Kratos Defense & Security Systems [KTOS] on Monday said it has agreed to sell its United States and United Kingdom operations of its Electronic Products Division to Britain’s Ultra Electronics Holdings for $260 million in cash.

Terms of the deal include reimbursement of up to $5 million for taxes incurred as part of the transaction, for a total transaction consideration of $265 million.

Kratos' Lancaster, Pa., facility, part of the former Herley Industries, is being sold as part of the deal with Ultra Electronics. Photo: Kratos
Kratos’ Lancaster, Pa., facility, part of the former Herley Industries, is being sold as part of the deal with Ultra Electronics. Photo: Kratos

Kratos’ Microwave and Products business will retain operations and manufacturing facilities in Israel, which support the Iron Dome, David’s Sling and Arrow anti-missile programs, and the Barak and Euro Fighter programs. The company will also retain its unmanned C3, airborne avionics, and ground and seaborne systems businesses, which have part of its Unmanned Systems Division since 2013.

The operations that Kratos is divesting provide electronic systems, subsystems and components for electron warfare, missile, radar, intelligence, and surveillance and reconnaissance programs.

Once the transaction is complete, Kratos will have over $200 million in income tax net operating loss carry-forwards and over $110 million in additional income tax related deductions available to reduce future taxable income.

“This transaction is financially accretive, deleveraging and positions Kratos to execute our long-term strategy,” Eric DeMarco, president and CEO of Kratos, said in a statement. The divestiture is the completion of a review of strategic alternatives the company announced last year.

DeMarco said that going forward, “Kratos remains a leader in unmanned systems, satellite communications, signal monitoring, cyber security, microwave technology, and certain disruptive technology areas, including hypersonics, directed energy and railgun.” He added that there is still “solid funding and opportunity” in these areas and the company will continue to make internal investments “where disruptive technology provides an opportunity for exponential growth and value creation.”

The Electronics Product Division of Kratos is the former Herley Industries, which Kratos acquired for $272 million in 2011, according to an analysis of the deal by the investment banking firm Jefferies. In a note to clients, Jefferies estimates that the former Herley operations that Kratos is retaining had sales of about $82 million last year.

Kratos said that once the sale is complete, it will begin to pay off between $175 million and $200 million if its Senior debt, and also pay down all outstanding amounts of its $110 million bank credit facility, which is $41 million.

Kratos’ financial adviser on the deal is SunTrust Robinson Humphrey Inc.