What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-03-03 compared with 2024-02-28 · 161 added, 335 removed, 331 unchanged (60% of the section changed)

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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”).

Department of Defense (the “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 address evolving and emerging threats.

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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.

We provide power conversion, control, distribution and propulsion systems for the U.S.

Navy’s top priority shipbuilding programs, including the Columbia Class ballistic missile submarine, the first modern U.S.

electric drive submarine.

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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 Business Excellence initiative called Always Performing for Excellence (“APEX”) program.

Part of this learning has resulted in institutionalizing our continuous improvement process through our Business Excellence initiative called the 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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Global Conflicts

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

In February 2022, Russia invaded and began occupying parts of Ukraine.

Since that time, western powers, including the U.S., have pledged support with humanitarian and military aid.

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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 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.

The ongoing conflicts in Israel and the broader Middle East region have the potential to evolve quickly creating uncertainty, 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.

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DRS has direct exposure to Israel principally through its RADA operations with approximately 5% of our workforce as of December 31, 2024 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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In March 2024, 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.

President’s fiscal year (“FY”) 2025 budget request was released and included $850 billion in base funding for national defense programs, which is largely flat over prior year levels.

Following that, the FY 2025 National Defense Authorization Act (“NDAA”) was passed by Congress late in 2024 and signed into law by the President in December 2024.

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.

The NDAA authorizes $850 billion in defense spending, including increases in procurement, research, development, testing and engineering.

To prevent a government shutdown at the end of fiscal year 2024, Congress passed two Continuing Resolutions (“CRs”) to fund the government.

The most recent CR was passed into law on December 21, 2024.

The new measure creates extensions effective through March 14, 2025, allowing lawmakers more time to potentially complete the fiscal year 2025 appropriations bills.

In the event of a U.S.

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

Additionally, the current U.S.

administration has discussed various changes to defense spending levels ranging from across-the-board percentage cuts, to a change in spending allocations in favor of new priorities, and potential increases in the top-line spending profile.

It remains unclear whether and to what extent the DoD’s budget may

change and, if it does, to what extent our business, financial condition and results of operations may be affected.

Operating Performance Assessment and Reporting

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For contracts accounted for in this way, our reported revenues may contain amounts which we have not billed to customers if we have incurred costs, and recognized related profits, in excess of billed progress or performance based payments.

GAAP, contract costs, including allowable general and administrative expenses on certain government contracts, are charged to work in progress inventory and are written off to costs and expenses as revenues are recognized.

The Federal Acquisition Regulations (“FAR”) and the defense supplement (“DFARS”), incorporated by reference in U.S.

GAAP, contract costs are charged to work in progress inventory and are expensed as revenues are recognized.

The Federal Acquisition Regulation (“FAR”) and the Defense Federal Acquisition Regulation Supplement (“DFARS”), incorporated by reference in U.S.

government contracts, provide that internal research and development costs are allowable general and administrative expenses.

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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.

Results from Operations

Components of Operations

Revenue consists primarily of product related revenue, which represented 94%, 93% and 91% of our total revenues for the periods ended December 31, 2024, 2023 and 2022, respectively.

The remaining revenue was generated from service related contracts.

Additionally, 84%, 84% and 87% of our revenue for December 31, 2024, 2023 and 2022, respectively, was derived from firm-fixed price contracts.

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

Revenue on fixed-price contracts is generally recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our

performance obligations.

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

Under flexibly priced contracts, which consisted of 16%, 16% and 13% of our total revenues for December 31, 2024, 2023 and 2022, 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 are performed and are contractually billable.

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:

Revenue from Contracts with Customers to the Consolidated Financial Statements for additional information.

Cost of Revenues

Cost of revenues includes materials, labor and overhead costs incurred in the manufacturing, design, and provision of products and services sold in the period as well as warranty costs.

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.

General and Administrative Expenses

General and administrative (“G&A”) expenses include general and administrative expenses not included within cost of revenues such as salaries, wages and fringe benefits, facility costs and other costs related to these indirect functions.

Additionally, general and administrative expenses include internal research and development costs as well as expenditures related to bid and proposal efforts.

Results of Operations

The following discussion of operating results is intended to help the reader understand the results of operations and financial condition of the Company, as well as individual segments, for the year ended December 31, 2024 as compared to the year ended December 31, 2023, and for the year ended December 31, 2023 compared to December 31, 2022.

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Year Ended December 31, 2024 vs.

2022 Variance 2022 vs.

2021 Variance

2023 Change 2023 vs.

(Dollars in millions, except per share amounts) 2024 2023 2022 $ % $ %

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

Total cost of revenues (2,178) (2,118) (2,332) (60) 2.8 % 214 (9.2) %

$ 3,234 $ 2,826 $ 2,693 $ 408 14.4 % $ 133 4.9 %

Cost of revenues

(2,498) (2,178) (2,118) (320) 14.7 % (60) 2.8 %

Gross profit $ 736 $ 648 $ 575 $ 88 13.6 % $ 73 12.7 %

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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.

(1) Gives effect to a 1.451345331-for-1 forward stock split on our common stock effected November 23, 2022.

(2) See Part I, Item 1A, “ Risk Factors—Risks Relating to Our Business—We may not realize the full value of our total estimated contract value or bookings, including as a result of reduction of funding or cancellation of our U.S.

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Year Ended December 31, 2024 Compared With Year Ended December 31, 2023

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 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.

Our operating results for the year ended December 31, 2024, are highlighted by our record $8.5 billion of backlog and over $4 billion of new orders, demonstrating the strong customer demand for our mission critical technologies.

Embedded in the record backlog is 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, Network Computing and Advanced Sensing programs.

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.

Revenue of $3,234 million for the year ended December 31, 2024 represented an increase of $408 million (14.4%) driven by increased demand across our program portfolio.

Our gross profit of $736 million increased $88 million (13.6%) from the prior year results attributed to the increased volume.

Despite this growth, gross margin saw a slight decrease of 10 bps driven in part by program related impacts from our Ground Surveillance program and unfavorable revenue mix, offset in part by improved program execution on our Columbia Class program.

Our operating earnings and net earnings increased $62 million (26.8%)

and $45 million (26.8%) from the year ended December 31, 2023, respectively, attributed to the higher gross profit, and lower interest expense, offset slightly by higher tax expense.

For the year ended December 31, 2024, revenue increased by $408 million, or 14.4%, to $3,234 million from $2,826 million for year ended December 31, 2023.

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.

The revenue increase in 2024 was attributed to increased customer demand across our portfolio, including our increased revenue contribution from international customers as well as a stabilized supply chain enabling more efficient execution.

The revenue growth is attributed to both of our operating segments and is highlighted by our Force Protection and Electric Power and Propulsion programs within our IMS segment and Advanced Sensing in our ASC segment.

See “— Review of Operating Segments ” below for additional detail.

Cost of Revenues

Cost of revenues increased $320 million, or 14.7%, from $2,178 million to $2,498 million for the year ended December 31, 2024, due to the 14.4% 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).

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.

The increase was further impacted by realized adjustments on cost at completion estimates which negatively impacted earnings with net charges totaling approximately 1% of revenue for the year ended December 31, 2024, relatively consistent with the prior year (see Note 3:

Revenue from Contracts with Customers to the Consolidated Financial Statements for further detail), which includes the aforementioned ground vehicle surveillance program noted above.

Additionally, revenue mix and the impact of cost increases tied to germanium used in our optics and infrared programs increased our cost of revenues for the period within our ASC segment.

This impact was largely offset by improved performance on our Columbia Class submarine program efforts.

Gross profit increased $88 million, or 13.6%, from $648 million for the year ended December 31, 2023, to $736 million for the year ended December 31, 2024 attributed to increased volume offset by the program impacts noted above.

General and Administrative Expenses

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.

G&A expenses increased by $30 million, or 7.8%, from $384 million for the year ended December 31, 2023, to $414 million for the year ended December 31, 2024.

The increase is largely attributed to enhanced internal research and development (IR&D) expenditures as well as a ‘one-time’ prior year reserve adjustment in 2023 related to an environmental claim that impacted the year over year compare.

Amortization of Intangibles

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.

Amortization of intangibles for the year ended December 31, 2024 of $22 million remained consistent with the year ended December 31, 2023.

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.

Other operating expenses, net decreased $4 million from $11 million for the year ended December 31, 2023 to $7 million for the year ended December 31, 2024.

The expense in both periods is attributed to restructuring efforts implemented in our ASC segment.

Operating Earnings

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.

Operating earnings increased by $62 million, or 26.8%, to $293 million for the year ended December 31, 2024, from $231 million for the year ended December 31, 2023, driven by the higher gross profit offset by the impacts of G&A expenditures.

Interest Expense

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.

Interest expense decreased by $15 million to $21 million for the year ended December 31, 2024, from $36 million for the year ended December 31, 2023.

The decrease is primarily attributed to a decrease in borrowings on our revolving credit facility.

Se e Note 13:

Debt f or further information regarding our debt.

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

Debt to the Consolidated Financial Statements for further information regarding our debt.

Other, net increased to $8 million for the year ended December 31, 2024, from $3 million for the year ended December 31, 2023 driven by higher foreign exchange rate impacts.

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.

Earnings before taxes increased by $72 million to $264 million for the year ended December 31, 2024, from $192 million for the year ended December 31, 2023.

This was primarily due to increased operating earnings of $62 million, the decrease of $15 million in interest expense and the increase in other, net costs of $5 million as described above.

Income Tax Provision

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.

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.

Income tax provision increased by $27 million to $51 million for the year ended December 31, 2024, from $24 million for the year ended December 31, 2023.

This was primarily due to an increase in earnings before taxes and the absence of a multi-year catch-up on the R&D tax credit that benefited 2023.

These two items resulted in an increase in our overall effective tax rate of 19.3% compared to 12.5% in 2023.

Net earnings increased by $45 million to $213 million for the year ended December 31, 2024, when compared to the year ended December 31, 2023.

This was driven by increased earnings before taxes of $72 million offset by the increased income tax provision of $27 million as described above.

Basic and Diluted EPS

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

For the year ended December 31, 2024, the weighted average shares outstanding totaled 263.7 million and 267.7 million for basic and diluted shares, respectively.

The weighted average basic and diluted share count increased approximately 2 million and 4 million shares, respectively, as compared to the prior year basic and diluted weighted average shares outstanding, respectively.

The increase in weighted average shares outstanding is attributed to equity vesting and stock option exercises.

The increased shares outstanding resulted in $0.81 and $0.80 for basic and diluted EPS, respectively, as compared to the prior year results of $0.64 for both basic and diluted EPS.

The increase in basic and diluted EPS is attributed to the increased net earnings described above, partially offset by the increased weighted average shares outstanding.

Total backlog includes the following components:

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

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

The following table summarizes the value of our backlog at December 31, 2024 and 2023, incorporating both funded and unfunded components:

(Dollars in millions) 2024 2023

Funded $ 4,177 $ 3,397

Unfunded 4,332 4,354

Total Backlog

$ 8,509 $ 7,751

Backlog increased by $758 million, or 9.8%, from $7,751 million as of December 31, 2023, to $8,509 million as of December 31, 2024.

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.

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 backlog increase is largely attributed to increased demand in airborne, naval and dismounted soldier sensing programs as well as naval and land based computing efforts within our ASC segment.

Within the IMS segment backlog increased in both our Naval power and propulsion programs and for our Short-Range Air Defense solutions with the U.S.

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

We define bookings as the total value of contract awards received from the U.S.

government for which it has appropriated funds and legally obligated such funds to the Company through a contract or purchase order, plus the value of contract awards and orders received from customers other than the U.S.

For the year ended December 31, 2024, we generated bookings of $4,077 million, a 16.0% increase over the $3,516 million realized during the year ended December 31, 2023.

The bookings increase is attributed to increased customer demand across both of our segments with our IMS and ASC segments realizing bookings growth of 21.4% and 13.1%, 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.

Key Non-GAAP Operating Measures

We measure our business using both key financial and operating data including key performance indicators (“KPIs”) and non-GAAP financial measures.

In addition to the operational analysis detailed above, we also use the following non-GAAP metrics to manage our business, monitor results of operations and ensure proper allocation of capital:

(i) adjusted EBITDA, (ii) adjusted EBITDA margin, (iii) adjusted diluted earnings per share (“EPS”) and (iv) free cash flow.

We believe that these financial performance metrics represent the primary drivers of value enhancement, balancing both short and long-term indicators of increased shareholder value.

These are the metrics we use to measure our results and evaluate our business and related contract performance.

Year Ended December 31, 2023 vs.

2022 Variance 2022 vs.

2021 Variance

(Dollars in millions, except per share amounts) 2023 2022 2021 $ % $ %

Adjusted EBITDA (1)

$ 324 $ 318 $ 310 6 1.9 % $ 8 2.6 %

Adjusted EBITDA margin (1)

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

Adjusted Diluted EPS (1)(2)

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

Free cash flow (1)

$ 159 $ 74 $ 122 $ 85 114.9 % $ (48) (39.3) %

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(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.

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

GAAP are included below.

(2) 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.

Non-GAAP Financial Measures

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.

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

GAAP results, these non-GAAP financial measures provide a baseline for analyzing trends in our underlying businesses and can be used by management as a tool to help make financial, operational and planning decisions.

Finally, these measures are often used by analysts and other interested parties to evaluate companies in our industry by providing more comparable measures that are less affected by factors such as capital structure.

We recognize that these non-GAAP financial measures have limitations, including that they may be calculated differently by other companies or may be used under different circumstances or for different purposes, thereby affecting their comparability from company to company.

In order to compensate for these and the other limitations discussed below, management does not consider these measures in isolation from or as alternatives to the comparable financial measures determined in accordance with U.S.

Readers should review the reconciliations below and should not rely on any single financial measure to evaluate our business.

We define these non-GAAP financial measures as:

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, 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.

Adjusted EBITDA and adjusted EBITDA margin are not measures calculated in accordance with U.S.

GAAP, and they should not be considered an alternative to any financial measures that were calculated under U.S.

Adjusted EBITDA and adjusted EBITDA margin are used to facilitate a comparison of the ordinary, ongoing and customary course of our operations on a consistent basis from period to period and provide an additional understanding of factors and trends affecting our business.

Adjusted EBITDA and adjusted EBITDA margin are driven by changes in volume, performance, contract mix and general and administrative expenses and investment levels.

Performance, as used in this definition, refers to changes in profitability and is primarily based on adjustments to estimates at completion on individual contracts.

These adjustments result from increases or decreases to the estimated value of the contract, the estimated costs to complete the contract, or both.

These measures therefore assist management and our Board and may be useful to investors in comparing our operating performance consistently over time as they remove the impact of our capital structure, asset base and items outside the control of the management team and expenses that do not relate to our core operations.

Adjusted EBITDA and adjusted EBITDA margin may not be comparable to similarly titled non-GAAP measures used by other companies as other companies may have calculated the measures differently.

The reconciliation of adjusted EBITDA to net earnings is provided below:

Adjusted EBITDA

Consolidated Entity Reconciliation of Adjusted EBITDA:

Year Ended December 31,

(Dollars in millions) 2023 2022 2021

Net earnings $ 168 $ 405 $ 154

Income tax provision 24 120 46

Amortization of intangibles 22 10 9

Depreciation 63 55 49

Restructuring costs 11 3 5

Interest expense 36 34 35

Deal-related transaction costs 7 43 5

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

Gain on sale of dispositions — (354) —

Adjusted EBITDA $ 324 $ 318 $ 310

Adjusted EBITDA margin 11.5 % 11.8 % 10.8 %

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

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

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.

The reconciliation of adjusted diluted EPS to U.S.

GAAP diluted EPS is shown below:

Consolidated Entity Reconciliation of Adjusted Diluted EPS:

Year Ended December 31,

(Dollars in millions, except per share amounts;

shares in millions) 2023 2022 2021

Net earnings $ 168 $ 405 $ 154

Deal-related transaction costs 7 43 5

Amortization of intangibles 22 10 9

Restructuring costs 11 3 5

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

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

Tax effect of adjustments (7) (9) (6)

Adjusted net earnings $ 194 $ 179 $ 174

Diluted weighted average number of shares outstanding

Diluted EPS (1)

$ 0.64 $ 1.88 $ 0.73

Adjusted diluted EPS (1)

$ 0.73 $ 0.83 $ 0.83

________________

(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.

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 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 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

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.

Free cash flow also provides insight into our flexibility to allocate capital and pursue opportunities that may enhance stockholder value.

We believe that while expenditures and dispositions of property, plant and equipment will fluctuate period to period, we seek to ensure that we have adequate capital on hand to maintain ongoing operations and enable growth of the business.

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.

GAAP measure) is shown below:

Consolidated Entity Reconciliation of Free Cash Flow:

Year Ended December 31,

(Dollars in millions) 2023 2022 2021

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

Transaction-related expenditures, net of tax 13 25 4

Tax payments on disposals — 78 —

Capital expenditures (60) (65) (60)

Proceeds from sales of assets 1 — —

Dividends from investments — 3 —

Free cash flow $ 159 $ 74 $ 122

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.

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.

The bookings increase was most notable in our airborne and naval 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 along with increased demand for surface ship power solutions.

These increases were offset in part by lower new awards received on certain infrared counter measures that were accelerated into the prior year.

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

Factors Impacting Our Performance

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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 ” 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 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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In those cases, the Company accounts for the distinct contract deliverables as separate performance obligations and allocates the transaction price to each performance obligation based on its relative standalone selling price, which is generally estimated using cost plus a reasonable margin.

We classify revenues as products or services on our Consolidated Statements of Earnings based on the predominant attributes of the performance obligations.

While the Company provides warranties on certain contracts, we typically do not provide for services beyond standard assurances and therefore do not consider warranties to be separate performance obligations.

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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 often requires judgment.

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

The estimated transaction price may include variable consideration such as performance incentives, requests for equitable adjustment (“REAs”) and claims.

Variable consideration is included in the estimated transaction price only to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

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 on a routine basis.

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.

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 earnings 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:

The following represents the net impact that changes in our estimates, particularly those regarding our fixed-price development programs, have had on our revenues for the 2024, 2023 and 2022 periods, respectively:

Year Ended December 31,

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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.

These efforts are highlighted by demand for our battle management, weapon sights and tactical radar solutions.

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.

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:

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%.

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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 Acquisition for additional information regarding the transaction.

Business Acquisition to the Consolidated Financial Statements 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 (expenses), net partially reduced by aggregate transaction costs of $14 million included in general and 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 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 years ended December 31, 2022 and 2021, respectively.

The Company recorded operating earnings for the GES business of $13 million for the year ended December 31, 2022.

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.

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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 aggregate gain of $31 million is included in other operating 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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The dividend was issued on August 5, 2022.

Components of Operations

Revenue consists primarily of product related revenue, generating 93%, 91% and 87% of our total revenues for the periods ended December 31, 2023, 2022 and 2021, respectively.

The remaining revenue is generated from service-related contracts.

Additionally, 84%, 87% and 87% of our revenue generation for December 31, 2023, 2022 and 2021, respectively, is derived from firm-fixed priced contracts.

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

Revenue on fixed-price contracts is generally recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations.

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 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 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:

Revenue from Contracts with Customers in the Notes to our Consolidated Financial Statements.

Cost of Revenues

Cost of revenues includes materials, labor and overhead costs incurred in the manufacturing, design, and provision of products and services sold in the period as well as warranty costs.

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

General and Administrative Expenses

General and administrative expenses include general and administrative expenses not included within cost of revenues such as salaries, wages and fringe benefits, facility costs and other costs related to these indirect functions.

Additionally, general and administrative expenses include internal research and development costs as well as expenditures related to bid and proposal efforts.

Review of Operating Segments

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, operating earnings, operating 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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Year Ended December 31, 2024 vs.

2022 Variance 2022 vs.

2021 Variance

2023 Change 2023 vs.

(Dollars in millions) 2024 2023 2022 $ % $ %

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Total revenues $ 3,234 $ 2,826 $ 2,693 $ 408 14.4 % $ 133 4.9 %

Adjusted EBITDA:

Operating earnings:

ASC $ 183 $ 136 $ 503 $ 47 34.6 % $ (367) (73.0) %

IMS 117 92 101 25 27.2 % (9) (8.9) %

Corporate & Eliminations — — — — NM — NM

Total adjusted EBITDA $ 324 $ 318 $ 310 $ 6 1.9 % $ 8 2.6 %

Adjusted EBITDA margin:

ASC 11.7 % 11.5 % 11.3 % 20 bps 20 bps

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

Corporate & Eliminations (7) 3 (43) (10) (333.3) % 46 (107.0) %

Total operating earnings $ 293 $ 231 $ 561 $ 62 26.8 % $ (330) (58.8) %

Operating margin:

ASC 8.6 % 7.4 % 29.0 %

IMS 10.3 % 9.0 % 10.3 %

ASC $ 2,609 $ 2,307 $ 1,975 $ 302 13.1 % $ 332 16.8 %

IMS 1,468 1,209 1,181 259 21.4 % 28 2.4 %

Total bookings $ 4,077 $ 3,516 $ 3,156 $ 561 16.0 % $ 360 11.4 %

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Total backlog $ 8,509 $ 7,751 $ 4,269 $ 758 9.8 % $ 3,482 81.6 %

______________

NM- percentage change not meaningful

Year Ended December 31, 2024, Compared to the Year Ended December 31, 2023

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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

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.

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.

Major drivers include continued expansion of dismounted sensing and tactical radar programs in both our domestic and international markets.

This was offset in part by a reduction in infrared counter measure programs which were accelerated into 2023.

Operating Earnings and Operating Margin

ASC’s operating earnings increased by $47 million, or 34.6%, from $136 million for the year ended December 31, 2023 to $183 million for the year ended December 31, 2024.

Operating margin increased from 7.4% for the year ended December 31, 2023 to 8.6% for the year ended December 31, 2024.

The increase in operating earnings is driven by the increase in overall revenue contribution noted above.

This was offset in part by increased G&A expenditures and increased IR&D investments during the period.

ASC’s bookings increased by $302 million, or 13.1%, from $2,307 million for the year ended December 31, 2023 to $2,609 million for the year ended December 31, 2024.

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 1.2 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.

The increase compared to the prior year is highlighted by increased demand across nearly all of our sensing domains, including airborne, dismounted soldier, naval and electronic warfare.

Additionally we saw increased demand for our tactical computing programs.

These results were offset in part by a reduction on infrared counter measure (IRCM) and ground vehicle sensing programs where awards were accelerated into the prior year.

ASC’s backlog increased by $590 million, or 24.6%, from $2,402 million for the year ended December 31, 2023 to $2,992 million for the year ended December 31, 2024.

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IMS revenue increased by $117 million, or 11.5%, from $1,021 million for the year ended December 31, 2023 to $1,138 million for the year ended December 31, 2024.

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

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.

The increase is attributed primarily to our increased output within our electric power and propulsion programs with the U.S.

Navy’s premier submarine initiative, the Columbia Class submarine.

The naval growth was compounded by efforts for fire system support programs including the Patriot Missile program.

This was offset by the timing of contract awards and revenue realized on our surface ship power and propulsion programs within the segment.

Operating Earnings and Operating Margin

In total, IMS’s operating earnings increased by $25 million, or 27.2%, from $92 million for the year ended December 31, 2023 to $117 million for the year ended December 31, 2024, driven by the increased revenue output noted above.

As a result, operating margin increased 130bps from 9.0% for the year ended December 31, 2023 to 10.3% for the year ended December 31, 2024.

This increase in operating earnings and operating margin is attributed to operational leverage realized on the expanding revenue base coupled with improved program performance on our Columbia Class program, offset in part by costs realized on our Land Surveillance program along with minor increases in G&A and IR&D expenditures.

Bookings for the year ended December 31, 2024 were $1,468 million, an increase of $259 million as compared to the year ended December 31, 2023, driving a book to bill ratio of 1.3 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.

The new awards are highlighted by the receipt of awards totaling approximately $520 million for new Columbia Class funding, approximately $500 million of additional naval power awards outside of the Columbia Class programs and approximately $210 million of short-range air defense and C-UAS programs during the period.

Backlog increased by $168 million, or 3.1%, to $5,517 million for the year ended December 31, 2024 from $5,349 million for the year ended December 31, 2023.

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

The following table sets forth selected unaudited quarterly results of operations data for each of the eight quarters in the period ended December 31, 2023.

This data should be read in conjunction with our audited Consolidated Financial Statements and related notes included elsewhere in this document.

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

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

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

Interest expense 9 10 9 8 7 9 10 8

Net earnings 74 47 35 12 65 279 25 36

Adjusted EBITDA (1)

131 82 62 49 120 58 67 73

Free cash flow (1)

$ 494 $ 21 $ (10) $ (346) $ 336 $ 2 $ 4 $ (268)

_______________

(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.

The backlog increase is largely attributed to awards received on surface ship programs within our power and propulsion line of business.

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 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.

In addition to our cash position, we use various financial measures to assist in capital deployment decision-making, including cash provided by operating activities.

We believe that the combination of our existing cash, access to credit facilities as described in Note 13:

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Net cash (used in) provided by investing activities (84) (59) 436

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

Net cash (used in) provided by financing activities (56) 15 (403)

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

Net increase in cash and cash equivalents $ 131 $ 161 $ 66

Free cash flow (1)

$ 159 $ 74 $ 122

________________

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

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, 2024, Compared to the Year Ended December 31, 2023

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We generated cash from operating activities of $271 million for the year ended December 31, 2024, as compared to $205 million for the year ended December 31, 2023.

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.

The increase in cash from operating activities is attributed to improved profit generation during the period, partially offset by increased investments in working capital to facilitate future growth.

In total our changes in our assets and liabilities absorbed $79 million of cash for the year ended December 31, 2024, compared to $14 million for the year ended December 31, 2023.

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.

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.

The cash usage in the working capital accounts is driven primarily from increased inventory levels ($29 million) to support enhanced customer demand as well as increased accounts receivables ($102 million) attributed to timing of our customer payments.

Conversely, we realized a reduction in our net contract assets and an increase in our contract liabilities of $36 million and $64 million, respectively.

Investing Activities

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.

Investing activities used $84 million of cash during the year ended December 31, 2024 as compared to $59 million during the year ended December 31, 2023.

The $25 million increase is attributed mainly to investments in our new South Carolina manufacturing facility.

Financing Activities

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

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 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.

Cash used in financing activities for the year ended December 31, 2024 was $56 million compared to cash provided by financing activities for the year ended December 31, 2023 of $15 million.

The primary cash outflow for the current year is driven by our $43 million of debt repayments made during the period.

Additionally the Company reacquired equity instruments related to employee stock vesting of $19 million.

These outflows were offset in part by $16 million of cash proceeds received upon the exercise of stock options.

The financing cash inflow in the prior year was primarily attributed to the exercise of stock options during the year.

Material Cash Requirements

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(1) Includes scheduled interest payments.

(2) Finance leases and other includes a build-to-suit, failed sale leaseback asset obligation of $47 million as of December 31, 2023.

Debt of our Notes to Consolidated Financial Statements.

(2) Finance leases and other includes financing arrangement rel ated to our Menomonee Falls, WI manufacturing facility.

Debt to the Consolidated Financial Statements.

(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.

Pension and Other Postretirement Benefits to the Consolidated Financial Statements.

(4) Purchase commitments include open purchase orders with vendors for which the Company is contractually obligated.

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• Revenue Recognition and Contract Estimates

• Reviews for Impairment of Goodwill

• Pension Assumptions

• Business Combinations

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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.

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

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 aggregate net impact of adjustments in contract estimates that negatively impacted our revenue and profit totals were $25 million, $23 million, and $26 million for 2024, 2023, and 2022, respectively.

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

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Revenue from Contracts with Customers to the Consolidated Financial Statements.

Reviews for Impairment of Goodwill

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

We review goodwill for impairment annually at each of our reporting units or when changes in circumstances indicate that the carrying value may not be recoverable.

Such circumstances include a significant adverse change in the business climate for one of our reporting units or a decision to dispose of a reporting unit or a significant portion of a reporting unit.

We use both qualitative and quantitative approaches when testing goodwill for impairment.

When determining the approach to be used, we consider the current facts and circumstances of each reporting unit as well as the excess of each reporting unit’s estimated fair value over its carrying value based on our most recent quantitative assessments.

Our qualitative approach evaluates the business environment and various events impacting the reporting unit including, but not limited to, macroeconomic conditions, changes in the business environment and reporting unit-specific events.

If, based on the qualitative assessment, we determine that it is more likely than not that the fair value of a reporting unit is greater than its carrying value, then a quantitative assessment is not necessary.

However, if a quantitative assessment is determined to be necessary, we estimate the fair value of the reporting unit and compare that to its carrying value.

To the extent the carrying value exceeds the fair value of a reporting unit, an impairment is recorded for the amount equal to this excess.

Our estimate of fair value is based primarily on the discounted projected cash flows of the underlying operations and requires the use of judgment by management.

The process requires numerous assumptions, including the timing of work embedded in our backlog, our performance and profitability under our contracts, our success in securing future business and the appropriate risk adjusted interest rate used to discount the projected cash flows.

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.

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.

Pension Assumptions

Our defined benefit pension and other post-retirement benefit costs and obligations depend on several assumptions and estimates.

The key assumptions include interest rates used to discount estimated future liabilities and projected long-term rates of return on plan assets.

The expected long-term rate of return is based on the market expectations at the beginning of the period for returns over the entire life of the related obligation.

These retirement plan assumptions are based on our best judgment, including consideration of current and future market conditions.

In the event any of the assumptions change, pension and other post-retirement benefit cost could increase or decrease.

For further discussion about our retirement plan assumptions, see Note 14:

Pension and Other Postretirement Benefits to the Consolidated Financial Statements.

Business Combinations

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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.

7 unchanged sentences

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