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Item 7. Management’s Discussion and Analysis

2024-02-28 compared with 2023-03-28 · 218 added, 409 removed, 448 unchanged (58% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read this discussion together with our consolidated financial statements and related notes thereto included elsewhere in this Annual Report.

You should read this discussion together with our consolidated financial statements and related notes thereto included elsewhere in this Annual Report, as well as Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the year ended December 31, 2022, which provides additional information on comparisons of the year ended December 31, 2022, to the year ended December 31, 2021.

This discussion and other parts of this document include forward-looking statements such as those relating to our plans, objectives, expectations and beliefs, which involve risks, uncertainties and assumptions.

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

The strength of our market positioning in these technology areas have created a foundational and diverse base of programs across the Department of Defense (“DoD”).

We believe these technologies will not only support our customers in today’s mission but will also underpin their strategy to migrate towards more autonomous, dynamic, interconnected, and multi-domain capabilities needed to defend against evolving and emerging threats.

The strength of our market positioning in these technology areas have created a foundational and diverse base of programs across the U.S.

Department of Defense (“DoD”).

We view more advanced capabilities in sensing, computing, self-protection and power as necessary to enable these strategic priorities.

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The DoD is our largest customer and, for the years ended December 31, 2023 and 2022, accounted for approximately 80% and 84%, respectively, of our business as an end-user, with revenues principally derived directly or indirectly from contracts with the U.S.

Army and U.S.

Navy, which represented 37% and 32%, and 38% and 31%, respectively, of our total revenues for the years ended December 31, 2022 and 2021.

Our operations and reporting are structured into the following three technology driven segments based on the capabilities and solutions offered to our customers:

Navy and U.S.

Army, which represented 38% and 31%, respectively, of our total revenues for the year ended December 31, 2023 and 32% and 37%, respectively, for the year ended December 31, 2022.

Our operations and reporting are structured into the following two technology driven segments based on the capabilities and solutions offered to our customers:

Advanced Sensing and Computing

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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Our sensing capabilities are complemented by our rugged, trusted and cyber resilient network computing products.

Our network computing offerings are utilized across a broad range of mission applications including platform computing on ground and shipboard (both surface ship and submarine) for

advanced battle management, combat systems, radar, command and control (“C2”), tactical networks, tactical computing and communications.

Our network computing offerings are utilized across a broad range of mission applications including platform computing on ground and shipboard (both surface ship and submarine) for advanced battle management, combat systems, radar, command and control (“C2”), tactical networks, tactical computing and communications.

These products help support the DoD’s need for greater situational understanding at the tactical edge by rapidly transmitting data securely between command centers and forward-positioned defense assets and personnel.

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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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This approach permeates through the Company with a focus on continuous improvement at every level.

Part of this learning has resulted in institutionalizing our continuous improvement process through our APEX program, which is transforming this year from Operational Excellence to Business Excellence.

Part of this learning has resulted in institutionalizing our continuous improvement process through our Business Excellence initiative called Always Performing for Excellence (“APEX”) program.

The APEX program’s goal is to strive for continuous improvement through unification of all of our business practices, tools and metrics, ongoing employee training and innovation.

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We challenge ourselves to exceed our customers’ expectations and we partner with them to work to ensure that our execution meets their needs.

Continuous improvement, through the APEX program also allows us to improve our efficiency, which contributes to increased margins, helps us to remain competitive and allows us to make strategic investments, all while maintaining our focus on customer satisfaction.

Continuous improvement, through the APEX program also allows us to improve our efficiency, which we believe contributes to increased margins, helps us to remain competitive and allows us to make

strategic investments, all while maintaining our focus on customer satisfaction.

In these elements, our goals are aligned with those of our customers.

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Global Events and Business Impacts

The coronavirus (COVID-19) pandemic caused certain disruptions to our business, including various adverse supply chain impacts which are anticipated to continue into 2023.

Ukraine Invasion

Global Conflicts

In February 2022, Russia escalated its war with Ukraine by invading and occupying parts of that country.

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and allies to both provide equipment in support of this effort, and to replace equipment pledged.

We expect that these orders will continue until that support is no longer needed and the equipment pledged is replaced.

We expect that these orders will continue until that support is no longer needed and certain transferred equipment is replaced.

In October 2023, Hamas militants located in Gaza launched a terrorist attack on Israel.

The ensuing and ongoing conflict has the potential to evolve quickly creating uncertainty in the broader Middle East region, along with the potential for disruptions to our Israeli operations in the region, including but not limited to workforce calls for duty, transportation and other logistical impacts and reduced customer confidence.

To date, the conflict has not had a material impact to our operations.

and other western powers have directed military and funding support to Israel.

DRS has direct exposure to Israel principally through its RADA operations with approximately 4% of our workforce as of December 31, 2023 residing in Israel.

At this time, it is unclear whether supplemental funding for Israel will impact demand for DRS products.

Business Environment

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government revenue for the year ended December 31, 2023, and are principally derived directly or indirectly from contracts with the U.S.

Army and U.S.

Navy, which represented 37% and 32%, respectively, of our total revenues for the year ended December 31, 2022.

Navy and U.S.

Army, which represented 38% and 31%, respectively, of our total revenues for the year ended December 31, 2023.

Therefore, our revenue is highly correlated to changes in 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.

To prevent a government shutdown at the end of fiscal year 2023, Congress passed three Continuing Resolutions (“CRs”) to fund the government.

The President signed the most recent CR into law on January 19, 2024.

The new measure creates extensions effective through March 1, 2024, for four appropriations bills and March 8, 2024, for the remaining eight appropriations bills, allowing lawmakers more time to potentially complete the fiscal year 2024 appropriations bills.

In the event of a U.S.

government shutdown or an extended period of CR, our business, program performance and results of operations could be impacted by the resulting disruptions to federal government offices, workers, and operations, including but not limited to program cancellations, schedule delays, production halts and other disruptions and nonpayment, which could adversely affect our results of operations.

The significance of these impacts will primarily be based on the length of the CR or shutdown.

Operating Performance Assessment and Reporting

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The DCAA performs these audits on behalf of the U.S.

The DCAA has the right to perform audits on our incurred costs on cost-type or price redeterminable-type

contracts on a yearly basis.

The DCAA has the right to perform audits on our incurred costs on cost-type or price redeterminable-type contracts on a yearly basis.

Approval of an incurred cost submission can take from one to three years from the date of the submission of the contract cost.

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Consequently, at the outset of a major program, the contract is typically only partially funded, and additional funds normally are committed to the contract by the procuring agency only as appropriations are made by Congress for future fiscal years.

Year Ended December 31, 2022

Results from Operations

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Gross profit $ 648 $ 575 $ 547 $ 73 12.7 % $ 28 5.1 %

Gross margin 21.4% 19.0% 17.8% 2.4% 12.4% 1.2% 6.8%

Gross margin 22.9 % 21.4 % 19.0 % 150 bps 240 bps

General and administrative expenses (384) (357) (293) (27) 7.6 % (64) 21.8 %

Amortization of intangibles (22) (10) (9) (12) 120.0 % (1) 11.1 %

Other operating expenses, net 353 (9) (21) 362 (4022.2)% 12 (57.1)%

Other operating (expenses) income, net (11) 353 (9) (364) (103.1) % 362 (4022.2) %

Operating earnings $ 231 $ 561 $ 236 $ (330) (58.8) % $ 325 137.7 %

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Other, net (3) (2) (1) (1) 50.0 % (1) 100.0 %

Earnings before taxes $525 $200 $112 325 162.5% $88 NM

Income tax provision 120 46 27 74 160.9% 19 NM

Net earnings $405 $154 $85 251 163.0% $69 NM

Earnings before taxes $ 192 $ 525 $ 200 $ (333) (63.4) % $ 325 162.5 %

Income tax provision 24 120 46 (96) (80.0) % 74 160.9 %

Net earnings $ 168 $ 405 $ 154 $ (237) (58.5) % $ 251 163.0 %

Basic EPS (1)

$1.88 $0.73 $0.40 $1.15 157.5% $0.33 NM

$ 0.64 $ 1.88 $ 0.73 $ (1.24) (66.0) % $ 1.15 157.5 %

Diluted EPS (1)

$1.88 $0.73 $0.40 $1.15 157.3% $0.33 NM

$ 0.64 $ 1.88 $ 0.73 $ (1.24) (66.0) % $ 1.15 157.5 %

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$ 3,516 $ 3,156 $ 2,595 $ 360 11.4 % $ 561 21.6 %

NM- percentage change not meaningful

______________

(1) Gives effect to a 1,450,000-for-1 forward stock split on our common stock effected on February 25, 2021 and a 1.451345331-for-1 forward stock split on our common stock effected November 23, 2022.

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government contracts, which could have a material adverse impact on our business, financial condition and results of operations ” in this Annual Report.

Year Ended December 31, 2022 Compared to the Years Ended December 31, 2021 and December 31, 2020

Year Ended December 31, 2023 Compared With Year Ended December 31, 2022

Our operating results for the year ended December 31, 2022 are highlighted by our record $4.3 billion of backlog showing the strong demand for our mission critical technologies.

This is coupled with strong program performance driving margin expansion despite the macro inflation and supply chain headwinds realized across the industry.

Revenue of $2,693 million for the year ended December 31, 2022 represented a decline of $(186) million ((6.5)%) driven primarily from the timing and magnitude of the GES disposition (net divestiture impact).

Despite the revenue decline, our gross profit of $575 million increased $28 million from the prior year results attributed to improved program performance including the successful contract modification on

the second ship set on our Columbia Class program which contributed an incremental $15 million for the period.

Additionally, our operating earnings and net earnings grew $325 million (137.7%) and $251 million (163.0%) from the year ended December 31, 2021, respectively, attributed in large part to the gain realized on the GES disposition.

Our backlog of $4.3 billion at December 31, 2022 represents a diversified, balanced portfolio supported by foundational programs strongly aligned in areas of, in our view, growing importance within the DoD budget priorities.

Our backlog position is highlighted by the recent awards received to support the electric power and propulsion system for the Columbia Class production program as well as continued demand in our Force Protection and Advanced sensing programs.

The increases in these program lines more than offset the backlog reduction from the disposition of our GES business unit.

We believe the performance on these and other programs within our portfolio will support continued revenue growth while the transition from development efforts to production will continue our trend of earnings growth and margin expansion.

Year Ended December 31, 2021 Compared With Year Ended December 31, 2020

Our operating results for the year ended December 31, 2021 are highlighted by our financial performance including strong margin expansion, free cash flow generation and continued revenue growth, all while we were continuing to combat the impacts of the global pandemic.

Revenue of $2,879 million for the year ended December 31, 2021 represented year over year growth of $101 million (3.6%) while our gross profit of $547 million increased $53 million from the prior year attributed primarily to improved contractual performance on our Columbia Class efforts.

Additionally, operating earnings and net earnings grew $55 million (30.4%) and $69 million (81.2%) from the year ended December 31, 2020, respectively driven largely by the gross profit improvement.

Our operating results for the year ended December 31, 2023, are highlighted by our record $7.8 billion of backlog showing the strong demand for our mission critical technologies and strong program performance, driving gross margin expansion despite the macro inflation and supply chain headwinds realized across the industry.

Revenue of $2,826 million for the year ended December 31, 2023 represented an increase of $133 million (4.9%) driven by increased demand across our program portfolio.

Our gross profit of $648 million increased $73 million (12.7%) from the prior year results attributed to increased volume coupled with improved program mix and program performance driving an increase in gross margin of 150bps.

Despite the gross margin increase as compared to the prior year, our operating earnings and net earnings declined $330 million (58.8%) and $237 million (58.5%) from the year ended December 31, 2022, respectively, attributed to the gain realized on the GES disposition in the prior year.

Our backlog of $7.8 billion at December 31, 2023 represents a diversified, balanced portfolio supported by foundational programs strongly aligned in areas of, in our view, growing importance within the DoD budget priorities.

Our backlog position is highlighted by the recent awards received on next generation Airborne Force Protection and Dismounted Soldier Sensing programs at our ASC segment, production contracts received to provide propulsion system and electrical components on the Columbia-class submarine and CVN Carrier Class programs at our IMS segment and our legacy positions within our ASC segment including our flagship Mounted Family of Computer Systems (“MFoCS”) ruggedized computing and battle management system, Global Access Network and naval network and hardware programs.

Our backlog position is highlighted by the recent awards received to support the electric power and propulsion system for the Columbia Class production program as well as continued

demand in our Force Protection, Network Computing and Advanced sensing programs.

Year Ended December 31, 2022 Compared With Year Ended December 31, 2021

For the year ended December 31, 2022 , Revenue declined by $(186) million, or (6.5)%, to $2,693 million from $2,879 million for year ended December 31, 2021.

The revenue decline in 2022 was primarily due to the disposal of GES in August ($109 million).

In addition to the net divestiture impact, the availability of supply chain components within our ASC segment resulted in a reduction in revenue year over year of over $100 million.

Additionally our tactical computing programs were negatively impacted by customer staffing levels which limited our annual procurement ($47 million).

These shortfalls were offset in part by year over year revenue expansion of 3% at our IMS segment, driven by enhanced demand for our submarine propulsion efforts on the Columbia Class with the Navy ($82 million) and for our critical short range air defense and Counter UAS programs to combat emerging threats ($38 million).

Year Ended December 31, 2021 Compared With Year Ended December 31, 2020

For the year ended December 31, 2023, revenue increased by $133 million, or 4.9%, to $2,826 million from $2,693 million for year ended December 31, 2022.

The revenue growth in 2021 was primarily due to an increase of $126 million at our IMS segment, driven by contracted efforts to provide the U.S.

Army with Mission Equipment Packages to support mobile short range air defense capabilities ($158 million) and continued progress providing power conversion equipment and electrical components and systems to the U.S.

Navy to support the CVN 80/81 carrier ($72 million) and Columbia Class program ($36 million).

The IMS revenue growth was partially offset by the completion of the urgent operational needs TROPHY TM APS program ($93 million) which realized significant production efforts in 2020.

Offsetting the IMS results was a $18 million revenue decrease at our ASC segment attributed primarily to a reduction in naval electronics hardware programs and bandwidth demands on certain global network programs, partially offset by a ramp up of full-rate production efforts on next generation dismounted soldier targeting systems with the U.S.

Army ($37 million).

The revenue increase in 2023 was attributed to increased customer demand across our portfolio.

The growth is highlighted by airborne and ground vehicle sensing programs within our ASC segment and our Columbia Class as well as other surface and subsurface naval power efforts within our IMS segment.

The growth was partially offset by a decline in tactical computing and short-range air defense revenue contribution during the period.

Cost of Revenues

Year Ended December 31, 2022 Compared With Year Ended December 31, 2021

Cost of revenues decreased $214 million, or 9.2%, from $2,332 million to $2,118 million for the year ended December 31, 2022, primarily due to the 6.5% decrease in revenue as described above coupled with improved program performance further driving the decline.

The improved programmatic performance is highlighted by our electrical components and system programs with the U.S.

Navy on the Columbia Class program which enhanced our gross margin percentage to 21.4%, a 240 bps increase from the prior year.

Despite the improved program performance however we did realize adjustments on cost at completion estimates which negatively impacted earnings with charges totaling 1% of revenue for the period ended December 31, 2022, consistent with the prior year;

Revenue from Contracts with Customers and Note 20:

Segment Information for further detail.

Year Ended December 31, 2021 Compared With Year Ended December 31, 2020

Cost of revenues increased $48 million, or 2.1%, from $2,284 million to $2,332 million for the year ended December 31, 2021, primarily due to the 3.7% increase in revenue as described above.

The cost of revenues growth was favorably offset by improved program performance on certain of our development programs as they transition from development to production.

The improved programmatic performance is highlighted by our electrical components and system programs with the U.S.

Navy on the Columbia Class program.

Cost of revenues increased $60 million, or 2.8%, from $2,118 million to $2,178 million for the year ended December 31, 2023, due to the 4.9% increase in revenue as described above.

The increase was offset by improved program performance within our naval computing and power and propulsion programs as well as the impact of favorable program mix across the portfolio, including the high margin contribution generated from our tactical radar portfolio.

Despite the improved program performance, however we did realize adjustments on cost at completion estimates which negatively impacted earnings with charges totaling 1% of revenue for the year ended December 31, 2023, consistent with the prior year (see Note 3:

Revenue from Contracts with Customers for further detail).

Year Ended December 31, 2022 Compared With Year Ended December 31, 2021

Gross profit increased $28 million, or 5.1%, from $547 million for the year ended December 31, 2021 to $575 million for the year ended December 31, 2022, despite the decline in revenue, attributed to favorable program performance, including the improved execution and contract modification realized on the Columbia Class program efforts as noted above.

The contract modification positively impacted the full year by $15 million.

Year Ended December 31, 2021 Compared With Year Ended December 31, 2020

Gross profit increased $53 million, or 10.7%, from $494 million for the year ended December 31, 2020 to $547 million for the year ended December 31, 2021, primarily driven by revenue growth and

favorable program performance, including the improved execution on the Columbia Class program efforts as noted above.

Gross profit increased $73 million, or 12.7%, from $575 million for the year ended December 31, 2022, to $648 million for the year ended December 31, 2023 attributed to increased volume, favorable program performance and program mix as noted above.

General and Administrative Expenses

Year Ended December 31, 2022 Compared With Year Ended December 31, 2021

General and administrative expenses increased by $64 million, or 21.8%, from $293 million for the year ended December 31, 2021 to $357 million for the year ended December 31, 2022, resulting primarily from expenditures attributed to our disposition of GES and AAC as well as our merger with RADA.

These transactions contributed $38 million of additional expenses for the period.

Investments related to Independent Research and Development (IR&D) costs also increased $10 million as compared to 2021.

Additionally we realized an increase in General and Administrative spend driven by public company costs, including legal and accounting support as well as cost of living adjustments required to retain our employees throughout the organization.

Year Ended December 31, 2021 Compared With Year Ended December 31, 2020

General and administrative expenses increased by $10 million, or 3.5%, from $283 million for the year ended December 31, 2020 to $293 million for the year ended December 31, 2021, resulting primarily from increases in discretionary investment of $7 million related to IR&D.

Additionally, we realized a slight increase in General and Administrative spend driven by increased travel costs and medical expenses when compared to the prior year where we experienced a reduction in these costs as a result of the COVID-19 Pandemic.

These costs were partially offset by a reduction in deal related transaction costs which peaked in 2020 with preparation for a potential public offering.

Other Operating Expenses, Net

Year Ended December 31, 2022 Compared With Year Ended December 31, 2021

Other operating (expenses) / income increased by $362 million to $353 million for the year ended December 31, 2022 from ($9 million) for the year ended December 31, 2021.

The increase realized for the year ended December 31, 2022 is attributed to the gain realized on the GES and AAC disposals of $354 million.

This is offset in part by $7 million of expenditures related to the COVID-19 pandemic in 2021 which did not occur in 2022.

These costs included paid leave, personal protective equipment and other cleaning measures, and social and physical distancing efforts including the use of zones and subzones for manufacturing facilities.

Please see “—Business Overview and Considerations—Impacts of COVID-19 On Our Business” for further details on COVID-19 impact on our business.

Year Ended December 31, 2021 Compared With Year Ended December 31, 2020

Other operating expenses decreased by $12 million to $9 million for the year ended December 31, 2021 from $21 million for the year ended December 31, 2020, mainly due to lower restructuring costs and a reduction in costs incurred in response to impacts of the COVID-19 pandemic.

In total we incurred $7 million of expenditures related to the COVID-19 pandemic from January 1, 2021 through December 31, 2021, compared to $12 million from March 1,2020 to December 31, 2020, to ensure a safe work environment for our employees.

Please see “—Business Overview and Considerations—Impacts of COVID-19 On Our Business” for further details on the COVID-19 pandemic impact on our business.

General and administrative (“G&A”) expenses increased by $27 million, or 7.6%, from $357 million for the year ended December 31, 2022, to $384 million for the year ended December 31, 2023.

The increase is largely attributed to increased public operating costs, enhanced internal research and development (IR&D) expenditures and the business structure of RADA as compared to GES.

These costs were partially offset by a reduction in deal-related expenditures realized during the period.

Amortization of Intangibles

Year Ended December 31, 2022 Compared With Year Ended December 31, 2021

Amortization of intangibles for the year ended December 31, 2022 of $10 million were consistent with the year ended December 31, 2021, increasing $1 million attributed to the one month of amortization of intangible assets generated from the RADA transaction.

Year Ended December 31, 2021 Compared With Year Ended December 31, 2020

Amortization of intangibles for the year ended December 31, 2021 of $9 million were consistent with the year ended December 31, 2020.

Amortization of intangibles for the year ended December 31, 2023, of $22 million increased $12 million as compared with the year ended December 31, 2022.

This is attributed to the increased amortization generated from the RADA acquired intangible assets.

Other Operating (Expenses) Income, Net

Other operating (expenses) income, net decreased from an income of $353 million for the year ended December 31, 2022 to an expense of $11 million for the year ended December 31, 2023.

The income realized for the year ended December 31, 2022 is attributed to the gain realized on the Global Enterprise Solutions (“GES”) and Advanced Acoustic Concepts, LLC (“AAC”) disposals of $354 million.

The remainder of the decrease is attributed to certain restructuring efforts implemented across our operations to streamline efficiency.

Operating Earnings

Year Ended December 31, 2022 Compared With Year Ended December 31, 2021

Operating earnings increased by $325 million to $561 million, or 137.7%, for the year ended December 31, 2022 from $236 million for the year ended December 31, 2021, driven by the gain on disposals of GES and AAC, improved program performance driven by improved performance at our IMS segment as noted above, offset by the deal related expenditures and IR&D investments incurred.

Year Ended December 31, 2021 Compared With Year Ended December 31, 2020

Operating earnings increased by $55 million to $236 million, or 30.4%, for the year ended December 31, 2021 from $181 million for the year ended December 31, 2020, driven by the increased revenue output and related contribution margin as well as improved program performance driven by improved performance at our IMS segment as noted above.

Operating earnings decreased by $330 million, or 58.8%, to $231 million for the year ended December 31, 2023, from $561 million for the year ended December 31, 2022, driven by the gain on disposals of GES and AAC in the prior year offset by the impacts of gross profit, G&A expenditures and the amortization of intangible assets noted above.

Interest Expense

Year Ended December 31, 2022 Compared With Year Ended December 31, 2021

Interest expense decreased by $1 million to $34 million for year end December 31, 2022 from $35 million for the year ended December 31, 2021.

The reduction is attributed to the favorable impact of the new capital structure put into place subsequent to the RADA merger.

For further detail se e Note 13:

Interest expense increased by $2 million to $36 million for the year ended December 31, 2023, from $34 million for the year ended December 31, 2022.

The increase is attributed to the impact of increased interest rates realized on our variable rate debt instruments during the period.

Se e Note 13:

Debt f or further information regarding our debt.

Year Ended December 31, 2021 Compared With Year Ended December 31, 2020

Interest expense decreased by $29 million to $35 million for year end December 31, 2021 from $64 million for the year ended December 31, 2020.

The reduction in annual interest was primarily attributed to the $300 million of forgiveness of principal on our 7.5% Term Loan debt that occurred in December 2020.

The weighted average interest rate on our revolving credit facility was 3.67% in 2021 compared to 4.36% in 2020.

Debt for further detail.

Year Ended December 31, 2022 Compared With Year Ended December 31, 2021

Other, net decreased to $2 million for the year ended December 31, 2022 from $1 million for the year ended December 31, 2021.

Year Ended December 31, 2021 Compared With Year Ended December 31, 2020

Other, net decreased to $1 million for the year ended December 31, 2021 from $5 million for the year ended December 31, 2020.

This was primarily related to a loss realized on the termination on one of our international defined benefit pension plans recorded in the year ended December 31, 2020.

Earnings (Loss) Before Taxes

Year Ended December 31, 2022 Compared With Year Ended December 31, 2021

Earnings before taxes increased by $325 million to $525 million for the year ended December 31, 2022 from $200 million for the year ended December 31, 2021.

This was primarily due to increased operating earnings of $325 million, the reduction of $1 million in interest expenditures and a reduction in other, net costs of $1 million as described above.

Year Ended December 31, 2021 Compared With Year Ended December 31, 2020

Earnings before taxes increased by $88 million to $200 million for the year ended December 31, 2021 from $112 million for the year ended December 31, 2020.

This was primarily due to increased operating earnings of $55 million, the reduction of $29 million in interest expenditures and a reduction in other, net costs of $4 million as described above.

Other, net increased to $3 million for the year ended December 31, 2023, from $2 million for the year ended December 31, 2022.

Earnings Before Taxes

Earnings before taxes decreased by $333 million to $192 million for the year ended December 31, 2023, from $525 million for the year ended December 31, 2022.

This was primarily due to decreased operating earnings of $330 million, driven by the gain realized on our 2022 dispositions of GES and AAC, the increase of $2 million in interest expenditures and the increase in other, net costs of $1 million as described above.

Income Tax Provision

Year Ended December 31, 2022 Compared With Year Ended December 31, 2021

Income tax provision increased by $74 million to $120 million for the year ended December 31, 2022 from $46 million for the year ended December 31, 2021.

This was primarily due to an increase in earnings before taxes.

Our effective tax rate for 2022 was 22.9% compared to 23.0% in 2021.

Income tax provision decreased by $96 million to $24 million for the year ended December 31, 2023, from $120 million for the year ended December 31, 2022.

This was primarily due to a decrease in earnings before taxes and the favorable impact realized for R&D tax credits in the period.

The R&D tax credits assisted in reducing our overall effective tax rate of 12.5% compared to 22.9% in 2022.

As of December 31, 2023 the Company had $22 million of Federal net operating loss carryforwards that can be utilized to reduce approximately $5 million of future tax liabilities prior to their expiration commencing in 2032.

Year Ended December 31, 2021 Compared With Year Ended December 31, 2020

Income tax provision increased by $19 million to $46 million for the year ended December 31, 2021 from $27 million for the year ended December 31, 2020.

This was primarily due to an increase in earnings before taxes.

Our effective tax rate for 2021 was 23.0% compared to 24.1% in 2020.

The decrease in the effective tax rate is primarily attributable to a decrease in non-deductible costs in connection with planned deal related expenditures of $9 million incurred during 2020.

As of December 31, 2021 the Company had $28 million of Federal net operating loss carryforwards and $23 million of net tax credit carry-forwards that can be utilized to reduce approximately $30 million of future tax liabilities prior to their expiration commencing in 2025.

Year Ended December 31, 2022 Compared With Year Ended December 31, 2021

Net earnings increased by $251 million to $405 million for the year ended December 31, 2022 when compared to the year ended December 31, 2021.

This was driven by increased earnings before taxes of $325 million offset by an increased income tax provision of $74 million as described above.

Year Ended December 31, 2021 Compared With Year Ended December 31, 2020

Net earnings increased by $69 million to $154 million for the year ended December 31, 2021 when compared to the year ended December 31, 2020.

This was driven by increased earnings before taxes of $88 million offset by an increased income tax provision of $19 million as described above.

Net earnings decreased by $237 million to $168 million for the year ended December 31, 2023, when compared to the year ended December 31, 2022.

This was driven by decreased earnings before taxes of $333 million offset by a decreased income tax provision of $96 million as described above.

Basic and Diluted EPS

Year Ended December 31, 2022 Compared With Year Ended December 31, 2021

As of December 31, 2023, there were 262,525,390 shares of common stock outstanding, increasing 2,291,357 shares from the December 31, 2022, shares outstanding of 260,234,033.

The increased share count is attributed to shares issued to consummate the RADA merger.

Despite the increased share count, for the year ended December 31, 2022, there was minimal impact to the weighted average basic and diluted shares outstanding.

The increased share count is attributed to equity vesting and stock option exercises.

For the year ended December 31, 2023, the weighted average shares outstanding totaled 261,454,010 and 264,175,239 for basic and diluted shares, respectively.

The weighted average basic and diluted share count increased 46,510,402 and 49,041,882 as compared to the prior year basic and diluted weighted average shares outstanding, respectively.

The increase in weighted average shares outstanding is attributed to the current year equity grants and the impact of the RADA merger, see Note 16:

Share-based Compensation Plans for further detail.

The increase in weighted average shares outstanding is attributed to the timing of the incremental shares issued to consummate the RADA merger, see Note 2:

Business Acquisition for further detail.

The increased shares outstanding resulted in $0.64 for both basic and diluted EPS as compared to the prior year results of $1.88 for both basic and diluted EPS.

The increase in EPS is attributed to the net earnings growth described above.

Year Ended December 31, 2021 Compared With Year Ended December 31, 2020

For the year ended December 31, 2021, there were no changes in the number of basic and diluted shares.

No equity awards were issued during such year.

As of December 31, 2021 and 2020, there were 210,445,073 shares of common stock outstanding (after giving effect to a 1,450,000-for-1 forward stock split on our common stock effected on February 25, 2021 and a 1.451345331-for-1 forward stock split on our common stock effected November 23, 2022 ), resulting in a basic and diluted EPS of $0.73 and $0.40 per share for the years ended December 31, 2021 and 2020, respectively.

The increase in EPS is attributed to the net earnings growth described above.

Year Ended December 31, 2022 Compared With Year Ended December 31, 2021

The decrease in EPS is attributed to the net earnings decline described above as well as the increased weighted average shares outstanding.

Backlog increased by $3,482 million, or 81.6%, from $4,269 million as of December 31, 2022, to $7,751 million as of December 31, 2023.

The backlog increase was driven primarily by the receipt of a multi-submarine contract to support the electric propulsion efforts on the Columbia Class submarine program with the U.S.

Navy resulting in an additional $1,083 million of unfunded backlog.

In addition, funded backlog also increased driven from the strong bookings performance as detailed below.

Funded backlog expanded $273 million driven by our ground vehicle sensing ($86 million), counter UAS and Short Range Air Defense ($50 million) and tactical computing ($57 million) programs.

These increases more than offset the reduction of the net divestiture impact of backlog $123 million from the GES disposition.

Please see “—Review of Operating Segments” below for a more detailed analysis.

Year Ended December 31, 2021 Compared With Year Ended December 31, 2020

Backlog decreased by $(430) million, or 13.1%, from $3,291 million as of December 31, 2020 to $2,861 million as of December 31, 2021.

The backlog decrease was driven by our progress on our Naval

Programs within our IMS segment.

The backlog increase was attributed to increased demand across both of our operating segments.

The backlog increase is largely attributed to the receipt of multi-submarine contracts to support the electric propulsion efforts on the Columbia Class submarine program with the U.S.

Navy resulting in an additional approximately $3 billion of unfunded backlog.

In addition to the Columbia effort we also realized a funded backlog increase driven by our Airborne, Dismounted and Ground Vehicle sensing programs as well as Naval Computing programs within our ASC segment.

Please see “— Review of Operating Segments ” below for a more detailed analysis.

Year Ended December 31, 2022 Compared With Year Ended December 31, 2021

For the year ended December 31, 2022, we generated bookings of $3,156 million, a 21.6% increase over the $2,595 million realized during the year ended December 31, 2021.

The bookings increase is attributed to both of our segments with our IMS and ASC segments realizing bookings growth of 30.6% and 16.8%, respectively.

For the year ended December 31, 2023, we generated bookings of $3,516 million, an 11.4% increase over the $3,156 million realized during the year ended December 31, 2022.

The bookings increase is attributed to increased customer demand across both of our segments with our IMS and ASC segments realizing bookings growth of 2.4% and 16.8%, respectively.

The bookings increase was most notable in our airborne and ground vehicle sensing programs as well as naval and ground tactical computing and network programs within our ASC segment.

The growth in the IMS segment is attributed to our Columbia Class efforts.

These increases were offset in part by lower new awards received on certain short-range air defense programs.

Please see “— Review of Operating Segments ” below for a more detailed analysis.

Year Ended December 31, 2021 Compared With Year Ended December 31, 2020

Our business cycle is such that program allocated funding that supports our bookings is largely funded incrementally to support 12 - 15 months of revenue output, depending on the program.

Throughout the fiscal years ended December 31, 2019 and 2020, we realized a surge in multi-year funding of programs that impacted our bookings trend for the period ended December 31, 2021 but allows for our continued revenue growth.

For the cumulative three-year period ended December 31, 2021, we have realized new awards totaling $8,573 million while generating revenue of $8,371 million a ratio of greater than 1:1.

For the year ended December 31, 2021, we generated bookings of $2,595 million, 15.1% less than the $3,055 million realized during the year ended December 31, 2020.

The decrease, as noted above, was anticipated as significant multi-year production awards received during the year ended December 31, 2020.

The multi-year production awards realized in 2020 includes the receipt of multi-year funding received on our naval power and propulsion programs to support the CVN 80/81 carriers program and production awards for next generation Dismounted Soldier Sensing and Airborne Force Protection programs with the U.S.

Army, which reduced annual bookings by $210 million and $193 million, respectively.

Key Non-GAAP Operating Measures

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Adjusted EBITDA margin (1)

11.8% 10.8% 9.6% 1.1% 9.8% 1.1% 11.6%

11.5 % 11.8 % 10.8 % (30) bps 100 bps

Adjusted Diluted EPS (1)(2)

$0.83 $0.83 $0.58 $0.01 0.6% $0.25 NM

$ 0.73 $ 0.83 $ 0.83 $ (0.10) (12.0) % $ — — %

Free cash flow (1)

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______________

NM- percentage change not meaningful

(1) Note on non-GAAP financial measures:

Throughout the discussion of our results of operations we use non-GAAP financial measures including Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Diluted EPS, and Free

Cash Flow, as measures of our overall performance.

Throughout the discussion of our results of operations we use non-GAAP financial measures including adjusted EBITDA, adjusted EBITDA margin, adjusted diluted EPS, and free cash flow as measures of our overall performance.

Definitions and reconciliations of these measures to the most directly comparable financial measure calculated and presented in accordance with U.S.

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We believe the non-GAAP financial measures presented in this document will help investors understand our financial condition and operating results and assess our future prospects.

We believe these non-GAAP financial measures, each of which is discussed in greater detail below, are important supplemental measures because they exclude unusual or non-recurring items as well as non-cash items that are unrelated to or may not be indicative of our ongoing operating results.

We believe these non-GAAP financial measures, each of which is discussed in greater detail below, are important

supplemental measures because they exclude unusual or non-recurring items as well as non-cash items that are unrelated to or may not be indicative of our ongoing operating results.

Further, when read in conjunction with our U.S.

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Adjusted EBITDA and Adjusted EBITDA Margin

We define Adjusted EBITDA as our net earnings before income taxes, amortization of acquired intangible assets, depreciation, restructuring costs, interest, deal related transaction costs, other non-operating expenses such as foreign exchange, COVID-19 response costs, non-service pension expenditures and other one-time non-operational events as well as gains (losses) on business disposals.

We define adjusted EBITDA as our net earnings before income taxes, amortization of acquired intangible assets, depreciation, restructuring costs, interest, deal-related transaction costs, other non-operating expenses such as foreign exchange, COVID-19 response costs, non-service pension expenditures, legal liability accrual reversals, and other one-time non-operational events as well as gains (losses) on business disposals.

Adjusted EBITDA margin is calculated by dividing adjusted EBITDA by revenue.

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Adjusted EBITDA

Consolidated Entity Adjusted EBITDA Reconciliation:

Consolidated Entity Reconciliation of Adjusted EBITDA:

Year Ended December 31,

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Deal-related transaction costs 7 43 5

Other non-operating expense 2 7 18

Other one-time non-operational events (7) 2 7

Gain on sale of dispositions — (354) —

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Adjusted EBITDA margin 11.5 % 11.8 % 10.8 %

Year Ended December 31, 2022 Compared With Year Ended December 31, 2021

Adjusted EBITDA increased $8 million, or 2.7%, from $310 million for the year ended December 31, 2021 to $318 million for the year ended December 31, 2022, primarily due to favorable program performance, including the improved execution and contract modification realized on the Columbia Class program efforts as noted above.

Year Ended December 31, 2021 Compared With Year Ended December 31, 2020

Adjusted EBITDA increased $42 million, or 15.7%, from $268 million for the year ended December 31, 2020 to $310 million for the year ended December 31, 2021, primarily due to the increased gross profit contribution attributed to revenue growth and favorable program performance improvements.

Adjusted EBITDA increased $6 million, or 1.9%, from $318 million for the year ended December 31, 2022, to $324 million for the year ended December 31, 2023, primarily due to increased revenue volume, favorable program performance and contract mix, offset by increases in G&A expenditures resulting from increased public operating costs and IR&D expenditures.

Adjusted EBITDA Margin

Year Ended December 31, 2022 Compared With Year Ended December 31, 2021

Adjusted EBITDA Margin increased 90 bps from 10.8% for the year ended December 31, 2021 to 11.8% for year ended December 31, 2022.

This was primarily due to gross margin expansion attributable to favorable program performance realized at our IMS segment driven by our Columbia Class efforts as noted above.

Year Ended December 31, 2021 Compared With Year Ended December 31, 2020

Adjusted EBITDA Margin increased 120 bps from 9.6% for the year ended December 31, 2020 to 10.8% for year ended December 31, 2021.

This was primarily due to gross margin expansion attributable to favorable program performance realized at our IMS segment driven by our Columbia Class efforts as noted above.

Adjusted EBITDA margin decreased 30 bps from 11.8% for the year ended December 31, 2022, to 11.5% for year ended December 31, 2023.

This was primarily due to the increase in G&A expenditures as noted above.

Adjusted Diluted EPS

Adjusted Diluted EPS – We calculate Adjusted Diluted EPS by excluding deal related transaction costs, acquisition and divestiture related expenses and COVID-19 response costs from our net earnings

(loss) to arrive at Adjusted Diluted EPS.

We calculate adjusted diluted EPS by excluding deal-related transaction costs, amortization of acquired intangible assets, restructuring costs, other non-operating expenses such as foreign exchange, COVID-19 response costs, non-service pension expenditures, legal liability accrual reversals, and other one-time non-operational events offset by the tax effect of such adjustments, as well as gains (losses) on business disposals (net of tax) from our net earnings and dividing by the diluted weighted average number of shares outstanding to arrive at adjusted diluted EPS.

We believe that adjusted diluted EPS allows investors to effectively compare our core performance from period to period by excluding items that are not indicative of, or are unrelated to, results from our ongoing business.

Adjusted Diluted EPS has limitations as an analytical tool and does not represent and should not be considered an alternative to basic or diluted EPS as determined in accordance with U.S.

Adjusted diluted EPS has limitations as an analytical tool and does not represent and should not be considered an alternative to

basic or diluted EPS as determined in accordance with U.S.

The reconciliation of adjusted diluted EPS to U.S.

GAAP EPS is shown below:

GAAP diluted EPS is shown below:

Consolidated Entity Reconciliation of Adjusted Diluted EPS:

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(Dollars in millions, except per share amounts;

shares in millions) 2023 2022 2021

Net earnings $ 168 $ 405 $ 154

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Restructuring costs 11 3 5

Other non-operating expense 2 7 18

Other one-time non-operational events (7) 2 7

Gain on sale of dispositions, net of taxes — (275) —

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Adjusted net earnings $ 194 $ 179 $ 174

Basic EPS (1)

Diluted weighted average number of shares outstanding

Diluted EPS (1)

$ 0.64 $ 1.88 $ 0.73

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(1) Gives effect to a 1,450,000-for-1 forward stock split on our common stock effected on February 25, 2021 and a 1.451345331-for-1 forward stock split on our common stock effected November 23, 2022.

Year Ended December 31, 2022 Compared With Year Ended December 31, 2021

As of December 31, 2023, there were 262,525,390 shares of common stock outstanding, increasing 2,291,357 shares from the December 31, 2022, shares outstanding of 260,234,033 .

The increased share count is attributed to shares issued to consummate the RADA merger.

Despite the increased share count, for the year ended December 31, 2022, there was minimal impact to the weighted average diluted shares outstanding, based on the timing of the incremental shares issued to consummate the transaction with RADA.

The increased share count is attributed to equity vesting and stock option exercises.

For the year ended December 31, 2023, the diluted weighted average shares outstanding totaled 264,175,239.

The weighted average diluted share count increased 49,041,882 as compared to the prior year.

The increase in weighted average shares outstanding is attributed to the current year equity grants and the impact of the RADA merger, see Note 16:

Share-based Compensation Plans for further detail.

For the period ended December 31, 2022, Adjusted EPS totaled $0.83 per share, consistent with the prior year.

The increased in Adjusted Net Earnings was offset by the increase in weighted average shares outstanding.

Year Ended December 31, 2021 Compared With Year Ended December 31, 2020

For the year ended December 31, 2021, there were no changes in the number of basic and diluted shares.

No equity awards were issued during such year.

As of December 31, 2021 and 2020, there were 210,445,073 shares of common stock outstanding (after giving effect to a 1,450,000-for-1 forward stock split on our common stock effected on February 25, 2021 and a 1.451345331-for-1 forward stock split on our common stock effected November 23, 2022 ), resulting in adjusted EPS of $0.78 and $0.50 per share, respectively.

The increase in EPS is attributed to the net earnings growth as compared to 2020.

The increase in weighted average shares outstanding is attributed to the timing of the incremental shares issued to consummate the transaction with RADA, see Note 2:

Business Acquisition for further detail.

For the year ended December 31, 2023, adjusted diluted EPS totaled $0.73 per share, a decrease of $0.10 from the prior year.

The decrease is attributed to the increase in diluted weighted average shares outstanding noted above, partially offset by the adjusted net earnings increase as shown in the table above.

Free Cash Flow

Free Cash Flow – We define free cash flow as the sum of the cash flows provided by operating activities and the cash flows provided by (used in) investing activities pertaining to capital expenditures and proceeds generated from the sale of capital assets.

We define free cash flow as the sum of the cash flows provided by (used in) operating activities, the cash flows provided by (used in) investing activities pertaining to capital expenditures, proceeds generated from the sale of capital assets and dividends received from investments, less transaction-related expenditures (net of tax) and tax payments on disposals.

We believe that free cash flow provides management and investors with an important measure of our ability to generate cash on a normalized basis.

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Additionally, free cash flow is of limited usefulness, in that it does not represent residual cash flows available for discretionary expenditures, due to the fact the measures do not deduct the payments required for debt service and other contractual obligations or payments.

The reconciliation between free cash flow and net cash provided by operating activities (the most comparable U.S.

The reconciliation between free

cash flow and net cash provided by operating activities (the most comparable U.S.

GAAP measure) is shown below:

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Free cash flow $ 159 $ 74 $ 122

Year Ended December 31, 2022 Compared With Year Ended December 31, 2021

Free cash flow decreased by $48 million, or 39.7%, to $74 million for the year ended December 31, 2022 from $122 million for the year ended December 31, 2021.

This reduction in free cash flow is attributed to supply chain delays resulting increase investment in inventory and contract asset levels.

Year Ended December 31, 2021 Compared With Year Ended December 31, 2020

Free cash flow increased by $85 million, or 114.9%, to $159 million for the year ended December 31, 2023, from $74 million for the year ended December 31, 2022.

This was primarily attributable to the increase in net earnings of $69 million realized during the period.

The free cash flow contribution from net earnings was partially offset by an increase of operating working capital relating to timing and the ongoing transition of development and the related contract asset liquidations.

The increase in free cash flow is attributed to higher overall adjusted net earnings and reduced investments in inventory and contract assets as compared to the prior year.

Factors Impacting Our Performance

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government spending as well as areas of spending growth could impact our business and results of operations.

In particular, our results can be affected by shifts in strategies and priorities on homeland security, intelligence, defense-related programs,

infrastructure and urbanization and continued increased spending on technology and innovation, including cybersecurity, artificial intelligence, connected communities and physical infrastructure (for example, the potential impact for the Russia / Ukraine conflict).

In particular, our results can be affected by shifts in strategies and priorities on homeland security, intelligence, defense-related programs, infrastructure and urbanization and continued increased spending on technology and innovation, including cybersecurity with respect to our and third parties' information networks and related systems, artificial intelligence, connected communities and physical infrastructure (for example, the potential impacts for the Russia / Ukraine conflict and the Israel-Hamas war).

Cost-cutting and efficiency initiatives, current and future budget restrictions, spending cuts and other efforts to reduce government spending and shifts in overall priorities could cause our government customers to reduce or delay funding or invest appropriated funds on a less consistent basis or not at all, and demand for our solutions or services could diminish.

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See Part I, Item 1A, “ Risk Factors—Risks Related to Our Business—Significant delays or reductions in appropriations for our programs and changes in U.S.

government priorities and spending levels more broadly may negatively impact our business and could have a material adverse impact on our business, financial condition and results of operations” Please see also Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Overview and Considerations—Business Environment” in this Annual Report for further details on U.S.

government priorities and spending levels more broadly may negatively impact our business and could

have a material adverse impact on our business, financial condition and results of operations ” and Part II, Item 7, “ Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Overview and Considerations—Business Environment ” in this Annual Report for further details on U.S.

government spending’s impact on our business.

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The majority of our total revenues are derived from fixed-price contracts;

refer to the revenue disaggregation disclosures that follow.

For fixed-price contracts, customers agree to pay a fixed amount, negotiated in advanced for a specified scope of work.

refer to the revenue disaggregation disclosures in Note 3:

Revenue from Contracts with Customers to the Consolidated Financial Statements.

For fixed-price contracts, customers agree to pay a fixed amount, negotiated in advance for a specified scope of work.

For cost-plus contracts typically we are reimbursed for allowable or otherwise defined total costs (defined as cost of revenues plus allowable general and administrative expenses) incurred, plus a fee.

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Revenue from contracts with customers is recognized when the performance obligations are satisfied through the transfer of control over the good or service to the customer, which may occur either over time or at a point in time.

Revenues for the majority of our contracts are measured using the the over time, percentage of completion cost-to-cost method of accounting to calculate percentage of completion.

Revenues for the majority of our contracts are measured using the over time, percentage of completion cost-to-cost method of accounting to calculate percentage of completion.

We believe this is an appropriate measure of progress toward satisfaction of performance obligations as this measure most accurately depicts the progress of our work and transfer of control to our customers.

Due to the long-term nature of many of our contracts, developing the estimated total cost at completion and total transaction price often requires judgment.

Due to the long-term nature of many of our contracts, developing the estimated total cost at completion often requires judgment.

Factors that must be considered in estimating the cost of the work to be completed include the nature and complexity of the work to be performed, subcontractor performance and the risk and impact of delayed performance.

After establishing the estimated total cost at completion, we follow a standard Estimate at Completion (“EAC”) process in which we review the progress and performance on our ongoing contracts$1 The following represents the impact that changes in our estimates, particularly those regarding our fixed-price development programs, have had on our revenues for the 2022, 2021 and 2020 periods, respectively:

Impact of Change in Estimates on our Revenue Results

Adjustments to original estimates for a contract's revenue, estimated costs at completion and estimated profit or loss often are required as work progresses under a contract, as experience is gained

and as more information is obtained, even though the scope of work required under the contract may not change and are also required if contract modifications occur.

When adjustments in estimated total costs at completion are determined, the related impact on revenue and operating income are recognized using the cumulative catch-up method, which recognizes in the current period the cumulative effect of such adjustments for all prior periods.

Any anticipated losses on these contracts are fully recognized in the period in which the losses become evident.

The following represents the impact that changes in our estimates, particularly those regarding our fixed-price development programs, have had on our revenues for the 2023, 2022 and 2021 periods, respectively:

Year Ended December 31,

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International revenue, including foreign military sales, foreign military financing, and direct commercial sales, accounted for approximately 10%, 7% and 5% of our revenue for the years ended December 31, 2023, 2022 and 2021, respectively.

The increase is due in part to incremental demand resulting from higher defense spending within Eastern Europe, compounded by continued military aid programs in support of Ukraine in its conflict with Russia.

These efforts are highlighted by demand for our battle management and C-UAS products.

Since our focus is primarily with the DoD and our investments are focused as such, we anticipate that international sales will continue to account for a similar percentage of revenue in the future.

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(“RADA”), a leading Israel-based provider of small-form tactical radar, to become a combined public company.

As previously disclosed, RADA shareholders retained approximately 19% ownership in the combined Company with Leonardo DRS’s parent company, Leonardo S.p.A., (MIL:

At the time of the transaction, RADA

shareholders retained approximately 19% ownership in the combined Company with Leonardo DRS’s parent company, Leonardo S.p.A., (MIL:

LDO), owning the remaining 81%.

Immediately following the closing, the Company began trading on the Nasdaq Stock Exchange and the Tel Aviv Stock Exchange under the ticker “DRS”.

Immediately following the closing, the Company began trading on the Nasdaq Stock Exchange under the ticker “DRS.”

The acquisition of RADA has been accounted for using the acquisition method of accounting in accordance with ASC 805, Business Combinations, with the Company as the accounting acquirer, which requires the assets acquired and liabilities assumed be recognized at their acquisition date fair value.

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The total purchase consideration for RADA was $511 million and is comprised of Company’s shares issued in exchange for all issued and outstanding common shares of RADA, as well as the portion of replacement stock compensation awards’ fair value attributable to pre-combination services.

Business Acquisitions and Dispositions for additional information regarding the transaction.

During the third quarter of 2021 the Company acquired substantially all the assets of Ascendant Engineering Solutions (“AES”), an advanced gimbal producer located in Austin, TX.

The purchase closed on July 28, 2021, for a purchase price of $11 million with an additional $5 million payable upon the achievement of certain financial and operational targets.

AES designs, develops and manufactures high-performance, stabilized, multi-sensor gimbal systems for the growing market of Group 1, 2 and 3 unmanned aerial systems (“UAS”) serving several branches of the DoD.

The Company is focused on gimbal payload opportunities in strategic U.S.

government programs including those intended to counter current and next-generation anti-access and area-denial systems.

We believe this acquisition enables the integration of our own Electro-Optical and Infrared systems with the gimbals of AES and is a strategic investment, offering an integrated solution for our customers in the market for lightweight military platforms including small unmanned aerial systems.

The acquisition has been accounted for as a business combination and has been integrated into our ASC segment.

On March 21, 2022, the Company entered into a definitive agreement to sell its Global Enterprise Solutions (“GES”) business to SES Government Solutions, Inc., a wholly-owned subsidiary of SES S.A., for $450 million subject to certain working capital adjustments.

Business Acquisition for additional information regarding the transaction.

On March 21, 2022, the Company entered into a definitive agreement to sell its GES business to SES Government Solutions, Inc., a wholly-owned subsidiary of SES S.A., for $450 million subject to certain working capital adjustments.

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

The transaction netted an aggregate pretax gain net of transaction costs of $309 million ($239 million after

tax) of which $323 million, was included in Other Operating income (expense) net partially reduced by aggregate transaction costs of $14 million included in Selling, General & Administrative costs and tax expenses of $70 million.

The transaction netted an aggregate pretax gain net of transaction costs of $309 million ($239 million after tax) of which $323 million, was included in other operating income (expenses), net partially reduced by aggregate transaction costs of $14 million included in general and administrative costs and tax expenses of $70 million.

GES, which was part of the ASC segment, provides commercial satellite communications to the U.S.

government and delivers satellite communications and security solutions to customers worldwide.

The Company recorded operating income for the GES business of $13 million and $29 million for the year ended December 31, 2022 and for the period ended December 31, 2021, respectively.

On April 19, 2022, we entered into a definitive sales agreement to divest our share of our equity investment in Advanced Acoustic Concepts LLC (“AAC”) for $56 million to Thales Defense & Security, Inc., the minority partner in this joint venture.

The Company recorded operating income for the GES business of $13 million and $29 million for the years ended December 31, 2022 and 2021, respectively.

On April 19, 2022, we entered into a definitive sales agreement to divest our share of our equity investment in AAC for $56 million 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.

The transaction netted an aggregate pretax gain of $31 million ($22 million net of taxes), The aggregate gain of $31 million is included in Other Operating income (expense) net offset by tax expense of $9 million.

The transaction netted an aggregate pretax gain of $31 million ($22 million net of taxes).

The aggregate gain of $31 million is included in other operating income (expenses), net offset by tax expense of $9 million.

The proceeds generated from the GES and AAC divestitures resulted in a $396 million dividend to US Holding, at that time, our sole shareholder.

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Incurred costs represent work performed that corresponds with and thereby best depicts the transfer of control to the customer.

Under flexibly priced contracts, which consists of 13%,13% and 13% of our total revenues for December 31, 2022, 2021 and 2020, respectively, we are reimbursed for allowable or otherwise defined total costs (defined as cost of revenues plus allowable general and administrative expenses) incurred, plus a fee.

Under flexibly priced contracts, which consists of 16%,13% and 13% of our total revenues for December 31, 2023, 2022 and 2021, respectively, we are reimbursed for allowable or otherwise defined

total costs (defined as cost of revenues plus allowable general and administrative expenses) incurred, plus a fee.

The contracts may also include incentives for various performance criteria, including quality, timeliness, cost-effectiveness or other factors.

In addition, costs are generally subject to review by clients and regulatory audit agencies, and such reviews could result in costs being disputed as non-reimbursable under the terms of the contract.

Revenue for flexibly priced contracts are generally recognized as services performed and are contractually billable.

Revenue for flexibly priced contracts are generally recognized as services are performed and are contractually billable.

Please refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” and Note 3:

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Material costs include raw materials, purchased components and sub-assemblies and outside processing and inbound freight.

Labor and overhead costs consist of direct and indirect manufacturing costs, including wages and fringe

benefits, operating supplies, depreciation and amortization, occupancy costs, and purchasing, receiving, inspection costs and inbound freight costs.

Labor and overhead costs consist of direct and indirect manufacturing costs, including wages and fringe benefits, operating supplies, depreciation and amortization, occupancy costs, and purchasing, receiving, inspection costs and inbound freight costs.

General and Administrative Expenses

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The following is a discussion of operating results for each of our operating segments.

We have elected to use Revenue, Adjusted EBITDA, Adjusted EBITDA Margin, Bookings and Backlog to provide detailed information on our segment performance.

We have elected to use revenue, adjusted EBITDA, adjusted EBITDA margin, bookings and backlog to provide

detailed information on our segment performance.

Additional information regarding our segments can be found in Note 19:

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2022 Variance 2022 vs.

2021 Variance

(Dollars in millions) 2023 2022 2021 $ % $ %

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Corporate & Eliminations (26) (23) (20) (3) 13.0 % (3) 15.0 %

Total revenue $ 2,693 $ 2,879 $ 2,778 $ (186) (6.5) % $ 101 3.7 %

Total revenues $ 2,826 $ 2,693 $ 2,879 $ 133 4.9 % $ (186) (6.5) %

Adjusted EBITDA:

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Adjusted EBITDA margin:

ASC 11.5 % 11.3 % 10.9 % 0.2 % 1.3 % 0.4 % 3.7 %

IMS 12.1 % 9.4 % 6.6 % 2.7 % 29.0 % 2.8 % 42.4 %

ASC 11.7 % 11.5 % 11.3 % 20 bps 20 bps

IMS 10.7 % 12.1 % 9.4 % (140) bps 270 bps

ASC $ 2,307 $ 1,975 $ 1,691 $ 332 16.8 % $ 284 16.8 %

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Total backlog $ 7,751 $ 4,269 $ 2,861 $ 3,482 81.6 % $ 1,408 49.2 %

Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021 and 2020

Year Ended December 31, 2022 Compared With Year Ended December 31, 2021

In total, ASC segment revenue decreased $207 million, or 11%, from $1,940 million for the year ended December 31, 2021 to $1,733 million for the year ended December 31, 2022.

The decrease is primarily attributed to the divestiture timing of the GES disposition compared to the RADA acquisition resulting in a net negative divestiture impact for the year of $108 million.

The remaining shortfall is largely attributed supply chain delays impacting the receipt and revenue conversion across the segment and the

reduction in order quantity of our tactical computing products resulting from customer order delays attributed to reduced installation rates minimizing the annual buy ($47 million).

The reduced installation rates are attributed to prior year COVID-19 impacts to staffing levels.

Year Ended December 31, 2021 Compared With Year Ended December 31, 2020

In total, ASC segment revenue decreased $18 million, or 1%, from $1,958 million for the year ended December 31, 2020 to $1,940 million for the year ended December 31, 2021.

Though the segment realized revenue growth on the transition from development to production on our recently awarded Next Generation dismounted soldier targeting system ($37 million) and the continuation of providing upgraded vehicle sensing for the Bradley Fighting Vehicle ($16 million), both with the U.S.

Army, this growth was offset by a reduction in Second Generation ground vehicle components with the U.S.

Army of $18 million and, reduced demand of certain computing hardware and antenna programs with the U.S.

Navy of $17 million and $15 million, respectively.

Additionally, we realized a decline in bandwidth awards on our Global Network programs with various DoD customers reducing revenue by $27 million as compared to the prior year.

______________

NM- percentage change not meaningful

Year Ended December 31, 2023, Compared to the Year Ended December 31, 2022

In total, ASC segment revenue increased $98 million, or 5.7%, from $1,733 million for the year ended December 31, 2022 to $1,831 million for the year ended December 31, 2023.

The increase is primarily attributed to the increased demand realized throughout the segment.

Major drivers include continued expansion of our airborne and ground vehicle sensing programs as well as incremental sales of tactical radar and tactical communication programs.

The increased sales were partially offset by the divestiture of GES.

Adjusted EBITDA and Adjusted EBITDA Margin

Year Ended December 31, 2022 Compared With Year Ended December 31, 2021

ASC’s Adjusted EBITDA decreased by $21 million, or 9.5%, from $220 million for the year ended December 31, 2021 to $199 million for the year ended December 31, 2022.

Despite the EBITDA reduction, Adjusted EBITDA Margin expanded slightly from 11.3% for the year ended December 31, 2021 to 11.5% for the year ended December 31, 2022.

The decrease in Adjusted EBITDA is driven by the reduction in overall revenue contribution and the absorption of G&A expenditures for the period.

This reduction was largely offset by improved contract performance and profit contribution across the segment including our dismounted sensing and tactical computing & networks lines of business.

Year Ended December 31, 2021 Compared With Year Ended December 31, 2020

ASC’s adjusted EBITDA increased by $16 million, or 8.0%, from $199 million for the year ended December 31, 2022 to $215 million for the year ended December 31, 2023.

The EBITDA growth, contributed to the Adjusted EBITDA Margin increase from 10.9% for the year ended December 31, 2020 to 11.3% for the year ended December 31, 2021.

The increase in Adjusted EBITDA is primarily attributed to the revenue increase noted above coupled with performance improvements in our electronic warfare, signal intelligence, computing hardware programs for the U.S.

Navy’s shipboard launch systems and Bradley Ground vehicle sensing programs.

Offsetting the improved program performance and revenue expansion is increased general and administrative costs driven primarily by increased investments in IR&D efforts to support the continued market position of the segment.

The increased discretionary expenditures offset the margin expansion realized by improved program performance resulting in a slight increase in Adjusted EBITDA margin of 40 basis points to 11.3%.

Year Ended December 31, 2022 Compared With Year Ended December 31, 2021

Adjusted EBITDA margin expanded slightly from 11.5% for the year ended December 31, 2022 to 11.7% for the year ended December 31, 2023.

The increase in adjusted EBITDA is driven by the increase in overall revenue contribution noted above as well as favorable contract mix, largely attributed to increased tactical radar sales as compared to the prior year.

This was offset in part by increased G&A expenditures driven by allocated public company costs and increased IR&D investments during the period.

ASC’s bookings increased by $332 million, or 16.8%, from $1,975 million for the year ended December 31, 2022 to $2,307 million for the year ended December 31, 2023.

The increase in new awards is driven by our alignment of customer priorities to combat the emerging threats our service men and women face in today’s environment.

The increase vs the prior year is highlighted by increased demand for our dismounted soldier ($103 million), tactical computing ($101 million), ground vehicle sensing ($75 million) and EW ($22 million) products which more than offset the $54 million net divestiture impact from the GES sale.

Year Ended December 31, 2021 Compared With Year Ended December 31, 2020

ASC’s bookings decreased by $328 million, or 16.2%, from $2,019 million for the year ended December 31, 2020 to $1,691 million for the year ended December 31, 2021.

The bookings reduction to the prior year is attributed to multi-year production awards realized on our Next Generation of Family of Soldier Sensing Systems and Airborne Missile Warning programs with the U.S.

Army which resulted a reduction in bookings of $156 million and $37 million, respectively.

Additionally, the lower demand of ruggedized computing maintenance support programs with the U.S.

Army attributed to the decease over the prior year.

Our bookings continue to be highlighted by our foundational programs including follow-on awards received for our ruggedized computing and battle management systems with the U.S.

Army ($138 million), our Submarine hardware upgrade programs with the U.S.

Navy ($100 million) and our Global Network program awards with Special Operations Command (“SOCOM”) and the U.S.

Army ($132 million).

The bookings reduction was partially offset by the receipt of a Ground Vehicle Remote Weapon Sight program with the U.S.

Army ($57 million) and the Air Force decision to equip the Joint Strike Fighter (JSF) lot 15 with pilot training systems ($37 million).

Year Ended December 31, 2022 Compared With Year Ended December 31, 2021

ASC’s backlog decreased by $106 million, or 6.0%, from $1,762 million for the year ended December 31, 2021 to $1,868 million for the year ended December 31, 2022.

This was attributed to the new award growth noted above coupled with the decline in revenue realized due to supply chain delays.

These positive impacts to backlog were offset by the disposal of the GES backlog.

Year Ended December 31, 2021 Compared With Year Ended December 31, 2020

ASC’s backlog decreased by $304 million, or 14.7%, from $2,066 million for the year ended December 31, 2020 to $1,762 million for the year ended December 31, 2021.

This was attributed to anticipated progress on the multi-year production awards received in 2020 for our Next Generation Soldier Sensing program with the U.S.

Year Ended December 31, 2022 Compared With Year Ended December 31, 2021

IMS revenue increased by $24 million, or 3%, from $959 million for the year ended December 31, 2021 to $983 million for the year ended December 31, 2022.

The increase in revenue is driven from our alignment with the emerging threat profile in the areas of Counter UAS / Short range air defense and the submarine propulsion efforts on the Columbia Class program.

These capabilities contributed year over year revenue growth of $26 million and $70 million, respectively.

The growth in revenue in these lines of business were offset in part by timing of surface ship efforts ($52 million) and delays in the next purchase of active protection systems ($16 million)

Year Ended December 31, 2021 Compared With Year Ended December 31, 2020

The increase in new awards is driven by our alignment of customer priorities to combat the emerging threats our service men and women face in today’s environment, driving a book to bill ratio of 1.3 to 1 for the year.

The increase vs the prior year is highlighted by increased demand for our airborne, dismounted and ground vehicle sensing programs, new awards realized on our naval network and computing, IRCM and next generation tactical communications programs, as well as increase in bookings attributed to tactical radar demand.

The combination of these awards more than offset a reduction in new awards for our tactical computing programs and the contribution of the GES awards realized in the prior year.

ASC’s backlog increased by $534 million, or 28.6%, from $1,868 million for the year ended December 31, 2022 to $2,402 million for the year ended December 31, 2023.

This was attributed to the increased demand and new awards realized (noted above) which were 1.3x that of the revenue generated during the period, driving an increase in the backlog position.

IMS revenue increased by $38 million, or 3.9%, from $983 million for the year ended December 31, 2022 to $1,021 million for the year ended December 31, 2023.

The revenue increase was driven by contracted efforts to provide the U.S.

Navy to support the CVN 80/81 carrier ($72 million) and Columbia Class programs ($36 million).

The IMS revenue growth was partially offset by

the completion of the urgent operational needs TROPHY TM APS program ($93 million) which realized significant production efforts in 2020

The increase is attributed primarily to our increased output within our electric power and propulsion programs with the Navy’s premier submarine initiative, the Columbia Class submarine.

Additionally, our non-Columbia power demand also contributed to the revenue growth as compared to the prior year.

The naval growth was offset by the timing of contract awards and revenue realized in our ground systems integration efforts within the segment.

Adjusted EBITDA and Adjusted EBITDA Margin

Year Ended December 31, 2022 Compared With Year Ended December 31, 2021

In total, IMS’s Adjusted EBITDA increased by $29 million, or 32.2%, from $90 million for the year ended December 31, 2021 to $119 million for the year ended December 31, 2022.

Adjusted Margin increased 260 bps from 9.4% for the year ended December 31, 2021 to 12.1% for the year ended December 31, 2022.

This increase in Adjusted EBITDA and margin improvement was attributed to the revenue expansion coupled with improved program performance on fixed price development program efforts including submarine power and propulsion system components for the U.S.

Navy’s Columbia Class program, including the $15 million positive impact related to the contract modification combining the 2nd production shipset.

Year Ended December 31, 2021 Compared With Year Ended December 31, 2020

In total, IMS’s Adjusted EBITDA increased by $35 million, or 63.6%, from $55 million for the year ended December 31, 2020 to $90 million for the year ended December 31, 2021.

Adjusted Margin increased 280 bps from 6.6% for the year ended December 31, 2020 to 9.4% for the year ended December 31, 2021.

Navy’s Columbia Class program which realized losses of $37 million in the period ended December 31, 2020 as compared to $3 million during the current year.

Year Ended December 31, 2022 Compared With Year Ended December 31, 2021

Bookings as of December 31, 2022 were $1,181 million, an increase of $277 million as compared to the period ended December 31, 2021.

The new awards are highlighted by the receipt of awards totaling $322 million for short range air defense and CUAS programs during the period and an increase of $52 million over the 2021 contribution.

Additionally, our power efforts on submarines contributed an additional $312 million of funded awards during the year, an increase of $187 million as compared to the period ended December 31, 2021, primarily attributed to our Columbia Class funding.

Our fire system support systems also contributed an additional $86 million as compared to the 2021 output.

These new awards were offset in part by the timing of power awards on surface ships which reduced bookings by $55 million during the year.

Year Ended December 31, 2021 Compared With Year Ended December 31, 2020

Bookings as of December 31, 2021 were $904 million highlighted by the receipt of awards totaling $250 million for mission equipment packages for counter unmanned and short range air defense programs and $140 million for electrical propulsion components for production efforts on the Columbia Class program.

The bookings decreased $(132) million, or 12.7%, from $1,036 million as of December 31, 2020 driven primarily to the prior year multi-year awards received in the prior year to support the CVN 80/81 carriers driving a reduction in annual bookings of $210 million.

Year Ended December 31, 2022 Compared With Year Ended December 31, 2021

In total, IMS’s adjusted EBITDA decreased by $10 million, or 8.4%, from $119 million for the year ended December 31, 2022 to $109 million for the year ended December 31, 2023, despite the increased revenue output noted above.

As a result, adjusted EBITDA margin decreased 140bps from 12.1% for the year ended December 31, 2022 to 10.7% for the year ended December 31, 2023.

This decrease in adjusted EBITDA and margin decline is attributed to increased G&A expenditures including allocated public company costs, increased IR&D expenditures and extensive bid and proposal (B&P) efforts to secure the Columbia Class “Rest of Class” contract awards.

These expenditures were partially offset by improved program performance and gross margin contribution within our Naval Power programs.

Bookings for the year ended December 31, 2023 were $1,209 million, an increase of $28 million as compared to the year ended December 31, 2022, driving a book to bill ratio of 1.2 to 1.

The new awards are highlighted by the receipt of awards totaling approximately $490 million for new Columbia Class funding, approximately $300 million of additional naval power awards outside of the Columbia Class programs and over $170 million of short-range air defense and C-UAS programs during the period.

Backlog increased by $2,948 million, or 122.8%, to $5,349 million for the year ended December 31, 2023 from $2,401 million for the year ended December 31, 2022.

The backlog increase is largely attributed to the $1,083 million of unfunded backlog realized on the Columbia Class, driven primarily to

the multi-ship contract award.

In addition, funded backlog also expanded over the prior year driven by the emerging threats requiring our CUAS and short-range air defense solutions ($60 million), fire support systems ($75 million) and funded efforts on the Columbia Class program ($132 million).

Year Ended December 31, 2021 Compared With Year Ended December 31, 2020

Backlog decreased by $126 million, or 10.3%, to $1,099 million for the year ended December 31, 2021 from $1,225 million for the year ended December 31, 2020.

The backlog reduction is due primarily to progress on our awards to support the CVN 80/81 program ($85 million).

The backlog increase is largely attributed to the approximately $3 billion of unfunded backlog realized on the Columbia Class efforts, driven primarily by the multi-ship “Rest of Class” contract awards.

Quarterly Results

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These quarterly operating results are not necessarily indicative of our operating results for a full year or any future period.

(Dollars in millions, except per share amounts) Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1

(Dollars in millions) Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1

Total revenues $ 926 $ 703 $ 628 $ 569 $ 820 $ 634 $ 627 $ 612

6 unchanged sentences

_______________

(1) See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Financial and Operating Measures—Non-GAAP Financial Measures” above for definitions of these measures.

Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Diluted EPS and free cash flow are non-GAAP measures.

See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Non-GAAP Operating Measures” above for reconciliations of these measures to the most directly comparable financial measure calculated and presented in accordance with U.S.

(1) Adjusted EBITDA and free cash flow are non-GAAP measures.

See Part II, Item 7, “ Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Financial and Operating Measures—Non-GAAP Financial Measures ” above for definitions of these measures and reconciliations of these measures to the most directly comparable financial measure calculated and presented in accordance with U.S.

Liquidity and Capital Resources

We endeavor to ensure the most efficient conversion of operating income into cash for deployment in our business and to maximize shareholder value through cash deployment activities.

We endeavor to ensure the most efficient conversion of operating income into cash for deployment in our business and to maximize stockholder value through cash deployment activities.

In addition to our cash position, we use various financial measures to assist in capital deployment decision-making, including cash provided by operating activities and free cash flow, a non-GAAP measure described in more detail below.

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Net cash provided by operating activities $ 205 $ 33 $ 178

Net cash provided by (used in) investing activities 436 39 (70)

Net cash used in financing activities (403) (38) (80)

Net cash (used in) provided by investing activities (59) 436 39

Net cash provided by (used in) financing activities 15 (403) (38)

Effect of exchange rate changes on cash and cash equivalents — — —

Net increase (decrease) in cash and cash equivalents $ 66 $ 179 $ (24)

Net increase in cash and cash equivalents $ 161 $ 66 $ 179

Free cash flow (1)

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(1) Free cash flow is a Non-GAAP measure.

The reasons we use this Non-GAAP financial measure and its reconciliation to the most directly comparable U.S.

GAAP financial measure is provided above under “See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Non-GAAP Operating Measures” above for reconciliations of these measures to the most directly comparable financial measure calculated and presented in accordance with U.S.

Year Ended December 31, 2022 Compared to the Years Ended December 31, 2021 and 2020

See Part II, Item 7, “ Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Non-GAAP Operating Measures ” above for definition and reconciliation of this measure to the most directly comparable financial measure calculated and presented in accordance with U.S.

Year Ended December 31, 2023, Compared to the Year Ended December 31, 2022

Operating Activities

Year Ended December 31, 2022 Compared With Year Ended December 31, 2021

We generated cash from operating activities of $205 million for the year ended December 31, 2023, as compared to $33 million for the year ended December 31, 2022.

The decrease in cash from operating activities is attributed to the tax payments generated from dispositions of GES and AAC during the period of $79 million and the transaction related cash outlays of $29 million to support our disposition and merger activities.

The increase in cash from operating activities is attributed to lower cash outlays for working capital during the current year.

Additionally, the prior year cash from operating activities included tax payments generated from dispositions of GES and AAC of $78 million.

In total our changes in our assets and liabilities absorbed $14 million of cash for the year ended December 31, 2023, compared to $82 million for the year ended December 31, 2022.

The growth in net assets is primarily attributed to investments in contract assets and inventory as of December 31, 2023, which resulted in a $36 million and $10 million use of cash during the period, respectively.

Offsetting this working capital growth was an increase in contract liabilities of $72 million generated primarily from advances from customers.

Year Ended December 31, 2021 Compared With Year Ended December 31, 2020

We generated cash from operating activities of $178 million for the year ended December 31, 2021 as compared to $125 million for the year ended December 31, 2020.

This increase was primarily attributed to increased Net Income driven by our improved profitability and reduction in interest related expenditures which was offset in part by an increase in working capital during the period.

In total our changes in our assets and liabilities absorbed $65 million of cash for the year ended December 31, 2021 compared to $46 million for the year ended December 31, 2020.

The growth in net assets is primarily attributed to investments in Contract Assets as of December 31, 2021 which resulted in a $71 million use of cash during the period.

Additionally, we also generated higher accounts receivables driving a cash usage of $54 million.

This increase in working capital was partially offset by a $42 million reduction in our inventory levels attributed to progress on certain sensor programs within our ASC segment.

Additionally accounts payable contributed to a use of cash of $59 million during the period.

Offsetting this working capital growth was an increase in contract liabilities of $102 million generated primarily from advances from customers within our IMS segment.

Investing Activities

Year Ended December 31, 2022 Compared With Year Ended December 31, 2021

Investing activities generated $436 million of cash during the year ended December 31, 2022 as compared to $39 million usage during the year ended December 31, 2021.

The $397 million improvement in investing cash inflows is attributed to the gross proceeds generated from the disposition of the GES and AAC assets during the period.

Year Ended December 31, 2021 Compared With Year Ended December 31, 2020

Investing activities generated $39 million of cash during the year ended December 31, 2021 as compared to $70 million usage during the year ended December 31, 2020.

The $109 million improvement in investing cash inflows is attributed to the 2020 loan of $115 million issued to US Holding.

The loan was repaid during the 2021 fiscal year and a subsequent loan was not issued in December 2021.

In addition during the year ended December 31, 2021 we completed an acquisition for $11 million offsetting the increase from our other investing activities.

Summary of Significant Accounting Policies f or further detail on the AES acquisition.

Investing activities used $59 million of cash during the year ended December 31, 2023 as compared to $436 million generated during the year ended December 31, 2022.

The $495 million decrease is attributed to the gross proceeds generated from the disposition of the GES and AAC assets during the prior year.

Financing Activities

Year Ended December 31, 2022 Compared With Year Ended December 31, 2021

Cash used in financing activities for the year ended December 31, 2022 and December 31, 2021 was $403 million and $38 million, respectively.

Cash used in financing activities consists primarily of a special dividend of $396 million issued subsequent to the disposition of the GES and AAC assets.

Year Ended December 31, 2021 Compared With Year Ended December 31, 2020

Cash used in financing activities for the year ended December 31, 2021 and December 31, 2020 was $38 million and $80 million, respectively.

Cash used in financing activities consisted of the $20 million payment of our 5.0% Daylight term loan and the repayment of other short term debt obligations of $12 million.

Cash provided by financing activities for the year ended December 31, 2023 was $15 million compared to cash used in financing activities for the year ended December 31, 2022 of $403 million.

Cash used in financing activities in the prior year consisted primarily of a special dividend of $396 million issued subsequent to the disposition of the GES and AAC assets.

The financing cash inflow in the current period is primarily attributed to the exercise of stock options during the year.

Free Cash Flow

Year Ended December 31, 2022 Compared With Year Ended December 31, 2021

Free cash flow decreased by $49 million, or 39.7%, to $74 million for the year ended December 31, 2022 as compared to $122 million for the year ended December 31, 2021.

This was primarily due to growth in our inventory and contract assets driven by supply chain delays and mitigation efforts to combat extending lead times.

This was partially offset by advances received from customers during the period.

See cash flows from operations for further detail.

Year Ended December 31, 2021 Compared With Year Ended December 31, 2020

Free cash flow increased by $85 million, or 114.9%, to $159 million for the year ended December 31, 2023, as compared to $74 million for the year ended December 31, 2022.

This was primarily due to growth in net income and a reduction in Inventory of $42 million.

This was partially offset by investments in our net asset position.

See cash flows from operations for further detail.

This was primarily due to a reduction in working capital investments, coupled with an increase in customer advance payments during the period.

See operating activities discussion above for further detail.

Material Cash Requirements

As of December 31, 2023, our material cash requirements were as follows:

Payments Due by Period

(Dollars in millions) Total Less than

Years More than

Borrowings with related parties (1)

$ 246 $ 34 $ 212 $ — $ —

(Dollars in millions) Total Due Within

Loans from banks (1)

1 unchanged sentence

Finance leases and other (2)

243 17 33 30 163

Post-retirement obligations (3)

130 12 26 26 66

Purchase commitments (4)

815 683 98 13 21

Total $ 2,004 $ 971

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Debt of our Notes to Consolidated Financial Statements.

(3) Post-retirement obligations include those amounts we expect to pay out in benefits payments and are further explained in Note 14:

(3) Post-retirement obligations include those amounts we expect to pay out in benefit payments and are further explained in Note 14:

Pension and Other Postretirement Benefits of our Notes to Consolidated Financial Statements.

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• Revenue Recognition and Contract Estimates

• Reviews for Impairment of Goodwill and Long-Lived Assets

• Reviews for Impairment of Goodwill

• Pension Assumptions

3 unchanged sentences

We recognize revenue from contracts with customers using the five-step model prescribed in ASC 606.

Substantially all of our contracts are accounted for using the over time, percentage of completion cost-to-cost method of accounting as determined by the ratio of cumulative costs incurred to date to estimated total contract costs at completion.

Substantially all of our contracts are accounted for using the over time, percentage of completion

cost-to-cost method of accounting as determined by the ratio of cumulative costs incurred to date to estimated total contract costs at completion.

5 unchanged sentences

Revenue and profit in future periods of contract performance are recognized using the adjusted estimate.

The aggregate impact of adjustments in contract estimates that impacted our revenue and profit totals are $26 million, $34 million, and $77 million for 2022, 2021, and 2020, respectively.

The aggregate impact of adjustments in contract estimates that negatively impacted our revenue and profit totals are $23 million, $26 million, and $34 million for 2023, 2022, and 2021, respectively.

The changes in estimates are primarily attributed to changes in our firm-fixed-priced development type programs.

3 unchanged sentences

Revenue from Contracts with Customers to the Consolidated Financial Statements.

Reviews for Impairment of Goodwill and Long-lived Assets

Reviews for Impairment of Goodwill

Goodwill represents the excess purchase price paid to acquire a business over the fair value of net assets acquired.

10 unchanged sentences

Due to the variables inherent in our estimates of fair value, differences in assumptions may have a material effect on the result of our impairment analysis.

As of December 31, 2022 we performed a quantitative analysis on each of our six existing reporting units noting no impairments.

As of December 31, 2021, we completed qualitative assessments for our reporting units that did not identify the need for further analysis.

Historically, we assessed the recoverability of our goodwill as the last day of our fourth quarter.

In 2023, we changed the date of our annual goodwill impairment assessment to the first day of our fourth quarter to better align with our strategic business planning process and allow for operational expediency.

The Company believes this change does not represent a material change to a method of applying an

accounting principle.

This voluntary change in accounting principle, applied prospectively, is preferable as it aligns the annual goodwill impairment test date more closely with our internal budgeting process and did not delay, accelerate or avoid an impairment of our goodwill.

As of October 1, 2023 and December 31, 2022, we performed our annual goodwill impairment testing on each of our reporting units noting no impairments.

As a result, no impairments to goodwill were recorded.

Long-lived assets held for use, which primarily includes finite-lived intangible assets and property, plant and equipment, are evaluated for impairment whenever events or circumstances indicate that the undiscounted net cash flows to be generated by their use over their expected useful lives and eventual disposition are less than their carrying value.

The long-term nature of these assets requires the estimation of their cash inflows and outflows several years into the future and only takes into consideration technological advances known at the time of the impairment test.

Pension Assumptions

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The provision for federal, state, foreign and local income taxes is calculated on income before income taxes based on current tax law and includes the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities.

Such provision differs from the amounts

currently payable because certain items of income and expense are recognized in different reporting periods for financial reporting purposes than for income tax purposes.

Such provision differs from the amounts currently payable because certain items of income and expense are recognized in different reporting periods for financial reporting purposes than for income tax purposes.

We recognize liabilities for uncertain tax positions when it is more likely than not that a tax position will not be sustained upon examination and settlement with various taxing authorities.

Liabilities for uncertain tax positions are measured based upon the largest amount of benefit that is greater than 50% likely to be realized upon ultimate settlement.

Liabilities for

uncertain tax positions are measured based upon the largest amount of benefit that is greater than 50% likely to be realized upon ultimate settlement.

We recognize interest and penalties related to uncertain tax positions in our income tax expense.

As of December 31, 2022 and December 31, 2021, we had gross deferred tax assets of $208 million and $179 million, respectively, and deferred tax asset valuation allowances of $17 million and $10 million, respectively.

The deferred tax assets principally relate to benefit accruals, inventory obsolescence, tax benefit carryforwards and contract reserves.

The deferred tax assets as of December 31, 2022 and December 31, 2021 include $18 million and $19 million, respectively, related to tax benefit carryforwards associated with net operating losses.

As of December 31, 2023 and 2022, we had gross deferred tax assets of $258 million and $208 million, respectively, and deferred tax asset valuation allowances of $21 million and $17 million, respectively.

The deferred tax assets principally relate to capitalized R&D, benefit accruals, inventory obsolescence, tax benefit carryforwards and contract reserves.

The deferred tax assets as of December 31, 2023 and 2022 include $11 million and $18 million, respectively, related to tax benefit carryforwards associated with net operating losses.

The increase in the deferred tax asset as compared to the prior year is primarily attributed to the capitalization of R&D expenditures pursuant to Section 174 of the Tax Code.

This section was as part of the Tax Cuts and Jobs Act of 2017 (the “TCJA”) and became effective for tax years beginning in 2022.

This section was a part of the Tax Cuts and Jobs Act of 2017 and became effective for tax years beginning in 2022.

Accounting Standards Updates (ASU)

1 unchanged sentence

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 7. Management’s Discussion and Analysis