What changed in this filing

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Item 1. Business

2024-02-28 compared with 2023-03-28 · 76 added, 69 removed, 182 unchanged (44% of the section changed)

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national security customers and allies around the world.

We specialize in the design, development and manufacture of advanced sensing, network computing, force protection as well as electric power and propulsion.

We specialize in the design, development and manufacture of advanced sensing, network computing, force protection and electric power and propulsion technologies and solutions.

Our innovative spirit and agility, together with our established market position in these areas have created a foundational and diverse base of programs across the DoD.

We believe DRS is well positioned to not only support our customers in today’s mission but to also provide more autonomous, dynamic, interconnected, and multi-domain capabilities to defend against evolving and emerging threats.

We view enhancement of capabilities in sensing, computing, self-protection and power as necessary to enable the strategic priorities of the DoD and our other customers.

DRS benefits from an over 50-year legacy in providing innovative and differentiated products and solutions for defense applications.

From our earliest offerings to today’s best-in-class products including naval propulsion, electro-optical sensors and electronic warfare systems, we have continually developed advanced technologies to address complex national security challenges.

DRS benefits from an over 50-year legacy of providing innovative and differentiated products and solutions for defense applications.

From our earliest offerings to today’s best-in-class products offerings including naval propulsion, electro-optical sensors, electronic warfare systems and other mission critical technologies, we have continually sought to develop advanced technologies enabling solutions to address complex national security challenges.

We continue to target our investments toward high growth areas of the U.S.

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Our Advanced Sensing and Computing (“ASC”) segment designs, develops and manufactures sensing and network computing technology that enables real-time situational awareness required for enhanced operational decision making and execution by our customers.

Our sensing capabilities span numerous applications, including missions requiring advanced detection, precision targeting and surveillance sensing, long range electro-optic/infrared (“EO/IR”), signals intelligence (“SIGINT”) and other intelligence systems, electronic warfare (“EW”), ground vehicle sensing, next generation active electronically scanned array (“AESA”) tactical radars, dismounted soldier sensing and space sensing.

Our sensing capabilities span numerous applications, including missions requiring advanced detection, precision targeting and surveillance sensing, long range electro-optic/infrared (“EO/IR”), signals intelligence (“SIGINT”) and other intelligence systems, electronic warfare (“EW”), ground vehicle sensing, next generation active electronically scanned array tactical radars, dismounted soldier sensing and space sensing.

Across our offerings, we are focused on advancing sensor distance and enhancing the precision, clarity, definition, spectral depth and effectiveness of our sensors.

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Integrated Mission Systems

Our Integrated Mission Systems (“IMS”) segment designs, develops, manufactures and integrates power conversion, control and distribution systems, ship propulsion systems, motors and variable

frequency drives, force protection systems, and transportation and logistics systems for the U.S.

Our Integrated Mission Systems (“IMS”) segment designs, develops, manufactures and integrates power conversion, control and distribution systems, ship propulsion systems, motors and variable frequency drives, force protection systems, and transportation and logistics systems for the U.S.

military and allied defense customers.

DRS is currently a leading provider of next-generation electrical propulsion systems for the U.S.

DRS is a leading provider of next-generation electrical propulsion systems for the U.S.

We provide power conversion, control, distribution and propulsion systems for the Navy’s top priority shipbuilding programs, including the Columbia Class ballistic missile submarine, the first modern U.S.

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The DoD budget is the largest defense budget in the world.

President’s government fiscal year 2024 budget request included $842 billion for national defense programs, which marks continued growth from prior years.

The most recent National Defense Strategy and annual defense budget request continue to prioritize a strategic focus on countering and deterring threats from near-peer adversaries.

We believe that the level and growth of the defense budget as well as strategic priorities requiring more advanced and sophisticated defense technology capabilities create a favorable market environment for DRS.

In March 2023, the U.S.

President’s fiscal year (“FY”) 2024 budget request was released and included $842 billion for national defense programs, which marks a 3% increase over prior year levels.

Following that, the FY 2024 National Defense Authorization Act (“NDAA”) was passed by Congress late in 2023 and signed into law by the President in December 2023.

The NDAA authorizes $842 billion in defense spending, including increases in procurement, research, development, testing and engineering, as well as military assistance to Ukraine.

After partially completing the companion defense appropriations bill for FY 2024, Congress landed on a series of Continuing Resolutions (“CRs”), passing a two-part, or “laddered,” Continuing Resolution to extend FY 2023 spending and avoid a government shutdown.

The current laddered CRs expire in March 2024 and are linked to a broader agreement that may include some form of supplemental funding for foreign aid to Ukraine and Israel.

government is our largest customer.

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government revenue for any given year, including the entirety of our government sales in 2023.

Our revenues with the DoD span the Army, Navy, Air Force and other DoD agencies which represent 37%, 32%, 5% and 10%, respectively, of our total revenue for 2022.

Our revenues with the DoD span the Navy, Army, Air Force and other DoD agencies which represent 38%, 31%, 4% and 7%, respectively, of our total revenue for 2023.

The remaining 20% of our revenues for 2023, were derived from sales to foreign governments as well as commercial type sales within the U.S.

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We operate in a highly competitive market and we compete with a variety of companies in the defense market including divisions of the large defense primes, mid-tier and smaller defense companies as well as certain non-traditional companies.

To gain new business, we also often team with, are supplier to, or find other ways to work with other market participants.

When appropriate, we also often team with, are supplier to, or find other ways to work with other market participants.

Our products are sold in markets in which several of our competitors are substantially larger than we are, enabling them to devote greater resources to research and development.

The principal competitive factors evaluated by customers in our markets

include product performance, cost, overall value, delivery schedule, embedded positions, past performance, innovation and reputation.

The principal competitive factors evaluated by customers in our markets include product performance, cost, overall value, delivery schedule, embedded positions, past performance, innovation and reputation.

As a mid-tier defense company with a diverse portfolio of technology that includes offerings at the system, sub-system and component level, we approach each market opportunity with the flexibility and agility to provide the most value to our customers.

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government, we have a diverse business mix within the U.S.

government funding and limited dependence on any single contract.

Currently no single contract or platform represented more than 10% of our revenues for the 2022, 2021, and 2020 years.

government funding.

Currently no single contract represented more than 10% of our revenues for 2023, 2022, and 2021.

The amount of our revenues attributable to our contracts by contract type during 2023, 2022, and 2021 were as follows:

($ in millions)

Year Ended December 31,

(Dollars in millions)

2023 2022 2021

Firm-fixed price

Flexibly priced (a)

$ 2,373 $ 2,347 $ 2,498

(a) Includes revenue derived from cost type and time and materials contracts.

Flexibly priced (1)

______________

(1) Includes revenue derived from cost-type and time-and-materials contracts.

Typically we enter into three types of contracts:

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Cost-type contracts typically require that the contractor use its best efforts to accomplish the scope of the work within some specified time and stated dollar limitation.

Fees on cost-type contracts can be fixed in terms of dollar value or can be variable due to award and incentive fees, which are generally based on performance

criteria such as cost, schedule, quality and/or technical performance.

Fees on cost-type contracts can be fixed in terms of dollar value or can be variable due to award and incentive fees, which are generally based on performance criteria such as cost, schedule, quality and/or technical performance.

Award fees are determined and earned based on customer evaluation of the Company’s performance against contractual criteria.

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Funded backlog represents the revenue value of orders for services under existing contracts for which funding is appropriated or otherwise authorized less revenue previously recognized on these contracts.

Unfunded backlog represents the revenue value of firm orders for products and services under existing contracts for which funding has not been obligated less funding previously recognized on these contracts.

Unfunded backlog represents the revenue value of firm orders for products and services under existing contracts for which funding has not been appropriated less funding previously recognized on these contracts.

(Dollars in millions) 2023 2022 2021

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Although materials and purchased components generally are available from a number of different suppliers, several suppliers serve as the sole source of certain components.

If a supplier should cease to deliver such components, generally we would expect that other sources would be available;

If a supplier should cease to deliver such components, generally, but not in all cases, we would expect that other sources would be available;

however, added cost and manufacturing delays might result.

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Effective management and oversight of suppliers and subcontractors is an important element of our successful performance.

If our sources of supply are disrupted, particularly in instances where we rely on only one or two sources of supply, our ability to meet our customer commitments could be adversely impacted.

If our sources of supply are disrupted, particularly in instances where we rely on only one or two sources of supply, our ability to meet our customer commitments could be adversely

We attempt to mitigate risks with our suppliers by entering into long-term agreements and leveraging company-wide agreements to achieve economies of scale and by negotiating flexible pricing terms in our customer contracts.

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Customer-funded R&D costs are charged directly to the related customer contract.

Substantially all R&D costs are charged to cost of revenues as incurred.

Company-funded R&D costs charged to cost of revenues totaled $58 million, $48 million and $41 million in 2022, 2021 and 2020, respectively.

R&D costs are expensed as incurred.

Company-funded R&D costs charged to general and administrative expenses totaled $82 million, $58 million and $48 million in 2023, 2022 and 2021, respectively.

Intellectual Property

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government, this requires us to have sufficient contracting leverage and to take timely affirmative measures to preserve our right.

In addition, in some cases the US government is empowered to unilaterally use, or allow our competitors to use, patented technologies, subject only to the obligation to pay reasonable compensation.

Human Capital

Our performance is dependent on our highly educated and highly skilled workforce.

We had approximately 6,400 employees on December 31, 2022.

As of December 31, 2022, approximately 451 (or 7)% of our employees were represented by labor unions.

We strive to maintain a culture that fosters and rewards growth, problem-solving, technology development and process improvements.

Our engineers work on programs in advanced fields, including sensing, electro-optical infrared systems, laser systems, network computing, communications systems, integration and power propulsion.

A portion of our employees also maintain security clearances to allow engineers and management to carry on business activities for our customers’ classified programs.

Our people are all committed to upholding the core values of the Company including integrity, operational excellence, customer focus, diversity, equity & inclusion and innovation.

Our performance depends on the skills, expertise, education and experience of our workforce.

As of December 31, 2023, our workforce included approximately 6,600 employees, of which, approximately 470 (or 7%) were represented by labor unions.

We continuously strive to maintain a culture that fosters and rewards growth, agility, problem-solving, innovation and operational excellence.

Our engineers work on programs that require advanced technology, such as sensing, electro-optical infrared systems, laser systems, network computing, cyber, communications systems, integration and power propulsion.

Some of our employees maintain security clearances which allows us to conduct business activities for our customers’ classified programs.

Our people are committed to upholding the Company’s core values of:

customer focus;

diversity, equity and inclusion;

and innovation.

Our commitment to ethical business practices is outlined in our Code of Ethics & Business Conduct (the “Code”).

The Code applies to all employees and establishes our expectations for appropriate business conduct is a variety of scenarios.

Once a year, all employees must confirm their commitment to our ethics program by providing confirmation they will adhere to the Code.

We recognize that our success as a Company depends on our ability to attract, develop and retain a qualified workforce with an emphasis on a strong commitment to diversity and inclusion.

As such, we promote the health, welfare and safety of our employees and seek to treat all employees with dignity and respect and provide fair, market-based, competitive and equitable compensation.

We strive to recognize and reward the performance of our employees and to provide a comprehensive suite of benefit options that enables our employees and their dependents to live healthy and productive lives.

Safety in our workplaces is paramount.

Across our businesses, we take measures to prevent workplace hazards, encourage safe behaviors and enforce a culture of continuous improvement to ensure our processes help reduce incidents and illnesses and comply with governing health and safety laws.

Our strong commitment to diversity, inclusion, succession planning and training includes our Diversity Advisory Group geared at improving diversity and inclusiveness so that we look like the communities in which we operate.

We have targeted increases in minority hiring and expanding women in the workforce.

Our values motivate us to promote strong workplace practices with opportunities for development and training.

Our training and development efforts focus on ensuring that the workforce is appropriately trained on critical job skills as well as leadership behaviors that are consistent with our core values.

We conduct rigorous succession planning exercises to ensure that key positions have the appropriate level of bench strength to provide for future key positions and leadership transitions.

We listen to our workforce to assess areas of concern and levels of engagement.

The Code applies to all employees and establishes our expectations for appropriate business conduct in a variety of scenarios.

Our employees receive annual compliance training and must formally confirm their commitment to upholding the standards set forth in our Code and ethics program.

We recognize that our success depends on our ability to attract, develop and retain a qualified inclusive and diverse workforce.

To accomplish this, we have talent acquisition, talent management, and Diversity, Equity and Inclusion (“DE&I”) programs established to attract and retain our employees.

We recognize and reward the performance of our employees, provide equitable, market-based and competitive compensation, and offer a comprehensive suite of benefits for our employees and their families to support their health and well-being.

We strive to create an environment where all employees are treated with dignity and respect.

Maintaining a safe work environment for our employees is of utmost importance.

We have policies, processes, and trainings in place to comply with health and safety laws and to prevent workplace hazards from occurring.

Emphasis is placed on encouraging safe behaviors and creating a culture of continuous improvement to minimize or eliminate workplace incidents and illnesses.

Our strong commitment to employee and leadership development, talent management, talent development and succession planning ensures our workforce is prepared for the critical skills necessary for the work today and for future opportunities.

We are developing our current leaders and preparing the next generation of leaders to demonstrate behaviors and attributes that are aligned with our core values.

We work to develop bench strength for our leadership team and other critical roles.

Our mission and core values are the driving force behind our actions to maintain an engaged and motivated workforce.

We continuously strive to deliver employee programs that support employee performance, development, well-being, and health and safety.

In addition, we support our local communities, active military, and veterans through our charitable giving and volunteerism.

We are committed to fostering diversity and inclusion with our Employee Resources Groups and Me (“mERGe”) program, local diversity action teams, and by creating a workforce representative of the communities in which we live and work.

Joint Ventures, Strategic Investments and Mergers and Acquisitions

We continually evaluate our existing portfolio and the related capabilities to maximize our ability to drive value.

Through this process we consider the acquisition of, or investments in businesses that we believe will expand or complement our current portfolio, allow access to new customers and enhance technologies.

We also may explore the divestiture of businesses that no longer meet our needs or strategy or that could perform better outside of our organization.

On June 21, 2022, the Company entered into a definitive agreement with RADA Electronic Industries Ltd.

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The transaction was completed on August 1, 2022 and resulted in net cash proceeds of $427 million after net working capital adjustments.

On April 19, 2022 we entered into a definitive sales agreement to divest our share of our current equity investment in Advanced Acoustic Concepts LLC to Thales Defense & Security, Inc.

(TDSI), the minority partner in this joint venture.

On April 19, 2022 we entered into a definitive sales agreement to divest our share of our current equity investment in Advanced Acoustic Concepts LLC to Thales Defense & Security, Inc., the minority

partner in this joint venture.

The transaction was completed on July 8, 2022 and resulted in proceeds of $56 million.

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(“Hoverfly”), which designs, develops and manufactures power-tethered unmanned aerial systems and related products.

We are also party to an exclusive manufacturing and teaming agreement with Hoverfly.

We do not consider any material portion of our business to be seasonal.

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government, any of which could have a material adverse effect on our business, financial condition and results of operations.

See Part I Item 1A.

“Risk Factors—Risks Relating to Our Business—We are subject to a number of procurement, international trade, and other rules regulations and requirements related to our industry, our products, and the businesses we operate.

See Part I Item 1A, “ Risk Factors—Risks Relating to Our Business—We are subject to a number of procurement, international trade, and other rules, regulations and requirements related to our industry, our products, and the businesses we operate.

If we fail to comply with such rules, regulations or other requirements we may be subject to civil and/or criminal penalties and/or administrative sanctions ” in this Annual Report.

We (again, including our subcontractors and others with whom we do business) also are subject to, and expected to perform in compliance with, a vast array of federal, state, local and international laws, regulations and requirements related to our industry, our products and the businesses we operate.

We (including our subcontractors and others with whom we do business) are also subject to, and expected to perform in compliance with, a vast array of federal, state, local and international laws, regulations and requirements related to our industry, our products and the businesses we operate.

These laws and regulations include, but are not limited to, the Anti-Kickback Act, the Arms Export Control Act, including the ITAR, the Communications Act, the Defense Federal Acquisition Regulations, the Export Control Reform Act, including the EAR (which includes anti-boycott provisions), the False Claims Act, the Federal Acquisition Regulation, the FCPA, the Lobbying Disclosure Act, the Procurement Integrity Act, the Truthful Cost or Pricing Data Act, the Foreign Trade Regulations, the Foreign Investment Risk Review Modernization Act, the International Emergency Economic Powers Act, the Trading with the Enemy Act, and Executive Orders and regulations, administered by the U.S.

Department of the Treasury, Office of Foreign Assets Control, as well as rules and regulations administered by the U.S.

Customs and Border Protection and the Bureau of Alcohol, Tobacco, Firearms and Explosives.

If we are found to have violated such requirements, we may be subject to reductions of the value of contracts;

Customs and Border

Protection and the Bureau of Alcohol, Tobacco, Firearms and Explosives.

If we are found to have violated such requirements, we may be subject to:

reductions of the value of contracts;

contract modifications or termination;

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federal, state, local and foreign laws and regulations relating to the protection of the environment, including those governing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites and the maintenance of a safe workplace.

See Part I Item 1A.

“Risk Factors—Risks Relating to Our Business—We are subject to environmental laws and regulations, and our ongoing operations may expose us to environmental liabilities affecting our reputation, business, financial condition and results of operations” in this Annual Report.

Except as described in Note 18:

Commitments and Contingencies ” to the Consolidated Financial Statements, we believe that we have been and are in material compliance with environmental laws and regulations and that we have no liabilities under environmental requirements that

would be expected to have a material adverse effect on our business, results of operations, financial condition or liquidity.

It is possible, however, that the ultimate resolution of the matters discussed under Note 18:

Commitments and Contingencies to the Consolidated Financial Statements could result in a material adverse effect on our results of operations for a particular reporting period, any of which could have a material adverse effect on our business.

See Part I Item 1A, “ Risk Factors—Risks Relating to Our Business—We are subject to environmental laws and regulations, and our ongoing operations may expose us to environmental liabilities affecting our reputation, business, financial condition and results of operations ” in this Annual Report.

Except as described in Item 3, “Legal Proceedings,” we believe that we have been and are in material compliance with environmental laws and regulations and that we have no liabilities under environmental requirements that would be expected to have a material adverse effect on our business, results of operations, financial condition or liquidity.

It is possible, however, that the ultimate resolution of the matters discussed under Item 3, “Legal Proceedings,” could result in a material adverse effect on our results of operations for a particular reporting period, any of which could have a material adverse effect on our business.

Governance Structure

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and its affiliated entities with customary demand, shelf and piggy-back registration rights to facilitate a public offering of the Company Common Stock held by US Holding.

The Cooperation Agreement, among other things, (a) Leonardo S.p.A.

has certain consent, access and cooperation rights, (b) US Holding has certain consent rights with respect to actions taken by the Company and its subsidiaries, including with respect to the creation or issuance of any new classes or series of stock (subject to customary exceptions), listing or delisting from any securities exchange, and making material changes to the Company’s accounting policies and changing the Company’s auditor, and (c) neither US Holding nor Leonardo S.p.A.

has the ability to transfer any Company voting securities for a period of six months following the merger with RADA, except in connection with a change in control of the Company or for transfers to affiliates.

Under the Cooperation Agreement, among other things, (a) Leonardo S.p.A.

has certain consent, access and cooperation rights, and (b) US Holding has certain consent rights with respect to actions taken by the Company and its subsidiaries, including with respect to the creation or issuance of any new classes or series of stock (subject to customary exceptions), listing or delisting from any securities exchange, and making material changes to the Company’s accounting policies and changing the Company’s auditor.

Our Ultimate Majority Stockholder

Leonardo S.p.A., a global high-technology company, is a leading global Aerospace, Defense and Security company and Italy’s main industrial company.

Leonardo S.p.A., a global high-technology company, is a leading global Aerospace, Defense and Security company and one of Italy’s main industrial companies.

Organized into five business Sectors, Leonardo S.p.A.

has a significant industrial presence in Italy, the United Kingdom, Germany, Poland, Switzerland and the USA, where it operates through subsidiaries, joint ventures and partnerships as:

GIE ATR, MBDA, Telespazio, Thales Alenia Space, Hensoldt AG and other minor entities.

has a significant industrial presence in Italy, the United Kingdom, Germany, Poland, Switzerland and the USA, where it operates through subsidiaries, joint ventures and partnerships, including GIE ATR, MBDA, Telespazio, Thales Alenia Space, and Hensoldt AG.

Leonardo S.p.A.

competes in the most important international markets by leveraging its areas of technological and product leadership (Helicopters, Defense Electronics & Security, Aircraft, Aerostructures and Space).

competes internationally by leveraging its areas of technological and product leadership (Helicopters, Defense Electronics & Security, Aircraft, Aerostructures and Space).

Listed on the Milan Stock Exchange (under the trading symbol “LDO”), in 2022 Leonardo S.p.A.

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Our website is https://www.leonardodrs.com.

We make available on our website, free of charge, the periodic reports that we file with or furnish to the SEC, as well as amendments to those reports, as soon as reasonably practicable after such reports are filed with or furnished to the SEC.

We are not including the information contained in our website as part of, or incorporating it by reference into, this Report.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business