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What changed in Leonardo DRS, Inc.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Leonardo DRS, Inc.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+426 added−514 removedSource: 10-K (2024-02-28) vs 10-K (2023-03-28)

Top changes in Leonardo DRS, Inc.'s 2023 10-K

426 paragraphs added · 514 removed · 362 edited across 9 sections

Item 1. Business

Business — how the company describes what it does

54 edited+15 added−10 removed36 unchanged
Biggest changeOur innovative spirit and agility, together with our established market position in these areas have created a foundational and diverse base of programs across the DoD. We believe DRS is well positioned to not only support our customers in today’s mission but to also provide more autonomous, dynamic, interconnected, and multi-domain capabilities to defend against evolving and emerging threats.
Biggest changeWe believe DRS is well positioned to not only support our customers in today’s mission but to also provide more autonomous, dynamic, interconnected, and multi-domain capabilities to defend against and counter evolving and emerging threats. We view enhancement of capabilities in sensing, computing, self-protection and power as necessary to enable the strategic priorities of the DoD and our other customers.
Our sensing capabilities span numerous applications, including missions requiring advanced detection, precision targeting and surveillance sensing, long range electro-optic/infrared (“EO/IR”), signals intelligence (“SIGINT”) and other intelligence systems, electronic warfare (“EW”), ground vehicle sensing, next generation active electronically scanned array (“AESA”) tactical radars, dismounted soldier sensing and space sensing.
Our sensing capabilities span numerous applications, including missions requiring advanced detection, precision targeting and surveillance sensing, long range electro-optic/infrared (“EO/IR”), signals intelligence (“SIGINT”) and other intelligence systems, electronic warfare (“EW”), ground vehicle sensing, next generation active electronically scanned array tactical radars, dismounted soldier sensing and space sensing.
Fees on cost-type contracts can be fixed in terms of dollar value or can be variable due to award and incentive fees, which are generally based on performance 3 criteria such as cost, schedule, quality and/or technical performance. Award fees are determined and earned based on customer evaluation of the Company’s performance against contractual criteria.
Fees on cost-type contracts can be fixed in terms of dollar value or can be variable due to award and incentive fees, which are generally based on performance criteria such as cost, schedule, quality and/or technical performance. Award fees are determined and earned based on customer evaluation of the Company’s performance against contractual criteria.
Effective management and oversight of suppliers and subcontractors is an important element of our successful performance. If our sources of supply are disrupted, particularly in instances where we rely on only one or two sources of supply, our ability to meet our customer commitments could be adversely impacted.
Effective management and oversight of suppliers and subcontractors is an important element of our successful performance. If our sources of supply are disrupted, particularly in instances where we rely on only one or two sources of supply, our ability to meet our customer commitments could be adversely 4 impacted.
The group has been part of the Dow Jones Sustainability Index (“DJSI”) since 2010 and was again named as sustainability global leader in the Aerospace & Defense sector of DJSI in 2022. Available Information 8 We file reports and other information with the Securities and Exchange Commission (“SEC”).
The group has been part of the Dow Jones Sustainability Index (“DJSI”) since 2010 and was again named as sustainability global leader in the Aerospace & Defense sector of DJSI in 2022. Available Information We file reports and other information with the Securities and Exchange Commission (“SEC”).
If actual costs under such a contract exceed estimated costs, however, excess costs are apportioned between the customer and us, up to a ceiling. We bear all costs that exceed the ceiling, if any. • Cost-type contracts include cost plus fixed fee, cost plus award fee and cost plus incentive fee contracts.
If actual costs under such a contract exceed estimated costs, however, excess costs are apportioned between the customer and us, up to a ceiling. We bear all costs that exceed the ceiling, if any. 3 • Cost-type contracts include cost plus fixed fee, cost plus award fee and cost plus incentive fee contracts.
Research and Development 4 We conduct research and development (“R&D”) activities using our own funds (referred to as company-funded R&D or independent research and development (“IR&D”)) and under contractual arrangements with our customers (referred to as customer-funded R&D) to enhance existing products and services and to develop future technologies.
Research and Development We conduct research and development (“R&D”) activities using our own funds (referred to as company-funded R&D or independent research and development (“IR&D”)) and under contractual arrangements with our customers (referred to as customer-funded R&D) to enhance existing products and services and to develop future technologies.
We (again, including our subcontractors and others with whom we do business) also are subject to, and expected to perform in compliance with, a vast array of federal, state, local and international laws, regulations and requirements related to our industry, our products and the businesses we operate.
We (including our subcontractors and others with whom we do business) are also subject to, and expected to perform in compliance with, a vast array of federal, state, local and international laws, regulations and requirements related to our industry, our products and the businesses we operate.
Department of the Treasury, Office of Foreign Assets Control, as well as rules and regulations administered by the U.S. Customs and Border Protection and the Bureau of Alcohol, Tobacco, Firearms and Explosives.
Department of the Treasury, Office of Foreign Assets Control, as well as rules and regulations administered by the U.S. Customs and Border 7 Protection and the Bureau of Alcohol, Tobacco, Firearms and Explosives.
On April 19, 2022 we entered into a definitive sales agreement to divest our share of our current equity investment in Advanced Acoustic Concepts LLC to Thales Defense & Security, Inc. (TDSI), the minority partner in this joint venture. The transaction was completed on July 8, 2022 and resulted in proceeds of $56 million.
On April 19, 2022 we entered into a definitive sales agreement to divest our share of our current equity investment in Advanced Acoustic Concepts LLC to Thales Defense & Security, Inc., the minority 6 partner in this joint venture. The transaction was completed on July 8, 2022 and resulted in proceeds of $56 million.
R&D costs include basic research, applied research, concept formulation studies, design, development, and related test activities. IR&D costs are allocated to customer contracts as part of the general and administrative overhead costs and generally recoverable on our customer contracts with the U.S. Government. Customer-funded R&D costs are charged directly to the related customer contract.
R&D costs include basic research, applied research, concept formulation studies, design, development, and related test activities. IR&D costs are allocated to customer contracts as part of the general and administrative overhead costs and generally recoverable on our customer contracts with the U.S. government. Customer-funded R&D costs are charged directly to the related customer contract. R&D costs are expensed as incurred.
Unfunded backlog represents the revenue value of firm orders for products and services under existing contracts for which funding has not been obligated less funding previously recognized on these contracts.
Unfunded backlog represents the revenue value of firm orders for products and services under existing contracts for which funding has not been appropriated less funding previously recognized on these contracts.
If we fail to comply with the proxy agreement our classified U.S. government contracts could be terminated, which could have a material adverse impact on our business, financial condition and results of operations” in this Annual Report.
If we fail to comply with the proxy agreement our classified U.S. government contracts could be terminated, which could have a material adverse impact on our business, financial condition and results of operations ” in this Annual Report.
See Part I Item 1A. “Risk Factors—Risks Relating to Our Business—We are subject to a number of procurement, international trade, and other rules regulations and requirements related to our industry, our products, and the businesses we operate.
See Part I Item 1A, “ Risk Factors—Risks Relating to Our Business—We are subject to a number of procurement, international trade, and other rules, regulations and requirements related to our industry, our products, and the businesses we operate.
See Part I Item 1A, “Risk Factors—Risks Relating to Our Ownership and Status under the Proxy Agreement — We operate under a proxy agreement with the DoD that regulates significant areas of our governance.
See Part I Item 1A, “ Risk Factors—Risks Relating to Our Ownership and Status under the Proxy Agreement — We operate under a proxy agreement with the DoD that regulates significant areas of our governance.
ITEM 1. BUSINESS Overview Leonardo DRS, Inc. provides 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.
ITEM 1. BUSINESS Overview Leonardo DRS, Inc. provides 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 and electric power and propulsion technologies and solutions.
Leonardo S.p.A. competes in the most important international markets by leveraging its areas of technological and product leadership (Helicopters, Defense Electronics & Security, Aircraft, Aerostructures and Space). Listed on the Milan Stock Exchange (under the trading symbol “LDO”), in 2022 Leonardo S.p.A. recorded consolidated revenues of €14.7 billion and invested €2.0 billion in R&D.
Leonardo S.p.A. competes internationally by leveraging its areas of technological and product leadership (Helicopters, Defense Electronics & Security, Aircraft, Aerostructures and Space). Listed on the Milan Stock Exchange (under the trading symbol “LDO”), in 2022 Leonardo S.p.A. recorded consolidated revenues of €14.7 billion and invested €2.0 billion in R&D.
Typically we enter into three types of contracts: fixed price contracts, cost-plus contracts and time and material (“T&M”) contracts (cost-plus contracts and T&M contracts are aggregated above as flexibly priced contracts). Our contracts are normally for production, services or development.
Typically we enter into three types of contracts: fixed-price contracts, cost-plus contracts and time-and-material (“T&M”) contracts (cost-plus contracts and T&M contracts are aggregated above as flexibly priced contracts). Our contracts are normally for production, services or development. Production contracts are typically the fixed-price type, development contracts are sometimes of the cost-plus type, and service contracts are sometimes the T&M type.
If we fail to comply with such rules, regulations or other requirements we may be subject to civil and/or criminal penalties and/or administrative sanctions” in this Annual Report.
If we fail to comply with such rules, regulations or other requirements we may be subject to civil and/or criminal penalties and/or administrative sanctions ” in this Annual Report.
Organized into five business Sectors, Leonardo S.p.A. has a significant industrial presence in Italy, the United Kingdom, Germany, Poland, Switzerland and the USA, where it operates through subsidiaries, joint ventures and partnerships as: GIE ATR, MBDA, Telespazio, Thales Alenia Space, Hensoldt AG and other minor entities.
Organized into five business Sectors, Leonardo S.p.A. has a significant industrial presence in Italy, the United Kingdom, Germany, Poland, Switzerland and the USA, where it operates through subsidiaries, joint ventures and partnerships, including GIE ATR, MBDA, Telespazio, Thales Alenia Space, and Hensoldt AG.
We are subject to various U.S. federal, state, local and foreign laws and regulations relating to the protection of the environment, including those governing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites and the maintenance of a safe workplace. See Part I Item 1A.
We are subject to various U.S. federal, state, local and foreign laws and regulations relating to the protection of the environment, including those governing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites and the maintenance of a safe workplace.
If a supplier should cease to deliver such components, generally we would expect that other sources would be available; however, added cost and manufacturing delays might result. We have experienced delays attributable to supply shortages and quality and other related problems with respect to certain components.
If a supplier should cease to deliver such components, generally, but not in all cases, we would expect that other sources would be available; however, added cost and manufacturing delays might result. We have experienced delays attributable to supply shortages and quality and other related problems with respect to certain components.
Under fixed-price contracts, we agree to perform for an agreed-upon price. Accordingly, we derive benefits from cost savings, but bear the risk of cost overruns. Under fixed-price-incentive-fee contracts, if actual costs incurred in the performance of the contracts are less than estimated costs for the contracts the savings are apportioned between the customer and us.
Accordingly, we derive benefits from cost savings, but bear the risk of cost overruns. Under fixed-price-incentive-fee contracts, if actual costs incurred in the performance of the contracts are less than estimated costs for the contracts the savings are apportioned between the customer and us.
December 31, (Dollars in millions) 2022 2021 2020 Backlog: Funded (1) $ 2,783 $ 2,510 $ 2,847 Unfunded (1) 1,486 351 444 Total backlog (1) $ 4,269 $ 2,861 $ 3,291 ________________ (1) 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.
December 31, (Dollars in millions) 2023 2022 2021 Backlog: Funded (1) $ 3,397 $ 2,783 $ 2,510 Unfunded (1) 4,354 1,486 351 Total backlog (1) $ 7,751 $ 4,269 $ 2,861 ________________ (1) 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.
We determine our prime versus subcontract position based on our competitive position, likelihood of contract win and overall profit contribution. For 2022 our revenue consisted of 41% as a prime contractor direct with the government and 59% as a subcontractor.
We determine our prime versus subcontract position based on our competitive position, likelihood of contract win and overall profit contribution. For 2023 our revenue consisted of 39% as a prime contractor direct with the government and 61% as a subcontractor.
Various factors can affect the distribution of our revenues, profits and cash flows between accounting periods, including the U.S. federal government’s budget cycle based on its October-to-September fiscal year (which can lead to customers making orders in the weeks and days leading up to September 30 to avoid the loss of expiring and unobligated funds), the timing of government awards, the availability of government funding, the timing of costs incurred (including when materials are received), product deliveries and customer acceptance. 6 Product Warranties Product warranty costs generally are accrued in proportion to product revenue realized in conjunction with our over-time revenue recognition policy.
Various factors can affect the distribution of our revenues, profits and cash flows between accounting periods, including the U.S. federal government’s budget cycle based on its October-to-September fiscal year (which can lead to customers making orders in the weeks and days leading up to September 30 to avoid the loss of expiring and unobligated funds), the timing of government awards, the availability of government funding, the timing of costs incurred (including when materials are received), product deliveries and customer acceptance.
While we may retain rights over any technology, product or intellectual property that we develop under U.S. government contracts or using funding of the U.S. government, this requires us to have sufficient contracting leverage and to take timely affirmative measures to preserve our right. Human Capital Our performance is dependent on our highly educated and highly skilled workforce.
While we may retain rights over any technology, product or intellectual property that we develop under U.S. government contracts or using funding of the U.S. government, this requires us to have sufficient contracting leverage and to take timely affirmative measures to preserve our right.
While the majority of our revenue is derived from the U.S. government, we have a diverse business mix within the U.S. government funding and limited dependence on any single contract. Currently no single contract or platform represented more than 10% of our revenues for the 2022, 2021, and 2020 years.
While the majority of our revenue is derived from the U.S. government, we have a diverse business mix within the U.S. government funding. Currently no single contract represented more than 10% of our revenues for 2023, 2022, and 2021.
The amount of our revenues attributable to our contracts by contract type during 2022, 2021, and 2020 were as follows: December 31, ($ in millions) 2022 2021 2020 Firm fixed price $ 2,347 $ 2,498 $ 2,408 Flexibly priced (a) $ 346 $ 381 $ 370 (a) Includes revenue derived from cost type and time and materials contracts.
The amount of our revenues attributable to our contracts by contract type during 2023, 2022, and 2021 were as follows: Year Ended December 31, (Dollars in millions) 2023 2022 2021 Firm-fixed price $ 2,373 $ 2,347 $ 2,498 Flexibly priced (1) 453 346 381 ______________ (1) Includes revenue derived from cost-type and time-and-materials contracts.
Except as described in Note 18: Commitments and Contingencies ” to the Consolidated Financial Statements, we believe that we have been and are in material compliance with environmental laws and regulations and that we have no liabilities under environmental requirements that 7 would be expected to have a material adverse effect on our business, results of operations, financial condition or liquidity.
Except as described in Item 3, “Legal Proceedings,” we believe that we have been and are in material compliance with environmental laws and regulations and that we have no liabilities under environmental requirements that would be expected to have a material adverse effect on our business, results of operations, financial condition or liquidity.
“Risk Factors—Risks Relating to Our Business—We are subject to environmental laws and regulations, and our ongoing operations may expose us to environmental liabilities affecting our reputation, business, financial condition and results of operations” in this Annual Report.
See Part I Item 1A, “ Risk Factors—Risks Relating to Our Business—We are subject to environmental laws and regulations, and our ongoing operations may expose us to environmental liabilities affecting our reputation, business, financial condition and results of operations ” in this Annual Report.
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.
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.
It is possible, however, that the ultimate resolution of the matters discussed under Note 18: Commitments and Contingencies to the Consolidated Financial Statements could result in a material adverse effect on our results of operations for a particular reporting period, any of which could have a material adverse effect on our business.
It is possible, however, that the ultimate resolution of the matters discussed under Item 3, “Legal Proceedings,” could result in a material adverse effect on our results of operations for a particular reporting period, any of which could have a material adverse effect on our business.
We also hold an approximately 10% interest in Hoverfly Technologies, Inc. (“Hoverfly”), which designs, develops and manufactures power-tethered unmanned aerial systems and related products. We are also party to an exclusive manufacturing and teaming agreement with Hoverfly. Seasonality We do not consider any material portion of our business to be seasonal.
We also hold an approximately 11% interest in Hoverfly Technologies, Inc. (“Hoverfly”), which designs, develops and manufactures power-tethered unmanned aerial systems and related products. Seasonality We do not consider any material portion of our business to be seasonal. However, a significant portion of our revenue, profit and cash flows are generated in the fourth quarter of our fiscal year.
Production contracts are typically the fixed-price type, development contracts are sometimes of the cost-plus-type, and service contracts are sometimes the T&M type. We believe continued predominance of fixed-price contracts is reflective of the significant portion of production contracts in our U.S. government contract portfolio. • Fixed-price contracts may provide for a fixed price or they may be fixed-price-incentive-fee contracts.
We believe continued predominance of fixed-price contracts is reflective of the significant portion of production contracts in our U.S. government contract portfolio. • Fixed-price contracts may provide for a fixed price, or they may be fixed-price-incentive-fee contracts. Under fixed-price contracts, we agree to perform for an agreed-upon price.
Substantially all R&D costs are charged to cost of revenues as incurred. Company-funded R&D costs charged to cost of revenues totaled $58 million, $48 million and $41 million in 2022, 2021 and 2020, respectively. Intellectual Property We believe our intellectual property portfolio is valuable to our operations.
Company-funded R&D costs charged to general and administrative expenses totaled $82 million, $58 million and $48 million in 2023, 2022 and 2021, respectively. Intellectual Property We believe our intellectual property portfolio is valuable to our operations.
Defense Market Trends 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.
Defense Market Trends 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.
Our people are all committed to upholding the core values of the Company including integrity, operational excellence, customer focus, diversity, equity & inclusion and innovation. Our commitment to ethical business practices is outlined in our Code of Ethics & Business conduct (the “Code”).
Some of our employees maintain security clearances which allows us to conduct business activities for our customers’ classified programs. 5 Our people are committed to upholding the Company’s core values of: integrity; agility; excellence; customer focus; diversity, equity and inclusion; and innovation. Our commitment to ethical business practices is outlined in our Code of Ethics & Business Conduct (the “Code”).
We had approximately 6,400 employees on December 31, 2022. As of December 31, 2022, approximately 451 (or 7)% of our employees were represented by labor unions. We strive to maintain a culture that fosters and rewards growth, problem-solving, technology development and process improvements.
As of December 31, 2023, our workforce included approximately 6,600 employees, of which, approximately 470 (or 7%) were represented by labor unions. We continuously strive to maintain a culture that fosters and rewards growth, agility, problem-solving, innovation and operational excellence.
The Cooperation Agreement, among other things, (a) Leonardo S.p.A. has certain consent, access and cooperation rights, (b) US Holding has certain consent rights with respect to actions taken by the Company and its subsidiaries, including with respect to the creation or issuance of any new classes or series of stock (subject to customary exceptions), listing or delisting from any securities exchange, and making material changes to the Company’s accounting policies and changing the Company’s auditor, and (c) neither US Holding nor Leonardo S.p.A. has the ability to transfer any Company voting securities for a period of six months following the merger with RADA, except in connection with a change in control of the Company or for transfers to affiliates.
Under the Cooperation Agreement, among other things, (a) Leonardo S.p.A. has certain consent, access and cooperation rights, and (b) US Holding has certain consent rights with respect to actions taken by the Company and its subsidiaries, including with respect to the creation or issuance of any new classes or series of stock (subject to customary exceptions), listing or delisting from any securities exchange, and making material changes to the Company’s accounting policies and changing the Company’s auditor. 8 Our Ultimate Majority Stockholder Leonardo S.p.A., a global high-technology company, is a leading global Aerospace, Defense and Security company and one of Italy’s main industrial companies.
Product warranty expense is recognized based on the term of the product warranty, generally one to three years, and the related estimated costs, considering historical claims expense. Accrued warranty costs are reduced as these costs are incurred and as the warranty period expires, and otherwise may be modified as specific product performance issues are identified and resolved.
Accrued warranty costs are reduced as these costs are incurred and as the warranty period expires, and otherwise may be modified as specific product performance issues are identified and resolved.
Our U.S. government sales are concentrated with the DoD, which constitutes the majority of our U.S. government revenue for any given year, including the entirety of our government sales in 2022. Our revenues with the DoD span the Army, Navy, Air Force and other DoD agencies which represent 37%, 32%, 5% and 10%, respectively, of our total revenue for 2022.
Revenues derived directly or indirectly from the U.S. government represent 80%, 84% and 86% of our total revenue for full year 2023, 2022, and 2021, respectively. Our U.S. government sales are concentrated with the DoD, which constitutes the majority of our U.S. government revenue for any given year, including the entirety of our government sales in 2023.
Our diverse technologies, systems and solutions are used across land, air, sea, space and cyber domains on a wide range of platforms for the DoD and the defense agencies of our international allies. Across the spectrum of multi-domain operations, we believe our core capabilities will help the U.S. and its allies maintain a strategic advantage over their adversaries.
We continue to target our investments toward high growth areas of the U.S. defense budget. Our diverse technologies, systems and solutions are used across land, air, sea, space and cyber domains on a wide range of platforms for the DoD and the defense agencies of our international allies.
Our products are sold in markets in which several of our competitors are substantially larger than we are, enabling them to devote greater resources to research and development. The principal competitive factors evaluated by customers in our markets 2 include product performance, cost, overall value, delivery schedule, embedded positions, past performance, innovation and reputation.
The principal competitive factors evaluated by customers in our markets include product performance, cost, overall value, delivery schedule, embedded positions, past performance, innovation and reputation.
We listen to our workforce to assess areas of concern and levels of engagement. Joint Ventures, Strategic Investments and Mergers and Acquisitions On June 21, 2022, the Company entered into a definitive agreement with RADA Electronic Industries Ltd. (“RADA”), a leading provider of advanced software-defined military tactical radars, to merge and become a combined public company.
We also may explore the divestiture of businesses that no longer meet our needs or strategy or that could perform better outside of our organization. On June 21, 2022, the Company entered into a definitive agreement with RADA Electronic Industries Ltd. (“RADA”), a leading provider of advanced software-defined military tactical radars, to merge and become a combined public company.
Competition We operate in a highly competitive market and we compete with a variety of companies in the defense market including divisions of the large defense primes, mid-tier and smaller defense companies as well as certain non-traditional companies. To gain new business, we also often team with, are supplier to, or find other ways to work with other market participants.
Our international sales consist primarily of transactions with foreign governments for defense applications. 2 Competition We operate in a highly competitive market and we compete with a variety of companies in the defense market including divisions of the large defense primes, mid-tier and smaller defense companies as well as certain non-traditional companies.
The Code applies to all employees and establishes our expectations for appropriate business conduct is a variety of scenarios.
The Code applies to all employees and establishes our expectations for appropriate business conduct in a variety of scenarios. Our employees receive annual compliance training and must formally confirm their commitment to upholding the standards set forth in our Code and ethics program.
From our earliest offerings to today’s best-in-class products including naval propulsion, electro-optical sensors and electronic warfare systems, we have continually developed advanced technologies to address complex national security challenges. We continue to target our investments toward high growth areas of the U.S. defense budget.
DRS benefits from an over 50-year legacy of providing innovative and differentiated products and solutions for defense applications. From our earliest offerings to today’s best-in-class products offerings including naval propulsion, electro-optical sensors, electronic warfare systems and other mission critical technologies, we have continually sought to develop advanced technologies enabling solutions to address complex national security challenges.
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 1 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.
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. 1 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.
Our Company consists of eight business units which are organized as two operating segments: Advanced Sensing and Computing and Integrated Mission Systems. For information regarding segment performance see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report.
For information regarding segment performance see Part II, Item 7, “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” in this Annual Report.
The remaining 16% of our revenues for 2022, were derived from sales to foreign governments as well as commercial type sales within the U.S. and abroad. Our international sales consist primarily of transactions with foreign governments for defense applications.
Our revenues with the DoD span the Navy, Army, Air Force and other DoD agencies which represent 38%, 31%, 4% and 7%, respectively, of our total revenue for 2023. The remaining 20% of our revenues for 2023, were derived from sales to foreign governments as well as commercial type sales within the U.S. and abroad.
Our engineers work on programs in advanced fields, including sensing, electro-optical infrared systems, laser systems, network computing, communications systems, integration and power propulsion. A portion of our employees also maintain security clearances to allow engineers and management to carry on business activities for our customers’ classified programs.
Our engineers work on programs that require advanced technology, such as sensing, electro-optical infrared systems, laser systems, network computing, cyber, communications systems, integration and power propulsion.
Across our businesses, we take measures to prevent workplace hazards, encourage safe behaviors and enforce a culture of continuous improvement to ensure our processes help reduce incidents and illnesses and comply with governing health and safety laws.
Maintaining a safe work environment for our employees is of utmost importance. We have policies, processes, and trainings in place to comply with health and safety laws and to prevent workplace hazards from occurring. Emphasis is placed on encouraging safe behaviors and creating a culture of continuous improvement to minimize or eliminate workplace incidents and illnesses.
As such, we promote the health, welfare and safety of our employees and seek to treat all employees with dignity and respect and provide fair, market-based, competitive and equitable compensation.
We recognize and reward the performance of our employees, provide equitable, market-based and competitive compensation, and offer a comprehensive suite of benefits for our employees and their families to support their health and well-being. We strive to create an environment where all employees are treated with dignity and respect.
Removed
We view enhancement of capabilities in sensing, computing, self-protection and power as necessary to enable the strategic priorities of the DoD and our other customers. DRS benefits from an over 50-year legacy in providing innovative and differentiated products and solutions for defense applications.
Added
Our innovative spirit and agility, together with our established market position in these areas have created a foundational and diverse base of programs across the DoD.
Removed
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.
Added
Across the spectrum of multi-domain operations, we believe our core capabilities will help the U.S. and its allies maintain a strategic advantage over their adversaries. Our Company consists of eight business units which are organized as two operating segments: Advanced Sensing and Computing and Integrated Mission Systems.
Removed
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.
Added
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.
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Customers The U.S. government is our largest customer. Revenues derived directly or indirectly from the U.S. government represent 84%, 86% and 84% of our total revenue for full year 2022, 2021, and 2020, respectively.
Added
After partially completing the companion defense appropriations bill for FY 2024, Congress landed on a series of Continuing Resolutions (“CRs”), passing a two-part, or “laddered,” Continuing Resolution to extend FY 2023 spending and avoid a government shutdown.
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Once a year, all employees must confirm their commitment to our ethics program by providing confirmation they will adhere to the Code. 5 We recognize that our success as a Company depends on our ability to attract, develop and retain a qualified workforce with an emphasis on a strong commitment to diversity and inclusion.
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The current laddered CRs expire in March 2024 and are linked to a broader agreement that may include some form of supplemental funding for foreign aid to Ukraine and Israel. Customers The U.S. government is our largest customer.
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We strive to recognize and reward the performance of our employees and to provide a comprehensive suite of benefit options that enables our employees and their dependents to live healthy and productive lives. Safety in our workplaces is paramount.
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When appropriate, we also often team with, are supplier to, or find other ways to work with other market participants. Our products are sold in markets in which several of our competitors are substantially larger than we are, enabling them to devote greater resources to research and development.
Removed
Our strong commitment to diversity, inclusion, succession planning and training includes our Diversity Advisory Group geared at improving diversity and inclusiveness so that we look like the communities in which we operate. We have targeted increases in minority hiring and expanding women in the workforce. Our values motivate us to promote strong workplace practices with opportunities for development and training.
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In addition, in some cases the US government is empowered to unilaterally use, or allow our competitors to use, patented technologies, subject only to the obligation to pay reasonable compensation. Human Capital Our performance depends on the skills, expertise, education and experience of our workforce.
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Our training and development efforts focus on ensuring that the workforce is appropriately trained on critical job skills as well as leadership behaviors that are consistent with our core values. We conduct rigorous succession planning exercises to ensure that key positions have the appropriate level of bench strength to provide for future key positions and leadership transitions.
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We recognize that our success depends on our ability to attract, develop and retain a qualified inclusive and diverse workforce. To accomplish this, we have talent acquisition, talent management, and Diversity, Equity and Inclusion (“DE&I”) programs established to attract and retain our employees.
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However, a significant portion of our revenue, profit and cash flows are generated in the fourth quarter of our fiscal year.
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Our strong commitment to employee and leadership development, talent management, talent development and succession planning ensures our workforce is prepared for the critical skills necessary for the work today and for future opportunities. We are developing our current leaders and preparing the next generation of leaders to demonstrate behaviors and attributes that are aligned with our core values.
Removed
Our Ultimate Majority Stockholder Leonardo S.p.A., a global high-technology company, is a leading global Aerospace, Defense and Security company and Italy’s main industrial company.
Added
We work to develop bench strength for our leadership team and other critical roles. Our mission and core values are the driving force behind our actions to maintain an engaged and motivated workforce. We continuously strive to deliver employee programs that support employee performance, development, well-being, and health and safety.
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In addition, we support our local communities, active military, and veterans through our charitable giving and volunteerism. We are committed to fostering diversity and inclusion with our Employee Resources Groups and Me (“mERGe”) program, local diversity action teams, and by creating a workforce representative of the communities in which we live and work.
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Joint Ventures, Strategic Investments and Mergers and Acquisitions We continually evaluate our existing portfolio and the related capabilities to maximize our ability to drive value. Through this process we consider the acquisition of, or investments in businesses that we believe will expand or complement our current portfolio, allow access to new customers and enhance technologies.
Added
Product Warranties Product warranty costs generally are accrued in proportion to product revenue realized in conjunction with our over time revenue recognition policy. Product warranty expense is recognized based on the term of the product warranty, generally one to three years, and the related estimated costs, considering historical claims expense.
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We make available on our website, free of charge, the periodic reports that we file with or furnish to the SEC, as well as amendments to those reports, as soon as reasonably practicable after such reports are filed with or furnished to the SEC.
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We are not including the information contained in our website as part of, or incorporating it by reference into, this Report.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

146 edited+11 added−20 removed281 unchanged
Biggest changeIf we fail to comply with such rules, regulations or other requirements we may be subject to civil and/or criminal penalties and/or administrative sanctions. 9 • The U.S. government’s organizational conflict of interest rules could limit our ability to successfully compete for new contracts or may require us to exit or wind down certain existing contracts, any of which could adversely affect our business, financial condition, results of operations and prospects. • The U.S. government has and may continue to implement initiatives focused on efficiencies, affordability and cost growth as well as other changes to its procurement practices. • We use estimates in pricing and accounting for many of our programs, and changes in our estimates could adversely impact our business, financial condition and results of operations. • 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. • Our business may be harmed if we are unable to appropriately manage our inventory. • Our working capital requirements and cash flows are extremely variable and subject to fluctuation, which could have a material adverse effect on our business, financial condition and results of operations. • We cannot predict future capital needs, the sufficiency of our current financing or our ability to obtain additional financing if we need it. • We cannot predict the effect of global and regional economic downturns and rising interest rates on our business. • As a public company, we have incurred and will continue to incur significant legal, accounting and other expenses that we did not incur as a private company. • As a public company we must maintain an effective system of internal control over financial reporting. • The agreements governing our debt may contain various covenants that limit our ability to take certain actions and also require us to meet financial maintenance tests, and failure to comply with these covenants could have an adverse impact on our business, financial condition and results of operations. • To service indebtedness and fund other cash needs, we will require a significant amount of cash, and our ability to generate cash depends on many factors beyond our control. • We face intense competition and may suffer losses if we fail to compete efficiently. • Preferences or set-asides for minority-owned, small and small disadvantaged businesses could impact our ability to be a prime contractor and limit our opportunity to work as a subcontractor on certain governmental procurements. • We depend in part upon our relationships and alliances with industry participants in order to generate revenue, which involves risks and uncertainties. • Contractual disputes with industry participants or the inability of our key suppliers to timely deliver our components, parts or services, could cause our products, systems or services to be produced or delivered in an untimely or unsatisfactory manner. • 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. • We may be at greater risk from terrorism and other threats to our physical security and personnel, than other companies. • Our future success will depend on our ability to respond to the rapid technological changes in the markets in which we compete, our ability to introduce new or enhanced products and to enter into new markets. • Many of our contracts contain performance obligations that require innovative design capabilities, are technologically complex, require state-of-the-art manufacturing expertise or are dependent upon factors not wholly within our control.
Biggest changeIf we fail to comply with such rules, regulations or other requirements we may be subject to civil and/or criminal penalties and/or administrative sanctions. • We may not realize the full value of our total estimated remaining 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. • Our working capital requirements and cash flows are extremely variable and subject to fluctuation, which could have a material adverse effect on our business, financial condition and results of operations. • We are subject to global and regional economic downturns, rising interest rates and related risks. • To service indebtedness and fund other cash needs, we will require a significant amount of cash, and our ability to generate cash depends on many factors beyond our control. • We face intense competition and may suffer losses if we fail to compete efficiently. • We depend in part upon our relationships and alliances with industry participants in order to generate revenue, which involves risks and uncertainties. • Contractual disputes with industry participants or the inability of our key suppliers to timely deliver our components, parts or services, could cause our products, systems or services to be produced or delivered in an untimely or unsatisfactory manner. • 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 may be at greater risk from terrorism and other threats to our physical security and personnel, than other companies. • Our future success will depend on our ability to respond to the rapid technological changes in the markets in which we compete, and our ability to introduce new or enhanced products and to enter into new markets. • Many of our contracts contain performance obligations that require innovative design capabilities, are technologically complex, require state-of-the-art manufacturing expertise or are dependent upon factors not wholly within our control.
For example, the thresholds for certain allowable costs in the U.S., including compensation costs, have been significantly reduced; the allowability of other types of costs are being challenged, debated and, in certain cases, modified, all with potentially significant financial costs to the Company.
For example, the thresholds for certain allowable costs in the U.S., including compensation costs, have been significantly reduced and the allowability of other types of costs are being challenged, debated and, in certain cases, modified, all with potentially significant financial costs to the Company.
Our future success will depend on our ability to respond to the rapid technological changes in the markets in which we compete, our ability to introduce new or enhanced products and to enter into new markets. The markets in which we compete are characterized by rapid technological developments and frequent new product introductions, enhancements and modifications.
Our future success will depend on our ability to respond to the rapid technological changes in the markets in which we compete, and our ability to introduce new or enhanced products and to enter into new markets. The markets in which we compete are characterized by rapid technological developments and frequent new product introductions, enhancements and modifications.
Our business also involves the handling, transportation, storage and disposal of potentially dangerous chemicals and unstable materials and is subject to hazards inherent in such activities including chemical spills, storage tank leaks, discharges or releases of toxic or hazardous substances or gases and other hazards incident to the handling, transportation, storage and disposal of dangerous chemicals.
Our business also involves the handling, transportation, storage and disposal of potentially dangerous chemicals and unstable materials and is subject to hazards inherent in such activities including chemical spills, storage tank leaks, discharges or releases of toxic or hazardous substances or gases and other hazards incident to the handling, transportation, storage and disposal of dangerous chemicals.
We depend on revenues from contracts and subcontracts with the U.S. government, including defense-related programs with the DoD and a broad range of programs with the U.S. Army and U.S. Navy. See “— Risks Relating to Our Business — We depend on U.S. defense spending for the vast majority of our revenues.
We depend on revenues from contracts and subcontracts with the U.S. government, including defense-related programs with the DoD and a broad range of programs with the U.S. Navy and U.S. Army. See “— Risks Relating to Our Business — We depend on U.S. defense spending for the vast majority of our revenues.
However, the proxy holders may only vote for or consent to the following matters with the express written approval of US Holding: • other than in the ordinary course of business with vendors, customers and suppliers, the sale or disposition of any of our subsidiaries, property, assets or business or those of our subsidiaries or the purchase by us or our subsidiaries of any business, properties, assets or entities, other than in the ordinary course of business, in any individual transaction where our investment (based on our share of the enterprise value) exceeds two percent (2)% of our revenues for the immediately preceding year or where our investment, in the aggregate for all such sales or dispositions in a 42 calendar year, exceeds an amount equal to five percent (5)% of our revenues for the immediately preceding year; • the incurrence of debt or pledge, mortgage, lease or other encumbrance of our assets of those of our subsidiaries in connection with the incurrence of debt if such incurrence would cause the aggregate outstanding principal amount of all debt of us and our subsidiaries to exceed a target leverage ratio set forth in our then-current operating plan, excluding current debt incurred for purposes of funding day-to-day working capital requirements in the ordinary course of business; • any merger, consolidation, reorganization or dissolution of us of any of our subsidiaries except as permitted above and excluding transactions solely among our wholly owned subsidiaries; and • the filing or making of any petition by us or our subsidiaries under the federal bankruptcy laws or any similar law or statute of any state or any foreign country.
However, the proxy holders may only vote for or consent to the following matters with the express written approval of US Holding: • other than in the ordinary course of business with vendors, customers and suppliers, the sale or disposition of any of our subsidiaries, property, assets or business or those of our subsidiaries or the purchase by us or our subsidiaries of any business, properties, assets or entities, other than in the ordinary course of business, in any individual transaction where our investment (based on our share of the enterprise value) exceeds two percent (2)% of our revenues for the immediately preceding year or where our investment, in the aggregate for all such sales or dispositions in a calendar year, exceeds an amount equal to five percent (5)% of our revenues for the immediately preceding year; • the incurrence of debt or pledge, mortgage, lease or other encumbrance of our assets of those of our subsidiaries in connection with the incurrence of debt if such incurrence would cause the aggregate outstanding principal amount of all debt of us and our subsidiaries to exceed a target leverage ratio set forth in our then-current operating plan, excluding current debt incurred for purposes of funding day-to-day working capital requirements in the ordinary course of business; • any merger, consolidation, reorganization or dissolution of us or any of our subsidiaries except as permitted above and excluding transactions solely among our wholly owned subsidiaries; and • the filing or making of any petition by us or our subsidiaries under the federal bankruptcy laws or any similar law or statute of any state or any foreign country.
A security breach or other significant disruption involving these types of information and IT networks and related systems could: • disrupt the proper functioning of these networks and systems and, therefore, our operations and/or those of certain of our customers; • result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of, proprietary, confidential, sensitive or otherwise valuable information of ours, our customers or our employees, including trade secrets, which could be used to compete against us or for disruptive, destructive or otherwise harmful purposes and outcomes; • result in litigation and governmental investigation and proceedings associated with cybersecurity incidents; • compromise national security and other sensitive government functions; • require significant management attention and resources to remedy the damages that result; • result in costs which exceed our insurance coverage and/or indemnification arrangements; • subject us to claims for contract breach, damages, credits, penalties or termination; and • damage our reputation with our customers (particularly agencies of the U.S. government) and the general public.
A security breach or other significant disruption involving these types of information and IT networks and related systems could: • disrupt the proper functioning of these networks and systems and, therefore, our operations and/or those of certain of our customers; • result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of, proprietary, confidential, sensitive or otherwise valuable information of ours, our customers or our employees, including trade secrets, which could be used to compete against us or for disruptive, destructive or otherwise harmful purposes and outcomes; • result in litigation and governmental investigation and proceedings associated with cybersecurity incidents; • compromise national security and other sensitive government functions; 25 • require significant management attention and resources to remedy the damages that result; • result in costs which exceed our insurance coverage and/or indemnification arrangements; • subject us to claims for contract breach, damages, credits, penalties or termination; and • damage our reputation with our customers (particularly agencies of the U.S. government) and the general public.
From time to time, we are and may become subject to investigations, claims, disputes, enforcement actions and administrative, civil or criminal litigation, arbitration or other legal proceedings 31 globally and across a broad array of matters, including, but not limited to, government contracts, commercial transactions, false claims, false statements, mischarging, contract performance, fraud, procurement integrity, products liability, warranty liability, the use of hazardous materials, personal injury claims, environmental matters, shareholder-derivative actions, prior acquisitions and divestitures, intellectual property, tax, employees, export/import, anti-corruption, labor, health and safety, accidents, employee benefits and plans, including plan administration, and improper payments, as well as matters relating to our acquisition of assets or companies and other matters.
From time to time, we are and may become subject to investigations, claims, disputes, enforcement actions and administrative, civil or criminal litigation, arbitration or other legal proceedings globally and across a broad array of matters, including, but not limited to, government contracts, commercial transactions, false claims, false statements, mischarging, contract performance, fraud, procurement integrity, products liability, warranty liability, the use of hazardous materials, personal injury claims, environmental matters, shareholder-derivative actions, prior acquisitions and divestitures, intellectual property, tax, employees, export/import, anti-corruption, labor, health and safety, accidents, employee benefits and plans, including plan administration, and improper payments, as well as matters relating to our acquisition of assets or companies and other matters.
Among other things, the proxy agreement: • provides that the shares of our common stock owned directly by US Holding and indirectly by Leonardo S.p.A. are voted through proxy holders, who must be independent from current and prior affiliation with Leonardo S.p.A. and its subsidiaries (including US Holding and us) (subject to limited exceptions) and must maintain adequate security clearance; • provides that the proxy holders are appointed by our immediate majority stockholder US Holding (in consultation with Leonardo S.p.A.)., but the appointment is subject to approval of the DCSA, an agency of the DoD, and that the proxy holders must be members of our Board; 40 • restricts our ability to share facilities and personnel with and receive certain services from Leonardo S.p.A. or its other subsidiaries; • requires us to maintain a government security committee of our Board; and • regulates meetings, visits and communications that are not deemed to be routine business visits between us and Leonardo S.p.A. or its other subsidiaries (including US Holding).
Among other things, the proxy agreement: • provides that the shares of our common stock owned directly by US Holding and indirectly by Leonardo S.p.A. are voted through proxy holders, who must be independent from current and prior affiliation with Leonardo S.p.A. and its subsidiaries (including US Holding and us) (subject to limited exceptions) and must maintain adequate security clearance; • provides that the proxy holders are appointed by our immediate majority stockholder US Holding (in consultation with Leonardo S.p.A.)., but the appointment is subject to approval of the DCSA, an agency of the DoD, and that the proxy holders must be members of our Board; • restricts our ability to share facilities and personnel with and receive certain services from Leonardo S.p.A. or its other subsidiaries; • requires us to maintain a government security committee of our Board; and • regulates meetings, visits and communications that are not deemed to be routine business visits between us and Leonardo S.p.A. or its other subsidiaries (including US Holding).
The acquisition and the integration of an acquired company, business or technology may create unforeseen operating difficulties and expenditures and involves risks, including: • the need to implement or remediate controls, procedures, policies and compliance programs appropriate for a larger public company at companies that prior to the acquisition lacked these controls, procedures and policies; 37 • diversion of management time and focus from operating our business to acquisition integration challenges; • cultural challenges associated with integrating employees from the acquired company into our organization; • retaining employees and customers from the businesses we acquire; • the need to integrate each company’s accounting, management information, human resource and other administrative systems to permit effective management; and • litigation related to acquisitions.
The acquisition and the integration of an acquired company, business or technology may create unforeseen operating difficulties and expenditures and involves risks, including: • the need to implement or remediate controls, procedures, policies and compliance programs appropriate for a larger public company at companies that prior to the acquisition lacked these controls, procedures and policies; • diversion of management time and focus from operating our business to acquisition integration challenges; • cultural challenges associated with integrating employees from the acquired company into our organization; • retaining employees and customers from the businesses we acquire; • the need to integrate each company’s accounting, management information, human resource and other administrative systems to permit effective management; and • litigation related to acquisitions.
If we fail to comply with the proxy agreement our classified U.S. government contracts could be terminated, which could have a material adverse impact on our business, financial condition and results of operations .” While we currently mitigate FOCI under the interim proxy agreement, the DoD reserves the right to impose such additional security safeguards as it believes necessary in order to prevent unauthorized access to classified and controlled unclassified information and any U.S. government agency may deny or revoke our access to classified and controlled unclassified information under its jurisdiction if it considers 14 it necessary to protect national security.
If we fail to comply with the proxy agreement our classified U.S. government contracts could be terminated, which could have a material adverse impact on our business, financial condition and results of operations .” While we currently mitigate FOCI under the interim proxy agreement, the DoD reserves the right to impose such additional security safeguards as it believes necessary in order to prevent unauthorized access to classified and controlled unclassified information and any U.S. government agency may deny or revoke our access to classified and controlled unclassified information under its jurisdiction if it considers it necessary to protect national security.
See “— Risks Relating to Our Business — We are subject to the U.S. government’s requirements, including the DoD’s National Industrial Security Program Operating Manual, for our facility security clearances, which are prerequisites to our ability to perform on classified contracts for the U.S. government .” Furthermore, the combination of the Italian state beneficially owning approximately 30.2% of Leonardo S.p.A.’s voting power (through its ownership of approximately 30.2% of the outstanding ordinary shares of Leonardo S.p.A.), and the governance of Leonardo S.p.A. itself, has led DRS to be deemed to be controlled by a foreign government by certain U.S. regulatory authorities.
See “— Risks Relating to Our Business — We are subject to the U.S. government’s requirements, including the DoD’s National Industrial Security Program Operating Manual, for our facility security clearances, which are prerequisites to our ability to perform on classified contracts for the U.S. government .” Furthermore, the combination of the Italian state beneficially owning approximately 30.2% of Leonardo S.p.A.’s voting 39 power (through its ownership of approximately 30.2% of the outstanding ordinary shares of Leonardo S.p.A.), and the governance of Leonardo S.p.A. itself, has led DRS to be deemed to be controlled by a foreign government by certain U.S. regulatory authorities.
The extent to which a pandemic or epidemic, will impact us in the future will depend on numerous evolving factors and developments that we are unable to predict, including: the severity and transmission rate of the virus(es); the duration of the outbreak, including the risk of a resurgence of the virus in areas in which it appears to have been contained; the extent and effectiveness of containment actions; governmental, business and other actions (which could include limitations on our operations or mandates to provide products, systems or services); the continued success of measures taken by governmental authorities worldwide to stabilize the markets and support economic growth, which is unknown and may not be sufficient to address future market dislocations or avert severe and prolonged reductions in economic activity; the impacts on our supply chain; the impact of the pandemic on economic activity; the effects of additional business or facility closures or other changes to our operations; the health of and the effect on our workforce and our ability to meet staffing needs in our businesses and facilities, particularly if members of our workforce are quarantined as a result of exposure; any impairment in value of our 38 tangible or intangible assets which could be recorded as a result of a weaker economic conditions; and the potential effects on our internal controls, including those over financial reporting, as a result of remote working environments and other conditions such as shelter-in-place and similar orders that apply to our employees and business partners, among others.
The extent to which a pandemic or epidemic, will impact us in the future will depend on numerous evolving factors and developments that we are unable to predict, including: the severity and transmission rate of the virus(es); the duration of the outbreak, including the risk of a resurgence of the virus in areas in which it appears to have been contained; the extent and effectiveness of containment actions; governmental, business and other actions (which could include limitations on our operations or mandates to provide products, systems or services); the continued success of measures taken by governmental authorities worldwide to stabilize the markets and support economic growth, which is unknown and may 37 not be sufficient to address future market dislocations or avert severe and prolonged reductions in economic activity; the impacts on our supply chain; the impact of the pandemic on economic activity; the effects of additional business or facility closures or other changes to our operations; the health of and the effect on our workforce and our ability to meet staffing needs in our businesses and facilities, particularly if members of our workforce are quarantined as a result of exposure; any impairment in value of our tangible or intangible assets which could be recorded as a result of a weaker economic conditions; and the potential effects on our internal controls, including those over financial reporting, as a result of remote working environments and other conditions such as shelter-in-place and similar orders that apply to our employees and business partners, among others.
If we fail to comply with the proxy agreement our classified U.S. government contracts could be terminated, which could have a material adverse impact on our business, financial condition and results of operations. 11 • CFIUS may modify, delay or prevent our future acquisition or investment activities. • Our ultimate majority stockholder, Leonardo S.p.A., may have interests that are different from, or conflict with, those of our other stockholders, and their significant ownership in us may discourage change of control transactions.
If we fail to comply with the proxy agreement our classified U.S. government contracts could be terminated, which could have a material adverse impact on our business, financial condition and results of operations. • CFIUS may modify, delay or prevent our future acquisition or investment activities. • Our ultimate majority stockholder, Leonardo S.p.A., may have interests that are different from, or conflict with, those of our other stockholders, and their significant ownership in us may discourage change of control transactions.
These laws and regulations include, but are not limited to, the Anti-Kickback Act, the Arms Export Control Act, including the ITAR, the Communications Act, the Defense Federal Acquisition Regulations, the EAR (which includes anti-boycott provisions), the False Claims Act, the Federal Acquisition Regulation, the FCPA, the Lobbying Disclosure Act, the Procurement Integrity Act, the Truthful Cost or Pricing Data Act, the Foreign Trade Regulations, the Foreign Investment Risk Review Modernization Act, the International Emergency Economic Powers Act, the Trading with the Enemy Act, and Executive Orders and regulations, administered by the U.S.
These laws and regulations include, but are not limited to, the Anti-Kickback Act, the Arms Export Control Act, including the ITAR, the Communications Act, the Defense Federal Acquisition Regulations, the EAR 16 (which includes anti-boycott provisions), the False Claims Act, the Federal Acquisition Regulation, the FCPA, the Lobbying Disclosure Act, the Procurement Integrity Act, the Truthful Cost or Pricing Data Act, the Foreign Trade Regulations, the Foreign Investment Risk Review Modernization Act, the International Emergency Economic Powers Act, the Trading with the Enemy Act, and Executive Orders and regulations, administered by the U.S.
Disruptions or deteriorations in our relationships with the relevant customer agencies of the U.S. government could have a material adverse impact on our business, financial condition and results of operations. • 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. • Our results of operations and cash flows are substantially affected by our mix of fixed-price, cost-plus and time-and-material type contracts.
Disruptions or deteriorations in our relationships with the relevant agencies of the U.S. government could have a material adverse impact on our business, financial condition and results of operations. • 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. • Our results of operations and cash flows are substantially affected by our mix of fixed-price, cost-plus and time-and-material type contracts.
These restrictions may include compliance with, or maintenance of, certain financial tests and ratios and may limit or prohibit our ability to, among other things: • borrow money or guarantee debt; • create liens; • pay dividends or acquire our capital stock; • make investments and acquisitions; • enter into, or permit to exist, contractual limits on the ability of our subsidiaries to pay dividends to us; • enter into new lines of business; • enter into transactions with affiliates; and • sell assets or merge with other companies.
These restrictions may include compliance with, or maintenance of, certain financial tests and ratios and may limit or prohibit our ability to, among other things: • borrow money or guarantee debt; • create liens; • pay dividends or acquire our capital stock; 21 • make investments and acquisitions; • enter into, or permit to exist, contractual limits on the ability of our subsidiaries to pay dividends to us; • enter into new lines of business; • enter into transactions with affiliates; and • sell assets or merge with other companies.
Failure to comply with the NISPOM or other security requirements may result in loss of access to classified information and subject us to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the U.S. government, which could have a material adverse impact on our business, financial condition and results of operations.
Failure to comply with the NISPOM or other security requirements may result in loss of access to classified information and subject us to civil and criminal penalties and administrative sanctions, including termination of contracts, 13 forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the U.S. government, which could have a material adverse impact on our business, financial condition and results of operations.
We are subject to the reporting requirements of the Exchange Act and are required to comply with the applicable requirements of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as the rules and regulations subsequently implemented by the SEC and the listing standards of the Nasdaq Stock Exchange (the “Nasdaq”), including changes in corporate governance practices and the establishment and maintenance of effective disclosure and financial controls.
We are 20 subject to the reporting requirements of the Exchange Act and are required to comply with the applicable requirements of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as the rules and regulations subsequently implemented by the SEC and the listing standards of the Nasdaq Stock Exchange (the “Nasdaq”), including changes in corporate governance practices and the establishment and maintenance of effective disclosure and financial controls.
As an advanced technology-based solutions provider, and particularly as a government contractor with access to national security and other sensitive government information, we face a heightened risk of a security breach or disruption from threats to gain unauthorized access to our and our customers’ proprietary or classified information on our IT networks 25 and related systems and to the IT networks and related systems that we operate and maintain for certain of our customers.
As an advanced technology-based solutions provider, and particularly as a government contractor with access to national security and other sensitive government information, we face a heightened risk of a security breach or disruption from threats to gain unauthorized access to our and our customers’ proprietary or classified information on our IT networks and related systems and to the IT networks and related systems that we operate and maintain for certain of our customers.
These third parties may have varying levels of cybersecurity expertise and safeguards, and their relationships with government contractors, such as our company, 26 may increase the likelihood that they are targeted by the same cyber threats, including from foreign governments. In the event of a breach affecting these third parties, our business and financial results could suffer materially.
These third parties may have varying levels of cybersecurity expertise and safeguards, and their relationships with government contractors, such as our company, may increase the likelihood that they are targeted by the same cyber threats, including from foreign governments. In the event of a breach affecting these third parties, our business and financial results could suffer materially.
Failure to meet our contractual obligations could 27 adversely affect our business, financial condition, results of operations, reputation and future prospects. We design, develop and manufacture technologically advanced and innovative products and services, which are applied by our customers in a variety of environments, including some under highly demanding operating conditions, to accomplish challenging missions.
Failure to meet our contractual obligations could adversely affect our business, financial condition, results of operations, reputation and future prospects. We design, develop and manufacture technologically advanced and innovative products and services, which are applied by our customers in a variety of environments, including some under highly demanding operating conditions, to accomplish challenging missions.
Examples of unforeseen problems that could negatively affect revenue, schedule and results of operations include premature failure of products that cannot be accessed for repair or replacement, failure to perform in anticipated or unanticipated battlefield conditions, unintended explosions or similar events, problems with design, quality and workmanship, inadequate delivery of subcontractor components or services and degradation of product performance.
Examples of unforeseen problems that could negatively affect revenue, schedule and results of operations include premature failure of products that cannot be accessed for repair or replacement, failure to perform in anticipated or unanticipated battlefield conditions, unintended explosions or similar events, problems with design, quality and workmanship, inadequate delivery of 27 subcontractor components or services and degradation of product performance.
In addition, if our actual return on assets differs from our long-term ROA assumption, our pension plan funded status and pension expense would be impacted. Changes to financial accounting standards may affect our results of operations and cause us to change our business practices. We prepare our financial statements in accordance with U.S. GAAP.
In addition, if our actual return on assets differs from our long-term ROA assumption, our pension plan funded status and pension expense would be impacted. 35 Changes to financial accounting standards may affect our results of operations and cause us to change our business practices. We prepare our financial statements in accordance with U.S. GAAP.
In 20 addition, any decline in the ratings of our corporate credit or any indications from the rating agencies that their ratings on our corporate credit are under surveillance or review with possible negative implications could adversely impact our ability to access capital. These limitations could have a material adverse impact on our business, financial condition and results of operations.
In addition, any decline in the ratings of our corporate credit or any indications from the rating agencies that their ratings on our corporate credit are under surveillance or review with possible negative implications could adversely impact our ability to access capital. These limitations could have a material adverse impact on our business, financial condition and results of operations.
Additionally, a failure to comply with the National Institute of Standards and Technology Special Publication 800-171 or other DoD cybersecurity requirements including the Cyber Security Material Model Certificate (“CMMC”), whether or not resulting in a security breach or disruption, could restrict our ability to bid for, be awarded and perform on DoD contracts.
Additionally, a failure to comply with the National Institute of Standards and Technology Special Publication 800-171 or other DoD cybersecurity requirements including the Cybersecurity Material Model Certificate (“CMMC”), whether or not resulting in a security breach or disruption, could restrict our ability to bid for, be awarded and perform on DoD contracts.
Cost overruns could have a material adverse impact on our business, financial condition and results of operations. 13 We are subject to the U.S. government’s requirements, including the DoD’s National Industrial Security Program Operating Manual, for our facility security clearances, which are prerequisites to our ability to perform on classified contracts for the U.S. government.
Cost overruns could have a material adverse impact on our business, financial condition and results of operations. We are subject to the U.S. government’s requirements, including the DoD’s National Industrial Security Program Operating Manual, for our facility security clearances, which are prerequisites to our ability to perform on classified contracts for the U.S. government.
The U.S. government has increasingly relied on certain types of contracts that are subject to multiple competitive bidding processes, including multi-vendor Indefinite Delivery Indefinite Quantity (“IDIQ”), Government wide Acquisition Contracts, General Services Administration Schedule and other multi-award contracts, which has resulted in greater competition and increased pricing pressure.
The U.S. government has increasingly relied on certain types of contracts that are 22 subject to multiple competitive bidding processes, including multi-vendor Indefinite Delivery Indefinite Quantity (“IDIQ”), Government wide Acquisition Contracts, General Services Administration Schedule and other multi-award contracts, which has resulted in greater competition and increased pricing pressure.
U.S. government appropriations in turn are affected by general U.S. government budgetary issues and related legislation. Although multi-year contracts may be authorized and appropriated in connection with major procurements, Congress generally appropriates funds on a government fiscal year basis, which runs from October 1 to September 30.
U.S. government appropriations in turn are affected by general U.S. 14 government budgetary issues and related legislation. Although multi-year contracts may be authorized and appropriated in connection with major procurements, Congress generally appropriates funds on a government fiscal year basis, which runs from October 1 to September 30.
Disruptions or deterioration in our relationships with the relevant agencies of the U.S. government could have a material adverse impact on our business, financial condition and results of operations. ” Therefore, if we fail to comply with the terms of the proxy agreement and the DoD imposes any of the above remedies, this could have a material adverse impact on our business, financial condition and results of operations.
Disruptions or deterioration in our relationships with the relevant agencies of the U.S. government could have a material adverse impact on our business, financial condition and results of operations. ” Therefore, if we fail to comply with the terms of the proxy agreement and the DoD imposes any of the above remedies, this could have a material adverse impact on our business, financial 40 condition and results of operations.
If a particular proposed acquisition or investment in a U.S. business falls 41 within CFIUS’s jurisdiction, we may determine that we are required to make a mandatory filing or that we will submit a voluntary notice to CFIUS, or to proceed with the transaction without notifying CFIUS and risk CFIUS intervention, before or after closing the transaction.
If a particular proposed acquisition or investment in a U.S. business falls within CFIUS’s jurisdiction, we may determine that we are required to make a mandatory filing or that we will submit a voluntary notice to CFIUS, or to proceed with the transaction without notifying CFIUS and risk CFIUS intervention, before or after closing the transaction.
In addition, there are certain parts, components and services for many of our products, 24 systems and services that we source from other manufacturers or vendors. Some of our suppliers, from time to time, experience financial and operational difficulties, which may impair their ability to supply the materials, components, subsystems and services that we require.
In addition, there are certain parts, components and services for many of our products, systems and services that we source from other manufacturers or vendors. Some of our suppliers, from time to time, experience financial and operational difficulties, which may impair their ability to supply the materials, components, subsystems and services that we require.
Under our existing AOP services agreements we continue to provide Leonardo S.p.A. and its affiliates with services in support of its U.S. operations (aside from us), including services related to tax, financial and accounting support, legal support, trade compliance, marketing and, communications on an arm’s-length basis.
Under our existing AOP services agreements, we continue to provide Leonardo S.p.A. and its affiliates with services in support of its U.S. operations (aside from us), including services related to tax, 43 financial and accounting support, legal support, trade compliance, marketing and, communications on an arm’s-length basis.
We evaluate bookings which we define 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.
We evaluate bookings which we define as the total value of contract awards received from the U.S. government for which it has 18 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.
Any actual or perceived weaknesses and conditions that need to be addressed in the internal controls over financial reporting (including those weaknesses identified in 21 periodic reports), or disclosure of management’s assessment of the internal controls over financial reporting may have an adverse impact on the price of our common stock.
Any actual or perceived weaknesses and conditions that need to be addressed in the internal controls over financial reporting (including those weaknesses identified in periodic reports), or disclosure of management’s assessment of the internal controls over financial reporting may have an adverse impact on the price of our common stock.
If we are unable to appropriately manage our inventory balances it could have a material adverse impact on our business, financial condition and results of operations. 19 Our working capital requirements and cash flows are extremely variable and subject to fluctuation, which could have a material adverse effect on our business, financial condition and results of operations.
If we are unable to appropriately manage our inventory balances it could have a material adverse impact on our business, financial condition and results of operations. Our working capital requirements and cash flows are extremely variable and subject to fluctuation, which could have a material adverse effect on our business, financial condition and results of operations.
We cannot predict how stable our union relationships will be or whether we will be able to successfully negotiate successor collective bargaining agreements without impacting our financial condition. In addition, the presence of unions may limit our flexibility in dealing with our workforce.
We cannot predict how stable our union relationships will be or whether we will be able to successfully negotiate successor collective bargaining agreements without impacting our financial 34 condition. In addition, the presence of unions may limit our flexibility in dealing with our workforce.
We (again, including our subcontractors and others with whom we do business) are also subject to, and expected to perform in compliance with, a vast array of federal, state, local and international laws, regulations and requirements related to our industry, our products and the businesses we operate.
We (including our subcontractors and others with whom we do business) are also subject to, and expected to perform in compliance with, a vast array of federal, state, local and international laws, regulations and requirements related to our industry, our products and the businesses we operate.
Past efforts by the U.S. government to reform its procurement practices have focused, among other areas, on the separation of certain types of work to facilitate objectivity and avoid or mitigate 17 organizational conflicts of interest, and the strengthening of regulations governing organizational conflicts of interest.
Past efforts by the U.S. government to reform its procurement practices have focused, among other areas, on the separation of certain types of work to facilitate objectivity and avoid or mitigate organizational conflicts of interest, and the strengthening of regulations governing organizational conflicts of interest.
These agencies review performance on government contracts, direct and indirect rates and pricing practices, and compliance with applicable contracting and procurement laws, regulations and standards. They also review compliance with government standards for our business systems and the adequacy of our internal control systems and policies.
These agencies review performance on government contracts, direct and indirect rates and pricing practices, and compliance 15 with applicable contracting and procurement laws, regulations and standards. They also review compliance with government standards for our business systems and the adequacy of our internal control systems and policies.
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 32 financial position, results of operations and/or cash flows.
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.
Ongoing instability and current conflicts in global markets, including in Eastern Europe, the Middle East and Asia, and the potential for other conflicts and future terrorist activities and other recent geo-political events throughout the world, including the conflict in Ukraine, the U.S. military withdrawal from Afghanistan, new or increased tariffs or sanctions and potential trade wars have created and continue to create economic and political uncertainties and impacts that could have a material adverse impact on our business, financial condition and results of operations.
Ongoing instability and current conflicts in global markets, including in Eastern Europe, the Middle East and Asia, and the potential for other conflicts and future terrorist activities and other recent geopolitical events throughout the world, including the conflict in Ukraine, the U.S. military withdrawal from Afghanistan, new or increased tariffs or sanctions and potential trade wars have created and continue to create economic and political uncertainties and impacts that could have a material adverse impact on our business, financial condition and results of operations.
Additionally, we may have to seek qualification of any new facilities in order to meet customer or contractual requirements. We would also have to obtain facility security clearances for the new facility in order to continue to perform on classified contracts.
Additionally, we may have to seek qualification of any new facilities in order to 38 meet customer or contractual requirements. We would also have to obtain facility security clearances for the new facility in order to continue to perform on classified contracts.
Conflicts of interest could also arise with respect to business opportunities that could be advantageous to Leonardo S.p.A., and they may pursue acquisition opportunities that may be complementary to our business. As a result, those acquisition opportunities may not be available to us.
Conflicts of interest could also arise with respect to business 42 opportunities that could be advantageous to Leonardo S.p.A., and they may pursue acquisition opportunities that may be complementary to our business. As a result, those acquisition opportunities may not be available to us.
The inability of our suppliers to perform, or their inability to perform adequately, could also result in the need for us to transition to alternate suppliers, which could result in significant incremental cost and delay or the need for us to provide other resources to support our existing suppliers.
The inability of our suppliers to perform, or their inability to perform adequately, could also result in the need for us to transition to alternate suppliers, which could 24 result in significant incremental cost and delay or the need for us to provide other resources to support our existing suppliers.
The cost of complying, or of failing to comply, with these and other climate change and emissions regulations could have an adverse impact on our business, financial condition and results of operations.
The cost of complying, or of failing to 30 comply, with these and other climate change and emissions regulations could have an adverse impact on our business, financial condition and results of operations.
The proxy agreement provides that the proxy holders may vote for or consent to in, their sole and absolute discretion, without consultation with US Holding or Leonardo S.p.A., the election of additional directors who are not proxy holders (and who are selected from candidates proposed by US Holding after reasonable consultation with our nominating and corporate governance committee, and subject to DCSA’s approval in certain circumstances), any changes or amendments to our certificate of incorporation or by‑laws, the sale or disposal of our property, assets or business, our incurrence of debt or any pledge, mortgage or encumbrance of any of our assets, or any other matter affecting us, other than as described below.
The proxy agreement provides that the proxy holders may vote for or consent to in, their sole and absolute discretion, without consultation with US Holding or Leonardo S.p.A., the election of additional 41 directors who are not proxy holders (and who are selected from candidates proposed by US Holding after reasonable consultation with our nominating and corporate governance committee, and subject to DCSA’s approval in certain circumstances), any changes or amendments to our certificate of incorporation or bylaws, the sale or disposal of our property, assets or business, our incurrence of debt or any pledge, mortgage or encumbrance of any of our assets, or any other matter affecting us, other than as described below.
Our failure to anticipate risks or technical problems, estimate costs accurately or control costs during performance will reduce our profit or cause a loss on these contracts.
Our failure to anticipate or address risks or technical problems, estimate costs accurately or control costs during performance will reduce our profit or cause a loss on these contracts.
Due to the size, nature and performance period 18 of many of our contracts, the estimation of total revenue and cost at completion is complicated and subject to many variables.
Due to the size, nature and performance period of many of our contracts, the estimation of total revenue and cost at completion is complicated and subject to many variables.
Department of Justice and Federal Trade Commission have periodically and increasingly focused on ensuring competition in government acquisition and could challenge a teaming arrangement.
Department of 23 Justice and Federal Trade Commission have periodically and increasingly focused on ensuring competition in government acquisition and could challenge a teaming arrangement.
If we experience difficulties with renewals and renegotiations of existing collective agreements or if our employees pursue new collective representation, we could incur additional expenses and may be subject to work stoppages, slow-downs or other labor-related disruptions. Any such expenses or delays could adversely affect our programs served by employees who are covered by such agreements or representation.
If we experience difficulties with renewals and negotiations of existing collective agreements or if our employees pursue new collective representation, we could incur additional expenses and may be subject to work stoppages, slow-downs or other labor-related disruptions. Any such expenses or delays could adversely affect our programs served by employees who are covered by such agreements or representation.
We have significant business operations located in areas that are subject to these risks, for example our facilities in Florida and Texas.
We have significant business operations located in areas that are subject to these risks, for example our facilities in California, Florida and Texas.
ITEM 1A. RISK FACTORS You should consider carefully the risks and uncertainties described below, as well as other information contained in this Annual Report, including our financial statements and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” when evaluating our business.
ITEM 1A. RISK FACTORS You should carefully consider the risks and uncertainties described below, as well as other information contained in this Annual Report, including our financial statements and the section titled “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ,” when evaluating our business.
These factors may also delay purchasing or payment decisions by our customers. In the event government funding for significant programs in which we participate becomes unavailable, or is reduced or delayed, our contract or subcontract under such programs may be terminated or adjusted by the U.S. government or the prime contractor.
These factors may also delay or adversely impact purchasing or payment decisions by our customers. In the event government funding for significant programs in which we participate becomes unavailable, or is reduced or delayed, our contract or subcontract under such programs may be terminated or adjusted by the U.S. government or the prime contractor.
Leonardo S.p.A., an Italian company listed on the Milan Stock Exchange, owns the entire share capital of US Holding which, in turn, owns approximately 81% of the voting power of our outstanding common stock. As a result, we are deemed to be under FOCI.
Leonardo S.p.A., an Italian company listed on the Milan Stock Exchange, owns the entire share capital of US Holding which, in turn, owns approximately 72% of the voting power of our outstanding common stock. As a result, we are deemed to be under FOCI.
Additionally, our U.S. government contracts are heavily regulated and subject to audit and negative audit findings which could result in the termination of these or other contracts or the failure to receive future awards, see “— We operate in a highly regulated environment and are routinely audited and reviewed by the U.S. government and its agencies .” The U.S. government also has the ability to stop work under a contract for a limited period of time for its convenience.
Additionally, our U.S. government contracts are heavily regulated and subject to audit and negative audit findings which could result in the termination of these or other contracts or the failure to receive future awards, see “— Risks Relating to Our Business — We operate in a highly regulated environment and are routinely audited and reviewed by the U.S. government and its agencies .” The U.S. government also has the ability to stop work under a contract for a limited period of time for its convenience.
It is possible that the ultimate resolution of these matters could result in a material adverse impact on our financial condition, results of operations and/or cash flows from operating activities in a particular reporting period. Our international business exposes us to additional risks, including risks related to geopolitical and economic factors, laws and regulations.
It is possible that the ultimate resolution of these matters could result in a material adverse impact on our financial condition, results of operations and/or cash flows from operating activities in a particular reporting period. Our international business exposes us to additional risks, including risks related to geopolitical conflicts, including the war in Israel, and economic factors, laws and regulations.
Furthermore, if we do not meet contract deadlines or specifications, we may need to renegotiate contracts on less favorable terms, be forced to pay penalties or liquidated damages or suffer significant losses if the customer terminates our contract.
Furthermore, if we do not meet contract deadlines or specifications, we may need to renegotiate contracts on less favorable terms, be forced to pay actual or liquidated damages or suffer significant losses if the customer terminates our contract.
Leonardo S.p.A., an Italian company listed on the Milan Stock Exchange, ultimately owns the entire share capital of our immediate majority stockholder US Holding which, in turn owns approximately 81% our outstanding common stock.
Leonardo S.p.A., an Italian company listed on the Milan Stock Exchange, ultimately owns the entire share capital of our immediate majority stockholder US Holding which, in turn owns approximately 72% our outstanding common stock.
As is the case with many other companies, we have experienced cyber-security incidents in the past, including denial of service attacks, ransomware, and attacks from suspected nation state actors. Our efforts and measures have not been effective in the case of every incident, but no incident has had a material negative impact on us to date.
As is the case with many other companies, we have experienced cybersecurity incidents in the past, including denial-of-service attacks, ransomware, and attacks from suspected nation state actors. Our efforts and measures have not been effective in the case of every incident, but no incident has had a material negative impact on us to date.
U.S. government contracts can expose us to potentially large losses because the U.S. government can hold us responsible for completing a project or, in certain circumstances, paying the entire cost of its replacement by another provider regardless of the size or foresee ability of any cost overruns that occur over the life of the contract.
U.S. government contracts can expose us to potentially large losses because the U.S. government can hold us responsible for completing a project or, in certain circumstances, paying the entire cost of its replacement by another provider regardless of the size or foreseeability of any cost overruns that occur over the life of the contract.
We depend on revenues from contracts and subcontracts with the U.S. government, including defense-related programs with the DoD and a broad range of programs with each of the service branches. Revenues derived directly or indirectly from contracts with the U.S. government were approximately 84%, 86% and 84% for the years ended December 31, 2022, 2021, and 2020, respectively.
We depend on revenues from contracts and subcontracts with the U.S. government, including defense-related programs with the DoD and a broad range of programs with each of the service branches. Revenues derived directly or indirectly from contracts with the U.S. government were approximately 80%, 84% and 86% for the years ended December 31, 2023, 2022, and 2021, respectively.
In addition, the proxy holders may only vote to declare or suspend dividends after prior consultation with US Holding. At all times subject to the proxy agreement, on November 28, 2022, the Company entered into a registration rights agreement (the “Registration Rights Agreement”) as well as a cooperation agreement (the “Cooperation Agreement”) with Leonardo S.p.A and US Holding.
In addition, the proxy holders may only vote to declare or suspend dividends after prior consultation with US Holding. At all times subject to the proxy agreement, on November 28, 2022, the Company entered into the Registration Rights Agreement as well as the Cooperation Agreement with Leonardo S.p.A and US Holding.
Proxy agreements, including ours, typically have limited duration and need to be renewed on a regular basis. For additional information on the terms and requirements of the proxy agreement, see “— We operate under a proxy agreement with the DoD that regulates significant areas of our governance.
Proxy agreements, including ours, typically have limited duration and need to be renewed on a regular basis. For additional information on the terms and requirements of the proxy agreement, see “— Risks Relating to Our Status under the Proxy Agreement — We operate under a proxy agreement with the DoD that regulates significant areas of our governance.
Our operations and the operations of our suppliers and customers could be subject to natural disasters or other significant disruptions, including hurricanes, typhoons, tsunamis, floods, earthquakes, fires, water shortages, other extreme weather conditions, medical epidemics, pandemics, acts of terrorism, power shortages and blackouts, telecommunications failures and other natural and manmade disasters or disruptions.
Our operations and the operations of our suppliers and customers could be subject to natural disasters or other significant disruptions, including hurricanes, typhoons, tsunamis, floods, earthquakes, fires, water shortages, other extreme weather conditions, medical epidemics, pandemics, acts of terrorism, power shortages and blackouts, telecommunications failures and other natural and man-made disasters or disruptions.
For the years ended December 31, 2022, 2021, and 2020, approximately 87%, 87% and 87%, respectively, of our revenue was derived from fixed-price contracts. We assume financial risk on fixed-price contracts due to the risk of potential cost overruns, particularly for firm fixed-price contracts in which we assume all of the cost burden.
For the years ended December 31, 2023, 2022, and 2021, approximately 84%, 87% and 87%, respectively, of our revenue was derived from fixed-price contracts. We assume financial risk on fixed-price contracts due to the risk of potential cost overruns, particularly for firm-fixed price contracts in which we assume all of the cost burden.
For further information, see “— We operate in a highly regulated environment and are routinely audited and reviewed by the U.S. government and its agencies.” Our results of operations depend on our ability to maximize our earnings from our contracts.
For further information, see “— Risks Relating to Our Business — We operate in a highly regulated environment and are routinely audited and reviewed by the U.S. government and its agencies.” Our results of operations depend on our ability to maximize our earnings from our contracts.
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.
For the years ended December 31, 2023, 2022, and 2021, approximately 10%, 7% and 5%, 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.
Our inability to terminate a lease when we stop fully utilizing a facility could negatively impact our business, financial condition and results of operations. 39 We cannot predict the consequences of future geo-political events, but they may adversely affect the markets in which we operate, our ability to insure against risks, our operations or our results of operations.
Our inability to terminate a lease when we stop fully utilizing a facility could negatively impact our business, financial condition and results of operations. We cannot predict the consequences of future geopolitical events, but they may adversely affect the markets in which we operate, our ability to insure against risks, our operations or our results of operations.
See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report. If we are unable to manage fluctuations in cash flow, it could have a material adverse impact on our liquidity, as well as on our business, financial condition and results of operations.
See Part II, Item 7, “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” in this Annual Report. If we are unable to manage fluctuations in cash flow, it could have a material adverse impact on our liquidity, as well as on our business, financial condition and results of operations.
The Company faces risks related to health epidemics and other outbreaks of communicable disease which could significantly disrupt operations, and may materially and adversely affects its business, financial conditions and results of operations.
The Company faces risks related to pandemics, health epidemics and other outbreaks of communicable disease which could significantly disrupt operations, and may materially and adversely affects our business, financial conditions and results of operations.
In such cases we may have limited means to protect our intellectual property. 28 While we enter into confidentiality and non-disclosure agreements with our employees, consultants, partners, customers and others to attempt to limit access to and distribution of proprietary and confidential information, it is possible that: • some or all of our confidentiality agreements will not be honored; • third parties will independently develop equivalent technology or misappropriate our technology or designs; • disputes will arise with our strategic partners, customers or others concerning the ownership of intellectual property; and • contractual provisions may not be enforceable in certain jurisdictions.
While we enter into confidentiality and non-disclosure agreements with our employees, consultants, partners, customers and others to attempt to limit access to and distribution of proprietary and confidential information, it is possible that: • some or all of our confidentiality agreements will not be honored; • third parties will independently develop equivalent technology or misappropriate our technology or designs; • disputes will arise with our strategic partners, customers or others concerning the ownership of intellectual property; and • contractual provisions may not be enforceable in certain jurisdictions.
We have unfunded obligations under our pension plans, and we use estimates in accounting for our pension plans and changes in our estimates could adversely affect our financial condition and results of operations. We have unfunded obligations under our pension, postretirement and supplemental retirement plans, see “Note 14: Pension and Other Postretirement Benefits” to the Consolidated Financial Statements.
We have unfunded obligations under our pension plans, and we use estimates in accounting for our pension plans and changes in our estimates could adversely affect our financial condition and results of operations. We have unfunded obligations under our pension, postretirement and supplemental retirement plans, see Note 14: Pension and Other Postretirement Benefits to the Consolidated Financial Statements.
In particular, fixed-price contracts subject us to the risk of loss in the event of cost overruns or higher than anticipated inflation .” and Part I, Item 1A, “Risk Factors — We use estimates in pricing and accounting for many of our programs, and changes in our estimates could adversely impact our business, financial condition and results of operations .” If we are unable to meet our obligations, including due to issues regarding the design, development or manufacture of our products or services, it could have a material adverse impact on our reputation, our ability to compete for other contracts and our business, financial condition and results of operations.
In particular, fixed-price contracts subject us to the risk of loss in the event of cost overruns or higher than anticipated inflation .” and “ — Risks Relating to Our Business — We use estimates in pricing and accounting for many of our programs, and changes in our estimates could adversely impact our business, financial condition and results of operations .” If we are unable to meet our obligations, including due to issues regarding the design, development or manufacture of our products or services, it could have a material adverse impact on our reputation, our ability to compete for other contracts and our business, financial condition and results of operations.
Sensitive data saved on networks, systems and facilities therefore remain vulnerable because of the risk that cybersecurity incidents, including, but not limited to, attempts to gain unauthorized access to data, potential security breaches, particularly cyber-attacks and cyber-intrusions, or disruptions, will occur in the future, and because the techniques used in such attempts are constantly evolving and generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may not be detected.
Sensitive data saved on networks, systems and facilities therefore remain vulnerable because of the risk that cybersecurity incidents, including, but not limited to, attempts to gain unauthorized access to data; potential security breaches, particularly cyber-attacks and cyber-intrusions; or disruptions, will occur in the future, and because the techniques used in such attempts are constantly evolving and generally are not recognized until launched against a target.
For a general description of our U.S. government contracts and subcontracts, including a discussion of revenue generated thereunder and of cost-reimbursable versus fixed-price contracts please see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report.
For a general description of our U.S. government contracts and subcontracts, including a discussion of revenue generated thereunder and of cost-reimbursable versus fixed-price contracts please see Part II, Item 7, “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” in this Annual Report.
As of December 31, 2022 and 2021, we had goodwill and other intangible assets of $1,408 and $1,123 million, respectively, net of accumulated amortization, which represented 38% and 37%, respectively, of our total assets. Our goodwill is subject to an impairment test on an annual basis and is also tested whenever events and circumstances indicate that goodwill may be impaired.
As of December 31, 2023 and 2022, we had goodwill and other intangible assets, net of accumulated amortization, of $1,389 and $1,408 million, respectively, which represented 35% and 38%, respectively, of our total assets. Our goodwill is subject to an impairment test on an annual basis and is also tested whenever events and circumstances indicate that goodwill may be impaired.
In January 2023, the U.S. government announced it intends to end the public health emergency (and national emergency) declarations in May 2023. However, there can be no assurances that the federal government will not seek to enforce the requirements of this EO or subsequently issue a similar EO in response to COVID-19 or a future pandemic .
In January 2023, the U.S. government announced its intention to end the public health (and national) emergency declarations as of May 2023. However, there can be no assurances that the federal government will not seek to enforce the requirements of the EO or subsequently issue a similar EO in response to COVID-19 or a future pandemic .
The loss of revenues from our possible failure to obtain renewal or follow-on contracts may be significant because we depend on the U.S. government for a significant portion of our revenues. For further information, see “— We depend on U.S. defense spending for the vast majority of our revenues.
The loss of revenues from our possible failure to obtain renewal or follow-on contracts may be significant because we depend on the U.S. government for the vast majority of our revenues. For further information, see “— Risks Relating to Our Business — We depend on U.S. defense spending for the vast majority of our revenues.
Termination by the U.S. government, or one of its prime contractors, of a 15 contract due to default could in addition to the loss of future revenue obligate us to pay for re-procurement costs in excess of the original contract price, net of the value of work accepted from the original contract, as well as other damages.
Termination by the U.S. government, or one of its prime contractors, of a contract due to default could, in addition to the loss of future revenue, obligate us to pay for re-procurement costs in excess of the original contract price, as well as other damages.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeWalton Beach, FL Engineering, Office Advanced Sensing and Computing 60,465 Owned 2345 Crystal Dr., Arlington, VA Office Corporate 49,048 Leased 13544 N Central Expressway, Dallas, TX Manufacturing, Engineering, Office Advanced Sensing and Computing 48,374 Leased Block 22844 Portions of Plots 90, 91, Beit She’an Israel Manufacturing, Engineering, Office Advanced Sensing and Computing 30,000 Owned 150 Bluewater Road, Bedford, NS, Canada Manufacturing, Engineering, Office Advanced Sensing and Computing 41,750 Owned 11 Durant Ave, Bethel, Ct Distribution Warehouse Integrated Mission Systems 37,840 Leased 20511 Seneca Meadows Parkway, Germantown, MD Engineering, Office Advanced Sensing and Computing 35,583 Leased 825 Greenbrier Circle, Chesapeake, VA Manufacturing, Engineering, Office Advanced Sensing and Computing 34,299 Leased 1021 Production Ct, Madison, AL Distribution, Office Advanced Sensing and Computing 33,000 Leased 651 Anchors Street, Ft.
Biggest changeWalton Beach, FL Engineering, Office Advanced Sensing and Computing 60,465 Owned 13544 N Central Expressway, Dallas, TX Manufacturing, Engineering, Office Advanced Sensing and Computing 48,374 Leased 2345 Crystal Dr., Arlington, VA Office Corporate 46,184 Leased 47 Block 22844 Portions of Plots 90, 91, Beit She’an Israel Manufacturing, Engineering, Office Advanced Sensing and Computing 42,610 Owned 20511 Seneca Meadows Parkway, Germantown, MD Engineering, Office Advanced Sensing and Computing 42,476 Leased 150 Bluewater Road, Bedford, NS, Canada Manufacturing, Engineering, Office Advanced Sensing and Computing 41,750 Owned 11 Durant Ave, Bethel, Ct Distribution Warehouse Integrated Mission Systems 37,840 Leased 825 Greenbrier Circle, Chesapeake, VA Manufacturing, Engineering, Office Advanced Sensing and Computing 34,299 Leased 1021 Production Ct, Madison, AL Distribution, Office Advanced Sensing and Computing 33,000 Leased 1832 Wright Street, Madison, WI Manufacturing, Engineering, Office Advanced Sensing and Computing 32,319 Leased 651 Anchors Street, Ft.
Walton Beach, FL Manufacturing, Engineering, Office Advanced Sensing and Computing 74,304 Owned 21 South Street, Danbury, CT Manufacturing, Engineering, Warehouse, Office Integrated Mission Systems 74,300 Owned 1200 Sherman Street, Dallas, TX Engineering, Office Advanced Sensing and Computing 73,646 Leased 1240 Seesetown Rd., Sidman, PA Distribution, Warehouse Advanced Sensing and Computing 72,450 Leased 47 16465 Via Esprillo, San Diego, CA Manufacturing, Engineering, Office Advanced Sensing and Computing 67,762 Leased 7700 US Highway 1, Titusville, FL Warehouse Advanced Sensing and Computing 63,309 Leased 640 Lovejoy, Ft.
Walton Beach, FL Manufacturing, Engineering, Office Advanced Sensing and Computing 74,304 Owned 21 South Street, Danbury, CT Manufacturing, Engineering, Warehouse, Office Integrated Mission Systems 74,300 Owned 1200 Sherman Street, Dallas, TX Engineering, Office Advanced Sensing and Computing 73,646 Leased 1240 Seesetown Rd., Sidman, PA Distribution, Warehouse Advanced Sensing and Computing 72,450 Leased 16465 Via Esprillo, San Diego, CA Manufacturing, Engineering, Office Advanced Sensing and Computing 67,762 Leased 7700 US Highway 1, Titusville, FL Warehouse Advanced Sensing and Computing 63,309 Leased 640 Lovejoy, Ft.
It is not certain whether we will negotiate new leases as existing leases expire or whether we will be able to negotiate new leases without substantial cost or at all. Such determinations will be made as existing leases approach expiration and will be based on an assessment of our requirements at that time.
It is not certain whether we will negotiate new leases as existing leases expire or whether we will be able to negotiate new leases without substantial cost. Such determinations will be made as existing leases approach expiration and will be based on an assessment of our requirements at that time.
The owned building is situated on land leased form the Israeli Land Authority for a period of 49 years ending in 2034. We believe that our facilities are adequate for our intended use and sufficient for our immediate needs, including to meet any security certification requirements or requirements for locating facilities in certain locations.
The owned building is situated on land leased from the Israeli Land Authority for a period of 49 years ending in 2034. We believe that our facilities are adequate for our intended use and sufficient for our immediate needs, including to meet any security certification requirements or requirements for locating facilities in certain locations.
ITEM 2. Properties We are headquartered in Arlington, Virginia. Our principal executive offices are leased under a lease agreement expiring March 31, 2027 with an option to extend for five years thereafter. We also lease space in 16 other states and the District of Columbia in the United States, one city in Canada and three cities in Israel.
ITEM 2. PROPERTIES We are headquartered in Arlington, Virginia. Our principal executive offices are leased under a lease agreement expiring March 31, 2027, with an option to extend for five years thereafter. We also lease or own space in 18 other states and the District of Columbia in the United States, one city in Canada and three cities in Israel.
Location Activities Operating Segment Approximate Square Footage Owned / Leased 4265 North 30th Street, Milwaukee, WI Manufacturing, Engineering, Warehouse, Office Integrated Mission Systems 610,800 Leased 1 McDaniel Street, West Plains, MO Manufacturing, Engineering, Warehouse, Office Integrated Mission Systems 447,067 Owned Good Hope Rd., Menomonee Falls, WI Manufacturing, Engineering, Warehouse Integrated Mission Systems 372,856 Leased 100 North Babcock Street, Melbourne, FL Manufacturing, Engineering, Warehouse, Office Advanced Sensing and Computing 336,287 Leased 6060 Highway, High Ridge, MO Manufacturing, Engineering, Office Integrated Mission Systems 183,600 Owned 4545 Innovation Way, Bridgeton, MO Manufacturing, Engineering, Warehouse, Office Integrated Mission Systems 171,500 Leased One Milestone Center Court, Germantown, MD Engineering, Office Advanced Sensing and Computing 133,140 Leased 46 7200 Redstone Gateway, Huntsville, AL Manufacturing, Engineering, Office Advanced Sensing and Computing 131,498 Leased 246 Airport Road, Johnstown, PA Manufacturing, Engineering, Warehouse, Office Advanced Sensing and Computing 129,716 Leased 500 Palladium Drive, Ottawa, ON, Canada Manufacturing, Engineering, Warehouse, Office Advanced Sensing and Computing 127,334 Leased 401 Flint Drive, Menomonee Falls, WI Engineering, Office Integrated Mission Systems 118,620 Leased 166 Boulder Drive, Building #2, Fitchburg, MA Manufacturing, Warehouse Integrated Mission Systems 114,454 Leased 6200 118th Avenue North, Largo, FL Manufacturing, Engineering, Office Advanced Sensing and Computing 113,329 Owned 10600 Valley View Street, Cypress, CA Engineering, Office Advanced Sensing and Computing 91,506 Leased 13532 N Central Expressway, Dallas, TX Manufacturing, Engineering, Office Advanced Sensing and Computing 89,982 Leased 645 Anchors Street, Ft.
The table below provides additional information about our significant leased and owned facilities and properties: Location Activities Operating Segment Approximate Square Footage Owned / Leased 1 McDaniel Street, West Plains, MO Manufacturing, Engineering, Warehouse, Office Integrated Mission Systems 447,067 Owned Good Hope Rd., Menomonee Falls, WI Manufacturing, Engineering, Warehouse Integrated Mission Systems 372,856 Leased 100 North Babcock Street, Melbourne, FL Manufacturing, Engineering, Warehouse, Office Advanced Sensing and Computing 336,287 Leased 6060 Highway, High Ridge, MO Manufacturing, Engineering, Office Integrated Mission Systems 183,600 Owned 4545 Innovation Way, Bridgeton, MO Manufacturing, Engineering, Warehouse, Office Integrated Mission Systems 171,500 Leased 46 7200 Redstone Gateway, Huntsville, AL Manufacturing, Engineering, Office Advanced Sensing and Computing 131,498 Leased 246 Airport Road, Johnstown, PA Manufacturing, Engineering, Warehouse, Office Advanced Sensing and Computing 129,716 Leased 500 Palladium Drive, Ottawa, ON, Canada Manufacturing, Engineering, Warehouse, Office Advanced Sensing and Computing 127,334 Leased 401 Flint Drive, Menomonee Falls, WI Engineering, Office Integrated Mission Systems 118,620 Leased 166 Boulder Drive, Building #2, Fitchburg, MA Manufacturing, Warehouse Integrated Mission Systems 114,454 Leased 6200 118th Avenue North, Largo, FL Manufacturing, Engineering, Office Advanced Sensing and Computing 113,329 Owned 10600 Valley View Street, Cypress, CA Engineering, Office Advanced Sensing and Computing 91,506 Leased 13532 N Central Expressway, Dallas, TX Manufacturing, Engineering, Office Advanced Sensing and Computing 89,982 Leased 4910 Executive Court South, Frederick, MD Manufacturing, Engineering, Office Advanced Sensing and Computing 88,146 Leased 645 Anchors Street, Ft.
Walton Beach, FL Manufacturing, Engineering, Office Advanced Sensing and Computing 32,107 Owned 1620 Old Airport Road, West Plains, MO Distribution, Warehouse Integrated Mission Systems 30,000 Leased 2601 Mission Point Blvd, Beavercreek, OH Engineering, Office Advanced Sensing and Computing 27,306 Leased 48 1057 South Sherman, Richardson, TX Engineering, Office Advanced Sensing and Computing 26,696 Leased 590 Territorial Drive, Bolingbrook, IL Manufacturing, Engineering, Office Advanced Sensing and Computing 26,460 Leased 166 Boulder Drive, Fitchburg, MA Engineering, Office Integrated Mission Systems 22,000 Leased 26 Castilian Drive, Goleta, CA Engineering, Office Integrated Mission Systems 20,823 Leased 49
Walton Beach, FL Manufacturing, Engineering, Office Advanced Sensing and Computing 31,783 Owned 1620 Old Airport Road, West Plains, MO Distribution, Warehouse Integrated Mission Systems 30,000 Owned 2601 Mission Point Blvd, Beavercreek, OH Engineering, Office Advanced Sensing and Computing 27,306 Leased 590 Territorial Drive, Bolingbrook, IL Manufacturing, Engineering, Office Advanced Sensing and Computing 26,460 Leased 166 Boulder Drive, Fitchburg, MA Engineering, Office Integrated Mission Systems 22,000 Leased 640 Independence Blvd, West Plains, MO Manufacturing, Engineering, Warehouse, Office Integrated Mission Systems 22,000 Owned 26 Castilian Drive, Goleta, CA Engineering, Office Integrated Mission Systems 20,823 Leased
Further, we believe that we can obtain additional space, if necessary, based on prior experience and current real estate market conditions. The table below provides additional information about our significant leased and owned facilities and properties.
Further, we believe that we can obtain additional space, if necessary, based on prior experience and current real estate market conditions.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeIn addition, the NPS may seek to recover damages for loss of use of certain natural resources. We believe that we have legitimate defenses to our subsidiary’s potential liability and that there are other potentially responsible parties for the environmental conditions at the site, including the U.S. government as owner, operator and arranger at the site.
Biggest changeWe believe that we have legitimate defenses to our subsidiary’s potential liability and that there are other potentially responsible parties for the environmental conditions at the site, including the U.S. government as owner, operator and arranger at the site.
In July 2000, an entity which later became a subsidiary of the Company received a Section 104(e) Request for Information (“RFI”) from the National Park Service (“NPS”), pursuant to CERCLA, regarding the presence of radioactive material at a site within a national park, which site was operated by an alleged predecessor to our subsidiary over 50 years ago.
In July 2000, an entity which later became a subsidiary of the Company received a Section 104(e) Request for Information (“RFI”) from the National Park Service (“NPS”), pursuant to CERCLA, regarding the presence of radioactive material at a site within a national park, (“Orphan Mine”), which site was operated by an alleged predecessor to our subsidiary over 50 years ago.
The NPS previously posted its intention to open a formal public comment period regarding the EE/CA at the end of 2019. To our knowledge, the EE/CA has not been released and a public comment period has yet to be opened.
The NPS previously posted its intention to open a formal public comment period regarding the EE/CA at the end of 2019. To our knowledge, the EE/CA has not been released and a public comment period has yet to be opened. The Environmental Protection Agency (“EPA”) episodically updates its electronic databases concerning pending Superfund sites.
Removed
Following completion of the EE/CA, the NPS may seek reimbursement for its investigative and remedial efforts to date, or direct one or more of the potentially responsible parties to perform any remediation that may be required by CERCLA or may enter an alternative dispute resolution proceeding to attempt to resolve each party’s share.
Added
The Company reviews the developments in contingencies that could affect the amount of the reserves that have been previously recorded. The Company adjusts provisions and changes to disclosures accordingly to reflect the impact of negotiations, 48 settlements, rulings, advice of legal counsel, and updated information.
Added
Significant judgment is required to determine both the probability and the estimated amount of any potential losses.
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As of June 2023, the entry in EPA’s Superfund database for this site states that this “[s]ite does not qualify for the NPL [National Priorities List] based on existing information.
Added
The EPA has determined that no further federal action (NFFA) will be taken at this site.” As a result, DRS has eliminated the Orphan Mine reserve as a liability is no longer probable or estimable. However, it remains possible that the NPS may seek to recover damages, including for remediation and/or loss of use of certain natural resources.

Item 4. Mine Safety Disclosures

Mine Safety Disclosures — required of mining issuers

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Biggest changeLynn III 68 Chief Executive Officer and Chairman John A. Baylouny 61 Executive Vice President, Chief Operating Officer Michael D. Dippold 42 Executive Vice President, Chief Financial Officer Mark A. Dorfman 48 Executive Vice President, General Counsel & Secretary Sally A. Wallace 56 Executive Vice President, Business Operations William J. Lynn III Mr.
Biggest changeLynn III 69 Chief Executive Officer and Chairman John A. Baylouny 62 Executive Vice President, Chief Operating Officer Michael D. Dippold 43 Executive Vice President, Chief Financial Officer Mark A. Dorfman 49 Executive Vice President, General Counsel & Secretary Sally A. Wallace 57 Executive Vice President, Business Operations 49 William J. Lynn III Mr.
Lynn has been a director since 2012 and has been our Chief Executive Officer since January 2012. Mr. Lynn also serves as Chairman of our Board. Prior to joining DRS in January 2012, Mr. Lynn served as the 30th United States Deputy Secretary of Defense from 2009 to 2011. From 2002 to 2009, Mr.
Lynn has been a director since 2012 and our Chief Executive Officer since January 2012. Mr. Lynn also serves as Chairman of our Board. Prior to joining DRS in January 2012, Mr. Lynn served as the 30th United States Deputy Secretary of Defense from 2009 to 2011. From 2002 to 2009, Mr.
Dippold served as Senior Vice President, Corporate Controller from December 2015 to January 2017, and Vice President, Assistant Controller from December 2010 to December 2015. Prior to joining DRS in 2006, Mr. Dippold spent three years at KPMG LLP where he worked primarily on defense industry client accounts, including DRS. 51 Mr.
Dippold served as Senior Vice President, Corporate Controller from December 2015 to January 2017, and Vice President, Assistant Controller from December 2010 to December 2015. Prior to joining DRS in 2006, Mr. Dippold spent three years at KPMG LLP where he worked primarily on defense industry client accounts, including DRS. Mr.
ITEM 4. MINE SAFETY DISCLOSURES Not applicable. SUPPLEMENTARY ITEM— INFORMATION ABOUT OUR EXECUTIVE OFFICERS The following table sets forth certain information concerning our executive officers, including the respective age of each individual, as of December 31, 2022. Biographies of each of our executive officers are also below. 50 Name Age Position William J.
ITEM 4. MINE SAFETY DISCLOSURES Not applicable. SUPPLEMENTARY ITEM— INFORMATION ABOUT OUR EXECUTIVE OFFICERS The following table sets forth certain information concerning our executive officers, including the respective age of each individual, as of December 31, 2023. Biographies of each of our executive officers are also below. Name Age Position William J.
Wallace has a master’s degree in business from the University of Chicago, a master’s degree in mechanical engineering from the University of Connecticut and a Bachelor of Science degree in engineering physics from Grove City College. PART II 52
Wallace has a master’s degree in business from the University of Chicago, a master’s degree in mechanical engineering from the University of Connecticut and a Bachelor of Science degree in engineering physics from Grove City College. 51 PART II
As the Company’s chief legal officer, Mr. Dorfman oversees the Company's legal and regulatory affairs, including transactions, litigation, corporate governance, internal audit, contracts, insurance, intellectual property protection, and ethics and compliance programs (including environmental health and safety, international trade, and industrial and cyber security). Mr.
As the Company’s chief legal officer, Mr. 50 Dorfman oversees the Company's legal and regulatory affairs, including transactions, litigation, corporate governance, internal audit, contracts, insurance, intellectual property protection, and ethics and compliance programs (including environmental health and safety, international trade, and industrial and cybersecurity). Mr.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeThe following performance graph does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other previous or future filings by us under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate the performance graph by reference therein. 53 54 ITEM 6. RESERVED 55
Biggest changeFor purposes of this comparison, we have assumed an initial investment of $100, that dividends have been reinvested, and the returns of each company in the S&P 500 Index and the S&P A&D Select Industry Index have been weighted to reflect relative stock market capitalization. 52 The following performance graph does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other previous or future filings by us under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate the performance graph by reference therein.
Performance Graph The following graph compares the cumulative total stockholder return, from November 29, 2022, the date our common stock began trading on the Nasdaq, through December 31, 2022 for our common stock, the Standard & Poor’s 500 Index (the “S&P 500 Index”) and the Standard & Poor’s Aerospace & Defense Select Industry Index (the “S&P A&D Select Industry Index”).
Performance Graph The following graph compares the cumulative total stockholder return on our common stock, from November 29, 2022, the date our common stock began trading on Nasdaq, through December 31, 2023, to the Standard & Poor’s 500 Index (the “S&P 500 Index”) and the Standard & Poor’s Aerospace & Defense Select Industry Index (the “S&P A&D Select Industry Index”).
Such payments are at the discretion of our Board and will depend upon our financial condition, results of operations, capital requirements, alternative uses of capital and other factors that our Board may consider at its discretion. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Report.
Such payments are at the discretion of our Board and will depend upon our financial condition, results of operations, capital requirements, alternative uses of capital and other factors that our Board may consider at its discretion. See Part II, Item 7, “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” included in this Report.
Holders of Common Stock The Transfer Agent and Registrar for our common stock is American Stock Transfer LLC located at 6201 15th Avenue, Brooklyn, NY 11219. On March 27, 2023 there were 42 registered holders of record of our common stock. Common Stock Share Repurchase Program We do not currently have a common stock share repurchase program.
Holders of Common Stock The Transfer Agent and Registrar for our common stock is American Stock Transfer LLC located at 6201 15th Avenue, Brooklyn, NY 11219. As of February 26, 2024, there were 49 registered holders of record of our common stock. Common Stock Share Repurchase Program We do not currently have a common stock share repurchase program.
ITEM 5. MARKET FOR THE COMPANY’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Our stock is listed on the Nasdaq and the Tel Aviv Stock Exchange under the symbol “DRS”. Dividends We do not currently, nor do we expect to in the future, pay quarterly cash dividends.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Our stock is listed on the Nasdaq under the symbol “DRS.” Dividends We do not currently pay quarterly cash dividends.
Removed
For purposes of this comparison, we have assumed that dividends have been reinvested, and the returns of each company in the S&P 500 Index and the S&P A&D Select Industry Index have been weighted to reflect relative stock market capitalization.

Item 6. [Reserved]

Selected Financial Data — reserved (removed by SEC in 2021)

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Biggest changeItem 6. Selected Historical Consolidated Financial Data 55 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 56 Item 7A. Quantitative and Qualitative Disclosure of Market Risks 87 Item 8. Financial Statements and Supplementary Data 89 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 144
Biggest changeItem 6. [Reserved] 53 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 54 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 77 Item 8. Financial Statements and Supplementary Data 78 Item 9. Changes in and Disagreements W ith Accountants on Accounting and Financial Disclosure 130

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeYear Ended December 31, 2022 vs. 2021 Variance 2021 vs. 2020 Variance (Dollars in millions, except per share amounts) 2022 2021 2020 $ % $ % Total revenues $2,693 $2,879 $2,778 $(186) (6.5)% $101 3.6% Total cost of revenues (2,118) (2,332) (2,284) 214 (9.2)% (48) 2.1% Gross profit $575 $547 $494 28 5.1% $53 10.7% Gross margin 21.4% 19.0% 17.8% 2.4% 12.4% 1.2% 6.8% General and administrative expenses (357) (293) (283) (64) 21.8% (10) 3.5% Amortization of intangibles (10) (9) (9) (1) 11.1% — —% Other operating expenses, net 353 (9) (21) 362 (4022.2)% 12 (57.1)% Operating earnings $561 $236 $181 325 137.7% $55 30.4% Interest expense (34) (35) (64) 1 (2.9)% 29 (45.3)% Other, net $(2) (1) (5) (1) 100.0% 4 (80.0)% Earnings before taxes $525 $200 $112 325 162.5% $88 NM Income tax provision 120 46 27 74 160.9% 19 NM Net earnings $405 $154 $85 251 163.0% $69 NM Basic EPS (1) $1.88 $0.73 $0.40 $1.15 157.5% $0.33 NM Diluted EPS (1) $1.88 $0.73 $0.40 $1.15 157.3% $0.33 NM Backlog (2) 4,269 2,861 3,291 1,408 49.2% (430) (13.1)% Bookings (2) 3,156 2,595 3,055 561 21.6% (460) (15.1)% ______________ 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.
Biggest changeYear Ended December 31, 2023 vs. 2022 Variance 2022 vs. 2021 Variance (Dollars in millions, except per share amounts) 2023 2022 2021 $ % $ % Total revenues $ 2,826 $ 2,693 $ 2,879 $ 133 4.9 % $ (186) (6.5) % Total cost of revenues (2,178) (2,118) (2,332) (60) 2.8 % 214 (9.2) % Gross profit $ 648 $ 575 $ 547 $ 73 12.7 % $ 28 5.1 % Gross margin 22.9 % 21.4 % 19.0 % 150 bps 240 bps General and administrative expenses (384) (357) (293) (27) 7.6 % (64) 21.8 % Amortization of intangibles (22) (10) (9) (12) 120.0 % (1) 11.1 % Other operating (expenses) income, net (11) 353 (9) (364) (103.1) % 362 (4022.2) % Operating earnings $ 231 $ 561 $ 236 $ (330) (58.8) % $ 325 137.7 % Interest expense (36) (34) (35) (2) 5.9 % 1 (2.9) % Other, net (3) (2) (1) (1) 50.0 % (1) 100.0 % Earnings before taxes $ 192 $ 525 $ 200 $ (333) (63.4) % $ 325 162.5 % Income tax provision 24 120 46 (96) (80.0) % 74 160.9 % Net earnings $ 168 $ 405 $ 154 $ (237) (58.5) % $ 251 163.0 % Basic EPS (1) $ 0.64 $ 1.88 $ 0.73 $ (1.24) (66.0) % $ 1.15 157.5 % Diluted EPS (1) $ 0.64 $ 1.88 $ 0.73 $ (1.24) (66.0) % $ 1.15 157.5 % Backlog (2) $ 7,751 $ 4,269 $ 2,861 $ 3,482 81.6 % $ 1,408 49.2 % Bookings (2) $ 3,516 $ 3,156 $ 2,595 $ 360 11.4 % $ 561 21.6 % ______________ (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.
Revenues for the majority of our contracts are measured using the the over time, percentage of completion cost-to-cost method of accounting to calculate percentage of completion. 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.
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.
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.
We believe these non-GAAP financial measures, each of which is discussed in greater detail below, are important 61 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.
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.
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 64 cash flow and net cash provided by operating activities (the most comparable U.S.
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 shareholder.
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.
(3) Post-retirement obligations include those amounts we expect to pay out in benefits 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.
(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.
Our sensing capabilities span numerous applications, including missions requiring advanced detection, precision targeting and surveillance sensing, long range electro-optic/infrared (“EO/IR”), signals intelligence (“SIGINT”) and other intelligence systems, electronic warfare (“EW”), ground vehicle sensing, next generation active electronically scanned array (“AESA”) tactical radars, dismounted soldier sensing and space sensing.
Our sensing capabilities span numerous applications, including missions requiring advanced detection, precision targeting and surveillance sensing, long range electro-optic/infrared (“EO/IR”), signals intelligence (“SIGINT”) and other intelligence systems, electronic warfare (“EW”), ground vehicle sensing, next generation active electronically scanned array tactical radars, dismounted soldier sensing and space sensing.
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.
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.
The DCAA has the right to perform audits on our incurred costs on cost-type or price redeterminable-type 58 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.
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.
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.
Adjusted diluted EPS has limitations as an analytical tool and does not represent and should not be considered an alternative to 63 basic or diluted EPS as determined in accordance with U.S. GAAP. The reconciliation of adjusted diluted EPS to U.S.
Substantially all of our contracts are accounted for using the over time, percentage of completion cost-to-cost method of accounting as determined by the ratio of cumulative costs incurred to date to estimated total contract costs at completion.
Substantially all of our contracts are accounted for using the over time, percentage of completion 74 cost-to-cost method of accounting as determined by the ratio of cumulative costs incurred to date to estimated total contract costs at completion.
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 59 contracts and varying delivery schedules. Accordingly, operating results in a particular year may not be indicative of future operating results.
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 57 contracts and varying delivery schedules. Accordingly, operating results in a particular year may not be indicative of future operating results.
Labor and overhead costs consist of direct and indirect manufacturing costs, including wages and fringe 75 benefits, operating supplies, depreciation and amortization, occupancy costs, and purchasing, receiving, inspection costs and inbound freight costs.
Labor and overhead costs consist of direct and indirect manufacturing costs, including wages and fringe benefits, operating supplies, depreciation and amortization, occupancy costs, and purchasing, receiving, inspection costs and inbound freight costs.
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 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.
Off-Balance Sheet Arrangements As of December 31, 2022 and 2021, 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.
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.
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 2022 and other new accounting standards that have been issued by the Financial Accounting Standards Board but are not effective until after December 31, 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.
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.
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.
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, 2022, 2021 and 2020.
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.
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.
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.
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.
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.
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 Acquisitions and Dispositions for additional information regarding the transaction.
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.
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 91%, 87% and 87% of our total revenues for the periods ended December 31, 2022, 2021 and 2020, respectively.
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.
Review of Operating Segments The following is a discussion of operating results for each of our operating segments. We have elected to use Revenue, Adjusted EBITDA, Adjusted EBITDA Margin, Bookings and Backlog to provide detailed information on our segment performance. Additional information regarding our segments can be found in Note 20: Segment Information within the Consolidated Financial Statements.
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 69 detailed information on our segment performance. Additional information regarding our segments can be found in Note 19: Segment Information within the Consolidated Financial Statements.
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.
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 55 strategic investments, all while maintaining our focus on customer satisfaction. In these elements, our goals are aligned with those of our customers.
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.
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.
The remaining revenue is generated from service related contracts. Additionally, 87%, 87% and 87% of our revenue generation for December 31, 2022, 2021 and 2020, 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.
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.
GES, which was part of the ASC segment, provides commercial satellite communications to the U.S. Government and delivers satellite communications and security solutions to customers worldwide. The Company recorded operating income for the GES business of $13 million and $29 million for the year ended December 31, 2022 and for the period ended December 31, 2021, respectively.
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.
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 and Long-Lived Assets • Pension Assumptions • Business Combinations 84 • 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.
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.
For further discussion, see Note 3 : Revenue from Contracts with Customers to the Consolidated Financial Statements. Reviews for Impairment of Goodwill and Long-lived Assets Goodwill represents the excess purchase price paid to acquire a business over the fair value of net assets acquired.
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.
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”).
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”).
The transaction netted an aggregate pretax gain net of transaction costs of $309 million ($239 million after 74 tax) of which $323 million, was included in Other Operating income (expense) net partially reduced by aggregate transaction costs of $14 million included in Selling, General & Administrative costs and tax expenses of $70 million.
The transaction netted an aggregate pretax gain net of transaction costs of $309 million ($239 million after tax) of which $323 million, was included in other operating income (expenses), net partially reduced by aggregate transaction costs of $14 million included in general and administrative costs and tax expenses of $70 million.
(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.
(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.
Under flexibly priced contracts, which consists of 13%,13% and 13% of our total revenues for December 31, 2022, 2021 and 2020, respectively, we are reimbursed for allowable or otherwise defined total costs (defined as cost of revenues plus allowable general and administrative expenses) incurred, plus a fee.
Under flexibly priced contracts, which consists of 16%,13% and 13% of our total revenues for December 31, 2023, 2022 and 2021, respectively, we are reimbursed for allowable or otherwise defined 68 total costs (defined as cost of revenues plus allowable general and administrative expenses) incurred, plus a fee.
Revenue for flexibly priced contracts are generally recognized as services 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.
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.
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.
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.
Revenue and profit in future periods of contract performance are recognized using the adjusted estimate. The aggregate impact of adjustments in contract estimates that impacted our revenue and profit totals are $26 million, $34 million, and $77 million for 2022, 2021, and 2020, respectively. The changes in estimates are primarily attributed to changes in our firm-fixed-priced development type programs.
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.
(2) Finance leases and other includes a build-to-suit, failed sale leaseback asset obligation of $48 million as of December 31, 2022. See Note 13: Debt of our Notes to Consolidated Financial Statements .
(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.
On April 19, 2022, we entered into a definitive sales agreement to divest our share of our equity investment in Advanced Acoustic Concepts LLC (“AAC”) for $56 million to Thales Defense & Security, Inc., the minority partner in this joint venture. The transaction was completed on July 8, 2022 and resulted in proceeds of $56 million.
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.
GAAP. 80 Liquidity and Capital Resources We endeavor to ensure the most efficient conversion of operating income into cash for deployment in our business and to maximize shareholder value through cash deployment activities.
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.
International Sales International revenue, including foreign military sales, foreign military financing, and direct commercial sales, accounted for approximately 7%, 5% and 8% of our revenue for the years ended December 31, 2022, 2021 and 2020, respectively.
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.
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.
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).
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.
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.
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.
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.
In total our changes in our assets and liabilities absorbed $82 million of cash for the year ended December 31, 2022 compared to $65 million for the year ended December 31, 2021.
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.
See Part I, Item 1A, “Risk Factors—Risks Related to Our Business—Significant delays or reductions in appropriations for our programs and changes in U.S. government priorities and spending levels more broadly may negatively impact our business and could have a material adverse impact on our business, financial condition and results of operations” Please see also Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Overview and Considerations—Business Environment” in this Annual Report for further details on U.S. government spending’s impact on our business.
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 65 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.
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 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.
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.
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.
The following table summarizes our cash flows for the periods presented: Year ended December 31, (Dollars in millions) 2022 2021 2020 Net cash provided by operating activities $ 33 $ 178 $ 125 Net cash provided by (used in) investing activities 436 39 (70) Net cash used in financing activities (403) (38) (80) Effect of exchange rate changes on cash and cash equivalents — — 1 Net increase (decrease) in cash and cash equivalents $ 66 $ 179 $ (24) Free cash flow (1) $ 74 $ 122 $ 82 ________________ (1) Free cash flow is a Non-GAAP measure.
The following table summarizes our cash flows for the periods presented: Year ended December 31, (Dollars in millions) 2023 2022 2021 Net cash provided by operating activities $ 205 $ 33 $ 178 Net cash (used in) provided by investing activities (59) 436 39 Net cash provided by (used in) financing activities 15 (403) (38) Effect of exchange rate changes on cash and cash equivalents — — — Net increase in cash and cash equivalents $ 161 $ 66 $ 179 Free cash flow (1) $ 159 $ 74 $ 122 ________________ (1) Free cash flow is a Non-GAAP measure.
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 56 advanced battle management, combat systems, radar, command and control (“C2”), tactical networks, tactical computing and communications.
Our network computing offerings are utilized across a broad range of mission applications including platform computing on ground and shipboard (both surface ship and submarine) for advanced battle management, combat systems, radar, command and control (“C2”), tactical networks, tactical computing and communications.
GAAP financial measure is provided above under “See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Non-GAAP Operating Measures” above for reconciliations of these measures to the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP.
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.
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 that follow.
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.
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.
The significance of these impacts will primarily be based on the length of the CR or shutdown. 56 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.
Our cash balance as of December 31, 2022 was $306 million compared to $240 million as of December 31, 2021.
Our cash balance as of December 31, 2023 was $467 million compared to $306 million as of December 31, 2022.
GAAP EPS is shown below: Consolidated Entity Reconciliation of Adjusted Diluted EPS: Year Ended December 31, (Dollars in millions, except per share amounts) 2022 2021 2020 Net earnings $ 405 $ 154 $ 85 Deal related transaction costs 43 5 9 Amortization of intangibles 10 9 9 Restructuring costs 3 5 12 Other non-operating expense 2 7 18 Gain on sale of dispositions, net of taxes $ (275) $ — $ — Tax effect of adjustments $ (9) $ (6) $ (11) Adjusted net earnings $ 179 $ 174 $ 122 Basic EPS (1) $ 1.88 $ 0.73 $ 0.40 Adjusted diluted EPS (1) $ 0.83 $ 0.83 $ 0.58 ________________ (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.
GAAP diluted EPS is shown below: Consolidated Entity Reconciliation of Adjusted Diluted EPS: Year Ended December 31, (Dollars in millions, except per share amounts; shares in millions) 2023 2022 2021 Net earnings $ 168 $ 405 $ 154 Deal-related transaction costs 7 43 5 Amortization of intangibles 22 10 9 Restructuring costs 11 3 5 Other one-time non-operational events (7) 2 7 Gain on sale of dispositions, net of taxes — (275) — Tax effect of adjustments (7) (9) (6) Adjusted net earnings $ 194 $ 179 $ 174 Diluted weighted average number of shares outstanding 264 215 210 Diluted EPS (1) $ 0.64 $ 1.88 $ 0.73 Adjusted diluted EPS (1) $ 0.73 $ 0.83 $ 0.83 ________________ (1) Gives effect to a 1,450,000-for-1 forward stock split on our common stock effected on February 25, 2021 and a 1.451345331-for-1 forward stock split on our common stock effected November 23, 2022.
Navy, which represented 37% and 32%, and 38% and 31%, respectively, of our total revenues for the years ended December 31, 2022 and 2021.
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.
After establishing the estimated total cost at completion, we follow a standard Estimate at Completion (“EAC”) process in which we review the progress and performance on our ongoing contracts$1 The following represents the impact that changes in our estimates, particularly those regarding our fixed-price development programs, have had on our revenues for the 2022, 2021 and 2020 periods, respectively: Impact of Change in Estimates on our Revenue Results Year Ended December 31, (Dollars in millions) 2022 2021 2020 Revenue $ (26) $ (34) $ (77) Total % of Revenue 1 % 1 % 3 % 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.
The following represents the impact that changes in our estimates, particularly those regarding our fixed-price development programs, have had on our revenues for the 2023, 2022 and 2021 periods, respectively: Year Ended December 31, (Dollars in millions) 2023 2022 2021 Revenue $ (23) $ (26) $ (34) Total % of Revenue 1 % 1 % 1 % 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.
In particular, our results can be affected by shifts in strategies and priorities on homeland security, intelligence, defense-related programs, 71 infrastructure and urbanization and continued increased spending on technology and innovation, including cybersecurity, artificial intelligence, connected communities and physical infrastructure (for example, the potential impact for the Russia / Ukraine conflict).
In particular, our results can be affected by shifts in strategies and priorities on homeland security, intelligence, defense-related programs, infrastructure and urbanization and continued increased spending on technology and innovation, including cybersecurity with respect to our and third parties' information networks and related systems, artificial intelligence, connected communities and physical infrastructure (for example, the potential impacts for the Russia / Ukraine conflict and the Israel-Hamas war).
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.
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 increase in new awards is driven by our alignment of customer priorities to combat the emerging threats our service men and women face in today’s environment.
The increase 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.
GAAP measure) is shown below: Consolidated Entity Reconciliation of Free Cash Flow: Year Ended December 31, (Dollars in millions) 2022 2021 2020 Net cash provided by operating activities $ 33 $ 178 $ 125 Transaction related expenditures, net of tax 25 4 8 Tax payments on disposals 78 — — Capital expenditures (65) (60) (56) Proceeds from sales of assets — — 5 Dividends from investments $ 3 $ — $ — Free cash flow $ 74 $ 122 $ 82 Year Ended December 31, 2022 Compared With Year Ended December 31, 2021 Free cash flow decreased by $48 million, or 39.7%, to $74 million for the year ended December 31, 2022 from $122 million for the year ended December 31, 2021.
GAAP measure) is shown below: Consolidated Entity Reconciliation of Free Cash Flow: Year Ended December 31, (Dollars in millions) 2023 2022 2021 Net cash provided by operating activities $ 205 $ 33 $ 178 Transaction-related expenditures, net of tax 13 25 4 Tax payments on disposals — 78 — Capital expenditures (60) (65) (60) Proceeds from sales of assets 1 — — Dividends from investments — 3 — Free cash flow $ 159 $ 74 $ 122 Free cash flow increased by $85 million, or 114.9%, to $159 million for the year ended December 31, 2023, from $74 million for the year ended December 31, 2022.
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.
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.
The growth in net assets is primarily attributed to investments in Contract Assets and Inventory as of December 31, 2022, which resulted in a $134 million and $33 million use of cash during the period, respectively.
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.
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.
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 58 demand in our Force Protection, Network Computing and Advanced sensing programs.
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.
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.
Year Ended December 31, 2022 vs. 2021 Variance 2021 vs. 2020 Variance (Dollars in millions, except per share amounts) 2022 2021 2020 $ % $ % Adjusted EBITDA (2) $318 $310 $268 8 2.7% 42 15.7% Adjusted EBITDA Margin (2) 11.8% 10.8% 9.6% 1.1% 9.8% 1.1% 11.6% Adjusted diluted EPS (1)(2) $0.83 $0.83 $0.58 $0.01 0.6% $0.25 NM Free cash flow (2) $74 $122 $82 $(48) (39.7)% $40 49.4% ______________ 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 67 Cash Flow, as measures of our overall performance.
Year Ended December 31, 2023 vs. 2022 Variance 2022 vs. 2021 Variance (Dollars in millions, except per share amounts) 2023 2022 2021 $ % $ % Adjusted EBITDA (1) $ 324 $ 318 $ 310 6 1.9 % $ 8 2.6 % Adjusted EBITDA margin (1) 11.5 % 11.8 % 10.8 % (30) bps 100 bps Adjusted Diluted EPS (1)(2) $ 0.73 $ 0.83 $ 0.83 $ (0.10) (12.0) % $ — — % Free cash flow (1) $ 159 $ 74 $ 122 $ 85 114.9 % $ (48) (39.3) % ______________ (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.
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.
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.
Year Ended December 31, 2022 Compared to the Years Ended December 31, 2021 and 2020 Operating Activities Year Ended December 31, 2022 Compared With Year Ended December 31, 2021 We generated cash from operating activities of $33 million for the year ended December 31, 2022 as compared to $178 million for the year ended December 31, 2021.
GAAP. 72 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.
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.
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.
Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Diluted EPS and free cash flow are non-GAAP measures. See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Non-GAAP Operating Measures” above for reconciliations of these measures to the most directly comparable financial measure calculated and presented in accordance with U.S.
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.
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.
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.
The reconciliation of Adjusted EBITDA to net earnings is provided below: 68 Adjusted EBITDA Consolidated Entity Adjusted EBITDA Reconciliation: Year Ended December 31, (Dollars in millions) 2022 2021 2020 Net earnings $ 405 $ 154 $ 85 Income tax provision 120 46 27 Amortization of intangibles 10 9 9 Depreciation 55 49 44 Restructuring costs 3 5 12 Interest expense 34 35 64 Deal related transaction costs 43 5 9 Other non-operating expense 2 7 18 Gain on sale of dispositions (354) — — Adjusted EBITDA $ 318 $ 310 $ 268 Adjusted EBITDA Margin 11.8 % 10.8 % 9.6 % 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.
The reconciliation of adjusted EBITDA to net earnings is provided below: 62 Adjusted EBITDA Consolidated Entity Reconciliation of Adjusted EBITDA: Year Ended December 31, (Dollars in millions) 2023 2022 2021 Net earnings $ 168 $ 405 $ 154 Income tax provision 24 120 46 Amortization of intangibles 22 10 9 Depreciation 63 55 49 Restructuring costs 11 3 5 Interest expense 36 34 35 Deal-related transaction costs 7 43 5 Other one-time non-operational events (7) 2 7 Gain on sale of dispositions — (354) — Adjusted EBITDA $ 324 $ 318 $ 310 Adjusted EBITDA margin 11.5 % 11.8 % 10.8 % Adjusted EBITDA increased $6 million, or 1.9%, from $318 million for the year ended December 31, 2022, to $324 million for the year ended December 31, 2023, primarily due to increased revenue volume, favorable program performance and contract mix, offset by increases in G&A expenditures resulting from increased public operating costs and IR&D expenditures.
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.
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.
The increase in EPS is attributed to the net earnings growth as compared to 2020. 70 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.
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.
This was driven by increased earnings before taxes of $325 million offset by an increased income tax provision of $74 million as described above. 65 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.
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.
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. 73 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.
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.
Backlog: Year Ended December 31, 2022 Compared With Year Ended December 31, 2021 Backlog increased by $1,302 million, or 118.5%, to $2,401 million for the year ended December 31, 2022 from $1,099 million for the year ended December 31, 2021.
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.
Year Ended December 31, 2022 vs. 2021 Variance 2021 vs. 2020 Variance (Dollars in millions) 2022 2021 2020 Revenue: ASC $ 1,733 $ 1,940 $ 1,958 $ (207) (10.7) % $ (18) (0.9) % IMS 983 959 834 $ 24 2.5 % 125 15.1 % Corporate & Eliminations (23) (20) (14) $ (3) 15.0 % (6) 42.9 % Total revenue $ 2,693 $ 2,879 $ 2,778 $ (186) (6.5) % $ 101 3.7 % Adjusted EBITDA: ASC $ 199 $ 220 $ 213 $ (21) (9.5) % $ 7 3.3 % IMS 119 90 55 29 32.2 % 35 63.6 % Corporate & Eliminations — — — — NM — NM Total Adjusted EBITDA $ 318 $ 310 $ 268 $ 8 2.7 % $ 42 15.7 % Adjusted EBITDA Margin: ASC 11.5 % 11.3 % 10.9 % 0.2 % 1.3 % 0.4 % 3.7 % IMS 12.1 % 9.4 % 6.6 % 2.7 % 29.0 % 2.8 % 42.4 % Bookings: ASC $ 1,975 $ 1,691 $ 2,019 $ 284 16.8 % $ (328) (16.2) % IMS 1,181 904 1,036 277 30.6 % (132) (12.7) % Total bookings $ 3,156 $ 2,595 $ 3,055 $ 561 21.6 % $ (460) (15.1) % Backlog: ASC $ 1,868 $ 1,762 $ 2,066 $ 106 6.0 % $ (304) (14.7) % IMS 2,401 1,099 1,225 1,302 118.5 % (126) (10.3) % Total backlog $ 4,269 $ 2,861 $ 3,291 $ 1,408 49.2 % $ (430) (13.1) % Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021 and 2020 ASC Revenue: Year Ended December 31, 2022 Compared With Year Ended December 31, 2021 In total, ASC segment revenue decreased $207 million, or 11%, from $1,940 million for the year ended December 31, 2021 to $1,733 million for the year ended December 31, 2022.
Year Ended December 31, 2023 vs. 2022 Variance 2022 vs. 2021 Variance (Dollars in millions) 2023 2022 2021 $ % $ % Revenues: ASC $ 1,831 $ 1,733 $ 1,940 $ 98 5.7 % $ (207) (10.7) % IMS 1,021 983 959 38 3.9 % 24 2.5 % Corporate & Eliminations (26) (23) (20) (3) 13.0 % (3) 15.0 % Total revenues $ 2,826 $ 2,693 $ 2,879 $ 133 4.9 % $ (186) (6.5) % Adjusted EBITDA: ASC $ 215 $ 199 $ 220 $ 16 8.0 % $ (21) (9.5) % IMS 109 119 90 (10) (8.4) % 29 32.2 % Corporate & Eliminations — — — — NM — NM Total adjusted EBITDA $ 324 $ 318 $ 310 $ 6 1.9 % $ 8 2.6 % Adjusted EBITDA margin: ASC 11.7 % 11.5 % 11.3 % 20 bps 20 bps IMS 10.7 % 12.1 % 9.4 % (140) bps 270 bps Bookings: ASC $ 2,307 $ 1,975 $ 1,691 $ 332 16.8 % $ 284 16.8 % IMS 1,209 1,181 904 28 2.4 % 277 30.6 % Total bookings $ 3,516 $ 3,156 $ 2,595 $ 360 11.4 % $ 561 21.6 % Backlog: ASC $ 2,402 $ 1,868 $ 1,762 $ 534 28.6 % $ 106 6.0 % IMS 5,349 2,401 1,099 2,948 122.8 % 1,302 118.5 % Total backlog $ 7,751 $ 4,269 $ 2,861 $ 3,482 81.6 % $ 1,408 49.2 % ______________ 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.
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.
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.
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.
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.
These quarterly operating results are not necessarily indicative of our operating results for a full year or any future period. 2022 2021 (Dollars in millions, except per share amounts) Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Total revenues $ 820 $ 634 $ 627 $ 612 $ 820 $ 720 $ 658 $ 681 Interest expense 7 9 10 8 8 9 9 9 Net earnings 65 279 25 36 58 35 32 29 Adjusted EBITDA (1) 120 58 67 73 100 70 69 71 Free cash flow (1) 336 2 4 (268) 271 61 48 (262) _______________ (1) See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Financial and Operating Measures—Non-GAAP Financial Measures” above for definitions of these measures.
These quarterly operating results are not necessarily indicative of our operating results for a full year or any future period. 2023 2022 (Dollars in millions) Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Total revenues $ 926 $ 703 $ 628 $ 569 $ 820 $ 634 $ 627 $ 612 Interest expense 9 10 9 8 7 9 10 8 Net earnings 74 47 35 12 65 279 25 36 Adjusted EBITDA (1) 131 82 62 49 120 58 67 73 Free cash flow (1) $ 494 $ 21 $ (10) $ (346) $ 336 $ 2 $ 4 $ (268) _______________ (1) Adjusted EBITDA and free cash flow are non-GAAP measures.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeInflation Risk We have experienced inflationary pressures to our supply chain costs, including those associated with micro-electronics, commodities (e.g., metals), and others. Historically, we have generally been able 87 to anticipate increases in costs when pricing our contracts but as inflation continues, certain costs have impacted our profitability.
Biggest changeInflation Risk We have experienced inflationary pressures to our supply chain costs, including those associated with micro-electronics, commodities (e.g., metals), and others. These costs have impacted our profitability. Bids for longer-term firm-fixed price contracts typically include assumptions for labor and other cost escalations in amounts that have been sufficient to cover cost increases over the period of performance.
See for Note 13: Debt additional information. 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.
See Note 13: Debt for additional information. 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 $46 million as of December 31, 2022. 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.
Currently our exposure is primarily with the Canadian dollar and limited to receivables owed of $31 million as of December 31, 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.
A 0.5% increase or decrease in our weighted average interest rate on our variable debt outstanding as of December 31, 2022 would result in an increase or decrease in our annual interest expense of approximately $1 million. The carrying value of the Company’s borrowings under the 2022 Credit Facility approximate their fair values at December 31, 2022.
A 0.5% increase or decrease in our weighted average interest rate on our variable debt outstanding as of December 31, 2023, would result in an increase or decrease in our annual interest expense of approximately $1 million. The carrying value of the Company’s borrowings under the 2022 Credit Agreement approximate their fair values at December 31, 2023.
ITEM 7A. Quantitative and Qualitative Disclosure of Market Risks Equity Risk We currently have limited risk related to fluctuations in marketable securities. Outside of pension assets which are disclosed in ‘Note 14: Pension and Other Postretirement Benefits to the Consolidated Financial Statements, the only investments the Company holds are overnight money market accounts.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Equity Risk We currently have limited risk related to fluctuations in marketable securities. Outside of pension assets which are disclosed in Note 14: 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, for which no amounts were outstanding as of December 31, 2022.
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 2022 Term Loan A, which had an outstanding balance of $214 million, and our revolving credit facilities, which had no amounts outstanding as of December 31, 2023.
Bids for longer-term firm fixed-price contracts typically include assumptions for labor and other cost escalations in amounts that have been sufficient to cover cost increases over the period of performance. However, these costs could rise further and may not be mitigated. As a result, they could affect our financial results negatively in the future. 88
However, these costs could rise further and may not be mitigated. As a result, they could affect our financial results negatively in the future. 77

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