
(0.2 ) 3.4
Non-cash income tax benefit —
—
(18.7 )
Amortization of deferred financing costs 1.3
1.5
1.9
Amortization of premium and discount on Senior Secured Notes 0.7
0.9
1.1
Provision for doubtful accounts 0.1
0.3
0.4
Litigation related charges —
1.7
—
Provision for non-cash restructuring charges —
9.1
—
Change in accrual for excess facilities —
—
(2.3 )

Changes in assets and liabilities, net of acquisitions:

Accounts receivable (39.1 ) (24.7 ) 10.3
Inventoried costs 7.1
(2.7 ) (8.2 )
Prepaid expenses (4.0 ) 1.8
(3.5 )
Other assets (2.6 ) 3.2
(3.2 )
Accounts payable (3.4 ) 2.9
2.9
Accrued expenses (5.4 ) 16.5
0.6
Accrued compensation (4.4 ) 2.3
(4.4 )
Accrued interest (1.9 ) (0.3 ) 1.5
Billings in excess of costs and earnings on uncompleted contracts 5.4
(0.4 ) (7.3 )
Income tax receivable and payable 1.7
1.2
(3.1 )
Other liabilities (1.5 ) 2.3
(0.4 )
Net cash used in operating activities from continuing operations (27.0 ) (12.4 ) (29.7 )
Investing activities:

Cash paid for acquisitions, net of cash acquired —
(5.1 ) —
Proceeds from sale of assets 0.7
0.1
0.9
Change in restricted cash —
0.3
4.7
Capital expenditures (26.5 ) (9.2 ) (11.3 )
Net cash used in investing activities from continuing operations (25.8 ) (13.9 ) (5.7 )
Financing activities:

Proceeds from the issuance of long-term debt 300.0
—
—
  Extinguishment of long-term debt (448.8 ) (14.1 ) (175.0 )
Proceeds from the issuance of common stock 269.1
76.2
—
   Repayments under credit facility (1.0 ) (1.0 ) (42.0 )
   Cash paid for contingent acquisition consideration —
—
(1.1 )
Debt issuance costs (6.6 ) —
—
Proceeds from exercise of restricted stock units, employee stock options, and employee stock purchase plan 1.5
2.0
3.4
Other (0.8 ) —
—
Net cash provided by (used in) financing activities from continuing operations 113.4
63.1
(214.7 )
Net cash flows of continuing operations 60.6
36.8
(250.1 )
Net operating cash flows of discontinued operations —
0.1
2.8
Net investing cash flows of discontinued operations (0.6 ) 4.0
242.5
Effect of exchange rate changes on cash and cash equivalents 0.5
(0.3 ) (0.2 )
Net increase (decrease) in cash and cash equivalents 60.5
40.6
(5.0 )
Cash and cash equivalents at beginning of year 69.1
28.5
33.5
Cash and cash equivalents at end of year $ 129.6
$ 69.1
$ 28.5
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 28.3
$ 32.4
$ 43.8
Net cash paid during the year for income taxes $ (0.9 ) $ —
$ 8.8
Non-cash financing and investing activities:
Capital expenditures included in accounts payable and accrued expenses $ 1.6
$ 2.1
$ —
Liability for contingent consideration and goodwill related to acquisition $ —
$ 5.1
$ —

The accompanying notes are an integral part of these Consolidated Financial Statements.

F-7

KRATOS DEFENSE & SECURITY SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2023, December 25, 2022, and December 26, 2021

(in millions)


	2023		2022		2021
Operating activities:
Net income (loss)	$	2.4	$	(33.2)	$	(1.6)
Income (loss) from discontinued operations	0.2		0.9		(2.1)
Income (loss) from continuing operations	2.2		(34.1)		0.5

Adjustments to reconcile income (loss) from continuing operations to net cash provided by (used in) operating activities from continuing operations:
Depreciation and amortization	33.2		30.5		25.7
Deferred income taxes	2.5		(3.1)		(0.4)
Amortization of lease right-of-use assets	11.5		10.4		9.0
Stock-based compensation	25.3		26.3		25.8

Loss on extinguishment of debt	—		13.0		—

Amortization of deferred financing costs	0.7		0.8		1.0

Provision (recovery) of doubtful accounts	1.0		—		(0.2)
Litigation settlement charges	—		5.5		—



Changes in assets and liabilities, net of acquisitions:
Accounts receivable	(13.1)		(4.9)		2.6
Unbilled receivables	14.4		(22.4)		(15.7)
Inventoried costs	(29.6)		(23.8)		(5.3)
Prepaid expenses	(3.9)		(1.9)		2.4
Other assets	(12.3)		(18.7)		(6.9)
Operating lease liabilities	(11.4)		(10.5)		(9.3)
Accounts payable	4.4		4.5		(5.3)
Accrued expenses	1.4		5.6		(7.4)
Accrued compensation	12.4		0.8		(1.3)
Accrued interest	0.2		0.1		(0.1)
Billings in excess of costs and earnings on uncompleted contracts	28.4		2.7		24.1
Income tax receivable and payable	(0.5)		0.1		1.4
Other liabilities	(1.6)		(6.5)		(5.3)
Net cash provided by (used in) operating activities from continuing operations	65.2		(25.6)		35.3
Investing activities:
Cash paid for acquisitions, net of cash acquired	0.3		(132.2)		(12.3)
Proceeds from sale of assets	8.3		0.2		2.2
Proceeds from insurance	—		—		4.5


Capital expenditures	(52.4)		(45.4)		(46.5)
Net cash used in investing activities from continuing operations	(43.8)		(177.4)		(52.1)
Financing activities:
Proceeds from the issuance of long-term debt	—		200.0		—

Borrowing under credit facility	69.0		100.0		—
Redemption of Senior Secured Notes	—		(309.8)		—
Repayment under credit facility, term loan and other debt	(101.0)		(42.5)		(5.1)
Payments of employee taxes withheld from share-based awards	(3.7)		(12.5)		(9.1)

Debt issuance costs	—		(3.3)		—
Payments under finance leases	(1.5)		(1.4)		(1.0)
Proceeds from shares issued under equity plans	6.5		6.2		5.9

Net cash used in financing activities from continuing operations	(30.7)		(63.3)		(9.3)
Net cash used in continuing operations	(9.3)		(266.3)		(26.1)
Net operating cash flows of discontinued operations	—		(0.1)		(4.5)

Effect of exchange rate changes on cash, cash equivalents and restricted cash	0.8		(1.7)		(1.5)
Net decrease in cash, cash equivalents and restricted cash	(8.5)		(268.1)		(32.1)
Cash, cash equivalents and restricted cash at beginning of year	81.3		349.4		381.5
Cash, cash equivalents and restricted cash at end of year	$	72.8	$	81.3	$	349.4
Supplemental disclosure of cash flow information:
Cash paid during the year for interest	$	19.6	$	13.7	$	19.9
Net cash paid during the year for income taxes	$	6.5	$	4.4	$	2.0
Non-cash financing and investing activities:
Financing lease obligation incurred	$	6.9	9.1		5.8
Capital expenditures included in accounts payable and accrued expenses	$	0.6	$	2.7	$	3.0
Common stock issuance for purchase of noncontrolling interests	$	10.7	$	2.7	$	—
Common stock issuance for acquisition	$	14.8	$	5.0	$	—

The accompanying notes are an integral part of these Consolidated Financial Statements.

~~Table of Contents~~

F-8

KRATOS DEFENSE & SECURITY SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization and Summary of Significant Accounting Policies


~~(a)~~	~~Description of Business~~

(a)Description of Business

Kratos is technology, products, system and software company addressing the defense, national security, and commercial markets. Kratos makes true internally funded research, development, capital and other investments, to rapidly develop, produce and field solutions that address our customers’ mission critical needs and requirements. At Kratos, affordability is a ~~mid-tier~~technology, and the Company seeks to utilize proven, leading edge approaches and technology, not unproven bleeding edge approaches or technology, with Kratos’ approach designed to reduce cost, schedule and risk, and enable the Company to be first to market with cost effective solutions. Kratos believes that it is known as the innovative disruptive change agent in the industry, a company that is an expert in designing products and systems up front for successful rapid, large quantity, low cost future manufacturing which is a value add competitive differentiator for the Company’s large traditional prime system integrator partners and also to the Company’s government and commercial customers. Kratos intends to pursue program and contract opportunities as the prime or lead contractor ~~at the forefront~~when we believe that our probability of ~~the U.S. Department of Defense’s (the “DoD”) Third Offset Strategy.~~win is high and any investment required by Kratos is within our capital resource comfort level. Kratos intends to partner and team with a ~~leading technology, intellectual property~~large, traditional system integrator when our assessment of probability of win is greater or required investment is beyond Kratos’ comfort level. Kratos’ primary business areas include, virtualized ground systems for satellites and ~~proprietary product~~space vehicles including software for command & control (C2) and ~~solution company focused on the U.S.~~telemetry, tracking and ~~its allies’ national security. Kratos is a recognized industry leader in the rapid development, demonstration~~control (TT&C), jet powered unmanned aerial drone systems, hypersonic vehicles and ~~fielding of high technology~~rocket systems, propulsion systems for drones, missiles, loitering munitions, supersonic systems, space craft and launch systems, C5ISR and microwave electronic products for missile, radar, missile defense, space, satellite, counter UAS, directed energy, communication and other systems, and ~~products at an affordable cost. Kratos’ primary focus areas are unmanned~~virtual & augmented reality training systems satellite communications, microwave electronics, cyber security/warfare, missile defense and combat systems. The Company believes that its technology, intellectual property, proprietary products and designed-in positions on its customers’ platforms and systems is a competitive advantage and high barrier to entry tofor the markets in which it operates. The Company’s work force is primarily technically oriented, highly skilled with a significant number holding national security clearances. The Company’s entire organization is focused on executing its strategy of becoming the leading technology and intellectual property based company in its industry.warfighter.

The Company conducts most of its business with the U.S. Government (which includes foreign military sales) and performs work as the prime contractor, subcontractor, or preferred supplier. The Company also conducts business with local, state, and foreign governments and domestic and international commercial customers.

The Company operates in ~~three~~two reportable segments. The Kratos Government Solutions (“KGS”) reportable segment is comprised of an aggregation of KGS operating segments, including its microwave electronic products, space, satellite, ~~communications,~~ training and cybersecurity, C5ISR/modular systems, turbine technologies and defense and rocket support services operating segments. The Unmanned Systems (“US”) reportable segment consists of its unmanned aerial system and unmanned ground and ~~unmanned~~ seaborne system ~~businesses.~~products. The Public Safety & Security (“PSS”) reportable segment ~~consists~~(which was divested in June 2018 and has been classified as discontinued operations - see Note 9 of ~~its businesses that provide~~these Notes to Consolidated Financial Statements) previously provided independent integrated solutions for advanced homeland security, public safety, critical infrastructure, and security and surveillance systems for government and commercial applications.

The Company organizes its ~~business~~operating segments based primarily on the nature of the products, solutions and services offered. Transactions between segments are negotiated and accounted for under terms and conditions similar to other government and commercial contracts, and these intercompany transactions are eliminated in consolidation. For additional information regarding the Company’s operating segments, see Note 1314 of these ~~notes~~Notes to ~~consolidated financial statements.~~Consolidated Financial Statements.


~~(b)~~	~~Principles of Consolidation and Basis of Presentation~~

(b)Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of Kratos and its ~~100%~~majority owned subsidiaries, for which all intercompany transactions have been eliminated in consolidation.

The Company has a 52/53 week fiscal year ending on the last Sunday of the calendar year, with interim fiscal periods ending on the last Sunday of each calendar quarter. There were 53 calendar weeks in the fiscal ~~year~~years ending on December 31, ~~2017,~~2023, and 52 calendar weeks in the fiscal years ~~ended~~ending on December 25, ~~2016~~2022 and December ~~27, 2015.~~26, 2021.


~~(d)~~	~~Use of Estimates~~

(d)Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and

F-9

liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include revenue recognition, valuation of long-lived assets including identifiable intangibles and goodwill, accounting for income taxes including the related valuation allowance on the deferred tax asset and uncertain tax positions, contingencies and litigation, contingent acquisition consideration, and stock-based compensation. In the future, the Company may realize actual results that differ from the current reported estimates and if the estimates that the Company has used change in the future, such changes could have a material impact on the Company’s consolidated financial position, results of operations and cash flows.

(e)Revenue Recognition

~~F-8~~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”).

~~Table~~To determine revenue recognition for arrangements that the Company determines are within the scope of ~~Contents~~


~~(e)~~	~~Revenue Recognition~~

ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) 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 ~~typically generates its~~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 under 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 ~~three~~ ~~different types of contractual arrangements: cost-plus-fee contracts, time-and-materials~~other promises in the contracts and, ~~fixed-price contracts. Revenue~~therefore, not distinct. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using the best estimate of the 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 ~~cost-plus-fee~~the contract. The Company generally recognizes revenue over time as work is performed on long-term contracts ~~is recognized~~because of continuous transfer of control to the ~~extent~~customer. For U.S. government contracts, this continuous transfer of ~~allowable~~control to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay for costs incurred plus ~~an estimate~~a reasonable profit and take control of any work in process. Similarly, for non-U.S. government contracts, the customer typically controls the work in process as evidenced either by contractual termination clauses or by our rights to payment of the ~~applicable fees earned.~~transaction price associated with work performed to date on products or services that do not have an alternative use to the Company. As a result, under ASC 606 revenue is recognized over time using the cost-to-cost method (cost incurred relative to total estimated cost at completion).

Remaining Performance Obligations

Revenues from remaining performance obligations are calculated as the dollar value of the remaining performance obligations on executed contracts. On December 31, 2023, the Company had approximately $1,243.9 million of remaining performance obligations. The Company ~~considers fees under cost-plus-fee contracts~~expects to ~~be earned in proportion to the allowable costs incurred in performance~~recognize approximately 65.0% of the ~~contract~~remaining performance obligations as revenue in 2024, an additional 14.0% in 2025, and ~~recognizes~~ the ~~relevant portion of the expected fee~~balance thereafter.

Contract Estimates

Due to be awarded by the customer at the time such fee can be reasonably estimated, based on factors such as its prior award experience and communications with the customer regarding performance, including any interim performance evaluations rendered by the customer. Revenue on time-and-materials contracts is recognized to the extent of billable rates times hours delivered for services provided, to the extent of material cost for products delivered to customers, and to the extent of expenses incurred on behalf of the customers.

~~The Company has~~ ~~three~~ ~~basic categories of fixed-price contracts: fixed unit price, fixed-price-level of effort, and fixed-price-completion. Revenue recognition methods on fixed-price contracts will vary depending on~~ the nature of the work required to be performed on many performance obligations, the estimation of total 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 ~~terms. Revenues on fixed-price service contracts are recorded as~~requirements. Management must

F-10

make assumptions and estimates regarding labor productivity and availability, the complexity of the work ~~is performed in accordance with~~ ~~Accounting Standards Codification~~ ~~(“ASC”)~~ ~~Topic 605, Revenue Recognition~~ (“~~Topic 605”), specifically~~ ~~Topic 605-10-S99, which generally requires revenue~~ to be ~~deferred until all~~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.

In addition, certain of the ~~following have occurred: (1) there~~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 ~~a contract in place; (2) delivery has occurred or services have been provided; (3)~~estimated at the price is fixed or determinable; and (4) collectability is reasonably assured. Revenues on fixed-price contracts that require delivery of specific items may be recorded based on a price per unit as units are delivered. Revenue for fixed-price contracts inmost likely amount to which the Company is ~~paid~~expected to be entitled. Estimated amounts are included in the transaction price to the extent it is probable that a ~~specific amount~~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 ~~provide~~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 ~~stated period~~contract modification on the transaction price, and the measure of ~~time~~progress for the performance obligation to which it relates, is recognized ~~ratably over the service period.~~as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.

OnAs a ~~portion~~result of the ~~fixed price-completion contracts,~~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 ~~accordance with~~ ~~Topic 605~~ ~~using~~ the ~~percentage-of-completion method based~~period the loss is determined. For the year ended December 26, 2021 the Company recorded a $6.9 million favorable EAC adjustment on ~~the ratio~~one of ~~total costs incurred to date compared to estimated total costs to complete the contract. Estimates of costs to complete include material, direct labor, overhead, and allowable indirect expenses for~~its long-term government contracts. ~~These cost estimates are reviewed~~No other cumulative catch-up adjustment on any one contract was material to the Company’s consolidated financial statements for the years ended December 31, 2023, December 25, 2022 and ~~if necessary, revised on a contract-by-contract basis. If, as a result~~December 26, 2021. Likewise, other than the impact of ~~this review, management determines that a loss on a~~the adjustment for the one contract ~~is probable, then the full amount of estimated loss is charged to operations~~ in the ~~period.~~year ended December 26, 2021, total cumulative catch-up adjustments were not material for the years ended December 31, 2023, December 25, 2022 and December 26, 2021. As of December 31, ~~2017~~2023 and December 25, ~~2016~~,2022, accrued expenses included the accrual for losses on contracts of ~~$10.3~~$2.0 million and ~~$17.7~~$1.2 million, respectively.

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.

F-11

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.

Net contract assets and liabilities are as follows (in millions):


	December 31, 2023		December 25, 2022		Net Change
Contract assets	$	200.4	$	222.8	$	(22.4)
Contract liabilities	$	101.8	$	62.1	$	39.7
Net contract assets	$	98.6	$	160.7	$	(62.1)

The change in the balances of the Company’s contract assets and liabilities primarily results from timing differences between revenue recognition and customer billings and/or payments. Contract assets decreased $22.4 million during the year ended December 31, 2023, primarily due to lower unbilled receivables. There were no significant impairment losses related to any receivables or contract assets arising from the Company’s contracts with customers during the year ended December 31, 2023. Contract liabilities increased $39.7 million during the year ended December 31, 2023, primarily due to payments received in excess of revenue recognized on these performance obligations. For the years ended December 31, 2023 and December 25, 2022, the Company recognized revenue of $48.1 million and $47.5 million, respectively, that was previously included in the beginning balance of contract liabilities.

In certain instances, when the Company’s customers have requested that it commence work prior to receipt of the contract award and funding and it has incurred costs related to that specific anticipated contract, and the Company believes recoverability of the costs is probable, it may defer those costs incurred until the associated contract has been awarded and fundedNovember 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. In March 2022, the Company and the customer agreed to a settlement of $6.0 million for a portion of the amounts outstanding on this project, which was collected in July 2022. At December 31, 2023, approximately $4.8 million in unbilled receivables was outstanding on this project, which is subject to negotiation and settlement with the customer.

The Company was also in dispute with an international customer in the Unmanned Systems (US) segment concerning the completion of certain system requirements and certain contractual milestones related to a contract the Company acquired with the acquisition of CEi in 2012. On June 30, 2022, the parties entered into a settlement agreement to resolve their dispute and to settle all claims and counterclaims. The Company has recorded a $5.5 million litigation settlement charge included in restructuring expenses and other in the year ended December 25, 2022. In ~~accounting for~~the year ended December 25, 2022, the Company paid approximately $3.7 million related to the settlement agreement. The Company has implemented all terms of the settlement agreement and the dispute is fully resolved effective July 2023.

F-12

Disaggregation of Revenue

The following series of tables presents the Company’s ~~long-term~~revenue disaggregated by several categories. For the majority of contracts, ~~for production of products provided~~revenue is recognized over time as work is performed on the contract. Revenue by contract type was as follows (in millions):


	Year Ended December 31, 2023		Year Ended December 25, 2022
Kratos Government Solutions
Fixed price	$	566.3	$	476.1
Cost plus fee	209.5		158.4
Time and materials	49.1		42.1
Total Kratos Government Solutions	824.9		676.6
Unmanned Systems
Fixed price	160.9		156.6
Cost plus fee	41.9		59.1
Time and materials	9.4		6.0
Total Unmanned Systems	212.2		221.7
Total Revenues	$	1,037.1	$	898.3

Revenue by customer was as follows (in millions):


	Year Ended December 31, 2023		Year Ended December 25, 2022
Kratos Government Solutions
U.S. Government (1)	$	512.5	$	420.4
International (2)	192.8		157.5
U.S. Commercial and other customers	119.6		98.7
Total Kratos Government Solutions	824.9		676.6
Unmanned Systems
U.S. Government (1)	200.2		203.3
International (2)	9.2		15.6
U.S. Commercial and other customers	2.8		2.8
Total Unmanned Systems	212.2		221.7
Total Revenues	$	1,037.1	$	898.3

(1) Sales to the U.S. Government include sales from contracts for which the Company ~~utilizes both cost-to-cost and units delivered measures under~~is the ~~percentage-of-completion method of accounting under the provisions of~~ ~~Topic 605. Under the units delivered measure of the percentage-of-completion method of accounting, sales are recognized~~prime contractor, as ~~the units are accepted by the customer generally using sales values~~well as those for units in accordance with the contract terms. The Company estimates profit as the difference between total estimated revenue and total estimated cost of a contract and recognizes that profit over the life of the contract based on units delivered or as computed on the basis of the estimated final average unit costs plus profit. The Company classifies contract revenues as product sales or service revenues depending upon the predominant attributes of the relevant underlying contracts.

Significant management judgments and estimates, including but not limited to the estimated costs to complete projects, must be made and used in connection with the revenue recognized in any accounting period. A cancellation, schedule delay, or modification of a fixed-price contract which is accounted for using the percentage-of-completion method may adversely affect the Company’s gross margins for the period in which the ~~contract~~Company is ~~modified or canceled. Under certain circumstances,~~ a ~~cancellation or negative modification could result in~~subcontractor and the ~~Company having to reverse revenue that was recognized in a prior period, thus significantly reducing~~ultimate customer is the amount of revenues recognized for the period in which the adjustment is made. Correspondingly, a positive modification may positively affect gross margins. In addition, a schedule delay or modifications can result in an increase in estimated cost to complete the project, which would also result in an impact to gross margins. Changes in contract estimates are reviewed on a contract-by-contract basis and are revised periodically throughout the life of the contract such that adjustments to profit resulting from revisions are made cumulative to the date of the revision in accordance with GAAP. Material

~~F-9~~

~~Table of Contents~~

~~differences may result in the amount and timing~~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 ~~any period if management made different judgments or utilized different estimates.~~

~~It is the Company’s policy to review any arrangement containing software or software deliverables and services against the criteria contained inASC~~ ~~Topic 985, Software~~ (“~~Topic 985~~”). ~~Under the provisions of~~ ~~Topic 985~~, the Company reviews the contract value of software deliverables and services and determines allocations of the contract value based on vendor-specific objective evidence (“VSOE”) of fair value for each of the software elements. All software arrangements requiring significant production, modification, or customization of the software are accounted for in conformity with ~~Topic 605~~.

~~The Company’s contracts may include the provision of more than one of its services (“multiple element arrangements”). In these situations, the Company applies the guidance of~~ ~~Topic 605~~. Accordingly, for applicable arrangements, revenue recognition includes the proper identification of separate units of accounting and the allocation of revenue across all elements based on relative fair values.

For multiple element arrangements that include hardware products containing software essential to the hardware products’ functionality, the Company allocates revenue to all deliverables based on their relative selling prices. In such circumstances, the Company uses a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) VSOE, (ii) third-party evidence of selling price (“TPE”), and (iii) best estimate of the selling price (“ESP”).

VSOE generally exists only when the Company sells the deliverable separately and is the price actually charged by the Company for that deliverable. TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, the Company’s offerings contain significant differentiation such that comparable pricing of products with similar functionality cannot be obtained. Furthermore,which the Company is ~~unable to reliably determine what similar competitor products’ selling prices are on a stand-alone basis. Therefore,~~the prime contractor, as well as those for which the Company ~~typically~~ is ~~unable to obtain TPE of selling price. ESP reflects~~a subcontractor and the ~~Company’s best estimates of what~~ultimate customer is an international customer. These sales include direct sales with governments outside the selling prices of elements would be if they were sold regularly on a stand-alone basis. The Company determines ESP for a product or service by considering multiple factors including, but not limited to major product groupings, geographies, market conditions, competitive landscape, internal costs, gross margin objectivesU.S. and ~~pricing practices. The determination of ESP is made through consultation~~commercial sales with ~~management, taking into consideration~~customers outside the ~~Company’s marketing strategy.~~U.S.

The Company accounts for multiple element arrangements that consist only of software or software-related products, including the sale of upgrades to previously sold software, in accordance with industry specific software accounting guidance. For such transactions, revenue on arrangements that include multiple elements is allocated to each element based on the relative fair value of each element, and fair value is determined by VSOE. If the Company cannot objectively determine the fair value of any undelivered element included in such multiple element arrangements, the Company defers revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements. Under certain of the Company’s contractual arrangements, the Company may also recognize revenue for out-of-pocket expenses in accordance with ~~Topic 605.~~ ~~Depending on the contractual arrangement, these expenses may be reimbursed with or without a fee.~~

Under certain of its contracts, the Company provides supplier procurement services and materials for its customers. The Company records revenue on these arrangements on a gross or net basis in accordance with ~~Topic 605,~~ ~~depending on the specific circumstances of the arrangement. The Company considers the following criteria, among others, for recording revenue on a gross or net basis:~~


~~(1)~~	~~whether the Company acts as a principal in the transaction;~~


~~(2)~~	~~whether the Company takes title to the products;~~


~~(3)~~	~~whether the Company assumes risks and rewards of ownership, such as risk of loss for collection, delivery or returns;~~


~~(4)~~	~~whether the Company serves as an agent or broker, with compensation on a commission or fee basis; and~~


~~(5)~~	~~whether the Company assumes the credit risk for the amount billed to the customer subsequent to delivery.~~

For federal contracts, the Company follows U.S. Government procurement and accounting standards in assessing the allowability and the allocability of costs to contracts. ~~Due to the significance of the judgments and estimation processes, it is likely that materially different amounts could be recorded if different assumptions were used~~

~~F-10~~

~~Table of Contents~~

or if the underlying circumstances were to change. The Company closely monitors the consistent application of its critical accounting policies and compliance with contract accounting. Business operations personnel conduct periodic contract status and performance reviews. When adjustments in estimated contract revenues or costs are required, any significant changes from prior estimates are included in earnings in the current period. Also, regular and recurringRecurring evaluations of contract cost, scheduling and technical matters are performed by ~~management personnel who are independent from the business operations personnel performing work under the contract.~~management. Costs incurred and allocated to contracts with the U.S. Government are scrutinized for compliance with regulatory standards by the Company’s personnel, and are subject to audit by the Defense Contract Audit ~~Agency.~~Agency (“DCAA”).

From time to time, the Company may proceed with work based on customer direction prior to the completion and signing of formal contract documents. The Company has a formal review process for approving any such work. Revenue associated with such work is recognized only when ~~it can be reliably estimated~~the criteria to establish a contract under ASC 606 are met and ~~realization is probable. The Company bases its estimates on previous experiences with~~ the ~~customer, communications with the customer regarding funding status, and its knowledge of available funding for~~obligations under the contract ~~or program.~~are legally enforceable. As of December 31, ~~2017~~2023 and December 25, ~~2016,~~2022, approximately ~~$1.9~~

F-13

$13.0 million and ~~$2.0~~$12.2 million, respectively, of the Company’s unbilled accounts receivable balance were under an authorization to proceed or work order from its customers where a formal purchase order had not yet been received.

Costs incurred for shipping and handling are included in cost of product sales at the time the related revenue is recognized. Amounts billed to a customer for shipping and handling are reported as revenue.(f)Inventoried costs


~~(f)~~	~~Inventoried costs~~

Inventoried costs are stated at the lower of cost or ~~market.~~estimated net realizable value. Cost is determined using the average cost or first-in, first-out methods and the applicable method is applied consistently within an operating entity. ~~Inventoried~~The Company capitalizes labor, material, subcontractor and overhead costs ~~primarily relate~~as work-in-process for contracts where control has not yet passed to ~~work under fixed-price contracts using~~ the ~~units-of-delivery method~~customer. In addition, the Company capitalizes costs incurred to fulfill a contract in advance of ~~percentage-of-completion accounting. These costs represent accumulated~~ contract ~~costs less the portion of such costs allocated to delivered items. Accumulated~~award in inventories as work-in-process if it is determined that contract ~~costs include direct production costs, factory and engineering overhead and production tooling costs.~~award is probable. Pursuant to contract provisions of U.S. Government contracts, such customers may have title to, or a security interest in inventories related to such contracts as a result of advances, performance-based payments, and progress payments. ~~The Company reflects those advances and payments as an offset against the related inventory balances.~~

The Company regularly reviews inventory quantities on hand, future purchase commitments with its suppliers, and the estimated utility of its inventory. If the Company’s review indicates a reduction in utility below carrying value, it reduces its inventory to a new cost basis.

(g)Research and Development

Costs incurred in research and development activities are expensed as incurred in accordance with ~~Financial Accounting Standards Board~~ ~~(“FASB”)~~FASB ASC Topic 730, Research and Development.


~~(h)~~	~~Income Taxes~~

(h)Income Taxes

The Company records deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The Company maintains a valuation allowance on the deferred tax assets for which it is more likely than not that the Company will not realize the benefits of these tax assets in future tax periods. The valuation allowance is based on estimates of future taxable income by tax jurisdiction in which the Company operates, the number of years over which the deferred tax assets will be recoverable, and scheduled reversals of deferred tax liabilities.

In accordance with the recognition standards established byASCTopic 740, Income Taxes(“ (“Topic ~~740~~”740”), the Company makes a comprehensive review of its portfolio of uncertain tax positions regularly. In this regard, an uncertain tax position represents the Company’s expected treatment of a tax position taken in a filed tax return, or

~~F-11~~

~~Table of Contents~~

planned to be taken in a future tax return or claim, which has not been reflected in measuring income tax expense for financial reporting purposes. Until these positions are sustained by the taxing authorities, the Company has not recognized the tax benefits resulting from such positions and reports the tax effects as a liability for uncertain tax positions in its consolidated balance sheets.


~~(i)~~	~~Stock-Based Compensation~~

(i)Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with ASC Topic 718, Compensation-Stock Compensation (“Topic ~~718~~”718”). All of the Company’s stock-based compensation plans are considered equity plans under Topic 718, and compensation expense recognized is net of estimated forfeitures over the vesting period. The Company issues stock options and stock awards under its existing plans. The fair value of stock options is estimated on the date of grant using a Black-Scholes option-pricing model ~~or a trinomial lattice options pricing model~~ and is expensed on a straight-line basis over the remaining vesting period of the options, which is generally six or less years. The fair value of stock awards is determined based on the closing market price of the Company’s common stock on the grant date and is adjusted at each reporting date based on the amount of shares ultimately expected to vest. Compensation expense for stock awards is expensed over the vesting period, usually five to ten ~~years~~.years. Compensation expense for stock issued under the Company’s employee stock purchase plan is estimated at the beginning date of the offering period using a Black-Scholes option-pricing model and is expensed on a straight-line basis over the period of the offering, which is generally six months.

When tax deductions from stock options and awards are less than the cumulative book compensation expense, the tax effect of the resulting difference is a shortfall. For the ~~years~~year ended December 31, ~~2017,~~ ~~December 25, 2016~~ ~~and December 27, 2015, there were no incremental~~2023, an income tax ~~benefits~~expense of $0.4 million was recorded for shortfall generated from stock options and awards exercised in 2023. For the ~~periods.~~ year ended December 25, 2022,

F-14

an income tax benefit of $0.7 million was recorded for windfalls generated from stock options and awards exercised in 2022. For the tax year ended December 26, 2021, an income tax benefit of $2.4 million was recorded for windfalls generated from stock options and awards exercised in 2021.

The following table shows the amounts recognized in the consolidated financial statements ~~for 2017,~~ ~~2016~~ ~~and 2015~~ for stock-based compensation expense related to stock options, stock awards and stock offered under the Company’s employee stock purchase plan (in ~~millions, except per share amounts)~~millions).


	Year ended December 31, 2023		Year ended December 25, 2022		Year ended December 26, 2021
Selling, general and administrative expenses	$	25.3	$	26.3	$	25.8
Total cost of employee stock-based compensation included in operating income (loss) from continuing operations	$	25.3	$	26.3	$	25.8

2017 2016 2015
Selling, general and administrative expenses $ 7.8
$ 5.1
$ 6.1
Total cost of employee stock-based compensation included in operating loss from continuing operations 7.8
5.1
6.1
Impact on net loss per common share:
Basic and diluted $ (0.09 ) $ (0.08 ) $ (0.10 )

(j)Allowance for Doubtful Accounts


~~(j)~~	~~Allowance for Doubtful Accounts~~

The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments, which results in bad debt expense. Management ~~periodically~~ determines the adequacy of this allowance by periodically evaluating the comprehensive risk profiles of all individual customer receivable balances including, but not limited to, the customer’s financial condition, credit agency reports, financial statements and overall current economic conditions. Additionally, on certain contracts whereby the Company performs services for a prime/general contractor, a specified percentage of the invoiced trade accounts receivable may be retained by the customer until the project is completed. The Company periodically reviews all retainages for collectability and records allowances for doubtful accounts when deemed appropriate, based on its assessment of the associated credit risks. Changes to estimates of contract value are recorded as adjustments to revenue and not as a component of the allowance for doubtful accounts. Individual accounts receivable are written off to the allowance for doubtful accounts when the Company becomes aware of a specific customer’s inability to meet its financial obligation, and all collection efforts are exhausted.

~~F-12~~

~~Table of Contents~~

The following table outlines the balance of the Company’s allowance for doubtful accounts for ~~2017, 2016~~2023, 2022 and ~~2015.~~2021. The table identifies the additional provisions each year as well as the write-offs that utilized the allowance (in millions).


Allowance for Doubtful Accounts	Balance at Beginning of Year		Provisions		Write-offs/ Recoveries		Balance at End of Year
Year ended December 26, 2021	$	1.8	$	(0.2)	$	(1.2)	$	0.4
Year ended December 25, 2022	$	0.4	$	—	$	—	$	0.4
Year ended December 31, 2023	$	0.4	$	1.0	$	(0.3)	$	1.1

Allowance for Doubtful Accounts Balance at Beginning of Year Provisions Write-offs/Recoveries Balance at End of Year
Year ended December 27, 2015 $ 1.9
$ 0.4
$ (0.5 ) $ 1.8
Year ended December 25, 2016 $ 1.8
$ 0.3
$ (0.4 ) $ 1.7
Year ended December 31, 2017 $ 1.7
$ 0.1
$ (1.2 ) $ 0.6

(k)Cash and Cash Equivalents


~~(k)~~	~~Cash and Cash Equivalents~~

The Company’s cash equivalents consist of its highly liquid investments with an original maturity of three months or less when purchased by the Company.

~~The Company has restricted cash accounts of approximately $0.4 million at~~ ~~December 31, 2017~~(l)Property and ~~$0.5 million at December 25, 2016. As of~~ ~~December 31, 2017~~ ~~and December 25, 2016, restricted cash consists primarily of a deposit securing foreign letters of credit related to payment and performance bonds on international contracts.~~Equipment, Net


~~(l)~~	~~Property and Equipment, Net~~

Property and equipment, net owned by the Company is depreciated over the estimated useful lives of individual assets. Equipment acquired under capital leases are amortized over the shorter of the lease term or the estimated useful life of the asset. Improvements, which significantly improve and extend the useful life of an asset, are capitalized and depreciated over the shorter of the lease period or the estimated useful life. Expenditures for maintenance and repairs are charged to operations as incurred.

F-15

Assets are depreciated predominately using the straight-line method, with the following lives:


		Years

	~~Years~~
Buildings and improvements	15 – 39
Machinery and equipment		3 – 1020
Computer equipment and software		1 – 10
Vehicles, furniture, and office equipment		5
Leasehold improvements		Shorter of useful life or length of lease

(m)Leases

The Company ~~classifies~~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 ~~as held for sale (“disposal group”) when management, having~~are initially recognized based on the ~~authority to approve the action, commits to a plan to sell the disposal group, the sale is probable within one year, and the disposal group is available for immediate sale in its~~ present condition. The Company also considers whether an active program to locate a buyer has been initiated, whether the disposal group is marketed actively for sale at a price that is reasonable in relation to its current fair value, and whether actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or the plan will be withdrawn.

~~At the time of classifying assets as held for sale and at the end of each reporting period, the Company compares the carrying~~ value of ~~these assets to estimates of fair value to assess for impairment. The Company compares~~lease payments over the ~~carrying value to estimates of fair value utilizing the assistance of third-party broker opinions of value to assist in its fair value estimates.~~

In the third quarter of 2016, the Company’s management, following the closure of its manufacturing facility in South Carolina, committed to a plan to sell the Walterboro building facility reported within the KGS segment. At that time, the building facility had a carrying value of $1.9 million and was classified as held for sale. In the fourth quarter of 2016, after not receiving any viable offers to purchase the building facility, the Company decided to reclassify the building facility from held for sale to held for use. In accordance with ASC ~~Topic 360-10, Property, Plant and Equipment - Disposal of Long-Lived Assets, utilizing the assistance of a third-party broker to assist in the~~

~~F-13~~

~~Table of Contents~~

estimating of fair value, the remeasured fair value of the building was determined to be $500,000. The impairment loss of $1.4 million was recorded at that time and is reflected in unused office space and other restructuring in the consolidated statements of operations and comprehensive income (loss) for the year ended December 25, 2016.


~~(m)~~	~~Leases~~

~~The Company uses its~~lease term calculated using an incremental borrowing rate ingenerally applicable to the assessment of lease classification as capital or operating and defines the initial lease term to include renewal options determined to be reasonably assured. The Company conducts operations primarily under operating leases.

Most lease agreements for real property contain incentives for tenant improvements, rent holidays, or rent escalation clauses. For incentives for tenant improvements, the Company capitalizes the leasehold improvements which are depreciated over the shorterlocation of the lease ~~term~~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 ~~their estimated useful life~~terminate the lease when it is reasonably certain that those options will be exercised. The Company has operating lease arrangements with lease and ~~records~~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 ~~deferred rent liability which is amortized over~~single component.in the ~~term~~calculation of the lease asset and corresponding liability.

Variable lease payments are generally expensed as ~~a reduction to rent expense. For rent holidays~~incurred. Leases with an initial term of 12 months or less are not recorded on the balance sheet, and ~~rent escalation clauses during~~ the ~~lease term, the Company records minimum rental expenses~~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 ~~the lease. For purposes~~title or purchase option reasonably certain of ~~recognizing lease incentives, the Company uses the date of initial possession as the commencement date, which is generally when the Company is given the right of access~~exercise.

See Note 6 for additional disclosures related to the ~~space~~Company’s lease obligations.

(n)Goodwill and ~~begins to make improvements in preparation for intended use.~~Other Intangible Assets, Net


~~(n)~~	~~Goodwill and Other Intangible Assets, Net~~

In accordance with the provisions ofASCTopic 350, Intangibles-Goodwill and Other (“Topic ~~350~~”350”), the Company performs impairment tests for goodwill and indefinite lived intangibles as of the last day of its fiscal October, or when evidence of potential impairment exists. When it is determined that impairment has occurred, a charge to operations is recorded. Goodwill and other purchased intangible asset balances are included in the identifiable assets of the operating segment to which they have been assigned. Any goodwill impairment, as well as the amortization of other purchased intangible assets, is charged against the respective segments’ operating income.

In accordance with Topic 350, the Company classifies intangible assets into two categories: (1) intangible assets with finite lives subject to amortization and (2) intangible assets with indefinite lives not subject to amortization. Separately, the Company tests intangible assets with finite lives for impairment if conditions exist that indicate the carrying value may not be recoverable. Such conditions may include an economic downturn in a geographic market or a change in the assessment of future operations. The Company records an impairment charge when the carrying value of the finite lived intangible asset is not recoverable by the cash flows generated from the use of the asset.

The Company determines the useful lives of identifiable intangible assets after considering the specific facts and circumstances related to each intangible asset. Factors considered when determining useful lives include the contractual term of any agreement, the history of the asset, the Company’s long-term strategy for the use of the asset, any laws or other local regulations ~~which~~that could impact the useful life of the asset, and other economic factors, including competition and specific market conditions. Intangible assets that are deemed to have finite lives are amortized, generally on a straight-line basis, over their useful lives, ranging from one to 15 ~~years~~.years.

(o)Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

Long-lived assets are reviewed for impairment in accordance withASCTopic 360, Property, Plant, and Equipment, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future net cash flows (undiscounted and without interest) expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.


~~(p)~~	~~Fair Value of Financial Instruments~~

(p)Fair Value of Financial Instruments

ASC Topic 825, Financial Instruments, requires that fair values be disclosed for the Company’s financial instruments. The carrying amounts of cash equivalents, accounts receivable, accounts payable, accrued expenses, billings in excess of costs and earnings on uncompleted contracts, and income taxes payable, approximate fair value due to the short-term nature of these instruments. The fair value of the Company’s long-term debt outstanding at December 31, 2023 is ~~based upon actual~~

~~F-14~~

~~Table of Contents~~

~~trading activity.~~recorded at fair value. The fair value of ~~capital lease obligations~~the Company’s Senior Secured Notes (as defined below in Note 5), which were redeemed on March 14, 2022, is ~~estimated~~ based onupon quoted market ~~prices~~prices.

The Company uses forward exchange contracts to manage interest rate risk associated with our debts as well as foreign currency risks associated with certain transactions, specifically forecasted materials and salaries paid in foreign currencies. These derivative instruments are measured at fair value using observable market inputs such as forward rates. Based on these inputs, the derivative instruments are classified within Level 2 of the valuation hierarchy. At December 31, 2023, the derivative instruments were included in other current assets and other current liabilities on the Company's Condensed Consolidated Balance Sheets. The carrying amounts and the related fair values of the Company’s derivative instruments measured at fair value on a recurring basis at December 31, 2023 and December 25, 2022, are presented in Note 17. There were no derivative instruments for ~~the same or similar obligations with the same remaining maturities.~~forward exchange contracts at December 26, 2021.


~~(q)~~	~~Concentrations and Uncertainties~~

(q)Concentrations and Uncertainties

The Company maintains cash balances at various financial institutions and such balances commonly exceed the ~~$250,000~~$250,000 insured amount by the Federal Deposit Insurance Corporation. The Company has not experienced any losses in such accounts and management believes that the Company is not exposed to any significant credit risk with respect to such cash and cash equivalents.

Financial instruments, which subject the Company to potential concentrations of credit risk, consist principally of the Company’s billed and unbilled accounts receivable. The Company’s accounts receivable result from sales to customers within the U.S. Government, state and local agencies and with commercial customers in various industries. The Company performs ongoing credit evaluations of its commercial customers. Credit is extended based on evaluation of the customer’s financial condition and collateral is not required. Accounts receivable are recorded at the invoiced amount and do not bear interest. See Note 1213 for a discussion of the Company’s significant customers.

(r)Debt Issuance Costs

Fees paid to obtain debt financing and revolving credit facilities or amendments under such debt financing and revolving credit facilities are treated as debt issuance costs and are capitalized and amortized over the expected term of the related debt or revolving credit facility and are shown as a financing activity in the consolidated statements of cash flows. Issuance costs related to debt are presented in the consolidated balance sheets as a direct deduction from the carrying amount of the associated debt liability. Issuance costs related to a revolving credit facility are included in other assets in the consolidated balance sheets.


~~(s)~~	~~Interest Expense, Net~~

(s)Interest Expense, Net

Interest expense, net is summarized in the following table (in millions):


	Year ended December 31, 2023		Year ended December 25, 2022		Year ended December 26, 2021
Interest expense incurred primarily on indebtedness	$	(21.7)	$	(18.3)	$	(23.7)
Miscellaneous interest income	1.2		0.6		0.3
Interest expense, net	$	(20.5)	$	(17.7)	$	(23.4)

2017 2016 2015
Interest expense incurred primarily on the Company’s Senior Secured Notes $ (29.1 ) $ (34.7 ) $ (36.0 )
Miscellaneous interest income 0.5
—
—
Interest expense, net $ (28.6 ) $ (34.7 ) $ (36.0 )

(t)Foreign Currency


~~(t)~~	~~Foreign Currency~~

For operations outside the U.S. that prepare financial statements in currencies other than the U.S. dollar, results of operations and cash flows are translated at average exchange rates during the period, and assets and liabilities are generally translated at end-of-period exchange rates. Translation adjustments are included as a separate component of accumulated other comprehensive loss.

The Company transacts with foreign customers in currencies other than the U.S. dollar. It experiences realized and unrealized foreign currency gains or losses on foreign denominated receivables. In addition, certain intercompany transactions give rise to realized and unrealized foreign currency gains or losses. Also, any other transactions between the Company or its subsidiaries and a third-party, denominated in a currency different from the functional currency, are foreign currency transactions.

The aggregate foreign currency transaction ~~gain (loss)~~loss included in determining net loss for the years ended December 31, ~~2017,~~ 2023, December 25, ~~2016~~,2022, and December ~~27, 2015~~26, 2021 was approximately ~~$0.4~~$1.7 million, ~~$0.4~~$0.1 million, and ~~$(0.8)~~$0.8 million, respectively, which is included in other income (expense), net on the accompanying consolidated statements of operations and comprehensive income (loss).

~~F-15~~

~~Table of Contents~~

(u)Recent Accounting Pronouncements

On December 22, 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP related to the enactment of the comprehensive tax legislation, commonly referred to as the Tax Cut and Jobs Act (the “2017 Tax Act”). This guidance was adopted in the fourth quarter of 2017. Additional information regarding our adoption of this guidance is contained in Note 7.

In ~~May 2017,~~November 2023, the FASB issued ~~Accounting Standards Update (“ASU”) 2017-09 (“~~ASU ~~2017-09”),~~ ~~Compensation-Stock Compensation~~2023-07, Segment Reporting (Topic ~~718)~~280): ~~Scope~~Improvements to Reportable Segment Disclosures, which expands reportable segment disclosure requirements by requiring disclosures of ~~Modification Accounting. ASU 2017-09 was issued to provide guidance about which changes~~significant reportable segment expenses that are regularly provided to the ~~terms or conditions~~Chief Operating Decision Maker (“CODM”) and included within each reported measure of a ~~share-based payment award require~~segment's profit or loss. ASU 2023-07 also requires all segment profit or loss and assets disclosures to be provided on an ~~entity to apply modification accounting. The amendments in this~~annual and interim basis. ASU ~~are~~2023-07 is effective for ~~annual periods~~fiscal years beginning after December 15, ~~2017. The Company does not expect that the standard will have a material effect on its consolidated financial statements~~2023, and ~~will apply this guidance to applicable transactions after the adoption date.~~

~~In January 2017, the FASB issued ASU 2017-04 (“ASU 2017-04”),~~ ~~Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment~~. ASU 2017-04 amends the guidance to simplify the subsequent measurement of goodwill by removing Step 2 of the goodwill impairment test. Instead, an entity should 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. ASU 2017-04 is effective for annual reporting periods beginning after December 15, 2019, with early adoption permitted. The Company adopted this new guidance in 2017 in its assessment of the carrying value of the DRSS reporting unit, which resulted in a $24.2 million impairment charge.

~~In October 2016, the FASB issued ASU 2016-16 (“ASU 2016-16”),~~ ~~Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory.~~ ASU 2016-16 requires that entities recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather than when the asset is sold to an outside party. ASU 2016-16 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within ~~those annual reporting periods. Early adoption is permitted as of the~~fiscal years beginning of an annual reporting period (as of the first interim period if an entity issues interim financial statements). ASU 2016-16 requires adoption on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption.one year later. The ~~Company early adopted this standard on December 26, 2016. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.~~

~~In February 2016, the FASB issued ASU 2016-02 (“ASU 2016-02”),~~ ~~Leases. ASU 2016-02 requires that lessees recognize assets and liabilities for the rights and obligations underlying leases with a lease term of more than one year. The~~ amendments ~~in this ASU are effective for annual periods beginning after December 15, 2018. Early adoption is permitted. The standard~~ must be applied ~~using a modified retrospective approach.~~retrospectively to all prior periods presented. The Company is currently evaluating the impact of the adoption of ASU ~~2016-02~~2023-07 on its consolidated financial statements.

Note 2. Acquisitions

CTT Inc.

On December 10, 2021 , the Company acquired CTT Inc. (“CTT”), a company that designs, develops, and manufactures microwave application components and equipment primarily for customers in the defense industry. The ~~Company has developed an implementation plan~~purchase price was approximately $22.0 million in cash, subject to ~~evaluate the contracts across all the business segments, has educated both management~~adjustments for transaction expenses, indebtedness, cash on hand, and ~~other employees on the effects~~post-closing working capital adjustments. Approximately $6.3 million of the ~~new guidance~~purchase price was paid on December 10, 2021, $15.2 million of the purchase price was paid on December 30, 2021, and ~~has preliminarily assessed~~ the ~~internal control structure~~remainder of the purchase price was paid during the three months ended June 26, 2022. The operating results of the acquisition have been included in ~~order~~the Company’s results of operations from the effective acquisition date. The amount of net sales and earnings of CTT included in the condensed consolidated statement of operations for the year ended December 26, 2021 are not material. Had the acquisition occurred as of December 28, 2020, net sales, net income from consolidated operations, net income attributable to ~~adopt~~Kratos, and basic and diluted net income per share attributable to Kratos on a pro forma basis for the ~~ASU~~year ended December 26, 2021 would not have been materially different than the reported amounts. CTT is included in the KGS segment.

F-16

Cosmic Advanced Engineered Solutions, Inc.

On December 27, 2021, Kratos Integral Holdings, LLC entered into a Stock Purchase Agreement to acquire Cosmic Advanced Engineered Solutions, Inc. (“Cosmic”) from the Carol L. Zanmiller Living Trust and the John G. Hutchens Living Trust for $37.9 million in cash (including a $0.4 million holdback which was subsequently settled). Cosmic focuses on ~~January 1, 2019.~~

~~In May 2014, the FASB issued ASU 2014-09~~radio frequency (“~~ASU 2014-09”~~RF”), ~~Revenue~~terrestrial, and space-based communication solutions, including digital signals processing and geolocation analysis. In addition, Cosmic provides overhead persistent infrared for missile defense systems and embedded cyber solutions to U.S. government agencies. On December 27, 2021, the acquisition was completed following the satisfaction of all closing conditions, including receipt of regulatory approval from ~~Contracts with Customers. ASU 2014-09 establishes a broad principle that would require an entity~~all required government authorities. The operating results of the acquisition have been included in the Company’s results of operations from the effective acquisition date. Cosmic is included in the 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 ~~recognize revenue to depict~~goodwill. The goodwill represents the ~~transfer of promised goods or services to customers in an amount that reflects~~value the ~~consideration to which the entity~~Company expects to be ~~entitled~~created by integrating Cosmic’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 identifiable 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 ~~exchange~~the marketplace and thus represent Level 3 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	$	3.8
Unbilled receivables	4.1
Other current assets	0.1
Property and equipment	1.3
Intangible assets	8.5
Total identifiable net assets acquired	17.8
Total identifiable net liabilities assumed	(9.1)
Goodwill	29.2
Net assets acquired, excluding cash	$	37.9

Based on the Company’s estimate of fair value, as of December 27, 2021, net liabilities included $6.7 million of current liabilities. The identifiable intangible assets include trade names of $0.6 million with a remaining useful life of 5 years, backlog of $1.7 million with an estimated useful life of 1 year, customer relationships of $4.4 million with a remaining useful life of 10 years, and developed technology of $1.8 million with a remaining useful life of 5 years. The Company also established a deferred tax liability of $2.4 million for ~~those goods or services.~~the difference between the financial statement basis and tax basis of the acquired assets of Cosmic and a corresponding increase in goodwill. The ~~FASB has also issued several updates~~goodwill recorded in this transaction is not expected to ~~ASU 2014-09.~~ be tax-deductible.

The ~~new standard supersedes GAAP guidance on revenue recognition~~value of customer relationships was estimated using the multi-period excess earnings method (“MPEEM”), an income approach (Level 3), which converts projected revenues and ~~requires~~costs into cash flows. To reflect the use of more estimates and judgments than the present standards. It also requires additional disclosures. ASU 2014-09 may be applied either retrospectively or through the use of a modified-retrospective method. The full retrospective method requires companies to recast each prior reporting period presented as if the new guidance had always existed. Under the modified retrospective method, companies would recognize the cumulative effect of initially applying the standard as an adjustmentfact that certain other assets contribute to the ~~opening balance~~cash flows generated, the returns for these contributory assets were removed to arrive at estimated cash flows solely attributable to the acquired customer relationships, which were discounted at a rate of ~~retained earnings at~~11% to determine the ~~date~~fair value. The value of ~~initial application.~~backlog was also valued using MPEEM. The ~~Company adopted~~value of developed technology was estimated using the ~~new revenue standard effective January 1, 2018,~~relief-from-royalty method, an income approach (Level 3), which estimates the cost savings that accrue to the owner of the intangible asset that would otherwise be payable as royalties or license fees on revenues earned through the use of the ~~modified-retrospective method.~~

~~The Company commenced a detailed analysis~~asset. A royalty rate of 11% was applied to the ~~impact~~projected revenues associated with the intangible asset to determine the amount of ASU 2014-09 in 2016, by evaluating its impact on selected contracts at each of the Company’s business segments. With this baseline understanding, the Company developed a project plan to evaluate the contracts across all the business segments, spent significant effort in education of both management and other employees on the effects of the new guidance and assessed the internal

~~F-16~~

~~Table of Contents~~

~~control structure~~savings in order to ~~adopt~~determine the ~~ASU~~fair value.

F-17

A summary of the consideration paid for the acquired ownership in Cosmic is as follows (in millions):


Cash paid	$	39.4
Less: Cash acquired	(1.5)
Total consideration	$	37.9

Pro Forma Financial Information (Unaudited)

The following tables summarize the supplemental condensed consolidated statements of operations information on ~~January 1, 2018. ASU 2014-09~~an unaudited pro forma basis as if the acquisition of Cosmic occurred on December 28, 2020 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 income (loss). The pro forma results are for illustrative purposes only for the applicable period.

For the year ended December 26, 2021 (all amounts, except per share amounts, are in millions):


Pro forma revenues	$	855.2
Pro forma net loss before tax	$	(0.8)
Pro forma net loss	$	(2.9)

Basic pro forma loss per share	$	(0.03)
Diluted pro forma loss per share	$	(0.03)

Southern Research Engineering Division

On March 9, 2022, the Company executed an Asset Purchase Agreement to acquire the assets of the Engineering Division of Southern Research Institute (“SRI”), an Alabama non-profit corporation, for a purchase price of approximately $79.4 million, comprised of $74.4 million in cash, subject to adjustments for working capital, potential earn-out consideration tied to revenue from certain in-development products, indebtedness and transaction expenses, and $5.0 million in Kratos common stock. SRI’s Engineering Division (“SRE”) is the market leader in assisting customers in the development, modeling, and deployment of advanced materials for extreme environments, including hypersonic, space, missile, missile defense, strategic deterrence, propulsion systems, and energy applications. SRE also specializes in Intelligence Surveillance and Reconnaissance (“ISR”) sensor development, electromechanical systems design and integration, aerospace engineering, materials engineering, artificial intelligence and machine learning, directed energy, RF systems design and integration, advanced manufacturing, and computational sciences. The acquisition established Kratos SRE, Inc., a new business within Kratos’ Defense and Rocket Support Services Division.

On May 23, 2022, the acquisition was completed following the satisfaction of all closing conditions, including receipt of necessary approval from all required government authorities. The operating results of the acquisition have been included in the Company’s results of operations from the effective acquisition date.

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 SRE’s existing business with Kratos’ related products and customers.

The transaction has been accounted for using the acquisition method of accounting, which requires, ~~expanded disclosure regarding~~among other things, that the ~~nature, timing, and uncertainty of revenue, cash flow and customer contract balances, including how and when performance obligations are satisfied~~identifiable assets acquired and the ~~relationship between revenue~~liabilities assumed be recognized and changes in contract balances during a reporting period. An entity is also required to disclose requirements for the remaining performance obligations. Disclosure includes the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied (or partially unsatisfied)at their fair values as of the ~~end~~acquisition date. The fair value measurements are based primarily on significant inputs not observable in the marketplace and thus represent Level 3 measurements.

F-18

The following table summarizes the allocation of the ~~reporting period~~purchase price over the estimated fair values of the major assets acquired and liabilities assumed (in millions):


Accounts receivable	$	2.9
Unbilled receivables	11.1
Inventory	0.5
Other current assets	0.2
Property and equipment	22.8
Other assets	0.2
Intangible assets	10.8
Total identifiable net assets acquired	48.5
Total identifiable net liabilities assumed	(3.4)
Goodwill	34.3
Net assets acquired, excluding cash	$	79.4

Based on the Company’s estimate of fair value, as of May 23, 2022, net liabilities included $2.5 million of current liabilities. The identifiable intangible assets include trade names of $0.5 million with a remaining useful life of 5 years, contracts and backlog of $2.5 million with an ~~explanation~~estimated useful life of ~~when~~3 years, in-process research and development of $7.3 million that will commence amortization at the ~~entity expects~~completion of the development, and developed technology of $0.5 million with a remaining useful life of 3 years. The Company also established a deferred tax asset of $0.2 million for the difference between the financial statement basis and tax basis of the acquired assets of SRE and a corresponding decrease in goodwill. The goodwill recorded in this transaction is expected to ~~recognize~~be tax-deductible.

The value of backlog was estimated using MPEEM, an income approach (Level 3), which converts projected revenues and costs into cash flows. To reflect the fact that certain other assets contribute to the cash flows generated, the returns for these contributory assets were removed to arrive at estimated cash flows solely attributable to the acquired backlog, which were discounted at a rate of 6.4% to determine the fair value. The value of developed technology was estimated using the relief-from-royalty method, an income approach (Level 3), which estimates the cost savings that accrue to the owner of the intangible asset that would otherwise be payable as ~~revenue~~royalties or license fees on revenues earned through the use of the asset. A royalty rate was applied to the projected revenues associated with the intangible asset to determine the amount of ~~remaining performance obligations.~~savings, which was at a rate of 11% to determine the fair value. The ~~entity can disclose on a quantitative basis~~value of in-process research and development was also estimated using the ~~time bands that would be most appropriate~~relief-from-royalty method. A royalty rate of 12% was applied to the projected revenues associated with the intangible asset to determine the amount of savings in order to determine the fair value.

The amounts of revenue and operating income of SRE included in the Company’s condensed consolidated statement of operations for the ~~duration~~year end December 31, 2023 were $53.2 million and $3.6 million, respectively. The amounts of revenue and operating income of SRE included in the Company’s condensed consolidated statement of operations for the year end December 25, 2022 were $26.8 million and $2.9 million, respectively.

A summary of the ~~remaining performance obligations or by using qualitative information.~~consideration paid for the acquired assets is as follows (in millions):


Cash paid	$	74.4
Common stock issued	5.0
Total consideration	$	79.4

Pro Forma Financial Information (Unaudited)

The following tables summarize the supplemental condensed consolidated statements of operations information on an unaudited pro forma basis as if the acquisition of SRE occurred on December 28, 2020 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 income (loss). The pro forma results are for illustrative purposes only for the applicable period.

F-19

For the years ended December 25, 2022 and December 26, 2021 (all amounts, except per share amounts, are in millions):


		2022		2021
Pro forma revenues	$	915.3	$	850.7
Pro forma net income (loss) before tax	$	(31.6)	$	3.8
Pro forma net income ( loss)	$	(35.8)	$	1.3

Basic pro forma income (loss) per share	$	(0.28)	$	0.01
Diluted pro forma income (loss) per share	$	(0.28)	$	0.01

Sierra Technical Services, Inc.

On October 3, 2023, the Company ~~has evaluated these disclosure requirements~~entered into an agreement to acquire all of the outstanding equity securities of aerial target drone designer Sierra Technical Services, Inc. (“STS”) pursuant to which the Company (i) issued 866,026 shares of

Kratos common stock valued at $12.8 million on October 3, 2023 and ~~has incorporated~~(ii) agreed to issue up to an additional 979,038 shares of

Kratos common stock valued at $14.5 million pursuant to certain holdback and earn-out provisions, in each case, to the ~~collection~~former

stockholders of ~~relevant data into its quarterly processes.~~STS. The Company ~~also designed~~recorded net assets of $12.4 million and ~~implemented specific controls based on its evaluation~~goodwill of $10.9 million related to the STS acquisition. Significant assets of STS acquired by the Company included accounts receivable of $11.0 million, and identified intangibles (contracts and backlog) of $14.0 million. Significant liabilities of STS assumed by the Company included deferred revenue of $11.4 million. The allocation of the ~~impact of ASU 2014-09, including~~total consideration for this acquisition to the ~~calculation~~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 ~~cumulative effect of adopting ASU 2014-09. Significant changes to~~acquisition have been included in the Company’s ~~accounting systems were~~results of operations from the effective date of the acquisition. The amount of net sales and earnings of STS included in the condensed consolidated statement of operations for the year ended December 31, 2023 are not ~~determined to be necessary upon adoption of ASU 2014-09. Several new controls were added and certain current controls have been modified to incorporate~~material. Had the ~~revisions that have been made to the Company’s accounting policies and practices.~~

~~Based upon an assessment of material active contracts~~acquisition occurred as of December 26, 2022, net sales, net income from consolidated operations, net income attributable to Kratos, and basic and diluted net income per share attributable to Kratos on a pro forma basis for the year ended December 31, ~~2017,~~2023 would not have been materially different than the ~~Company has determined that the impact on the results of operations and cash flows upon adoption are not material. The Company also does not expect the impact~~reported amounts. STS is included in the periods after adoption to be material. Under ASU 2014-09, revenue is recognized as control transfers to the customer. As such, revenue for the Company’s contracts will generally be recognized over time using the cost-to-cost method, which is consistent with the revenue recognition model in use for the majority of contracts prior to adoption. For those contracts where revenue was previously recognized as units are delivered, in most cases the accounting for those contracts changed under ASU 2014-09 such that revenue will be recognized as costs are incurred. This change will generally result in an acceleration of revenue as compared with the pre-adoption revenue recognition method for those contracts.US segment.

The Company expects the cumulative effect of adopting ASU 2014-09 to result in an increase in revenue of less than $2 million and an increase in operating income of less than $2 million. These changes principally reflect the impact of converting contracts applying the units-of-delivery under the old revenue guidance to the cost-to-cost method of accounting. The cumulative effect of adoption of the new revenue guidance will be recognized as an increase in contract assets, a reduction in inventoried costs, an increase in contract liabilities and a net decrease in accumulated deficit as of January 1, 2018.

Note 2.3. Goodwill and Other Intangible Assets


~~(a)~~	~~Goodwill~~

(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~~five operating ~~segments:~~businesses: Defense and Rocket Support ~~Services~~Systems (“DRSS”), Microwave Electronics (“ME”), ~~Technical~~Space, Training and ~~Training~~Cybersecurity Solutions (“~~TTS”~~ST&C”), ~~and~~ C5ISR/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~~C5ISR requirements. The PSS reportable business segment provides integrated solutions for advanced homeland security, public safety, critical infrastructure security, and security and surveillance systems for government, industrial and commercial customers. The US reportable segment consists of ~~our~~its unmanned aerial system, unmanned ground, and unmanned seaborne system ~~businesses.~~products.

~~F-17~~

~~Table of Contents~~

The Company identified its reporting units to be the DRSS, ME, ~~TTS,~~ST&C, MS, USKTT and ~~PSS~~US operating segments. ~~In order~~The Company tests goodwill for impairment by first performing a qualitative assessment. If, based on its qualitative assessment management determines it is not more likely than not that the fair value of the reporting unit exceeds its carrying value, a quantitative assessment is then performed. For operations where a quantitative assessment is performed, the identification and measurement of impairment involves the estimation of the fair value of reporting units. If the fair value is determined to ~~test~~be less than the carrying value, a charge to operations is recorded for ~~potential impairment,~~the amount that the carrying value exceeds fair value. As part of its quantitative assessment, the Company estimates the fair value of each of ~~its~~the reporting units based on a comparison and

F-20

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. As a result of the annual goodwill impairment test, the Company recorded a $24.2 million impairment charge which represented the excess of the carrying amount of goodwill compared to the fair value of the DRSS reporting unit.

In determining the fair value for the reporting units, where a quantitative assessment is performed, 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 $461.2 million goodwill and $22.0 million long-lived intangible assets 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 platformsexpected cash flows, terminal growth rates, appropriate discount rates, market multiples, and the ~~successful acceptance of new unmanned system platforms, including from~~control premium 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.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 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 our 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 was recently notified of losses on two new sizable five year contract opportunities where Kratos was underbid on cost, which significantly impacted the expected future financial performance of this business.

The carrying amounts of goodwill as of December 31, ~~2017~~2023 and December 25, ~~2016~~2022 by reportable segment are as follows (in millions):


	As of December 31, 2023
	US		KGS		Total
Gross value	$	138.8	$	683.6	$	822.4
Less accumulated impairment	13.8		239.5		253.3
Net	$	125.0	$	444.1	$	569.1


	As of December 31, 2017
					As of December 25, 2022

					As of December 25, 2022

					As of December 25, 2022
	PSS		US		KGS		Total		US	KGS	Total
Gross value	$	53.9	$	111.1	$	567.8	$	732.8
Less accumulated impairment	18.3		13.8		239.5		271.6
Net	$	35.6	$	97.3	$	328.3	$	461.2

(b) Purchased Intangible Assets

~~F-18~~

~~Table of Contents~~

As of December 25, 2016
PSS US KGS Total
Gross value $ 53.9
$ 111.1
$ 567.8
$ 732.8
Less accumulated impairment 18.3
13.8
215.3
247.4
Net $ 35.6
$ 97.3
$ 352.5
$ 485.4


~~(b)~~	~~Purchased Intangible Assets~~

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


	As of December 31, 2023						As of December 25, 2022
	Gross Value		Accumulated Amortization		Net Value		Gross Value		Accumulated Amortization		Net Value
Acquired finite-lived intangible assets:
Customer relationships	$	80.9	$	(62.8)	$	18.1	$	80.9	$	(60.1)	$	20.8
Contracts and backlog	53.1		(38.8)		14.3		39.1		(36.3)		2.8
Developed technology and technical know-how	33.7		(28.2)		5.5		33.7		(27.0)		6.7
Trade names	3.8		(2.7)		1.1		3.8		(2.3)		1.5
In-process research and development	16.8		(0.3)		16.5		16.8		(0.3)		16.5
Total finite-lived intangible assets	188.3		(132.8)		55.5		174.3		(126.0)		48.3
Indefinite-lived trade names	6.9		—		6.9		6.9		—		6.9
Total intangible assets	$	195.2	$	(132.8)	$	62.4	$	181.2	$	(126.0)	$	55.2

As of December 31, 2017 As of December 25, 2016

Gross
Value

Accumulated
Amortization

Net
Value

Gross
Value

Accumulated
Amortization

Net
Value
Acquired finite-lived intangible assets:

Customer relationships $ 53.7
$ (50.2 ) $ 3.5
$ 53.7
$ (44.9 ) $ 8.8
Contracts and backlog 30.8
(25.7 ) 5.1
30.8
(23.7 ) 7.1
Developed technology and technical know-how 25.0
(18.6 ) 6.4
25.2
(15.7 ) 9.5
Trade names 1.4
(1.3 ) 0.1
1.4
(1.1 ) 0.3
Total finite-lived intangible assets 110.9
(95.8 ) 15.1
111.1
(85.4 ) 25.7
Indefinite-lived trade names 6.9
—
6.9
6.9
—
6.9
Total intangible assets $ 117.8
$ (95.8 ) $ 22.0
$ 118.0
$ (85.4 ) $ 32.6

The aggregate amortization expense for finite-lived intangible assets was ~~$10.4~~$6.8 million, ~~$10.5~~$7.4 million and ~~$13.0~~$4.7 million, for the years ended December 31, ~~2017,~~ 2023, December 25, ~~2016~~,2022, and December ~~27, 2015,~~26, 2021, respectively. The Company records all amortization expense in selling, general and administrative expenses.

F-21

The estimated future amortization expense of acquired intangible assets with finite lives as of December 31, ~~2017~~2023 is as follows (in millions):

Fiscal Year Amount
2018 $ 5.9
2019 5.1
2020 3.0
2021 1.1
Total $ 15.1


Fiscal Year	Amount
2024	9.4
2025	9.7
2026	9.1
2027	7.4
2028	4.5
Thereafter	15.4
Total	$	55.5

Note 3.4. Balance Sheet Details

The detail of certain assets in the consolidated balance sheets consists of the ~~following (in millions).~~following:

Cash and cash equivalents

The Company’s cash equivalents consist of overnight cash sweep accounts that are invested on a daily basis. Cash and cash equivalents at December 31, ~~2017~~2023 and December 25, ~~2016~~2022 were ~~$129.6~~$72.8 million and ~~$69.1~~$81.3 million, respectively, and approximated their fair value.

~~F-19~~

~~Table of Contents~~

Accounts receivable, net ~~(in millions)~~and Unbilled receivables, net

Receivables including amounts due under long-term contracts are summarized as ~~follows:~~follows (in millions):


	December 31, 2023		December 25, 2022
Billed, current	$	129.8	$	105.9
Unbilled, current	200.5		223.0
Total current accounts receivable	330.3		328.9
Allowance for doubtful accounts	(1.1)		(0.4)
Total accounts receivable and unbilled receivables, net	$	329.2	$	328.5

December 31, 2017 December 25, 2016
Billed, current $ 101.5
$ 102.8
Unbilled, current 167.5
128.3
Total current accounts receivable 269.0
231.1
Allowance for doubtful accounts (0.6 ) (1.7 )
Total accounts receivable, net $ 268.4
$ 229.4

Unbilled receivables represent the balance of recoverable costs and accrued profit, composed principally of revenue recognized on contracts for which billings have not been presented to the customer because the amounts were earned but not contractually billable as of the balance sheet date. Retainages receivable were $6.6 million as of December 31, 2017 and $6.2 million as of December 25, 2016 and are included in accounts receivable net.

Substantially all accounts receivable at December 31, ~~2017,~~2023, are expected to be collected in ~~2018.~~2024. The Company does not believe it has significant exposure to credit risk, as accounts receivable and the related unbilled amounts are primarily from contracts ~~where the end customer is~~associated with the U.S. Government.

U.S. Government contract receivables where the Company is the prime contractor included in accounts receivable, net (in millions):

December 31, 2017 December 25, 2016
Billed $ 17.3
$ 15.6
Unbilled 55.3
39.3
Total U.S. Government contract receivables $ 72.6
$ 54.9

~~Inventoried costs, net of progress payments (in millions)~~


	December 31, 2023		December 25, 2022
Billed	$	21.0	$	15.9
Unbilled	71.0		87.4
Total U.S. Government contract receivables	$	92.0	$	103.3

F-22

December 31,
2017 December 25,
2016
Raw materials $ 35.4
$ 31.9
Work in process 11.4
22.1
Finished goods 2.3
1.4
Supplies and other 1.9
1.8
Subtotal inventoried costs 51.0
57.2
Less customer advances and progress payments (0.6 ) (1.8 )
Total inventoried costs $ 50.4
$ 55.4

~~F-20~~

~~Table of Contents~~

Inventoried costs (in millions):


	December 31, 2023		December 25, 2022
Raw materials	$	78.0	$	73.6
Work in process	72.9		50.8
Finished goods	5.3		1.1



Total inventoried costs	$	156.2	$	125.5

Property, plant and equipment, net (in millions)


	December 31, 2023		December 25, 2022
Finance lease right of use assets	$	56.1	$	54.9
Land and buildings	40.8		38.4
Computer equipment and software	51.4		45.7
Machinery and equipment	152.8		129.9
Furniture and office equipment	8.2		7.6
Leasehold improvements	24.0		22.9
Construction in progress	69.7		51.0
Property and equipment	403.0		350.4
Accumulated depreciation and amortization	(159.4)		(137.3)
Total property and equipment, net	$	243.6	$	213.1

December 31, 2017 December 25, 2016
Land and buildings $ 12.1
$ 12.2
Computer equipment and software 30.1
26.9
Machinery and equipment 49.9
47.2
Furniture and office equipment 5.7
5.3
Leasehold improvements 11.2
9.9
Construction in progress 19.8
6.1
Property and equipment 128.8
107.6
Accumulated depreciation and amortization (67.6 ) (57.8 )
Total property and equipment, net $ 61.2
$ 49.8

Depreciation expense was ~~$12.1~~$26.4 million, ~~$12.3~~$23.1 million and ~~$12.5~~$21.0 million for the years ended December 31, ~~2017,~~ 2023, December 25, ~~2016~~,2022, and December ~~27, 2015,~~26, 2021, respectively.

Note 4.5. Debt

(a) ~~Issuance~~2022 Credit Facility

On February 18, 2022, the Company completed the refinancing of its then-outstanding $90 million revolving credit facility and $300 million 6.5% Senior Secured Notesdue ~~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%~~“Senior Secured Notes”) in, with a ~~private placement conducted pursuant to Rule 144A~~new 5-year $200 million Revolving Credit Facility and ~~Regulation S under~~5-year $200 million Term Loan A (collectively, the ~~Securities Act of 1933, as amended (the “Act”~~“2022 Credit Facility”). The Company incurred debt issuance costs of ~~$6.6~~$3.3 million associated with the 2022 Credit Facility. During the year ended December 31, 2023, the Company made $5.0 million of principal payments on Term Loan A. The Company has net amounts outstanding of approximately $35.0 million under the new ~~6.5%~~Revolving Credit Facility, with approximately $165.0 million remaining in borrowing capacity, less approximately $10.2 million of letters of credit outstanding.

On February 18, 2022, the proceeds of $300 million from the 2022 Credit Facility, along with cash funded by the Company for the 3.25% call premium to redeem the Company’s then-outstanding Senior Secured Notes, plus accrued interest, was distributed to the trustee for redemption of the Senior Secured Notes. The Company utilized the net proceeds from the sale of the 6.5% Notes, as well as cash from its recent equity offering to extinguish the outstanding 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 (in such capacity, the “2017 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; (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 and the guarantees (as set forth in the Indenture, the “Guarantees”) 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 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 allredemption of the Company’s ~~assets and the assets~~outstanding Senior Secured Notes closed on March 14, 2022, for an amount of ~~the Subsidiary Guarantors, except with respect~~cash equal 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.

The 6.5% Notes will be redeemable, in whole or in part, at any time on or after November 30, 2020 at the respective redemption prices specified in the Indenture. In addition, the Company may redeem up to 40% of the 6.5% Notes before November 30, 2020 with the net proceeds of certain equity offerings. The Company may also redeem some or all of the 6.5% Notes before November 30, 2020 at a redemption price of 100%103.25% of the principal amount thereof plus accrued and unpaid interest ~~to, but excluding, the redemption date, if any, plus~~thereon. The Company incurred a ~~“make whole” premium. In addition, during each 12-month period commencing~~loss on the ~~issue date and ending~~extinguishment of debt of $9.8 million related to the call premium on ~~or prior to November 30, 2020,~~ the Company may redeem up to 10% of the original aggregate principal amount of the 6.5% Notes issued under the Indenture at a redemption price of 103.000% of the principal amount thereof, plus accrued and unpaid interest, to, but excluding, the date of redemption, if any. 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.

~~F-21~~

~~Table of Contents~~

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 December 31, 2017, the Company was in compliance with the covenants contained in the Indenture governing the 6.5% Notes.


~~(b)~~	~~Issuance of 7.00% Senior Secured Notes due 2019~~

~~In May 2014, the Company refinanced its $625.0 million 10%~~ Senior Secured Notes ~~due in 2017 (the “10% Notes”) with $625.0~~and the write-off of $3.2 million of ~~newly issued 7.00% Senior Secured Notes due in 2019 (the “7% Notes”). The net proceeds of the 7% Notes was $618.5 million after an original issue discount of $6.5 million. The Company incurred~~unamortized debt issuance costs, of $8.8 million associated with the new 7% Notes. The Company utilized the net proceeds from the 7% Notes, a $41.0 million draw on the Credit Agreement discussed below, as well as cash from operations to extinguish the 10% Notes. The total reacquisition price of the 10% Notes was $661.5 million including a $31.2 million early termination fee, the write-off of $15.5 million of unamortized issue costs, $12.9 million of unamortized premium, along with $5.3 million of additional interest while in escrow, which resultedresulting in a ~~loss on extinguishment of $39.1 million. On October 16, 2014, the Company exchanged the outstanding 7% Notes for an equal amount of 7% Notes that had been registered under the Act.~~

The 7% Notes were governed by an Indenture dated May 14, 2014 (the “Indenture”) among the Company, certain of the Company’s subsidiaries and Wilmington Trust, National Association, as Trustee and Collateral Agent. The Company paid interest on the 7% Notes semi-annually, in arrears, on May 15 and November 15 of each year. The 7% Notes included customary covenants and events of default as well as a consolidated fixed charge ratio of 2.0:1 for the incurrence of additional indebtedness. Negative covenants include, among other things, limitations on additional debt, liens, negative pledges, investments, dividends, stock repurchases, asset sales and affiliate transactions. Events of default include, among other events, non-performance of covenants, breach of representations, cross-default to other material debt, bankruptcy, insolvency, material judgments and changes in control.

Following the sale of the Herley Entities (as defined below) (see Note 8 - Discontinued Operations), the Company, on August 21, 2015, paid down the $41.0 million outstanding on the $110.0 million Credit Agreement and on September 22, 2015, repurchased $175.0 million of the 7% Notes at par, in accordance with the Indenture. In connection with the $175.0 million repurchase of 7% Notes, the Company wrote off $1.8 million of unamortized issue costs, $1.4 million of unamortized discount, and incurred $0.2 million of legal fees, which resulted in atotal loss on extinguishment of debt of $3.4 million. The Company reinvested all net proceeds remaining after the repurchase of the $175.0 million of 7% Notes in replacement collateral under the Indenture within the 360 days following the asset disposition in accordance with the terms of the Indenture.

During the year ended December 25, 2016, the Company repurchased and extinguished $14.5 million of the outstanding 7% Notes, which resulted in a gain of $0.4 million offset by $0.1 million of unamortized issuance cost and $0.1 million of unamortized discount resulting in a net gain of $0.2$13.0 million.

~~During the year ended December 31, 2017, the Company redeemed and extinguished the remaining $435.5 million of outstanding 7% Notes as of December 25, 2016, which resulted in~~The 2022 Credit Facility is governed by a ~~loss of $13.4 million and the realization of $2.3 million of unamortized issuance cost and $1.6 million of unamortized discount resulting in a loss on extinguishment of debt of $17.3 million.~~

~~F-22~~

~~Table of Contents~~

~~(c) Other Indebtedness~~

Credit ~~and Security Agreement~~

~~On May 14, 2014, the Company entered into a $110.0 million Credit and Security~~ Agreement ~~dated May 14, 2014 (as amended from time to time, the~~(the “Credit Agreement”), ~~with~~dated February 18, 2022, by and among the Company, the lenders from time to time party thereto ~~SunTrust~~(the “Lenders”), the Issuing Banks party thereto (as defined in the Credit Agreement) and Truist Bank, in its capacity as ~~Agent (the “Agent”), PNC Bank, National Association,~~administrative agent for the Lenders, and as ~~Joint Lead Arranger~~an issuing bank and ~~Documentation Agent, and SunTrust Robinson Humphrey, Inc.,~~ as ~~Joint Lead Arranger and Sole Book Runner. The Credit Agreement~~the swingline lender which established a five-year senior secured credit facility which is comprised of a $200 million revolving credit facility in(the “Revolving Credit Facility”) (which includes sub-facilities for the ~~maximum~~incurrence of up to $10.0 million of swingline loans and the issuance of up to $50.0 million of Letters of Credit) and a $200 million term loan (the “Term Loan A”). The Credit Agreement contemplates uncommitted incremental credit facilities of up to $200 million (which amount would be reduced by the aggregate amount of ~~$110.0 million~~ ~~(subject to a potential increase of the maximum principal amount to~~ ~~$135.0 million, subject to the Agent’s~~any and ~~applicable lenders’ approval as described therein), consisting of a subline for letters of~~all incremental 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. The obligations~~facilities actually established under the Credit ~~Agreement are secured by~~Agreement)

F-23

plus additional uncommitted incremental capacity subject to a ~~first priority lien~~limitation based on the Company’s ~~accounts receivable, inventory, deposit accounts, securities accounts, cash, securities and general intangibles (other than intellectual property)~~pro forma total net leverage ratio (including any such additional uncommitted incremental capacity). ~~The obligations under the Credit Agreement are secured by a second priority lien, junior to the lien securing the Notes, on all of the Company’s other assets.~~

The Credit Agreement contains certain covenants, which include, but are not limited to, restrictions on indebtedness, liens, and investments, and limits on other various payments, as well as a financial covenant relating to a minimum fixed charge coverage ratio. Events of default under the terms of the Credit Agreement include, but are not limited to: failure of the Company to pay any principal of any loans in full when due and payable; failure of the Company to pay any interest on any loan or any fee or other amount payable under the Credit Agreement within three business days after the date when due and payable; failure of the Company or any of its subsidiaries to comply with certain covenants and agreements, subject to applicable grace periods and/or notice requirements; any representation, warranty or statement made in or pursuant to the Credit Agreement or any related writing or any other material information furnished by the Company or any of its subsidiaries to the Agent or the lenders proving to be false or erroneous; and the occurrence of an event or condition having or reasonably likely to have a material adverse effect, which includes a material adverse effect on the business, operations, condition (financial or otherwise) or prospects of the Company or the ability of the Company to repay its obligations. Where an event of default arises from certain bankruptcy events, the commitments will automatically and immediately terminate and the principal of, and interest then outstanding on, all of the loans will become immediately due and payable. Subject to certain notice requirements and other conditions, upon the occurrence of an event of default, including the occurrence of a condition having or reasonably likely to have a material adverse effect, commitments may be terminated and the principal of, and interest then outstanding on, all of the loans may become immediately due and payable. As of December 31, 2017, no event of default had occurred and the Company believes that events or conditions having a material adverse effect, giving rise to an acceleration of any amounts outstanding under the Credit Agreement, have not occurred and the likelihood of such events or conditions occurring is remote.

On May 31, 2015, the Company entered into a third amendment (the “Third Amendment”) to the Credit Agreement. Under the terms of the Third Amendment, the definitions of certain terms of the Credit Agreement were modified, the disposition of the Herley Entities was approved by the lenders, a minimum $175.0 million repurchase of the 7% Notes by the Company was required and the payment in full of the outstanding balance of the Credit Agreement was required upon consummation of the sale of the Herley Entities. Additionally, the measurement of the fixed charge coverage ratio of 1.15:1 was modified as follows: (i) the fixed charge coverage ratio will not be measured as of the end of any quarterly reporting period ending after June 30, 2015, if on such date (a) there are no outstanding revolving loans or swingline loans and (b) the aggregate amount outstanding under letters of credit is less than or equal to $17.0 million, and (ii) as to any subsequent quarterly reporting period ending after June 30, 2015, and not covered by (i) above, a fixed charge coverage ratio of at least 1.05:1 must be maintained if the percentage of (a) outstanding revolving loans plus the sum of the outstanding swingline loans and outstanding letters of credit that are in excess of $17.0 million, to (b) the revolving credit commitment, minus the Herley Disposition Proceeds Reinvestment Reserve, as defined below, is greater than 0.00% but less than 15.00% or a fixed charge coverage ratio of at least 1.10:1 must be maintained if the aforementioned percentage is equal to or greater than 15.00% but less than 25.00%. In all other instances, a fixed charge coverage ratio of at least 1.15:1 must be maintained. For purposes of computing the fixed charge coverage ratio, the associated reduction in consolidated interest expense in connection with the repurchase of 7% Notes with proceeds from the sale of the Herley Entities shall be deemed to have occurred on the first day of the most recently completed four quarterly reporting periods prior to the sale.

On August 20, 2015, the Company entered into a fourth amendment (the “Fourth Amendment”) to the Credit Agreement. Among other things, the Fourth Amendment provides for a modification of the Third Amendment as it relates to when the minimum fixed charge coverage ratio will be measured based upon the Company’s outstanding borrowings. Outstanding borrowings for purposes of computing the applicable minimum fixed charge coverage ratio exclude any letter of credit exposure outstanding of $17.0 million plus the amount of letters of credit outstanding for the divested Herley Entities for

~~F-23~~

~~Table of Contents~~

~~which a cash deposit was placed in escrow by the Buyer to cover the amount of such outstanding letters of credit, should the letters of credit be pulled.~~

On November 20, 2017, the Company entered into an amended and restated Credit Agreement with the lenders from time to time party thereto, the Agent, PNC Bank, National Association, as Joint Lead Arranger and Documentation Agent, and SunTrust Robinson Humphrey, Inc., as Joint Lead Arranger and Sole Book Runner. As amended and restated, the Credit Agreement establishes 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 SunTrust’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 and the term loan credit facility may take the form of a base rate ~~revolving loan, Eurodollar revolving loan~~loans or ~~swingline loan.~~Secured Overnight Financing Rate (“SOFR”) loans. Base rate ~~revolving~~ loans ~~and swingline loans~~under the Credit Agreement 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 (as defined in the Credit Agreement) prime lending rate, as in effect at such time, (ii) the ~~federal funds rate,~~Federal Funds Rate (as defined in the Credit Agreement), as in effect at such time, plus 0.50% ~~per annum and~~, (iii) the Adjusted ~~LIBO Rate~~Term SOFR (as defined in the Credit Agreement) ~~determined at~~for a one-month tenor in effect on such ~~time for an interest period of one month,~~day, plus 1.00% ~~per annum. Eurodollar revolving~~and (iv) 1.00%. SOFR 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.~~Term SOFR for an Interest Period (as defined in the Credit Agreement) selected by the Company of one, three or six months. The Applicable Margin varies between ~~1.00%-1.50%~~1.25% and 2.25% per annum for SOFR loans and between 0.25% and 1.25% per annum 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~~total net leverage ratio from time to time.

Mandatory amortization on the ~~lenders’ total commitment amount and revolving credit exposure. The calculation~~Term Loan A is 2.5% in each of the ~~Company’s borrowing base takes into account several items relating to~~first and second years and 5.0% in each of the ~~Company~~third, fourth and ~~its subsidiaries, including amounts~~fifth years, with the remaining outstanding balance due ~~and owing under billed and unbilled accounts receivables, then held eligible raw materials inventory, work-in-process inventory, and applicable reserves~~.

at maturity. The ~~measurement of a minimum fixed charge coverage ratio was modified in the November 2017 amended and restated~~ Credit Agreement contains certain covenants, which include, but are not limited to, ~~be 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.~~

~~As of December 31, 2017, there were no borrowings outstanding~~restrictions on ~~the Credit Agreement; there was $9.5 million outstanding~~indebtedness, liens, fundamental changes, restricted payments, asset sales, and investments, and places limits on ~~letters of credit, resulting in net borrowing base availability of $65.8 million.~~various other payments. The Company was in compliance with the ~~financial~~ covenants ofcontained in the Credit Agreement as of December 31, ~~2017.~~2023.

~~Debt Acquired in Acquisition~~

~~The~~On April 28, 2023, the Company ~~has a 10-year term loan with a bank in Israel~~ entered into ~~on September 16, 2008~~an interest rate swap contract to hedge U.S. dollar-one month Term SOFR in ~~connection~~order to fix the interest rate movements associated with the ~~acquisition~~Company’s Term Loan A. The initial hedge amount was $195.0 million and amortizes in accordance with Term Loan A. The swap is at a fixed rate of ~~one~~one-month term SOFR of ~~its wholly owned subsidiaries.~~3.721% and settles monthly on the last day of each calendar month. The ~~balance as~~swap has an effective date of ~~December 31, 2017~~May 1, 2023 and ~~December 25, 2016 was~~ ~~$0.8 million~~ ~~and $1.8 million, respectively. The loan is payable in quarterly installments~~terminates on May 1, 2026. Refer to Note 17 for further discussion of ~~$0.3 million~~ ~~plus interest at~~ ~~LIBOR~~ ~~plus a margin~~the accounting treatment of ~~1.5%. The loan agreement governing~~ the ~~term loan contains various covenants, including a minimum net equity covenant as defined in the loan agreement. The Company was in compliance with all covenants contained in the loan agreement as of~~ ~~December 31, 2017~~.

~~Fair Value of Long-term Debt~~swap arrangement.

~~Carrying amounts~~Term Loan and Revolving Credit Debt

Term loan and revolving credit debt 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~~ ~~December 31, 2017~~ ~~and December 25, 2016 are presented in the following table:~~

As of December 31, 2017 As of December 25, 2016
$ in millions Principal
Carrying
Amount
Fair Value Principal
Carrying
Amount
Fair Value
Long-term debt $ 300.8
$ 294.3
$ 312.7
$ 437.3
$ 432.0
$ 423.6

~~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~~ ~~December 31, 2017, the difference between the carrying amount of~~ ~~$294.3 million~~ ~~and the principal amount of~~ ~~$300.8 million~~ ~~presented in the previous table, is the unamortized debt issuance costs of $6.5 million, which are being accreted to~~current period interest ~~expense over the term of the related debt. As of December 25, 2016, the difference between the carrying amount of~~

~~F-24~~

~~Table of Contents~~

$432.0 million and the principal amount of $437.3 million presented in the above table is the net unamortized original issue discount of $2.4 million and the unamortized debt issuance costs of $2.9 million, which are being accreted to interest expense over the term of the related debt.

~~Future maturities of long-term debt are $0.8 million in 2018, and $300.0 million in 2025.~~

~~Note 5. Lease Commitments~~

~~The Company leases certain facilities and equipment under operating leases having terms expiring at various dates through 2033.~~

~~Future minimum lease payments under operating leases as of~~ ~~December 31, 2017, which does not include $7.4 million in sublease income on the Company’s operating leases,~~rates are as follows (in millions):


	December 31, 2023			December 25, 2022
Term Loan A	$	192.5		$	197.5
Revolving credit facility	35.0			60.0
Total debt	227.5			257.5
Less current portion	7.5			6.3
Total long-term debt, less current portion	220.0			251.2
Less long-term unamortized debt issuance costs - term loans	0.7			1.0
Total long-term debt, net of unamortized debt issuance costs - term loans	$	219.3		$	250.2
Unamortized debt issuance costs - revolving credit facility	$	0.7		$	1.0
Current period interest rate	7.7		%	6.4		%

Future long-term debt principal payments at December 31, 2023 were as follows (in millions):


2024	$	7.5
2025	$	10.0
2026	$	10.0
2027	$	200.0

	$	227.5

F-24

Year Operating Leases
2018 $ 18.0
2019 19.5
2020 14.3
2021 11.4
2022 9.3
Thereafter 55.3
Total future minimum lease payments $ 127.8

Note 6. Leases

~~Gross rent~~The components of lease expense ~~under operating leases~~ for the years ended December 31, ~~2017,~~ 2023, and December 25, ~~2016, and December 27, 2015 was $21.5 million, $21.6 million, and $23.1 million, respectively. Total sublease income~~2022 were as follows (in millions):


	December 31, 2023		December 25, 2022
Amortization of right of use assets - finance leases	$	3.1	$	2.9
Interest expense on lease liabilities - finance leases	3.1		3.0
Operating lease cost (expense resulting from amortization of total lease payments)	14.0		12.9
Short-term lease cost	1.2		0.8
Variable lease cost (cost excluded from lease payments)	0.1		0.1
Sublease income	—		—
Total lease cost	$	21.5	$	19.7

The components of leases on the balance sheet were as follows (in millions):


	December 31, 2023		December 25, 2022
Operating Leases:
Operating lease right-of-use assets	$	45.7	$	47.4
Current portion of operating lease liabilities	$	12.1	$	10.8
Operating lease liabilities, net of current portion	$	37.8	$	40.8
Finance leases:
Property, plant and equipment, net	$	45.4	$	45.8
Other current liabilities	$	1.3	$	1.7
Other long-term liabilities	$	50.9	$	49.9

Cash paid for amounts included in the measurement of lease liabilities for the years ended December 31, ~~2017,~~2023, and December 25, ~~2016, and December 27, 2015, totaling $3.4 million,~~ ~~$3.3 million, and $3.3 million, respectively, has been netted against rent expense.~~

~~The Company’s accrual for excess facilities was $3.3 million and $4.0 million, as of December 31, 2017 and~~ ~~December 25, 2016~~, respectively. The accruals are included in other current liabilities and other long-term liabilities on the consolidated balance sheets. The Company estimates that the remaining accrual will be paid through 2020.

~~The accrual for excess facilities is~~2022 were as follows (in millions):


	December 31, 2023			December 25, 2022
Finance lease - cash paid for interest		$	3.1		$	3.0
Finance lease - financing cash flows		$	1.5		$	1.4
Operating lease - operating cash flows (fixed payments)		$	14.1		$	13.3

Excess Facilities
Balance as of December 27, 2015 $ 5.5
Adjustment of excess facility accrual —
Cash payments (1.5 )
Balance as of December 25, 2016 4.0
Adjustments of excess facility accruals —
Cash payments (0.7 )
Balance as of December 31, 2017 $ 3.3
Other supplemental noncash information (in millions):


	December 31, 2023			December 25, 2022
Operating lease liabilities arising from obtaining right-of-use assets	$	12.1		$	20.1
Finance lease liabilities arising from obtaining right-of-use assets	$	6.9		$	9.1

Weighted-average remaining lease term (in years):
Operating leases	4.59			5.14
Finance leases	14.91			15.20

Weighted-average discount rate:
Operating leases	4.95		%	4.92		%
Finance leases	6.35		%	6.02		%

The lease on certain office facilities includes scheduled base rent increases over the term of the lease. The total amount of the base rent payments is being charged to expense on the straight-line method over the term of the lease. In addition to the base rent payment, the Company pays a monthly allocation of the building’s operating expenses. The Company has recorded deferred rent, included in accrued expenses and other long-term liabilities, of $3.3 million, and ~~$3.9 million, at December 31, 2017 and~~ ~~December 25, 2016, respectively, to reflect the excess of rent expense over cash payments since inception of the respective leases.~~

F-25

~~Table of Contents~~

The maturity of lease liabilities is (in millions):


	Operating Leases		Finance Leases
2024	$	14.1	$	4.6
2025	12.0		4.8
2026	10.2		5.0
2027	9.5		5.1
2028	6.4		5.2
Thereafter	3.5		58.0
Total lease payments	55.7		82.7
Less: imputed interest	(5.8)		(30.5)
Total present value of lease liabilities	$	49.9	$	52.2

Note 6.7. Net ~~Loss~~Income (Loss) Per Common Share

The Company calculates net ~~loss~~income (loss) per common share in accordance with FASB ASCTopic 260,, Earnings per Share (“Topic 260”). Under Topic 260,”). ~~Under~~ ~~Topic 260~~, basic net ~~loss~~income (loss) per common share is calculated by dividing net ~~loss~~income (loss) by the weighted-average number of common shares outstanding during the reporting period. Diluted net ~~loss~~income (loss) per common share reflects the effects of potentially dilutive securities.

The following shares were excluded from the calculation of diluted ~~loss~~income (loss) per common share because their inclusion would have been anti-dilutive (in millions):

Year Ended

December 31, 2023

December 25, 2022

December 26, 2021

Shares from stock options and awards

1.8

1.5

0.1

2017 2016 2015
Domestic $ (54.2 ) $ (61.8 ) $ (54.2 )
Foreign 3.4
9.5
9.6
Total $ (50.8 ) $ (52.3 ) $ (44.6 )

The provision (benefit) for income taxes from continuing operations ~~for the years ended December 31, 2017, December 25, 2016, and December 27, 2015~~ are comprised of the following (in millions):


	Year Ended
	December 31, 2023		December 25, 2022		December 26, 2021
Federal income taxes:
Current	$	—	$	—	$	—
Deferred	2.4		(4.5)		(0.1)
Total Federal	2.4		(4.5)		(0.1)
State and local income taxes:
Current	1.3		0.6		1.5
Deferred	0.3		1.9		0.5
Total State and local	1.6		2.5		2.0
Foreign income taxes:
Current	5.1		3.9		2.9
Deferred	(0.2)		(0.5)		(0.9)
Total Foreign	4.9		3.4		2.0
Total	$	8.9	$	1.4	$	3.9

2017 2016 2015
Federal income taxes:
Current $ (0.7 ) $ (0.5 ) $ (15.7 )
Deferred (9.0 ) 4.0
1.4
Total Federal (9.7 ) 3.5
(14.3 )
State and local income taxes
Current 0.7
2.3
0.8
Deferred (0.7 ) 0.7
—
Total State and local —
3.0
0.8
Foreign income taxes:
Current 2.0
1.5
1.2
Deferred (0.5 ) 0.1
0.9
Total Foreign 1.5
1.6
2.1
Total $ (8.2 ) $ 8.1
$ (11.4 )

~~F-27~~

~~Table of Contents~~

A reconciliation of the total income tax provision (benefit) to the amount computed by applying the statutory federal income tax rate of ~~35%~~21% to the ~~loss~~income from continuing operations before income taxes for the years ended December 31, ~~2017,~~ 2023, December 25, ~~2016~~,2022 and December ~~27, 2015~~26, 2021 is as follows (in millions):


	Year Ended
	December 31, 2023		December 25, 2022		December 26, 2021
Income tax (benefit) at federal statutory rate	$	2.3	$	(6.9)	$	0.9
State taxes (benefit), net of federal tax benefit and valuation allowance	3.7		(0.3)		0.5
Difference in tax rates between U.S. and foreign	1.7		(0.2)		(0.5)
Increase (decrease) in valuation allowance	(2.0)		4.9		1.2
Nondeductible expense	0.5		0.5		0.8
Increase in reserve for uncertain tax positions	0.5		0.3		0.9

Other	0.1		0.2		0.1
Officer’s compensation 162(m) limitation	0.5		1.0		0.9



R&D tax credit	(0.9)		(0.9)		(0.9)
Stock-based compensation	2.5		2.8		—

Total	$	8.9	$	1.4	$	3.9

On August 16, 2022, the President signed into law the Inflation Reduction Act of 2022 which contained provisions effective January 1, 2023, including a 15% corporate minimum tax and a 1% excise tax on stock buybacks, both of which we expect to be immaterial to our financial results, financial position and cash flows.

F-27

2017 2016 2015
Income tax (benefit) at federal statutory rate $ (17.8 ) $ (18.3 ) $ (15.6 )
State taxes, net of federal tax benefit and valuation allowance 0.7
0.2
(0.2 )
Difference in tax rates between U.S. and foreign —
0.1
(0.7 )
Increase (decrease) in valuation allowance (45.6 ) 19.1
—
Nondeductible expense 1.1
0.7
0.8
Increase in reserve for uncertain tax positions 1.3
2.2
0.9
Changes to indefinite life items and separate state deferred taxes (2.2 ) 4.1
3.4
One-time transition tax on previously undistributed foreign earnings 6.2
—
—
Goodwill impairment 8.1
—
—
Impact related to the 2017 Tax Act 40.0
—
—
Total $ (8.2 ) $ 8.1
$ (11.4 )

The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities ~~as of December 31, 2017 and December 25, 2016~~ are as follows (in millions):


	December 31, 2023		December 25, 2022
Deferred tax assets:
Stock-based compensation	$	9.3	$	9.4
Payroll related accruals	8.6		6.7
Lease accruals	27.0		25.7
Net operating loss carryforwards	44.7		55.1
Tax credit carryforwards	12.2		11.3
Deferred expenses	12.6		14.1
Other	19.8		19.4
	134.2		141.7
Valuation allowance	(12.6)		(14.6)
Total deferred tax assets, net of valuation allowance	121.6		127.1
Deferred tax liabilities:
Unearned revenue	(2.9)		(3.3)
Operating lease right-of-use assets	(24.2)		(23.2)
Other intangibles	(22.2)		(23.1)
Property and equipment, principally due to differences in depreciation	(6.3)		(5.6)
Other	(2.0)		(1.6)
Total deferred tax liabilities	(57.6)		(56.8)
Net deferred tax asset	$	64.0	$	70.3

2017 2016
Deferred tax assets:
Allowance for doubtful accounts $ 0.2
$ 0.4
Sundry accruals 1.5
2.2
Vacation accrual 3.2
4.7
Stock-based compensation 3.1
5.2
Payroll related accruals 2.1
2.9
Lease accruals 2.5
4.5
Investments 1.3
2.0
Net operating loss carryforwards 95.7
124.8
Tax credit carryforwards 9.5
9.4
Deferred revenue 1.9
2.5
Reserves and other 6.1
11.9
127.1
170.5
Valuation allowance (87.5 ) (133.1 )
Total deferred tax assets, net of valuation allowance 39.6
37.4
Deferred tax liabilities:
Unearned revenue (38.8 ) (43.0 )
Other intangibles (5.4 ) (7.0 )
Property and equipment, principally due to differences in depreciation (0.7 ) (2.0 )
Other (1.7 ) (2.7 )
Total deferred tax liabilities (46.6 ) (54.7 )
Net deferred tax liability $ (7.0 ) $ (17.3 )

~~In assessing~~During the ~~Company’s ability~~fourth quarter of 2023, the Company evaluated all available evidence, both positive and negative, to ~~realize~~determine whether based on the weight of that evidence, a valuation allowance for deferred tax assets ~~management considers, on~~was needed. Evidence evaluated by the Company included but was not limited to, its three-year cumulative results, and its forecast of taxable income. As a ~~periodic basis, whether it is~~result, the Company determined that the majority of the Company’s U.S. deferred tax assets were more likely than not to be realized and that ~~some portion or all of the deferred tax assets will not be realized. As such, management has determined that it is appropriate to maintain~~ a ~~full~~ valuation allowance ~~against~~with respect to a majority of the Company’s deferred tax assets ~~with~~was not required. The remaining valuation allowance on the ~~exception of an amount equal to its~~Company’s U.S. deferred tax ~~liabilities, which can~~assets as of December 31, 2023 relates primarily to state net operating loss carryforwards, capital loss carryforwards and research & development tax credit carryforwards the Company estimates it may not be ~~expected~~able to reverse over a definite life and certain foreign and separate state deferred tax assets. Management will continue to evaluate the necessity to maintain a valuation allowance against the Company’s net deferred tax assets.utilize in future periods. During fiscal ~~2017,~~2023, the Company recorded a net decrease in its ~~federal~~ valuation allowance of ~~$47.8~~$2.0 million.

~~F-28~~

~~Table of Contents~~

At December 31, ~~2017,~~2023, the Company had federal tax loss carryforwards of ~~$390.7~~$169.6 million and various state tax loss carryforwards of ~~$348.7~~$207.8 million. The federal tax loss carryforwards will begin to expire in ~~2020~~2032 and state tax loss carryforwards begin to expire in 2024 in certain states.

At December 31, 2023, the Company had federal tax credit carryforwards of $14.2 million and various state tax credit carryforwards of $0.9 million. The federal tax credit carryforwards will begin to expire in ~~2018 in certain states.~~2024 and the state tax credit carryforwards do not have an expiration.

Federal and state income tax laws impose restrictions on the utilization of net operating losses (“NOLs”) 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 3~~-year~~3-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 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~~tax years 2010 anand 2011 the Company experienced a Section 382 “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~~Additionally, 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

F-28

Acquired NOLs. ~~As a result, the Company’s federal annual utilization of NOL carryforwards was limited to at least~~ ~~$27.0 million~~ ~~a year for the~~ ~~five~~ ~~years succeeding the March 2010 ownership change and at least $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 year ended December 31, ~~2017,~~2023, there was no impact of such Section 382 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. As discussed elsewhere, deferred tax assets relating to the NOLs and credit carryforwards are offset by a full valuation allowance. In addition, utilization of state tax loss carryforwards is dependent upon sufficient taxable income apportioned to the states.

~~The Company has not provided deferred U.S. income taxes or foreign withholding taxes of approximately~~ ~~$7.7 million~~ ~~on temporary differences relating to the outside basis in its investment in foreign subsidiaries, which are essentially permanent in duration.~~ As of December 31, 2017, all accumulated undistributed earnings of our foreign subsidiaries were subject to the one-time transition tax on foreign earnings required by the 2017 Tax Cuts and Jobs Act. It is the Company’s intention to permanently reinvest undistributed earnings of its foreign subsidiaries. As such, the Company has not provided deferred U.S. income taxes or foreign withholding taxes of approximately $6.4 million on temporary differences relating to the outside basis in its investment in foreign subsidiaries. As of December 31, ~~2017,~~2023, the Company has ~~$10.7~~$44.1 million of cash and cash equivalents available for distribution.

The Company is subject to taxation in the U.S., various state tax jurisdictions and various foreign tax jurisdictions. The Company’s tax years for ~~2000~~2003 and later are subject to examination by the U.S. and state tax authorities due to the existence of NOL carryforwards. Generally, the Company’s tax years for ~~2002~~2018 and later are subject to examination by various foreign tax authorities as well.

~~F-29~~

~~Table of Contents~~

The following table summarizes the activity related to the Company’s unrecognized tax benefits (in millions):


Balance as of December 27, 2020	$	25.4
Increases related to prior periods	0.1
Increases related to current year tax positions	0.5
Expiration of applicable statutes of limitations	(0.2)
Increases related to acquisitions	0.1


Balance as of December 26, 2021	25.9
Decreases related to prior periods	(0.7)
Increases related to current year tax positions	0.2
Expiration of applicable statutes of limitations	(0.4)



Balance as of December 25, 2022	25.0
Increases related to prior periods	0.2
Increases related to current year tax positions	0.2
Expiration of applicable statutes of limitations	(0.1)


Balance as of December 31, 2023	$	25.3

Balance as of December 28, 2014 $ 16.4
Increases related to prior periods (acquired entities) 0.4
Increases related to current year tax positions 0.9
Decreases related to disposition (0.5 )
Balance as of December 27, 2015 17.2
Increases related to prior periods (acquired entities) 1.4
Increases related to current year tax positions 0.2
Expiration of applicable statutes of limitations (0.2 )
Balance as of December 25, 2016 18.6
Increases related to prior periods 0.4
Increases related to current year tax positions 1.1
Expiration of applicable statutes of limitations (0.6 )
Decrease in federal tax rate (3.9 )
Balance as of December 31, 2017 $ 15.6

Included in the balance of unrecognized tax benefits at December 31, ~~2017~~,2023, are ~~$15.6~~$22.7 million of tax benefits that, if recognized, would ~~affect~~impact the effective tax rate. Included in this amount is ~~$11.0~~$11.3 million that would become a deferred tax asset if the tax benefit were recognized. As such, this benefit may be impacted by a corresponding valuation allowance depending upon the Company’s ~~consolidated financial position~~assessment of the realizability of the deferred tax asset at the time the benefits are recognized.

The Company recognizes interest and penalties related to unrecognized tax benefits in its provision for income taxes. For the years ended December 31, ~~2017,~~ 2023, December 25, ~~2016~~2022 and December ~~27, 2015,~~26, 2021, the Company recorded ~~$0.5~~$0.3 million, ~~$0.9~~$0.3 million, and ~~$0.2~~$0.6 million, respectively, in interest or ~~penalties.~~penalty expenses. These amounts are netted by a benefit for interest and penalties related to the reversal of prior positions ~~as noted above~~ of ~~$0.2~~$0.1 million, ~~$0.0~~$0.2 million, and $0.1 million for the years ended December 31, ~~2017,~~2023, December 25, ~~2016,~~2022, and December ~~27, 2015,~~26, 2021, respectively. As of December 31, ~~2017,~~2023, December 25, ~~2016,~~2022, and December ~~27, 2015,~~26, 2021, the Company had ~~recorded~~accrued total interest and penalties of ~~$2.2~~$5.3 million, ~~$1.9~~$5.1 million and ~~$1.0~~$5.0 million, respectively.

~~The Company believes that it is reasonably possible that as much as $0.4 million of the liabilities for uncertain tax positions will expire within~~ 12 ~~months of December 31, 2017 due to the expiration of various applicable statues of limitations.~~

Note 8.9. Discontinued Operations

On ~~August 21, 2015,~~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 the U.S. and U.K. operations of its Electronic Products Division to Ultra Electronics Holdings plc (“Ultra”), a public limited company formed under the laws of England and Wales and traded on the London Stock Exchange, and Ultra Electronics Defense Inc. (the “Buyer”), a Delaware corporation ultimately owned by Ultra, (the “Transaction”). Pursuant to the terms of that certain Stock Purchase Agreement, dated May 31, 2015, by and among the Company, Ultra and the Buyer (the “Purchase Agreement”), the Company sold to the Buyer all of the issued and outstanding capital stock of ~~its wholly owned subsidiary Herley Industries, Inc. (“Herley”) and certain~~PSS to Buyer for a purchase price of ~~Herley’s subsidiaries, including Herley-CTI, Inc., EW Simulation Technology, Ltd. and Stapor Research, Inc. (collectively, the “Herley Entities”), for $260.0~~$69 million in cash, ~~plus $5.0~~subject to a closing net working capital adjustment (the “Transaction”). The Company received approximately $68.7 million ~~for taxes incurred~~of aggregate net cash proceeds from the Transaction, after taking into account amounts that were paid by the Company pursuant to a negotiated

F-29

transaction services agreement between the Company and the Buyer, receipt of approximately $7.3 million in net working capital retained by the Company, and associated transaction fees and expenses and including the impact of the final settlement and determination of the closing net working capital adjustment which was settled with the Buyer in the fourth quarter of 2021. Included in the year ended December 26, 2021 is approximately $1.1 million of loss from discontinued operations related to the final working capital settlement. Included in the year ended December 25, 2022 is an approximate $0.9 million gain as a result of the release of an indemnification liability following the lapse of the statute of limitations associated with a potential tax liability that was recorded in 2019 as part of the ~~Transaction, less~~sale of PSS. Included in the year ended December 31, 2023 is an approximate $0.2 million gain as a ~~$2.0 million escrow to satisfy any purchase price adjustments, and~~result of the release of an ~~estimated working capital adjustment~~indemnification liability following the lapse of ~~$8.3 million. The Purchase Agreement also contains certain non-compete and indemnification provisions. Under~~ the Purchase Agreement, the Company entered into an agreement to indemnify the Buyer for any pre-acquisition tax liabilities. The Company also agreed to indemnify Ultra for pre-existing environmental conditions for a periodstatute of ~~five years from the closing date and~~limitations associated with a ~~maximum indemnification payment of $34.0 million. The Company does not believe payments will be required under the indemnification provision, and the assessment~~potential tax liability that was recorded in 2019 as part of the fair value is immaterial. Under the terms of the Purchase Agreement, a joint 338(h)(10) election has been made for income tax purposes, providing a “step up” in tax basis to Ultra. The Company incurred approximately $11.5 million in transaction-related costs. The gain on sale of ~~$80.8 million is subject to changes in the indemnification obligations.~~ PSS.

In accordance with ASC 360-10-45-9, Property, Plant, and Equipment ~~(Topic~~(Topic 360) and ASC 205-20-45-3 Presentation of Financial Statements (Topic 205), ~~the Herley Entities were classified as~~PSS and its subsidiaries have been reported in discontinued operations in the accompanying consolidated financial statements for all periods presented.

~~F-30~~

~~Table of Contents~~

Immediately prior to the closing of the Transaction, the outstanding shares of the capital stock of (i) General Microwave Corporation, a New York corporation, and its direct and indirect wholly owned subsidiaries General Microwave Israel Corporation, a Delaware corporation, General Microwave Israel (1987) Ltd., an Israeli company, and Herley GMI Eyal Ltd., an Israeli company, (ii) MSI Acquisition Corp., a Delaware corporation and its wholly owned subsidiary Micro Systems, Inc., a Florida corporation, and (iii) Herley-RSS, Inc., a Delaware corporation, were distributed as a dividend by Herley to the Company and continued their current operations as wholly owned subsidiaries of the Company.

In November 2015, the Company and Ultra settled the working capital adjustment at $8.1 million, and the net cash position at closing, resulting in a net payment to the Company of $2.7 million. This represents the payment from escrow to the Company of $2.0 million, as well as the payment from Ultra of $0.7 million, reflecting the difference in the estimated working capital and actual working capital and the net cash position at the close of the Transaction. In December 2015, the Company submitted to Ultra for reimbursement the maximum $5.0 million for taxes incurred as part of the Transaction, which was reimbursed in January 2016.

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


	Year ended December 31, 2023		Year ended December 25, 2022		Year ended December 26, 2021
Revenue	$	—	$	—	$	0.1
Cost of sales	—		—		—
Selling, general and administrative expenses	—		0.3		2.4


Loss from discontinued operations before income taxes	—		(0.3)		(2.3)
Gain on disposal of discontinued operations before income taxes	—		—		—
Total loss of discontinued operations before income taxes	—		(0.3)		(2.3)
Income tax benefit	(0.2)		(1.2)		(0.2)
Income (loss) from discontinued operations	$	0.2	$	0.9	$	(2.1)

Year ended December 31, 2017 Year ended December 25, 2016 Year ended December 27, 2015
Revenue $ —
$ —
$ 59.7
Cost of sales —
�� —
40.6
Selling, general and administrative expenses —
0.1
15.2
Interest expense, net —
—
9.1
Other net income (expense) items that are not major —
—
0.1
Loss from discontinued operations before income taxes —
(0.1 ) (5.3 )
Gain on disposal of discontinued operations before income taxes —
—
80.8
Total gain (loss) of discontinued operations before income taxes —
(0.1 ) 75.5
Income tax expense 0.1
—
22.5
Income (loss) from discontinued operations $ (0.1 ) $ (0.1 ) $ 53.0

~~The~~Revenue and operating results for the year ended December ~~27, 2015 are through~~26, 2021 reflect the ~~date~~final settlement of ~~disposal of August 21, 2015.~~

~~There was $4.2 million of depreciation and amortization expense included in selling, general and administrative expenses for~~ the ~~year ended December 27, 2015.~~

~~Interest expense is included based on an allocation consistent~~working capital dispute with the ~~redemption~~Buyer which resulted in expenses of ~~$175.0~~approximately $1.1 million, ~~of the Notes~~ and ~~the repayment of $41.0 million in outstanding borrowings~~related legal fees as well as performance on the ~~Credit Agreement that was repaid upon~~contracts and working capital retained by the ~~completion of the sale of the Herley Entities in accordance with the terms and conditions of the Indenture and the Credit Agreement. Refer to Note 4 for further discussion.~~Company.

Intra-period tax allocation rules require the Company to allocate its provision for income taxes between continuing operations and other categories of earnings, such as discontinued operations. In periods in which there is a year-to-date pre-tax loss from continuing operations and pre-tax income in other categories of earnings, such as discontinued operations, the Company must allocate the tax provision to the other categories of earnings. A related tax benefit is then recorded in continuing operations. Due to the intra-period allocation rules, the Company recorded income tax expense of $0.1 million and $22.5 million in discontinued operations for the years ended December 31, 2017, and December 27, 2015, respectively. There was no income tax recorded in discontinued operations for the year ended December 25, 2016.

~~F-31~~

~~Table of Contents~~

The following is a summary of the assets and liabilities of discontinued operations as of December 31, ~~2017~~2023 and December 25, ~~2016~~2022 (in millions):


	December 31, 2023		December 25, 2022














Other current liabilities	0.9		0.9
Current liabilities of discontinued operations	$	0.9	$	0.9
Other long-term liabilities of discontinued operations	$	1.1	$	1.4

December 31, 2017 December 25, 2016
Accrued compensation $ —
$ 0.6
Other current liabilities 1.1
1.0
Current liabilities of discontinued operations $ 1.1
$ 1.6
Other long-term liabilities of discontinued operations $ 3.8
$ 3.7

Note 9.10. Fair Value Measurement

ASC Topic 820, Fair Value Measurement, establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

As more fully described in Note 17, Derivative Financial Instruments, our forward exchange contracts used to manage foreign currency risks and an interest rate swap contract to hedge U.S. dollar-one month Term SOFR in order to mitigate the exposure to interest rate movements associated with the Company’s Term Loan A are recognized on the Consolidated Balance Sheets as either assets or liabilities and are measured at fair value.

F-30

Note ~~10.~~11. Stockholders’ Equity

(a) ~~Common Stock~~ Equity Incentive Plans

On November 23, 2016, the Company sold approximately 13.4 million shares of its common stock at a purchase price of $6.00 per share in an underwritten public offering. The Company received gross proceeds of approximately $80.5 million. After deducting underwriting fees and other offering expenses, the Company received approximately $76.2 million in net proceeds. The Company used $14.1 million of the net proceeds from this transaction to redeem approximately $14.5 million of its Notes.

On March 7, 2017 and September 12, 2017, the Company sold approximately 11.9 million and 16.1 million, respectively, shares of common stock at a purchase price of $7.25 and $12.25, respectively, per share in underwritten public offerings. The Company received gross proceeds of approximately $283.5 million. After deducting underwriting fees and other offering expenses, the Company received approximately $269.1 million in net proceeds. The Company used the net proceeds to repurchase and extinguish $135.5 million of its outstanding 7% Notes.

The remainder of the funds will be used for general corporate purposes, including funding expected growth and strategic investments in the Company’s high performance unmanned aerial vehicle business area and other new programs under contract.

~~(b)Stock Option Plans and Restricted Stock Unit Plans~~

In ~~March 2014~~May 2023, the Company’s board of directors (the “Board”) and stockholders approved the 2023 Equity Incentive Plan (the “2023 Equity Plan”). The 2023 Equity Plan is the successor the Amended and Restated Kratos Defense & Security Systems, Inc. 2014 Equity Incentive Plan (the “2014 Plan”)~~. The 2014 Plan is the successor to~~, the Kratos Defense & Security Solutions, Inc. 2011 Equity Incentive Plan (the “2011 Plan”), and the Kratos Defense & Security Solutions, Inc. Amended and Restated 2005 Equity Incentive Plan the Kratos Defense & Security Solutions, Inc. 2000 Nonstatutory Stock Option Plan, the Kratos Defense & Security Solutions, Inc. 1999 Equity Incentive Plan, the Amended and Restated Integral Systems, Inc. 2008 Stock Incentive Plan, the Amended and Restated Herley Industries, Inc. 2010 Stock Plan, the Herley Industries, Inc. 2003 Stock Option Plan, the Henry Bros. Electronics, Inc. 2007 Stock Option Plan, the Henry Bros. Electronics, Inc. 2006 Stock Option Plan, the Amended and Restated 2005 Digital Fusion, Inc. Equity Incentive Plan, the 2000 Digital Fusion, Inc. Stock Option Plan, the 1999 Digital Fusion, Inc. Stock Option Plan, and the 1998 Digital Fusion, Inc. Stock Option Plan(the “2005 Plan”), (collectively, the “Prior Plans”).

The ~~2014~~2023 Equity Plan became effective May ~~14, 2014~~24, 2023 and no additional stock awards ~~will be~~were granted under the Prior Plans as of ~~April 1, 2014.~~May 24, 2023. All outstanding stock awards granted subject to the terms of the Prior Plans will continue to be subject to the terms and conditions as set forth in the agreements evidencing such stock awards and the terms of the respective Prior Plans. Any shares subject to outstanding stock awards granted under the Prior Plans or granted outside of a Prior Plan that, at any time after March 27, 2014, (i) expire or terminate for any reason prior to exercise or settlement; (ii) are forfeited, canceled or otherwise returned to the Company because of the failure to meet a contingency or condition required to vest such shares; or

~~F-32~~

~~Table of Contents~~

(iii) are reacquired, withheld (or not issued) to satisfy a tax withholding obligation in connection with an award or to satisfy the purchase price or exercise price of a stock award (collectively, the “Returning Shares”) will immediately be added to the share reserve of the 2014 Plan and become available for issuance pursuant to stock awards granted under the 2014 Plan.

As of ~~March 27, 2014,~~May 23, 2023, there were ~~2,306,256~~2,280,707 shares remaining available for issuance under the Prior Plans. The ~~total number of awards outstanding under all of the Prior Plans and outside of any Prior~~2023 Equity Plan ~~was 5,511,322 as of March 27, 2014. The 2014 Plan decreased~~increased the number of shares remaining available for issuance under its equity compensation plans ~~from 2,306,256~~by 2,466,983 shares to 1,550,000, although, per the 2014 Plan, up to 5,511,322 shares subject to outstanding awards under the Prior Plans and non-plan grants could potentially become Returning Shares available for issuance under the 2014 Plan. In May 2017, the Company’s shareholders approved an amendment to the 2014 Plan to increase the aggregate number of shares that may be issued under the plan by 2,500,0004,747,690 shares.

The Board may grant equity-based awards to selected employees, directors and consultants of the Company pursuant to its ~~2014~~2023 Equity Plan. As of December 31, ~~2017~~,2023, there were ~~3,954,912~~4,605,190 shares reserved for issuance for future grant under the ~~2014~~2023 Equity Plan. The Board may amend or terminate the ~~2014~~2023 Equity Plan at any time. Certain amendments, including an increase in the share reserve, require stockholder approval. Generally, options and restricted stock units outstanding vest over periods not exceeding ten ~~years~~.years. When the Company grants stock options, they are granted with a per share exercise price not less than the fair market value of the Company’s common stock on the date of grant, and generally would be exercisable for up to ten years from the grant date.

The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model or a trinomial lattice options pricing model with the weighted average assumptions (annualized percentages) ~~included~~. There were no stock options granted or related expenses for stock options in ~~the following table. Awards with graded vesting are recognized using the straight-line method with the following assumptions:~~2023, 2022 or 2021.

2017 2016 2015
Stock Options
Expected life 10.0 10.0 10.0
Risk-free interest rate(1) 2.2% - 2.5% 1.8% - 2.4% 2.1% - 2.3%
Volatility(2) 53.8% - 55.0% 55.2% - 55.8% 54.4% - 54.7%
Forfeiture rate(3) 5.0% 5.0% 5.0%
Dividend yield(4) —% —% —%

~~(1) The risk-free interest rate is based on U.S. Treasury yields in effect at the time of grant with a term equal to the expected term of the options.~~

~~(2) In 2017,~~ ~~2016, and 2015, the Company estimated implied volatility based upon trailing volatility.~~

~~(3) Forfeitures are estimated at the time of grant based upon historical information. Forfeitures will be revised, if necessary, in subsequent periods if actual forfeitures differ from estimates.~~

~~(4) The Company has no history or expectation of paying dividends on its common stock.~~

A summary of the status of the Company’s stock option plan as of December 31, ~~2017,~~2023, and changes in options outstanding under the plan for the year ended December 31, ~~2017,~~2023, is as follows:


	Number of Shares Under Option	Weighted-Average Exercise Price per Share		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
	(000’s)				(000’s)
Options outstanding at December 25, 2022	18	$	4.98	0.0	$	79.9
Granted	—	$	—
Exercised	(18)	$	4.98
Forfeited or expired	—	$	—
Options outstanding at December 31, 2023	—	$	—	0.0	$	—
Options exercisable at December 31, 2023	—	$	—	0.0	$	—

Number of
Shares Under Option
Weighted-Average Exercise Price per Share
Weighted-
Average
Remaining
Contractual
Term
(in years)
Aggregate Intrinsic Value
(000’s) (000’s)
Options outstanding at December 25, 2016 963
$ 8.05
5.2 $ 1,924.1
Granted 7
$ 9.78

Exercised (49 ) $ 8.85

Forfeited or expired (22 ) $ 16.40

Options outstanding at December 31, 2017 899
$ 7.82
4.4 4,224.8
Options exercisable at December 31, 2017 322
$ 12.91
3.4 $ 965.6

~~F-33~~

~~Table of Contents~~

~~As of~~ ~~December 31, 2017~~, there was $0.1 million of total unrecognized stock-based compensation expense related to nonvested options, which is expected to be recognized over a remaining weighted-average vesting period of .5 years. Upon exercise of an option, the Company issues new shares of common stock.

During the years ended December 31, ~~2017,~~2023, December 25, ~~2016,~~2022, and December ~~27, 2015~~26, 2021, the following values relate to the ~~grants and~~ exercises under the Company’s option plans:


	2023		2022		2021
Total intrinsic value of options exercised (in thousands)	$	80.8	$	163.0	$	—

F-31

2017 2016 2015
Weighted average grant date fair value of options granted $ 6.39
$ 3.36
$ 3.31
Total intrinsic value of options exercised (in thousands) $ 67.1
$ —
$ —

The following table summarizes the Company’s Restricted Stock Unit activity:


	Restricted Stock Units (000’s)	Weighted-Average Grant Date Fair Value
Nonvested balance at December 25, 2022	4,659	$	12.88
Granted	1,427	$	11.39
Vested	(871)	$	11.34
Forfeited or expired	(35)	$	16.12
Vested but not released	(245)	$	12.55
Nonvested balance at December 31, 2023	4,935	$	—

Restricted
Stock Units
(000’s) Weighted-Average Grant Date Fair Value
Nonvested balance at December 25, 2016 2,246
$ 6.81
Grants 1,180
$ 7.45
Vested (841 ) $ 7.48
Forfeitures (20 ) $ 7.28
Vested but not released (307 ) $ 7.24
Nonvested balance at December 31, 2017 2,258
$ 6.83

As of December 31, ~~2017~~,2023, there was ~~$7.2~~$29.9 million of total unrecognized stock-based compensation expense related to nonvested restricted stock units which is expected to be recognized over a remaining weighted-average vesting period of ~~3.1~~1.9 years. The fair value of restricted stock unit awards that vested in ~~2017,~~ ~~2016~~,2023, 2022, and ~~2015~~2021 was ~~$6.3~~$9.8 million, ~~$4.7~~$30.5 million,, and ~~$3.6~~$24.7 million, respectively.


~~(c)~~	~~Amended and Restated Employee Stock Purchase Plan~~

(b) Employee Stock Purchase Plans

In ~~August 1999,~~May 2023, the Board approved the 2023 Employee Stock Purchase Plan (as amended from time to time, the “2023 Purchase Plan”). The 2023 Purchase Plan is the successor to the 1999 Employee Stock Purchase Plan (as amended from time to time, the ~~“Purchase~~“1999 Purchase Plan”). AThe total of 5,200,000 shares of common stock had been previously approved for reservation of the Company’s common stock for purchase by employees under the Purchase Plan. In May 2017, the Company’s shareholders approved an amendment to the Purchase Plan to increase the maximum number of shares of our common stock that ~~may be issued~~were authorized for issuance under the 2023 ESPP is equal to the sum of (1) 3,500,000 shares, plus (2) 766,586 shares, which is the number of shares that remained available for issuance under the 1999 Purchase Plan ~~by 3,000,000 shares.~~ as of its termination on June 30, 2023 (after giving effect to the purchases pursuant to the offering period ending on such date under the Existing ESPP).The 2023 Purchase Plan qualifies as an employee stock purchase plan within the meaning of Section 423 of the Internal Revenue Service Code. Unless otherwise determined by the Compensation Committee of the Board, all U.S. employees are eligible to participate in the 2023 Purchase Plan, so long as they are employed by the Company (or a subsidiary designated by the Board) for at least 20 hours per week and were customarily employed by the Company (or a subsidiary designated by the Board) for at least 5 months per calendar year. The 2023 Plan also allows the Board to extend the employee stock purchase program to eligible employees outside of the U.S. In 2023, Kratos employees in Canada and the United Kingdom have been allowed to participate in the 2023 Purchase Plan.

Employees who actively participate in the 2023 Purchase Plan are eligible to have up to 15% of their earnings for each purchase period withheld pursuant to the 2023 Purchase Plan. The amount that is withheld is used at various purchase dates within the offering period to purchase shares of common stock. The price paid for common stock at each such purchase date is equal to the lower of 85% of the fair market value of the common stock at the commencement date of that offering period or 85% of the fair market value of the common stock on the relevant purchase date. Employees are also able to end their participation in the offering at any time during the offering period, and participation ends automatically upon termination of employment. From the 1999 Purchase Plan’s inception through December 31, ~~2017,~~2023, the cumulative number of shares of common stock that have been issued under the 1999 Purchase Plan and the 2023 Purchase Plan is ~~5.0~~7.7 million and approximately ~~3.2~~4.0 million shares are available for future ~~issuance.~~issuance under the 2023 Purchase Plan. During ~~fiscal 2017,~~2023, approximately ~~870,000~~1,036,000 shares were issued under the ~~plan~~2023 and 1999 Purchase Plans at an average price of ~~$5.65.~~$9.70 per share.

~~F-34~~

F-32

~~Table of Contents~~

The fair value of ~~Kratos’~~shares issued under the 1999 Purchase Plan ~~shares~~and the 2023 Purchase Plan for ~~2017~~2023 was estimated using the Black-Scholes option pricing model. The assumptions and resulting fair values of options granted for ~~2017,~~ ~~2016~~2023, 2022 and ~~2015~~2021 were as follows:


	Offering Periods January 1 to December 31 2023	Offering Periods January 1 to December 31 2022	Offering Periods January 1 to December 31 2021
Expected term (in years)(1)	0.5	0.5	0.5
Risk-free interest rate(2)	4.76% - 5.47%	0.19% - 2.51%	0.06% - 0.09%
Expected volatility(3)	41.65% - 45.77%	40.52% - 60.79%	41.40% - 45.93%
Expected dividend yield(4)	—%	—%	—%
Weighted average grant-date fair value per share	$3.30	$4.80	$7.60

Offering
Periods
January 1 to
December 31
2017

Offering
Periods
January 1 to
December 31,
2016

Offering
Periods
January 1 to
December 31,
2015
Expected term (in years)(1) 0.5 0.5 0.5
Risk-free interest rate(2) .62% - 1.14% 0.36% - 0.49% 0.11% - 0.12%
Expected volatility(3) 44.38% - 53.70% 53.00% - 55.55% 39.63% - 40.91%
Expected dividend yield(4) —% —% —%
Weighted average grant-date fair value per share $2.51 $1.23 $1.43

(1) The expected term is equivalent to the offering period.


~~(1)~~	~~The expected term is equivalent to the offering period.~~


~~(2)~~	~~The risk-free interest rate is based on U.S. Treasury yields in effect at the time of grant with a term equal to the expected term.~~

(2) The risk-free interest rate is based on U.S. Treasury yields in effect at the time of grant with a term equal to the expected term.

(3) The Company estimated implied volatility based upon trailing volatility.

(4) The Company has no history or expectation of paying dividends on its common stock.

As of December 31, ~~2017~~,2023, there was no material unrecognized compensation expense related to the 2023 Purchase Plan or the 1999 Purchase Plan.

Note ~~11.~~12. Retirement Plans

The Company provides eligible employees the opportunity to participate in defined-contribution savings plans (commonly known as 401(k) plans), which permit contributions on a before-tax basis. Generally, salaried employees and certain hourly employees are eligible to participate in the plans. Under most plans, the employee may contribute to various investment alternatives. In certain plans, the Company matches a portion of the employees’ contributions. The Company’s matching contributions to these defined-contribution savings plans totaled ~~$4.7~~$10.7 million in ~~2017, $4.3~~2023, $8.1 million in ~~2016~~,2022, and ~~$4.9~~$6.4 million in ~~2015.~~2021.

Note ~~12.~~13. Significant Customers

Revenue from the U.S. Government (which includes ~~Foreign Military Sales)~~foreign military sales) includes revenue 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. The KGS and US segments have substantial revenue from the U.S. Government. Sales to the U.S. Government amounted to approximately ~~$452.8~~$712.7 million, ~~$398.3~~$623.7 million, and ~~$402.9~~$571.1 million or ~~60%~~69%, ~~60%~~69%, and ~~61%~~70%, of total revenue for the years ended December 31, ~~2017,~~ 2023, December 25, ~~2016~~,2022, and December ~~27, 2015,~~26, 2021, respectively.

Note ~~13.~~14. Segment Information

The Company operates in ~~three~~two reportable segments. The KGS reportable segment is comprised of an aggregation of KGS operating segments, including ~~defense~~DRSS, ME, ST&C, MS, and ~~rocket support services, microwave electronic products and satellite communications, technical and training solutions, and modular systems operating segments.~~KTT. The US reportable segment consists of the Company’s unmanned aerial, unmanned ground, unmanned seaborne and command, control and communications system ~~business.~~products. The KGS and US segments provide products, solutions and services for mission critical ~~national security~~National Security programs. KGS and US customers primarily include ~~national security~~National Security related agencies, the DoD, intelligence agencies and classified agencies, and to a lesser degree, international government agencies and domestic and international commercial customers. The PSS segment designs, engineers, deploys, operates, integrates into command and control infrastructure, maintains and operates security and surveillance solutions for homeland security, public safety, critical infrastructure, government and commercial customers. PSS customers include those in the critical infrastructure, power generation, power transport, nuclear energy, financial, IT, healthcare, education, transportation and petro-chemical industries, as well as certain government and military 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 (loss) from continuing operations of the reportable business segments is reconciled to the corresponding consolidated amount. ~~The reconciling item “unallocated~~

~~F-35~~

~~Table of Contents~~

~~corporate expense, net”~~“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.

As discussed in “Discontinued Operations” in Note 8 of these notes to consolidated financial statements, the Company began reporting the Herley Entities as discontinued operations effective in the second quarter of fiscal 2015. Prior to the decision to sell the Herley Entities, the Company reported their financial results in the KGS reportable segment. Accordingly, segment results have been recast for 2015 to reflect the disposition of the Herley Entities as discontinued operations.

As certain overhead type costs previously allocated to the Herley Entities were not allocable to discontinued operations, prior period corporate costs have been reallocated amongst the continuing reportable segments.

~~F-36~~F-33

~~Table of Contents~~

Revenues, operating income (loss) and assets disclosed below provided by the Company’s reportable segments for the years ended December 31, ~~2017,~~ 2023, December 25, ~~2016~~,2022, and December ~~27, 2015,~~26, 2021, are as follows (in millions):


	2023									2023	2022	2021
Revenues:
Kratos Government Solutions
Kratos Government Solutions
Kratos Government Solutions
Service revenues
Service revenues
Service revenues
Product sales
Total Kratos Government Solutions

	2017			2016			2015
Revenues:
Kratos Government Solutions

Unmanned Systems

Unmanned Systems

Unmanned Systems
Service revenues	$	196.5		$	221.0		$	209.5
Product sales	283.8			244.8			236.6
Total Kratos Government Solutions	480.3			465.8			446.1
Public Safety & Security
Service revenues	149.9			127.1			144.7
Product sales	—			—			—
Total Public Safety & Security	149.9			127.1			144.7
Unmanned Systems
Service revenues	—			—			—
Product sales	121.7			75.8			66.3
Total Unmanned Systems	121.7			75.8			66.3
Total revenues	$	751.9		$	668.7		$	657.1
Depreciation and amortization:
Kratos Government Solutions	$	14.3		$	14.9		$	18.2
Public Safety & Security	0.4			0.5			0.6
Kratos Government Solutions
Kratos Government Solutions

Unmanned Systems
Unmanned Systems
Unmanned Systems	7.8			7.4			6.7
Total depreciation and amortization	$	22.5		$	22.8		$	25.5
Operating income (loss) from continuing operations:
Operating income (loss):
Kratos Government Solutions	$	1.7		$	17.3		$	16.1
Public Safety & Security	3.8			(3.0		)	2.6
Kratos Government Solutions
Kratos Government Solutions

Unmanned Systems
Unmanned Systems
Unmanned Systems	(3.0		)	(27.7		)	(16.2		)
Corporate activities	(8.3		)	(5.2		)	(7.0		)
Total operating loss from continuing operations	$	(5.8	)	$	(18.6	)	$	(4.5	)
Total operating income (loss)



	Page
PART I
Item 1.		Business	3
Item 1A.		Risk Factors	1220
Item 1B.		Unresolved Staff Comments	3146
Item 2.1 C .		~~Properties~~Cybersecurity	3146
Item 3.2.		~~Legal Proceedings~~Properties	3247
Item 3.		Legal Proceedings	48
Item 4.		Mine Safety Disclosures	3248
PART II
Item 5.		Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	3249
Item 6.		~~Selected Financial Data~~Reserved	3550
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	3651
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk	5762
Item 8.		Financial Statements and Supplementary Data	5763
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	5763
Item 9A.		Controls and Procedures	5763
Item 9B.		Other Information	5865
Item 9C.		Disclosure Regarding Foreign Jurisdiction that Prevent Inspectio ns	65
PART III
Item 10.		Directors, Executive Officers and Corporate Governance	5866
Item 11.		Executive Compensation	5866
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	5866
Item 13.		Certain Relationships and Related Transactions, and Director Independence	5966
Item 14.		Principal ~~Accounting~~Accountant Fees and Services	5966
PART IV
Item 15.		~~Exhibits,~~Exhibit and Financial Statement Schedules	5967
Item 16.		Form 10-K Summary	6370



4.3	Registration Rights Agreement, dated as of May 14, 2014, among Kratos Defense & Security Solutions, Inc., as Issuer, and SunTrust Robinson Humphrey, Inc., as Representative of the Initial Purchasers.	8-K	05/15/2014 (001-34460)	10.1
4.4	Indenture, dated as of November 20, 2017, among Kratos Defense & Security Solutions, Inc., as Issuer, the Guarantors party thereto, and Wilmington Trust, National Association, as Trustee and Collateral Agent.	8-K	11/21/2017 (001-34460)	4.1
4.5	First Supplemental Indenture, dated as of December 21, 2017, among Kratos Defense & Security Solutions, Inc., as Issuer, the Guarantor as party thereto, and Wilmington Trust, National Association, as Trustee.				*
10.1#	Form of Indemnification Agreement by and between Kratos Defense & Security Solutions, Inc. and its directors and executive officers.	10-Q	08/04/2011 (001-34460)	10.8
10.2#	Amended and Restated 1999 Employee Stock Purchase Plan.	S-8	07/31/2017 (001-34460)	99.1
10.3#	2000 Nonstatutory Stock Option Plan.	10-Q	11/14/2000 (000-27231)	10.2
10.4#	Form of Stock Option Agreement and Form of Stock Option Grant Notice used in connection with the 2000 Nonstatutory Stock Option Plan.	10-Q	11/14/2000 (000-27231)	10.3
10.5#	2005 Equity Incentive Plan.	S-8	08/01/2005 (333-127060)	99.2
10.6#	Form of Stock Option Agreement pursuant to the 2005 Equity Incentive Plan.	S-8	08/01/2005 (333-127060)	99.1
10.7#	Form of Restricted Stock Unit Agreement and Form of Notice of Grant of Restricted Stock Units under the 2005 Equity Incentive Plan.	8-K	01/17/2007 (000-27231)	99.3
10.8#	Herley Industries, Inc. 1997 Stock Option Plan.	S-8	04/08/2011 (333-173383)	4.11
10.9#	Herley Industries, Inc. 2000 Stock Option Plan.	S-8	04/08/2011 (333-173383)	4.13
10.10#	Herley Industries, Inc. 2003 Stock Option Plan.	S-8	04/08/2011 (333-173383)	4.14
10.11#	Herley Industries, Inc. Amended and Restated 2006 New Employee Stock Option Plan.	S-8	04/08/2011 (333-173383)	4.15
10.12#	2011 Equity Incentive Plan.	DEF 14A	04/15/2011 (001-34460)	n/a
10.13#	Form of Notice of Grant of Restricted Stock Units and Restricted Stock Unit Award Agreement pursuant to the 2011 Equity Incentive Plan.	8-K	11/18/2011 (001-34460)	10.2
10.14#	2014 Equity Incentive Plan.	S-8	07/31/2017 (001-34460)	99.2
10.15#	Form of Restricted Stock Unit Grant & Notice and Form of Restricted Stock Unit Award Agreement pursuant to the 2014 Equity Incentive Plan.	10-Q	11/07/2014 (001-34460)	10.1
10.16#	Second Amended and Restated Executive Employment Agreement, dated as of August 4, 2011, by and between Kratos Defense & Security Solutions, Inc. and Eric DeMarco.	10-Q	08/04/2011 (001-34460)	10.3



10.17#	Second Amended and Restated Severance and Change of Control Agreement, dated as of August 4, 2011, by and between Kratos Defense & Security Solutions, Inc. and Deanna Lund.	10-Q	08/04/2011 (001-34460)	10.4
10.18	Sublease Agreement, dated as of December 17, 2009, by and between Amylin Pharmaceuticals, Inc., as Sublessor, and Kratos Defense & Security Solutions, Inc., as Sublessee.	10-K	03/11/2010 (001-34460)	10.26
10.19#	Herley Industries, Inc. Amended and Restated 2010 Stock Plan, and the related Form of Notice of Grant of Restricted Stock Units and Restricted Stock Unit Award Agreement.	S-8	03/08/2012 (333-179977)	4.10
10.20#	Amended and Restated Integral Systems, Inc. 2008 Stock Incentive Plan, and the related Form of Notice of Grant of Restricted Stock Units and Restricted Stock Units and Restricted Stock Unit Award Agreement.	S-8	03/08/2012 (333-179977)	4.11
10.21	Standstill Agreement, dated May 14, 2012, between Kratos Defense & Security Solutions, Inc., Bandel Carano, Oak Investment Partners IX, L.P., Oak IX Affiliates Fund, L.P., Oak IX Affiliates Fund-A, L.P., Oak X Affiliates Fund, L.P., Oak Investment Partners X, L.P., and Oak Investment Partners XIII, L.P.	8-K	05/15/2012 (001-34460)	10.1
10.22#	Form of Notice of Grant of Restricted Stock Units and Restricted Stock Unit Award Agreement, entered into between Kratos Defense & Security Solutions, Inc. and certain employees of Composite Engineering, Inc.	S-8	07/27/2012 (333-182910)	4.12
10.23#	Employment Agreement, effective January 1, 2015, by and between Kratos Defense & Security Solutions, Inc. and Richard Poirier.	8-K	03/12/2015 (001-34460)	10.1
10.24#	Bonus Agreement, dated June 1, 2015, by and between Kratos Defense & Security Solutions, Inc. and Richard Poirier.	8-K	06/02/2015 (001-34460)	10.1
10.25#	Employment Agreement, effective August 5, 2016, by and between Kratos Defense & Security Solutions, Inc. and Gerald Beaman.	8-K	08/09/2016 (001-34460)	10.1
10.26#	Employment Agreement, effective January 1, 2017, by and between Kratos Defense & Security Solutions, Inc. and Phil Carrai.	8-K	12/08/2016 (001-34460)	10.1
10.27	Credit and Security Agreement, dated as of May 14, 2014, among Kratos Defense & Security Solutions, Inc., as Borrower, the Lenders named therein, SunTrust Bank, as Agent, PNC Bank, National Association, as Joint Lead Arranger and Documentation Agent, and SunTrust Robinson Humphrey, Inc., as Joint Lead Arranger and Sole Book Runner.	8-K	05/15/2014 (001-34460)	10.2
10.28	Third Amendment to Credit and Security Agreement, dated May 31, 2015, among Kratos Defense & Security Solutions, Inc., as Borrower, each of the Credit Parties and Required Lenders party thereto and SunTrust Bank as Agent.	10-Q	08/06/2015 (001-34460)	10.1



10.29	Fourth Amendment to Credit and Security Agreement, dated August 20, 2015, among Kratos Defense & Security Solutions, Inc., as Borrower, each of the Credit Parties and Required Lenders party thereto and SunTrust Bank as Agent.	8-K	08/24/2015 (001-34460)	10.1
10.30	Amended and Restated Credit and Security Agreement, dated as of November 20, 2017, among Kratos Defense & Security Solutions, Inc., as Borrower, the lenders named therein, SunTrust Bank, as Agent, and SunTrust Robinson Humphrey, Inc., as Lead Arranger and Sole Book Runner.	8-K	11/21/2017 (001-34460)	10.1
10.31	Office Lease, dated as of May 1, 2017, by and between Kratos Defense & Security Solutions, Inc. and TPP 212 Scripps, LLC.	10-Q	5/04/2017 (001-34460)	10.2
10.32	Lease Agreement, dated as of May 31,2017, by and between STORE Capital Acquisitions, LLC and Real Time Logic, Inc.	10-Q	07/27/2017 (001-34460)	10.2
10.33	Lease Agreement, dated as of May 31, 2017, by and between STORE Capital Acquisitions, LLC and Real Time Logic, Inc.	10-Q	07/27/2017 (001-34460)	10.3
10.34	Fifth Amendment to Credit and Security Agreement, dated July 22, 2016, among Kratos Defense & Security Solutions, Inc., as Borrower, each of the Credit Parties and Required Lenders party thereto and SunTrust Bank as Agent.				*
21.1	List of Subsidiaries.				*
23.1	Consent of Independent Registered Public Accounting Firm.				*
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002.				*
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002.				*
32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Eric M. DeMarco.				*
32.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Deanna Lund.				*
101	Financial statements from the Annual Report on Form 10-K of Kratos Defense & Security Solutions, Inc. for the year ended December 31, 2017, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations and Comprehensive Loss, (iii) the Consolidated Statements of Cash Flows, (iv) the Notes to the Consolidated Financial Statements.				*



Kratos Defense & Security Solutions, Inc.

	By:	/s/ Eric M. DeMarco
	~~By:~~	Eric M. DeMarco President and Chief Executive Officer (Principal Executive Officer)


1.	~~spending limits created by the BCA will be increased by approximately $300 billion over the next two years;~~


4.	~~Congress will suspend the debt limit through March 2019, putting the next debt limit vote past the 2018 midterm elections.~~



	High		Low
Year Ended December 31, 2017:
Fourth Quarter	$	13.75	$	9.71
Third Quarter	$	13.93	$	10.64
Second Quarter	$	11.63	$	7.37
First Quarter	$	9.19	$	6.83
Year Ended December 25, 2016:
Fourth Quarter	$	8.22	$	5.23
Third Quarter	$	7.58	$	3.75
Second Quarter	$	5.58	$	3.87
First Quarter	$	4.70	$	2.80



Amounts in millions except per share amounts
	December 31, 2017			December 25, 2016			December 27, 2015			December 28, 2014			December 29, 2013
Consolidated Statements of Operations Data:
Revenues	$	751.9		$	668.7		$	657.1		$	763.0		$	844.1
Gross profit	197.3			153.6			161.8			179.4			204.5
Operating income (loss)	(5.8		)	(18.6		)	(4.5		)	5.3			18.2
Provision (benefit) for income taxes	(8.2		)	8.1			(11.4		)	3.9			1.1
Loss from continuing operations	(42.6		)	(60.4		)	(33.2		)	(75.7		)	(29.5		)
Income (loss) from discontinued operations	(0.1		)	(0.1		)	53.0			(2.3		)	(7.7		)
Net income (loss)	$	(42.7	)	$	(60.5	)	$	19.8		$	(78.0	)	$	(37.2	)
Loss from continuing operations per common share:
Basic	$	(0.48	)	$	(0.99	)	$	(0.56	)	$	(1.31	)	$	(0.52	)
Diluted	$	(0.48	)	$	(0.99	)	$	(0.56	)	$	(1.31	)	$	(0.52	)
Income (loss) from discontinued operations per common share:
Basic	$	—		$	—		$	0.90		$	(0.04	)	$	(0.13	)
Diluted	$	—		$	—		$	0.90		$	(0.04	)	$	(0.13	)
Net income (loss) per common share:
Basic	$	(0.48	)	$	(0.99	)	$	0.34		$	(1.35	)	$	(0.65	)
Diluted	$	(0.48	)	$	(0.99	)	$	0.34		$	(1.35	)	$	(0.65	)
Weighted average shares:
Basic	89.5			61.3			58.7			57.6			56.8
Diluted	89.5			61.3			58.7			57.6			56.8

	December 31, 2017			December 25, 2016			December 27, 2015			December 28, 2014			December 29, 2013
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	129.6		$	69.1		$	28.5		$	33.5		$	54.2
Working capital	282.4			176.6			148.0			147.1			174.9
Total assets	1,024.0			948.6			903.3			1,131.2			1,201.6
Short-term debt	0.8			1.0			1.0			1.1			1.3
Long-term debt	293.5			431.0			444.1			655.4			613.9
Long-term debt premium	—			—			—			—			14.5
Total stockholders’ equity	$	511.5		$	276.4		$	254.2		$	224.3		$	295.8



	Year Ended
	December 31, 2017			December 25, 2016			December 27, 2015
Net cash used in operating activities from continuing operations	$	(27.0	)	$	(12.4	)	$	(29.7	)


	Total		Due within 1 Year
Total debt	$	227.5	$	7.5
Interest payment	44.8		12.4
Purchase orders	278.9		172.8
Operating leases	55.7		14.1
Finance leases	82.7		4.6
Total contractual cash obligations and commitments	$	689.6	$	211.4



	Payments due/forecast by Period
	Total		2018		2019 - 2020		2021 - 2022		2023 and After
Debt, net of interest(1)	$	300.8	$	0.8	$	—	$	—	$	300.0
Estimated interest on debt(2)	156.0		19.5		39.0		39.0		58.5
Purchase orders(3)	138.2		92.6		45.6		—		—
Operating leases(4)	127.8		18.0		33.8		20.7		55.3
Unrecognized tax benefits, including interest and penalties(5)	—		—		—		—		—
Total commitments and recorded liabilities	$	722.8	$	130.9	$	118.4	$	59.7	$	413.8


~~(1)~~	The 6.5% Notes in the aggregate outstanding principal amount of $300.0 million are due November 30, 2025. See Note 4 in the Notes to Consolidated Financial Statements contained within this Annual Report for further details.


~~(2)~~	Includes interest payments based on current interest rates for variable rate debt and the 6.5% Notes. See Note 4 in the Notes to Consolidated Financial Statements contained within in this Annual Report for further details.


~~(3)~~	~~Purchase orders include commitments in which a written purchase order has been issued to a vendor, but the goods have not been received or services have not been performed.~~


~~(4)~~	We have entered into or acquired various non-cancelable operating lease agreements that expire on various dates through 2033. The amounts include $3.3 million in excess facility costs and exclude expected sublease income. See Note 5 in the Notes to Consolidated Financial Statements contained within this Annual Report for further details.


~~(5)~~	~~As of~~ ~~December 31, 2017~~, we have a $6.8 million noncurrent liability for uncertain tax positions and a $3.8 million guarantor liability, all of which may result in cash payments. The future payments related to uncertain tax positions have not been presented in the table above due to the uncertainty of the amounts and timing of cash settlements with the taxing authorities.


~~(1)~~	~~whether we act as a principal in the transaction;~~


~~(3)~~	~~whether we assume risks and rewards of ownership, such as risk of loss for collection, delivery or returns;~~


~~(4)~~	~~whether we serve as an agent or broker, with compensation on a commission or fee basis; and~~


~~(5)~~	~~whether we assume the credit risk for the amount billed to the customer subsequent to delivery.~~



Report of Independent Registered Public Accounting Firm(PCAOB ID No. 34)						F-~~F-2~~2
Consolidated Balance Sheets as of December 31 ~~2017~~, 202 3 and December 25, ~~2016~~2022						F-~~F-4~~4
Consolidated Statements of Operations for the Years Ended December 31 , 202 3 , December 2 5 , 202 2 , and December 2 6 , 202 1						F-5
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31 ~~2017,~~, 202 3 , December ~~25, 2016,~~2 5 , 202 2 , and December ~~27, 2015~~2 6 , 202 1						F-~~F-5~~6
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31 ~~2017,~~, 202 3 , December ~~25, 2016,~~2 5 , 202 2 , and December ~~27, 2015~~2 6 , 202 1						F-~~F-6~~7
Consolidated Statements of Cash Flows for the Years Ended December 31 ~~2017,~~, 202 3 , December ~~25, 2016,~~2 5 , 202 2 , and December ~~27, 2015~~2 6 , 20 21						F-~~F-7~~8
Notes to Consolidated Financial Statements						F-~~F-8~~9



	As of December 25, 2016
	PSS		US		KGS		Total
Gross value	$	53.9	$	111.1	$	567.8	$	732.8
Less accumulated impairment	18.3		13.8		215.3		247.4
Net	$	35.6	$	97.3	$	352.5	$	485.4



	As of December 31, 2017						As of December 25, 2016
$ in millions	Principal		Carrying Amount		Fair Value		Principal		Carrying Amount		Fair Value
Long-term debt	$	300.8	$	294.3	$	312.7	$	437.3	$	432.0	$	423.6



Year	Operating Leases
2018	$	18.0
2019	19.5
2020	14.3
2021	11.4
2022	9.3
Thereafter	55.3
Total future minimum lease payments	$	127.8



	Excess Facilities
Balance as of December 27, 2015	$	5.5
Adjustment of excess facility accrual	—
Cash payments	(1.5		)
Balance as of December 25, 2016	4.0
Adjustments of excess facility accruals	—
Cash payments	(0.7		)
Balance as of December 31, 2017	$	3.3



Balance as of December 28, 2014	$	16.4
Increases related to prior periods (acquired entities)	0.4
Increases related to current year tax positions	0.9
Decreases related to disposition	(0.5		)
Balance as of December 27, 2015	17.2
Increases related to prior periods (acquired entities)	1.4
Increases related to current year tax positions	0.2
Expiration of applicable statutes of limitations	(0.2		)
Balance as of December 25, 2016	18.6
Increases related to prior periods	0.4
Increases related to current year tax positions	1.1
Expiration of applicable statutes of limitations	(0.6		)
Decrease in federal tax rate	(3.9		)
Balance as of December 31, 2017	$	15.6



	Year ended December 31, 2017				Year ended December 25, 2016			Year ended December 27, 2015
Revenue	$	—			$	—		$	59.7
Cost of sales	—			��	—			40.6
Selling, general and administrative expenses	—				0.1			15.2
Interest expense, net	—				—			9.1
Other net income (expense) items that are not major	—				—			0.1
Loss from discontinued operations before income taxes	—				(0.1		)	(5.3		)
Gain on disposal of discontinued operations before income taxes	—				—			80.8
Total gain (loss) of discontinued operations before income taxes	—				(0.1		)	75.5
Income tax expense	0.1				—			22.5
Income (loss) from discontinued operations	$	(0.1	)		$	(0.1	)	$	53.0



	Restricted Stock Units (000’s)		Weighted-Average Grant Date Fair Value
Nonvested balance at December 25, 2016	2,246		$	6.81
Grants	1,180		$	7.45
Vested	(841	)	$	7.48
Forfeitures	(20	)	$	7.28
Vested but not released	(307	)	$	7.24
Nonvested balance at December 31, 2017	2,258		$	6.83

Condensed Consolidating Balance Sheet December 31, 2017 (in millions)

	Parent Company		Subsidiary Guarantors on a Combined Basis			Non-Guarantors on a Combined Basis		Eliminations			Consolidated
Assets
Current Assets:
Cash and cash equivalents	$	121.1	$	(2.2	)	$	10.7	$	—		$	129.6
Accounts receivable, net	—		239.9			28.5		—			268.4
Amounts due from affiliated companies	238.1		—			—		(238.1		)	—
Inventoried costs	—		32.2			18.2		—			50.4
Other current assets	3.9		15.6			3.4		—			22.9
Total current assets	363.1		285.5			60.8		(238.1		)	471.3
Property, plant and equipment, net	1.9		52.5			6.8		—			61.2
Goodwill	—		418.3			42.9		—			461.2
Intangible assets, net	—		15.8			6.2		—			22.0
Investment in subsidiaries	471.1		70.0			—		(541.1		)	—
Other assets	0.8		7.5			—		—			8.3
Total assets	$	836.9	$	849.6		$	116.7	$	(779.2	)	$	1,024.0
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	2.3	$	42.0		$	4.5	$	—		$	48.8
Accrued expenses	5.7		38.3			3.3		—			47.3
Accrued compensation	5.6		25.3			3.9		—			34.8
Billings in excess of costs and earnings on uncompleted contracts	—		42.6			4.6		—			47.2
Amounts due to affiliated companies	—		206.4			31.7		(238.1		)	—
Other current liabilities	1.4		4.6			3.7		—			9.7
Current liabilities of discontinued operations	1.0		—			0.1		—			1.1
Total current liabilities	16.0		359.2			51.8		(238.1		)	188.9
Long-term debt, net of current portion	293.5		—			—		—			293.5
Other long-term liabilities	12.1		7.3			6.9		—			26.3
Non-current liabilities of discontinued operations	3.8		—			—		—			3.8
Total liabilities	325.4		366.5			58.7		(238.1		)	512.5
Total stockholders’ equity	511.5		483.1			58.0		(541.1		)	511.5
Total liabilities and stockholders’ equity	$	836.9	$	849.6		$	116.7	$	(779.2	)	$	1,024.0

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss) Year Ended December 31, 2017 (in millions)

	Parent Company			Subsidiary Guarantors on a Combined Basis			Non-Guarantors on a Combined Basis		Eliminations			Consolidated
Service revenues	$	—		$	334.3		$	12.1	$	—		$	346.4
Product sales	—			360.2			60.0		(14.7		)	405.5
Total revenues	—			694.5			72.1		(14.7		)	751.9
Cost of service revenues	—			238.6			8.9		—			247.5
Cost of product sales	—			274.4			47.4		(14.7		)	307.1
Total costs	—			513.0			56.3		(14.7		)	554.6
Gross profit	—			181.5			15.8		—			197.3
Selling, general and administrative expenses	9.1			163.6			12.6		—			185.3
Research and development expenses	—			16.6			1.2		—			17.8
Operating income (loss) from continuing operations	(9.1		)	1.3			2.0		—			(5.8		)
Other income (expense):
Interest income (expense), net	(28.9		)	0.2			0.1		—			(28.6		)
Loss on extinguishment of debt	(17.3		)	—			—		—			(17.3		)
Other income (expense), net	—			0.2			0.7		—			0.9
Total other income (expense), net	(46.2		)	0.4			0.8		—			(45.0		)
Income (loss) from continuing operations before income taxes	(55.3		)	1.7			2.8		—			(50.8		)
Provision (benefit) for income taxes from continuing operations	0.4			(8.9		)	0.3		—			(8.2		)
Income (loss) from continuing operations	(55.7		)	10.6			2.5		—			(42.6		)
Loss from discontinued operations	(0.1		)	—			—		—			(0.1		)
Equity in net income (loss) of subsidiaries	13.1			2.5			—		(15.6		)	—
Net income (loss)	$	(42.7	)	$	13.1		$	2.5	$	(15.6	)	$	(42.7	)
Comprehensive income (loss)	$	(42.4	)	$	13.1		$	2.8	$	(15.9	)	$	(42.4	)

Condensed Consolidating Statement of Cash Flows Year Ended December 31, 2017 (in million)

	Parent Company			Subsidiary Guarantors on a Combined Basis			Non-Guarantors on a Combined Basis			Eliminations			Consolidated
Net cash provided by (used in) operating activities from continuing operations	$	(25.9	)	$	(8.8	)	$	7.7		$	—		$	(27.0	)
Investing activities:
Investment in affiliated companies	(33.2		)	—			—			33.2			—
Capital expenditures	(0.8		)	(23.9		)	(1.8		)	—			(26.5		)
Proceeds from sale of assets	—			0.7			—			—			0.7
Net cash provided by (used in) investing activities from continuing operations	(34.0		)	(23.2		)	(1.8		)	33.2			(25.8		)
Financing activities:
Proceeds from the issuance of long-term debt	300.0			—			—			—			300.0
Extinguishment of long-term debt	(448.8		)	—			—			—			(448.8		)
Repayments under credit facility	—			—			(1.0		)	—			(1.0		)
Debt issuance costs	(6.6		)	—			—			—			(6.6		)
Proceeds from the issuance of common stock	269.1			—			—			—			269.1
Proceeds from exercise of restricted stock units, employee stock options, employee stock purchase plan, and other	0.7			—			—			—			0.7
Financings from affiliated companies	—			33.2			—			(33.2		)	—
Net cash provided by (used in) financing activities from continuing operations	114.4			33.2			(1.0		)	(33.2		)	113.4
Net cash flows of continuing operations	54.5			1.2			4.9			—			60.6
Net investing cash flows from discontinued operations	(0.6		)	—			—			—			(0.6		)
Effect of exchange rate changes on cash and cash equivalents	—			—			0.5			—			0.5
Net increase in cash and cash equivalents	$	53.9		$	1.2		$	5.4		$	—		$	60.5


	December 31, 2023				December 25, 2022
	Notional Value		Fair Value		Notional Value		Fair Value
Interest rate swap contract designated as a cash flow hedge, net of taxes	$	192.5	$	0.7	$	—	$	—