# Leonardo DRS, Inc.: Form 10-Q for the period ended Sep 30, 2023

- Company: [Leonardo DRS, Inc.](/companies/drs.md) (CIK 1833756)
- Form: 10-Q
- Filed: 2023-11-02
- Accepted by EDGAR: Nov 2, 2023, 16:36 ET
- Period: 2023-09-30
- Accession: 0001628280-23-036429
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1833756/000162828023036429/drs-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1833756/000162828023036429/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $703.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $1.90bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-07-01 to 2023-09-30 | $541.0m | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months, 2023-01-01 to 2023-09-30 | $1.46bn | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2023-07-01 to 2023-09-30 | $162.0m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2023-01-01 to 2023-09-30 | $438.0m | us-gaap:GrossProfit |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | $59.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | $126.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $10.0m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $27.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $1.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $3.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | $47.0m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | $94.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.18 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | $0.36 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.18 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | $0.36 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 265,000,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 264,000,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | −$310.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $42.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2023-01-01 to 2023-09-30 | $0 | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2023-09-30 | $47.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $1.74bn | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $3.71bn | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $951.0m | us-gaap:LiabilitiesCurrent |
| Current portion of debt | at 2023-09-30 | $132.0m | us-gaap:DebtCurrent |
| Short-term borrowings | at 2023-09-30 | $1.0m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2023-09-30 | $2.24bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 71,558 characters.

*You should read this discussion together with our Consolidated Financial Statements and related notes thereto included elsewhere in this Quarterly Report.*

*This discussion and other parts of this Quarterly Report 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 discussed under “Special Note Regarding Forward-Looking Statements and Information” and “Risk Factors” in this Quarterly Report and under “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 28, 2023. 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 includes being 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 nine months ended September 30, 2023, accounted for approximately 80% 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 29% and 40%, respectively, of our total revenues for such period, which is consistent with historic trends.

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

#### Advanced Sensing and Computing

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

Our sensing capabilities span numerous applications, including missions requiring advanced detection, precision targeting and surveillance sensing, long range electro-optic/infrared (“EO/IR”), signals intelligence (“SIGINT”) and other intelligence systems, electronic warfare (“EW”), ground vehicle sensing, next generation active electronically scanned array (“AESA”) tactical radars, dismounted soldier sensing and space sensing. 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 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 Operational Excellence initiative called “Always Performing For Excellence,” or “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 we believe contributes to increased margins, helps us to remain competitive and allows us to make strategic investments, all while maintaining our focus on customer satisfaction. In these elements, our goals are aligned with those of our customers. 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

### COVID-19

The coronavirus pandemic caused certain disruptions to our business, including various adverse supply chain impacts which are anticipated to continue through 2023.

### 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 the equipment pledged is replaced.

In October 2023, Hamas militants located in Gaza launched a terrorist attack on Israel. The ensuing, and ongoing, conflict has the potential to evolve quickly creating uncertainty in the broader Middle East region, along with the potential for disruptions to our Israeli operations in the region, including but not limited to workforce calls for duty, transportation and other logistical impacts and reduced customer confidence. The U.S. and other western powers have indicated military and funding support to Israel. DRS has direct exposure to Israel principally through its RADA operations with approximately 4% of the DRS workforce as of September 30, 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 93% and 80% of our consolidated revenue for the three and nine months ended September 30, 2023, respectively, and 83% and 82% of our consolidated revenue for the three and nine months ended September 30, 2022, respectively. Of these sales directly to the U.S. government, the Army and Navy are our largest customers. For the three and nine months ended September 30, 2023, U.S. government sales with the U.S. Army represented 30% and 29% and U.S. government sales with the U.S. Navy represented 48% and 40%, respectively, of our consolidated revenue. For the three and nine months ended September 30, 2022, U.S. government sales with the U.S. Army represented 40% and 35%, respectively, and U.S. government sales with the U.S. Navy represented 31% and 32%, respectively, of our consolidated revenue.

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

In March 2023, the U.S. President’s fiscal year 2024 budget request was released and 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 China as the pacing threat, countering other near peer adversaries, investing in the nuclear triad, and funding operations in Ukraine. In June 2023, the Fiscal Responsibility Act of 2023 was enacted, which suspends the federal debt ceiling until January 1, 2025, postponing the threat of a federal government default. Pursuant to this law, the President and Congress also agreed upon federal discretionary spending levels for defense and non-defense. For fiscal year 2024, defense spending levels were consistent with the President’s March budget request and reflect an approximately 3% increase over prior levels. For fiscal year 2025, the agreed upon defense spending increase is 1% from prior year levels. However, failure to pass all twelve full year appropriations by calendar year end will trigger 1% cuts from prior year enacted levels. We believe that the strategic priorities requiring more advanced and sophisticated defense technology capabilities create a favorable market environment for DRS.

To prevent a government shutdown at the end of fiscal year 2023, Congress passed a Continuing Resolution (CR) at the end of September, and the President signed the legislation into law on September 30, 2023. The extension is effective through November 17, 2023 allowing lawmakers more time to potentially complete the fiscal year 2024 appropriations bills. In the event of a U.S. government shutdown or an extended period of CR, our business, program performance and results of operations could be impacted by the resulting disruptions to federal government offices, workers, and operations, including but not limited to program cancellations, schedule delays, production halts and other disruptions and nonpayment, which could adversely affect our results of operations. The significance of these impacts will primarily be based on the length of the CR or shutdown.

### Operating Performance Assessment and Reporting

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 Defense Contract Audit Agency (“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, generating 93% and 93% of our total revenues for the three and nine months ended September 30, 2023, respectively. Our remaining revenue is generated from service related contracts. The percentage of product sales increased from 91% for the three months ended September 30, 2022 to 93% during the current quarter. The increased revenue allocation towards more product based sales is attributed to the disposition of our GES business in August of the 2022 fiscal year. Additionally, 84% and 84% of our revenue is derived from firm-fixed priced contracts for the three and nine months ended September 30, 2023, respectively. This is consistent with the prior year which realized firm-fixed sales of 86% and 87% for the three and nine months ended September 30, 2022, respectively.

Under flexibly priced contracts, 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.

For the three and nine months ended September 30, 2023, flexibly priced contracts represented 16% of our total revenues.

Please refer to *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. We expect general and administrative expenses will continue to be impacted by the costs associated with being a publicly-traded company.

### 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, for the three and nine months ended September 30, 2023, as compared to the three and nine months ended September 30, 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 contracts and varying delivery schedules. Accordingly, operating results in a particular period may not be indicative of future operating results.

*(Dollars in millions, except per share amounts)*

|  | Three Months Ended September 30, 2023 | September 30, 2022 | September 30, 2023 vs. September 30, 2022 $% |  |  |
| --- | ---: | ---: | ---: | --- | ---: |
| Total revenues | $703 | $634 | $69 |  | 10.9% |
| Total cost of revenues | (541) | (504) | (37) |  | 7.3% |
| Gross profit | $162 | $130 | $32 |  | 24.6% |
| Gross margin | 23.0% | 20.5% | 250 | bps |  |
| General and administrative expenses | (96) | (101) | 5 |  | (5.0)% |
| Amortization of intangibles | (5) | (3) | (2) |  | 66.7% |
| Other operating (expenses) income, net | (2) | 350 | (352) |  | (100.6)% |
| Operating earnings | $59 | $376 | $(317) |  | (84.3)% |
| Interest expense | (10) | (9) | (1) |  | 11.1% |
| Other, net | (1) | — | (1) |  | NM |
| Earnings before taxes | $48 | $367 | $(319) |  | (86.9)% |
| Income tax provision | 1 | 88 | (87) |  | (98.9)% |
| Net earnings | $47 | $279 | $(232) |  | (83.2)% |
| Basic EPS(1) | $0.18 | $1.33 | $(1.15) |  | (86.5)% |
| Diluted EPS(1) | $0.18 | $1.33 | $(1.15) |  | (86.5)% |
| Backlog | $4,719 | $3,138 | $1,581 |  | 50.4% |
| Bookings | $1,055 | $874 | $181 |  | 20.7% |

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.

*(Dollars in millions, except per share amounts)*

|  | Nine Months Ended September 30, 2023 | September 30, 2022 | September 30, 2023 vs. September 30, 2022 $% |  |  |
| --- | ---: | ---: | ---: | --- | ---: |
| Total revenues | $1,900 | $1,873 | $27 |  | 1.4% |
| Total cost of revenues | (1,462) | (1,482) | 20 |  | (1.3)% |
| Gross profit | $438 | $391 | $47 |  | 12.0% |
| Gross margin | 23.1% | 20.9% | 220 | bps |  |
| General and administrative expenses | (286) | (261) | (25) |  | 9.6% |
| Amortization of intangibles | (16) | (7) | (9) |  | 128.6% |
| Other operating (expenses) income, net | (10) | 351 | (361) |  | (102.8)% |
| Operating earnings | $126 | $474 | $(348) |  | (73.4)% |
| Interest expense | (27) | (27) | — |  | —% |
| Other, net | (2) | — | (2) |  | NM |
| Earnings before taxes | $97 | $447 | $(350) |  | (78.3)% |
| Income tax provision | 3 | 107 | (104) |  | (97.2)% |
| Net earnings | $94 | $340 | $(246) |  | (72.4)% |
| Basic EPS(1) | $0.36 | $1.62 | $(1.26) |  | (77.8)% |
| Diluted EPS(1) | $0.36 | $1.62 | $(1.26) |  | (77.8)% |
| Backlog | $4,719 | $3,138 | $1,581 |  | 50.4% |
| Bookings | $2,502 | $2,304 | $198 |  | 8.6% |

NM- percentage change not meaningful

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

### Revenue

Our revenue generation of $703 million for the three months ended September 30, 2023 represents an increase of $69 million or 10.9% as compared to the three months ended September 30, 2022. The revenue increase is primarily attributed to continued performance on our electric power and propulsion programs with the U.S. Navy which was offset in part by a reduction in Force Protection related revenues, both within our IMS segment, during the period.

Our revenue generation of $1,900 million for the nine months ended September 30, 2023 represents an increase of $27 million or 1.4% over the nine months ended September 30, 2022. The revenue increase was also driven by increased demand within our electric power and propulsion programs with the U.S. Navy for both submarine and surface ships within our IMS segment. This was offset in part by the difference in revenue contribution realized from our now disposed Global Enterprise Solutions (“GES”) operating unit as compared to the revenue generated from RADA, the “net divestiture impact.”

### Cost of Revenues

Cost of revenues increased by $37 million or 7.3% from $504 million to $541 million for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022. The cost of revenue increase was primarily due to the increased revenue contribution realized during the period. This was offset in part by improved program performance within our laser sensing portfolio as well as the mix benefit realized from increased sales of our tactical radars acquired in the RADA acquisition. In total for the three months ended September 30, 2023, cost of revenues decreased as a percentage of revenues driving gross margin contribution to 23.0% as compared to 20.5% realized during the three months ended September 30, 2022.

Cost of revenue decreased by $20 million or 1.3% from $1,482 million to $1,462 million for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. The decrease was primarily due to the reduced cost of revenues attributed to favorable program mix and performance within both our IMS and ASC segments highlighted by the continued performance improvements realized within our laser program portfolio. Additionally the higher profit generation of the RADA revenue contribution further drove a reduction in the overall cost of revenues. For the year to date period, this was partially offset by the reduction of revenues noted above as well as certain programmatic cost growth realized on our dismounted soldier sensing programs.

### Gross Profit

Gross profit increased by $32 million, or 24.6% to $162 million for the three months ended September 30, 2023 as compared to $130 million for the three months ended September 30, 2022, and gross profit increased by $47 million or 12.0% for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 resulting from the revenue and cost of revenue trends noted above.

### General and Administrative Expenses

General and administrative expenses (“G&A”) decreased by $5 million or 5.0% for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 and increased by $25 million or 9.6% for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. The decrease in G&A for the three months ended September 30, 2023 is primarily attributed to transaction costs recorded in 2022, partially offset by increased investment in internal research and development (“IR&D”) of $2 million and public company operating costs. The increase in G&A for the nine months ended September 30, 2023 is primarily due to increased investment in IR&D expenditures of $18 million, the addition of the RADA commercial business model and increased public company operating costs also contributed to the year over year increase in G&A expenditures.

### Amortization of Intangibles

Amortization of intangibles of $5 million for the three months ended September 30, 2023 increased $2 million as compared to the three months ended September 30, 2022. Amortization of intangibles of $16 million for the nine months ended September 30, 2023 increased $9 million as compared to the nine months ended September 30, 2022. This is attributed to the increased amortization generated from the RADA acquired intangible assets.

### Other Operating (Expenses) Income, Net

Other operating (expenses) income decreased from an income of $350 million and $351 million for the three and nine months ended September 30, 2022, respectively, to an expense of $2 million and $10 million for the three and nine months ended September 30, 2023, respectively. The income for both the three and nine months in the prior year is primarily due to the gain on sale of the GES business and AAC Joint venture which totaled $350 million. The expense in the current year is largely attributed to restructuring efforts implemented in our ASC segment.

### Operating Earnings

Operating earnings decreased by $317 million to $59 million for the three months ended September 30, 2023. For the nine months ended September 30, 2023, operating earnings decreased by $348 million from $474 million for nine months ended September 30, 2022 to $126 million for the nine months ended September 30, 2023. The decrease was driven by the gains on asset sales in the prior year, resulting from our dispositions of our GES and AAC operating units.

### Interest Expense

Interest expense remained relatively consistent realizing an expense of $10 million for three months ended September 30, 2023, compared to $9 million for the three months ended September 30, 2022. For the nine months ended September 30, 2023 and September 30, 2022, interest expense remained consistent at $27 million.

### Other, Net

Other, net increased $1 million for the three months ended September 30, 2023 when compared to the three months ended September 30, 2022, and increased $2 million for the nine months ended September 30, 2023 when compared to the nine months ended September 30, 2022.

### Earnings Before Taxes

Earnings before taxes decreased by $319 million and $350 million to $48 million and $97 million for the three and nine months ended September 30, 2023, respectively, from $367 million and $447 million for the three and nine months ended September 30, 2022, respectively. This was primarily due to the decreases in operating earnings as noted above.

### Income Tax Provision

Income tax provision decreased by $87 million and $104 million to $1 million and $3 million for the three and nine months ended September 30, 2023, respectively, from $88 million and $107 million for the three and nine months ended September 30, 2022, respectively. This was primarily attributable to the prior year tax expenditures on the gains realized on the disposition of GES and AAC in the prior year. This was compounded by the federal research and development credits recorded in the three and nine months ended September 30, 2023, which further reduced our tax expenditures for the three and nine months ended September 30, 2023.

### Net Earnings

Net earnings decreased by $232 million to $47 million for the three months ended September 30, 2023 and decreased $246 million to $94 million for the nine months ended September 30, 2023, respectively, when compared to the three and nine months ended September 30, 2022. This was driven by a decrease in earnings before taxes offset by the income tax provision decreasing as noted above.

### Backlog

*Backlog* - We define Backlog to include the following components:

(1) 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.

(2) 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.

Total backlog increased by $1,581 million to $4,719 million for nine months ended September 30, 2023, from $3,138 million for the nine months ended September 30, 2022. The backlog increase was driven primarily by the receipt of a multi-boat contract to support the electric propulsion efforts on the Columbia Class submarine program with the U.S. Navy. Subsequent to the third quarter, the Company agreed to contract terms and pricing totaling over $3 billion, for the majority of our electric power and propulsion system on the remaining seven Columbia Class submarines. The award is not included in the backlog numbers noted above.

### Bookings

*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.

Bookings results for three months ended September 30, 2023 increased to $1,055 million as compared to $874 million for the three months ended September 30, 2022. Bookings for the nine months ended September 30, 2023 increased by 9% or $198 million to $2,502 million as compared to $2,304 million for the nine months ended September 30, 2022.

### 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.

*(Dollars in millions, except per share amounts)*

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Adjusted EBITDA(1) | $82 | $58 | $193 | $198 |
| Adjusted EBITDA Margin(1) | 11.7% | 9.2% | 10.2% | 10.6% |
| Adjusted Diluted EPS(1)(2) | $0.20 | $0.12 | $0.42 | $0.47 |
| Free Cash Flow(1) |  |  | $(335) | $(262) |

(1) Note on non-GAAP financial measures: Throughout the discussion of our results of operations we use non-GAAP financial measures including Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Diluted EPS and Free Cash Flow, as measures of our overall performance. Definitions and reconciliations of these measures to the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP are included below.

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

### Non-GAAP Financial Measures

We believe the non-GAAP financial measures presented in this document will help investors understand our financial condition and operating results and assess our future prospects. We believe these non-GAAP financial measures, each of which is discussed in greater detail below, are important supplemental measures because they exclude unusual or non-recurring items as well as non-cash items that are unrelated to or may not be indicative of our ongoing operating results. Further, when read in conjunction with our U.S. GAAP results, these non-GAAP financial measures provide a baseline for analyzing trends in our underlying businesses and can be used by management as a tool to help make financial, operational and planning decisions. Finally, these measures are often used by analysts and other interested parties to evaluate companies in our industry by providing more comparable measures that are less affected by factors such as capital structure.

We recognize that these non-GAAP financial measures have limitations, including that they may be calculated differently by other companies or may be used under different circumstances or for different purposes, thereby affecting their comparability from company to company. In order to compensate for these and the other limitations discussed below, management does not consider these measures in isolation from or as alternatives to the comparable financial measures determined in accordance with U.S. 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:

#### Consolidated Entity Adjusted EBITDA Reconciliation:

*(Dollars in millions)*

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net earnings | $47 | $279 | $94 | $340 |
| Income tax provision | 1 | 88 | 3 | 107 |
| Amortization of intangibles | 5 | 3 | 16 | 7 |
| Depreciation | 16 | 14 | 47 | 41 |
| Restructuring costs | 2 | — | 10 | — |
| Interest expense | 10 | 9 | 27 | 27 |
| Deal related transaction costs | 1 | 16 | 4 | 26 |
| Gain on sale of business | — | (350) | — | (350) |
| Other one-time non-operational events | — | (1) | (8) | — |
| Adjusted EBITDA | $82 | $58 | $193 | $198 |
| Adjusted EBITDA Margin | 11.7% | 9.2% | 10.2% | 10.6% |

### Adjusted EBITDA

Adjusted EBITDA increased by $24 million or 41.4% to $82 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The increase in Adjusted EBITDA for the three month period is primarily attributed to improved program performance noted above offset by increased IR&D investments and the impact of higher public company expenditures both residing in our G&A expense line item. For the nine months ended September 30, 2023, Adjusted EBITDA decreased $5 million or 2.5% to $193 million from $198 million for the nine months ended September 30, 2022. This is primarily attributed to the increase in IR&D and public company expenditures as well as the non- recurring ‘one-time’ increase in profitability on the Columbia Class program experienced in the nine months ended September 30, 2022.

### Adjusted EBITDA Margin

Adjusted EBITDA Margin was 9.2% and 10.6% for the three and nine months ended September 30, 2022, respectively, and 11.7% and 10.2% for the three and nine months ended September 30, 2023, respectively. The increase for the quarter was primarily due to operational leverage realized on the 10.9% increase in revenue realized during the three months ended September 30, 2023 as compared to the three month period ended September 30, 2022. This was compounded by improved program performance further enhancing our adjusted EBITDA margin.

The decrease for the nine month period was primarily due to the increased G&A expenditures as well as the ‘one-time’ non-recurring profitability on the Columbia Class program mentioned above.

### Adjusted Diluted EPS

*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 as well as gains (losses) on business disposals (net of taxes) from our net earnings and dividing by the diluted weighted average number of shares outstanding to arrive at Adjusted Diluted EPS. We believe that Adjusted Diluted EPS allows investors to effectively compare our core performance from period to period by excluding items that are not indicative of, or are unrelated to, results from our ongoing business. Adjusted Diluted EPS has limitations as an analytical tool and does not represent and should not be considered an alternative to basic or diluted EPS as determined in accordance with U.S. GAAP. The reconciliation of Adjusted Diluted EPS to U.S. GAAP diluted EPS is shown below:

#### Consolidated Entity Reconciliation of Adjusted Diluted EPS:

*(Dollars in millions, except per share amounts; shares in millions)*

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net earnings | $47 | $279 | $94 | $340 |
| Deal related transaction costs | 1 | 16 | 4 | 26 |
| Amortization of intangibles | 5 | 3 | 16 | 7 |
| Restructuring costs | 2 | — | 10 | — |
| Gain on sale of business, net of taxes | — | (270) | — | (270) |
| Other one-time non-operational events | — | (1) | (8) | — |
| Tax effect of adjustments | (2) | (2) | (5) | (5) |
| Adjusted net earnings | $53 | $25 | $111 | $98 |
| Diluted weighted average number of shares outstanding | 265 | 210 | 264 | 210 |
| Diluted EPS(1) | $0.18 | $1.33 | $0.36 | $1.62 |
| Adjusted diluted EPS(1) | $0.20 | $0.12 | $0.42 | $0.47 |

(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.

### Adjusted Diluted EPS

For the nine months ended September 30, 2023 there were 262,039,337 shares of common stock outstanding, an increase of 51,594,264 shares from the September 30, 2022 shares outstanding of 210,445,073. The increased share count is attributed to shares issued to consummate the RADA merger of 49,788,960 and equity vesting and stock option exercises of 1,805,304. Diluted shares as of September 30, 2023 totaled 3 million and 3 million for the three and nine months ended September 30, 2023, respectively, increasing from the prior year which predated equity award grants. The diluted shares are attributable to equity grants and unexercised stock options. There were no outstanding equity grants at September 30, 2022. Adjusted diluted EPS of $0.20 for the three months ended September 30, 2023 increased $0.08 as compared with the same period in the prior year. The increase is a product of the increased adjusted net earnings offset by the increased share count as noted above. Adjusted Diluted EPS of $0.42 for the nine months ended September 30, 2023 represents a decrease of $0.05 from $0.47 for the nine months ended September 30, 2022, which is attributed to the increase in shares outstanding noted above, partially offset by the adjusted net earnings increase as shown in the table above.

### Free Cash Flow

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

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:

*(Dollars in millions)*

|  | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Net cash used in operating activities | $(310) | $(246) |
| Transaction related expenditures, net of tax | 17 | 19 |
| Capital expenditures | (42) | (35) |
| Proceeds from sales of assets | — | — |
| Free cash flow | $(335) | $(262) |

### Free Cash Flow

Free cash flow usage increased by $73 million to $335 million for the nine months ended September 30, 2023 from $262 million for the nine months ended September 30, 2022. This was primarily due to cash used to fund working capital for the nine months ended September 30, 2023 when compared to nine months ended September 30, 2022.

### 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 have a material adverse impact on our business, financial condition and results of operations” Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Overview and Considerations—Business Environment” in our Annual Report for the year ended December 31, 2022, filed with the SEC on March 28, 2023 and Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Overview and Considerations—Business Environment” in this Quarterly 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.*

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 and total transaction price 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. 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 three and nine months ended September 30, 2023 and 2022, respectively:

#### Impact of Change in Estimates on our Revenue Results:

*(Dollars in millions)*

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Revenue | $6 | $(11) | $(14) | $(22) |
| Total % of Revenue | 0.9% | 1.8% | 0.7% | 1.2% |

Additionally, the timing of our cash flows is impacted by the timing of achievement of billable milestones on contracts. Historically, this has resulted and could continue to result in fluctuations in working capital levels and quarterly free cash flow results. As a result of such quarterly fluctuations in free cash flow results, we believe that quarter-to-quarter comparisons of our results of operations may not necessarily be meaningful and should not be relied upon as indicators of future performance.

### 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 U.S. intelligence community, including those related to cybersecurity, could impact our ability to perform in the markets we serve.

### International & Commercial Sales

International revenue, including foreign military sales, foreign military financing, and direct commercial sales, accounted for approximately 7% and 20% of our revenue for the three and nine months ended September 30, 2023, respectively, and 17% and 18% of our revenues for the three and nine months ended September 30, 2022, respectively. The increase is due in part to increased purchases resulting from continued military aid programs in support of Ukraine in its conflict with Russia. Given that 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 three and nine months ended September 30, 2023.

### 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, a leading Israel-based provider of small-form tactical radar, to become a combined public company. As previously disclosed, RADA shareholders retained approximately 19% ownership in the combined Company with Leonardo DRS’s parent company, Leonardo S.p.A., (MIL: LDO), owning the remaining 81%. Immediately following the closing, the Company began trading on the Nasdaq Stock Exchange and the Tel Aviv Stock Exchange under the ticker “DRS.”

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 the 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 Acquisitions and Dispositions* for additional information regarding the transaction.

### Dispositions

On March 21, 2022, the Company entered into a definitive agreement to sell its Global Enterprise Solutions (“GES”) business to SES Government Solutions, Inc., a wholly-owned subsidiary of SES S.A., for $450 million subject to certain working capital adjustments. The transaction was completed on August 1, 2022 and resulted in cash proceeds of $427 million after net working capital adjustments. The transaction netted an aggregate pretax gain net of transaction costs of $309 million ($239 million after tax) of which $323 million was included in Other Operating income (expense) net partially reduced by aggregate transaction costs of $14 million included in Selling, General & Administrative costs and tax expenses of $70 million. 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 Advanced Acoustic Concepts LLC (“AAC”) for $56 million to Thales Defense & Security, Inc., the minority partner in AAC. The transaction was completed on July 8, 2022 and resulted in proceeds of $56 million. The transaction netted an aggregate pretax gain of $31 million ($22 million net of taxes). The aggregate gain of $31 million is included in Other Operating income (expense) net offset by tax expense of $9 million.

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

### 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, and Bookings to provide detailed information on our segment performance. Additional information regarding our segments can be found in *Note 16: Segment Information* within the unaudited Consolidated Financial Statements.

*(Dollars in millions)*

| Revenues: | Three Months Ended September 30, 2023 | 2022 | September 30, 2023 vs. September 30, 2022 Variance |  |  |
| --- | ---: | ---: | ---: | --- | ---: |
| ASC | $431 | $408 | $23 |  | 5.6% |
| IMS | 277 | 229 | 48 |  | 21.0% |
| Corporate & Eliminations | (5) | (3) | (2) |  | 66.7% |
| Total revenues | $703 | $634 | $69 |  | 10.9% |
| **Adjusted EBITDA:** |  |  |  |  |  |
| ASC | $48 | $36 | $12 |  | 33.3% |
| IMS | 34 | 22 | 12 |  | 54.5% |
| Corporate & Eliminations | — | — | — |  | NM |
| Total Adjusted EBITDA | $82 | $58 | $24 |  | 41.4% |
| **Adjusted EBITDA Margin:** |  |  |  |  |  |
| ASC | 11.1% | 8.8% | 230 | bps |  |
| IMS | 12.3% | 9.6% | 270 | bps |  |
| **Bookings:** |  |  |  |  |  |
| ASC | $820 | $700 | $120 |  | 17.1% |
| IMS | 235 | 174 | 61 |  | 35.1% |
| Total bookings | $1,055 | $874 | $181 |  | 20.7% |

*(Dollars in millions)*

| Revenues: | Nine Months Ended September 30, 2023 | 2022 | September 30, 2023 vs. September 30, 2022 Variance |  |  |
| --- | ---: | ---: | ---: | --- | ---: |
| ASC | $1,226 | $1,248 | $(22) |  | (1.8)% |
| IMS | 692 | 634 | 58 |  | 9.1% |
| Corporate & Eliminations | (18) | (9) | (9) |  | 100.0% |
| Total revenues | $1,900 | $1,873 | $27 |  | 1.4% |
| **Adjusted EBITDA:** |  |  |  |  |  |
| ASC | $121 | $125 | $(4) |  | (3.2)% |
| IMS | 72 | 73 | (1) |  | (1.4)% |
| Corporate & Eliminations | — | — | — |  | NM |
| Total Adjusted EBITDA | $193 | $198 | $(5) |  | (2.5)% |
| **Adjusted EBITDA Margin:** |  |  |  |  |  |
| ASC | 9.9% | 10.0% | (10) | bps |  |
| IMS | 10.4% | 11.5% | (110) | bps |  |
| **Bookings:** |  |  |  |  |  |
| ASC | $1,693 | $1,573 | $120 |  | 7.6% |
| IMS | 809 | 731 | 78 |  | 10.7% |
| Total bookings | $2,502 | $2,304 | $198 |  | 8.6% |

### ASC

#### Revenue:

The ASC segment reported revenue of $431 million and $1,226 million for the three and nine months ended September 30, 2023, respectively, an increase of 6% or $23 million from the three months ended September 30,

2022\. The increase is attributed to Naval and Land based network computing programs. This was offset in part by a reduction in international dismounted soldier programs realized during the period.

The ASC segment realized a revenue decrease of 2% or $22 million from the nine months ended September 30, 2022. This decrease is attributed to the net divestiture impact, in which our disposed assets (GES) provided a higher revenue contribution than the acquired RADA asset for the year to date period. The net divestiture impact was offset in large part by increased revenue contributions within our airborne sensing and naval computing programs.

#### Adjusted EBITDA and Adjusted EBITDA Margin:

ASC’s Adjusted EBITDA increased by $12 million or 33% to $48 million from $36 million for the three months ended September 30, 2023 when compared to the three months ended September 30, 2022. The increase was driven by increased revenue contribution, favorable mix and improved program performance. This was offset by an increase in G&A expenditures attributed to IR&D investments, incremental public company costs allocated to the segment, as well as the increased G&A attributed to the RADA commercial business model.

For the nine month period ended September 30, 2023 Adjusted EBITDA decreased $4 million or 3%, from $125 million to $121 million. The decrease in Adjusted EBITDA was driven by increased G&A expenditures attributed to IR&D investments, incremental public company costs allocated to the segment, as well as the increased G&A attributed to the RADA commercial business model. Additionally the ASC segment realized a reduction in revenue as compared to the prior nine month period ended September 30, 2022. These reductions were offset by increased gross margin contribution attributed in large part to the high margin realized on the RADA revenue contribution.

The increase in Adjusted EBITDA drove an increase in Adjusted EBITDA Margin from 8.8% for the three months ended September 30, 2022 to 11.1% for the three months ended September 30, 2023. The margin expansion is driven by the incremental revenue contribution during the period coupled with improved program performance as noted above. The increase was offset in part by the incremental G&A investments detailed above.

ASC realized a decrease in Adjusted EBITDA which drove a slight decrease in Adjusted EBITDA Margin from 10.0% for the nine months ended September 30, 2022 to 9.9% for nine months ended September 30, 2023. The margin impact was attributed to the reduction in operational leverage from the reduction in revenues attributed to the net divestiture impact coupled with the increase in G&A expenditures as noted above. This was largely offset by the improved program performance and higher margin contribution from the RADA tactical radar sales.

#### Bookings:

The ASC segment generated a 17.1% increase in bookings for the three months ended September 30, 2023 increasing $120 million when compared to the three months ended September 30, 2022. The increase in new awards is driven by increased demand for ground vehicle and airborne sensing programs. Bookings continue to exceed the revenue output driving an increase in backlog over the period.

For the nine months ended September 30, 2023 bookings also increased $120 million or 7.6% from the nine months ended September 30, 2022, driving a total booking contribution of $1,693 million for the current period. The increase is driven by ground vehicle sensing and naval computing programs awarded during the period.

### IMS

#### Revenue:

IMS segment revenue increased by $48 million or 21% to $277 million for the three months ended September 30, 2023 from $229 million for the three months ended September 30, 2022 attributed to continued momentum in our naval power and propulsion business. Additionally, the trend continued in the nine months ended September 30, 2023 with revenue growth of $58 million or 9% to $692 million for the nine months ended September 30, 2023 from $634 million for the nine months ended September 30, 2022. The growth for the nine month period was also attributed to our naval power and propulsion business but was partially offset by the non-recurring impact of the contract modification on the Columbia program realized in the prior year.

#### Adjusted EBITDA and Adjusted EBITDA Margin:

IMS’s Adjusted EBITDA increased by $12 million or 55% to $34 million for the three months ended September 30, 2023 from $22 million for the three months ended September 30, 2022. The increase for the quarter is attributed to operational leverage created by the increased revenue output as well as continued program improvement on our Columbia Class submarine program. This drove Adjusted EBITDA margin up 270 bps to 12.3% compared to the 9.6% realized during the three month period ended September 30, 2022.

For the nine months ended September 30, 2023, Adjusted EBITDA decreased $1 million or 1% to $72 million from $73 million for the nine months ended September 30, 2022. This was primarily due to the favorable financial impact realized from the 2nd ship-set contract modification on the Columbia program realized in the first quarter of 2022 ($25 million) largely offset by increased revenue contribution and the related operational leverage.

#### Bookings:

Booking contributions increased by $61 million and $78 million or 35.1% and 10.7% for the three and nine months ended September 30, 2023, respectively, to $235 million and $809 million from $174 million and $731 million for the three and nine months ended September 30, 2022, respectively. The increase for the quarter is largely attributed to our force protection efforts in short range air defense and logistic support programs. For the year to date period the bookings performance is largely attributed to continued funding progress on our Electronic Power & Propulsion contracts.

### 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 11: 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 September 30, 2023, was $47 million compared to $306 million as of December 31, 2022.

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

*(Dollars in millions)*

|  | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Net cash used in operating activities | $(310) | $(246) |
| Net cash (used in) provided by investing activities | (42) | 448 |
| Net cash provided by (used in) financing activities | 93 | (379) |
| Effect of exchange rate changes on cash and cash equivalents | — | — |
| Net decrease in cash and cash equivalents | $(259) | $(177) |
| Free cash flow(1) | $(335) | $(262) |

(1) Free cash flow is a Non-GAAP measure. The reasons we use this Non-GAAP financial measure and its reconciliation to the most directly comparable U.S. GAAP financial measure is provided above under “—Key Financial and Operating Measures—Non-GAAP Financial Measures.”

### Operating Activities

Cash usage related to the operating activities increased by $64 million from $246 million for the nine months ended September 30, 2022 to $310 million for the nine months ended September 30, 2023. This was primarily due to cash used to fund working capital for the nine months ended September 30, 2023 when compared to the nine months ended September 30, 2022. The increased working capital was driven by incremental tax payments associated with the R&D capitalization requirements of Section 174 of the Tax Code coupled with incremental investments in inventory and contract assets to combat supply chain lead-times.

### Investing Activities

Net cash used in investing activities increased by $490 million for the nine months ended September 30, 2023 when compared to the nine months ended September 30, 2022 primarily due to the prior year investing cash inflow generated from the disposition of our GES and AAC operations.

### Financing Activities

Net cash provided by financing activities increased by $472 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The increase was primarily related to the dividend of our disposition proceeds to US Holding in the prior year.

### Free Cash Flow

Free cash flow usage increased by $73 million to $335 million for nine months ended September 30, 2023 from $262 million for the nine months ended September 30, 2022. This was primarily due to cash used in operating activities noted above for the nine months ended September 30, 2023 when compared to the nine months ended September 30, 2022.

## Market risk

As filed, 2,255 characters.

### Equity Risk

We currently have limited risk related to fluctuations in marketable securities. Outside of pension assets which are disclosed in *Note 12: Pension and Other Postretirement Benefits* to the Consolidated Financial Statements, the only investments the Company holds are overnight money market accounts. Fluctuations are unlikely and would have limited impact on the financial statements of the Company.

### Interest Rate Risk

We are exposed to interest rate risk on variable-rate borrowings under our $225 million Term Loan A and our revolving credit facilities under which we had an outstanding balance of $217 million and $110 million, respectively, as of September 30, 2023. A 0.5% increase or decrease in our weighted average interest rate on our variable debt outstanding as of September 30, 2023 would result in an increase or decrease in our annual interest expense of approximately $2 million. The carrying values of the Company’s borrowings under the 2022 Credit Facility approximate their fair values at September 30, 2023. For additional information please refer to *Note 11: Debt.*

### Foreign Currency Risk

In certain circumstances, we may be exposed to foreign currency risk. However, as the overwhelming majority of our revenue is derived from U.S. sources directly as a prime contractor or indirectly as a subcontractor for the U.S. government as end-customer, we have limited foreign currency exposure. Currently, our exposure is primarily with the Canadian dollar and limited to receivables owed of $39 million as of September 30, 2023. A 10% fluctuation in exchange rates would not have a material impact on our financial statements. We do not enter into or issue derivative instruments for trading purposes.

### Inflation Risk

We have generally been able to anticipate increases in costs when pricing our contracts. Bids for longer-term firm fixed-price contracts typically include assumptions for labor and other cost escalations in amounts that historically have been sufficient to cover cost increases over the period of performance. We have seen impacts due to inflation on isolated programs. These have largely been offset with our internal continuous improvement savings initiatives and improved program performance.

## Controls and procedures

As filed, 1,527 characters.

### Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the quarterly period ended September 30, 2023, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive officer and principal financial officer has concluded that during the period covered by this report, our disclosure controls and procedures were effective.

Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

### Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the quarterly period ended September 30, 2023 covered by this Quarterly Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 11,182 characters.

**We are susceptible to a security breach, through cyber-attack, cyber-intrusion, insider threats or otherwise, and to other significant disruptions of our IT networks and related systems, or those of our customers, suppliers, vendors, subcontractors, partners, or other third parties.**

We are subject to the risks of cybersecurity incidents described in the section “Risk Factors—We are susceptible to a security breach, through cyber-attack, cyber-intrusion, insider threats or otherwise, and to other significant disruptions of our IT networks and related systems or of those we operate for our customers” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022. These risk include that safeguards put in place by third parties, including our customers, subcontractors, suppliers, vendors and partners, may not be effective to minimize the impact of cyber threats, security threats or other business disruptions. From time to time, these third parties have been and continue to be subject to breaches. For example, we are currently taking measures in response to a cyber-attack by a malicious actor impacting one of our suppliers. While this incident has not had a material impact on us at this time, our responses to this and similar incidents may disrupt our business relationships and could negatively affect our operations. Although we have processes designed to assess and confirm certain cybersecurity standards, we are and will remain at risk of a data breach due to the intentional or unintentional non-compliance by a third party’s employee or agent or the break-down of a third party’s data protection processes, which may not be as sophisticated as ours, or a cyber-attack on a third party’s information network or systems. There can be no assurance that cybersecurity incidents at our customers, suppliers, vendors, subcontractors, partners or other third parties will not have a material negative impact on our reputation, business and operations.

**Our international business exposes us to additional risks, including risks related to geopolitical and economic factors, laws and regulations.**

For the nine months ended September 30, 2023 and 2022, approximately 9% and 8%, respectively, and for the years ended December 31, 2022, 2021, and 2020, approximately 7%, 5% and 8%, respectively, of our revenue was derived from sales to customers located in foreign countries and foreign governments. We cannot assure you that we will maintain significant operations internationally or that any such operations will be successful. International business (including our participation in joint ventures and other joint business arrangements) is subject to numerous political and economic factors, legal requirements, cross-cultural considerations and other risks associated with doing business globally. These risks differ in some respects from those associated with our U.S. business and our exposure to such risks may increase if our international business continues to grow.

Our international business is subject to both U.S. and foreign laws and regulations, which may include, without limitation, laws and regulations relating to import-export controls (such as the ITAR, EAR, and customs laws), tariffs, embargoes, technology transfer restrictions, government contracts and procurement, data privacy and protection, investment, exchange rates and controls, the FCPA and other anti-corruption laws, including the UK Bribery Act and the Canadian Corruption of Foreign Public Officials Act, Article 5 of the Israeli Penal Law of 1977, the anti-boycott provisions under the EAR, U.S. economic sanctions administered by the Office of Foreign Assets Control and other federal agencies, labor and employment, works councils and other labor groups, anti-human trafficking, taxes, environment, immunity, security restrictions and intellectual property. If we or our employees, affiliates, partners or others with whom we work fail to comply with applicable laws and regulations we may be subject to administrative, civil, commercial or criminal penalties and liabilities, including suspension or debarment from government contracts or suspension of our export privileges. Our international business also exposes us to difficulties associated with repatriating cash generated or held abroad in a tax-efficient manner and changes in tax laws. Our customers outside of the U.S. generally have the ability to terminate contracts for default based on performance. Suspension or debarment, or termination of a contract due to default, in particular, could have a material adverse effect on our reputation, our ability to compete for other contracts and our financial position, results of operations and/or cash flows. New regulations and requirements, or changes to existing ones in the various countries in which we operate can significantly increase our costs and risks of doing business internationally. Any such future violations could have a material adverse impact on our reputation, business, results of operations and financial condition.

Changes in laws, regulations, political leadership and environment, or security risks may significantly affect our ability to conduct or continue to conduct business in international markets. Our international business may be impacted by changes in U.S. and foreign national policies and priorities, and geopolitical relationships, any of which may be influenced by changes in the threat environment, political leadership, geopolitical uncertainties, world events, acts of terrorism, bilateral and multi-lateral relationships, government budgets, and economic and political factors more generally, and any of which could impact funding for programs, alter export authorizations, or delay purchasing decisions or customer payments. These changes may affect the defense spending priorities and procurement policies of foreign governments which may affect our international military sales.

The Company is subject to risks associated with a dynamic geopolitical climate, including nation states that could take action to limit our access to key material and subcomponents used in our products. Recently enacted export controls by foreign governments covering rare elements could have a material adverse impact on our business, financial condition and results of operations.

Global economic conditions and fluctuations in foreign currency exchange rates could further impact our business. For example, the tightening of credit in financial markets outside of the U.S. could adversely affect the ability of our customers and suppliers to obtain financing and could result in a decrease in or cancellation of orders for our products and services or impact the ability of our customers to make payments. In addition, the majority of our foreign costs are denominated in local currencies. Over time, an increasing portion of our contracts with paid customers outside of the United States may be denominated in local currencies. Therefore, fluctuations in the value of the U.S. dollar and foreign currencies may affect our results of operations when translated into U.S. dollars. We do not currently engage in currency-hedging activities to limit the risk of exchange rate fluctuations. However, in the future, we may use derivative instruments, such as foreign currency forward and option contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates. The use of such hedging activities may not offset any or more than a portion of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place. Moreover, the use of hedging instruments may introduce additional risks if we are unable to structure effective hedges with such instruments.

Our contracts with non-U.S. customers may also include terms and reflect legal requirements that create additional risks including the risk of non-payment or delayed payment by foreign customers and governments. They may include industrial cooperation agreements requiring specific in-country purchases, investments, manufacturing agreements or other operational or financial obligations, including offset obligations, and provide for significant penalties if we fail to meet such requirements. They may also require us to enter into letters of credit, performance or surety bonds, bank guarantees and/or other financial arrangements to secure our performance obligations. We also increasingly are dependent on in-country suppliers and we face risks related to their failure to perform in accordance with the contracts and applicable laws, particularly where we rely on a sole source supplier. Our ability to sell products outside the U.S. could be adversely affected if we are unable to design our products for export on a cost-effective basis or to obtain and retain all necessary export licenses and authorizations on a timely basis.

Conducting business outside of the U.S. also exposes us to the complexity and necessity of using, and disruptions involving, our international dealers, distributors, sales representatives and consultants as well as the difficulties of managing a geographically dispersed organization and culturally diverse workforces, including compliance with applicable U.S. and local laws and practices, such as anti-corruption and anti-trust/competition laws. Contracts with international customers are significantly different than the contracts with our U.S. customers, and some are more complex and require different skills to manage. Our ability to conduct business outside of the U.S. also depends on our ability to attract and retain sufficient qualified personnel with the skills and/or security clearances in the markets in which we do business.

The products and services we provide internationally, including those provided by subsidiaries, subcontractors and joint ventures in which we have an interest, are sometimes in countries with unstable governments, economic or fiscal challenges, military or political conflicts and/or developing legal systems. This may increase the risk to our employees, subcontractors or other third parties, and/or increase the risk of a wide range of liabilities, as well as loss of property or damage to our products.

We are also closely monitoring developments in the war between Israel and Hamas that began on October 7, 2023. At this time, the conflict has the potential to evolve quickly creating uncertainty in the broader Middle East region, along with the potential for disruptions to our Israeli operations in the region including, but not limited to workforce calls for duty, transportation and other logistical impacts and reduced customer confidence.

The occurrence and impact of these factors is difficult to predict, but one or more of them could negatively impact our business, financial condition and results of operations.

As of the date of this Quarterly Report, there have been no other material changes to the risk factors discussed under “Risk Factors” in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 28, 2023.

Filed Nov 2, 2023.
Source: SEC EDGAR, the filing index for accession 0001628280-23-036429. Last ingested by Listed: Nov 2, 2026, 15:39 ET. No prices; not investment advice.