| Acquisitions |
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 purchase price was $22.0 million in cash. Approximately $6.3 million of the purchase price was paid on December 10, 2021, with the remaining $15.2 million of the purchase price paid on December 30, 2021. The operating results of the acquisition have been included in 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 Kratos, and basic and diluted net income per share attributable to Kratos on a pro forma basis for the year ended December 26, 2021 would not have been materially different than the reported amounts. CTT is included in the Kratos Government Solutions (KGS) segment.
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 $37.5 million in cash. Cosmic focuses on radio frequency, 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 allocation of the total consideration for this acquisition to the tangible and identifiable intangible assets acquired and liabilities assumed is preliminary until the Company obtains final information regarding their fair values. However, the Company does not expect any adjustment to such allocations to be material to the Company's consolidated financial statements. The operating results of the acquisition have been included in the Company’s results of operations from the effective acquisition date. 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 receivables | | 4.0 | | | Other current assets | | 0.1 | | | Property and equipment | | 1.3 | | | Intangible assets | | 10.0 | | | Total identifiable net assets acquired | | 19.2 | | | Total identifiable net liabilities assumed | | (9.6) | | | Goodwill | | 28.4 | | | Net assets acquired, excluding cash | | $ | 38.0 | | | | |
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 $1.5 million with a remaining useful life of 5 years, backlog of $3.0 million with an estimated useful life of 2 years, customer relationships of $2.5 million with a remaining useful life of 10 years, and developed technology of $3.0 million with a remaining useful life of 10 years. The Company also established a deferred tax liability of $2.9 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 amounts of revenue and operating loss of Cosmic included in the Company’s condensed consolidated statement of operations were $15.0 million and $0.1 million for the three months ended June 26, 2022, and $27.7 million and $0.3 million for the six months ended June 26, 2022, respectively.
A summary of the consideration paid for the acquired ownership in Cosmic is as follows (in millions):
| | | | | | | | | | Cash paid | | $ | 39.5 | | | Less: Cash acquired | | (1.5) | | | Total consideration | | $ | 38.0 | | | | |
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 $80.0 million, comprised of $75.0 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 allocation of the total consideration for this acquisition to the tangible and identifiable intangible assets acquired and liabilities assumed is preliminary until the Company obtains final information regarding their fair values. 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 | | $ | 3.0 | | | Unbilled receivables | | 9.6 | | | Inventory | | 0.5 | | | Other current assets | | 0.1 | | | Property and equipment | | 23.0 | | | Other assets | | 0.2 | | | Intangible assets | | 15.0 | | | Total identifiable net assets acquired | | 51.4 | | | Total identifiable net liabilities assumed | | (1.1) | | | Goodwill | | 29.2 | | | Net assets acquired, excluding cash | | $ | 79.5 | | | | |
Based on the Company’s preliminary estimate of fair value, as of May 23, 2022, net liabilities included $1.1 million of current liabilities. The identifiable intangible assets include trade names of $0.7 million with a remaining useful life of 5 years, contracts and backlog of $6.0 million with an estimated useful life of 2 years, customer relationships of $1.5 million with a remaining useful life of 10 years, in-process research and development of $1.5 million that will commence amortization at the completion of the development, and developed technology of $5.3 million with a remaining useful life of 7 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 amounts of revenue and operating income of SRE included in the Company’s condensed consolidated statement of operations for the three months ended June 26, 2022 were $4.1 million and $0.5 million, respectively.
A summary of the consideration paid for the acquired assets is as follows (in millions):
| | | | | | | | | | Cash paid | | $ | 74.5 | | | Common stock issued | | 5.0 | | | Total consideration | | $ | 79.5 | | | | |
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