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What changed in KRATOS DEFENSE & SECURITY SOLUTIONS, INC.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of KRATOS DEFENSE & SECURITY SOLUTIONS, INC.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+427 added−422 removedSource: 10-K (2024-02-13) vs 10-K (2023-02-23)

Top changes in KRATOS DEFENSE & SECURITY SOLUTIONS, INC.'s 2023 10-K

427 paragraphs added · 422 removed · 346 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

124 edited+32 added−24 removed88 unchanged
Biggest changeNavy in February 2019. • In 2019, the Company was awarded a $25.4 million contract for Lot 3 of low rate initial production for 34 BQM-177A aerial targets. • In 2020, the Company was awarded full rate production Lot 1 and 2 for $29.2 million and $38.7 million, for an additional 35 and 48 BQM-177A aerial targets, respectively. 8 • In 2021, we were awarded a $50.9 million contract modification exercising an option to procure 65 BQM-177A aerial targets, 50 for the Navy, seven for the government of Japan, and eight for the government of Saudi Arabia, as well as associated technical and administrative data in support of full rate production lot three. • In September 2022, Kratos was awarded a $14.7 million BQM-177A subsonic aerial target contract to continue software maintenance and updates of the BQM-177A SSAT. • In January 2023, the Naval Air Systems Command announced that it had recently awarded Kratos a $49.5 million contract for the production and delivery of 55 full rate production Lot 4 BQM-177A surface launched aerial targets, including associated equipment. • To date, Kratos has been awarded contracts to manufacture and deliver 312 BQM-177A SSATs.
Biggest changeNavy, seven for the government of Japan, and eight for the government of Saudi Arabia, as well as associated technical and administrative data in support of full rate production Lot 3. • In September 2022, Kratos was awarded a $14.7 million BQM-177A subsonic aerial target contract to continue software maintenance and updates of the BQM-177A SSAT. • In January 2023, the Naval Air Systems Command announced that it had recently awarded Kratos a $49.5 million contract for the production and delivery of 55 full rate production Lot 4 BQM-177A surface launched aerial targets, including associated equipment. • In 2021, we received a $338 million single award for production Lots 17 – 21, out-of-warranty repairs and contractor logistics support, with $30.5 million initially obligated for Lot 17.
In March 2021, the Kratos/AFRL team successfully completed the XQ-58A Valkyrie’s sixth test/demonstration flight and first release from the Valkyrie’s internal weapons bay. • In 2019, the Kratos XQ-58A Valkyrie was awarded Aviation Week’s Laureate Award for Defense Technology and Innovation. • In July 2020, the Company was awarded a five-year indefinite delivery indefinite quantity (“IDIQ”) contract valued at up to $400 million for the development, integration, and prototype air vehicle delivery in support of the Air Force’s Skyborg program. • In December 2020, Kratos was awarded a $37.7 million contract from the AFLCMC/WA Advanced Aircraft Program Executive Office for the Skyborg Delivery Order 2 to integrate, test and deliver XQ-58A Valkyrie aircraft.
In March 2021, the Kratos/AFRL team successfully completed the XQ-58A Valkyrie’s sixth test/demonstration flight and first release from the Valkyrie’s internal weapons bay. • In 2019, the Kratos XQ-58A Valkyrie was awarded Aviation Week’s Laureate Award for Defense Technology and Innovation. 7 • In July 2020, the Company was awarded a five-year indefinite delivery indefinite quantity (“IDIQ”) contract valued at up to $400 million for the development, integration, and prototype air vehicle delivery in support of the Air Force’s Skyborg program. • In December 2020, Kratos was awarded a $37.7 million contract from the AFLCMC/WA Advanced Aircraft Program Executive Office for the Skyborg Delivery Order 2 to integrate, test and deliver XQ-58A Valkyrie aircraft.
We have made these investments with the intention of developing, demonstrating, fielding, bringing to production and being first to market with high performance jet powered unmanned aerial combat systems and next generation, virtualized space and satellite communication systems, rocket and hypersonic systems and turbine and other engine technologies.
We have made these investments with the intention of developing, demonstrating, fielding, bringing to production and being first to market with high performance jet powered unmanned aerial combat systems, next generation, virtualized space and satellite communication systems, rocket and hypersonic systems and turbine and other engine technologies.
Leveraging off of this technology, for which Kratos owns important intellectual property, since 2013 we have made significant investments developing Kratos’ first UCAS, our Unmanned Tactical Aerial Platform (“UTAP-22”), also formally called the “Mako.” After successfully achieving the Mako’s first concept flights at the end of 2015, in 2016 we received a $12.6 million single-award contract to demonstrate certain payload integration and loyal wingman teaming with manned aircraft in a major military exercise.
Leveraging off of this technology, for which Kratos owns important intellectual property, since 2013 we have made significant investments developing Kratos’ first UCAS, our Unmanned Tactical Aerial Platform (“UTAP-22”), formally called the “Mako.” After successfully achieving the Mako’s first concept flights at the end of 2015, in 2016 we received a $12.6 million single-award contract to demonstrate certain payload integration and loyal wingman teaming with manned aircraft in a major military exercise.
These investments also included hiring senior executives with significant experience in the National Security and technology industries, hiring firms to support us on Capitol Hill, Congressionally and with our customers, strengthening our internal controls over financial reporting and accounting staff in support of increasing public company reporting requirements, expanding our infrastructure in response to increases in cybersecurity protection and related regulatory requirements, including the DoD’s Cybersecurity Maturity Model Certification (“CMMC”) requirement for all federal contractors, and expanding our backlog and bid and proposal pipeline resources.
These investments also included hiring senior executives and managers with significant experience in the National Security and technology industries, hiring firms to support us on Capitol Hill, Congressionally and with our customers, strengthening our internal controls over financial reporting and accounting staff in support of increasing public company reporting requirements, expanding our infrastructure in response to increases in cybersecurity protection and related regulatory requirements, including the DoD’s Cybersecurity Maturity Model Certification (“CMMC”) requirement for all federal contractors, and expanding our backlog and bid and proposal pipeline resources.
We believe our strategy of internally funding the research and development of many of our systems, products, solutions and capabilities will continue to enable Kratos to “be first to market” and advance our position in high growth markets, such as high performance UCAVs, satellite communications, turbine and engine technologies, hypersonic systems, ballistic missile targets and microwave electronics, and allow us to grow, over the long-term, at a rate greater than that of the industry.
We believe our strategy of internally funding the research and development of many of our systems, products, software, solutions and capabilities, will continue to enable Kratos to “be first to market” and advance our position in high growth markets, such as high performance UCAVs, satellite communications, turbine and engine technologies, hypersonic systems, ballistic missile targets and microwave electronics, and allow us to grow, over the long-term, at a rate greater than that of the industry.
Government regulations affecting our business are: • the Federal Acquisition Regulations and supplemental agency regulations, which comprehensively regulate the formation, administration, and performance under government contracts; • the Truthful Cost or Pricing Data Statute (formerly the Truth in Negotiations Act), which requires certification and disclosure of all cost and pricing data in connection with contract negotiations; • the Cost Accounting Standards, which impose accounting requirements that govern our right to reimbursement under cost-based government contracts; • the Industrial Security Manual, which establishes the security guidelines for classified programs and facilities as well as individual security clearances; 16 • the Foreign Corrupt Practices Act, which prohibits U.S. companies from providing anything of value to a foreign official to help obtain, retain or direct business, or obtain any unfair advantages; • the False Claims Act and the False Statements Act, which, respectively, impose penalties for payments made on the basis of false facts provided to the government and impose penalties on the basis of false statements, even if they do not result in a payment; and • laws, regulations and executive orders restricting the use and dissemination of information classified for National Security purposes and the exportation of certain products and technical data.
Government regulations affecting our business are: • the Federal Acquisition Regulations and supplemental agency regulations, which comprehensively regulate the formation, administration, and performance under government contracts; • the Truthful Cost or Pricing Data Statute (formerly the Truth in Negotiations Act), which requires certification and disclosure of all cost and pricing data in connection with contract negotiations; • the Cost Accounting Standards, which impose accounting requirements that govern our right to reimbursement under cost-based government contracts; • the Industrial Security Manual, which establishes the security guidelines for classified programs and facilities as well as individual security clearances; • the Foreign Corrupt Practices Act, which prohibits U.S. companies from providing anything of value to a foreign official to help obtain, retain or direct business, or obtain any unfair advantages; • the False Claims Act and the False Statements Act, which, respectively, impose penalties for payments made on the basis of false facts provided to the government and impose penalties on the basis of false statements, even if they do not result in a payment; and 17 • laws, regulations and executive orders restricting the use and dissemination of information classified for National Security purposes and the exportation of certain products and technical data.
We believe that the principal competitive factors in our ability to win new business include our ability as a technology company to address the defense, national security and commercial markets, our belief that affordability is a technology, our focus on making internally funded investments, and our ability to rapidly develop and produce actual working products and 15 systems and our strategy of being first to market with relevant systems, products and technology focused on priority DoD requirements and funding areas.
We believe that the principal competitive factors in our ability to win new business include our ability as a technology company to address the defense, national security and commercial markets, our belief that affordability is a technology, our focus on making internally funded investments, and our ability to rapidly develop and produce actual working products and systems and our strategy of being first to market with relevant systems, products and technology, focused on priority DoD requirements and funding areas.
We also believe that our ability to rapidly develop, demonstrate and field high technology systems and products at an affordable cost is a clear competitive differentiator for our Company. We anticipate that this overall expansion in our capabilities will enable us both to pursue larger program opportunities, higher value work and to further diversify our revenue base across additional U.S.
We also believe that our ability to rapidly develop, demonstrate and field high technology systems and products, at an affordable cost, is a clear competitive differentiator for our Company. We anticipate that this overall expansion in our capabilities will enable us to pursue larger program opportunities, higher value work and to further diversify our revenue base across additional U.S.
This has led to fewer sole source awards, as well as more emphasis on cost competitiveness, with contract awards issued on a Low Price Technically Acceptable (“LPTA”) basis rather than a best value basis, which has negatively impacted certain areas of our Defense and Rocket Support Services (“DRSS”) business in our KGS segment and in our training services business.
This has led to fewer sole source awards, as well as more emphasis on cost competitiveness, with certain contract awards issued on a Low Price Technically Acceptable (“LPTA”) basis, rather than a best value basis, which has negatively impacted certain areas of our Defense and Rocket Support Systems (“DRSS”) business in our KGS segment and in our training services business.
As the DoD works to increase, maintain or achieve a technological advantage over adversaries, it has continued its efforts to create breakthrough technologies for national security and related commercial markets, accelerate innovation to the warfighter and repurpose current capabilities to create cost-effective, disruptive technology advances that result in fielded systems and products.
As the DoD works to increase, maintain or achieve a technological advantage over adversaries, it has continued its efforts to create breakthrough technologies for national security and related commercial markets, accelerate innovation to the warfighter and repurpose current capabilities to create cost-effective, disruptive technology advances that result in rapidly fielded systems and products.
Our contract backlog provides visibility into stable future 10 revenue and cash flow over a diverse set of contracts. Importantly, a number of our systems and products are designed-in and support long term, multi-year/multi-decade programs, which provides significant operational and financial visibility to our Company. Highly skilled employees and an experienced management team.
Our contract backlog provides visibility into stable future revenue and cash flow over a diverse set of contracts. Importantly, a number of our systems and products are designed-in and support long term, multi-year/multi-decade programs, which provides significant operational and financial visibility to our Company. Highly skilled employees and an experienced management team.
Additionally, due to Kratos’ unique technology, product and potential intellectual property positions, including in the space, satellite, UAS, propulsion, engine, turbine, rocket, hypersonic and other areas, we are routinely approached to partner or team on large, new program and contract opportunities, where Kratos offerings are an important competitive differentiator.
Additionally, due to Kratos’ unique technology, product and potential intellectual property positions, including in the space, satellite, UAS, propulsion, engine, turbine, rocket, hypersonic and other areas, we are routinely approached to partner or team on large, new program and contract opportunities, where Kratos offerings and affordability are an important competitive differentiator.
Government contractors and system integrators such as Northrop Grumman, Lockheed Martin, General Dynamics, Raytheon Technologies, BAE Systems, L3Harris, General Atomics, and Boeing. While we view other government contractors as competitors, we also routinely team with these same companies in joint proposals or in the delivery of our products, solutions and services for customers.
Government contractors and system integrators such as Northrop Grumman, Lockheed Martin, General Dynamics, Raytheon Technologies, BAE Systems, L3Harris, General Atomics, and Boeing. While we view these and other government contractors as competitors, we also routinely team or partner with these same companies in joint proposals or in the delivery of our products, solutions and services for customers.
Air Force announced that the Skyborg Vanguard Program would be transitioning to a Program(s) of Record, certain of which the Company may not be able to publicly disclose. • In September 2022, it was announced that there was a successful flight from Kratos’ family of UCASs, which have been flying and demonstrating capabilities since 2015.
Air Force announced that the Skyborg Vanguard Program would be transitioning to a Program(s) of Record, certain details of which the Company may not be able to publicly disclose. • In September 2022, it was announced that there was a successful flight from Kratos’ family of UCASs, which have been flying and demonstrating capabilities since 2015.
The DoD has stated that they intend to field a family of new next generation drone aircraft, including Collaborative Combat Aircraft (“CCA”s) or UCAVs, including those that can successfully be force multipliers to manned aircraft and perform their mission in 9 highly contested, A2/AD environments.
The DoD has stated that they intend to field a family of new next generation drone aircraft, including Collaborative Combat Aircraft (“CCA”s) or UCAVs, including those that can successfully be force multipliers to manned aircraft and perform their mission in highly contested, A2/AD environments.
Our business may require compliance with state or local laws designed to limit the uses of personal user information gathered online or require online services to establish privacy policies. Material Availability We procure critical material, components, products and subsystems from both domestic and global supply partners.
Our business may require compliance with state or local laws designed to limit the uses of personal user information gathered online or require online services to establish privacy policies. Material Availability We procure critical material, components, products and subsystems from domestic and global supply partners.
Navy/Marine Corps to procure two XQ-58A Valkyrie drones, an initial $30 million in funding on a potential $250 million C5ISR program, a subcontract for Mach-TB and a Mayhem program award from our prime partner Dynetics, a $49.5 million contract announced by the Navy in January 2023 for the production and delivery of 55 full rate production Lot 4 BQM-177A surface launched aerial targets and related equipment, and a $54 million task order from the AFRL Turbine Engine Division (AFRL/RQT) to develop a low cost, limited life engine for attritable and expendable systems.
Navy/Marine Corps to procure two XQ-58A Valkyrie drones, an initial $30 million in funding on a potential $250 million single award to the Kratos C5ISR program, a subcontract for Mach-TB and a Mayhem program award from our prime partner Dynetics, a $49.5 million contract announced by the Navy in January 2023 for the production and delivery of 55 full rate production Lot 4 BQM-177A surface launched aerial targets and related equipment, and a $54 million task order from the AFRL Turbine Engine Division (AFRL/RQT) to develop a low cost, limited life engine for attritable and expendable systems.
In many instances, we are one of the few companies that invest in, develop, produce and are first to market with the mission-critical technology our customers require, or we outperformed our peers in a competitive bidding process, including as related to affordability.
In many instances, we believe that we are one of the few companies that invest in, develop, produce and are first to market with the mission-critical technology our customers require, or we outperformed our peers in a competitive bidding process, including as related to affordability.
The failure to obtain a permit for certain activities may be a violation of environmental law and subject the owner and operator to civil and criminal sanctions. Most environmental agencies 17 also have the power to shut down an operation if it is operating in violation of environmental law.
The failure to obtain a permit for certain activities may be a violation of environmental law and subject the owner and operator to civil and criminal sanctions. Most environmental agencies also have the power to shut down an operation if it is operating in violation of environmental law.
U.S. laws also allow citizens to bring private enforcement actions in some situations. Outside the U.S., the environmental laws and their enforcement vary and may be more burdensome. Other environmental laws, primarily in the U.S., address the contamination of land and groundwater and require the clean-up of such contamination.
U.S. laws also allow citizens to bring private enforcement actions in some situations. Outside the U.S., the environmental laws and their enforcement vary and may be more burdensome. 18 Other environmental laws, primarily in the U.S., address the contamination of land and groundwater and require the clean-up of such contamination.
In addition, the export from the U.S. of certain of our products may require the issuance of a license by the U.S. Department of Commerce under the Export Administration Act, as amended, and its implementing regulations as kept in force by the International Emergency Economic Powers Act of 1977, as amended.
In addition, the export from the U.S. of certain of our products may require the issuance of a license by the U.S. Department of Commerce under the Export Administration Act, and its implementing regulations as kept in force by the International Emergency Economic Powers Act of 1977.
The contract includes three phases of design, integration, and flight testing of the XQ-58A Valkyrie system, integrating multiple customer-defined mission payloads and customer-defined autonomy in coordination/cooperation with the 12 Skyborg System Design Agent, Leidos.
The contract includes three phases of design, integration, and flight testing of the XQ-58A Valkyrie system, integrating multiple customer-defined mission payloads and customer-defined autonomy in coordination/cooperation with the Skyborg System Design Agent, Leidos.
National Airspace System, (ii) the National Telecommunications and Information Administration and the Federal Communications Commission, which regulate the wireless communications upon which our UAS depend in the United States and (iii) the Defense Trade Controls of the U.S.
National Airspace System, (ii) the National Telecommunications and Information Administration and the Federal Communications Commission, which regulate the wireless communications upon which our UAS business depend in the United States and (iii) the Defense Trade Controls of the U.S.
This understanding of our customers’ missions, requirements, and needs, in conjunction with the strategic location of our employees, enables us to offer technical solutions tailored to our customers’ specific requirements and evolving mission objectives.
This understanding of our customers’ and partners’ missions, requirements, and needs, in conjunction with the strategic location of our employees, enables us to offer technical solutions tailored to our customers’ and partners’ specific requirements and evolving mission objectives.
We are pursuing new program and contract opportunities and awards as we build the business with our expanding technology base, intellectual property ownership, contract portfolio, and product, solution and service offerings.
We are pursuing new program and contract opportunities and awards as we build the business with our expanding technology base, intellectual property ownership, contract portfolio, and product, solution, software and service offerings.
At Kratos affordability is a technology, which we believe is a critical element of the successful execution of our strategy. Additionally, whenever there is a defense/security/commercial “dual use” opportunity for our technology, products and systems, we lever off of this opportunity with increased efficiencies and further reduced cost opportunity via increased quantities provided to dual or multiple markets.
At Kratos, affordability is a technology, which we believe is a critical element of the successful execution of our strategy. Additionally, whenever there is a defense/security/commercial “multi use” opportunity for our technology, products and systems, we lever off of this opportunity with increased efficiencies and further reduced cost opportunity via increased quantities provided to dual or multiple markets.
With our focus on delivering proven leading edge systems, products and technologies that address the most critical current and emerging threats, our customers include some of the most technologically advanced organizations of the defense establishment, including the U.S. Air Force, 6 the U.S. Navy, the U.S. Army and the U.S. Marine Corps.
With our focus on delivering proven leading edge systems, products and technologies that address the most critical current and emerging threats, our customers include some of the most technologically advanced organizations of the defense establishment, including the U.S. Air Force, the U.S. Navy, the U.S. Army, the U.S. Marine Corps, the U.S. Space Force and the U.S.
The contract includes three phases of design, integration, and flight testing of the XQ-58A Valkyrie or other systems, integrating multiple customer-defined mission payloads and customer-defined autonomy in coordination/cooperation with the Skyborg System Design Agent. • In December 2020 we received a $17.8 million award from the AFRL for work in support of the government’s Low Cost Attritable Aircraft Technology (LCAAT) efforts, including as related to the XQ-58A Valkyrie. • In December 2020, the Kratos Valkyrie UAS AttritableONE (as referred to by the US Air Force) completed a successful demonstration flight enabling the F-22 and F-35 5 th generation fighters to fly in formation together 7 in a test led by an integrated Advanced Battle Management System (“ABMS”) acquisition team comprised of AFRL and Air Force Life Cycle Management Center personnel, in conjunction with Eglin Air Force Base’s 46 th Test Squadron. • In August 2021, Kratos announced that it remains committed to be ready for a 2023 Skyborg Vanguard Program of Record, echoing the commitment expressed by the U.S.
The contract includes three phases of design, integration, and flight testing of the XQ-58A Valkyrie or other systems, integrating multiple customer-defined mission payloads and customer-defined autonomy in coordination/cooperation with the Skyborg System Design Agent. • In December 2020, we received a $17.8 million award from the AFRL for work in support of the government’s Low Cost Attritable Aircraft Technology (LCAAT) efforts, including as related to the XQ-58A Valkyrie. • In December 2020, the Kratos Valkyrie UAS AttritableONE (as referred to by the US Air Force) completed a successful demonstration flight enabling the F-22 and F-35 5th generation fighters to fly in formation together in a test led by an integrated Advanced Battle Management System (“ABMS”) acquisition team comprised of AFRL and Air Force Life Cycle Management Center personnel, in conjunction with Eglin Air Force Base’s 46th Test Squadron. • In August 2021, Kratos announced that it remains committed to be ready for a 2023 Skyborg Vanguard Program of Record, echoing the commitment expressed by the U.S.
Air Force in its August 16, 2021 update on the Skyborg program. Skyborg is an autonomy-focused capability developed to enable the Air Force to operate and sustain low-cost, teamed aircraft that can thwart adversaries with quick, decisive actions in contested environments.
Air Force in its August 16, 2021 update on the Skyborg program. Skyborg is an autonomy-focused capability developed to enable the U.S. Air Force to operate and sustain low-cost, teamed aircraft that can thwart adversaries with quick, decisive actions in contested environments.
Air Force in its August 16, 2021 update on the Skyborg program. Skyborg is an autonomy-focused capability developed to enable the Air Force to operate and sustain low-cost, teamed aircraft that can thwart adversaries with quick, decisive actions in contested environments.
Air Force in its August 16, 2021 update on the Skyborg program. Skyborg is an autonomy-focused capability developed to enable the U.S. Air Force to operate and sustain low-cost, teamed aircraft that can thwart adversaries with quick, decisive actions in contested environments.
In certain cases, our ability to obtain single award and/or sole source contracts is due to our intellectual property, proprietary products, historical performance qualifications, relative experience, affordability or Kratos already having demonstrated a first to market working system. We have a highly diverse base of customers and contracts with no contract representing more than 6% of 2022 revenue.
In certain cases, our ability to obtain 10 single award and/or sole source contracts is due to our intellectual property, proprietary products, historical performance qualifications, relative experience, affordability or Kratos already having demonstrated a first to market working system. We have a highly diverse base of customers and contracts with no contract representing more than 6% of 2023 revenue.
Customers A representative list of government customers in our KGS and US segments during 2022 included the U.S. Air Force, U.S. Army, U.S. Navy, U.S. Marines, Missile Defense Agency, Space Command, NASA, the AFRL, foreign military sales (“FMS”), the U.S.
Customers A representative list of government customers in our KGS and US segments during 2023 included the U.S. Air Force, U.S. Army, U.S. Navy, U.S. Marines, Missile Defense Agency, Space Command, NASA, the AFRL, foreign military sales (“FMS”), the U.S.
As a result of these changing market dynamics, Kratos has made the strategic decision to deemphasize these types of services businesses, and to focus our financial and other resources on our products, systems and technology focused business areas, making internally funded investments in our related core competency and market focus business areas, developing and owning important intellectual property and being first to market with our offerings.
As a result of these changing market dynamics, Kratos has made the strategic decision to deemphasize these types of potential LPTA services businesses, and to focus our financial and other resources on our products, systems, software and technology focused business areas, making internally funded investments in our related core competency and market focus business areas, developing and owning important intellectual property and being first to market with our offerings.
National Security Strategy, and the DoD’s focus on leveraging technology to defeat or deter peer and near-peer adversaries, are competitive advantages. Additionally, Kratos’ strategy of being “first to market” with our systems, products, technology and solutions, we believe is also a competitive differentiator, including as compared to the traditional defense industrial complex prime system integrators.
National Security Strategy, and the DoD’s focus on leveraging technology to defeat or deter peer and near-peer adversaries, are competitive advantages. Additionally, Kratos’ strategy of being “first to market” with our systems, products, technology and solutions, we believe is also a competitive differentiator, including in certain areas as compared to the traditional defense industrial complex prime system integrators.
We believe that our internally funded, developed and owned intellectual property allows us to rapidly provide relevant jet powered, unmanned aircraft, designed to fly in A2/AD environments and with performance capabilities equal to or greater than fourth generation manned jet fighter aircraft, at an affordable cost. Kratos’ tactical UAS provide force multiplication and augmentation for manned high-performance fighter aircraft.
We believe that our internally funded, developed and owned intellectual property, allows us to rapidly provide relevant, affordable, jet powered, unmanned aircraft, designed to fly in A2/AD environments and with performance capabilities equal to or greater than fourth generation manned jet fighter aircraft. Kratos’ tactical UAS provide force multiplication and augmentation for manned high-performance fighter aircraft.
Specifically, since 2012, we have invested over $200 million in our UAS business and since 2019, approximately $139 million in our Space, Satellite and Cyber business, and made investments in rocket and hypersonic systems, and engine and turbine technology areas, through internally funded research, development, contract design retrofit costs, contract design costs for new platforms, software design and development, non-recurring engineering costs and capital expenditures related to these strategic growth areas. • We invested in internally funded research, development and capital expenditures to build our own UTAP-22 (Mako) UAS from 2012 to 2015, and demonstrated the capabilities of the UTAP-22 Mako in a flight demonstration in the fall of 2015 where Kratos Mako drones flew as an unmanned wingman to manned tactical fighter jet aircraft.
Specifically, since 2012, we have invested over $230 million in our UAS business and since 2019, approximately $196 million in our Space, Satellite and Cyber business, and made investments in rocket and hypersonic systems, and engine 12 and turbine technology areas, through internally funded research, development, contract design retrofit costs, contract design costs for new platforms, software design and development, non-recurring engineering costs and capital expenditures related to these strategic growth areas. • We invested in internally funded research, development and capital expenditures to build our own UTAP-22 (Mako) UAS from 2012 to 2015, and demonstrated the capabilities of the UTAP-22 Mako in a flight demonstration in the fall of 2015 where Kratos Mako drones flew as an unmanned wingman to manned tactical fighter jet aircraft.
We believe that our reputation, longstanding customer relationships, 5 and the designed-in position of our systems, technology and products into our customers’ platforms, programs and systems, provide a unique competitive advantage and position us well for accelerated growth.
We believe that our reputation, longstanding customer relationships, and the designed-in position of our systems, technology and products into our customers’ platforms, programs and systems, provide a unique competitive advantage and position us well for future accelerated growth.
We deliver our systems, products and services through a skilled and primarily engineering and technically oriented workforce of approximately 3,600 employees. Our senior managers have significant experience with technology companies, commercial enterprises, U.S. Government agencies, the U.S. military, U.S. Government contractors and other relevant entities. A significant number of Kratos employees hold National Security clearances.
We deliver our systems, products and services through a skilled and primarily engineering and technically oriented workforce of approximately 3,900 employees. Our executives and senior managers have significant experience with technology companies, commercial enterprises, U.S. Government agencies, the U.S. military, U.S. Government contractors and other relevant entities. A significant number of Kratos employees hold National Security clearances.
The outlook for defense spending is primarily focused on deterring and defeating our adversaries, power projection, warfighting readiness, lethality, and recapitalization of key strategic defense systems to address peer and near peer threats. Our primary capabilities and areas of focus, certain which are listed below, are aligned with the objectives of the U.S.
The outlook for defense spending is primarily focused on deterring and defeating our adversaries, power projection, warfighting readiness, lethality, and recapitalization of key strategic defense systems to address peer and near peer threats. We believe that our primary capabilities and areas of focus, certain which are listed below, are aligned with the objectives of the U.S.
At Kratos, affordability is a technology, a core competence and a focus that we believe is disruptive and brings an important value proposition to our customers. Kratos business focus areas include: unmanned systems, space, satellite communications, microwave electronics, cybersecurity/warfare, missile defense, hypersonic systems, C5ISR, turbine technologies and training systems.
At Kratos, affordability is a technology, a core competence and a focus that we believe is disruptive and brings an important value proposition to our customers. Kratos business focus areas include: unmanned systems, space and satellite communications, microwave electronics, cybersecurity/warfare, missile defense, hypersonic systems, C5ISR, turbine technologies, jet and rocket engines and training systems.
Additionally, Kratos customers also include the Defense Innovation Unit (“DIU”) (formerly the Defense Innovation Unit Experimental (“DIUx”)), Defense Advanced Research Projects Agency (“DARPA”), Air Force Research Laboratory (“AFRL”), the Strategic Capabilities Office (“SCO”), the Strategic Command (“STRATCOM”), the National Aeronautics and Space Administration (“NASA”), the U.S. intelligence community, and other confidential customers.
Additionally, Kratos customers also include the Defense Innovation Unit (“DIU”) (formerly the Defense Innovation Unit Experimental (“DIUx”)), Defense Advanced Research Projects Agency (“DARPA”), Air Force Research Laboratory (“AFRL”), the Strategic Capabilities Office (“SCO”), the Office of the Secretary of Defense (“OSD”),the Strategic Command (“STRATCOM”), the National Aeronautics and Space Administration (“NASA”), the U.S. intelligence community, and other confidential customers.
Government contractors and system integrators such as Northrop Grumman, Lockheed Martin, General Dynamics, Raytheon Technologies, BAE Systems, L3Harris, and Boeing, as well as Intelsat, Blue Halo, Microsoft, Amazon, Siemens, Rolls Royce and others. Revenue from the U.S.
Government contractors and system integrators such as Northrop Grumman, Lockheed Martin, General Dynamics, Raytheon Technologies, BAE Systems, L3Harris, and Boeing, as well as Intelsat, Blue Halo, Microsoft, Amazon, Siemens, Rolls Royce, Boom, GE Aerospace and others. Revenue from the U.S.
We are focused on expanding the technology, products, systems and solutions we provide to our current customers by making targeted internally funded investments in our core focus areas, by leveraging our strong relationships, technical capabilities, intellectual property and past performance qualifications and by offering a wider range of comprehensive low-cost technology leading and proven products and solutions.
We are focused on expanding the technology, products, systems and solutions we provide to our customers by making targeted internally funded investments in certain core focus areas, by leveraging our strong relationships, technical capabilities, intellectual property and past performance qualifications and by offering a wider range of comprehensive low-cost technology leading and proven products and solutions compared to our competitors.
These internally funded investments typically allow us to retain the intellectual property rights, design and data packages for these platforms and systems, including to ultimately secure sole source technology or production positions in these strategic growth areas.
These internally funded investments typically allow us to retain certain intellectual property rights, design and data packages, for these platforms, software and systems, including to ultimately secure sole source technology or production positions in these strategic growth areas.
We are also assessing new tactical program areas and platforms to pursue that are consistent with our core capabilities, technology and intellectual property. These current and existing programs, contracts, customers and related offerings provide Kratos important past performance qualifications and experience, positioning us to credibly pursue new opportunities. 11 Expand customer and contract base.
Additionally, we are assessing new program areas and platforms to pursue that are consistent with our core capabilities, technology and intellectual property. These current and existing programs, contracts, customers and related offerings provide Kratos important past performance qualifications and experience, positioning us to credibly pursue new opportunities. Expand customer and contract base.
In executing our strategy, Kratos primarily utilizes proven technology, which we modify, adopt, change, integrate and apply to address market opportunities that we identify jointly with our customers. This approach allows us to rapidly develop and field relevant offerings, while reducing technical, schedule and financial risk.
In executing our strategy, Kratos primarily seeks to utilize proven technology, which we modify, adopt, change, integrate and apply to address market opportunities that we identify jointly with our customers and with our partners. This approach allows us to rapidly develop and field relevant offerings, while reducing technical, schedule and financial risk.
Our advanced capabilities in the training systems and solutions market, including mixed, virtual and synthetic reality technology for aircraft, combat and other vehicles, have allowed us to successfully remain at the forefront of defense industry readiness initiatives.
We believe that our advanced capabilities in the training systems and solutions market, including mixed, virtual and synthetic reality technology, products and systems for aircraft, combat and other vehicles, have allowed us to successfully remain at the forefront of defense industry readiness initiatives.
Research and Development We believe that our future success depends upon our ability to continue to rapidly develop new products and services, and enhancements to and applications for our existing products and services, to be delivered at an affordable cost. Our research and development expenses were $38.6 million, $35.2 million and $27.0 million in 2022, 2021, and 2020, respectively.
Research and Development We believe that our future success depends upon our ability to continue to rapidly develop new products and services, and enhancements to and applications for our existing products and services, to be delivered at an affordable cost. Our research and development expenses were $38.4 million, $38.6 million and $35.2 million in 2023, 2022, and 2021, respectively.
Navy, other National Security related customers and agencies, commercial and other customers and entities enable us to develop an in-depth understanding of their missions, problems and technical requirements.
Marine Corps and other National Security-related customers and agencies, commercial and other customers and entities, enable us to develop an in-depth understanding of their missions, problems and technical requirements.
We rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality agreements, to establish and protect our proprietary rights. As of December 25, 2022, we held a number of U.S. and foreign patents.
We rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality agreements, to establish and protect our proprietary rights. As of December 31, 2023, we held a number of U.S. and foreign patents.
As such, consistent with the needs and requirements of the U.S. and allied militaries, we believe that our first to market position and leadership in these types of high-performance unmanned aircraft, including having a family of multiple UCAS flying today, and having active manufacturing facilities currently producing this class of UCAS, provides us with a potential market opportunity of these types of low-cost, high-performance systems.
As such, consistent with the needs and requirements of the U.S. and allied militaries, we believe that our first to market position and leadership in these types of high-performance unmanned aircraft, including having a family of multiple UCAS flying today, including with a weapons range pedigree and having active manufacturing facilities currently producing this class of UCAS, provides us with a potential large market opportunity.
Additionally, our ability to deliver cost effective systems, products, solutions and services that meet our customers’ requirements is also a key differentiator. In the U.S. defense, IT, and services markets, the U.S. Government has stressed competition and affordability or low cost in connection with its future procurement of products and services.
Additionally, our ability to deliver cost effective systems, products, solutions and services that meet our customers’ and partners’ requirements is also a key differentiator. 16 In the U.S. defense, IT, and services markets, the U.S. Government has stressed competition and affordability or low cost in connection with its future procurement of products and services, i.e. affordable mass.
Specifically, we have increased internally funded research and development, capital expenditures, including for drone aircraft, non-recurring engineering expenditures, and infrastructure investments, including executive management, bid, proposal and new business capture, pursuit and related expenses.
Specifically, we have increased internally funded research and development, capital and other expenditures, non-recurring engineering expenditures, and infrastructure investments, including executive management, bid, proposal and new business capture, pursuit and related expenses.
Competitive Strengths We believe that our status as a technology company, including the composition and experience of our Board of Directors and Executive management team, our ability to act and make decisions quickly, our culture of affordable innovation and our intellectual property, proprietary products, and technology, which are strongly aligned with certain of the highest priority spending areas of the DoD, the U.S.
Competitive Strengths We believe that Kratos being a technology company, including the composition and experience of our Board of Directors and Executive management team, our ability to act and make decisions quickly, our culture of affordable innovation and our investments to develop and maintain intellectual property, proprietary products, and technology, which are strongly aligned with certain of the highest priority spending areas of the DoD, the U.S.
National Security space assets and infrastructure. Accordingly, our proprietary products, systems and technologies, many of which are open architecture providing our customers technology and vendor flexibility and reduced costs, are developed and refined with the goal of enabling our customers to maintain an advantage over the advanced and constantly evolving threats of adversaries, at an affordable cost.
Accordingly, our proprietary products, systems and technologies, many of which are open architecture providing our customers technology access, vendor flexibility and reduced costs, are developed and refined with the goal of enabling our customers to maintain an advantage over the advanced and constantly evolving threats of adversaries, at an affordable cost.
Our fixed-price contracts, the majority of which are production contracts, represent approximately 71% of our 2022 revenue. Our cost-plus-fee contracts and time and materials contracts represent approximately 24% and 5%, respectively, of our 2022 revenue. We believe our diverse base of key contracts and low reliance on any one contract provides us with a stable, balanced revenue stream.
Our fixed-price contracts, the majority of which are production contracts, represent approximately 70% of our 2023 revenue. Our cost-plus-fee contracts and time and materials contracts represent approximately 24% and 6%, respectively, of our 2023 revenue. We believe our diverse base of key contracts and low reliance on any one contract provides us with a stable, balanced revenue stream.
In addition, once our products are “designed in” and we are on-site with a customer and providing our products and solutions, we have historically been successful in winning new and recompete business.
In addition, once our products are “designed in” to a program or system and we are on-site with a customer and providing our products and solutions, we have historically been successful in winning new and recompete business.
We believe a recent example of Kratos’ competitive strengths is that certain of Kratos Space, Satellite and Cyber business areas are uniquely positioned, as represented by certain new program awards, to address the DoD, National Security and commercial market areas, including with our first to market proprietary virtualized OpenSpace™ products and technology, which we believe provides our Company a competitive advantage.
We believe an example of Kratos’ competitive strengths is that certain of Kratos Space, Satellite and Cyber business areas are uniquely positioned, as represented by certain new program awards and by publicly available customer testimonials, to address the DoD, National Security and commercial 5 market areas, including with our first to market, proprietary, virtualized OpenSpace™ software products and technology, which we believe provides our Company a competitive advantage.
This is evidenced by our significant investment in high-performance Unmanned Aerial Drone System (“UADS”) platforms and technology, which has resulted in a series of Unmanned Combat Aerial System (“UCAS”) contract wins for Kratos.
This is evidenced by our significant investment in high-performance, jet powered Unmanned Aerial Drone System (“UADS”) platforms and technology, which has resulted in a series of Unmanned Combat Aerial System (“UCAS”) contract wins for Kratos with multiple customers.
This disclosure by the Secretary of the Air Force is considered to be a strong indication that the Air Force is counting on autonomous weapon systems to provide an advantage against peer adversaries to the United States. • In December 2022, the U.S.
Air Force is considered to be a strong indication that the U.S. Air Force is counting on autonomous weapon systems to provide an advantage against peer adversaries to the United States. • In December 2022, the U.S.
Kratos is an industry leader in high performance, jet powered, unmanned aerial target drone systems which are designed to replicate state of the art adversarial fighter aircraft, missiles, drones and other threats. Kratos is the sole source or primary unmanned aerial target drone system provider to the U.S. Air Force, U.S. Army, U.S. Navy, and numerous allied foreign defense agencies.
Kratos is an industry leader in high performance, jet powered, unmanned aerial target drone systems, which are designed to replicate state of the art, leading technology adversarial fighter aircraft, missiles, drones and other threats. Kratos is the sole source or primary unmanned aerial target drone system provider to the U.S. Air Force, U.S. Army, U.S.
Southern Command, STRATCOM, the SCO, DIU or DIUx, the Rapid Capabilities Offices, the U.S. intelligence community, DARPA and certain confidential customers. A representative list of non-government customers during 2022 included tier one, large U.S.
Southern Command, STRATCOM, the SCO, DIU or DIUx, the Rapid Capabilities Offices, the U.S. intelligence community, DARPA, Office of the Secretary of Defense (OSD), and certain confidential customers. A representative list of non-government customers during 2023 included tier one, large U.S.
Our Strategy Our strategy is to be a leading technology, systems and products provider to the Defense, National Security and commercial markets, and to disrupt our relevant market focus areas, by being first to market with internally funded and developed, relevant offerings at an affordable cost.
Our Strategy Our strategy is to be a leading technology, systems, software and products provider to the defense, national security and relevant commercial and related global markets, and to disrupt our market focus areas, by being first to market with internally funded and developed offerings, engineered and designed to be mass produced at an affordable cost.
In 2022, we received an approximate $160 million potential contract award from Blue Halo and a significant contract award from Intelsat as a result of Kratos OpenSpace™ products and technology. Capitalize on corporate infrastructure investments.
In 2022, we received an approximate $160 million potential contract award from Blue Halo and a significant contract award from Intelsat as a result of Kratos OpenSpace™ products and technology.
Additionally, with our space & satellite, terrestrial ground segment command, control, radio frequency interference monitoring, geolocation and mitigation products and capabilities, we believe we are well-positioned to capitalize on the DoD, National Security and commercial markets increasing budgets and funding for space investments, including a significant portion of which is for the development and protection of U.S.
Additionally, with our space & satellite, terrestrial ground segment command, control, radio frequency interference monitoring, geolocation and mitigation technology, software, products and capabilities, we believe we are well-positioned to capitalize on the DoD, National Security and commercial markets increasing budgets and funding for space investments, including funding for the development and protection of U.S. National Security space assets and infrastructure.
A key aspect of Kratos’ internal growth philosophy is also that “it is better to have a large part of something, than all of nothing”, which is directly relevant to our teaming and partnership approach and strategy. Expand technology product, solution and service offerings provided to existing customers.
A key aspect of Kratos’ internal growth philosophy is also that “it is better to have a large part of something, than all of nothing”, which is directly relevant to our teaming and partnership approach and strategy, including with the traditional large aerospace and defense system integrators. Expand technology product, solution and service offerings provided to existing customers.
The Kratos Government Solutions (“KGS”) reportable segment is comprised of an aggregation of KGS operating segments, including our microwave electronic products, space, satellite and cyber, training solutions, C5ISR/modular systems, turbine technologies, and defense and rocket support services operating segments.
Current Reporting Segments The Company currently operates in two reportable segments. The Kratos Government Solutions (“KGS”) reportable segment is comprised of an aggregation of KGS operating segments, including our microwave electronic products, space, satellite and cyber, training solutions, C5ISR/modular systems, turbine technologies, and defense and rocket support services operating segments.
Kratos is producing a lot of 12 Valkyrie drones systems, certain of which have been delivered to the respective customer(s), with others either committed to customer funded contracts or currently being produced with Kratos funds in advance of potential expected customer contracts.
Kratos is currently producing two lots of 12 Valkyrie drone systems, certain of the first lot of 12 which have been delivered to the respective customer(s), with others either committed to customer funded contracts or currently being produced 9 with Kratos funds in advance of potential expected customer contracts.
We also received an approximate $160 million contract award from our partner Blue Halo for the SCAR program and a contract award to deliver an advanced spectrum monitoring system for OneWeb to monitor, analyze and review its fleet of Low Earth Orbit constellations. Significant cash flow visibility driven by stable backlog.
We also received an approximate $160 million contract award from our partner Blue Halo for the SCAR program and a contract award to deliver an advanced spectrum monitoring system for OneWeb to monitor, analyze and review its fleet of Low Earth Orbit constellations.
While budget pressures routinely cause delays in contracts or orders for our business, the global threat environment as described in the recently released National Security Strategy documents and current budget projections suggest defense spending will continue to be significant over the next few years, including to address the increasing threats to the United States and its allies.
While budget pressures routinely cause delays in contracts or orders for our business, the global threat environment as described in the 2022 National Security Strategy document and current budget projections suggest that future years defense spending will continue to be significant, including to address the increasing threats to the United States and its allies.
Kratos is also an industry leader in ground-based command, control and communications systems (“C3”), Telemetry Tracking and Control (“TT&C”) and other systems for satellites, and a leader in related radio frequency interference identification, geolocation and mitigation, or Space Domain Awareness. Our primary customers include the U.S. Air Force, Space Command and other agencies, and commercial customers, enterprises and entities.
We believe that Kratos is an industry leader in ground-based command, control and communications systems (“C3”), Telemetry Tracking and Control (“TT&C”) and other systems for satellites, and a leader in related radio frequency interference identification, geolocation and mitigation, or Space Domain Awareness. Our primary customers include the U.S.
As of December 25, 2022 and December 26, 2021, our total backlog (see Backlog below) was approximately $1,112.4 million and $953.9 million respectively, of which approximately $721.4 million was funded in 2022 and $653.7 million was funded in 2021. The majority of our sales are from awards issued under long-term contracts, typically three to five years in duration.
As of December 31, 2023 and December 25, 2022, our total backlog (see Backlog below) was approximately $1,243.9 million and $1,112.4 million respectively, of which approximately $944.6 million was funded in 2023 and $721.4 million was funded in 2022. The majority of our sales are from awards issued under long-term contracts, typically three to five years in duration.
Kratos has a reputation for being the industry disruptor, including by successfully rapidly designing, developing, demonstrating and fielding mission-critical products, solutions and services to our customers, at an affordable cost. Our long-term relationships with the U.S. Air Force, U.S. Army, U.S.
In-depth understanding of customer missions. We believe that Kratos has a reputation for being an industry disruptor, including by successfully rapidly designing, developing, demonstrating and fielding mission-critical products, solutions and services to our customers, at an affordable cost. Our long-term relationships with the U.S. Air Force, U.S. Army, U.S. Navy, U.S.
Kratos is the recognized affordable, industry leader in each of these areas, where Kratos systems, products and technology have disrupted the traditional market dynamics, including recent important new program and contract awards in the hypersonic areas with the Multi-Service Advanced Capability Hypersonics Test Bed (the “MACH TB”) and Mayhem Hypersonic System (“Mayhem”) programs.
Kratos systems, products and technology have disrupted the traditional market dynamics, including recent important new program and contract awards in the hypersonic areas with the Multi-Service Advanced Capability Hypersonics Test Bed (the “MACH TB”) and Mayhem Hypersonic System (“Mayhem”) programs.
Additionally, funding for certain programs, including those in which we currently participate, may be reduced, delayed or cancelled, and budget uncertainty or funding cuts globally could adversely affect the viability of our partners, teammates, subcontractors and suppliers, and our employee base. We believe that our business is well-positioned in areas that the U.S.
Additionally, funding for certain programs, including those in which we currently participate, may be reduced, delayed or cancelled, and budget uncertainty or funding cuts globally could adversely affect the viability of our customers, partners, teammates, subcontractors, suppliers, and our employee base.
We are focused on expanding our customer base into areas with significant growth opportunities as indicated by the FY 2023 spending bill and the 2022 National Defense Strategy documents, by leveraging our technology, intellectual property, proprietary products, capabilities, industry reputation, long-term customer relationships and diverse contract base.
We are focused on expanding our customer base into areas with significant growth opportunities, including as indicated by the fiscal year 2024 spending bill, the 2022 National Defense Strategy document and the related Fiscal Year Defense Plan (FYDP), by leveraging our technology, intellectual property, proprietary products, capabilities, industry reputation, long-term customer relationships and diverse contract base.
Kratos is the sole source provider of the BQM-167A to the US Air Force. • In 2018, we received a sole source, single award multi-year IDIQ contract from the Swedish Defence Materiel Administration for our MQM-178 Firejet aerial target aircraft and associated ground support equipment, spares, payloads, components, expendables and support services.
The AFSAT program is one of the largest and most important to Kratos. • In 2018, we received a sole source, single award multi-year IDIQ contract from the Swedish Defence Materiel Administration for our MQM-178 Firejet aerial target aircraft and associated ground support equipment, spares, payloads, components, expendables and support services.
These areas include unmanned systems, space and satellite communications, cybersecurity, microwave electronics, hypersonic and rocket systems, missile defense, turbine technologies, and training systems, which we believe have the highest potential for growth, based on the National Defense Strategy and recent funding requests.
Primary Kratos business areas include unmanned systems, space and satellite communications, cybersecurity, microwave electronics, hypersonic and rocket systems, missile defense, jet engines, rocket motors and turbine technologies, and training systems, which we believe have the highest potential for growth, based on the 11 2022 National Defense Strategy document and recent funding requests.
We believe any continued budget pressures, Continuing Resolution Authorizations (“CRAs”), Federal Government debt ceiling issues, or Federal Government shutdowns could have serious negative consequences for the security of our country and the defense industrial base, including the Company and the customers, employees, suppliers, investors, and communities that rely on companies in the defense industrial base.
We believe continued budget pressures (which are expected), CRAs, (which are also expected), future Federal Government debt ceiling issues, or Federal Government shutdowns could have serious negative consequences for the security of our country and the defense industrial base, including the Company and the related customers, employees, suppliers, investors, and communities that rely on companies in the defense industrial base.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeAdditional factors that may cause our financial results to fluctuate from quarter to quarter include those addressed elsewhere in this Item 1A “Risk Factors” and the following factors, among others: • the terms of customer contracts that affect the timing of revenue recognition; • variability in demand for our services and solutions; • commencement, completion or termination of contracts during any particular quarter; • timing of shipments and product deliveries; • timing of award or performance incentive fee notices; • timing of significant bid and proposal costs; • the costs of remediating unknown defects, errors or performance problems of our product offerings; • variable purchasing patterns under GSA contracts, GWACs, blanket purchase agreements and other IDIQ contracts; • restrictions on and delays related to the export of defense articles and services; • costs related to government inquiries; • strategic decisions by us or our competitors, such as acquisitions, divestitures, spin-offs and joint ventures; • strategic investments or changes in business strategy; • changes in the extent to which we use subcontractors; • seasonal fluctuations in our staff utilization rates; • changes in our effective tax rate, including changes in our judgment as to the necessity of the valuation allowance recorded against our deferred tax assets; and • the length of sales cycles. 28 Significant fluctuations in our operating results for a particular quarter could cause us to fall out of compliance with the financial covenants related to our debt, which if not waived, could restrict our access to capital and cause us to take extreme measures to pay down the debt, if any, under our new 5-year $200 million Revolving Credit Facility and 5-year $200 million Term Loan A (collectively, the “New Credit Facility”).
Biggest changeAdditional factors that may cause our financial results to fluctuate from quarter to quarter include those addressed elsewhere in this Item 1A “Risk Factors” and the following factors, among others: • the terms of customer contracts that affect the timing of revenue recognition; • variability in demand for our services and solutions; • commencement, completion or termination of contracts during any particular quarter; • timing of shipments and product deliveries; • timing of award or performance incentive fee notices; • timing of significant bid and proposal costs; • the costs of remediating unknown defects, errors or performance problems of our product offerings; • variable purchasing patterns under GSA contracts, GWACs, blanket purchase agreements and other IDIQ contracts; • restrictions on and delays related to the export of defense articles and services; • costs related to government inquiries; • strategic decisions by us or our competitors, such as acquisitions, divestitures, spin-offs and joint ventures; • strategic investments or changes in business strategy; • the ability of certain of our commercial based customers to raise adequate capital to fund early stage commercial initiatives; 29 • changes in the extent to which we use subcontractors; • seasonal fluctuations in our staff utilization rates; • changes in our effective tax rate, including changes in our judgment as to the necessity of the valuation allowance recorded against our deferred tax assets; and • the length of sales cycles.
We may also incur additional expenses when contracts are terminated or expire and are not renewed. In addition, payments due to us from our customers may be delayed due to billing cycles or as a result of failures of government budgets to gain congressional and administration approval in a timely manner. The U.S. Government’s fiscal year ends September 30.
We may also incur additional expenses when contracts are terminated or expire or are not renewed. In addition, payments due to us from our customers may be delayed due to billing cycles or as a result of failures of government budgets to gain congressional and administration approval in a timely manner. The U.S. Government’s fiscal year ends September 30.
Any such suspensions may reduce our revenue in the fourth quarter of the federal fiscal year or the first quarter of the subsequent year. The U.S. Government’s fiscal year end can also trigger increased purchase requests from customers for equipment and materials. Any increased purchase requests we receive as a result of the U.S.
Any such suspensions may reduce our revenue in the fourth quarter of the federal fiscal year or the first quarter of the subsequent federal fiscal year. The U.S. Government’s fiscal year end can also trigger increased purchase requests from customers for equipment and materials. Any increased purchase requests we receive as a result of the U.S.
If we determine that it is necessary to raise additional funds, either through an expansion or refinancing of our Credit Agreement or through public or private debt offerings or additional equity financings, additional financing may not be available on terms favorable to us, or at all.
If we determine that it is necessary to raise additional funds, either through an expansion or refinancing of our Credit Agreement or through public or private debt offerings or additional public or private equity financings, additional financing may not be available on terms favorable to us, or at all.
Our receipt of adverse audit findings or the failure to obtain an “approved” determination of our various accounting and management internal control systems, including our changes to indirect cost and direct labor estimating systems, from the responsible U.S.
Our receipt of adverse audit findings or the failure to obtain an “approved” determination of our various accounting and management internal control systems, including changes to our indirect cost and direct labor estimating systems, from the responsible U.S.
The price of our stock has been in the past, and will continue to be, subject to fluctuations as a result of a number of factors, most of which we cannot control, including: failure of our operating results to meet market or analysts’ expectations; general fluctuations in the stock market; actual or anticipated fluctuations in our operating results based on reduced and/or delayed government spending or the threat thereof; fluctuations in the stock prices of companies in our industry; changes in earnings estimated by securities analysts or our ability to meet those estimates; rumors or dissemination of false information; short selling of our common stock; litigation and government inquiries; political and/or military events associated with current worldwide conflicts; and domestic and foreign economic conditions.
The market price of our common stock has been in the past, and will continue to be, subject to fluctuations as a result of a number of factors, most of which we cannot control, including: failure of our operating results to meet market or analysts’ expectations; general fluctuations in the stock market; actual or anticipated fluctuations in our operating results based on reduced and/or delayed government spending or the threat thereof; fluctuations in the stock prices of companies in our industry; changes in earnings estimated by securities analysts or our ability to meet those estimates; rumors or dissemination of false information; short selling of our common stock; litigation and government inquiries; political and/or military events associated with current worldwide conflicts; and domestic and foreign economic conditions.
Risks Related to our Operations • Our operations expose us to risks associated with pandemics, epidemics or other public health emergencies, such as the outbreak of COVID-19. 19 • We may need additional capital to fund the growth of our business, and financing may not be available on favorable terms or at all. • Our 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. • Past acquisitions and future acquisitions could prove difficult to integrate, disrupt our business, dilute stockholder value and strain our resources. • The loss of any member of our senior management could impair our relationships with U.S.
Risks Related to our Operations • Our operations expose us to risks associated with pandemics, epidemics or other public health emergencies, such as the outbreak of COVID-19. 20 • We may need additional capital to fund the growth of our business, and financing may not be available on favorable terms or at all. • Our 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. • Past acquisitions and future acquisitions could prove difficult to integrate, disrupt our business, dilute stockholder value and strain our resources. • The loss of any member of our senior management could impair our relationships with U.S.
In addition, we may encounter challenges to satisfy those customers who require that all of the components of our products be certified as conflict-free, which could place us at a competitive disadvantage if we are unable to do so. Natural disasters or severe weather conditions could disrupt our business and result in loss of revenue or higher expenses.
In addition, we may encounter challenges to satisfy those customers who require that all of the components of our products be certified as conflict-free, which could place us at a competitive disadvantage if we are unable to do so. 43 Natural disasters or severe weather conditions could disrupt our business and result in loss of revenue or higher expenses.
Given the current market conditions and continued economic uncertainty in the U.S. defense industry, including sequestration and issues surrounding the national debt ceiling and COVID-19 related impacts to certain of our businesses, including disruptions in supply chain and inflationary impacts, our future revenues, profits, cash flows, and taxable income could be substantially lower than our current projections.
Given the current market conditions and continued economic uncertainty in the U.S. defense industry, including sequestration and issues surrounding the national debt ceiling and COVID-19 related impacts to certain of our businesses, including disruptions in supply chain and inflationary impacts, our future revenues, profits, cash flows, and taxable income could be substantially lower than our then-current projections.
In addition, under fixed-price contracts, we are required to absorb any unanticipated costs resulting from inflation, including increases in costs of materials and labor workforce. Under cost-plus-fee contracts, if costs exceed the contract ceiling or are not allowable under the provisions of the contract or applicable regulations, then we may not be able to obtain reimbursement for all such costs.
In addition, under fixed-price contracts, we are required to absorb any unanticipated costs resulting from inflation, including increases in costs of materials and labor. Under cost-plus-fee contracts, if costs exceed the contract ceiling or are not allowable under the provisions of the contract or applicable regulations, then we may not be able to obtain reimbursement for all such costs.
A pandemic, including COVID-19 or other public health epidemic, poses the risk that we or our employees, suppliers and other partners may be prevented from conducting business activities for an indefinite period of time, including due to spread of the disease within these groups or due to shutdowns that may be requested or mandated by governmental authorities.
A pandemic, including COVID-19 or other epidemic or public health emergency, poses the risk that we or our employees, suppliers and other partners may be prevented from conducting business activities for an indefinite period of time, including due to spread of the disease within these groups or due to shutdowns that may be requested or mandated by governmental authorities.
Additionally, we may become subject to claims by third parties based on damages, including personal injury and property damage, and costs resulting from the disposal or release of hazardous substances into the environment. 41 The increasing focus on environmental sustainability and social initiatives could increase our costs, harm our reputation and adversely impact our financial results.
Additionally, we may become subject to claims by third parties based on damages, including personal injury and property damage, and costs resulting from the disposal or release of hazardous substances into the environment. The increasing focus on environmental sustainability and social initiatives could increase our costs, harm our reputation and adversely impact our financial results.
We may be unable to bid on new contract awards or on follow-on awards for existing work, depending on the level of standard as required for each solicitation, which could adversely impact our revenues, operating margins and cash flows. The cost to comply with the new CMMC requirement has been significant and may increase.
We may be unable to bid on new contract awards or on follow-on awards for existing work, depending on the level of standard as required for each solicitation, which could adversely impact our revenues, operating margins and cash flows. The 36 cost to comply with the new CMMC requirement has been significant and may increase.
Competitive procurements impose substantial costs and managerial time and effort in order to prepare bids and proposals for contracts that may not be awarded to us. In many cases, unsuccessful bidders for government contracts are provided the opportunity to formally protest certain contract awards through various agencies, administrative and judicial channels.
Competitive procurements impose substantial costs and managerial time and effort in order to prepare bids and proposals for contracts that may not be awarded to us. In many cases, unsuccessful bidders for government contracts are provided the opportunity to formally protest certain contract awards through various agencies, 26 administrative and judicial channels.
See Note 15 of the Notes to Consolidated Financial Statements contained within this Annual Report for a further discussion of our legal proceedings. If 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.
See Note 15 of the Notes to Consolidated Financial Statements contained within this Annual Report for a further discussion of our legal proceedings. 45 If 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.
There has been increasing public focus by investors, environmental activists, the media and governmental and nongovernmental organizations on a variety of environmental, social and other sustainability matters. We may experience pressure to make commitments relating to sustainability matters that affect us, including the design and implementation of specific risk mitigation strategic initiatives relating to sustainability.
There has been increasing focus by investors, environmental activists, the media and governmental and nongovernmental organizations on a variety of environmental, social and other sustainability matters. We may experience pressure to make commitments relating to sustainability matters that affect us, including the design and implementation of specific risk mitigation strategic initiatives relating to sustainability.
These events, if not prevented or effectively mitigated, could damage our reputation, require remedial actions and lead to loss of business, regulatory actions, potential liability and other financial losses. We provide systems, products and services to various customers (both government and commercial) who also face cyber threats.
These events, if not prevented or effectively mitigated, could damage our reputation, require remedial actions and lead to loss of business, regulatory actions, potential liability and other losses. We provide systems, products and services to various customers (both government and commercial) who also face cyber threats.
Limitations on our ability to borrow contained in our Credit Agreement may limit our access to capital, and we could fall out of compliance with financial and other covenants contained in our Credit Agreement which, if not waived, would restrict our access to capital and could require us to pay down any then-existing debt under the Credit Agreement.
Limitations on our ability to borrow contained in our Credit Agreement may limit our access to capital, and we could fall out of compliance with financial and other covenants contained in our Credit Agreement which, if not waived, 33 would restrict our access to capital and could require us to pay down any then-existing debt under the Credit Agreement.
We cannot be sure that our pending patent applications will result in the issuance of patents to us, that patents issued to or licensed by us in the past or in the future will not be challenged or circumvented by competitors or that these patents will remain valid or sufficiently broad to preclude our competitors from introducing technologies similar to those covered by our patents and patent applications.
We cannot be sure that our pending patent applications will result in the issuance of patents to us, that patents issued to or licensed 40 by us in the past or in the future will not be challenged or circumvented by competitors or that these patents will remain valid or sufficiently broad to preclude our competitors from introducing technologies similar to those covered by our patents and patent applications.
We have experienced an increase in competitor bid protests on contracts on which we 25 were the successful bidder due to the competitive environment resulting from decreased government spending. In addition, we have formally protested procurement awards in which we were not the initial successful bidder, but believed that the source selection process was flawed.
We have experienced an increase in competitor bid protests on contracts on which we were the successful bidder due to the competitive environment resulting from decreased government spending. In addition, we have formally protested procurement awards in which we were not the initial successful bidder, but believed that the source selection process was flawed.
Our engagements often involve large scale, highly complex projects. The quality of our performance on such projects depends in large part upon our ability to manage the relationship with our customers and to effectively manage the project and 30 deploy appropriate resources, including third-party contractors and our own personnel, in a timely manner.
Our engagements often involve large scale, highly complex projects. The quality of our performance on such projects depends in large part upon our ability to manage the relationship with our customers and to effectively manage the project and deploy appropriate resources, including third-party contractors and our own personnel, in a timely manner.
These provisions may also frustrate or prevent any attempts by our stockholders to replace or remove our current management team by making it more difficult for stockholders to replace members of our board, which is responsible for appointing the members of our management. General Risk Factors The market price of our common stock may be volatile.
These provisions may also frustrate or prevent any attempts by our stockholders to replace or remove our current management team by making it more difficult for stockholders to replace members of our board, which is responsible for appointing the members of our management. 44 General Risk Factors The market price of our common stock may be volatile.
Market conditions, including increased price competitiveness specifically in the government services space, and procurements awarded on an LPTA rather than a best value basis, can significantly impact our projections. In addition, our ability to penetrate new international markets could also impact our current projections.
Market conditions, including increased price competitiveness specifically in the government services space, and procurements awarded on an LPTA rather than a best value basis, can significantly impact our projections. In addition, our ability to penetrate new international markets could also impact our current 32 projections.
We could be subject to fines, suspensions of production, alteration of our manufacturing processes or interruption or cessation of our operations if we fail to comply with present or future laws or regulations related to the use, storage, handling, discharge or disposal of toxic, volatile or otherwise hazardous chemicals used in our manufacturing processes.
We could be subject to fines, 42 suspensions of production, alteration of our manufacturing processes or interruption or cessation of our operations if we fail to comply with present or future laws or regulations related to the use, storage, handling, discharge or disposal of toxic, volatile or otherwise hazardous chemicals used in our manufacturing processes.
If we are unable to procure, or experience significant delays in subcontractor or supplier deliveries of, needed materials, components, intellectual property or parts; if our subcontractors or suppliers do not comply with all applicable laws and regulations; if the certifications we receive from them are inaccurate; or if what we receive is counterfeit or otherwise improper, it could have a material adverse effect on our financial position, results of operations and/or cash flows. 23 We 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.
If we are unable to procure, or experience significant delays in subcontractor or supplier deliveries of, needed materials, components, intellectual property or parts; if our subcontractors or suppliers do not comply with all applicable laws and regulations; if the certifications we receive from them are inaccurate; or if what we receive is counterfeit or otherwise improper, it could have a material adverse effect on our financial position, results of operations and/or cash flows. 24 We 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.
Any litigation to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others could result in substantial costs and diversion of resources, with no assurance of success. 39 We may be harmed by intellectual property infringement claims.
Any litigation to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others could result in substantial costs and diversion of resources, with no assurance of success. We may be harmed by intellectual property infringement claims.
This could reduce anticipated earnings or result in a loss, negatively affecting our cash flow and profitability. If 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.
This could reduce anticipated earnings or result in a loss, negatively affecting our cash flow and profitability. 30 If 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.
In addition, market-based inputs to the calculations in the impairment test, such as weighted average cost of capital, and market multiples, could also be negatively impacted. Such circumstances may result in the future deterioration of the fair value of our reporting units and an impairment of our goodwill.
In addition, market-based inputs to the 31 calculations in the impairment test, such as weighted average cost of capital, and market multiples, could also be negatively impacted. Such circumstances may result in the future deterioration of the fair value of our reporting units and an impairment of our goodwill.
A violation of ITAR or other applicable trade regulations could have a material adverse effect on our business, financial condition and results of operations. Risks Related to Our Long-Term Borrowings We have substantial long-term borrowings, which could adversely affect our cash flow, financial condition and business.
A violation of ITAR or other applicable trade regulations could have a material adverse effect on our business, financial condition and results of operations. 38 Risks Related to Our Long-Term Borrowings We have substantial long-term borrowings, which could adversely affect our cash flow, financial condition and business.
As a result, if we fail to properly evaluate acquisitions or investments, we may not achieve the anticipated benefits of any such acquisitions, and we may incur costs in excess of what we anticipate. Acquisitions frequently involve benefits related to integration of operations.
As a result, if we fail to properly evaluate acquisitions or investments, we may not achieve the anticipated benefits of any such acquisitions, and we may incur costs in 34 excess of what we anticipate. Acquisitions frequently involve benefits related to integration of operations.
If we fail in our new product development efforts or our products or services fail to achieve market acceptance more rapidly as compared to our competitors, our ability to procure new contracts could be negatively impacted, which could negatively impact our results of operations and financial condition. 24 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.
If we fail in our new product development efforts or if our products or services fail to achieve market acceptance more rapidly as compared to our competitors, our ability to procure new contracts could be negatively impacted, which could negatively impact our results of operations and financial condition. 25 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.
Therefore, to the extent that we must use cash generated in foreign jurisdictions to make principal or interest payments on our debt, there may be a cost associated with repatriating the cash to the U.S.
Therefore, to the extent that we must use cash generated 39 in foreign jurisdictions to make principal or interest payments on our debt, there may be a cost associated with repatriating the cash to the U.S.
We must be in a position to adjust our cost and expense structure to reflect 29 prevailing market conditions and to continue to motivate and retain our key employees. If we fail to respond to fluctuating market conditions our business could be seriously harmed.
We must be in a position to adjust our cost and expense structure to reflect prevailing market conditions and to continue to motivate and retain our key employees. If we fail to respond to fluctuating market conditions our business could be seriously harmed.
Other factors that may affect revenue and profitability include inaccurate cost estimates, design issues, unforeseen costs and expenses not covered by insurance or indemnification from the customer, diversion of management focus in responding to unforeseen problems, and loss of follow-on work. 22 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.
Other factors that may affect revenue and profitability include inaccurate cost estimates, design issues, unforeseen costs and expenses not covered by insurance or indemnification from the customer, diversion of management focus in responding to unforeseen problems, and loss of follow-on work. 23 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.
However, we cannot ensure that we will not experience such incidents in the future or that any such incidents will not result in production delays or otherwise have a material adverse effect on our business and financial condition.
However, we cannot ensure that we will not experience such incidents in the future or that any such incidents will not result in production delays or otherwise have a material adverse effect on our business or financial condition.
We currently anticipate that our available capital resources, amounts available under our Credit Agreement (as defined below in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “New Credit Facility”) and operating cash flow will be sufficient to meet our expected working capital and capital expenditure requirements for at least the next 12 months.
We currently anticipate that our available capital resources, amounts available under our Credit Agreement (as defined below in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “2022 Credit Facility”) and operating cash flow will be sufficient to meet our expected working capital and capital expenditure requirements for at least the next 12 months.
We are dependent on a small number of customers for certain large programs that represent a large portion of our revenues. A significant decrease in the sales to or loss of any of these programs or our major customers would have a material adverse effect on our business and results of operations. In fiscal 2022 and 2021, the U.S.
We are dependent on a small number of customers for certain large programs that represent a large portion of our revenues. A significant decrease in the sales to or loss of any of these programs or our major customers would have a material adverse effect on our business and results of operations. In fiscal 2023 and 2022, the U.S.
Both contractors and the U.S. Government agencies conducting these audits and reviews have come under increased scrutiny. The current audits and reviews have become more rigorous, and the standards to which contractors are being held are being more strictly interpreted, increasing the likelihood of an audit or review resulting in an adverse outcome.
Both contractors and the U.S. Government agencies conducting these audits and reviews have come under increased scrutiny. Recent audits and reviews have become more rigorous, and the standards to which contractors are being held are being more strictly interpreted, increasing the likelihood of an audit or review resulting in an adverse outcome.
We believe that the USAF BQM-167, USN BQM-177, and the GBSD (also known as Sentinel) programs could be a large portion of our future revenues in the coming years, and the loss or cancellation of any of these programs could adversely affect our future results.
We believe that the USAF BQM-167, USN BQM-177, and the GBSD (also known as Sentinel) programs could represent a large portion of our future revenues in the coming years, and the loss or cancellation of any of these programs could adversely affect our future results.
Risks Related to Our Common Stock • Some of our contracts with the U.S. Government are classified, which may limit investor insight into portions of our business. For a more complete discussion of the material risks facing our business, see below. 20 Risks Related to Our Business The U.S.
Risks Related to Our Common Stock • Some of our contracts with the U.S. Government are classified, which may limit investor insight into portions of our business. For a more complete discussion of the material risks facing our business, see below. 21 Risks Related to Our Business The U.S.
We believe that there are significant investment opportunities in a number of business areas. Because we account for research and development as an operating expense, these expenditures will adversely affect our earnings in the future.
We believe that there are significant investment opportunities in a number of business areas. Because we account for research and development as an operating expense, these expenditures will adversely affect our earnings.
Government and governmental entities. • Significant delays or reductions in appropriations for our programs and U.S.
Government and other governmental entities. • Significant delays or reductions in appropriations for our programs and U.S.
Government regulations; and • marketing efforts and publicity regarding these types of systems. Even if UAS and UGS gain wide market acceptance in general, our specific products may not adequately address market requirements or may not gain market acceptance.
Government regulations or other restrictions; and • marketing efforts and publicity regarding these types of systems. Even if UAS and UGS gain wide market acceptance in general, our specific products may not adequately address market requirements or may not gain market acceptance.
Our operations outside of the U.S. are subject to risks that are inherent in conducting business under non-U.S. laws, regulations and customs, including those related to: • foreign currency exchange rate fluctuations, potentially reducing the U.S. dollars we receive for sales denominated in foreign currency or reducing our profits when we pay for materials, subcontractors and payroll denominated in foreign currency ; • the possibility that unfriendly nations or groups could boycott our solutions; • political conditions in the markets in which we operate; 36 • the escalation or continuation of armed conflict, hostilities or economic sanctions between countries or regions, including the current conflict between Russia and Ukraine; • potential increased costs associated with overlapping tax structures; • import-export control, including the imposition of tariffs, embargoes, export controls and other trade restrictions; • the ability to obtain required U.S.
Our operations outside of the U.S. are subject to risks that are inherent in conducting business under non-U.S. laws, regulations and customs, including those related to: • foreign currency exchange rate fluctuations, potentially reducing the U.S. dollars we receive for sales denominated in foreign currency or reducing our profits when we pay for materials, subcontractors and payroll denominated in foreign currency; • the possibility that unfriendly nations or groups could boycott our products or solutions; • political conditions in the markets in which we operate; • 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; • potential increased costs associated with overlapping tax structures; • import-export control, including the imposition of tariffs, embargoes, export controls and other trade restrictions; • the ability to obtain required U.S.
Government imposing penalties and sanctions against us, including withholding of payments, suspension of payments and increased government scrutiny that could delay or adversely affect our 40 ability to invoice and receive timely payment on contracts, perform contracts or compete for contracts with the U.S. Government. We have submitted incurred cost claims through fiscal year 2021.
Government imposing penalties and sanctions against us, including withholding of payments, suspension of payments and increased government scrutiny that could delay or adversely affect our ability to invoice and receive timely payment on contracts, perform contracts or compete for contracts with the U.S. Government. We have submitted incurred cost claims through fiscal year 2022.
Macroeconomic conditions, such as increased volatility or disruption in the credit markets, the current high levels of inflation and rising interest rates, could adversely affect our ability to refinance existing debt or obtain additional financing at terms satisfactory to us, thereby affecting our resources to support operations or to fund new initiatives.
Macroeconomic conditions, such as increased volatility or disruption in the credit markets, and the current high levels of inflation and interest rates, could adversely affect our ability to refinance existing debt or obtain additional financing at terms satisfactory to us, if at all, thereby affecting our resources to support operations or to fund new initiatives.
Government agency issued export licenses to ship our product overseas; • more limited protection for intellectual property rights in some countries; • difficulties and costs associated with staffing and managing foreign operations; • unexpected changes in regulatory requirements; • the difficulties of compliance with a wide variety of foreign laws and regulations; • longer accounts receivable cycles in certain foreign countries, whether due to cultural differences, exchange rate fluctuation or other factors; • technology and data transfer restrictions; • changes to our distribution networks; • our employees; and • war and terrorist events, including impacts to our international operations such as Microwave Electronics, which is headquartered in Israel.
Government agency issued export licenses to ship our product overseas; • more limited protection for intellectual property rights in some countries; • difficulties and costs associated with staffing and managing foreign operations; • unexpected changes in regulatory requirements; • the difficulties of compliance with a wide variety of foreign laws and regulations; • longer accounts receivable cycles in certain foreign countries, whether due to cultural differences, exchange rate fluctuation or other factors; • technology and data transfer restrictions; • changes to our distribution networks; • our employees; and • war and terrorist events, including impacts to our international operations such as our microwave electronics business which has primary operations based in Israel.
Any determination to pay dividends or stock buybacks in the future will be at the discretion of our board of directors and will be dependent upon our future financial condition, results of operations and capital 42 requirements, general business conditions and other relevant factors as determined by our board of directors.
Any determination to pay dividends or stock buybacks in the future will be at the discretion of our board of directors and will be dependent upon our future financial condition, results of operations, capital requirements, legal restrictions general business conditions and other relevant factors as determined by our board of directors.
It is likely budget and program decisions made in this environment would have long-term implications for us and the entire defense industry. 21 Additionally, funding for certain programs in which we participate may be reduced, delayed or cancelled, and budget cuts globally could adversely affect the viability of our subcontractors and suppliers, and our employee base.
It is likely budget and program decisions made in this environment will have long-term implications for us and the entire defense industry. 22 Additionally, funding for certain programs in which we participate may be reduced, delayed or cancelled, and budget cuts globally could adversely affect the viability of our subcontractors and suppliers, and our employee base.
From time to time, in order to ensure that we satisfy our customers’ delivery requirements and schedules, we may elect to initiate procurement in advance of receiving final authorization from the government customer or a prime contractor.
From time to time, in order to ensure that we satisfy our customers’ delivery requirements and schedules, we may elect to initiate procurement and production in advance of receiving a contract award, or final authorization from the government customer or a prime contractor.
If annual appropriations bills are not timely enacted, the U.S. Government may again operate under a continuing resolution, restricting new contract or program starts, presenting resource allocation challenges and placing limitations on some planned program budgets, and we may face another government shutdown of unknown duration.
If annual appropriations bills are not timely enacted, the U.S. Government may again operate under a continuing resolution, restricting new contract or program starts, presenting resource allocation challenges and placing limitations on some planned program budgets, and we may face additional government shutdowns of unknown duration.
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 GWAC vehicles. We believe that our ability to provide services under these contracts will continue to be important to our business because of the multiple opportunities for new engagements each contract provides.
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 governmentwide acquisition contracts (GWACs). We believe that our ability to provide services under these contracts will continue to be important to our business because of the multiple opportunities for new engagements each contract provides.
The budget environment, including budget caps mandated by the Budget Control Act of 2011 (the “BCA”) for fiscal years 2021 and 2022, and uncertainty surrounding the debt ceiling and the appropriations process, remain significant short and long-term risks.
The budget environment, including budget caps mandated by the Budget Control Act of 2011 (the “BCA”) for fiscal years 2022 and 2023, and uncertainty surrounding the debt ceiling and the appropriations process, remain significant short and long-term risks for the Company.
As a result of the Small Business Administration (“SBA”) set-aside program, the federal government may decide to restrict certain procurements only to bidders that qualify as minority-owned, small, or small disadvantaged businesses.
As a result of the Small Business Administration (“SBA”) set-aside program, the federal government may decide to restrict certain procurements only to bidders that qualify as minority-owned, small, or small disadvantaged businesses. We do not qualify as a minority-owned, small or small disadvantaged business.
An increase in the amount of procurements under the SBA set-aside program may impact our ability to bid on new procurements as a prime contractor, limit our opportunity to work as a subcontractor or restrict our ability to compete on incumbent work that is placed in the set-aside program. U.S.
An increase in the amount of procurements under the SBA set-aside program, or other similar governmental programs, may impact our ability to bid on new procurements as a prime contractor, limit our opportunity to work as a subcontractor or restrict our ability to compete on incumbent work that is placed in the set-aside program. U.S.
Government provides a significant portion of our revenue, and our business could be adversely affected by changes in the fiscal policies of the U.S. Government and governmental entities. In fiscal 2022, 2021 and 2020, we generated 69%, 70% and 73%, respectively, of our total revenues from contracts with the U.S.
Government provides a significant portion of our revenue, and our business could be adversely affected by changes in the fiscal policies of the U.S. Government and other governmental entities. In fiscal 2023, 2022 and 2021, we generated 69%, 69% and 70%, respectively, of our total revenues from contracts with the U.S.
The degree to which we are leveraged could have adverse effects on our business, including the following: • it may limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate; • it may require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes; • it may restrict us from making strategic acquisitions or exploiting business opportunities; • it may place us at a competitive disadvantage compared to our competitors that have less debt; • it may limit our ability to borrow additional funds; and • it may decrease our ability to compete effectively or operate successfully under adverse economic and industry conditions. 37 Our level of long-term borrowings increases the risk that we may default on our debt obligations.
The degree to which we are leveraged could have adverse effects on our business, including the following: • it may limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate; • it may require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes; • it may restrict us from making strategic acquisitions or exploiting business opportunities; • it may place us at a competitive disadvantage compared to our competitors that have less debt; • it may limit our ability to borrow additional funds; and • it may decrease our ability to compete effectively or operate successfully under adverse economic and industry conditions.
In addition, we could be impacted by cyber threats or other disruptions or vulnerabilities found in products we use or in our partners’ or customers’ systems that are used in connection with our business.
In addition, we could be impacted by cyber threats or other disruptions or vulnerabilities found in products we use or in our partners’ or customers’ systems that are used in connection with or otherwise incorporated into our business.
We rely on a combination of patents, trademarks, copyrights, trade secrets and nondisclosure agreements to protect our proprietary intellectual property. Our efforts to protect our intellectual property and proprietary rights may not be sufficient.
Risks Related to Our Intellectual Property We may be unable to protect our intellectual property rights. We rely on a combination of patents, trademarks, copyrights, trade secrets and nondisclosure agreements to protect our proprietary intellectual property. Our efforts to protect our intellectual property and proprietary rights may not be sufficient.
Our international business represents 19% of our total revenue for the year ended December 25, 2022, which may be impacted by changes in foreign national priorities and government budgets and may be further impacted by global economic conditions and fluctuations in foreign currency exchange rates.
Our international business represents 19% of our total revenue for the year ended December 31, 2023, which may be impacted by changes in foreign national priorities and government budgets and may be further impacted by global economic conditions and fluctuations in foreign currency exchange rates.
A termination for default could expose us to liability, including liability for the agency’s costs of re-procurement, could damage our reputation and could hurt our ability to compete for future contracts. We are also required to procure certain materials and parts from supply sources approved by the U.S. Government.
A termination for default could expose us to liability, including liability for the agency’s costs of re-procurement, could damage our reputation and could hurt our ability to compete for future contracts. We are also required to procure certain materials and parts from supply sources approved by the U.S. Government. The inability of a supplier to meet our needs or U.S.
Fixed-price contracts (including both government and commercial contracts) represented approximately 71% of our revenue for the fiscal year ended December 25, 2022. If we fail to anticipate technical problems, estimate costs accurately or control costs during our performance of fixed-price contracts, then we may incur losses on these contracts because we absorb any costs in excess of the fixed price.
Fixed-price contracts (including both government and commercial contracts) represented approximately 70% of our revenue for the fiscal year ended December 31, 2023. If we fail to anticipate technical problems, estimate costs accurately or control costs during our performance of fixed-price contracts, then we may incur losses on these contracts because we absorb any costs in excess of the fixed price.
Air Force accounted for 25.3% and 26.7% respectively, of our total revenues and the U.S. Navy accounted for 14.2% and 13.9%, respectively, of our total revenues. No assurance can be given that our customers will not experience financial, technical or other difficulties that could adversely affect their operations and, in turn, our results of operations.
Air Force accounted for 22.6% and 25.3% respectively, of our total revenues and the U.S. Navy accounted for 13.0% and 14.2%, respectively, of our total revenues. No assurance can be given that our customers will not experience financial, technical or other difficulties that could adversely affect their operations and, in turn, our results of operations.
Cost-plus-fee and fixed-price contracts in our federal business accounted for approximately 35% and 61%, respectively, of our federal business revenues for the year ended December 25, 2022. To the extent that we enter into more cost-plus-fee or less fixed-price contracts in proportion to our total contract mix in the future, our margins and operating results may suffer.
Cost-plus-fee and fixed-price contracts in our federal business accounted for approximately 35% and 62%, respectively, of our federal business revenues for the year ended December 31, 2023. To the extent that we enter into more cost-plus-fee or less fixed-price contracts in proportion to our total contract mix in the future, our margins and operating results may suffer.
We believe that our cash is held in institutions whose credit risk is minimal and that the value and liquidity of our deposits are accurately reflected in our Consolidated Financial Statements as of December 25, 2022.
We believe that our cash is held in institutions whose credit risk is minimal and that the value and liquidity of our deposits are accurately reflected in our Consolidated Financial Statements as of December 31, 2023.
For the year ended December 25, 2022, there was no impact of such limitations on the income tax provision since the amount of taxable income did not exceed the cumulative annual limitation amount.
For the year ended December 31, 2023, there was no impact of such limitations on the income tax provision since the amount of taxable income did not exceed the cumulative annual limitation amount.
Early termination of client contracts or contract penalties could adversely affect our results of operations. • 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. • We 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. • 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. • Loss of our General Services Administration (“GSA”) contracts or government-wide acquisition contracts could impair our ability to attract new business. • Government contracts differ materially from standard commercial contracts, involve competitive bidding and may be subject to cancellation or delay without penalty. • We 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. • A 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. • U.S.
Early termination of client contracts or contract penalties could adversely affect our results of operations. • 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. • We 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. • 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. • Loss of our General Services Administration (“GSA”) contracts or government-wide acquisition contracts could impair our ability to attract new business. • Government contracts differ materially from standard commercial contracts, involve competitive bidding and may be subject to cancellation or delay without penalty. • We 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.
If we cannot provide reliable financial reports, our operating results could be misstated, our reputation may be harmed and the trading price of our stock could be negatively affected. Our management has concluded that there are no material weaknesses in our internal controls over financial reporting as of December 25, 2022.
If we cannot provide reliable financial reports, our operating results could be misstated, our reputation may be harmed and the market price of our common stock could be negatively affected. Our management has concluded that there are no material weaknesses in our internal controls over financial reporting as of December 31, 2023.
We plan to incur substantial research and development costs as part of our efforts to design, develop and commercialize new products and services and enhance existing products. We spent $38.6 million, or 4.3% of our revenue, in our fiscal year ended December 25, 2022 on internally funded research and development activities.
We plan to incur substantial research and development costs as part of our efforts to design, develop and commercialize new products and services and enhance existing products. We spent $38.4 million, or 3.7% of our total revenue, in our fiscal year ended December 31, 2023 on internally funded research and development activities.
Particularly, the market for electronic components is experiencing increased demand and a global shortage of semiconductors, creating substantial uncertainty regarding our suppliers’ continued production of key components for our products, and the supply for certain raw materials such as aluminum and resins and the availability for milling activities is experiencing shortages and delays which is impacting our C5ISR business.
Particularly, the market for electronic components is experiencing increased demand and a global shortage of semiconductors, creating substantial uncertainty regarding our suppliers’ continued production of key components for our products, and the supply for certain raw materials such as aluminum and resins, and the availability of certain parts and extrusions, and the availability for milling activities has, in each case, continued to experience shortages and delays which is impacting our C5ISR business.
For the fiscal year ended December 25, 2022, our US segment accounted for 24.7% of our total revenue. We cannot accurately predict the future growth rate or size of this market. Demand for our products may not increase, or may decrease, either generally or in specific markets, for particular types of products or during particular time periods.
For the fiscal year ended December 31, 2023, our US segment accounted for 20.5% of our total revenue. We cannot accurately predict the future growth rate or size of this market. Demand for our products may not increase, or may decrease, either generally or in specific markets, for particular types of products or during particular time periods.
A successful liability claim could result in substantial cost to us. Even if we are fully insured as it relates to a claim, the claim could nevertheless diminish our brand and divert management’s attention and resources, which could have a negative impact on our business, financial condition, and results of operations.
Even if we are fully insured as it relates to a claim, the claim could nevertheless diminish our brand and divert management’s attention and resources, which could have a negative impact on our business, financial condition, and results of operations.
We have incurred and may continue to incur goodwill impairment charges in our reporting entities, which could harm our profitability. As of December 25, 2022, goodwill represented approximately 36% of our total assets. We test for impairment annually.
We have incurred and may continue to incur goodwill impairment charges in our reporting entities, which could harm our profitability. As of December 31, 2023, goodwill represented approximately 35% of our total assets. We test for impairment annually.
The COVID-19 pandemic and subsequent mitigation measures have also had an adverse impact on global economic conditions which could have an adverse effect on our business and financial condition.
For example, the COVID-19 pandemic and subsequent mitigation measures had an adverse impact on global economic conditions which had, and could continue to have an adverse effect on our business and financial condition.
However, these resources may not be sufficient to fund the long-term growth of our business, especially in the event that we are awarded future multiple sizable production awards related to our tactical drone programs which require significant amounts of working capital to fund such growth.
However, these resources may not be sufficient to fund the long-term growth of our business, especially in the event that we are awarded future multiple sizable production awards related to our tactical drone programs or in the event we are awarded future multiple sizable production awards related to our turbine technologies and rocket motor businesses, each of which will require significant amounts of working capital to fund such growth.
As of December 25, 2022, we had approximately $250.2 million of long-term borrowings outstanding, which is net of $1.0 million of unamortized debt issuance costs. As a result of this indebtedness, our interest payment obligations are significant, and are subject to fluctuate as the interest rate is floating with SOFR (the “Secured Overnight Financing Rate”).
As of December 31, 2023, we had approximately $219.3 million of long-term borrowings outstanding, which is net of $0.7 million of unamortized debt issuance costs. As a result of this indebtedness, our interest payment obligations are significant, and are subject to fluctuate as the interest rate is floating with SOFR (the “Secured Overnight Financing Rate”).
The number of suppliers who provide conflict-free minerals is limited. In addition, there are costs associated with complying with the disclosure requirements, such as costs related to determining the source of certain minerals used in our products, as well as costs of changes to products, processes, or sources of supply as a consequence of such verification activities.
In addition, there are costs associated with complying with the disclosure requirements, such as costs related to determining the source of certain minerals used in our products, as well as costs of changes to products, processes, or sources of supply as a consequence of such verification activities.
They also review the adequacy of our compliance with government standards for our accounting and management of internal control systems, including our: control environment and overall accounting system; general IT system; budget and planning system; purchasing system; material management and accounting system; compensation system; labor system; indirect and other direct costs system; billing system; and estimating system used for pricing on government contracts.
These agencies review our performance on contracts, pricing practices, cost structure and compliance with applicable laws, regulations and standards. 41 They also review the adequacy of our compliance with government standards for our accounting and management of internal control systems, including our control environment and overall accounting system; general IT system; budget and planning system; purchasing system; material management and accounting system; compensation system; labor system; indirect and other direct costs system; billing system; and estimating system used for pricing on government contracts.
We rely on other companies to provide major components for our products. For instance, we build the airframe, electronics and flight control systems for our unmanned aerial systems. We primarily rely on our suppliers to provide the engines and parachutes for landing the aircraft.
For instance, we build the airframe, electronics and flight control systems for our unmanned aerial systems. We primarily rely on our suppliers to provide the engines and parachutes for landing the unmanned aerial systems.
Risks Related to Our Operations Our operations expose us to risks associated with pandemics, epidemics or other public health emergencies, such as the outbreak of COVID-19. The COVID-19 pandemic continues to impact worldwide economic activity.
Risks Related to Our Operations Our operations expose us to risks associated with pandemics, epidemics or other public health emergencies, such as the outbreak of COVID-19.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeThe following is a summary of our floor space at December 25, 2022: Square feet (in thousands) Owned Leased Total Kratos Government Solutions 618 845 1,463 Unmanned Systems 20 461 481 Corporate (includes San Diego, operations of KGS and US segments) — 26 26 Total 638 1,332 1,970 See Note 6 of the Notes to Consolidated Financial Statements contained within this Annual Report for information regarding commitments under leases.
Biggest changeThe following is a summary of our floor space at December 31, 2023: Square feet (in thousands) Owned Leased Total Kratos Government Solutions 619 1,022 1,641 Unmanned Systems 35 458 493 Corporate (includes San Diego, operations of KGS and US segments) — 26 26 Total 654 1,506 2,160 See Note 6 of the Notes to Consolidated Financial Statements contained within this Annual Report for information regarding commitments under leases.
Item 3. Legal Proceedings. See Note 15 of the Notes to Consolidated Financial Statements contained within this Annual Report for a discussion of our legal proceedings. Item 4. Mine Safety Disclosures. None. PART II
Item 3. Legal Proceedings. See Note 15 of the Notes to Consolidated Financial Statements contained within this Annual Report for a discussion of our legal proceedings. Item 4. Mine Safety Disclosures. None. 48 PART II
Locations outside the U.S. include Australia, Canada, France, Germany, Israel, Norway, and the United Kingdom. 44 Unmanned Systems: Huntsville, AL; McClellan, Roseville and Sacramento, CA; Fort Walton Beach, FL, Oxford, MI; Oklahoma City, OK; and Arlington and Round Rock, TX. Corporate and other locations : San Diego, CA and Round Rock, TX.
Locations outside the U.S. include Australia, Canada, France, Germany, Israel, Norway, and the United Kingdom. Unmanned Systems: Huntsville, AL; McClellan, Roseville, Sacramento, and Tehachapi, CA; Fort Walton Beach, FL; Oxford, MI; Oklahoma City, OK; and Arlington and Round Rock, TX. Corporate and other locations : San Diego, CA and Round Rock, TX.
At December 25, 2022, we also leased approximately 103 acres of land, which included 98 acres in Ontario, Canada which is used by our Kratos ASC Signal business. We continually evaluate our current and future space capacity in relation to current and projected future staffing levels.
At December 31, 2023, we also leased approximately 106 acres of land, which included 98 acres in Ontario, Canada which is used by our Kratos ASC Signal business. We continually evaluate our current and future space capacity in relation to 47 current and projected future staffing levels.
Item 2. Properties. At December 25, 2022, we owned or leased approximately 2.0 million square feet of floor space at 59 separate locations, primarily in the U.S., for manufacturing, warehousing, research and development, administration and various other uses.
Item 2. Properties. At December 31, 2023, we owned or leased approximately 2.2 million square feet of floor space at 64 separate locations, primarily in the U.S., for manufacturing, warehousing, research and development, administration and various other uses.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeThe companies included in the Company’s Peer Group are: AAR Corp., Aerojet Rocketdyne Holdings, Inc., AeroVironment Inc., Comtech Telecommunications Corp., CPI Aerostructures Inc., Ducommun Inc., Frequency Electronics Inc., and Mercury Systems Inc. Recent Sales of Unregistered Securities; Use of Proceeds None. 46 Purchases of Equity Securities by the Issuer and Affiliated Purchasers None. Item 6. Reserved
Biggest changeThe companies included in the Company’s Peer Group are: AAR Corp, AeroVironment Inc., Comtech Telecommunications Corp., CPI Aerostructures Inc., Ducommun Inc., Frequency Electronics Inc., and Mercury Systems Inc. Recent Sales of Unregistered Securities; Use of Proceeds None. Purchases of Equity Securities by the Issuer and Affiliated Purchasers None. Item 6. Reserved 50
Any future determination to pay cash dividends will be at the discretion of our board of directors and will be dependent upon our future financial condition, results of operations and capital requirements, general business conditions and other relevant factors as determined by our board of directors. 45 Performance Graph The following performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act of 1934 as amended (the “Exchange Act”), except to the extent that we specifically incorporate it by reference into such filing.
Any future determination to pay cash dividends will be at the discretion of our board of directors and will be dependent upon our future financial condition, results of operations and capital requirements, general business conditions and other relevant factors as determined by our board of directors. 49 Performance Graph The following performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act of 1934 as amended (the “Exchange Act”), except to the extent that we specifically incorporate it by reference into such filing.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among Kratos Defense & Security Solutions, Inc., the Russell 2000 Index, and Peer Group *$100 invested on 12/31/17 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among Kratos Defense & Security Solutions, Inc., the Russell 2000 Index, and Peer Group *$100 invested on 12/31/18 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.
The following performance graph presents a comparison of the five year cumulative stockholder return on our common stock against the cumulative total return of a broad equity market index, the Russell 2000 Stock Index, and one customized peer group consisting of the companies listed below, for the period commencing December 31, 2017 and ending December 31, 2022.
The following performance graph presents a comparison of the five year cumulative stockholder return on our common stock against the cumulative total return of a broad equity market index, the Russell 2000 Stock Index, and one customized peer group consisting of the companies listed below, for the period commencing December 31, 2018 and ending December 31, 2023.
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Market Information Our common stock is listed on the NASDAQ Global Select Market and is traded under the symbol “KTOS”. Holders of Record On February 17, 2023, there were 315 shareholders of record of our common stock.
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Market Information Our common stock is listed on the NASDAQ Global Select Market and is traded under the symbol “KTOS”. Holders of Record On February 9, 2024, there were 295 shareholders of record of our common stock.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeNet cash used in operating activities from continuing operations was primarily a result of working capital requirements, including increases in receivables and inventory balances reflecting advance payments to mitigate supply chain disruptions, and internal investments we are making in certain rocket motors and software products of approximately $16.7 million.
Biggest changeNet cash used in operating activities from continuing operations was $25.6 million for the year ended December 25, 2022, primarily as a result of net loss from continuing operations of $34.1 million, and changes in working capital requirements of $74.9 million, including increases in receivables and inventory balances reflecting advance payments to mitigate supply chain disruptions, and internal investments we are making in certain rocket motors and software products of approximately $16.7 million, partially offset by noncash charges of $83.4 million. 56 Our net cash used in investing activities from continuing operations is summarized as follows (in millions): Year Ended December 31, 2023 December 25, 2022 Investing activities: Cash paid for acquisitions, net of cash acquired $ 0.3 $ (132.2) Proceeds from sale of assets 8.3 0.2 Capital expenditures (52.4) (45.4) Net cash used in investing activities from continuing operations $ (43.8) $ (177.4) Net cash used in investing activities from continuing operations for year ended December 31, 2023 is comprised of $52.4 million in capital expenditures partially offset by the receipt of $8.3 million of proceeds from the sale of Valkyries which had been previously booked as capital assets as they were produced ahead of government contract award and $0.3 million cash acquired related to the acquisition of STS.
For the majority of contracts, we satisfy the underlying performance obligations over time as the customer obtains control or receives benefits as work is performed on the contract. We generally recognize revenue over time as we perform on long-term contracts because of continuous transfer of control to the customer.
For the majority of contracts, we satisfy the underlying performance obligations over time as the customer obtains control or receives benefits as work is performed on the contract. We generally recognize revenue over time as we perform on long-term contracts because of continuous transfer of control to the customer.
For U.S. government contracts, this continuous transfer of control to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process.
For U.S. government contracts, this continuous transfer of control to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process.
Similarly, for non-U.S. government contracts, the customer typically controls the work in process as evidenced either by contractual termination clauses or by our rights to payment of the transaction price associated with work performed to date on products or services that do not have an alternative use to the Company.
Similarly, for non-U.S. government contracts, the customer typically controls the work in process as evidenced either by contractual termination clauses or by our rights to payment of the transaction price associated with work performed to date on products or services that do not have an alternative use to the Company.
KGS has five operating businesses: Defense Rocket Support Services (“DRSS”), Microwave Electronics (“ME”), Space, Training and Cybersecurity Solutions (“ST&C”), C5ISR Systems/Modular Systems (“MS”), and Kratos Turbine Technologies (“KTT”), that provide technology based defense solutions, involving products and services, primarily for mission critical U.S. National Security priorities, with the primary focus relating to the nation’s C5ISR requirements.
KGS has five operating businesses: Defense and Rocket Support Systems (“DRSS”), Microwave Electronics (“ME”), Space, Training and Cybersecurity Solutions (“ST&C”), C5ISR Systems/Modular Systems (“MS”), and Kratos Turbine Technologies (“KTT”), that provide technology based defense solutions, involving products and services, primarily for mission critical U.S. National Security priorities, with the primary focus relating to the nation’s C5ISR requirements.
The New Credit Facility is governed by a Credit Agreement (the “Credit Agreement”), dated February 18, 2022, by and among the Company, the lenders from time to time party thereto (the “Lenders”), the Issuing Banks party thereto (as defined in the Credit Agreement) and Truist Bank, in its capacity as administrative agent for the Lenders, and as an issuing bank and as the swing line lender, which establishes the 5-year senior secured credit facility which is comprised of the $200 million Revolving Credit Facility (which includes sub-facilities for the incurrence of up to $10.0 million of swingline loans and the issuance of up to $50.0 million of Letters of Credit) and the $200 million Term Loan A.
The 2022 Credit Facility is governed by a Credit Agreement (the “Credit Agreement”), dated February 18, 2022, by and among the Company, the lenders from time to time party thereto (the “Lenders”), the Issuing Banks party thereto (as defined in the Credit Agreement) and Truist Bank, in its capacity as administrative agent for the Lenders, and as an issuing bank and as the swing line lender, which establishes the 5-year senior secured credit facility which is comprised of the $200 million Revolving Credit Facility (which includes sub-facilities for the incurrence of up to $10.0 million of swingline loans and the issuance of up to $50.0 million of Letters of Credit) and the $200 million Term Loan A.
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, 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) the costs incurred in settling with subcontractors and preparing and settling the termination proposal.
If, after performing a qualitative assessment and after assessing the totality of events or circumstances such as macroeconomic, industry and market conditions, cost factors, and overall financial performance, we determine that it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is greater than its carrying 57 amount, then a quantitative assessment is not unnecessary.
If, after performing a qualitative assessment and after assessing the totality of events or circumstances such as macroeconomic, industry and market conditions, cost factors, and overall financial performance, we determine that it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is greater than its carrying amount, then a quantitative assessment is not unnecessary.
We determine our reporting units by first identifying our operating segments, and then assessing whether any components of these segments constitute a business for which discrete financial information is available and where segment management regularly reviews the operating results of that component. We aggregate components within an operating segment that have similar economic characteristics.
We determine our reporting units by first identifying our 60 operating segments, and then assessing whether any components of these segments constitute a business for which discrete financial information is available and where segment management regularly reviews the operating results of that component. We aggregate components within an operating segment that have similar economic characteristics.
Our letters of credit are primarily related to milestone payments received from foreign customers for which the customer has not yet received the 55 product. Information regarding our debt payments and lease agreements can be found in Notes 5 and 6 to the Consolidated Financial Statements contained in this Annual Report.
Our letters of credit are primarily related to milestone payments received from foreign customers for which the customer has not yet received the product. Information regarding our debt payments and lease agreements can be found in Notes 5 and 6 to the Consolidated Financial Statements contained in this Annual Report.
As a result, under ASC 606 revenue is recognized over time using the percentage-of-completion cost-to-cost method (cost incurred relative to total estimated cost at completion). 56 For our federal contracts, we apply U.S. Government procurement and accounting standards in assessing the allowability and the allocability of costs to contracts.
As a result, under ASC 606 revenue is recognized over time using the percentage-of-completion cost-to-cost method (cost incurred relative to total estimated cost at completion). For our federal contracts, we apply U.S. Government procurement and accounting standards in assessing the allowability and the allocability of costs to contracts.
Topic 740 also provides guidance on derecognizing, classification, interest and penalties, accounting in interim periods, disclosure and transition. 58 As part of the process of preparing our Consolidated Financial Statements, we are required to estimate our provision for income taxes in each of the tax jurisdictions in which we conduct business.
Topic 740 also provides guidance on derecognizing, classification, interest and penalties, accounting in interim periods, disclosure and transition. As part of the process of preparing our Consolidated Financial Statements, we are required to estimate our provision for income taxes in each of the tax jurisdictions in which we conduct business.
On February 18, 2022, the proceeds of $300 million from the New Credit Facility, along with cash funded by the Company for the 3.25% call premium to redeem the Company’s outstanding Senior Secured Notes, plus accrued interest, was distributed to the trustee for redemption of the Senior Secured Notes.
On February 18, 2022, the proceeds of $300 million from the 2022 Credit Facility, along with cash funded by the Company for the 3.25% call premium to redeem the Company’s outstanding Senior Secured Notes, plus accrued interest, was distributed to the trustee for redemption of the Senior Secured Notes.
The redemption of the Company’s outstanding $300 million 6.5% Senior Secured Notes due November 2025 closed on March 14, 2022, for an amount of cash equal to 103.25% of the principal amount thereof plus accrued and unpaid interest thereon.
The redemption of the Company’s then-outstanding $300 million 6.5% Senior Secured Notes due November 2025 closed on March 14, 2022, for an amount of cash equal to 103.25% of the principal amount thereof plus accrued and unpaid interest thereon.
The majority of our 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.
The majority of our contracts have a single performance obligation as the promise to transfer the 59 individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct.
Additional information regarding our financial commitments is provided in the Note 15 to Consolidated Financial Statements contained in this Annual Report. We believe our cash on hand, together with funds available under the New Credit Facility and cash expected to be generated from operating activities will be sufficient to fund our short- and long-term liquidity needs.
Additional information regarding our financial commitments is provided in the Note 15 to Consolidated Financial Statements contained in this Annual Report. We believe our cash on hand, together with funds available under the 2022 Credit Facility and cash expected to be generated from operating activities will be sufficient to fund our short- and long-term liquidity needs.
The US reportable segment provides unmanned aerial systems, unmanned ground, and unmanned seaborne systems. We have identified our reporting units to be the DRSS, ME, ST&C, MS, and KTT operating segments, within the KGS reportable segment, and the US reportable segment, each of which has been assessed and evaluated for potential impairment in our fiscal year 2022 annual test.
The US reportable segment provides unmanned aerial systems, unmanned ground, and unmanned seaborne systems. We have identified our reporting units to be the DRSS, ME, ST&C, MS, and KTT operating segments, within the KGS reportable segment, and the US reportable segment, each of which has been assessed and evaluated for potential impairment in our fiscal year 2023 annual test.
The income tax provision for 2022 includes a $4.9 million expense related to the increase in the Company’s valuation allowance on U.S. deferred tax assets related to certain state net operating losses and federal research and development credits. Income (loss) from discontinued operations.
The income tax provision for 2022 includes a $4.9 million expense related to the increase in the Company’s valuation allowance on U.S. deferred tax assets related to certain state Net Operating Losses, capital loss carryforwards and federal research and development credits. Income from discontinued operations.
We also conduct business with local, state and foreign governments and domestic and international commercial customers. In fiscal 2022, 2021 and 2020, we generated 69%, 70% and 73%, respectively, of our total revenues from contracts with the U.S. Government (including all branches of the U.S. military and including FMS), either as a prime contractor or a subcontractor.
We also conduct business with local, state and foreign governments and domestic and international commercial customers. In fiscal 2023, 2022 and 2021, we generated 69%, 69% and 70%, respectively, of our total revenues from contracts with the U.S. Government (including all branches of the U.S. military and including FMS), either as a prime contractor or a subcontractor.
Additionally, funding for certain programs in which we currently participate may be reduced, delayed or cancelled, and budget uncertainty or funding cuts globally could adversely affect the viability of our partners, teammates, subcontractors and suppliers, and our employee base.
Additionally, funding for certain programs, including those in which we currently participate, may be reduced, delayed or cancelled, and budget uncertainty or funding cuts globally could adversely affect the viability of our customers, partners, teammates, subcontractors, suppliers, and our employee base.
Government spending generally, or specific departments or agencies; • changes in U.S.
Government spending generally, or specific departments or agencies; 61 • changes in U.S.
We drew approximately $200 million under the Term Loan A and $100 million on the new Revolving Credit Facility at the time of the refinancing transaction (as more fully described in Note 10 of the accompanying Condensed Consolidated Financial Statements).
We drew approximately $200 million under the Term Loan A and $100 million on the new Revolving Credit Facility at the time of the refinancing transaction (as more fully described in Note 5 of the accompanying Consolidated Financial Statements).
The effective tax rate at December 25, 2022 for annual and interim reporting periods could be impacted if uncertain tax positions that are not recognized at December 25, 2022 are settled at an amount which differs from our estimate. Contingencies and litigation. We are currently involved in certain legal proceedings.
The effective tax rate at December 31, 2023 for annual and interim reporting periods could be impacted if uncertain tax positions that are not recognized at December 31, 2023 are settled at an amount which differs from our estimate. Contingencies and litigation. We are currently involved in certain legal proceedings.
For a comparison of the Company’s results of operations for the fiscal year ended December 27, 2020 to the fiscal year ended December 26, 2021, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 26, 2021, which was filed with the U.S.
For a comparison of the Company’s results of operations for the fiscal year ended December 26, 2021 to the fiscal year ended December 25, 2022, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 25, 2022, which was filed with the U.S.
We monitor our policies and procedures with respect to our contracts on a regular basis to ensure consistent application under similar terms and conditions as well as compliance with all applicable government regulations. In addition, costs incurred and allocated to contracts with the U.S. Government are routinely audited by the DCAA.
We monitor our policies and procedures with respect to our contracts on a regular basis to ensure consistent application under similar terms and conditions as well as compliance with all applicable government regulations. In addition, costs incurred and allocated to contracts with the U.S.
The income from discontinued operations was $0.9 million for the year ended December 25, 2022, primarily as a result of a gain from the release of an indemnification liability due to the lapse of the statute of limitations associated with a potential tax liability that was recorded in 2019 from the sale of PSS.
The income from discontinued operations was $0.2 million for the year ended December 31, 2023 and was $0.9 million for the year ended December 25, 2022, in each case primarily as a result of a gain from the release of an indemnification liability due to the lapse of the statute of limitations associated with a potential tax liability that was recorded in 2019 from the sale of PSS.
Under the New Credit Facility, on February 18, 2022, we completed the refinancing of our outstanding $90 million revolving credit facility and $300 million of Senior Secured Notes, with a new 5-year $200 million Revolving Credit Facility and 5-year $200 million Term Loan A. We incurred debt issuance costs of $3.3 million associated with the New Credit 51 Facility.
On February 18, 2022, we completed the refinancing of our then-outstanding $90 million revolving credit facility and $300 million of Senior Secured Notes, with a new 5-year $200 million Revolving Credit Facility and 5-year $200 million Term Loan A issued pursuant to the 2022 Credit Facility. We incurred debt issuance costs of $3.3 million associated with the 2022 Credit Facility.
However, we will 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 December 25, 2022, approximately $4.8 million in unbilled receivables remain outstanding on this project.
However, we will 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 December 31, 2023, approximately $4.8 million in unbilled receivables remain outstanding on this project, which is subject to negotiation and settlement with the customer.
The carrying value of goodwill of the US and KGS reportable segments, was $114.1 million and $444.1 million, respectively, at December 25, 2022. In determining the fair value of our reporting units, there are key assumptions related to our future operating performance and revenue growth.
The carrying value of goodwill of the US and KGS reportable segments, was $125.0 million and $444.1 million, respectively, at December 31, 2023. In determining the fair value of our reporting units, there are key assumptions related to our future operating performance and revenue growth.
If these funds were needed to fund our operations or satisfy obligations in the U.S. they could be repatriated, and their repatriation into the U.S. may cause us to incur additional foreign withholding taxes. We do not currently intend to repatriate these earnings.
If these funds were needed to fund our operations or satisfy obligations in the U.S. they could be repatriated, and their repatriation into the U.S. may cause us to incur additional foreign withholding taxes.
Provision for income taxes from continuing operations. The Company recorded an income tax provision of $1.4 million for the year ended December 25, 2022, and an income tax provision of $3.9 million for the year ended December 26, 2021.
Provision for income taxes from continuing operations. The Company recorded an income tax provision of $8.9 million for the year ended December 31, 2023, and an income tax provision of $1.4 million for the year ended December 25, 2022.
We expect our capital expenditures for our fiscal year 2023 to continue to be significant for investments we are making, including in our US business totaling approximately $22 to $26 million, including approximately $10 to $15 million for capital aerial targets and related support equipment.
We expect our capital expenditures for our fiscal year 2024 to continue to be significant for investments we are making, including in our US business totaling approximately $28 to $32 million, including approximately $18 to $22 million for capital aerial targets and related support equipment.
Restructuring expenses and other increased to $6.8 million for the year ended December 25, 2022 from $0.0 million for the year ended December 26, 2021, primarily as a result of the $5.5 million charge related to the litigation settlement of a dispute with an international customer in our US segment. Other expense, net.
Restructuring expenses and other decreased to $0.9 million for the year ended December 31, 2023 from $6.8 million for the year ended December 25, 2022, primarily as a result of the $5.5 million charge related to the litigation settlement of a dispute with an international customer in our US segment during the year ended December 25, 2022.
As a percentage of revenues, R&D remained the same at 4.3% of revenues for the year ended December 25, 2022 and for the year ended December 26, 2021. R&D expenses are made by the Company, typically in conjunction with our customers, for the Company to achieve a “first to market” position with our products or technology.
As a percentage of revenues, R&D decreased to 3.7% of revenues for the year ended December 31, 2023, from 4.3% of revenues for the year ended December 25, 2022. R&D expenses are made by the Company, typically in conjunction with our customers, for the Company to achieve a “first to market” position with our products or technology.
We manage and assess the performance of our businesses based on our performance on individual contracts and programs obtained generally from government organizations.
Government are routinely audited by the DCAA. 53 We manage and assess the performance of our businesses based on our performance on individual contracts and programs obtained generally from government organizations.
Our net cash used in financing activities from continuing operations is summarized as follows (in millions): Year Ended December 25, 2022 December 26, 2021 Financing activities: Proceeds from the issuance of long-term debt $ 200.0 $ — Borrowings under credit facility 100.0 — Redemption of Senior Secured Notes (309.8) — Repayments under credit facility, term loan and other debt (42.5) (5.1) Payments of employee taxes withheld from share-based awards (12.5) (9.1) Debt issuance costs (3.3) — Payments under finance leases (1.4) (1.0) Proceeds from shares issued under equity plans 6.2 5.9 Net cash used in financing activities from continuing operations $ (63.3) $ (9.3) Net cash used in financing activities from continuing operations was $63.3 million for the year ended December 25, 2022, which included $309.8 million used to redeem our $300 million of Senior Secured Notes including the call premium of $9.8 million, debt issuance costs of $3.3 million, payroll withholding taxes paid from vested restricted stock traded for taxes of $12.5 million and payments made on financing lease obligations of $1.4 million.
Our net cash used in financing activities from continuing operations is summarized as follows (in millions): Year Ended December 31, 2023 December 25, 2022 Financing activities: Proceeds from the issuance of long-term debt $ — $ 200.0 Borrowings under credit facility 69.0 100.0 Redemption of Senior Secured Notes — (309.8) Repayments under credit facility, term loan and other debt (101.0) (42.5) Payments of employee taxes withheld from share-based awards (3.7) (12.5) Debt issuance costs — (3.3) Payments under finance leases (1.5) (1.4) Proceeds from shares issued under equity plans 6.5 6.2 Net cash used in financing activities from continuing operations $ (30.7) $ (63.3) Net cash used in financing activities from continuing operations was $30.7 million for the year ended December 31, 2023, which included $5.0 million of principal payments on our $200 million Term Loan A, a $94.0 million payment (partially offset by a $69.0 million draw) on the new Revolving Credit Facility, and a $2.0 million payment to settle debt acquired related to the STS acquisition, payroll withholding taxes paid from vested restricted stock traded for taxes of $3.7 million and payments made on financing lease obligations of $1.5 million.
The Credit Agreement contains certain covenants, which include, but are not limited to, restrictions on indebtedness, liens, fundamental changes, restricted payments, asset sales, and investments, and places limits on various other payments.
The Credit Agreement contains certain covenants, which include, but are not limited to, restrictions on indebtedness, liens, fundamental changes, restricted payments, asset sales, and investments, and places limits on various other payments. The Company was in compliance with the covenants contained in the Credit Agreement as of December 31, 2023.
These uses were partially offset by $300 million in proceeds from our New Credit Facility (partially offset by $2.5 million of principal payments on our $200 million Term Loan A and a $40 million payment on the new Revolving Credit Facility) and employee stock purchase plan receipts of $6.2 million.
These uses were partially offset by $300 million in proceeds from our 2022 Credit Facility (partially offset by $2.5 million of principal payments on our $200 million Term Loan A and a $40 million payment on the new Revolving Credit Facility) and employee stock purchase plan receipts of $6.2 million. 2022 Credit Facility On February 18, 2022, the Company completed the refinancing of its then-outstanding $90 million revolving credit facility and Senior Secured Notes, with the 2022 Credit Facility.
Securities and Exchange Commission on February 22, 2022. Liquidity and Capital Resources As of December 25, 2022, we had cash and cash equivalents of $81.3 million compared with cash and cash equivalents of $349.4 million as of December 26, 2021, which includes $18.9 million and $29.4 million, respectively, of cash and cash equivalents held by our foreign subsidiaries.
Securities and Exchange Commission on February 23, 2023. Liquidity and Capital Resources As of December 31, 2023, we had cash and cash equivalents of $72.8 million compared with cash and cash equivalents of $81.3 million as of December 25, 2022, which includes $44.1 million and $18.9 million, respectively, of cash and cash equivalents held by our foreign subsidiaries.
Margins in the US 50 segment decreased to 20.1% for the year ended December 25, 2022 from 21.4% for the year ended December 26, 2021, primarily due to a less favorable mix of products produced and shipped in the year ended December 25, 2022. Selling, general and administrative expenses (SG&A).
Margins in the US segment increased to 20.7% for the year ended December 31, 2023 from 20.1% for the year ended December 25, 2022. primarily due to a more favorable mix of products produced and shipped in the year ended December 31, 2023. Selling, general and administrative expenses (SG&A).
If the actual operating performance and financial results are not consistent with our assumptions, a further impairment in our $558.2 million goodwill and $55.2 million long-lived intangibles could occur in future periods.
If the actual operating performance and financial results are not consistent with our assumptions, an impairment in our $569.1 million goodwill and $62.4 million long-lived intangibles could occur in future periods.
As a percentage of total revenue, product sales were 63.8% for the year ended December 25, 2022, as compared to 73.0% for the year ended December 26, 2021. Service revenues increased by $105.8 million to $325.2 million for the year ended December 25, 2022, from $219.4 million for the year ended December 26, 2021.
As a percentage of total revenue, product sales were 61.2% for the year ended December 31, 2023, as compared to 63.8% for the year ended December 25, 2022. Service revenues increased by $77.4 million to $402.6 million for the year ended December 31, 2023, from $325.2 million for the year ended December 25, 2022.
As of December 25, 2022, we have $197.5 million outstanding on the Term Loan A and net borrowings of $60 million outstanding on the Revolving Credit Facility, with $140 million remaining in borrowing capacity, less approximately $10 million for outstanding letters of credit.
As of December 31, 2023, we have $192.5 million outstanding on the Term Loan A and net borrowings of $35.0 million outstanding on the Revolving Credit Facility, with $165.0 million remaining in borrowing capacity, less approximately $10.2 million for outstanding letters of credit.
However, due to federal budgetary uncertainty, CRAs, the BCA or similar budgetary restrictions or limitations, other defense spending cuts, including the budgetary impacts of ongoing COVID-19 spending and support for the conflict in Ukraine, challenges in the appropriations process, the debt ceiling and the ongoing fiscal debates, the short and long term impacts to our business remain uncertain.
However, due to a divided Congress and Executive Branch, federal budgetary uncertainty, expected CRAs, potential budgetary restrictions or limitations, defense or other spending cuts, including the budgetary impacts of support for the conflicts in Israel and Ukraine, challenges in the appropriations process, the debt ceiling issue and ongoing fiscal debates, the short and long term impacts to the industry and to our business remain uncertain.
The following discussion should be read in conjunction with our audited Consolidated Financial Statements and the related notes and other financial information appearing elsewhere in this Annual Report and other reports and filings made with the SEC. Overview Kratos is a technology company addressing the defense, National Security and commercial markets.
The following discussion should be read in conjunction with our audited Consolidated Financial Statements and the related notes and other financial information appearing elsewhere in this Annual Report and other reports and filings made with the SEC.
The KGS reportable segment is comprised of an aggregation of KGS operating segments, including its microwave electronic products, space, satellite and cyber, training solutions, C5ISR/modular systems, turbine technologies and defense and rocket support services operating segments. The US reportable segment consists of our unmanned aerial, unmanned ground and unmanned seaborne system products.
Current Reporting Segments We operate in two reportable segments. The KGS reportable segment is comprised of an aggregation of KGS operating segments, including its microwave electronic products, space, satellite and cyber, training solutions, C5ISR/modular systems, turbine technologies and defense and rocket support services operating segments.
The following table summarizes our contractual obligations and other commitments as of December 25, 2022, and the effect such obligations could have on our liquidity and cash flow in future periods (in millions): Total Due within 1 Year Total debt $ 257.5 $ 6.3 Interest payment 48.1 12.6 Purchase orders 205.7 168.9 Operating leases 58.1 12.9 Finance leases 80.1 4.6 Total contractual cash obligations and commitments $ 649.5 $ 205.3 As of December 25, 2022, we have $10.0 million of standby letters of credit outstanding.
The following table summarizes our contractual obligations and other commitments as of December 31, 2023, and the effect such obligations could have on our liquidity and cash flow in future periods (in millions): Total Due within 1 Year Total debt $ 227.5 $ 7.5 Interest payment 44.8 12.4 Purchase orders 278.9 172.8 Operating leases 55.7 14.1 Finance leases 82.7 4.6 Total contractual cash obligations and commitments $ 689.6 $ 211.4 As of December 31, 2023, we have $10.2 million of standby letters of credit outstanding.
SG&A increased $22.3 million to $182.5 million for the year ended December 25, 2022, from $160.2 million for the year ended December 26, 2021, primarily reflecting the increase in revenues.
SG&A increased $15.3 million to $197.8 million for the year ended December 31, 2023, from $182.5 million for the year ended December 25, 2022, primarily reflecting the increase in revenues.
Our KGS and US segments provide products, solutions and services for mission critical National Security programs. KGS and US customers primarily include National Security related agencies, the DoD, intelligence agencies and classified agencies, and to a lesser degree, international government agencies and domestic and international commercial customers.
KGS and US customers primarily include National Security related agencies, the DoD, intelligence agencies and classified agencies, and to a lesser degree, international government agencies and domestic and international commercial customers. We organize our operating segments based primarily on the nature of the products, solutions and services offered.
Significant management judgments and estimates, including the estimated costs to complete the project, which determine the project’s percentage complete, must be made and used in connection with the revenue recognized in any accounting period.
Significant management judgments and estimates, including the estimated costs to complete the project, which determine the project’s percentage complete, must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of our revenue for any period if management makes different judgments or utilizes different estimates.
We believe that our business is well-positioned in areas that the DoD and other customers indicate are priorities for future defense spending.
We believe that our business is well-positioned in areas that the DoD and other customers indicate are priorities for future defense spending, including those based on the 2022 National Security Strategy document, the 2023 U.S.
Net cash provided by operating activities from continuing operations was $35.3 million for the year ended December 26, 2021. 52 Our net cash used in investing activities from continuing operations is summarized as follows (in millions): Year Ended December 25, 2022 December 26, 2021 Investing activities: Cash paid for acquisitions, net of cash acquired $ (132.2) $ (12.3) Proceeds from sale of assets 0.2 2.2 Proceeds from insurance — 4.5 Capital expenditures (45.4) (46.5) Net cash used in investing activities from continuing operations $ (177.4) $ (52.1) Net cash used in investing activities from continuing operations for year ended December 25, 2022 is comprised of $74.0 million related to the acquisition of the assets of SRE, $37.5 million related to the acquisition of Cosmic, $15.3 million for the remaining purchase price due on the acquisition of CTT, and a $5.4 million payment due under the acquisition agreement for KTT Core, of which we purchased a controlling interest in February 2019.
Net cash used in investing activities from continuing operations for the year ended December 25, 2022 was comprised of $74.0 million related to the acquisition of SRE, $37.5 million related to the acquisition of Cosmic, $15.3 million for the remaining purchase price due on the acquisition of CTT, and a $5.4 million payment due under the acquisition agreement for KTT Core, of which we purchased a controlling interest in February 2019.
In addition to the challenges presented by the ongoing COVID-19 pandemic, the Company has also been affected by other unfavorable macroeconomic conditions. Significant adverse supply chain disruptions continue throughout the industry and for the Company, including delays in the receipt and delivery of materials, parts, supplies, etc., which in certain instances and for certain items is significant.
We continue to be affected by various unfavorable macroeconomic conditions including significant adverse supply chain disruptions that continue throughout the industry and for us, and related delays in the receipt and delivery of materials, parts, supplies, etc., which in certain instances and for certain items is significant.
Our days sales outstanding (“DSO”) have increased to 134 days as of December 25, 2022 from 128 days as of December 26, 2021.
Our days sales outstanding (“DSO”) have decreased to 116 days as of December 31, 2023 from 134 days as of December 25, 2022.
There is also a significant industry wide labor shortage, including in the science, technology, engineering, and math discipline areas, and for employees willing and/or able to obtain National Security clearances, including for high level manufacturing and production. In addition, recent actions by the Federal Reserve to increase interest rates have impacted our interest expense on our outstanding debt borrowings.
There is also a significant industry wide labor shortage, including in the Science, Technology, Engineering, and Math (STEM) discipline areas, and also including employees willing and/or able to obtain National Security clearances, and for high level manufacturing and production disciplines.
Government shutdowns could have serious negative consequences for the security of our country and the defense industrial base, including the Company and the customers, employees, suppliers, investors, and communities that rely on companies in the defense industrial base.
We believe continued budget pressures (which are expected), CRAs, (which are also expected), future Federal Government debt ceiling issues, or Federal Government shutdowns could have serious negative consequences for the security of our country and the defense industrial base, including the Company and the related customers, employees, suppliers, investors, and communities that rely on companies in the defense industrial base.
Also, the cost of labor for the Company’s employees and labor base has also increased significantly, and the current challenges in hiring, obtaining and retaining employees is adversely impacting Kratos’ ability to execute its business.
Also, a shortage of qualified labor, and the cost of that labor for the Company and its labor base is a significant operational challenge for the Company. The cost of labor has increased significantly and current challenges in hiring, obtaining 52 and retaining employees, including those employees requiring National Security clearances, is adversely impacting Kratos’ ability to execute its business.
Government provide for reimbursement of costs plus the payment of a fee. Some cost reimbursable contracts include award and incentive fees that are awarded based on performance on the contract.
Our business with the U.S. Government and prime contractors is generally performed under fixed-price, cost reimbursable, or time and materials contracts. Cost reimbursable contracts for the U.S. Government provide for reimbursement of costs plus the payment of a fee. Some cost reimbursable contracts include award and incentive fees that are awarded based on performance on the contract.
We enter into agreements with suppliers and subcontractors for goods and services in support of these contracts and programs with payment terms that are generally aligned with the payment terms from our customers. In some instances, we require advance payments or deposits from our customers, which help fund our purchase commitments and reduce the risk of customer performance.
We enter into agreements with suppliers and subcontractors for goods and services in support of these contracts and programs with payment terms that are generally aligned with the payment terms from our customers.
Such a challenging federal and DoD budgetary environment may negatively impact our business and programs and could have a material adverse effect on our forecasts, estimates, financial position, results of operations and/or cash flows. The nature of our operations exposes us to risks associated with pandemics, epidemics or other public health emergencies, such as the outbreak of COVID-19.
Such a challenging federal and DoD budgetary environment may negatively impact our customers, business and programs and could have a material adverse effect on our forecasts, estimates, financial position, results of operations and/or cash flows.
Other expense, net, increased to $30.1 million from $23.5 million for the years ended December 25, 2022 and December 26, 2021, respectively.
Total other expense, net. Other expense, net, decreased to $20.0 million from $30.1 million for the years ended December 31, 2023 and December 25, 2022, respectively.
We organize our operating segments based 48 primarily on the nature of the products, solutions and services offered. For additional information regarding our reportable segments, see Note 14 of the Notes to Consolidated Financial Statements. From a customer and solutions perspective, we view our business as an integrated whole, leveraging skills and assets wherever possible.
For additional information regarding our reportable segments, see Note 14 of the Notes to Consolidated Financial Statements. From a customer and solutions perspective, we view our business as an integrated whole, leveraging skills and assets wherever possible. Key Financial Statement Concepts As of December 31, 2023, we consider the following factors to be important in understanding our financial statements.
(“CTT”) and the Southern Research Institute’s Engineering Division (“SRE”), increased revenues in our space, satellite and cyber business of $4.1 million, increases in our defense and rocket support services, turbine technologies and C5ISR businesses of $22.7 million, partially offset by an $21.5 million reduction in our Training Solutions business, resulting primarily from the completion of Training Solutions contracts.
Revenues in our KGS segment increased $148.3 million primarily due to a full year contribution of revenues from the acquisition of the Southern Research Institute’s Engineering Division (“SRE”), which increased $26.4 million, increased revenues in our space, satellite, training solutions and cyber business of $64.0 million, increases in our C5ISR, turbine technologies, and microwave electronics products businesses of $65.4 million, partially offset by an $7.5 million reduction of revenues in our defense and rocket support services.
During the year ended December 25, 2022, the Company made $2.5 million of principal payments on Term Loan A. As of December 25, 2022, the Company has net borrowings of approximately $60 million outstanding on the new Revolving Credit Facility, with $140 million remaining in borrowing capacity, less approximately $10.0 million of letters of credit outstanding.
As of December 31, 2023, the Company has net borrowings of approximately $35.0 million outstanding on the new Revolving Credit Facility, with $165.0 million remaining in borrowing capacity, less approximately $10.2 million of letters of credit outstanding.
The current budget environment, including COVID-19 expenditures, Ukraine funding support, heightened levels of inflation, related supply chain disruptions and uncertainty surrounding the debt ceiling and the appropriations process, creates 47 significant short and long-term risks.
The current budget environment, including Israel and Ukraine funding support, heightened levels of inflation, related supply chain disruption, and the appropriations process, continues to create significant short and long-term industry risks.
R&D expenses were $38.6 million for the year ended December 25, 2022 and $35.2 million for the year ended December 26, 2021, with the primary increases in expenses in our US segment and our space and satellite business.
R&D expenses were $38.4 million for the year ended December 31, 2023 and $38.6 million for the year ended December 25, 2022, with the primary increases in expenses in our space and satellite communications business, offset by a net reduction in our unmanned systems business.
Revenues by reportable segment for the years ended December 25, 2022 and December 26, 2021 are as follows (in millions): 2022 2021 $ Change % Change Kratos Government Solutions Service revenues $ 320.0 $ 214.5 $ 105.5 49.2 % Product sales 356.6 365.1 (8.5) (2.3) % Total Kratos Government Solutions 676.6 579.6 97.0 16.7 % Unmanned Systems Service revenues 5.2 4.9 0.3 6.1 % Product sales 216.5 227.0 (10.5) (4.6) % Total Unmanned Systems 221.7 231.9 (10.2) (4.4) % Total revenues $ 898.3 $ 811.5 $ 86.8 10.7 % Total service revenues $ 325.2 $ 219.4 $ 105.8 48.2 % Total product sales 573.1 592.1 (19.0) (3.2) % Total revenues $ 898.3 $ 811.5 $ 86.8 10.7 % Revenues increased $86.8 million to $898.3 million for the year ended December 25, 2022 from $811.5 million for the year ended December 26, 2021.
Revenues by reportable segment for the years ended December 31, 2023 and December 25, 2022 are as follows (in millions): 2023 2022 $ Change % Change Kratos Government Solutions Service revenues $ 395.9 $ 320.0 $ 75.9 23.7 % Product sales 429.0 356.6 72.4 20.3 % Total Kratos Government Solutions 824.9 676.6 148.3 21.9 % Unmanned Systems Service revenues 6.7 5.2 1.5 28.8 % Product sales 205.5 216.5 (11.0) (5.1) % Total Unmanned Systems 212.2 221.7 (9.5) (4.3) % Total revenues $ 1,037.1 $ 898.3 $ 138.8 15.5 % Total service revenues $ 402.6 $ 325.2 $ 77.4 23.8 % Total product sales 634.5 573.1 61.4 10.7 % Total revenues $ 1,037.1 $ 898.3 $ 138.8 15.5 % Revenues increased $138.8 million to $1,037.1 million for the year ended December 31, 2023 from $898.3 million for the year ended December 25, 2022.
The increase in expense of $6.6 million was primarily related to the $13.0 million loss on the extinguishment of our $300 million 6.5% Senior Secured Notes due November 2025 (“Senior Secured Notes”) which was partially offset by a reduction in interest expense of $5.4 million as a result of the reduced rate on our new debt.
The decrease in other expense, net, of $10.1 million was primarily related to the $13.0 million loss on the extinguishment of our $300 million 6.5% Senior Secured Notes due November 2025 (“Senior Secured Notes”) during the year ended December 25, 2022, which was partially offset by a $2.8 million increase in interest expense for the year ended December 31, 2023 due to increased interest rates.
The remaining purchase price consideration of the CTT Inc. acquisition of approximately $15.2 million was made on December 30, 2021. During the year ended December 25, 2022, capital expenditures of approximately $24.0 million were incurred in our US business, primarily related to our unmanned combat target initiative.
During the year ended December 31, 2023, capital expenditures of approximately $25.1 million were incurred in our US business, primarily related to our unmanned combat target initiative.
Product sales decreased $19.0 million to $573.1 million for the year ended December 25, 2022 from $592.1 million for the year ended December 26, 2021, primarily as a result of decreased production activity in our US segment and reductions in our Training Solutions business.
Product sales increased $61.4 million to $634.5 million for the year ended December 31, 2023 from $573.1 million for the year ended December 25, 2022, primarily as a result of increased production activity in our KGS segment, offset partially by decreased volume in our US segment.
As of December 25, 2022, we had contractual commitments to repay debt, make payments under finance and operating leases, repay obligations related to agreements to purchase goods and services and settle tax and other liabilities.
In some instances, we require advance payments or deposits from our customers, which help fund our purchase commitments and reduce the risk of customer performance. 58 As of December 31, 2023, we had contractual commitments to repay debt, make payments under finance and operating leases, repay obligations related to agreements to purchase goods and services and settle tax and other liabilities.
Events and changes in circumstances arising after December 25, 2022, including those resulting from the continuing impacts of the current unfavorable macroeconomic climate, will be reflected in management’s estimates for future periods. Current Reporting Segments We operate in two reportable segments.
Our Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations reflect estimates and assumptions made by management as of December 31, 2023. Events and changes in circumstances arising after December 31, 2023, including those resulting from the continuing impacts of the current unfavorable macroeconomic climate, will be reflected in management’s estimates for future periods.
The increase was primarily a result of the recent Cosmic and SRE acquisitions. Cost of revenues. Cost of revenues increased to $672.3 million for the year ended December 25, 2022, from $586.4 million for the year ended December 26, 2021. The $85.9 million increase in cost of revenues was primarily a result of the overall increase in revenue discussed above.
The $96.2 million increase in cost of revenues was primarily a result of the overall increase in revenue discussed above. 54 Gross margin percentage increased to 25.9% for the year ended December 31, 2023, compared to 25.2% for the year ended December 25, 2022.
Additionally, with the recent change of party in Congress, considerable uncertainty exists regarding how future budget and program decisions will unfold, including the defense spending priorities of the Biden administration and Congress. We believe any continued budget pressures, CRAs or U.S.
Additionally, with the recent change of party in Congress in 2022, resulting with the Democrats controlling the Senate and the Presidency and the Republicans controlling the House of Representatives, considerable uncertainty exists regarding how future budgets, funding, timing and related program decisions will unfold, including the potential differing defense spending priorities of the Biden administration and of the Congress.
As a percentage of revenues, SG&A increased to 20.3% for the year ended December 25, 2022 from 19.7% for the year ended December 26, 2021 due primarily to an increase in stock compensation expense from $25.8 million in the year ended December 26, 2021 to $26.3 million in the year ended December 25, 2022 as well as increased SG&A expenses related to the recent acquisitions of CTT, Cosmic and SRE.
As a percentage of revenues, SG&A decreased to 19.1% for the year ended December 31, 2023 from 20.3% for the year ended December 25, 2022 due primarily to the increase in revenues in the year ended December 31, 2023. Research and development (R&D) expenses.
A summary of our net cash provided by (used in) operating activities from continuing operations from our Consolidated Statements of Cash Flows is as follows (in millions): Year Ended December 25, 2022 December 26, 2021 Net cash provided by (used in) operating activities from continuing operations $ (25.6) $ 35.3 Our net cash used in operating activities from continuing operations was $25.6 million for the year ended December 25, 2022.
A summary of our net cash provided by (used in) operating activities from continuing operations from our Consolidated Statements of Cash Flows is as follows (in millions): Year Ended December 31, 2023 December 25, 2022 Net cash provided by (used in) operating activities from continuing operations $ 65.2 $ (25.6) Our net cash provided by operating activities from continuing operations was $65.2 million for the year ended December 31, 2023, primarily as a result of the net income from continuing operations of $2.2 million and noncash charges of $74.2 million partially offset by changes in net working capital accounts of $11.2 million, which included customer advanced payments reflected as an increase in Billings in Excess of Costs of $28.4 million.
Revenues in our US segment decreased $10.2 million primarily due to the timing of program contract awards, which includes a reduction in our tactical drone-based revenues, as compared to the twelve months ended December 26, 2021.
Revenues in our US segment decreased $9.5 million primarily due to a reduction in our tactical drone-based revenues, as compared to the twelve months ended December 25, 2022 offset with the contribution of $6.4 million in revenues from the recent acquisition of Sierra Technical Services, Inc. (“STS”).
Margins on services decreased to 26.5% for the year ended December 25, 2022, from 28.8% for the year ended December 26, 2021, due primarily to a less favorable mix of revenues, primarily in our space, training & cyber business and in our turbine technologies business.
Margins in the KGS segment increased to 27.2% for the year ended December 31, 2023, from 26.8% for the year ended December 25, 2022. This change was primarily due to a more favorable mix of revenues for the year ended December 31, 2023.
Net cash used in financing activities from continuing operations was $9.3 million for the year ended December 26, 2021 and consisted primarily of payroll withholding taxes paid from vested restricted stock units traded for taxes of $9.1 million, and the pay-off of $5.1 million of indebtedness in our Israeli subsidiary which was issued in 2020. 53 The net operating cash flows of discontinued operations is summarized as follows (in millions): Year Ended December 25, 2022 December 26, 2021 Net operating cash flows of discontinued operations $ (0.1) $ (4.5) The net operating cash flow of discontinued operations for the year ended December 25, 2022 was a use of $0.1 million.
Net cash used in financing activities from continuing operations was $63.3 million for the year ended December 25, 2022, which included $309.8 million used to redeem our $300 million of Senior Secured Notes including the call premium of $9.8 million, debt issuance costs of $3.3 million, payroll withholding taxes paid from vested restricted stock traded for taxes of $12.5 million and payments made on financing lease obligations of $1.4 million.
Margins on product sales decreased for the year ended December 25, 2022, as compared to December 26, 2021 to 24.4% from 27.3%, respectively, primarily due to a less favorable mix of certain programs with an increase in lower margin developmental programs.
Margins on services decreased to 24.7% for the year ended December 31, 2023, from 26.5% for the year ended December 25, 2022. Margins on product sales increased to 26.7% for the year ended December 31, 2023, as compared to 24.4% for the year ended December 25, 2022.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

7 edited+1 added−0 removed7 unchanged
Biggest changeUncertainty as to the nature of alternative reference rates and as to potential changes or other reforms to LIBOR may adversely impact our interest rates and related interest expense. Risks and uncertainties related to the LIBOR phase out are further described in Part I, Item 1A.
Biggest changeWe are also exposed to market risk due to the current phase out of LIBOR and the subsequent replacement with alternative reference rates, including SOFR. Uncertainty as to the nature of alternative reference rates and as to potential changes or other reforms to LIBOR may adversely impact our interest rates and related interest expense.
Risk Factors- "The discontinuance of LIBOR and the replacement of LIBOR with an alternative reference rate may adversely affect our borrowing costs and could impact our business and results of operations.” 59 Exposure to market risk for foreign currency exchange rate risk is related to receipts from customers, payments to suppliers and intercompany loans denominated in foreign currencies.
Risk Factors- "The discontinuance of LIBOR and the replacement of LIBOR with an alternative reference rate may adversely affect our borrowing costs and could impact our business and results of operations.” Exposure to market risk for foreign currency exchange rate risk is related to receipts from customers, payments to suppliers and intercompany loans denominated in foreign currencies.
We manage exposure to these risks through our operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. Derivative financial instruments are viewed as risk management tools and are not used for speculation or for trading purposes.
We manage exposure to these risks through our operating and financing activities and, when deemed 62 appropriate, through the use of derivative financial instruments. Derivative financial instruments are viewed as risk management tools and are not used for speculation or for trading purposes.
Based on our overall foreign currency rate exposure as of December 25, 2022, including the limited derivative financial instruments that we have entered into to manage this risk, a 10% appreciation or depreciation of the USD from its cross-functional rates would not be expected, in the aggregate, to have a material effect on our financial position, results of operations and cash flows in the near-term.
Based on our overall foreign currency rate exposure as of December 31, 2023, including the limited derivative financial instruments that we have entered into to manage this risk, a 10% appreciation or depreciation of the USD from its cross-functional rates would not be expected, in the aggregate, to have a material effect on our financial position, results of operations and cash flows in the near-term.
We are exposed to interest rate risk, primarily through our borrowing activities under the Credit Agreement discussed under “ Liquidity and Capital Resources” above. Based on our current outstanding balances, a 1% change in the SOFR would not materially impact our financial position.
We are exposed to interest rate risk, primarily through our borrowing activities under the Credit Agreement discussed under “ Liquidity and Capital Resources” above. Based on our current outstanding balances, a 1% change in the SOFR would not materially impact our financial position and results of operations.
Our cash and cash equivalents as of December 25, 2022 were $81.3 million and are primarily invested in money market interest bearing accounts. A hypothetical 10% adverse change in the average interest rate on our money market cash investments and short-term investments would have had no material effect on our net income for the year ended December 25, 2022.
Our cash and cash equivalents as of December 31, 2023 were $72.8 million and are primarily invested in money market interest bearing accounts. A hypothetical 10% adverse change in the average interest rate on our money market cash investments and short-term investments would have had no material effect on our net income for the year ended December 31, 2023.
Derivative financial instruments were contracted with investment grade counterparties to reduce exposure to interest rate risk on our prior credit facilities. We had no outstanding derivative financial instruments as of December 25, 2022. We are also exposed to market risk due to the current phase out of LIBOR and the subsequent replacement with alternative reference rates, including SOFR.
Derivative financial instruments were contracted with investment grade counterparties to reduce exposure to interest rate risk on our prior credit facilities. Please see Note 17 in the accompanying Consolidated Financial Statements for information on our outstanding derivative financial instruments as of December 31, 2023.
Added
Risks and uncertainties related to the LIBOR phase out are further described in Part I, Item 1A.

Other KTOS 10-K year-over-year comparisons