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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
☒      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended June 25, 2023
or 
☐        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________ 
Commission file number 001-34460
 
KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware13-3818604
(State or other jurisdiction of
incorporation or organization)		(I.R.S. Employer Identification No.)

1 Chisholm Trail, Suite 300
Round Rock, TX
(Address of principal executive offices)

78681

(Zip Code)

(512) 238-9840
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.001 par valueKTOSThe NASDAQ Global Select Market
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ý  No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes ý  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
☐
 
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes ☐  No ☒
As of July 28, 2023, 128,059,186 shares of the registrant’s common stock were outstanding.

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KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
 
FORM 10-Q
 
FOR THE QUARTERLY PERIOD ENDED JUNE 25, 2023
 
INDEX
  Page
  
   
  
 
  
 
 
 
  
  
  
  
 
  
  
  
  
  
  
  
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PART I. FINANCIAL INFORMATION
Item 1.  Financial Statements.
KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 (in millions, except par value and number of shares)
 June 25, 2023
(Unaudited)December 25, 2022
Assets  
Current assets:  
Cash and cash equivalents$48.2 $81.3 
Accounts receivable, net115.7 105.7 
Unbilled receivables, net222.0 222.8 
Inventoried costs145.9 125.5 
Prepaid expenses12.8 11.9 
Other current assets43.2 35.4 
Total current assets587.8 582.6 
Property, plant and equipment, net218.6 213.1 
Operating lease right-of-use assets48.2 47.4 
Goodwill558.2 558.2 
Intangible assets, net52.2 55.2 
Other assets97.8 95.0 
Total assets$1,562.8 $1,551.5 
Liabilities and Stockholders’ Equity
  
Current liabilities:  
Accounts payable$58.4 $57.3 
Accrued expenses41.0 33.8 
Accrued compensation54.0 52.2 
Accrued interest1.5 1.5 
Billings in excess of costs and earnings on uncompleted contracts73.1 62.1 
Current portion of operating lease liabilities11.6 10.8 
Other current liabilities10.4 15.6 
Current liabilities of discontinued operations0.9 0.9 
Total current liabilities250.9 234.2 
Long-term debt, net of current portion232.1 250.2 
Operating lease liabilities, net of current portion41.0 40.8 
Other long-term liabilities77.4 77.4 
Long-term liabilities of discontinued operations1.1 1.4 
Total liabilities602.5 604.0 
Commitments and contingencies (Note 14)
Redeemable noncontrolling interest14.7 11.2 
Stockholders’ equity:
  
Preferred stock, $0.001 par value, 5,000,000 shares authorized, 0 shares outstanding at June 25, 2023 and December 25, 2022
— — 
Common stock, $0.001 par value, 195,000,000 shares authorized; 127,641,905 and 125,985,306 shares issued and outstanding at June 25, 2023 and December 25, 2022, respectively
— — 
Additional paid-in capital1,623.7 1,608.4 
Accumulated other comprehensive income (loss)2.9 (0.8)
Accumulated deficit(681.0)(671.3)
Total stockholders’ equity
945.6 936.3 
Total liabilities and stockholders’ equity
$1,562.8 $1,551.5 

The accompanying notes are an integral part of these condensed consolidated financial statements.
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KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
 (Unaudited)
 Three Months EndedSix Months Ended
 June 25, 2023June 26, 2022June 25, 2023June 26, 2022
Service revenues$103.7 $78.8 $195.3 $146.7 
Product sales153.2 145.4 293.4 273.7 
Total revenues256.9 224.2 488.7 420.4 
Cost of service revenues80.0 56.2 148.2 106.1 
Cost of product sales113.0 110.2 217.2 204.6 
Total costs193.0 166.4 365.4 310.7 
Gross profit63.9 57.8 123.3 109.7 
Selling, general and administrative expenses47.3 44.5 95.1 87.8 
Merger and acquisition expenses— 0.1 — 0.4 
Research and development expenses9.9 9.2 20.1 18.4 
Restructuring expenses and other— 5.9 0.9 6.2 
Operating income (loss)6.7 (1.9)7.2 (3.1)
Other expense:    
Interest expense, net(5.1)(2.9)(10.4)(8.8)
Loss on extinguishment of debt— — — (13.0)
Other income (loss), net0.2 — (0.1)0.1 
Total other expense, net(4.9)(2.9)(10.5)(21.7)
Income (loss) from continuing operations before income taxes1.8 (4.8)(3.3)(24.8)
Provision (benefit) for income taxes from continuing operations2.4 0.5 3.1 (3.8)
Loss from continuing operations(0.6)(5.3)(6.4)(21.0)
Discontinued operations:
Loss from discontinued operations before income taxes — — — (0.3)
Income tax benefit0.2 0.9 0.2 1.0 
Income from discontinued operations0.2 0.9 0.2 0.7 
Net loss(0.4)(4.4)(6.2)(20.3)
Less: Net income attributable to noncontrolling interest2.3 0.3 3.5 0.3 
Net loss attributable to Kratos$(2.7)$(4.7)$(9.7)$(20.6)
Basic and diluted loss per common share attributable to Kratos:
Loss from continuing operations$(0.02)$(0.04)$(0.08)$(0.17)
Income from discontinued operations— — — 0.01 
Loss per common share$(0.02)$(0.04)$(0.08)$(0.16)
Basic and diluted weighted average common shares outstanding129.1 126.4 128.9 126.2 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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

Three Months EndedSix Months Ended
June 25, 2023June 26, 2022June 25, 2023June 26, 2022
Net loss$(0.4)$(4.4)$(6.2)$(20.3)
Change in unrealized cash flow hedge (net of taxes of $0.6 million at June 25, 2023)
1.8 — 1.8 — 
Change in cumulative translation adjustment1.6 (0.6)1.9 (0.6)
Comprehensive income (loss)3.0 (5.0)(2.5)(20.9)
Less: Comprehensive income attributable to noncontrolling interest2.3 0.3 3.5 0.3 
Comprehensive income (loss) attributable to Kratos$0.7 $(5.3)$(6.0)$(21.2)

The accompanying notes are an integral part of these condensed consolidated financial statements.
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KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the three months ended June 25, 2023 and June 26, 2022
(in millions)
(Unaudited)
Redeemable Noncontrolling InterestCommon StockAdditional Paid-In CapitalAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal Stockholders’ Equity
SharesAmounts
Balance, March 27, 2022$15.2 124.8 $— $1,582.0 $0.6 $(650.3)$932.3 
Stock-based compensation— — — 6.4 — — 6.4 
Restricted stock issued and related taxes
— 0.3 — (4.8)— — (4.8)
Issuance of common stock for acquisitions— 0.3 — 5.0 — — 5.0 
Net Income (loss)0.3 — — — — (4.7)(4.7)
Other comprehensive loss, net of tax— — — — (0.6)— (0.6)
Changes in noncontrolling interest(7.7)0.2 — 4.5 — — 4.5 
Balance, June 26, 2022$7.8 125.6 $— $1,593.1 $— $(655.0)$938.1 

Redeemable Noncontrolling InterestCommon StockAdditional Paid-In CapitalAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal Stockholders’ Equity
SharesAmounts
Balance, March 26, 2023$12.4 126.7 $— $1,610.0 $(0.5)$(678.3)$931.2 
Stock-based compensation— — — 6.0 — — 6.0 
Restricted stock issued and related taxes
— 0.1 — (0.8)— — (0.8)
Net income (loss)2.3 — — — — (2.7)(2.7)
Other comprehensive income, net of tax — — — — 3.4 — 3.4 
Changes in noncontrolling interest$— 0.8 $— $8.5 $— $— 8.5 
Balance, June 25, 2023$14.7 127.6 $— $1,623.7 $2.9 $(681.0)$945.6 

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








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KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the six months ended June 25, 2023 and June 26, 2022
(in millions)
(Unaudited)
Redeemable Noncontrolling InterestCommon StockAdditional Paid-In CapitalAccumulated Other Comprehensive IncomeAccumulated DeficitTotal Stockholders’ Equity
SharesAmounts
Balance, December 26, 2021$15.2 124.0 $— $1,578.9 $0.6 $(634.4)$945.1 
Stock-based compensation— — — 13.3 — — 13.3 
Issuance of common stock for employee stock purchase plan and stock options— 0.2 — 2.9 — — 2.9 
Restricted stock issued and related taxes
— 0.9 — (11.5)— — (11.5)
Issuance of common stock for acquisitions— 0.3 — 5.0 — — 5.0 
Net income (loss)0.3 — — — — (20.6)(20.6)
Other comprehensive loss, net of tax— — — — (0.6)— (0.6)
Changes in noncontrolling interest(7.7)0.2 — 4.5 — — 4.5 
Balance, June 26, 2022$7.8 125.6 $— $1,593.1 $— $(655.0)$938.1 
Redeemable Noncontrolling InterestCommon StockAdditional Paid-In CapitalAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal Stockholders’ Equity
SharesAmounts
Balance, December 25, 2022$11.2 126.0 $— $1,608.4 $(0.8)$(671.3)$936.3 
Stock-based compensation— — — 12.6 — — 12.6 
Issuance of common stock for employee stock purchase plan and stock options— 0.3 — 2.9 — — 2.9 
Restricted stock issued and related taxes
— 0.5 — (3.4)— — (3.4)
Net income (loss)3.5 — — — — (9.7)(9.7)
Other comprehensive income, net of tax— — — — 3.7 — 3.7 
Changes in noncontrolling interest— 0.8 — 3.2 — — 3.2 
Balance, June 25, 2023$14.7 127.6 $— $1,623.7 $2.9 $(681.0)$945.6 

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






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KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
Six Months Ended
June 25, 2023June 26, 2022
Operating activities: 
Net loss$(6.2)$(20.3)
Income from discontinued operations0.2 0.7 
Loss from continuing operations(6.4)(21.0)
Adjustments to reconcile loss from continuing operations to net cash used in operating activities from continuing operations:  
Depreciation and amortization15.8 13.9 
Deferred income taxes0.1 0.4 
Amortization of lease right-of-use assets5.5 5.3 
Stock-based compensation12.6 13.3 
Amortization of deferred financing costs0.3 0.4 
Loss on extinguishment of debt— 13.0 
Provision for doubtful accounts0.9 — 
Litigation related charges— 5.5 
Changes in assets and liabilities, net of acquisitions:  
Accounts receivable(10.7)0.3 
Unbilled receivables(7.1)(15.3)
Inventoried costs(20.0)(25.8)
Prepaid expenses and other assets(9.7)(13.2)
Operating lease liabilities(5.2)(5.5)
Accounts payable2.2 5.6 
Accrued expenses7.2 7.7 
Accrued compensation2.0 (1.3)
Accrued interest(0.1)(1.1)
Billings in excess of costs and earnings on uncompleted contracts11.2 1.3 
Income tax receivable and payable0.6 (6.2)
Other liabilities(1.3)(6.8)
Net cash used in operating activities from continuing operations(2.1)(29.5)
Investing activities:  
Cash paid for acquisitions, net of cash acquired— (131.9)
Proceeds from sale of assets8.3 0.1 
Capital expenditures(18.9)(21.9)
Net cash used in investing activities from continuing operations(10.6)(153.7)
Financing activities: 
Proceeds from the issuance of long-term debt— 200.0 
Borrowing under credit facility34.0 100.0 
Redemption of Senior Secured Notes— (309.8)
Repayment under credit facility and term loan(53.5)— 
Debt issuance costs— (3.2)
Payments under finance leases(0.8)(0.6)
Payments of employee taxes withheld from share-based awards(3.4)(11.5)
Proceeds from shares issued under equity plans2.9 2.9 
Net cash used in financing activities from continuing operations(20.8)(22.2)
Net cash used in continuing operations(33.5)(205.4)
Net operating cash flows of discontinued operations(0.1)(0.4)
Effect of exchange rate changes on cash, cash equivalents and restricted cash0.5 (1.2)
Net decrease in cash, cash equivalents and restricted cash(33.1)(207.0)
Cash, cash equivalents and restricted cash at beginning of period81.3 349.4 
Cash, cash equivalents and restricted cash at end of period$48.2 $142.4 
Significant non-cash investing and financing activities:
Financing lease obligation incurred$0.1 $9.1 
Common stock issuance for purchase of noncontrolling interests$10.7 $2.7 
Common stock issuance for acquisition $— 5.0 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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KRATOS DEFENSE & SECURITY SOLUTIONS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(Unaudited)
 
Note 1. Summary of Significant Accounting Policies
 
All references to the “Company” and “Kratos” refer to Kratos Defense & Security Solutions, Inc., a Delaware corporation, and its subsidiaries.
 
(a)    Basis of Presentation

 The information as of June 25, 2023 and for the three and six months ended June 25, 2023 and June 26, 2022 is unaudited. The condensed consolidated balance sheet as of December 25, 2022 was derived from the Company’s audited consolidated financial statements at that date. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods presented. The results have been prepared in accordance with the instructions to Form 10-Q and do not necessarily include all information and footnotes necessary for presentation in accordance with accounting principles generally accepted in the U.S. (“GAAP”). These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes included in the Company’s audited annual consolidated financial statements for the fiscal year ended December 25, 2022, included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 23, 2023 (the “Form 10-K”). Interim operating results are not necessarily indicative of operating results expected in subsequent periods or for the year as a whole.

(b)    Principles of Consolidation
 
The condensed consolidated financial statements include the accounts of the Company, its 100% owned subsidiaries and its majority owned subsidiary, KTT CORE, Inc., a Delaware corporation formerly known as KTT CORE, LLC (“KTT Core”), which is 90.05% owned by the Company. All inter-company transactions have been eliminated in consolidation. Noncontrolling interest consists of the remaining 9.95% interest in KTT Core. See Note 12 for further information related to the redeemable noncontrolling interest.
 
(c)    Fiscal Year
 
The Company has a 52/53 week fiscal year ending on the last Sunday of the calendar year. The three month periods ended June 25, 2023 and June 26, 2022 consisted of 13-week periods. The six month periods ended June 25, 2023 and June 26, 2022 consisted of 26-week periods. There are 53 calendar weeks in the fiscal year ending on December 31, 2023 and 52 calendar weeks in the fiscal year ending December 25, 2022.
 
(d)    Accounting Estimates

There have been no significant changes in the Company’s accounting estimates for the six months ended June 25, 2023 as compared to the accounting estimates described in the Annual Report on Form 10-K.

(e)    Fair Value of Financial Instruments
 
The Company uses forward exchange contracts to manage foreign currency risks associated with certain transactions, specifically forecasted materials and salaries paid in foreign currencies. The Company also has entered into an interest rate swap contract in order to mitigate the exposure to interest rate movements associated with the Company’s Term Loan A. These derivative instruments are measured at fair value using observable market inputs such as interest rates. Based on these inputs, the derivative instruments are classified within Level 2 of the valuation hierarchy. At June 25, 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 June 25, 2023, are presented in Note 15.

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The carrying value of all financial instruments, including cash equivalents, accounts receivable, unbilled receivables, accounts payable, accrued expenses, billings in excess of cost and earnings on uncompleted contracts, income taxes payable and long and short-term debt, approximated their estimated fair values at June 25, 2023 and December 25, 2022 due to the short-term nature of these instruments.

Note 2. Acquisitions

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 radio frequency (“RF”), 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 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 goodwill. The goodwill represents the value the Company expects to be 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 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 receivables4.1 
Other current assets0.1 
Property and equipment1.3 
Intangible assets8.5 
  Total identifiable net assets acquired17.8 
Total identifiable net liabilities assumed(9.1)
Goodwill29.2 
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 the difference between the financial statement basis and tax basis of the acquired assets of Cosmic and a corresponding increase in goodwill. The goodwill recorded in this transaction is not expected to be tax-deductible.

The value of customer relationships was estimated using the multi-period excess earnings method (“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 customer relationships, which were discounted at a rate of 11% to determine the fair value. The value of backlog was also valued using MPEEM. 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
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asset that would otherwise be payable as royalties or license fees on revenues earned through the use of the asset. A royalty rate of 11% was applied to the projected revenues associated with the intangible asset to determine the amount of savings in order to determine the fair value.

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 

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, 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 the marketplace and thus represent Level 3 measurements.

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

Accounts receivable $2.9 
Unbilled receivables11.1 
Inventory0.5 
Other current assets0.2 
Property and equipment22.8 
Other assets0.2 
Intangible assets10.8 
  Total identifiable net assets acquired48.5 
Total identifiable net liabilities assumed(3.4)
Goodwill34.3 
Net assets acquired, excluding cash$79.4 

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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 estimated useful life of 3 years, in-process research and development of $7.3 million that will commence amortization at the 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 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 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 savings, which was at a rate of 11% to determine the fair value. The value of in-process research and development was also estimated using the 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 statements of operations were $13.1 million and $0.7 million for the three months ended June 25, 2023, respectively, and $25.1 million and $1.3 million for the six months ended June 25, 2023, respectively. The amounts of revenue and operating loss of SRE included in the Company’s condensed consolidated statements of operations were $4.1 million and $0.5 million for the three months ended June 26, 2022, respectively.

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

Cash paid$74.4 
Common stock issued5.0 
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 26, 2021 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 and do not purport to be indicative of the actual results that would have occurred had the transaction been completed as of the beginning of the period, nor are they indicative of results of operations that may occur in the future.

For the three and six month periods ended June 26, 2022 (all amounts, except per share amounts, are in millions):
Three Months EndedSix Months Ended
June 26, 2022June 26, 2022
Pro forma revenues
$230.9 $437.4 
Pro forma net loss before tax
$(4.5)$(23.7)
Pro forma net loss
$(4.4)$(19.5)
Basic pro forma loss per share
$(0.04)$(0.15)
Diluted pro forma loss per share
$(0.04)$(0.15)

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Note 3. Revenue Recognition

The Company has adopted the FASB ASU 2014-09, Revenue from Contracts with Customers, and the related amendments, which are codified into Accounting Standards Codification (“ASC”) 606 (“ASC 606”). To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in each contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. Once the contract is identified and determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract, determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC 606. The majority of the Company’s contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation based on the relative standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling price is the expected-cost-plus-margin approach, under which the Company forecasts the expected costs of satisfying a performance obligation and then adds an appropriate margin for that distinct good or service.

For the majority of contracts, the Company satisfies the underlying performance obligations over time as the customer obtains control or receives benefits as work is performed on the contract. The Company generally recognizes revenue over time as work is performed on long-term contracts because of the continuous transfer of control to the customer. For U.S. 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 for costs incurred plus 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 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

The Company calculates revenues from remaining performance obligations as the dollar value of the remaining performance obligations on executed contracts. On June 25, 2023, the Company had approximately $1,157.3 million of remaining performance obligations. The Company expects to recognize approximately 39% of the remaining performance obligations as revenue in fiscal year 2023, an additional 32% in fiscal year 2024, and the balance thereafter.

Contract Estimates

Due to the nature of the work required to be performed on many performance obligations, the estimation of total revenue and cost at completion is complex, subject to many variables, and requires significant judgment. On a quarterly basis, the Company conducts its contract cost Estimate at Completion (“EAC”) process by reviewing the progress and execution of outstanding performance obligations within its contracts. As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities and the related changes in estimates of revenues and costs. The risks and opportunities include management’s judgment about the ability and cost to achieve the schedule (e.g., the number and type of milestone events), technical requirements (e.g., a newly-developed product versus a mature product) and other contract requirements. Management must make assumptions and estimates regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation (e.g., to estimate increases in wages and prices for materials and related support cost allocations), execution by subcontractors, the availability and timing of funding from customers and overhead cost rates, among other variables.

In addition, certain of the Company’s long-term contracts contain award fees, incentive fees, or other provisions that can either increase or decrease the transaction price. These variable amounts generally are awarded upon achievement of certain performance metrics, program milestones, or cost targets and can be based upon customer discretion. Variable consideration is estimated at the most likely amount to which the Company is expected to be entitled. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the
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uncertainty associated with the variable consideration is resolved. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information (historical, current, and forecasted) that is reasonably available.

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

As a result of the EAC process, any quarterly adjustments to revenues, cost of sales, and the related impact to operating income are recognized as necessary in the period they become known. These adjustments may result from positive program performance, and may result in an increase in operating income during the performance of individual performance obligations, if it is determined the Company will be successful in mitigating the risks surrounding the technical, schedule and cost aspects of those performance obligations or realizing related opportunities. Likewise, these adjustments may result in a decrease in operating income if it is determined the Company will not be successful in mitigating these risks or realizing related opportunities. Changes in estimates of net sales, cost of sales, and the related impact to operating income are recognized quarterly on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current and prior periods. A significant change in one or more of these estimates could affect the profitability of one or more of the Company’s contracts. When estimates of total costs to be incurred on a performance obligation exceed total estimates of revenue to be earned, a provision for the entire loss on the performance obligation is recognized in the period the loss is determined. No cumulative catch-up adjustment on any one contract was material to the Company’s unaudited condensed consolidated financial statements for the three and six-month periods ended June 25, 2023, and June 26, 2022. Likewise, total cumulative catch-up adjustments were not material for the three and six-month periods ended June 25, 2023, and June 26, 2022.

Contract Assets and Liabilities

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

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

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

Net contract assets and liabilities are as follows (in millions):
June 25, 2023December 25, 2022Net Change
Contract assets$222.0 $222.8 $(0.8)
Contract liabilities$73.1 $62.1 $11.0 
Net contract assets$148.9 $160.7 $(11.8)
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Contract assets decreased $0.8 million during the six months ended June 25, 2023, primarily due to lower unbilled receivables, net during the six months ended June 25, 2023. There were no significant impairment losses related to any receivables or contract assets arising from the Company’s contracts with customers during the six months ended June 25, 2023. Contract liabilities increased $11.0 million during the six months ended June 25, 2023, primarily due to payments received in excess of revenue recognized on these performance obligations. For the three and six months ended June 25, 2023, the Company recognized revenue of $12.4 million and $33.6 million that was previously included in the contract liabilities that existed at December 25, 2022. For the three and six months ended June 26, 2022 the Company recognized revenue of $14.8 million and $36.0 million that was previously included in the contract liabilities that existed at December 26, 2021.

In November 2019, a large training solutions program was terminated for convenience (“T for C”) by the customer. Under a T for C, a contractor is entitled to seek specified costs through a termination settlement process including (1) the contract price for completed supplies and services accepted by the government but not previously paid for; (2) the cost incurred in the performance of work terminated plus a reasonable profit on those costs; and (3) its costs incurred in settling with subcontractors and preparing and settling the termination proposal. Under a T for C, the Company would not be able to collect the total withheld amounts until the settlement terms of the T for C have been negotiated and agreed to with the customer. At June 25, 2023, approximately $4.8 million in unbilled receivables remained outstanding on this project. 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. The remaining unbilled receivable balance of $4.8 million 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 Composite Engineering Inc. in 2012. On June 30, 2022, the parties entered into a settlement agreement to resolve their dispute and to settle all claims and counterclaims, and are currently in the process of implementing the terms of the settlement agreement. The Company recorded a $5.5 million litigation settlement charge which is included in restructuring expenses and other in the year ended December 25, 2022.

Disaggregation of Revenue

The following series of tables presents the Company’s revenue disaggregated by several categories. For the majority of contracts, revenue is recognized over time as work is performed on the contract. Revenue by contract type was as follows (in millions):
Three Months EndedSix Months Ended
June 25, 2023June 26, 2022June 25, 2023June 26, 2022
Kratos Government Solutions
Fixed price$132.5 $119.9 $259.5 $221.2 
Cost plus fee59.9 37.1 105.6 69.4 
Time and materials12.4 10.8 23.5 20.8 
Total Kratos Government Solutions204.8 167.8 388.6 311.4 
Unmanned Systems
Fixed price39.0 40.7 75.9 72.2 
Cost plus fee10.5 15.3 18.6 35.7 
Time and materials2.6 0.4 5.6 1.1 
Total Unmanned Systems52.1 56.4 100.1 109.0 
Total Revenues$256.9 $224.2 $488.7 $420.4 

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Revenue by customer was as follows (in millions):
Three Months EndedSix Months Ended
June 25, 2023June 26, 2022June 25, 2023June 26, 2022
Kratos Government Solutions
U.S. Government (1)
$129.5 $104.2 $244.0 $193.7 
International (2)
47.9 36.1 92.9 70.8 
U.S. Commercial and other customers27.4 27.5 51.7 46.9 
Total Kratos Government Solutions204.8 167.8 388.6 311.4 
Unmanned Systems
U.S. Government (1)
49.1 51.9 94.9 102.0 
International (2)
2.4 3.6 4.3 5.4 
U.S. Commercial and other customers0.6 0.9 0.9 1.6 
Total Unmanned Systems52.1 56.4 100.1 109.0 
Total Revenues$256.9 $224.2 $488.7 $420.4 
(1) Sales to the U.S. Government include sales from contracts for which the Company is the prime contractor, as well as those for which the
Company is a subcontractor and the ultimate customer is the U.S. Government. Each of the Company’s segments derives substantial revenue
from the U.S. Government. These sales include foreign military sales contracted through the U.S. Government.

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

Note 4. Discontinued Operations

On February 28, 2018, the Company entered into a Stock Purchase Agreement to sell the operations of Kratos Public Safety & Security Solutions, Inc., a Delaware corporation and wholly owned subsidiary of the Company (“PSS”), to Securitas Electronic Security, Inc., a Delaware corporation (“Buyer”). On June 11, 2018, the Company completed the sale of all of the issued and outstanding capital stock of PSS to Buyer for a purchase price of $69 million in cash, subject to a closing net working capital adjustment (the “Transaction”). To date, the Company has received approximately $68.7 million of aggregate net cash proceeds from the Transaction, after taking into account amounts that were paid by the Company pursuant to a negotiated 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, including the impact of the final settlement and determination of the closing net working capital adjustment and litigation which was settled with the Buyer in the fourth quarter of 2021 and first quarter of 2022, respectively.

Note 5. Goodwill and Intangible Assets
 
(a)    Goodwill
 
    The carrying amounts of goodwill as of June 25, 2023 and December 25, 2022 by reportable segment are as follows (in millions):
KGSUSTotal
Gross value$683.6 $127.9 $811.5 
Less accumulated impairment239.5 13.8 253.3 
Net$444.1 $114.1 $558.2 


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(b)    Purchased Intangible Assets
 
The following table sets forth information for finite-lived and indefinite-lived intangible assets (in millions): 
 As of June 25, 2023As 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 $(61.5)$19.4 $80.9 $(60.1)$20.8 
Contracts and backlog39.1 (37.1)2.0 39.1 (36.3)2.8 
Developed technology and technical know-how33.7 (27.6)6.1 33.7 (27.0)6.7 
Trade names3.8 (2.5)1.3 3.8 (2.3)1.5 
In-process research and development16.8 (0.3)16.5 16.8 (0.3)16.5 
Total finite-lived intangible assets174.3 (129.0)45.3 174.3 (126.0)48.3 
Indefinite-lived trade names6.9 — 6.9 6.9 — 6.9 
Total intangible assets$181.2 $(129.0)$52.2 $181.2 $(126.0)$55.2 

Consolidated amortization expense related to intangible assets subject to amortization was $1.4 million and $1.6 million for the three months ended June 25, 2023 and June 26, 2022, respectively, and $3.0 million and $3.3 million for the six months ended June 25, 2023 and June 26, 2022, respectively.

Note 6. Inventoried Costs
 
Inventoried costs, consisted of the following components (in millions):
 
 June 25, 2023December 25, 2022
Raw materials$76.6 $73.6 
Work in process62.7 50.8 
Finished goods6.6 1.1 
Total inventoried costs$145.9 $125.5 
 
Note 7. Net Income (Loss) per Common Share
 
The Company calculates net income (loss) per share in accordance with FASB ASC Topic 260, Earnings per Share (“Topic 260”). Under Topic 260, basic net income (loss) per common share attributable to the Kratos shareholders is calculated by dividing net income (loss) attributable to Kratos by the weighted-average number of common shares outstanding during the reporting period. Diluted net income (loss) per common share reflects the effects of potentially dilutive securities.

Shares from stock options and awards, excluded from the calculation of diluted net loss per share because their inclusion would have been anti-dilutive, were 1.0 million and 1.2 million for the three and six months ended June 25, 2023, respectively, and 1.8 million and 1.4 million for the three and six months ended June 26, 2022, respectively.
 
Note 8. Leases

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

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

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

    The components of lease expense were as follows (in millions):
Three Months EndedSix Months Ended
June 25, 2023June 26, 2022June 25, 2023June 26, 2022
Amortization of right of use assets - finance leases$0.7 $0.6 $1.5 $1.3 
Interest on lease liabilities - finance leases0.8 0.7 1.5 1.4 
Operating lease cost 3.4 3.3 6.7 6.6 
Short-term lease cost0.3 0.2 0.5 0.4 
Variable lease cost (cost excluded from lease payments)0.1 0.1 0.1 0.1 
Sublease income— — — — 
Total lease cost
$5.3 $4.9 $10.3 $9.8 

The components of leases on the balance sheet were as follows (in millions):
June 25, 2023December 25, 2022
Operating leases:
Operating lease right-of-use assets
$48.2 $47.4 
Current portion of operating lease liabilities
$11.6 $10.8 
Operating lease liabilities, net of current portion
$41.0 $40.8 
Finance leases:
Property, plant and equipment, net
$44.1 $45.8 
Other current liabilities
$1.4 $1.7 
Other long-term liabilities
$49.8 $49.9 

Cash paid for amounts included in the measurement of lease liabilities was as follows (in millions):
Three Months EndedSix Months Ended
June 25, 2023June 26, 2022June 25, 2023June 26, 2022
Finance lease - cash paid for interest$0.8 $0.7 $1.5 $1.4 
Finance lease - financing cash flows$0.4 $0.3 $0.8 $0.6 
Operating lease - operating cash flows (fixed payments)$3.6 $3.4 $6.6 $6.8 
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Other supplemental noncash information (in millions):
Three Months EndedSix Months Ended
June 25, 2023June 26, 2022June 25, 2023June 26, 2022
Operating lease liabilities arising from obtaining right-of-use assets$4.5 $1.3 $6.4 $5.0 
Finance lease liabilities arising from obtaining right-of-use assets$0.1 $9.1 $0.1 $9.1 
June 25, 2023June 26, 2022
Weighted-average remaining lease term (in years):
Operating leases
4.764.32
Finance leases
15.0815.56
Weighted-average discount rate:
Operating leases
4.95 %6.44 %
Finance leases
6.41 %6.03 %

The maturity of lease liabilities is (in millions):
Operating LeasesFinance Leases
2023 (1)
$7.3 $2.3 
202413.2 4.8 
202511.6 4.9 
202610.1 5.0 
20278.9 5.1 
Thereafter7.6 59.5 
Total lease payments58.7 81.6 
Less: imputed interest(6.1)(30.4)
Total present value of lease liabilities$52.6 $51.2 
(1) Excludes the six months ended June 25, 2023.

Note 9. Income Taxes

A reconciliation of the total income tax provision (benefit) to the amount computed by applying the statutory federal income tax rate of 21% to income (loss) from continuing operations before income taxes for the three and six months ended June 25, 2023 and June 26, 2022 is as follows (in millions):
 For the Three Months EndedFor the Six Months Ended
 June 25,
2023		June 26,
2022		June 25,
2023		June 26,
2022
Income tax expense (benefit) at federal statutory rate$0.4 $(1.0)$(0.7)$(5.2)
Nondeductible expenses and other1.9 1.5 3.5 2.5 
Stock compensation - excess tax shortfalls (benefits)0.3 0.3 0.7 (0.6)
Federal impact of research & development tax credits(0.2)(0.3)(0.4)(0.5)
Provision (benefit) for income taxes from continuing operations$2.4 $0.5 $3.1 $(3.8)

The Company calculates its interim income tax provision in accordance with ASC Topic 270, “Interim Reporting,” and ASC Topic 740, “Accounting for Income Taxes.” Prior to 2022, the Company calculated the provision for income taxes during the interim reporting periods by applying an estimate of the annual effective tax rate for the full fiscal year to “ordinary” income or loss (pretax income or loss excluding unusual or infrequently occurring discrete items) for the reporting period. The
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Company determined that since small changes in estimated “ordinary” income would result in significant changes in the estimated annual effective tax rate, the historical method used prior to 2022 would not provide a reliable estimate for the six months ended June 25, 2023 and June 26, 2022. Therefore, a discrete effective tax rate method was used to calculate taxes for the six months ended June 25, 2023 and June 26, 2022.
As of June 25, 2023, the Company had $25.1 million of unrecognized tax benefits. Included in the balance of unrecognized tax benefits at June 25, 2023 are $22.6 million that, if recognized, would impact the Company’s effective income tax rate.

The Company recognizes interest and penalties related to unrecognized tax benefits in its provision for income taxes. For the six months ended June 25, 2023 and June 26, 2022, the Company recorded an expense for interest and penalties of $0.1 million and $0.2 million, respectively. For the six months ended June 25, 2023 and June 26, 2022, there was no material benefit recorded related to the removal of interest and penalties. The Company believes that it is reasonably possible that as much as $0.1 million of the liabilities for uncertain tax positions will expire within the next twelve months due to the expiration of various applicable statutes of limitations.

On August 16, 2022, the Inflation Reduction Act of 2022 (“IRA”), was signed into law. Among other things, the IRA imposes a 15% corporate alternative minimum tax for tax years beginning after December 31, 2022, levies a 1% excise tax on net stock purchases after December 31, 2022, and provides tax incentives to promote clean energy. The IRA is not expected to have a material impact on our results of operations or financial position.

Note 10. Debt
 
(a) New Credit Facility

On February 18, 2022, the Company completed the refinancing of its outstanding $90 million revolving credit facility and $300 million 6.5% Senior Secured Notes (the “Senior Secured Notes”), with a new 5-year $200 million Revolving Credit Facility and 5-year $200 million Term Loan A (collectively, the “New Credit Facility”). The Company incurred debt issuance costs of $3.3 million associated with the New Credit Facility. As of June 25, 2023, the Company made $5.0 million in principal payments on Term Loan A, and has net amounts outstanding of approximately $43.0 million under the new Revolving Credit Facility, with approximately $157.0 million remaining in borrowing capacity, less approximately $13.6 million of letters of credit outstanding.

On February 18, 2022, the proceeds of $300 million from the New Credit Facility, along with cash 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 trustee for redemption of the Senior Secured Notes. The redemption of the Company’s outstanding $300 million 6.5% Senior Secured Notes due November 2025 closed on March 14, 2022, for an amount of cash equal to 103.25% of the principal amount thereof plus accrued and unpaid interest thereon. The Company incurred a loss on the extinguishment of debt of $9.8 million related to the call premium on the Senior Secured Notes and the write-off of $3.2 million of unamortized debt issuance costs, resulting in a total loss on extinguishment of debt of $13.0 million.

The New Credit Facility is governed by a Credit Agreement (the “Credit Agreement”), 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 the issuance of up to $50.0 million of Letters of Credit) and the $200 million 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 any and all incremental credit facilities actually established under the Credit Agreement) plus additional uncommitted incremental capacity subject to a limitation based on the Company’s pro forma total net leverage ratio (including any such additional uncommitted incremental capacity).

Borrowings under the revolving credit facility and the term loan credit facility may take the form of base rate loans or Secured Overnight Financing Rate (“SOFR”) loans. Base rate 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 (as defined in the Credit Agreement), as in effect at such time, plus 0.50%, (iii) the Adjusted Term SOFR (as defined in the Credit Agreement) for a one-month tenor in effect on such day, plus 1.00% 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 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 1.25% and 2.25% per annum for SOFR loans and between 0.25% and 1.25% per annum for base rate loans, and is based on the Company’s total net leverage ratio from time to time.
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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 third, fourth and fifth years, with the remaining outstanding balance due at maturity. The Credit Agreement contains certain covenants, which include, but are not limited to, restrictions on indebtedness, liens, fundamental changes, restricted payments, asset sales, and investments, and places limits on various other payments. The Company was in compliance with the covenants contained in the Credit Agreement as of June 25, 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 of 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. Refer to Note 15 for further discussion of the accounting treatment of the swap arrangement.

Term Loan and Revolving Credit Debt

Term loan and revolving credit debt and the current period interest rates are as follows (in millions):
June 25, 2023December 25, 2022
Term Loan A$195.0$197.5
Revolving credit facility43.060.0
Total debt238.0257.5
Less current portion5.0