Kratos Defense & Security Solutions, Inc.KTOS

Strategic execution · Strategic transformation and turnaround risks

Our success in competing depends, in part, on our ability to remain price- and cost-competitive, respond to changes in customer acquisition strategies and preferences, accurately anticipate our customers' needs, successfully effect our digital transformation strategy and identify, adopt and integrate new digital technologies.

Market position and competition · Competitive pressure and market share loss

We operate in highly competitive markets and our competitors may have more financial capacity or more extensive or specialized engineering, technical, manufacturing, marketing or servicing capabilities than we do. They may be willing to accept more risk or lower profitability in competing for contracts.

Strategic execution · Joint venture and partnership risks

In addition to acquisitions, we may engage in other strategic transactions in the future, including spin-offs, divestitures, and investments, any of which would present significant risks and uncertainties that could adversely affect our business, financial condition, results of operations, cash flows and equity.

Market position and competition · Pricing pressure and margin compression

Our margins and operating results may suffer if we experience unfavorable changes in the proportion of cost-plus-fee or fixed-price contracts in our total contract mix. Cost-plus-fee contracts are subject to statutory limits on profit margins and generally are the least profitable of our contract types.

Market position and competition · Market cyclicality and demand volatility

If the UAS and UGS markets do not experience significant growth, if we cannot expand our customer base or if our products do not achieve broad acceptance, or if the products we have developed or will develop do not become programs of record, then we may not be able to achieve our anticipated level of growth.

Strategic execution · Merger acquisition and divestiture risks

Past acquisitions and future acquisitions could prove difficult to integrate, disrupt our business, dilute stockholder value and strain our resources. Whether we realize the anticipated benefits from these acquisitions and related activities depends, in part, upon our ability to integrate the operations of the acquired business.

Customer and revenue · Customer concentration and key customer dependence

We are dependent on a small number of customers for certain large programs that represent a large portion of our revenues. In fiscal 2025 and 2024, the U.S. Air Force accounted for 12.6% and 15.2% respectively, of our total revenues and the U.S. Navy accounted for 17.7% and 14.7%, respectively, of our total revenues.

Capital structure and performance · Financial performance volatility

Our financial results may vary significantly from quarter to quarter. We expect our revenue and operating results to vary from quarter to quarter. Reductions in revenue in a particular quarter could lead to lower profitability in that quarter because a relatively large amount of our expenses are fixed in the short-term.

Credit and liquidity · Debt service and covenant compliance

The agreements governing our debt impose significant operating and financial restrictions on us and our subsidiaries that may prevent us and our subsidiaries from pursuing certain business opportunities and restrict our ability to operate our business. Our Credit Agreement subjects us, and our subsidiaries, to several financial and other restrictive covenants.

Capital structure and performance · Credit rating and cost of capital

Changes in our credit metrics or macroeconomic conditions may affect our liquidity, increasing borrowing costs and limiting our financing options. Macroeconomic conditions, such as increased volatility or disruption in the credit markets, and the levels of inflation and interest rates, could adversely affect our ability to refinance existing debt.

Geopolitical and trade · Political instability and government changes

On January 20, 2025, President Trump announced an executive order establishing the 'Department of Government Efficiency' to maximize government efficiency and productivity. In February 2025, President Trump stated that he has directed DOGE to review Pentagon spending for potential waste and fraud.

Economic and market conditions · Economic recession and downturns

Revenues derived from our international business could be subject to global economic downturn and hardship. Our international business represents 20% of our total revenue for the year ended December 28, 2025, which may be impacted by changes in foreign national priorities and government budgets.

Geopolitical and trade · International conflicts and tensions

Our international business exposes us to additional risks including the escalation or continuation of armed conflict, hostilities or economic sanctions between countries or regions, including the current armed conflicts in Ukraine and in the Middle East.

Information management · Data quality and integrity

We use estimates when accounting for contracts, and any changes in such estimates could have an adverse effect on our profitability. Due to the size and nature of many of our contracts, the estimation of total revenues and costs at completion is complicated and subject to many variables.

Digital transformation and innovation · Artificial intelligence and automation

Our success in competing depends, in part, on our ability to successfully effect our digital transformation strategy and identify, adopt and integrate new digital technologies, including artificial intelligence, into our manufacturing, operations, business processes, products and services.

Supply chain and procurement · Supplier operation and dependance

If our subcontractors or suppliers fail to perform their contractual obligations, our performance and reputation as a contractor and our ability to obtain future business could suffer. As a prime contractor, we often rely upon other companies as subcontractors to perform work we are obligated to perform for our customers.

Project and contract management · Large contract concentration

Loss of our GSA contracts or GWACs could impair our ability to attract new business. We are a prime contractor under several GSA contracts and government-wide acquisition contracts (GWACs). If we were to lose our position as prime contractor on one or more of these contracts, we could lose substantial revenues.

Organizational and management · Organizational structure and reporting

If we are unable to manage our growth, our business and financial results could suffer. Sustaining our growth has placed significant demands on our management, as well as on our administrative, operational and financial resources.

Tax and financial reporting · Transfer pricing and international tax

Changes in foreign tax laws and regulations could expose us to additional tax liabilities and could adversely affect our financial results. Several countries around the world have enacted or proposed changes to their existing tax laws based on the Organization for Economic Co-operation and Development's Base Erosion and Profit Shifting 2.0 project.

Tax and financial reporting · Tax compliance and changes in tax law

Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited. We may be required to record valuation allowances on our net operating loss carryforwards in future periods, which could adversely impact our profitability and financial condition. Federal and state income tax laws impose restrictions on the utilization of net operating loss carryforwards.