Leonardo DRS, Inc. (DRS)

ITEM 7. 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, 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, 2023, which provides additional information on comparisons of the year ended December 31, 2023, to the year ended December 31, 2022.

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. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Risk Factors” and “Special Note Regarding Forward-Looking Statements and Information.” Actual results may differ materially from those contained in any forward-looking statements.

Business Overview and Considerations

General

DRS is an innovative and agile provider of advanced defense technology to U.S. national security customers and allies around the world. We specialize in the design, development and manufacture of advanced sensing, network computing, force protection, as well as electric power and propulsion. 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 (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. We view more advanced capabilities in sensing, computing, self-protection and power as necessary to enable these strategic priorities.

Our overall strategy is to be a balanced and diversified company, less vulnerable to any one budgetary platform or service decision with a specific focus on establishing strong technical and market positions in areas of priority for the DoD. The DoD is our largest customer and, for the years ended December 31, 2024 and 2023, accounted for approximately 79% and 80%, respectively, of our business as an end-user, with revenues principally derived directly or indirectly from contracts with the U.S. Navy and U.S. Army, which represented 37% and 32%, respectively, of our total revenues for the year ended December 31, 2024 and 38% and 31%, respectively, for the year ended December 31, 2023.

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 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. We also seek to leverage the knowledge and expertise built through our decades of experience to optimize size, weight, power and cost for our customers’ specific mission requirements.

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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. 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.

Integrated Mission Systems

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

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

We believe DRS is well positioned to meet the needs of an increasingly electrified fleet with our high-efficiency, power dense permanent magnet motors, energy storage systems and associated efficient, rugged and compact power conversion, electrical actuation systems, and advanced cooling technologies.

DRS has a long history of providing a number of other critical products to the U.S. Navy with a significant installed base on submarines, aircraft carriers and other surface ships including motor controllers, instrumentation and control equipment, electrical actuation systems, and thermal management systems for electronics and ship stores refrigeration.

DRS is also an integrator of complex systems in ground vehicles for short-range air defense, counter-unmanned aerial systems (“C-UAS”), and vehicle survivability and protection. Our short-range air defense systems integrate EW equipment, reconnaissance and surveillance systems, modular combat vehicle turrets, and stabilized sensor suites, as well as kinetic countermeasures to protect against evolving threats. Our force protection systems, including solutions for C-UAS and active protection systems on army vehicles, help protect personnel and defense assets from enemy combatants.

Focus on Customer and Execution

DRS and its employees focus on our end-customers – the men and women of the armed forces in the U.S. and its allies. We seek to provide high-quality equipment and services to support their mission success. We strive for excellence in everything we do, in every job in our Company, in order to satisfy our customers’ needs embedded in our contractual commitments. We seek to ensure that we learn from every lesson experienced in our Company and insist that these lessons affect all elements of our businesses. 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 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. We believe that excellence is not a destination, but by constantly challenging ourselves to be better, we will improve, and ultimately approach excellence. 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 we believe contributes to increased margins, helps us to remain competitive and allows us to make

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strategic investments, all while maintaining our focus on customer satisfaction. In these elements, our goals are aligned with those of our customers. We are humbled by the dedication and sacrifice that our ultimate customers have made to serve and we work to perform for them with excellence in everything we do.

Global Events and Business Impacts

Global Conflicts

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. Some of that military aid pledged by the U.S. will result in increased efforts to replace equipment and consumables. We have received orders from the U.S. and allies to both provide equipment in support of this effort, and to replace equipment pledged.

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. The U.S. 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 5% of our workforce as of December 31, 2024 residing in Israel.

Business Environment

Revenues derived directly, as a prime contractor, or indirectly, as a subcontractor, from contracts with the U.S. government represented 79%, 80% and 84% of our total revenues for the years ended December 31, 2024, 2023 and 2022, respectively. Our U.S. government sales are highly concentrated within our DoD customers, which made up the overwhelming majority of our U.S. government revenue for the year ended December 31, 2024, and are principally derived directly or indirectly from contracts with the U.S. Navy and U.S. Army, which represented 37% and 32%, respectively, of our total revenues for the year ended December 31, 2024. Therefore, our revenue is highly correlated to changes in U.S. government spending levels, especially within the DoD.

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

In March 2024, the U.S. 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 $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. 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. 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

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

Operating Performance Assessment and Reporting

For the majority of our contracts, revenues are recognized using the over time, percentage of completion cost-to-cost method of accounting, with revenue recognized based on the ratio of cumulative costs incurred to date to estimated total contract costs at completion. 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.

Under 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. Unallowable costs, pursuant to the FAR, are excluded from costs accumulated on U.S. government contracts.

Our defense contracts and subcontracts that require the submission of cost or pricing data are subject to audit, various profit and cost controls, and standard provisions for termination at the convenience of the customer. The DCAA performs these audits on behalf of the U.S. government. 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.

U.S. government contracts are, by their terms, subject to termination by the U.S. government for either convenience or default by the contractor. Fixed-price contracts provide for payment upon termination for items delivered to and accepted by the U.S. government and, if the termination is for convenience, for payment of fair compensation of work performed plus the costs of settling and paying claims by terminated subcontractors, other settlement expenses and a reasonable profit on the costs incurred. Cost-plus contracts provide that, upon termination, the contractor is entitled to reimbursement of its allowable costs and, if the termination is for convenience, a total fee proportionate to the percentage of the work completed under the contract. If a contract termination is for default, however, the contractor is paid an amount agreed upon for completed and partially completed products and services accepted by the U.S. government. In these circumstances, the U.S. government is not liable for excess costs incurred by us in procuring undelivered items from another source.

In addition to the right of the U.S. government to terminate U.S. government contracts, such contracts are conditioned upon the continuing availability of Congressional appropriations. Congress usually appropriates funds for a given program on a September 30 fiscal year basis, even though contract performance may take many years. 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.

Components of Operations

Revenue

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

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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. Given the nature of our business, we believe revenue and earnings from operations are most relevant to an understanding of our performance at a business and segment level. Our operating cycle is lengthy and involves various types of production

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contracts and varying delivery schedules. Accordingly, operating results in a particular year may not be indicative of future operating results.

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

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%)

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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.

Revenue

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 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 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

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

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

Other Operating (Expenses) Income, Net

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 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.

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Interest Expense

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. See Note 13: Debt to the Consolidated Financial Statements for further information regarding our debt.

Other, Net

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 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 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

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

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.

Backlog

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.

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

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

Bookings

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. government.

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 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

U.S. Government Spending and Federal Budget Uncertainty

Changes in the volume and relative mix of U.S. 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 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. Furthermore, any disruption in the functioning of government agencies, including as a result of government closures and shutdowns, could have a negative impact on our operations and cause us to lose revenue or incur additional costs due to, among other things, our inability to maintain access and schedules for government testing or deploy our staff to customer locations or facilities as a result of such disruptions.

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There is also uncertainty around the timing, extent, nature and effect of Congressional and other U.S. government actions to address budgetary constraints, caps on the discretionary budget for defense and non-defense departments and agencies, and the ability of Congress to determine how to allocate the available budget authority and pass appropriations bills to fund both U.S. government departments and agencies that are, and those that are not, subject to the caps. Additionally, budget deficits and the growing U.S. national debt, may increase pressure on the U.S. government to reduce federal spending across all federal agencies, with uncertainty about the size and timing of those reductions. Furthermore, delays in the completion of future U.S. government budgets could in the future delay procurement of the federal government services we provide. A reduction in the amount of, or reductions, delays, or cancellations of funding for, services that we are contracted to provide to the U.S. government as a result of any of these impacts or related initiatives, legislation or otherwise could have a material adverse effect on our business and results of operations. 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 spending’s impact on our business.

Operational Performance on Contracts

The Company recognizes revenue for each separately identifiable performance obligation in a contract representing an obligation to transfer a distinct good or service to a customer. In most cases, goods and services provided under the Company’s contracts are accounted for as single performance obligations due to the complex and integrated nature of our products and services. These contracts generally require significant integration of a group of goods and/or services to deliver a combined output. In some contracts, the Company provides multiple distinct goods or services to a customer. 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. 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.

Typically, we enter into three types of contracts: fixed-price contracts, cost-plus contracts and T&M contracts (cost-plus contracts and T&M contracts are aggregated below as flexibly priced contracts). The majority of our total revenues are derived from fixed-price contracts; 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. The contracts may also include incentives for various performance criteria, including quality, timeliness and cost-effectiveness. 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.

T&M contracts provide for reimbursement of labor hours expended at a contractual fixed labor rate per hour, plus the actual costs of material and other direct non-labor costs. The fixed labor rates on T&M contracts include amounts for the cost of direct labor, indirect contract costs and profit.

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.

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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 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 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 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:

Regulations

Increased audit, review, investigation and general scrutiny by U.S. government agencies of performance under government contracts and compliance with the terms of those contracts and applicable laws could affect our operating results. Negative publicity and increased scrutiny of government contractors in general, including us, relating to government expenditures for contractor services and incidents involving the mishandling of sensitive or classified information as well as the increasingly complex requirements of the DoD and the United States intelligence community, including those related to cybersecurity, could impact our ability to perform in the markets we serve.

International Sales

International revenue, including foreign military sales, foreign military financing, and direct commercial sales, accounted for approximately 13%, 10% and 7% of our revenue for the years ended December 31, 2024, 2023 and 2022, 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, 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. We remain subject to the spending levels, pace and priorities of the U.S. government as well as international governments and commercial customers, and to general economic conditions that could adversely affect us, our customers and our suppliers.

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Additionally, some international sales may expose us to foreign exchange fluctuations and changing dynamics of foreign competitiveness based on variations in the value of the U.S. dollar relative to other currencies. The impact of those fluctuations is reflected throughout our Consolidated Financial Statements, but in the aggregate, did not have a material impact on our results of operations for the years ended December 31, 2024, 2023 and 2022.

Acquisitions

We consider the acquisition of businesses and investments that we believe will expand or complement our current portfolio and allow access to new customers or technologies. We also may explore the divestiture of businesses that no longer meet our needs or strategy or that could perform better outside of our organization.

On November 28, 2022, the Company announced the successful completion of the all-stock merger between Leonardo DRS and RADA Electronic Industries Ltd. (“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: LDO), owning the remaining 81%. 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. The acquisition was completed on November 28, 2022, when each issued and outstanding ordinary share of RADA was converted and exchanged for one share of common stock of the Company.

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. See Note 2: Business Acquisition to the Consolidated Financial Statements for additional information regarding the transaction.

Dispositions

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 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 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. 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 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. The $396 million represents the proceeds generated net of our costs to sell and estimated tax obligations. The dividend was issued on August 5, 2022.

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Review of Operating Segments

The following is a discussion of operating results for each of our operating segments. 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: Segment Information within the Consolidated Financial Statements.

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

ASC

Revenue

In total, ASC segment revenue increased $287 million, or 15.7%, from $1,831 million for the year ended December 31, 2023 to $2,118 million for the year ended December 31, 2024. The increase is primarily attributed to the increased demand realized throughout the segment. 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.

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Bookings

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 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.

Backlog

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. This was attributed to the increased demand and new awards realized (noted above) which were 1.2x that of the revenue generated during the period, driving an increase in the backlog position.

IMS

Revenue

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 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

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 $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

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 awards received on surface ship programs within our power and propulsion line of business.

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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. We believe that the combination of our existing cash, access to credit facilities as described in Note 13: Debt and future cash that we expect to generate from our operations will be sufficient to meet our short and long-term liquidity needs. There can be no assurance, however, that our business will continue to generate cash flow at current levels or that anticipated operational improvements will be achieved. We may also pursue acquisitions or other strategic priorities that will require additional liquidity beyond the liquidity we generate through our operations. Our cash balance as of December 31, 2024 was $598 million compared to $467 million as of December 31, 2023.

The following table summarizes our cash flows for the periods presented:

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

Operating Activities

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 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 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 $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 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.

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

Material Cash Requirements

As of December 31, 2024, our material cash requirements were as follows:

________________

(1)Includes scheduled interest payments.

(2)Finance leases and other includes financing arrangement related to our Menomonee Falls, WI manufacturing facility. See Note 13: 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 to the Consolidated Financial Statements.

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

Off-Balance Sheet Arrangements

As of December 31, 2024 and 2023, we had no significant off-balance sheet arrangements.

Critical Accounting Policies and Estimates

The following is not intended to be a comprehensive list of all of our accounting policies. Our significant accounting policies are more fully described in Note 1: Summary of Significant Accounting Policies to the Consolidated Financial Statements. The accounting treatment of a particular transaction is dictated by accounting principles generally accepted in the United States of America. Other areas require management's judgment to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and costs and expenses during the reporting period. Ultimately, actual amounts may differ from these estimates. We believe that critical accounting estimates have the following attributes: (1) they require management to make assumptions about matters that are uncertain at the time of the estimate; and (2) different estimates we reasonably could have used, or changes in the estimates that are reasonably likely to occur, that would have a material effect on our consolidated financial condition or results of operations.

We believe the following critical accounting policies contain the more significant judgments and estimates used in the preparation of our Consolidated Financial Statements:

•Revenue Recognition and Contract Estimates

•Business Combinations

•Income Taxes

Revenue Recognition on Contracts and Contract Estimates

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

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estimated total contract costs at 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.

Revenue and cost estimates for substantially all over time contract performance obligations are reviewed and updated quarterly. Contract estimates are based on various assumptions to project the outcome of future events that can span multiple years. These assumptions include labor productivity and availability, the complexity of the work to be performed, the cost and availability of materials, the performance of subcontractors and the availability and timing of funding from the customer. Changes in estimates affecting sales, costs and profits are recognized in the period in which the change becomes known using the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date on a contract is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance are recognized using the adjusted estimate. 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. As changes happen in the design to meet required specifications, those changes often result in changes to the overall profitability of the programs. Our contract reviews are conducted at least quarterly in which we incorporate our best estimate to complete the program known at that point in time.

For further discussion, see Note 3: Revenue from Contracts with Customers to the Consolidated Financial Statements.

Business Combinations

We record all tangible and intangible assets acquired and liabilities assumed in a business combination at fair value as of the acquisition date, with any excess purchase consideration recorded as goodwill. Determining the fair value of acquired assets and liabilities assumed, including intangible assets specific to technology and contract asset intangibles, requires management to make significant judgments about expected future cash flows, weighted average cost of capital, discount rates, and expected long-term growth rates. During the measurement period, not to exceed one year from the acquisition date, we may adjust provisional amounts recorded to reflect new information subsequently obtained regarding facts and circumstances that existed as of the acquisition date.

Income Taxes

We account for income taxes under the asset and liability method in accordance with the accounting standard for income taxes. The asset and liability method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities. Under this method, changes in tax rates and laws are recognized in income in the period such changes are enacted.

We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent results of operations. If we were to determine that we would be able to realize our deferred income tax assets in the future in excess of their net recorded amount or would no longer be able to realize our deferred income tax assets in the future as currently recorded, we would make an adjustment to the valuation allowance which would decrease or increase the provision for income taxes.

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.

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

As of December 31, 2024 and 2023, we had gross deferred tax assets of $297 million and $258 million, respectively, and deferred tax asset valuation allowances of $25 million and $21 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, 2024 and 2023 include $7 million and $11 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 a part of the Tax Cuts and Jobs Act of 2017 and became effective for tax years beginning in 2022.

Accounting Standards Updates (ASU)

See Note 1: Summary of Significant Accounting Policies to the Consolidated Financial Statements for information regarding accounting standards we adopted in 2024 and other new accounting standards that have been issued by the Financial Accounting Standards Board but are not effective until after December 31, 2024.

ITEM 7. 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, 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. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Risk Factors” and “Special Note Regarding Forward-Looking Statements and Information.” Actual results may differ materially from those contained in any forward-looking statements.

Business Overview and Considerations

General

DRS is an innovative and agile provider of advanced defense technology to U.S. national security customers and allies around the world. We specialize in the design, development and manufacture of advanced sensing, network computing, force protection, as well as electric power and propulsion. 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 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. We view more advanced capabilities in sensing, computing, self-protection and power as necessary to enable these strategic priorities.

Our overall strategy is to be a balanced and diversified company, less vulnerable to any one budgetary platform or service decision with a specific focus on establishing strong technical and market positions in areas of priority for the DoD. 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. 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 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. We also seek to leverage the knowledge and expertise built through our decades of experience to optimize size, weight, power and cost for our customers’ specific mission requirements.

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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. 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.

Integrated Mission Systems

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

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

We believe DRS is well positioned to meet the needs of an increasingly electrified fleet with our high-efficiency, power dense permanent magnet motors, energy storage systems and associated efficient, rugged and compact power conversion, electrical actuation systems, and advanced cooling technologies.

DRS has a long history of providing a number of other critical products to the U.S. Navy with a significant installed base on submarines, aircraft carriers and other surface ships including motor controllers, instrumentation and control equipment, electrical actuation systems, and thermal management systems for electronics and ship stores refrigeration.

DRS is also an integrator of complex systems in ground vehicles for short-range air defense, counter-unmanned aerial systems (“C-UAS”), and vehicle survivability and protection. Our short-range air defense systems integrate EW equipment, reconnaissance and surveillance systems, modular combat vehicle turrets, and stabilized sensor suites, as well as kinetic countermeasures to protect against evolving threats. Our force protection systems, including solutions for C-UAS and active protection systems on army vehicles, help protect personnel and defense assets from enemy combatants.

Focus on Customer and Execution

DRS and its employees focus on our end-customers – the men and women of the armed forces in the U.S. and its allies. We seek to provide high-quality equipment and services to support their mission success. We strive for excellence in everything we do, in every job in our Company, in order to satisfy our customers’ needs embedded in our contractual commitments. We seek to ensure that we learn from every lesson experienced in our Company and insist that these lessons affect all elements of our businesses. 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. 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. We believe that excellence is not a destination, but by constantly challenging ourselves to be better, we will improve, and ultimately approach excellence. 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 we believe contributes to increased margins, helps us to remain competitive and allows us to make

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strategic investments, all while maintaining our focus on customer satisfaction. In these elements, our goals are aligned with those of our customers. We are humbled by the dedication and sacrifice that our ultimate customers have made to serve and we work to perform for them with excellence in everything we do.

Global Events and Business Impacts

Global Conflicts

In February 2022, Russia escalated its war with Ukraine by invading and occupying parts of that country. Since that time, western powers, including the U.S., have pledged support with humanitarian and military aid. Some of that military aid pledged by the U.S. will result in increased efforts to replace equipment and consumables. We have received orders from the U.S. 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. To date, the conflict has not had a material impact to our operations. The U.S. 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

Revenues derived directly, as a prime contractor, or indirectly, as a subcontractor, from contracts with the U.S. government represented 80%, 84% and 86% of our total revenues for the years ended December 31, 2023, 2022 and 2021, respectively. Our U.S. government sales are highly concentrated within our DoD customers, which made up the overwhelming majority of our U.S. government revenue for the year ended December 31, 2023, and are principally derived directly or indirectly from contracts with the U.S. 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. government spending levels, especially within the DoD.

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

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.

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Operating Performance Assessment and Reporting

For the majority of our contracts, revenues are recognized using the over time, percentage of completion cost-to-cost method of accounting, with revenue recognized based on the ratio of cumulative costs incurred to date to estimated total contract costs at completion. 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.

Under U.S. 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. government contracts, provide that internal research and development costs are allowable general and administrative expenses. Unallowable costs, pursuant to the FAR, are excluded from costs accumulated on U.S. government contracts.

Our defense contracts and subcontracts that require the submission of cost or pricing data are subject to audit, various profit and cost controls, and standard provisions for termination at the convenience of the customer. The DCAA performs these audits on behalf of the U.S. government. 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.

U.S. government contracts are, by their terms, subject to termination by the U.S. government for either convenience or default by the contractor. Fixed-price contracts provide for payment upon termination for items delivered to and accepted by the U.S. government and, if the termination is for convenience, for payment of fair compensation of work performed plus the costs of settling and paying claims by terminated subcontractors, other settlement expenses and a reasonable profit on the costs incurred. Cost-plus contracts provide that, upon termination, the contractor is entitled to reimbursement of its allowable costs and, if the termination is for convenience, a total fee proportionate to the percentage of the work completed under the contract. If a contract termination is for default, however, the contractor is paid an amount agreed upon for completed and partially completed products and services accepted by the U.S. government. In these circumstances, the U.S. government is not liable for excess costs incurred by us in procuring undelivered items from another source.

In addition to the right of the U.S. government to terminate U.S. government contracts, such contracts are conditioned upon the continuing availability of Congressional appropriations. Congress usually appropriates funds for a given program on a September 30 fiscal year basis, even though contract performance may take many years. 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

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, 2023 as compared to the year ended December 31, 2022, and for the year ended December 31, 2022 compared to December 31, 2021. Given the nature of our business, we believe revenue and earnings from operations are most relevant to an understanding of our performance at a business and segment level. Our operating cycle is lengthy and involves various types of production

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contracts and varying delivery schedules. Accordingly, operating results in a particular year may not be indicative of future operating results.

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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.

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

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

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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

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 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

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).

Gross Profit

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

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

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.

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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.

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. See Note 13: Debt for further information regarding our debt.

Other, Net

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

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

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

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.

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Backlog

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 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.

Bookings

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.

Key Non-GAAP Operating Measures

Overview

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.

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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

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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. GAAP. 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. GAAP. 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:

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Adjusted EBITDA

Consolidated Entity Reconciliation of Adjusted EBITDA:

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

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basic or diluted EPS as determined in accordance with U.S. GAAP. The reconciliation of adjusted diluted EPS to U.S. GAAP diluted EPS is shown below:

Consolidated Entity Reconciliation of Adjusted Diluted EPS:

________________

(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

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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:

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.

Factors Impacting Our Performance

U.S. Government Spending and Federal Budget Uncertainty

Changes in the volume and relative mix of U.S. 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 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. Furthermore, any disruption in the functioning of government agencies, including as a result of government closures and shutdowns, could have a negative impact on our operations and cause us to lose revenue or incur additional costs due to, among other things, our inability to maintain access and schedules for government testing or deploy our staff to customer locations or facilities as a result of such disruptions.

There is also uncertainty around the timing, extent, nature and effect of Congressional and other U.S. government actions to address budgetary constraints, caps on the discretionary budget for defense and non-defense departments and agencies, and the ability of Congress to determine how to allocate the available budget authority and pass appropriations bills to fund both U.S. government departments and agencies that are, and those that are not, subject to the caps. Additionally, budget deficits and the growing U.S. national debt, may increase pressure on the U.S. government to reduce federal spending across all federal agencies, with uncertainty about the size and timing of those reductions. Furthermore, delays in the completion of future U.S. government budgets could in the future delay procurement of the federal government services we provide. A reduction in the amount of, or reductions, delays, or cancellations of funding for, services that we are contracted to provide to the U.S. government as a result of any of these impacts or related initiatives, legislation or otherwise could have a material adverse effect on our business and results of operations. 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

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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.

Operational Performance on Contracts

The Company recognizes revenue for each separately identifiable performance obligation in a contract representing an obligation to transfer a distinct good or service to a customer. In most cases, goods and services provided under the Company’s contracts are accounted for as single performance obligations due to the complex and integrated nature of our products and services. These contracts generally require significant integration of a group of goods and/or services to deliver a combined output. In some contracts, the Company provides multiple distinct goods or services to a customer. 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. Typically, we enter into three types of contracts: fixed-price contracts, cost-plus contracts and T&M contracts (cost-plus contracts and T&M contracts are aggregated below as flexibly priced contracts). The majority of our total revenues are derived from fixed-price contracts; 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. The contracts may also include incentives for various performance criteria, including quality, timeliness and cost-effectiveness. 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.

T&M contracts provide for reimbursement of labor hours expended at a contractual fixed labor rate per hour, plus the actual costs of material and other direct non-labor costs. The fixed labor rates on T&M contracts include amounts for the cost of direct labor, indirect contract costs and profit.

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 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 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 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

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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:

Regulations

Increased audit, review, investigation and general scrutiny by U.S. government agencies of performance under government contracts and compliance with the terms of those contracts and applicable laws could affect our operating results. Negative publicity and increased scrutiny of government contractors in general, including us, relating to government expenditures for contractor services and incidents involving the mishandling of sensitive or classified information as well as the increasingly complex requirements of the DoD and the United States intelligence community, including those related to cybersecurity, could impact our ability to perform in the markets we serve.

International Sales

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. We remain subject to the spending levels, pace and priorities of the U.S. government as well as international governments and commercial customers, and to general economic conditions that could adversely affect us, our customers and our suppliers.

Additionally, some international sales may expose us to foreign exchange fluctuations and changing dynamics of foreign competitiveness based on variations in the value of the U.S. dollar relative to other currencies. The impact of those fluctuations is reflected throughout our Consolidated Financial Statements, but in the aggregate, did not have a material impact on our results of operations for the years ended December 31, 2023, 2022 and 2021.

Acquisitions

We consider the acquisition of businesses and investments that we believe will expand or complement our current portfolio and allow access to new customers or technologies. We also may explore the divestiture of businesses that no longer meet our needs or strategy or that could perform better outside of our organization.

On November 28, 2022, the Company announced the successful completion of the all-stock merger between Leonardo DRS and RADA Electronic Industries Ltd. (“RADA”), a leading Israel-based provider of small-form tactical radar, to become a combined public company. At the time of the transaction, RADA

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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 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. The acquisition was completed on November 28, 2022, when each issued and outstanding ordinary share of RADA was converted and exchanged for one share of common stock of the Company.

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. See Note 2: Business Acquisition for additional information regarding the transaction.

Dispositions

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. 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.

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 (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. The $396 million represents the proceeds generated net of our costs to sell and estimated tax obligations. The dividend was issued on August 5, 2022.

Components of Operations

Revenue

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

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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. 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 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

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detailed information on our segment performance. Additional information regarding our segments can be found in Note 19: Segment Information within the Consolidated Financial Statements.

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NM- percentage change not meaningful

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

ASC

Revenue

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

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.

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Bookings

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, 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.

Backlog

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

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 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.

Bookings

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

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

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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.

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(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. GAAP.

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. We believe that the combination of our existing cash, access to credit facilities as described in Note 13: Debt and future cash that we expect to generate from our operations will be sufficient to meet our short and long-term liquidity needs. There can be no assurance, however, that our business will continue to generate cash flow at current levels or that anticipated operational improvements will be achieved. We may also pursue acquisitions or other strategic priorities that will require additional liquidity beyond the liquidity we generate through our operations. Our cash balance as of December 31, 2023 was $467 million compared to $306 million as of December 31, 2022.

The following table summarizes our cash flows for the periods presented:

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(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. GAAP.

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

Operating Activities

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 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. 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

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

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.

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Material Cash Requirements

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

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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. See Note 13: Debt of our Notes to 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.

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

Off-Balance Sheet Arrangements

As of December 31, 2023 and 2022, we had no significant off-balance sheet arrangements.

Critical Accounting Policies and Estimates

The following is not intended to be a comprehensive list of all of our accounting policies. Our significant accounting policies are more fully described in Note 1: Summary of Significant Accounting Policies to the Consolidated Financial Statements. The accounting treatment of a particular transaction is dictated by accounting principles generally accepted in the United States of America. Other areas require management's judgment to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and costs and expenses during the reporting period. Ultimately, actual amounts may differ from these estimates. We believe that critical accounting estimates have the following attributes: (1) they require management to make assumptions about matters that are uncertain at the time of the estimate; and (2) different estimates we reasonably could have used, or changes in the estimates that are reasonably likely to occur, that would have a material effect on our consolidated financial condition or results of operations.

We believe the following critical accounting policies contain the more significant judgments and estimates used in the preparation of our Consolidated Financial Statements:

•Revenue Recognition and Contract Estimates

•Reviews for Impairment of Goodwill

•Pension Assumptions

•Business Combinations

•Income Taxes

Revenue Recognition on Contracts and Contract Estimates

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

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

Revenue and cost estimates for substantially all over time contract performance obligations are reviewed and updated quarterly. Contract estimates are based on various assumptions to project the outcome of future events that can span multiple years. These assumptions include labor productivity and availability, the complexity of the work to be performed, the cost and availability of materials, the performance of subcontractors and the availability and timing of funding from the customer. Changes in estimates affecting sales, costs and profits are recognized in the period in which the change becomes known using the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date on a contract is recognized in the period the adjustment is identified. 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 changes in estimates are primarily attributed to changes in our firm-fixed-priced development type programs. As changes happen in the design to meet required specifications, those changes often result in changes to the overall profitability of the programs. Our contract reviews are conducted at least quarterly in which we incorporate our best estimate to complete the program known at that point in time.

For further discussion, see Note 3: 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

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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

We record all tangible and intangible assets acquired and liabilities assumed in a business combination at fair value as of the acquisition date, with any excess purchase consideration recorded as goodwill. Determining the fair value of acquired assets and liabilities assumed, including intangible assets specific to technology and contract asset intangibles, requires management to make significant judgments about expected future cash flows, weighted average cost of capital, discount rates, and expected long-term growth rates. During the measurement period, not to exceed one year from the acquisition date, we may adjust provisional amounts recorded to reflect new information subsequently obtained regarding facts and circumstances that existed as of the acquisition date.

Income Taxes

We account for income taxes under the asset and liability method in accordance with the accounting standard for income taxes. The asset and liability method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities. Under this method, changes in tax rates and laws are recognized in income in the period such changes are enacted.

We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent results of operations. If we were to determine that we would be able to realize our deferred income tax assets in the future in excess of their net recorded amount or would no longer be able to realize our deferred income tax assets in the future as currently recorded, we would make an adjustment to the valuation allowance which would decrease or increase the provision for income taxes.

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.

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

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

Accounting Standards Updates (ASU)

See Note 1: Summary of Significant Accounting Policies to the Consolidated Financial Statements for information regarding accounting standards we adopted in 2023 and other new accounting standards that have been issued by the Financial Accounting Standards Board but are not effective until after December 31, 2023.

ITEM 7.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.

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. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Risk Factors” and “Special Note Regarding Forward-Looking Statements and Information.” Actual results may differ materially from those contained in any forward-looking statements.

Business Overview and Considerations

General

DRS is an innovative and agile provider of advanced defense technology to U.S. national security customers and allies around the world. We specialize in the design, development and manufacture of advanced sensing, network computing, force protection, as well as electric power and propulsion. 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. We view more advanced capabilities in sensing, computing, self-protection and power as necessary to enable these strategic priorities.

Our overall strategy is to be a balanced and diversified company, less vulnerable to any one budgetary platform or service decision with a specific focus on establishing strong technical and market positions in areas of priority for the DoD. The DoD is our largest customer and, for the years ended December 31, 2022 and 2021, accounted for approximately 84% and 86%, 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:

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. Across our offerings, we are focused on advancing sensor distance and enhancing the precision, clarity, definition, spectral depth and effectiveness of our sensors. We also seek to leverage the knowledge and expertise built through our decades of experience to optimize size, weight, power and cost for our customers’ specific mission requirements.

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

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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.

Integrated Mission Systems

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

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

We believe DRS is well positioned to meet the needs of an increasingly electrified fleet with our high-efficiency, power dense permanent magnet motors, energy storage systems and associated efficient, rugged and compact power conversion, electrical actuation systems, and advanced cooling technologies.

DRS has a long history of providing a number of other critical products to the U.S. Navy with a significant installed base on submarines, aircraft carriers and other surface ships including motor controllers, instrumentation and control equipment, electrical actuation systems, and thermal management systems for electronics and ship stores refrigeration.

DRS is also an integrator of complex systems in ground vehicles for short-range air defense, counter-unmanned aerial systems (“C-UAS”), and vehicle survivability and protection. Our short-range air defense systems integrate EW equipment, reconnaissance and surveillance systems, modular combat vehicle turrets, and stabilized sensor suites, as well as kinetic countermeasures to protect against evolving threats. Our force protection systems, including solutions for C-UAS and active protection systems on army vehicles help protect personnel and defense assets from enemy combatants.

Focus on Customer and Execution

DRS and its employees focus on our end-customers – the men and women of the armed forces in the U.S. and its allies. We seek to provide high-quality equipment and services to support their mission success. We strive for excellence in everything we do, in every job in our Company, in order to satisfy our customers’ needs embedded in our contractual commitments. We seek to ensure that we learn from every lesson experienced in our Company and insist that these lessons affect all elements of our businesses. 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. 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. We believe that excellence is not a destination, but by constantly challenging ourselves to be better, we will improve, and ultimately approach excellence. 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. In these elements, our goals are aligned with those of our customers. We are humbled by the dedication and sacrifice that our ultimate customers have made to serve and we work to perform for them with excellence in everything we do.

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Global Events and Business Impacts

COVID-19

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

In February 2022 Russia escalated its war with Ukraine by invading and occupying parts of that country. Since that time, western powers, including the U.S., have pledged support with humanitarian and military aid. Some of that military aid pledged by the U.S. will result in increased efforts to replace equipment and consumables. We have received orders from the U.S. 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.

Business Environment

Revenues derived directly, as a prime contractor, or indirectly, as a subcontractor, from contracts with the U.S. government represented 84%, 86% and 84% of our total revenues for the years ended December 31, 2022, 2021 and 2020, respectively. Our U.S. government sales are highly concentrated within our DoD customers, which made up the overwhelming majority of our U.S. government revenue for the year ended December 31, 2022 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. Therefore, our revenue is highly correlated to changes in U.S. government spending levels, especially within the DoD.

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

The U.S. 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.

Operating Performance Assessment and Reporting

For the majority of our contracts, revenues are recognized using the over time, percentage of completion cost-to-cost method of accounting, with revenue recognized based on the ratio of cumulative costs incurred to date to estimated total contract costs at completion. 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.

Under U.S. 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. government contracts, provide that internal research and development costs are allowable general and administrative expenses. Unallowable costs, pursuant to the FAR, are excluded from costs accumulated on U.S. government contracts.

Our defense contracts and subcontracts that require the submission of cost or pricing data are subject to audit, various profit and cost controls, and standard provisions for termination at the convenience of the customer. The DCAA performs these audits on behalf of the U.S. government. The DCAA has the right to perform audits on our incurred costs on cost-type or price redeterminable-type

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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.

U.S. government contracts are, by their terms, subject to termination by the U.S. government for either convenience or default by the contractor. Fixed-price contracts provide for payment upon termination for items delivered to and accepted by the U.S. government and, if the termination is for convenience, for payment of fair compensation of work performed plus the costs of settling and paying claims by terminated subcontractors, other settlement expenses and a reasonable profit on the costs incurred. Cost-plus contracts provide that, upon termination, the contractor is entitled to reimbursement of its allowable costs and, if the termination is for convenience, a total fee proportionate to the percentage of the work completed under the contract. If a contract termination is for default, however, the contractor is paid an amount agreed upon for completed and partially completed products and services accepted by the U.S. government. In these circumstances, the U.S. government is not liable for excess costs incurred by us in procuring undelivered items from another source.

In addition to the right of the U.S. government to terminate U.S. government contracts, such contracts are conditioned upon the continuing availability of Congressional appropriations. Congress usually appropriates funds for a given program on a September 30 fiscal year basis, even though contract performance may take many years. 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

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, 2022 as compared to the year ended December 31, 2021, and for the year ended December 31, 2021 compared to December 31, 2020. Given the nature of our business, we believe revenue and earnings from operations are most relevant to an understanding of our performance at a business and segment level. Our operating cycle is lengthy and involves various types of production

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contracts and varying delivery schedules. Accordingly, operating results in a particular year may not be indicative of future operating results.

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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.

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

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

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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 backlog of $2.9 billion at December 31, 2021 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. 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

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).

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

For the year ended December 31, 2021, Revenue increased by $101 million, or 3.6%, to $2,879 million from $2,778 million for year ended December 31, 2020. 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 TROPHYTM 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).

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; see Note 3: 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. 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, 2021; see Note 3: Revenue from Contracts with Customers for further detail.

Gross Profit

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

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favorable program performance, including the improved execution on the Columbia Class program efforts 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. 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 the COVID-19 pandemic impact on our business.

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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.

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.

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 see Note 13: Debt for 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. see Note 13: Debt for further detail.

Other, Net

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.

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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.

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.

As of December 31, 2022 the Company had $31 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 2025.

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.

Net Earnings

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.

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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.

Basic and Diluted EPS

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

As of December 31, 2022, there were 260,234,033 shares of common stock outstanding, increasing 49,788,960 shares from the December 31, 2021 shares outstanding of 210,445,073. 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. For the year ended December 31, 2022, the weighted average shares outstanding totaled 214,943,608 and 215,133,357 for basic and diluted shares respectively. The weighted average basic and diluted share count increased 4,498,535 and 4,688,284 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 increased shares outstanding resulted in $1.88 for both basic and diluted EPS as compared to the prior year results of $0.73 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.

Backlog

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

Backlog increased by $1,408 million, or 49.2%, from $2,861 million as of December 31, 2021 to $4,269 million as of December 31, 2022. 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

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Programs within our IMS segment. Please see “—Review of Operating Segments” below for a more detailed analysis.

Bookings

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. 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

Overview

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.

______________

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

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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. GAAP. 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 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. GAAP. 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:

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Adjusted EBITDA

Consolidated Entity Adjusted EBITDA Reconciliation:

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 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 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

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(loss) 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. GAAP. The reconciliation of Adjusted Diluted EPS to U.S. GAAP EPS is shown below:

Consolidated Entity Reconciliation of Adjusted Diluted EPS:

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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, 2022, there were 260,234,033 shares of common stock outstanding, increasing 49,788,960 shares from the December 31, 2021 shares outstanding of 210,445,073. 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. For the year ended December 31, 2022 the diluted weighted average shares outstanding totaled 215,133,357. The weighted average diluted share count increased 4,688,284 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.

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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 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: