Kratos Defense & Security Solutions (KTOS) risk factors, FY2025 10-K

Risks Related to Our Business

1. 01Competitive dynamics within our markets may affect our ability to win new contracts and result in reduced revenues, which could have a material adverse effect on our financial position, results of operations and/or cash flowsNew
2. 02The U.S. Government provides a significant portion of our revenue, and our business could be adversely affected by changes in the fiscal and other policies of the U.S. Government and other governmental entities37% rewritten
3. 03Significant delays or reductions in appropriations for our programs and U.S. Government funding more broadly may negatively impact our business and programs and could have a material adverse effect on our financial position, results of operations and/or cash flows
4. 04The federal budget and debt ceiling are expected to continue to be the subject of considerable debate, which could have a significant impact on defense spending broadly and our programs in particular
5. 05If we fail to establish and maintain important relationships with government agencies and prime contractors, our ability to successfully maintain and develop new business may be adversely affected
6. 06The loss or delay of one or more of our largest customers, programs, or applications could adversely affect our results of operations33% rewritten
7. 07Many of our contracts contain performance obligations that require innovative design capabilities, are technologically complex, require state-of-the-art manufacturing expertise, or are dependent upon factors not wholly within our control
8. 08If 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
9. 09Our earnings and profitability depend, in part, on subcontractor and supplier performance and product availability
10. 10We face intense competition from many competitors that have greater resources than we do, which could result in price reductions, reduced profitability or loss of market share
11. 11Our business is dependent upon our ability to keep pace with the latest technological changes
12. 12If 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
13. 13Loss of our GSA contracts or GWACs could impair our ability to attract new business
14. 14Government contracts differ materially from standard commercial contracts, involve competitive bidding and may be subject to cancellation or delay without penalty
15. 15We may not receive the full amounts estimated under the contracts in our backlog, which could reduce our revenue in future periods below the levels anticipated
16. 16A preference for minority-owned, small and small disadvantaged businesses could impact our ability to be a prime contractor and limit our opportunity to work as a subcontractor on certain governmental procurements
17. 17U.S. Government in-sourcing could result in loss of business opportunities and personnel
18. 18Our business could be negatively impacted by cyber and other security threats or disruptions
19. 19If we experience systems or service failure, our reputation could be harmed and our customers could assert claims against us for damages or refunds
20. 20We cannot ensure that provisions in our customer contracts will be legally sufficient to protect us if we are sued
21. 21Our products are complex and could have unknown defects or errors, which may increase our costs, harm our reputation with customers, give rise to costly litigation, or divert our resources from other purposes
22. 22The existence of any defects, errors, or failures in our products or the misuse of our products could also lead to lawsuits against us, result in injury, death, or property damage, and significantly damage our reputation and support for our products in general
23. 23Due to the volatile and flammable nature of certain components of our products and equipment, fires or explosions may disrupt our business or cause significant injuries, which could adversely affect our financial results
24. 24Our financial results may vary significantly from quarter to quarter
25. 25Our 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
26. 26Cost overruns on our contracts could subject us to losses, decrease our operating margins and adversely affect our future business
27. 27Our cash flow and profitability could be reduced if expenditures are incurred prior to the final receipt of a contract
28. 28If we fail to respond to commercial industry cycles in terms of our cost structure, manufacturing capacity, and/or personnel needs, our business could be seriously harmed
29. 29We face significant risks in the management of our inventory, and failure to effectively manage our inventory levels may result in product recalls or supply imbalances that could harm our business
30. 30We have incurred and may continue to incur goodwill impairment charges in our reporting entities, which could harm our profitability
31. 31Failure to properly manage projects may result in additional costs or claims
32. 32We use estimates when accounting for contracts, and any changes in such estimates could have an adverse effect on our profitability and our overall financial performance
33. 33Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited
34. 34We expect to incur substantial research and development costs and devote significant resources to identifying and developing new products and services, which could significantly reduce our profitability and may never result in revenue to us

Risks Related to Our Operations

1. 35Our operations expose us to risks associated with pandemics, epidemics or other public health emergencies
2. 36We may need additional capital to fund the growth of our business, and financing may not be available on favorable terms or at all
3. 37Our cash may be subject to a risk of loss and we may be exposed to fluctuations in the market values of our portfolio investments and in interest rates
4. 38Past acquisitions and future acquisitions could prove difficult to integrate, disrupt our business, dilute stockholder value and strain our resources
5. 39Other strategic transactions, including spin-offs, divestitures, and investments involve significant risks and uncertainties that could adversely affect our business, financial condition, results of operations, cash flows and equityNew
6. 40If we are unable to manage our growth, our business and financial results could suffer
7. 41We may need to invest in new information technology systems and infrastructure to scale our operations
8. 42The loss of any member of our senior management could impair our relationships with U.S. Government customers and disrupt the management of our business
9. 43If we fail to attract and retain skilled employees or employees with the necessary National Security clearances, we might not be able to perform under our contracts or win new business
10. 44We are subject to the requirements of the National Industrial Security Program Operating Manual for our facility security clearance, which is a prerequisite to our ability to perform on classified contracts for the U.S. Government
11. 45We are subject to the DoW CMMC requirement issued by the Pentagon which may limit our ability to bid and win projects. The cost for the DoW CMMC requirement may be significant
12. 46Cybersecurity breaches or disruptions of our information technology systems could negatively impact our operations36% rewritten
13. 47Our operations expose us to the risk of material environmental liabilities

Risks Related to Our International Operations

1. 48Revenues derived from our international business could be subject to global economic downturn and hardship
2. 49Changes in foreign tax laws and regulations could expose us to additional tax liabilities and could adversely affect our financial results
3. 50Our international business exposes us to additional risks

Risks Related to Our Indebtedness

1. 51We and our subsidiaries may incur long-term indebtedness, which may introduce risks associated with our leverage, including our ability to service our indebtedness85% rewritten
2. 52Changes in our credit metrics or macroeconomic conditions may affect our liquidity, increasing borrowing costs and limiting our financing options
3. 53A portion of our business is conducted through foreign subsidiaries, and the failure to generate sufficient cash flow from these subsidiaries, or otherwise repatriate or receive cash from these subsidiaries, could result in our inability to repay our indebtedness
4. 54Our Credit Agreement subjects us, and our subsidiaries, to several financial and other restrictive covenants, including limitations on liens or indebtedness, payment of dividends, transactions with affiliates, and mergers, sales or other dispositions of our assets

Risks Related to Our Intellectual Property

1. 55We may be unable to protect our intellectual property rights
2. 56Disclosure of trade secrets could cause harm to our business
3. 57We may be harmed by intellectual property infringement claims

Risks Related to Regulatory, Environmental and Legal Issues

1. 58Our failure to comply with complex procurement laws and regulations could cause us to lose business and subject us to a variety of penalties
2. 59Our contracts and administrative processes and systems are subject to audits and cost adjustments by the U.S. Government, which could reduce our revenue, disrupt our business or otherwise adversely affect our results of operations
3. 60Our employees or others acting on our behalf may engage in misconduct or other improper activities, which could cause us to lose contracts or cause us to incur costs
4. 61We are subject to environmental laws and potential exposure to environmental liabilities
5. 62The increasing focus on environmental sustainability and social initiatives could increase our costs, harm our reputation and adversely impact our financial results
6. 63Regulations related to “conflict minerals” may cause us to incur additional expenses and could limit the supply and increase the cost of certain metals used in manufacturing our products
7. 64Natural disasters or severe weather conditions could disrupt our business and result in loss of revenue or higher expenses

Risks Related to Our Common Stock

1. 65Some of our contracts with the U.S. Government are classified, which may limit investor insight into portions of our business
2. 66We do not expect to pay any cash dividends or buyback any Kratos stock for the foreseeable future
3. 67Certain provisions in our amended and restated certificate of incorporation and third amended and restated bylaws, and of Delaware law, may prevent or delay an acquisition of our Company, which could decrease the trading price of our common stock
4. 68Delaware law also imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock

General Risk Factors

1. 69The market price of our common stock is volatile
2. 70Your percentage of ownership in us may be diluted in the future
3. 71Future sales of our common stock could cause the market price for our common stock to decline
4. 72If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud
5. 73Litigation may distract us from operating our business, and adverse judgments or settlements could adversely affect our financial results and operations
6. 74If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and any trading volume could decline