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Revenue Recognition | 9 Months Ended
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Sep. 27, 2020
Revenue from Contract with Customer [Abstract] |
Revenue Recognition | Revenue Recognition The Company recognizes revenue in accordance with Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”). Under ASC 606 revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration that the Company expects to be entitled to receive in exchange for these goods or services. 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 the 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 and 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. Remaining Performance Obligations The Company calculates revenues from remaining performance obligations as the dollar value of the remaining performance obligations on executed contracts. On September 27, 2020, the Company had approximately $873.1 million of remaining performance obligations. The Company expects to recognize approximately 22% of the remaining performance obligations as revenue in 2020, an additional 35% by 2021, 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 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 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 nine-month periods ended September 27, 2020, and September 29, 2019. Likewise, total cumulative catch-up adjustments were not material for the three and nine-month periods ended September 27, 2020, and September 29, 2019. 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):
| September 27, 2020 |  | December 29, 2019 |  | Net Change
Contract assets | $ | 192.7 |  |  | $ | 179.4 |  |  | $ | 13.3 |
Contract liabilities | $ | 36.3 |  |  | $ | 34.3 |  |  | $ | 2.0 |
Net contract assets | $ | 156.4 |  |  | $ | 145.1 |  |  | $ | 11.3 |
Contract assets increased $13.3 million during the nine months ended September 27, 2020, primarily due to the recognition of revenue related to the satisfaction or partial satisfaction of performance obligations for which the Company has not yet billed the customers. There were no significant impairment losses related to any receivables or contract assets arising from the Company’s contracts with customers during the nine months ended September 27, 2020. Contract liabilities increased $2.0 million during the nine months ended September 27, 2020, primarily due to payments received in excess of revenue recognized on these performance obligations. For the three and nine months ended September 27, 2020 the Company recognized revenue of $3.5 million and $23.5 million, respectively, that was previously included in the contract liabilities that existed at December 29, 2019. For the three and nine months ended September 29, 2019 the Company recognized revenue of $5.3 million and $26.6 million, respectively, that was previously included in the contract liabilities that existed at December 30, 2018. 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 September 27, 2020 an d December 29, 2019, appr oximately $11.5 million in unbilled receivables remained outstanding on this project. In addition, the Company is currently in dispute with an international customer in the US segment over approximately $10.0 million in unbilled receivables outstanding as of September 27, 2020 and December 29, 2019. The dispute concerns the completion of certain system requirements and certain contractual milestones. Although there could be a delay in billing and collecting amounts due to the Company under the aforementioned contracts, management has evaluated the present facts of the matters and performed a reassessment of the contractual amounts due and has determined that no adjustment to previously recognized revenue, or the corresponding unbilled receivables, is necessary at September 27, 2020. Disaggregation of Revenue The following series of tables presents the Company’s revenue disaggregated by several categories. For the majority of contracts, the customer obtains control or receives benefits as work is performed on the contract. Revenue by contract type was as follows (in millions):
| Three Months Ended |  | Nine Months Ended
| September 27, 2020 |  | September 29, 2019 |  | September 27, 2020 |  | September 29, 2019
Kratos Government Solutions |  |  |  |  |  |  |
Fixed price | $ | 113.3 |  |  | $ | 114.6 |  |  | $ | 315.9 |  |  | $ | 346.2 |
Cost plus fee | 27.7 |  |  | 15.6 |  |  | 62.9 |  |  | 39.1 |
Time and materials | 7.5 |  |  | 8.2 |  |  | 25.0 |  |  | 24.0 |
Total Kratos Government Solutions | 148.5 |  |  | 138.4 |  |  | 403.8 |  |  | 409.3 |
Unmanned Systems |  |  |  |  |  |  |
Fixed price | 39.6 |  |  | 38.9 |  |  | 95.5 |  |  | 100.1 |
Cost plus fee | 12.9 |  |  | 6.6 |  |  | 39.8 |  |  | 22.1 |
Time and materials | 1.0 |  |  | 0.2 |  |  | 2.2 |  |  | 0.9 |
Total Unmanned Systems | 53.5 |  |  | 45.7 |  |  | 137.5 |  |  | 123.1 |
Total Revenues | $ | 202.0 |  |  | $ | 184.1 |  |  | $ | 541.3 |  |  | $ | 532.4 |
Revenue by customer was as follows (in millions):
| Three Months Ended |  | Nine Months Ended
| September 27, 2020 |  | September 29, 2019 |  | September 27, 2020 |  | September 29, 2019
Kratos Government Solutions |  |  |  |  |  |  |
U.S. Government (1) | $ | 98.7 |  |  | $ | 89.1 |  |  | $ | 273.4 |  |  | $ | 272.2 |
International (2) | 34.5 |  |  | 29.6 |  |  | 87.4 |  |  | 82.9 |
U.S. Commercial and other customers | 15.3 |  |  | 19.7 |  |  | 43.0 |  |  | 54.2 |
Total Kratos Government Solutions | 148.5 |  |  | 138.4 |  |  | 403.8 |  |  | 409.3 |
Unmanned Systems |  |  |  |  |  |  |
U.S. Government (1) | 46.6 |  |  | 37.1 |  |  | 125.4 |  |  | 104.8 |
International (2) | 6.5 |  |  | 8.3 |  |  | 11.4 |  |  | 17.3 |
U.S. Commercial and other customers | 0.4 |  |  | 0.3 |  |  | 0.7 |  |  | 1.0 |
Total Unmanned Systems | 53.5 |  |  | 45.7 |  |  | 137.5 |  |  | 123.1 |
Total Revenues | $ | 202.0 |  |  | $ | 184.1 |  |  | $ | 541.3 |  |  | $ | 532.4 |
(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.

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- Definition The entire disclosure of revenue from contract with customer to transfer good or service and to transfer nonfinancial asset. Includes, but is not limited to, disaggregation of revenue, credit loss recognized from contract with customer, judgment and change in judgment related to contract with customer, and asset recognized from cost incurred to obtain or fulfill contract with customer. Excludes insurance and lease contracts. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 606 -URI http://asc.fasb.org/topic&trid=49130388 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 606 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=121604090&loc=SL49130551-203045 Reference 3: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 606 -SubTopic 10 -Section 50 -Paragraph 13 -Subparagraph (b)(2) -URI http://asc.fasb.org/extlink&oid=121604090&loc=SL49130556-203045 Reference 4: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 606 -SubTopic 10 -Section 50 -Paragraph 12 -Subparagraph (b) -URI http://asc.fasb.org/extlink&oid=121604090&loc=SL49130554-203045 Reference 5: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 606 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=121604090&loc=SL49130550-203045 Reference 6: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 606 -SubTopic 10 -Section 50 -Paragraph 12 -Subparagraph (e) -URI http://asc.fasb.org/extlink&oid=121604090&loc=SL49130554-203045 Reference 7: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 606 -SubTopic 10 -Section 50 -Paragraph 12 -Subparagraph (a) -URI http://asc.fasb.org/extlink&oid=121604090&loc=SL49130554-203045 Reference 8: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 606 -SubTopic 10 -Section 50 -Paragraph 12 -Subparagraph (d) -URI http://asc.fasb.org/extlink&oid=121604090&loc=SL49130554-203045 Reference 9: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 606 -SubTopic 10 -Section 50 -Paragraph 15 -URI http://asc.fasb.org/extlink&oid=121604090&loc=SL49130558-203045 Reference 10: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 606 -SubTopic 10 -Section 50 -Paragraph 12 -Subparagraph (c) -URI http://asc.fasb.org/extlink&oid=121604090&loc=SL49130554-203045 + Details
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