NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Summary of Significant Accounting Policies
All references to the “Company” and “Kratos” refer to Kratos Defense & Security Solutions, Inc., a Delaware corporation, and its subsidiaries.
(a) Basis of Presentation
The information as of March 29, 2026 and for the three months ended March 29, 2026 and March 30, 2025 is unaudited. The condensed consolidated balance sheet as of December 28, 2025 was derived from the Company’s audited consolidated financial statements at that date. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods presented. The results have been prepared in accordance with the instructions to Form 10-Q and do not necessarily include all information and footnotes necessary for presentation in accordance with generally accepted accounting principles in the U.S. (“GAAP”). These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes included in the Company’s audited annual consolidated financial statements for the fiscal year ended December 28, 2025, included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 23, 2026 (the “Form 10-K”). Interim operating results are not necessarily indicative of operating results expected in subsequent periods or for the year as a whole.
(b) Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its 100% owned subsidiaries. All inter-company transactions have been eliminated in consolidation.
(c) Fiscal Year
The Company has a 52/53 week fiscal year ending on the last Sunday of the calendar year. The three month periods ended March 29, 2026 and March 30, 2025 consisted of 13-week periods. There are 52 calendar weeks in the fiscal years ending on December 27, 2026 and December 28, 2025.
(d) Use of Estimates
There have been no significant changes in the Company’s accounting estimates for the three months ended March 29, 2026 as compared to the accounting estimates described in the Form 10-K.
(e) Fair Value of Financial Instruments
The Company uses forward exchange contracts from time to time to manage foreign currency risks associated with certain transactions, specifically forecasted materials and salaries paid in foreign currencies. These derivative instruments are measured at fair value using observable market inputs such as interest rates. Based on these inputs, the derivative instruments are classified within Level 2 of the valuation hierarchy. At March 29, 2026, the derivative instruments were included in other current assets and other long-term liabilities on the Company's condensed consolidated balance sheets. At December 28, 2025, the Company did not have any forward exchange contracts in place.
The Company also had entered into an interest rate swap contract in order to mitigate the exposure to interest rate movements associated with the Company’s Term Loan A. On June 30, 2025, in anticipation of the extinguishment of all outstanding Term Loan A debt under the 2022 Credit Facility, the Company terminated this interest rate swap contract.
The carrying amounts and the related fair values of the Company’s derivative instruments measured at fair value on a recurring basis at March 29, 2026 and December 28, 2025 are presented in Note 14.
The carrying value of all financial instruments, including cash equivalents, accounts receivable, unbilled receivables, accounts payable, accrued expenses, billings in excess of cost and earnings on uncompleted contracts and income taxes payable, approximated their estimated fair values at March 29, 2026 and December 28, 2025 due to the short-term nature of these instruments.
(f) Recent Accounting Pronouncements
In December 2025, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2025-10 Accounting for Government Grants Received by Business Entities (“ASU 2025-10”), which provides guidance on how companies should recognize, measure, and present government grants received. The new standard is effective for annual and interim reporting periods beginning after December 15, 2028. The new standard allows for a modified prospective, modified retrospective, or retrospective approach to all government grants through a cumulative-effect adjustment. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU 2025-10 on the Company’s consolidated financial position, results of operations and cash flows.
In December 2025, the FASB issued ASU No. 2025-11 Interim Reporting (Topic 270): Narrow-Scope Improvements (“ASU 2025-11”). ASU 2025-11 clarifies the applicability of Topic 270 and the form and content of interim financial statements. ASU 2025-11 requires entities to disclose material events occurring since the last annual reporting period. The amendments in this update are effective for fiscal years beginning after December 15, 2027, including interim periods within those fiscal years. Early adoption is permitted. The Company may apply the amendments either prospectively or retrospectively to all periods presented. The Company is currently evaluating the disclosure impact of ASU 2025-11; however, the standard is not expected to have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.
In September 2025, the FASB issued ASU No. 2025-06 Targeted Improvements to the Accounting for Internal-Use Software (Subtopic 350-40) (“ASU 2025-06”). ASU 2025-06 removes references to prescriptive software development stages and requires capitalization of internal-use software costs when it is probable that the software project will be completed and management has authorized and committed to funding the project. ASU 2025-06 is effective for the Company for fiscal years beginning after December 15, 2027, and interim periods within those fiscal years. The standard allows for prospective, modified prospective, or retrospective application to all periods presented. The Company is currently evaluating the impact of the adoption of ASU 2025-06 on its consolidated financial position, results of operations and cash flows.
In November 2024, the FASB issued ASU No. 2024-03, Income Statement (Topic 220): Reporting Comprehensive Income – Expense Disaggregation Disclosures (“ASU 2024-03”), which requires the amounts of purchases of inventory, employee compensation, depreciation, and intangible asset amortization included in each relevant expense caption. It also requires companies to include certain amounts that are already required to be disclosed under current GAAP in the same disclosure. Additionally, it requires companies to disclose a qualitative description of the amounts remaining in relevant expense captions that are not separately disaggregated quantitatively, and to disclose the total amount of selling expenses and, in annual reporting periods, an entity’s definition of selling expenses. ASU 2024-03 will be effective for annual periods beginning after December 15, 2026 and interim periods beginning after December 15, 2027 with early adoption permitted. ASU 2024-03 will be applied on a prospective basis with the option to apply the standard retrospectively. The Company is currently evaluating the impact of the adoption of ASU 2024-03; however, the standard is not expected to have an impact on the Company’s consolidated financial position, results of operations or cash flows.
Other accounting standards updates adopted and/or issued, but not effective until after March 29, 2026, are not expected to have a material effect on the Company’s consolidated financial position, results of operations and/or cash flows.
(g) Joint Venture Arrangements
On February 26, 2025, the Company and RAFAEL Advanced Defense Systems, Ltd. (“RAFAEL”) announced an approximate 50/50 joint venture for the establishment of a U.S.-based merchant supplier of solid rocket motors (“SRMs”) and other energetics. The new joint venture, named Prometheus Energetics (“Prometheus”), will be headquartered on an approximately 500-acre site near the U.S. Navy and Army facility in Crane, Indiana. Kratos and RAFAEL (through its U.S. based subsidiary RAFAEL USA) have jointly committed up to a combined total of $175 million in capital for the establishment of Prometheus and required property, plant, equipment and personnel needed for the new, state-of-the-art SRM and energetics manufacturing campus and facilities. After construction of the plant and once RAFAEL’s technology transfer is completed and certified for operations, Prometheus is projected to begin production of SRMs and energetics in 2027. As of the date of this Quarterly Report, the Company has incurred minimal amounts of expense related to the establishment of Prometheus and has contributed approximately $7 million in capital which is recorded in the Condensed Consolidated Balance Sheets as “Investment in joint venture” accounted for under the equity method.
Note 2. Acquisitions
Orbit Technologies Ltd.
On November 4, 2025, the Company, Kratos Holdings U K Limited, a private limited company incorporated under the laws of England and Wales and an indirect wholly-owned subsidiary of the Company (“Kratos U K”), Kratos Acquisition Ltd., a company organized under the laws of the State of Israel and a direct wholly-owned subsidiary of Kratos U K (“Merger Sub”), and Orbit Technologies Ltd., a company organized under the laws of the State of Israel (“Orbit”), entered into an Agreement and Plan of Merger (the “Orbit Merger Agreement”), pursuant to which, on the terms and subject to the conditions set forth in the Orbit Merger Agreement, on March 2, 2026, Merger Sub merged with and into Orbit (the “Orbit Merger”), with Orbit continuing as the surviving corporation in the Orbit Merger as an indirect wholly-owned subsidiary of the Company and a direct subsidiary of Kratos U K. The Orbit Merger was completed on March 2, 2026. Prior to completion of the Orbit Merger, Orbit’s ordinary shares were publicly traded on the Tel Aviv Stock Exchange. The purchase price paid for 100 percent of the ordinary shares of Orbit was approximately $352.7 million in cash, which was funded via cash on the Company’s balance sheet. The purchase price was determined based on $13.725 for each Orbit ordinary share (the “Orbit Merger Consideration”), as set forth in the Orbit Merger Agreement. The acquired Orbit business is included in the KGS segment.
Orbit is a leading global provider of mission-critical satellite-based communication systems for mobile and unmanned aerial, seaborne, undersea and land systems, military vehicles and other systems. Orbit provides its hardware, products, and systems to major air forces, traditional prime contractors and emerging new defense and space companies. Orbit’s customers are worldwide, including Israel, the United States, Europe and the Pacific region.
The allocation of the total consideration for this acquisition to the tangible and identifiable intangible assets acquired and liabilities assumed is preliminary until the Company obtains final information regarding their fair values. However, the Company does not expect any adjustment to such allocations to be material to the Company's consolidated financial statements. The operating results of this acquisition have been included in the Company’s results of operations from the effective acquisition date. The Company has determined that it is not currently possible to present pro forma revenue and earnings information for the periods prior to the acquisition. This is due to the fact that the acquiree was a foreign entity that did not historically maintain financial records in accordance with U.S. GAAP, and the Company is still in the process of reconciling and converting these historical records. The Company expects to complete this assessment and provide the required pro forma disclosures in its second quarter periodic report once the information is finalized.
The excess of the purchase price over the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed in the acquisition was allocated to goodwill. The goodwill represents the value the Company expects to be created by integrating the acquired Orbit business with Kratos’ related products and customers.
The transaction has been accounted for using the acquisition method of accounting, which requires, among other things, that the identifiable assets acquired and the liabilities assumed be recognized at their fair values as of the acquisition date. These preliminary fair value measurements are based primarily on significant inputs not observable in the marketplace and thus represent Level 3 measurements.
A summary of the consideration paid for the acquired Orbit business is as follows (in millions):
| | | | | | | | |
Cash paid | | $ | 352.7 | |
| Total consideration | | $ | 352.7 | |
The following table summarizes the preliminary allocation of the purchase price over the estimated fair values of the Orbit assets acquired and liabilities assumed (in millions):
| | | | | | | | |
Cash | | $ | 42.3 | |
| Accounts receivable | | 26.6 | |
| Inventory | | 18.8 | |
| Other current assets | | 7.0 | |
| Property and equipment | | 15.6 | |
| Intangible assets | | 114.8 | |
Other assets | | 0.5 | |
Total assets acquired | | 225.6 | |
Total liabilities assumed | | (60.4) | |
| Goodwill | | 187.5 | |
| Net assets acquired | | $ | 352.7 | |
Based on the Company’s preliminary estimate of fair value as of March 2, 2026, the identifiable intangible assets include the amounts in the following table ($ in millions):
| | | | | | | | |
| Intangible | Estimated Life | Value |
Customer relationships | 10 | 24.7 | |
Contracts and backlog | 2 | 21.5 | |
Developed technology | 5 | 9.9 | |
Trade names | 7 | 58.7 | |
| Total | | $ | 114.8 | |
The amounts of revenue and operating income of the acquired Orbit business included in the Company’s consolidated statement of operations for the three months ended March 29, 2026 were $13.3 million and $3.4 million, respectively.
Nomad Global Communication Solutions, Incorporated
On February 11, 2026, the Company and the other parties thereto entered into an Agreement and Plan of Merger (the “Nomad Merger Agreement”) pursuant to which the Company acquired Nomad Global Communication Solutions, Incorporated, a Montana corporation (“Nomad”). The Nomad acquisition was consummated on February 11, 2026. Nomad is a company that focuses on the design and manufacture of connected mobile operations centers. Pursuant to the Nomad Merger Agreement, the Company (i) issued 972,136 shares of Kratos common stock with a deemed value of $88.8 million on February 11, 2026 to the former Nomad shareholders in a private placement and paid approximately $37.0 million in cash to extinguish certain of Nomad’s existing indebtedness and fund certain transaction related expenses, (ii) agreed to issue up to $7 million worth of additional shares of Kratos common stock to the former Nomad shareholders in the future upon release of certain holdback amounts, (iii) agreed to pay up to $6 million in cash to the former Nomad shareholders in the future upon release of a certain holdback amount, and (iv) agreed to issue up to $10 million worth of additional shares of Kratos common stock upon achievement of certain milestones. The purchase price is subject to adjustment for net working capital and indebtedness, as defined in the Merger Agreement. Kratos granted the former shareholders of Nomad certain registration rights under the Nomad Merger Agreement and registered the 972,136 shares of Kratos common stock issued to the former Nomad shareholders on February 11, 2026 with the SEC on February 12, 2026. The Company incurred approximately $1.1 million of acquisition-related costs in connection with the Nomad acquisition, which were expensed as incurred and recorded within Selling, general and administrative expenses. The acquired Nomad business is included in the KGS segment.
The allocation of the total consideration for this acquisition to the tangible and identifiable intangible assets acquired and liabilities assumed is preliminary until the Company obtains final information regarding their fair values. However, the Company does not expect any adjustment to such allocations to be material to the Company's consolidated financial statements. The operating results of this acquisition have been included in the Company’s results of operations from the effective acquisition date. The Company has determined that it is not currently possible to present pro forma revenue and earnings information for the periods prior to the acquisition. This is due to the fact that the acquiree did not historically maintain financial records in accordance with U.S. GAAP, and the Company is still in the process of reconciling these historical records. The Company expects to complete this assessment and provide the required pro forma disclosures in its second quarter periodic report once the information is finalized..
The excess of the purchase price over the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed in the acquisition was allocated to goodwill. The goodwill represents the value the Company expects to be created by integrating the acquired Nomad business with Kratos’ related products and customers.
The transaction has been accounted for using the acquisition method of accounting, which requires, among other things, that the identifiable assets acquired and the liabilities assumed be recognized at their fair values as of the acquisition date. These preliminary fair value measurements are based primarily on significant inputs not observable in the marketplace and thus represent Level 3 measurements.
A summary of the consideration paid for the acquired Nomad business is as follows (in millions):
| | | | | | | | |
Common stock issued | | $ | 88.8 | |
Cash paid | | 37.0 | |
Holdback - contingent consideration | | 10.0 | |
Holdback - compliance, tax and other | | 8.0 | |
Holdback - indemnification escrow | | 5.0 | |
| Total consideration | | $ | 148.8 | |
The following table summarizes the preliminary allocation of the purchase price over the estimated fair values of the Nomad assets acquired and liabilities assumed ($ in millions):
| | | | | | | | |
| Accounts receivable | | $ | 14.3 | |
| Inventory | | 4.1 | |
| Other current assets | | 2.0 | |
| Property and equipment | | 20.9 | |
| Intangible assets | | 56.8 | |
Other assets | | 16.3 | |
Total assets acquired | | 114.4 | |
Total liabilities assumed | | (66.5) | |
| Goodwill | | 100.9 | |
Total assets acquired | | $ | 148.8 | |
Based on the Company’s preliminary estimate of fair value as of February 11, 2026, the identifiable intangible assets include the amounts in the following table (in millions):
| | | | | | | | |
| Intangible | Estimated Life | Value |
Customer relationships | 10 | 12.2 | |
Contracts and backlog | 2 | 10.7 | |
Developed technology | 5 | 4.9 | |
Trade names | 7 | 29.0 | |
| Total | | $ | 56.8 | |
The amounts of revenue and operating loss of the Nomad acquisition included in the Company’s consolidated statement of operations for the three months ended March 29, 2026 were $7.3 million and $1.2 million, respectively.
Norden Millimeter, Inc.
On January 27, 2025, the Company and Kratos Microwave, Inc., a subsidiary of the Company (“Kratos Microwave”), entered into an Asset Purchase Agreement (the “Purchase Agreement”) to acquire certain of the assets (the “Purchased Assets”) of Norden Millimeter, Inc. (“Norden”) and assume certain liabilities (the “Assumed Liabilities”) of Norden. Norden focuses on microwave and millimeter wave products. Pursuant to the Purchase Agreement, on February 4, 2025, the acquisition was completed following the satisfaction of all closing conditions and (a) the Company issued 1,095,674 shares of its common stock, with a deemed value of $32.2 million, to Norden in a private placement, (b) the Company agreed to issue up to $6 million worth of additional shares of its common stock to Norden in the future upon release of certain holdback amounts, and (c) Kratos Microwave agreed to assume the Assumed Liabilities, in each case, in exchange for the Purchased Assets. Included in these Assumed Liabilities was a contingent bonus liability of $5.0 million payable to certain former employees of Norden. Kratos granted Norden certain registration rights under the Asset Purchase Agreement and registered the 1,095,674 shares with the SEC on February 7, 2025. The Purchased Assets and Assumed Liabilities are included in the KGS segment.
The operating results of this acquisition have been included in the Company’s results of operations from the effective acquisition date.
The excess of the purchase price over the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed in the acquisition was allocated to goodwill. The goodwill represents the value the Company expects to be created by integrating the acquired Norden assets with Kratos’ related products and customers.
The acquisition has been accounted for using the acquisition method of accounting, which requires, among other things, that the identifiable assets acquired and the liabilities assumed be recognized at their fair values as of the acquisition date. These fair value measurements are based primarily on significant inputs not observable in the marketplace and thus represent Level 3 measurements.
The following table summarizes the allocation of the purchase price over the estimated fair values of the Norden assets acquired and liabilities assumed (in millions):
| | | | | | | | |
| Accounts receivable | | $ | 1.8 | |
| Inventory | | 6.1 | |
| Other current assets | | 0.1 | |
| Property and equipment | | 1.5 | |
| Intangible assets | | 9.7 | |
Deferred tax asset | | 1.2 | |
Total assets acquired | | 20.4 | |
Total liabilities assumed | | (10.1) | |
| Goodwill | | 26.9 | |
Total assets acquired | | $ | 37.2 | |
The identifiable intangible assets as of February 4, 2025 included customer relationships of $5.8 million with a useful life of 10 years, contracts and backlog of $1.4 million with a useful life of 2 years, developed technology of $1.4 million with a useful life of 5 years, trade names of $0.6 million with a useful life of 7 years, and a non-compete agreement valued at $0.5 million with a useful life of 5 years. The goodwill recorded in this transaction is expected to be tax-deductible.
The value of customer relationships was estimated using the multi-period excess earnings method (“MPEEM”), an income approach (Level 3), which converts projected revenues and costs into cash flows. To reflect the fact that certain other assets contribute to the cash flows generated, the returns for these contributory assets were removed to arrive at estimated cash flows solely attributable to the acquired customer relationships, which were discounted at a rate of 7.5% to determine the fair value referred to above. The value of contracts and backlog referred to above was also estimated using MPEEM. The value of developed technology referred to above was estimated using the relief-from royalty method, an income approach (Level 3), which estimates the cost savings that accrue to the owner of the intangible asset that would otherwise be payable as royalties or license fees on revenues earned through the use of the asset. A royalty rate was applied to the projected revenues associated
with the developed technology intangible asset to determine the amount of savings, which was discounted at a rate of 8.8% to determine the fair value. The value of trade names referred to above was also estimated using the relief-from royalty method. A royalty rate was applied to the projected revenues associated with the trade names intangible asset to determine the amount of savings, which was discounted at a rate of 8.8% to determine the fair value referred to above. Quantitative information about significant unobservable inputs utilized to measure the fair value of Level 3 assets includes a range of discount rates from 6% to 12% and a weighted average discount rate of 8.8%.
The amounts of revenue and operating income of the acquired Norden assets included in the Company’s consolidated statement of operations for the year ended December 28, 2025 were $22.3 million and $2.6 million, respectively.
A summary of the consideration paid for the acquired assets is as follows (in millions):
| | | | | | | | |
Common stock issued and cash paid | | $ | 32.3 | |
Holdback, net of $1.1 million purchase price adjustment | | 4.9 | |
| Total consideration | | $ | 37.2 | |
Note 3. Revenue Recognition
The Company has adopted the FASB ASU 2014-09, Revenue from Contracts with Customers, and the related amendments, which are codified into Accounting Standards Codification (“ASC”) 606 (“ASC 606”). To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in each contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. Once the contract is identified and determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract, determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC 606. The majority of the Company’s contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation based on the relative standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling price is the expected-cost-plus-margin approach, under which the Company forecasts the expected costs of satisfying a performance obligation and then adds an appropriate margin for that distinct good or service.
For the majority of contracts, the Company satisfies the underlying performance obligations over time as the customer obtains control or receives benefits as work is performed on the contract. The Company generally recognizes revenue over time as work is performed on long-term contracts because of the 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 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. As a result, under ASC 606, revenue is recognized over time using the cost-to-cost method (cost incurred relative to total estimated cost at completion).
Remaining Performance Obligations
The Company calculates revenues from remaining performance obligations as the dollar value of the remaining performance obligations on executed contracts. On March 29, 2026, the Company had approximately $2.011 billion of remaining performance obligations. The Company expects to recognize approximately 37% of the remaining performance obligations as revenue in fiscal year 2026, an additional 25% in fiscal year 2027, and the balance thereafter.
Contract Estimates
Due to the nature of the work required to be performed on many performance obligations, the estimation of total revenue and cost at completion is complex, subject to many variables, and requires significant judgment. On a quarterly basis, the Company conducts its contract cost Estimate at Completion (“EAC”) process by reviewing the progress and execution of outstanding performance obligations within its contracts. As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities and the related changes in estimates of revenues and costs. The risks and opportunities include management’s judgment about the ability and cost to achieve the schedule (e.g., the number and type of milestone events), technical requirements (e.g., a newly-developed product versus a mature product) and other contract requirements. Management must make assumptions and estimates regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation (e.g., to estimate increases in wages and prices for materials and related support cost allocations), execution by subcontractors, the availability and timing of funding from customers and overhead cost rates, among other variables.
In addition, certain of the Company’s long-term contracts contain award fees, incentive fees, or other provisions that can either increase or decrease the transaction price. These variable amounts generally are awarded upon achievement of certain performance metrics, program milestones, or cost targets and can be based upon customer discretion. Variable consideration is estimated at the most likely amount to which the Company is expected to be entitled. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information (historical, current, and forecasted) that is reasonably available.
Contracts are often modified to account for changes in contract specifications and requirements. Contract modifications are considered to exist when the modification either creates new or changes the existing enforceable rights and obligations. Most of the Company’s contract modifications are for goods or services that are not distinct from the existing contract due to the significant integration service provided in the context of the contract and are accounted for as if they were part of that existing contract. The effect of a contract modification on the transaction price, and the measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.
As a result of the EAC process, any quarterly adjustments to revenues, cost of sales, and the related impact to operating income are recognized as necessary in the period they become known. These adjustments may result from positive program performance, and may result in an increase in operating income during the performance of individual performance obligations, if it is determined the Company will be successful in mitigating the risks surrounding the technical, schedule and cost aspects of those performance obligations or realizing related opportunities. Likewise, these adjustments may result in a decrease in operating income if it is determined the Company will not be successful in mitigating these risks or realizing related opportunities. Changes in estimates of net sales, cost of sales, and the related impact to operating income are recognized quarterly on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current and prior periods. A significant change in one or more of these estimates could affect the profitability of one or more of the Company’s contracts. When estimates of total costs to be incurred on a performance obligation exceed total estimates of revenue to be earned, a provision for the entire loss on the performance obligation is recognized in the period the loss is determined. No cumulative catch-up adjustment on any one contract was material to the Company’s unaudited condensed consolidated financial statements for the three-month periods ended March 29, 2026, and March 30, 2025. Likewise, total cumulative catch-up adjustments were not material for the three-month periods ended March 29, 2026, and March 30, 2025.
Contract Assets and Liabilities
For each of the Company’s contracts, the timing of revenue recognition, customer billings, and cash collections results in a net contract asset or liability at the end of each reporting period. Fixed-price contracts are typically billed to the customer either using progress payments, whereby amounts are billed monthly as costs are incurred or work is completed, or performance based payments, which are based upon the achievement of specific, measurable events or accomplishments defined and valued at contract inception. Cost-type contracts are typically billed to the customer on a monthly or semi-monthly basis.
Contract assets consist of unbilled receivables, primarily related to long-term contracts where revenue recognized under the cost-to-cost method exceeds amounts billed to customers. Unbilled receivables are classified as current assets and, in accordance with industry practice, include amounts that may be billed and collected beyond one year due to the long-term
nature of many of the Company’s contracts. Accumulated contract costs in unbilled receivables include direct production costs, factory and engineering overhead, production tooling costs, and, for government contracts, recovery of allowable general and administrative expenses. Unbilled receivables also include certain estimates of variable consideration described above. The Company’s contracts that give rise to contract assets are not considered to include a significant financing component as the payment terms are intended to protect the customer in the event the Company does not perform on its obligations under the contract.
Contract liabilities include advance payments and billings in excess of revenue recognized. Certain customers make advance payments prior to the satisfaction of the Company’s performance obligations on the contract. These amounts are recorded as contract liabilities until such performance obligations are satisfied, either over time as costs are incurred or at a point in time when deliveries are made. The Company’s contracts that give rise to contract liabilities do not include a significant financing component as the underlying advance payments received are generally utilized to pay for contract costs within a one-year period or are used to ensure the customer meets contractual requirements.
Net contract assets and liabilities are as follows (in millions):
| | | | | | | | | | | | | | | | | |
| March 29, 2026 | | December 28, 2025 | | Net Change |
| Contract assets | $ | 334.1 | | | $ | 292.4 | | | $ | 41.7 | |
| Contract liabilities | $ | 108.1 | | | $ | 73.4 | | | $ | 34.7 | |
| Net contract assets | $ | 226.0 | | | $ | 219.0 | | | $ | 7.0 | |
Contract assets increased $41.7 million during the three months ended March 29, 2026, primarily due to higher unbilled receivables, net, including the impact of the recent acquisitions of Nomad and Orbit, during the three months ended March 29, 2026. There were no significant impairment losses related to any receivables or contract assets arising from the Company’s contracts with customers during the three months ended March 29, 2026. Contract liabilities increased $34.7 million during the three months ended March 29, 2026, primarily due to revenue recognized in excess of payments received on these performance obligations, including the impact of the recent acquisitions of Nomad and Orbit. For the three months ended March 29, 2026, the Company recognized revenue of $30.8 million that was previously included in the contract liabilities that existed at December 28, 2025. For the three months ended March 30, 2025, the Company recognized revenue of $36.4 million that was previously included in the contract liabilities that existed at December 29, 2024.
Disaggregation of Revenue
The following series of tables presents the Company’s revenue disaggregated by several categories. For the majority of contracts, revenue is recognized over time as work is performed on the contract.
Revenue by contract type was as follows (in millions):
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 29, 2026 | | March 30, 2025 | | | | |
| Kratos Government Solutions | | | | | | | |
| Fixed price | $ | 214.2 | | | $ | 166.5 | | | | | |
| Cost plus fee | 59.1 | | | 58.0 | | | | | |
| Time and materials | 15.1 | | | 15.0 | | | | | |
| Total Kratos Government Solutions | 288.4 | | | 239.5 | | | | | |
| Unmanned Systems | | | | | | | |
| Fixed price | 55.9 | | | 52.6 | | | | | |
| Cost plus fee | 25.0 | | | 9.8 | | | | | |
| Time and materials | 1.7 | | | 0.7 | | | | | |
| Total Unmanned Systems | 82.6 | | | 63.1 | | | | | |
| Total Revenues | $ | 371.0 | | | $ | 302.6 | | | | | |
Revenue by customer was as follows (in millions): | | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 29, 2026 | | March 30, 2025 | | | | |
| Kratos Government Solutions | | | | | | | |
U.S. Government (1) | $ | 179.9 | | | $ | 149.4 | | | | | |
International (2) | 70.6 | | | 55.3 | | | | | |
| U.S. Commercial and other customers | 37.9 | | | 34.8 | | | | | |
| Total Kratos Government Solutions | 288.4 | | | 239.5 | | | | | |
| Unmanned Systems | | | | | | | |
U.S. Government (1) | 74.8 | | | 56.1 | | | | | |
International (2) | 5.8 | | | 5.8 | | | | | |
| U.S. Commercial and other customers | 2.0 | | | 1.2 | | | | | |
| Total Unmanned Systems | 82.6 | | | 63.1 | | | | | |
| Total Revenues | $ | 371.0 | | | $ | 302.6 | | | | | |
(1) Sales to the U.S. Government include sales from contracts for which the Company is the prime contractor, as well as those for which the
Company is a subcontractor and the ultimate customer is the U.S. Government. Each of the Company’s segments derives substantial revenue
from the U.S. Government. These sales include foreign military sales contracted through the U.S. Government.
(2) International sales include sales from contracts for which the Company is the prime contractor, as well as those for which the Company is a
subcontractor and the ultimate customer is an international customer. These sales include direct sales with governments outside the U.S. and
commercial sales with customers outside the U.S.
Revenue by Geographic Area was as follows (in millions):
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 29, 2026 | | March 30, 2025 | | | | |
United States | $ | 286.7 | | | $ | 239.0 | | | | | |
Other North America | 9.0 | | | 5.9 | | | | | |
Asia Pacific | 13.4 | | | 15.8 | | | | | |
Middle East | 28.2 | | | 15.7 | | | | | |
Europe | 17.7 | | | 14.8 | | | | | |
Other | 16.0 | | | 11.4 | | | | | |
Total Revenues | $ | 371.0 | | | $ | 302.6 | | | | | |
Note 4. Goodwill and Intangible Assets
(a) Goodwill
The carrying amounts of goodwill as of March 29, 2026 and December 28, 2025 by reportable segment are as follows (in millions):
| | | | | | | | | | | | | | | | | |
| As of March 29, 2026 |
| KGS | | US | | Total |
| Gross value | $ | 998.8 | | | $ | 138.6 | | | $ | 1,137.4 | |
| Less accumulated impairment | 239.5 | | | 13.8 | | | 253.3 | |
| Net | $ | 759.3 | | | $ | 124.8 | | | $ | 884.1 | |
| | | | | |
| | | | | | | | | | | | | | | | | |
| As of December 28, 2025 |
| KGS | | US | | Total |
| Gross value | $ | 710.4 | | | $ | 138.6 | | | 849.0 | |
| Less accumulated impairment | 239.5 | | | 13.8 | | | 253.3 | |
| Net | $ | 470.9 | | | $ | 124.8 | | | $ | 595.7 | |
| | | | | |
The following table is a summary of preliminary goodwill (in millions):
| | | | | | | | | | | | | | | | | |
| KGS | | US | | Total |
Beginning balance as of December 28, 2025 | $ | 470.9 | | | $ | 124.8 | | | $ | 595.7 | |
| Acquisition of Orbit Technologies, Ltd. | 187.5 | | — | | | 187.5 | |
| Acquisition of Nomad Global Communication Solutions, Incorporated. | 100.9 | | — | | | 100.9 | |
Ending balance as of March 29, 2026 | $ | 759.3 | | | $ | 124.8 | | | $ | 884.1 | |
(b) Purchased Intangible Assets
The following table sets forth information for finite-lived and indefinite-lived intangible assets (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 29, 2026 | | As of December 28, 2025 |
| | Gross
Value | | Accumulated
Amortization | | Net
Value | | Gross
Value | | Accumulated
Amortization | | Net
Value |
| Acquired finite-lived intangible assets: | | | | | | | | | | | |
| Customer relationships | $ | 123.6 | | | $ | (69.3) | | | $ | 54.3 | | | $ | 86.7 | | | $ | (68.2) | | | $ | 18.5 | |
| Contracts and backlog | 86.7 | | | (50.3) | | | 36.4 | | | 54.5 | | | (47.7) | | | 6.8 | |
Non-compete Agreements | 0.5 | | | (0.1) | | | 0.4 | | | 0.5 | | | (0.1) | | | 0.4 | |
| Developed technology and technical know-how | 49.9 | | | (31.4) | | | 18.5 | | | 35.1 | | | (30.8) | | | 4.3 | |
| Trade names | 92.1 | | | (4.9) | | | 87.2 | | | 4.4 | | | (3.5) | | | 0.9 | |
| In-process research and development | 16.8 | | | (0.8) | | | 16.0 | | | 16.8 | | | (0.7) | | | 16.1 | |
| | | | | | | | | | | |
| Total finite-lived intangible assets | 369.6 | | | (156.8) | | | 212.8 | | | 198.0 | | | (151.0) | | | 47.0 | |
| Indefinite-lived trade names | 6.9 | | | — | | | 6.9 | | | 6.9 | | | — | | | 6.9 | |
| Total intangible assets | $ | 376.5 | | | $ | (156.8) | | | $ | 219.7 | | | $ | 204.9 | | | $ | (151.0) | | | $ | 53.9 | |
Consolidated amortization expense related to intangible assets subject to amortization was $5.8 million and $2.2 million for the three months ended March 29, 2026 and March 30, 2025, respectively.
The estimated future amortization expense of acquired intangible assets with finite lives for the remainder of 2026 and the next five fiscal years, and thereafter as of March 29, 2026 is as follows (in millions):
| | | | | |
| Amount |
2026 | $ | 34.6 | |
2027 | 43.7 | |
2028 | 27.1 | |
2029 | 24.8 | |
2030 | 24.3 | |
2031 | 21.6 | |
Thereafter | 36.7 | |
Total | $ | 212.8 | |
Note 5. Inventoried Costs
Inventoried costs, consisted of the following components (in millions):
| | | | | | | | | | | |
| | March 29, 2026 | | December 28, 2025 |
| Raw materials | $ | 130.2 | | | $ | 109.4 | |
| Work in process | 87.4 | | | 71.9 | |
| Finished goods | 8.1 | | | 6.9 | |
| | | |
| | | |
| | | |
| Total inventoried costs | $ | 225.7 | | | $ | 188.2 | |
Note 6. Net Income per Common Share
The Company calculates net income per share in accordance with FASB ASC Topic 260, Earnings per Share (“Topic 260”). Under Topic 260, basic net income per common share is calculated by dividing net income by the weighted-average number of common shares outstanding during the reporting period. Diluted net income per common share reflects the effects of potentially dilutive securities.
Diluted net income per share for the three months ended March 29, 2026 included the dilutive effect of an aggregate of 2.5 million shares of the Company’s common stock granted to employees under stock-based compensation plans. Diluted net income per share for the three months ended March 30, 2025 included the dilutive effect of an aggregate of 2.1 million shares of the Company’s common stock granted to employees under stock-based compensation plans.
Note 7. Leases
The Company leases certain facilities, office space, vehicles and equipment. Lease assets and lease liabilities are recognized at the commencement of an arrangement where it is determined at inception that a lease exists. Lease assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using an incremental borrowing rate generally applicable to the location of the lease asset, unless the implicit rate is readily determinable. Lease assets also include any upfront lease payments made and exclude lease incentives. Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised. The Company has operating lease arrangements with lease and non-lease components. The non-lease components in these arrangements are not significant when compared to the lease components. For all operating leases, the Company accounts for the lease and non-lease components as a single component.
Variable lease payments are generally expensed as incurred. Leases with an initial term of 12 months or less are not recorded on the balance sheet, and the expense for these short-term leases is recognized on a straight-line basis over the lease term.
The depreciable life of lease assets and leasehold improvements is limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
The components of lease expense were as follows (in millions):
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 29, 2026 | | March 30, 2025 | | | | |
| Amortization of right of use assets - finance leases | $ | 1.9 | | | $ | 0.8 | | | | | |
| Interest on lease liabilities - finance leases | 1.8 | | | 0.8 | | | | | |
| Operating lease cost | 3.9 | | | 3.6 | | | | | |
| Short-term lease cost | 0.6 | | | 0.4 | | | | | |
| | | | | | | |
| Sublease income | (0.1) | | | (0.1) | | | | | |
Total lease cost | $ | 8.1 | | | $ | 5.5 | | | | | |
| | | | | | | |
The components of leases on the balance sheet were as follows (in millions):
| | | | | | | | | | | |
| March 29, 2026 | | December 28, 2025 |
| Operating leases: | | | |
Operating lease right-of-use assets | $ | 45.4 | | | $ | 43.4 | |
Current portion of operating lease liabilities | $ | 13.9 | | | $ | 12.8 | |
Operating lease liabilities, net of current portion | $ | 34.7 | | | $ | 33.8 | |
| Finance leases: | | | |
Property, plant and equipment, net | $ | 118.1 | | | $ | 86.2 | |
Current portion of finance lease liabilities | $ | 4.8 | | | $ | 3.4 | |
Finance lease liabilities, net of current portion | $ | 132.0 | | | $ | 95.8 | |
Cash paid for amounts included in the measurement of lease liabilities was as follows (in millions):
| | | | | | | | | | | | | | | |
| | | | | | |
| Three Months Ended | | |
| March 29, 2026 | | March 30, 2025 | | | | |
| Finance lease - cash paid for interest | $ | 1.8 | | | $ | 0.8 | | | | | |
| Finance lease - financing cash flows | $ | 0.9 | | | $ | 0.4 | | | | | |
| Operating lease - operating cash flows (fixed payments) | $ | 4.0 | | | $ | 3.4 | | | | | |
Other supplemental noncash information (in millions): | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | | | March 29, 2026 | | March 30, 2025 |
| Operating lease liabilities arising from obtaining right-of-use assets | | | | | $ | 5.6 | | | $ | 6.8 | |
| Finance lease liabilities arising from obtaining right-of-use assets | | | | | $ | 37.3 | | | $ | — | |
| | | | | | | |
| | | | | March 29, 2026 | | March 30, 2025 |
| Weighted-average remaining lease term (in years): | | | | | | |
Operating leases | | | | | 4.26 | | 4.16 |
Finance leases | | | | | 14.96 | | 13.56 |
| | | | | | | |
| Weighted-average discount rate: | | | | | | | |
Operating leases | | | | | 5.40 | % | | 5.14 | % |
Finance leases | | | | | 6.12 | % | | 6.35 | % |
The maturity of lease liabilities is (in millions):
| | | | | | | | | | | |
| Operating Leases | | Finance Leases |
2026 (1) | $ | 12.3 | | | $ | 9.4 | |
| 2027 | 14.4 | | | 13.2 | |
| 2028 | 11.7 | | | 13.5 | |
| 2029 | 7.3 | | | 13.8 | |
2030 | 4.0 | | | 13.3 | |
| Thereafter | 5.1 | | | 147.8 | |
| Total lease payments | 54.8 | | | 211.0 | |
| Less: imputed interest | (6.2) | | | (74.2) | |
| Total present value of lease liabilities | $ | 48.6 | | | $ | 136.8 | |
(1) Excludes the three months ended March 29, 2026. | | | |
Note 8. Income Taxes
The provision/(benefit) for income taxes and the effective income tax rate are as follows ($ in millions):
| | | | | | | | | | | | | | | |
| | Three Months Ended | | |
| March 29, 2026 | | March 30, 2025 | | | | |
Federal, state and foreign income tax expense/(benefit) | $ | (2.1) | | | $ | 0.9 | | | | | |
| Effective income tax rate | (21.72) | % | | 17.26 | % | | | | |
The Company’s effective tax rate for the three months ended March 29, 2026 decreased to a benefit of 21.72% from a provision of 17.26% in the prior year period principally due to increased tax benefits related to stock-based compensation. The provision for income taxes for the three months ended March 29, 2026 and the three months ended March 30, 2025 included a benefit of $7.3 million and $1.6 million, respectively, for stock compensation related items.
The Company calculates its interim income tax provision in accordance with ASC Topic 270, “Interim Reporting,” and ASC Topic 740, “Accounting for Income Taxes.” The Company calculated the provision for income taxes during the interim reporting period by applying an estimate of the annual effective tax rate for the full fiscal year to “ordinary” income or loss (pretax income or loss excluding unusual or infrequently occurring discrete items) for the reporting period.
As of March 29, 2026, the Company had $28.8 million of unrecognized tax benefits. Included in the balance of unrecognized tax benefits at March 29, 2026 are $23.6 million that, if recognized, would impact the Company’s effective income tax rate.
The Company recognizes interest and penalties related to unrecognized tax benefits in its provision for income taxes. For the three months ended March 29, 2026 and March 30, 2025, the Company recorded no material expense related to the increase in interest and penalties. For the three months ended March 29, 2026 and March 30, 2025, there was no material benefit recorded related to the removal of interest and penalties.
The Organization for Economic Co-operation and Development (OECD) has a framework to implement a global minimum corporate tax of 15% for companies with global revenue and profits above certain thresholds (referred to as Pillar 2). Although the U.S. has not enacted legislation to implement Pillar 2, certain countries in which we operate have adopted legislation, and other countries are in the process of introducing legislation to implement Pillar 2. The OECD issued new administrative guidance on January 5, 2026, with respect to Pillar 2 which modifies key aspects of the framework for countries to enact in their own laws. This new guidance reaffirms we do not expect Pillar 2 to have a material impact on our effective tax rate or our financial results or cash flows.
On July 4, 2025, the One Big Beautiful Bill Act (OBBBA) was enacted. Key income tax-related provisions of the OBBBA include the repeal of mandatory capitalization of U.S. based research and development expenditures under Internal Revenue Code (IRC) Section 174 (reinstating full expensing beginning in 2025), extension of bonus depreciation, and revisions to international tax regimes. The Company recognized the income tax effects of the OBBBA in the quarter it was enacted, and continues to recognize the tax effects, which were not material, in its quarter ended March 29, 2026.
Note 9. Debt
(a) 2022 Credit Facility
On February 18, 2022, the Company completed the refinancing of its then-outstanding $90 million revolving credit facility and $300 million 6.5% Senior Secured Notes, with a 5-year $200 million Revolving Credit Facility and 5-year $200 million Term Loan A (collectively, the “2022 Credit Facility”). The Company incurred debt issuance costs of $3.3 million associated with the 2022 Credit Facility. On July 2, 2025, the Company extinguished all outstanding Term Loan A debt under the 2022 Credit Facility. The then-outstanding Term Loan A aggregate principal balance of $177.5 million, plus accrued interest, was paid in full utilizing a portion of the proceeds received from the June 27, 2025 public equity offering, which is described further in Note 11. The Company incurred a loss on the extinguishment of the debt of $0.5 million during the three months ended September 28, 2025 related to the write-off of unamortized debt issuance costs. The undrawn $200 million revolving credit facility under the 2022 Credit Facility remained active and available to the Company through the February 20, 2026 refinancing described below.
The 2022 Credit Facility was governed by a Credit Agreement (the “2022 Credit Agreement”), which established a five-year senior secured credit facility which was comprised of a $200 million Revolving Credit Facility (which included 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 Agreement contemplated uncommitted incremental credit facilities of up to $200 million (which amount would be reduced by the aggregate amount of any and all incremental credit facilities actually established under the 2022 Credit Agreement) plus additional uncommitted incremental capacity subject to a limitation based on the Company’s pro forma total net leverage ratio (including any such additional uncommitted incremental capacity).
Borrowings under the revolving credit facility and the term loan credit facility may take the form of base rate loans or Secured Overnight Financing Rate (“SOFR”) loans. Base rate loans under the 2022 Credit Agreement bore interest at a rate per annum equal to the sum of the Applicable Margin (as defined in the Credit Agreement) from time to time in effect plus the highest of (i) the Agent’s (as defined in the 2022 Credit Agreement) prime lending rate, as in effect at such time, (ii) the Federal Funds Rate (as defined in the 2022 Credit Agreement), as in effect at such time, plus 0.50%, (iii) the Adjusted Term SOFR (as defined in the 2022 Credit Agreement) for a one-month tenor in effect on such day, plus 1.00% and (iv) 1.00%. SOFR loans will bear interest at a rate per annum equal to the sum of the Applicable Margin from time to time in effect plus the Adjusted Term SOFR for an Interest Period (as defined in the 2022 Credit Agreement) selected by the Company of one, three or six months. The Applicable Margin varied between 1.25% and 2.25% per annum for SOFR loans and between 0.25% and 1.25% per annum for base rate loans, and is based on the Company’s total net leverage ratio from time to time.
The 2022 Credit Agreement contained certain covenants, which included, but were not limited to, restrictions on indebtedness, liens, fundamental changes, restricted payments, asset sales, and investments, and placed limits on various other payments.
On April 28, 2023, the Company entered into an interest rate swap contract to hedge U.S. dollar-one month Term SOFR in order to fix the interest rate movements associated with the Company’s Term Loan A. The initial hedge amount was $195.0 million and amortized in accordance with Term Loan A. The swap was at a fixed rate of one-month term SOFR of 3.721% and settled monthly on the last day of each calendar month. The swap had an effective date of May 1, 2023 and was scheduled to terminate on May 1, 2026. On June 30, 2025, in anticipation of the extinguishment of Term Loan A, the Company terminated the swap. The Company received a payment of approximately $0.3 million representing the termination value of the swap. Refer to Note 14 for further discussion of the accounting treatment of the swap arrangement.
On February 20, 2026, the Company completed the refinancing of its 2022 Credit Facility with a new 5-year $300 million Revolving Credit Facility described below. There were no outstanding borrowings under the 2022 Credit Facility subsequent to the repayment in full of the Term Loan A under the 2022 Credit Facility on July 2, 2025. The outstanding letters of credit under the 2022 Credit Facility were transferred to the 2026 Credit Agreement described below.
(b) 2026 Credit Facility
On February 20, 2026, the Company entered into a Credit Agreement (the “2026 Credit Agreement”), by and among
the Company, the guarantors from time to time party thereto, the lenders from time to time party thereto (the “Lenders”), and
PNC Bank, National Association (the “Administrative Agent”), in its capacity as administrative agent, and as swingline loan
lender and issuing lender. The 2026 Credit Agreement establishes a five-year senior secured credit facility which is comprised
of a $300 million revolving credit facility (which includes sub-facilities for the incurrence of up to $35.0 million of swingline
loans and the issuance of up to $50.0 million of Letters of Credit). Letters of credit outstanding under the 2022 Credit
Agreement have been transferred to the 2026 Credit Agreement. The 2026 Credit Agreement contemplates uncommitted
incremental credit facilities of up to $135.0 million. As of March 29, 2026, the Company has no amounts outstanding under the Revolving Credit Facility, with $300.0 million remaining in borrowing capacity, less approximately $31.2 million of letters of credit outstanding.
The Company’s obligations under the 2026 Credit Agreement are guaranteed by the Guarantors (as defined in the 2026 Credit Agreement). The Company’s obligations under the 2026 Credit Agreement and the Guarantors’ obligations under the Guaranty and Security Agreement (as defined in the 2026 Credit Agreement) are secured by first priority security interests in all assets of the loan parties that have executed the Guaranty and Security Agreement.
Borrowings under the revolving credit facility may take the form of base rate loans or SOFR loans. Base rate loans
under the 2026 Credit Agreement will bear interest at a rate per annum equal to the sum of the Applicable Margin (as defined in
the 2026 Credit Agreement) from time to time in effect plus the highest of (i) the Overnight Bank Funding Rate (as defined in
the 2026 Credit Agreement), as in effect at such time, plus 0.50%, (ii) the Administrative Agent’s prime lending rate, as in
effect at such time, and (iii) the Daily Simple SOFR (as defined in the 2026 Credit Agreement) plus 1.00%, so long as Daily
Simple SOFR is offered, ascertainable and not unlawful. SOFR loans will bear interest at a rate per annum equal to the sum of the
Applicable Margin from time to time in effect plus the Term SOFR Rate for an Interest Period (as defined in the 2026 Credit
Agreement) selected by the Company of one (1), three (3) or six (6) months. The Applicable Margin varies between 1.00% and
2.00% per annum for SOFR loans and between 0.00% and 1.00% per annum for base rate loans, and is based on the Company’s
total net leverage ratio from time to time.
The 2026 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.
Events of default under the terms of the 2026 Credit Agreement include, but are not limited to:
• Failure of the Company to pay any principal of any loans in full when due and payable;
• Failure of the Company to pay any interest on any loan or any fee or other amount payable under the 2026 Credit
Agreement within five business days after the date when due and payable;
• Failure of the Company or any of its subsidiaries to comply with certain covenants and agreements, subject to
applicable grace periods and/or notice requirements; and
• Any representation or warranty made or deemed made by or on behalf of the Company or any of its subsidiaries in or
in connection with the 2026 Credit Agreement or in any certificate, report, financial statement or other document submitted to
the Administrative Agent or the Lenders by the Company or the Guarantors pursuant to or in connection with the 2026 Credit
Agreement or any other loan document shall prove to be incorrect in any material respect (other than any representation or
warranty that is expressly qualified by a Material Adverse Effect (as defined in the 2026 Credit Agreement) or other materiality,
in which case such representation or warranty shall prove to be incorrect in any respect) when made or deemed made or
submitted.
Subject to certain notice requirements and other conditions, upon the occurrence of an event of default, commitments
may be terminated and the principal of, and interest then outstanding on, all of the loans may become immediately due and
payable; however, where an event of default arises from certain bankruptcy events, the commitments shall automatically and
immediately terminate and the principal of, and interest then outstanding on, all of the loans shall become immediately due and
payable.
In connection with the execution of the consummation of the transactions contemplated by the 2026 Credit Agreement,
the 2022 Credit Agreement was terminated.
Pursuant to the 2026 Credit Agreement, the Company is subject to certain restrictions on its ability to pay dividends or
make other distributions or payments on account of any redemption, retirement or purchase of any capital stock.
The Company has capitalized these costs to Other current assets and Other assets and is amortizing the debt issuance costs over the term of the facility. The unamortized balances at March 29, 2026 and December 28, 2025 were $1.4 million and $0.4 million, respectively.
Note 10. Segment Information
The Company operates in two reportable segments, KGS and US. The KGS reportable segment is comprised of an aggregation of KGS operating segments, including our microwave electronics 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 the Company’s unmanned aerial, unmanned ground, unmanned seaborne and command, control and communications system products. The KGS and US reportable segments provide products, solutions and services for mission critical National Security programs. KGS and US customers primarily include National Security related agencies, the DoW, intelligence agencies and classified agencies, and to a lesser degree, international government agencies and domestic and international commercial customers.
There were not any significant intersegment sales, cost of sales and profit for the three month periods ended March 29, 2026 and March 30, 2025.
The Company’s chief operating decision maker is the President and Chief Executive Officer. The chief operating decision maker uses segment operating income (loss) predominantly in the annual budget and forecasting process. The chief operating decision maker considers budget-to-actual variances on a quarterly basis when making decisions about the allocation of operating and capital resources to each segment. The chief operating decision maker also uses segment operating income (loss) to assess the performance of each segment by comparing the results of each segment with one another and in determining the compensation of certain employees.
(a) Summary Operating Results
The tables below provide information about the Company’s reportable segments. In these tables total segment operating income (loss) of the reportable business segments is reconciled to the corresponding consolidated amount. “Unallocated amounts” includes costs for merger and acquisition expenses, stock-based compensation expenses, interest income (expense), net, and other income (expense), net, items not considered part of management’s evaluation of segment operating income. See Note 3 (Revenue Recognition) to these condensed consolidated financial statements for segment revenues disaggregated by contract type, customer and geographic region. The summary operating results for the Company’s reportable segments for the three month periods ended March 29, 2026 and March 30, 2025, are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended March 29, 2026 | Kratos Government Solutions | | Unmanned Systems | | Totals |
| Service revenues | $ | 131.3 | | | $ | 2.7 | | | $ | 134.0 | |
| Product sales | 157.1 | | | 79.9 | | | 237.0 | |
| Total revenues | 288.4 | | | 82.6 | | | 371.0 | |
| Cost of service revenue | 97.2 | | | 2.1 | | | 99.3 | |
| Cost of product sales | 115.7 | | | 66.4 | | | 182.1 | |
| Total cost of sales | 212.9 | | | 68.5 | | | 281.4 | |
| | | | | |
| Selling, general & administrative expenses | 45.3 | | | 12.0 | | | 57.3 | |
| Research & development expenses | 9.9 | | | 0.8 | | | 10.7 | |
Total segment operating income | 20.3 | | | 1.3 | | | 21.6 | |
| Reconciliation of segment operating income | | | | | |
| Unallocated amounts: | | | | | |
Merger and acquisition related expenses | | | | | $ | (1.9) | |
| Stock compensation expense | | | | | (15.0) | |
Interest income (expense), net | | | | | 4.5 | |
Other income (expense), net | | | | | 0.6 | |
| Income before income taxes | | | | | $ | 9.8 | |
Revenues from foreign customers were approximately $76.4 million or 21% of total revenue for the three months ended March 29, 2026. Revenues from any one foreign country did not exceed 10% of total revenues.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended March 30, 2025 | Kratos Government Solutions | | Unmanned Systems | | Totals |
| Service revenues | $ | 100.7 | | | $ | 1.7 | | | $ | 102.4 | |
| Product sales | 138.8 | | | 61.4 | | | 200.2 |
| Total revenues | 239.5 | | 63.1 | | 302.6 |
| Cost of service revenue | 74.5 | | | 1.2 | | | 75.7 | |
| Cost of product sales | 101.4 | | | 51.9 | | | 153.3 | |
| Total cost of sales | 175.9 | | | 53.1 | | | 229.0 | |
| | | | | |
| Selling, general & administrative expenses | 37.0 | | | 11.3 | | | 48.3 | |
| Research & development expenses | 9.6 | | | 0.4 | | | 10.0 | |
Total segment operating income (loss) | 17.0 | | | (1.7) | | | 15.3 | |
| Reconciliation of segment operating income | | | | | |
| Unallocated amounts: | | | | | |
| Merger and acquisition related expenses | | | | | $ | — | |
| Stock compensation expense | | | | | (8.7) | |
| Interest income (expense), net | | | | | (0.9) | |
Other income (expense), net | | | | | (0.3) | |
| Income before income taxes | | | | | $ | 5.4 | |
Revenues from foreign customers were approximately $61.1 million or 20% of total revenue for the three months ended March 30, 2025. Revenues from any one foreign country did not exceed 10% of total revenues.
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(b) Capital Expenditures (in millions): | Three Months Ended | |
| March 29, 2026 | | March 30, 2025 | | | |
| Kratos Government Solutions | $ | 12.5 | | | $ | 13.6 | | | | |
| Unmanned Systems | 6.7 | | 9.0 | | | |
| Total reportable segment capital expenditures | 19.2 | | | 22.6 | | | | |
| Corporate capital expenditures | 0.7 | | — | | | |
| Total capital expenditures | $ | 19.9 | | | $ | 22.6 | | | | |
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(c) Depreciation and Amortization (in millions): | | Three Months Ended | |
| | March 29, 2026 | | March 30, 2025 | | | |
| Kratos Government Solutions | $ | 13.0 | | | $ | 7.1 | | | | |
| Unmanned Systems | 3.8 | | 3.3 | | | |
| Total depreciation and amortization | $ | 16.8 | | | $ | 10.4 | | | | |
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d) Reportable Segment Assets (in millions): | March 29, 2026 | | December 28, 2025 |
| Kratos Government Solutions | $ | 2,162.1 | | | $ | 1,472.9 | |
| Unmanned Systems | 455.0 | | 438.7 |
| Total reportable segment assets | 2,617.1 | | | 1,911.6 | |
| | | |
Corporate assets(1) | 1,425.6 | | 555.6 |
| Total assets | $ | 4,042.7 | | | $ | 2,467.2 | |
| | | |
(1)Corporate assets primarily include cash and cash equivalents, deferred income tax assets, and property, plant and equipment used in our corporate operations.
Assets of foreign subsidiaries in the KGS segment were $700.5 million and $300.5 million as of March 29, 2026 and December 28, 2025, respectively. As of March 29, 2026, long-lived assets located in Israel totaled $72.8 million, represented approximately 16% of our total consolidated long-lived assets. With the exception of Israel, no single foreign country accounted for more than 10% of the Company’s total long-lived assets. For purposes of this disclosure, long-lived assets consist
of property and equipment, net and operating lease right-of-use assets, and exclude cash, receivables, goodwill, and intangible assets.
Note 11. Stockholders Equity - Common Stock
On February 27, 2024, the Company sold 19,166,667 shares of its common stock at a public offering price of $18.00 per share in an underwritten offering. The Company received gross proceeds of approximately $345.0 million. After deducting underwriting fees and other offering expenses, the Company received approximately $331.2 million in net proceeds. The Company used the net proceeds of this public equity offering to facilitate its long-term strategy, including potential investment in facilities, expanding manufacturing capacity, anticipated capital expenditures for expansion of current sole source/single award programs and high probability pipeline opportunities, initiate or accelerate production or integration of unmanned drone, hypersonic or other systems in anticipation of customer contract awards, further strengthen its balance sheet in anticipation of upcoming customer and partner decisions and source selection on additional large, new program and contract opportunities, for general corporate purposes, including paydown of debt, and to pay fees and expenses in connection with this public equity offering. During the three months ended March 31, 2024, the Company used $45 million of the proceeds from the February 2024 public equity offering to pay down amounts outstanding under its Revolving Credit Facility.
On June 27, 2025, the Company sold 14,935,065 shares of its common stock at a public offering price of $38.50 per share in an underwritten offering. The Company received gross proceeds of approximately $575.0 million. After deducting underwriting fees and other offering expenses, the Company received approximately $555.9 million in net proceeds. The Company has used and expects to continue to use the net proceeds of this public equity offering (i) to fund investments and capital expenditures to scale and successfully execute on large, mission critical National Security priorities related to existing programs, recent program awards and significant high-probability pipeline opportunities; (ii) to finance important customer and program targeted acquisitions; (iii) and for general corporate purposes, including pay-down of debt and to pay fees and expenses in connection with this public equity offering. On July 2, 2025, the Company used a portion of the proceeds of the June 2025 public equity offering to pay off the then-outstanding $177.5 million aggregate principal amount of the Term Loan A debt, plus accrued interest, under the 2022 Credit Facility. Following such repayment of the Term Loan A debt, the $200 million revolving credit facility under the 2022 Credit Facility remained undrawn and available to the Company.
On February 26, 2026, the Company sold 16,428,571 shares of its common stock at a public offering price of $84.00 per share in an underwritten offering. The Company received gross proceeds of approximately $1,380.0 million. After deducting underwriting fees and other offering expenses, the Company received approximately $1,348.6 million in net proceeds. The Company has used and expects to continue to use the net proceeds of this public equity offering to (i) continue to make important capital expenditures to scale operations and meet the growing demands of The Department of War and our National Security customers with respect to existing programs, recently awarded contracts and new opportunities, (ii) to continue to invest in new product, system and software product development, including building and being first to market with National Security Systems, including in coordination with our customers and partners, (iii) to strengthen the Company's balance sheet to allow us to be responsive to anticipated contract awards from our large, strategic pipeline of opportunities, (iv) to fund the recent acquisitions of Nomad and Orbit and select future strategic M&A opportunities, and (v) for general corporate purposes, including to pay fees and expenses in connection with this offering.
Note 12. Significant Customers
Revenue from the U.S. Government, which includes foreign military sales contracted through the U.S. Government, includes revenue from contracts for which the Company is the prime contractor as well as those for which the Company is a subcontractor and the ultimate customer is the U.S. Government. The KGS and US segments have substantial revenue from the U.S. Government. Sales to the U.S. Government amounted to approximately $254.7 million and $205.5 million, or 69% and 68% of total Kratos revenue, for the three months ended March 29, 2026 and March 30, 2025, respectively.
Note 13. Commitments and Contingencies
In addition to commitments and obligations in the ordinary course of business, the Company is subject to various claims, pending and potential legal actions for damages, investigations relating to governmental laws and regulations and other matters arising out of the normal conduct of the Company’s business. The Company assesses contingencies to determine the degree of probability and range of possible loss for potential accrual in its unaudited condensed consolidated financial statements. An estimated loss contingency is accrued in the unaudited condensed consolidated financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable and unfavorable resolutions could occur, assessing litigation contingencies is highly subjective and requires judgments about future events. When evaluating contingencies, the Company may be unable to provide a meaningful
estimate due to a number of factors, including but not limited to the procedural status of the matter in question, the presence of complex or novel legal theories, and the ongoing discovery and development of information important to the matters. In addition, damage amounts claimed in litigation against it may be unsupported, exaggerated or unrelated to possible outcomes and, as such, are not meaningful indicators of its potential liability. The Company regularly reviews contingencies to determine the adequacy of its accruals and related disclosures. The amount of ultimate loss may differ from these estimates. It is possible that cash flows or results of operations could be materially affected in any particular period by the unfavorable resolution of one or more of these contingencies. Whether any losses finally determined in any claim, action, investigation or proceeding could reasonably have a material effect on the Company’s business, financial condition, results of operations or cash flows will depend on a number of variables, including the timing and amount of such losses; the structure and type of any remedies; the monetary significance any such losses, damages or remedies may have on the condensed consolidated financial statements; and the unique facts and circumstances of the particular matter that may give rise to additional factors.
Legal and Regulatory Matters
U.S. Government Cost Claims
The Company’s contracts with the DoW are subject to audit by the Defense Contract Audit Agency (“DCAA”). As a result of these audits, from time to time the Company is advised of claims concerning potential disallowed, overstated or disputed costs. For example, during the course of audits of the Company’s contracts, the DCAA is closely examining and questioning certain of the established and disclosed practices that it had previously audited and accepted. The Company’s personnel regularly scrutinize costs incurred and allocated to contracts with the U.S. Government for compliance with regulatory standards. For those Company subsidiaries and fiscal years which have not yet been audited by the DCAA or for those audits which are in process which have not yet been completed by the DCAA, the Company cannot reasonably estimate the range of loss, if any, that may result given the inherent difficulty in predicting regulatory action, fines and penalties, if any, and the various remedies and levels of judicial review available to the Company in the event of an adverse finding. As a result, the Company has not recorded any liability related to these matters.
Other Litigation Matters
The Company is subject to normal and routine litigation arising from the ordinary course and conduct of business and, at times, as a result of mergers, acquisitions and dispositions. Such disputes include, for example, commercial, employment, intellectual property, environmental, and securities matters. The aggregate amounts accrued related to these matters are not material to the total liabilities of the Company. The Company intends to defend itself in any such matters and does not currently believe that the outcome of any such matters will have a material adverse impact on the Company’s financial condition, results of operations or cash flows.
Note 14. Derivative Financial Instruments
The Company’s derivative portfolio consists of forward exchange contracts used to manage foreign currency risks and previously consisted of an interest rate swap contract to hedge U.S. dollar-one month Term SOFR in order to mitigate the exposure to interest rate movements associated with the Company’s Term Loan A. As noted below, the interest rate swap was terminated on June 30, 2025. Derivative financial instruments are recognized on the condensed consolidated balance sheets as either assets or liabilities and are measured at fair value.
Forward Exchange Contracts
Changes in the fair values of the foreign currency exchange contracts are recorded each period in earnings. The notional value of the Company’s foreign currency exchange contracts at March 29, 2026 was $13.7 million. At March 29, 2026, the fair value amounts of the foreign currency exchange contracts were a $0.0 million asset and a $0.0 million liability. The net gain from these forward exchange contracts was $0.1 million for the three months ended March 29, 2026, and is included in other income (expense). As of December 28, 2025, the Company did not use hedge accounting for its foreign currency exchange contracts.
Interest Rate Swap Contract
On April 28, 2023, the Company entered into an interest rate swap contract with an initial notional amount of $195.0 million to manage the variability of cash flows associated with the Term Loan A. The interest rate swap contract originally matured on May 1, 2026 and was terminated on June 30, 2025. The swap was at a fixed SOFR of 3.721% and settled monthly on the last day of each calendar month. The Company designated the interest rate swap contract as a cash flow hedge and assessed the hedge effectiveness both at the onset of the hedge and at regular intervals throughout the life of the derivative. Changes in fair value (gains and losses) related to derivative financial instruments that qualify as cash flow hedges were deferred in Accumulated Other Comprehensive Income (Loss) (“AOCI”) until the underlying transaction was reflected in earnings. The net gain reclassed from AOCI from the interest rate swap reflected in earnings was $0.3 million for the three months ended March 30, 2025, and was recorded as an offset to interest expense.
On June 30, 2025, in anticipation of the extinguishment of all outstanding Term Loan A debt under the 2022 Credit Facility, the Company terminated the interest rate swap contract referred to above. The Company received a payment of approximately $0.3 million representing the termination value of the interest rate swap.
Note 15. Collaborative Arrangement
On June 3, 2025, the Company and GE Aerospace (“GE”) announced a formal teaming agreement to advance the development and production of engines for the next generation of affordable unmanned aerial systems and Collaborative Combat Aircraft-type (CCA-type) aircraft. This teaming agreement supersedes an earlier letter of intent and memorandum of understanding between the Company and GE related to the development, testing and fielding of these engines. Under this arrangement, Kratos and GE share in the risks and rewards of the program through various revenue, cost and profit-sharing payment structures. In accordance with FASB ASC Topic 808, Collaborative Arrangements, (“Topic 808”), the accounting for the arrangement is within the scope of ASC 606 for those promised goods and services for which GE is a customer, and the related amounts are presented in revenues and cost of sales as the promised goods and services are provided. The ASC 606 considerations and facts discussed in Note 3. Revenue Recognition apply to this arrangement. Amounts disclosed through March 29, 2026 include activity under the July 22, 2024 memorandum of understanding and the June 3, 2025 superseding teaming agreement. Through March 29, 2026, Kratos has recorded revenues of $33.7 million and cost of sales of $33.7 million related to this arrangement. Kratos has recorded revenues of $2.2 million and cost of sales of $1.8 million for the three months ended March 29, 2026 related to this arrangement.