ARLINGTON, Va.--(BUSINESS WIRE)--Leonardo DRS, Inc. (NASDAQ: DRS) announced today that it has signed a ground lease in the Charleston, South Carolina metropolitan area to develop a state-of-the-art manufacturing facility, allowing the company to grow its naval propulsion capability and streamline its support of priority U.S. Navy programs. When complete there will be over 140,000 square feet of purpose-built advanced manufacturing, assembly and testing space representing an approximate net investment of ...

Part I [Business](index=9&type=section&id=Item%201.%20Business) Leonardo DRS, Inc. is an advanced defense technology provider specializing in sensing and computing, primarily serving U.S. government customers, with its backlog significantly growing to $7.8 billion - The company operates through two primary business segments: Advanced Sensing and Computing (ASC) and Integrated Mission Systems (IMS)[22](index=22&type=chunk) Revenue by Customer Type (2021-2023) | Customer Type | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | U.S. Government | 80% | 84% | 86% | | Foreign Gov't & Commercial | 20% | 16% | 14% | Revenue by Contract Type (2021-2023) | Contract Type | 2023 ($M) | 2022 ($M) | 2021 ($M) | | :--- | :--- | :--- | :--- | | Firm-fixed price | $2,373 | $2,347 | $2,498 | | Flexibly priced | $453 | $346 | $381 | Total Backlog (2021-2023) | Backlog Type | 2023 ($M) | 2022 ($M) | 2021 ($M) | | :--- | :--- | :--- | :--- | | Funded | $3,397 | $2,783 | $2,510 | | Unfunded | $4,354 | $1,486 | $351 | | **Total Backlog** | **$7,751** | **$4,269** | **$2,861** | Company-Funded R&D Expenses (2021-2023) | Year | R&D Expense ($M) | | :--- | :--- | | 2023 | $82 | | 2022 | $58 | | 2021 | $48 | - As of December 31, 2023, the company had approximately **6,600 employees**, with about **7% (470 employees)** represented by labor unions[48](index=48&type=chunk) - In 2022, the company completed a merger with RADA Electronic Industries Ltd. and sold its Global Enterprise Solutions (GES) business for net cash proceeds of **$427 million**[55](index=55&type=chunk)[56](index=56&type=chunk) [Risk Factors](index=17&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks including heavy dependence on U.S. defense spending, fixed-price contract cost overruns, FOCI status requiring a DoD proxy agreement, cybersecurity threats, and supply chain disruptions - The company is highly dependent on U.S. government contracts, which represented approximately **80%**, **84%**, and **86%** of total revenues for the years 2023, 2022, and 2021, respectively[89](index=89&type=chunk) - A significant portion of revenue is derived from fixed-price contracts (**84% in 2023**), which exposes the company to financial risk from potential cost overruns[95](index=95&type=chunk) - As a company deemed to be under Foreign Ownership, Control, or Influence (FOCI) due to its ownership by Leonardo S.p.A., DRS must operate under a proxy agreement with the DoD to maintain security clearances for classified work[100](index=100&type=chunk)[211](index=211&type=chunk) - The company faces a heightened risk of security breaches and cyber-attacks due to its role as a government contractor with access to sensitive and classified information[148](index=148&type=chunk) - The ongoing conflict between Israel and Hamas, which began in October 2023, has the potential to disrupt the company's Israeli operations, which includes the former RADA business[180](index=180&type=chunk) - The Committee on Foreign Investment in the United States (CFIUS) may review, delay, or prevent future acquisitions or investments by the company because it is considered a "foreign person" under CFIUS regulations[218](index=218&type=chunk) [Unresolved Staff Comments](index=52&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved staff comments from the Securities and Exchange Commission - None[232](index=232&type=chunk) [Cybersecurity](index=52&type=section&id=Item%201C.%20Cybersecurity) Leonardo DRS addresses significant cybersecurity threats through a comprehensive program with four core components, overseen by the Board's Government Security Committee and senior management - The company's Cybersecurity Program is built on four core components: Cyber Operations; Cyber and Information Technology Governance and Compliance; Classified Information Systems; and Cyber/Supplier Risk Management[235](index=235&type=chunk)[236](index=236&type=chunk)[237](index=237&type=chunk) - The Board of Directors oversees cybersecurity risks through its Government Security Committee (GSC), which receives regular briefings from senior leadership, including the Chief Information Security Officer[241](index=241&type=chunk) - The company utilizes third-party assessments to evaluate security controls and incident response capabilities, with findings tracked internally and reviewed by senior leadership and the Board[239](index=239&type=chunk)[240](index=240&type=chunk) [Properties](index=54&type=section&id=Item%202.%20Properties) The company operates a mix of owned and leased facilities across 18 U.S. states, Canada, and Israel, supporting manufacturing, engineering, and office functions for its business segments Significant Owned and Leased Facilities | Location | Segment | Approx. Sq. Footage | Owned/Leased | | :--- | :--- | :--- | :--- | | West Plains, MO | IMS | 447,067 | Owned | | Menomonee Falls, WI | IMS | 372,856 | Leased | | Melbourne, FL | ASC | 336,287 | Leased | | High Ridge, MO | IMS | 183,600 | Owned | | Bridgeton, MO | IMS | 171,500 | Leased | [Legal Proceedings](index=57&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in ordinary course legal proceedings, notably eliminating a reserve for a CERCLA environmental inquiry at the "Orphan Mine" site after the EPA indicated no further federal action - The company is involved in an inquiry under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) regarding potential radioactive material at the "Orphan Mine" site, operated by a predecessor entity[251](index=251&type=chunk) - In June 2023, the EPA's Superfund database indicated that the Orphan Mine site does not qualify for the National Priorities List and that no further federal action will be taken, consequently, DRS eliminated its reserve for this matter as liability is no longer considered probable or estimable[252](index=252&type=chunk) [Mine Safety Disclosures](index=58&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[253](index=253&type=chunk) [Information about our Executive Officers](index=58&type=section&id=Supplementary%20Item%20-%20Information%20about%20our%20Executive%20Officers) This section provides biographical information for the company's executive officers as of December 31, 2023, including the CEO, COO, CFO, General Counsel, and EVP of Business Operations Executive Officers (as of Dec 31, 2023) | Name | Age | Position | | :--- | :--- | :--- | | William J. Lynn 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 | Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=61&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on Nasdaq under "DRS," with no current cash dividends or share repurchase program, and 49 registered holders as of February 26, 2024 - The company's common stock trades on the Nasdaq under the symbol "DRS"[271](index=271&type=chunk) - The company does not currently pay quarterly cash dividends and does not have a common stock share repurchase program[271](index=271&type=chunk)[273](index=273&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=63&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) For 2023, revenues increased to $2.83 billion and gross profit grew, but net earnings decreased due to a prior-year divestiture gain, while backlog reached a record $7.8 billion and Adjusted EBITDA slightly increased Consolidated Results of Operations (2021-2023) | Metric (in millions, except EPS) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Total revenues | $2,826 | $2,693 | $2,879 | | Gross profit | $648 | $575 | $547 | | Operating earnings | $231 | $561 | $236 | | Net earnings | $168 | $405 | $154 | | Diluted EPS | $0.64 | $1.88 | $0.73 | | Backlog | $7,751 | $4,269 | $2,861 | | Bookings | $3,516 | $3,156 | $2,595 | - The significant decrease in operating and net earnings in 2023 compared to 2022 is primarily attributed to the **$354 million** gain realized on the disposals of the GES and AAC businesses in 2022[309](index=309&type=chunk)[318](index=318&type=chunk)[319](index=319&type=chunk) - Backlog increased by **$3.5 billion** (**81.6%**) in 2023, largely due to the receipt of multi-submarine contracts for the Columbia Class submarine program, which added approximately **$3 billion** in unfunded backlog[327](index=327&type=chunk) Key Non-GAAP Operating Measures (2021-2023) | Metric (in millions, except EPS) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Adjusted EBITDA | $324 | $318 | $310 | | Adjusted EBITDA margin | 11.5% | 11.8% | 10.8% | | Adjusted Diluted EPS | $0.73 | $0.83 | $0.83 | | Free cash flow | $159 | $74 | $122 | Segment Performance Highlights (2023 vs 2022) | Segment (in millions) | Revenues | % Change | Adj. EBITDA | % Change | Backlog | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | ASC | $1,831 | 5.7% | $215 | 8.0% | $2,402 | 28.6% | | IMS | $1,021 | 3.9% | $109 | (8.4)% | $5,349 | 122.8% | - Cash from operating activities increased to **$205 million** in 2023 from **$33 million** in 2022, driven by lower working capital outlays and the absence of tax payments on dispositions that occurred in the prior year[393](index=393&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=88&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is exposed to market risks including interest rate risk on variable-rate debt, limited foreign currency risk, and inflationary pressures on supply chain costs impacting profitability - The company is exposed to interest rate risk on its variable-rate 2022 Term Loan A. A **0.5%** increase or decrease in the weighted average interest rate would result in an approximate **$1 million** change in annual interest expense[423](index=423&type=chunk) - Foreign currency risk is limited as the vast majority of revenue is from U.S. sources. The primary exposure is to the Canadian dollar, with receivables of **$31 million** as of year-end 2023[424](index=424&type=chunk) - The company has experienced inflationary pressures on its supply chain costs, particularly for micro-electronics and commodities, which have impacted profitability[425](index=425&type=chunk) [Financial Statements and Supplementary Data](index=89&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the company's audited consolidated financial statements for 2021-2023, along with reports from independent registered public accounting firms - The critical audit matter identified by the independent auditor, Ernst & Young LLP, relates to revenue recognition, specifically the estimates required to determine the total cost at completion for certain long-term contracts accounted for using the percentage of completion method[433](index=433&type=chunk)[435](index=435&type=chunk)[436](index=436&type=chunk) Consolidated Balance Sheet Highlights (in millions) | Account | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $467 | $306 | | Total current assets | $1,918 | $1,707 | | Goodwill | $1,238 | $1,236 | | **Total assets** | **$3,921** | **$3,677** | | **Liabilities & Equity** | | | | Total current liabilities | $1,078 | $1,042 | | Long-term debt | $349 | $365 | | **Total liabilities** | **$1,596** | **$1,550** | | **Total shareholders' equity** | **$2,325** | **$2,127** | - The company completed its all-stock merger with RADA Electronic Industries Ltd. on November 28, 2022, with a total purchase consideration of **$511 million**, resulting in **$286 million** of goodwill allocated to the ASC segment[548](index=548&type=chunk)[552](index=552&type=chunk) - Total backlog (remaining performance obligations) was **$7.75 billion** as of December 31, 2023, of which approximately **27%** is expected to be recognized as revenue over the next 12 months[572](index=572&type=chunk) [Changes in and Disagreements With Accountants on Accounting and Financial Disclosure](index=146&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20With%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reports no changes in or disagreements with its accountants regarding accounting and financial disclosure - None[724](index=724&type=chunk) [Controls and Procedures](index=146&type=section&id=Item%209A.%20Controls%20and%20Procedures) As of December 31, 2023, management concluded that disclosure controls and internal control over financial reporting were effective, a conclusion affirmed by an unqualified auditor's opinion - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[725](index=725&type=chunk) - Based on an assessment using the COSO 2013 framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2023[726](index=726&type=chunk) - The independent registered public accounting firm, Ernst & Young LLP, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2023[733](index=733&type=chunk) [Other Information](index=149&type=section&id=Item%209B.%20Other%20Information) No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the fourth quarter of 2023 - No director or officer adopted or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement in the fourth quarter of 2023[741](index=741&type=chunk) Part III [Directors, Executive Officers and Corporate Governance](index=150&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information on directors, executive officers, and corporate governance is incorporated by reference from the company's 2024 definitive proxy statement - Information required by this item is incorporated by reference from the company's 2024 definitive proxy statement[744](index=744&type=chunk) [Executive Compensation](index=150&type=section&id=Item%2011.%20Executive%20Compensation) Information regarding executive compensation is incorporated by reference from the company's 2024 definitive proxy statement - Information required by this item is incorporated by reference from the company's 2024 definitive proxy statement[745](index=745&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=150&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information regarding security ownership is incorporated by reference from the company's 2024 definitive proxy statement - Information required by this item is incorporated by reference from the company's 2024 definitive proxy statement[746](index=746&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=150&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information regarding related party transactions and director independence is incorporated by reference from the company's 2024 definitive proxy statement - Information required by this item is incorporated by reference from the company's 2024 definitive proxy statement[746](index=746&type=chunk) [Principal Accountant Fees and Services](index=150&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Information regarding principal accountant fees and services is incorporated by reference from the company's 2024 definitive proxy statement - Information required by this item is incorporated by reference from the company's 2024 definitive proxy statement[747](index=747&type=chunk) Part IV [Exhibits and Financial Statement Schedules](index=151&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists the consolidated financial statements and provides an index of all exhibits filed with the Form 10-K, including key agreements and certifications - This section lists the financial statements and schedules filed as part of the annual report[749](index=749&type=chunk) - An index of exhibits is provided, incorporating by reference key documents such as the RADA merger agreement, credit agreements, and executive compensation plans[751](index=751&type=chunk) [Form 10-K Summary](index=153&type=section&id=Item%2016.%20Form%2010-K%20Summary) The company did not provide a Form 10-K summary - None[755](index=755&type=chunk)

February 27, 2024 米 LEONARDO DRS Key Messages 1 DRS team continues to build a solid execution track record by delivering strong fourth quarter and full year financial results • Generated robust organic revenue growth of 7% and total growth of 5% • Solid execution resulted in achievement of adjusted EBITDA and adjusted diluted EPS commitments • Delivered healthy free cash flow with conversion of 0.8x of adjusted net earnings, representing a 115% growth from 2022 2 Q4 | 2023 Growing and increasingly sophistic ...

Leonardo DRS, Inc. (DRS) came out with quarterly earnings of $0.31 per share, beating the Zacks Consensus Estimate of $0.30 per share. This compares to earnings of $0.35 per share a year ago. These figures are adjusted for non-recurring items.This quarterly report represents an earnings surprise of 3.33%. A quarter ago, it was expected that this company would post earnings of $0.15 per share when it actually produced earnings of $0.20, delivering a surprise of 33.33%.Over the last four quarters, the company ...

When it comes to short-term investing or trading, they say "the trend is your friend." And there's no denying that this is the most profitable strategy. But making sure of the sustainability of a trend to profit from it is easier said than done.Often, the direction of a stock's price movement reverses quickly after taking a position in it, making investors incur a short-term capital loss. So, it's important to ensure that there are enough factors -- such as sound fundamentals, positive earnings estimate rev ...

When it comes to short-term investing or trading, they say "the trend is your friend." And there's no denying that this is the most profitable strategy. But making sure of the sustainability of a trend to profit from it is easier said than done.The trend often reverses before exiting the trade, leading to a short-term capital loss for investors. So, for a profitable trade, one should confirm factors such as sound fundamentals, positive earnings estimate revisions, etc. that could keep the momentum in the st ...

ARLINGTON, Va.--(BUSINESS WIRE)--Leonardo DRS, Inc. (NASDAQ: DRS) announced today that it has delivered the 1,000th Solaris™ ruggedized laser system that is at the heart of Northrop Grumman’s Common Infrared Countermeasures (CIRCM) system. CIRCM is a next-generation aircraft protection system designed to defend rotary wing, tilt rotor, and small fixed wing platforms across the U.S. armed services from a range of missile threats. “We are proud to be a trusted partner with Northrop Grumman on this critical ...

ARLINGTON, Va.--(BUSINESS WIRE)--Leonardo DRS, Inc. (Nasdaq: DRS) has scheduled a conference call for Tuesday, February 27, 2024 beginning at 10:00 a.m. (ET) to discuss its fourth quarter 2023 and full year 2023 results. The company plans to issue its quarterly earnings press release prior to the conference call. The live audio broadcast of Leonardo DRS’s conference call with corresponding press release and supplemental information will be available on the company’s investor relations website. To attend th ...

Leonardo DRS, Inc. (NASDAQ:DRS) Q3 2023 Earnings Conference Call November 2, 2023 10:00 AM ET Company Participants Stephen Vather - Vice President, Investor Relations and Corporate Finance William Lynn - Chairman and CEO Michael Dippold - Chief Financial Officer Conference Call Participants Robert Stallard - Vertical Research Partners Michael Ciarmoli - Truist Securities Andre Madrid - Bank of America Jan-Frans Engelbrecht - Robert W. Baird Operator Ladies and gentlemen, good day, and welcome to the Leonar ...

[PART I. Financial Information](index=6&type=section&id=PART%20I.%20Financial%20Information) [Financial Statements (Unaudited)](index=6&type=section&id=ITEM%201.%20Financial%20Statements%20(Unaudited)) The company's unaudited financial statements for Q3 2023 show total revenues of $1.9 billion, a significant decrease in net earnings to $94 million due to prior-year asset sales, and increased cash used in operations Consolidated Statements of Earnings (Unaudited) | (Dollars in millions) | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | **Total revenues** | **$1,900** | **$1,873** | | Gross profit | $438 | $391 | | Operating earnings | $126 | $474 | | Net earnings | $94 | $340 | | **Diluted earnings per share** | **$0.36** | **$1.62** | Consolidated Balance Sheets Highlights | (Dollars in millions) | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $47 | $306 | | Total current assets | $1,740 | $1,707 | | **Total assets** | **$3,713** | **$3,677** | | Total current liabilities | $951 | $1,042 | | Total long-term debt | $351 | $365 | | **Total liabilities** | **$1,471** | **$1,550** | | **Total shareholders' equity** | **$2,242** | **$2,127** | Consolidated Statements of Cash Flows (Unaudited) | (Dollars in millions) | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | **Net cash used in operating activities** | **($310)** | **($246)** | | Net cash (used in) provided by investing activities | ($42) | $448 | | Net cash provided by (used in) financing activities | $93 | ($379) | | **Net decrease in cash and cash equivalents** | **($259)** | **($177)** | [Note 1: Summary of Significant Accounting Policies](index=12&type=section&id=Note%201.%20Summary%20of%20Significant%20Accounting%20Policies) Leonardo DRS, Inc. is a defense electronics supplier operating through two segments, with the U.S. DoD as its largest customer - The company operates through two reportable segments: Advanced Sensing and Computing (ASC) and Integrated Mission Systems (IMS)[34](index=34&type=chunk) - The U.S. DoD is the largest customer, representing about **80% of total revenues** for the nine months ended September 30, 2023[34](index=34&type=chunk) [Note 2: Business Acquisitions and Dispositions](index=14&type=section&id=Note%202.%20Business%20Acquisitions%20and%20Dispositions) The company completed an all-stock merger with RADA Electronic Industries, Ltd. and divested two major businesses in 2022 - Completed an all-stock merger with RADA Electronic Industries, Ltd. on November 28, 2022, with a total purchase consideration of **$511 million**[49](index=49&type=chunk)[50](index=50&type=chunk)[51](index=51&type=chunk) - Sold the Global Enterprise Solutions (GES) business on August 1, 2022, for **$450 million**, resulting in cash proceeds of **$427 million**[53](index=53&type=chunk) - Divested its share of equity investment in Advanced Acoustic Concepts (AAC) on July 8, 2022, for **$56 million**[54](index=54&type=chunk) [Note 3: Revenue from Contracts with Customers](index=14&type=section&id=Note%203.%20Revenue%20from%20Contracts%20with%20Customers) The company's revenue is primarily from fixed-price contracts, with total backlog at $4.719 billion, excluding a significant post-quarter Columbia Class submarine contract Total Backlog as of September 30, 2023 | (Dollars in millions) | Amount | | :--- | :--- | | Funded | $3,356 | | Unfunded | $1,363 | | **Total Backlog** | **$4,719** | - Subsequent to Q3, the company agreed to terms for a contract over **$3 billion** for the electric power and propulsion system on the remaining seven Columbia Class submarines, which is not included in the reported backlog[72](index=72&type=chunk) Impact of EAC Adjustments on Revenue | (Dollars in millions) | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Revenue Impact | $(14) | $(22) | [Note 11: Debt](index=21&type=section&id=Note%2011.%20Debt) Total debt principal increased to $485 million as of September 30, 2023, including $217 million on Term Loan A and $110 million drawn on the revolving credit facility Debt Composition as of September 30, 2023 | (Dollars in millions) | Amount | | :--- | :--- | | Term loan A | $217 | | Outstanding revolver | $110 | | Finance lease and other | $157 | | Short-term borrowings | $1 | | **Total debt principal** | **$485** | - The 2022 Credit Agreement provides for a **$225 million** term loan and a **$275 million** revolving credit facility[98](index=98&type=chunk)[101](index=101&type=chunk) [Note 16: Segment Information](index=26&type=section&id=Note%2016.%20Segment%20Information) For the nine months ended September 30, 2023, ASC generated $1.226 billion in revenue and $121 million in Adjusted EBITDA, while IMS generated $692 million in revenue and $72 million in Adjusted EBITDA Segment Performance (Nine Months Ended Sep 30, 2023) | (Dollars in millions) | ASC | IMS | Total | | :--- | :--- | :--- | :--- | | **Revenues** | $1,226 | $692 | $1,900 | | **Adjusted EBITDA** | $121 | $72 | $193 | - The company uses Adjusted EBITDA, a non-GAAP measure, to manage the business and allocate resources, reconciled to net earnings by excluding items like amortization, depreciation, interest, and gains on business disposals[130](index=130&type=chunk)[134](index=134&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=28&type=section&id=ITEM%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Revenue for Q3 2023 increased, but net earnings declined significantly due to prior-year asset sales, while Adjusted EBITDA showed mixed results, and total backlog grew substantially to $4.7 billion Q3 2023 vs Q3 2022 Performance | (Dollars in millions) | Q3 2023 | Q3 2022 | % Change | | :--- | :--- | :--- | :--- | | Total revenues | $703 | $634 | 10.9% | | Gross profit | $162 | $130 | 24.6% | | Operating earnings | $59 | $376 | (84.3)% | | Net earnings | $47 | $279 | (83.2)% | YTD 2023 vs YTD 2022 Performance | (Dollars in millions) | YTD 2023 | YTD 2022 | % Change | | :--- | :--- | :--- | :--- | | Total revenues | $1,900 | $1,873 | 1.4% | | Gross profit | $438 | $391 | 12.0% | | Operating earnings | $126 | $474 | (73.4)% | | Net earnings | $94 | $340 | (72.4)% | - The significant decrease in operating and net earnings is primarily due to the prior year's inclusion of a **$350 million** gain on the sale of the GES business and AAC joint venture[179](index=179&type=chunk)[180](index=180&type=chunk) - Total backlog increased by **50.4%** to **$4.719 billion**, driven by a multi-boat contract for the Columbia Class submarine program[186](index=186&type=chunk) [Business Overview and Environment](index=28&type=section&id=Business%20Overview%20and%20Environment) DRS is a defense technology provider with the DoD as its largest customer, benefiting from budget growth but facing risks from government shutdowns and global conflicts - The DoD is the largest customer, accounting for approximately **80% of business**, with the U.S. Army and U.S. Navy representing **29%** and **40%** of total revenues, respectively, for the nine months ended September 30, 2023[138](index=138&type=chunk) - The President's fiscal year 2024 budget request includes **$842 billion** for national defense, a **3% increase**, which is seen as creating a favorable market environment for DRS[155](index=155&type=chunk) - The conflict in Israel poses potential disruptions to the company's RADA operations, which employ approximately **4%** of the DRS workforce[152](index=152&type=chunk) [Key Non-GAAP Operating Measures](index=37&type=section&id=Key%20Non-GAAP%20Operating%20Measures) Adjusted EBITDA for Q3 2023 increased to $82 million, while nine-month Adjusted EBITDA slightly decreased to $193 million, and free cash flow usage increased due to higher working capital needs Key Non-GAAP Measures | (Dollars in millions, except per share) | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Adjusted EBITDA | $82 | $58 | $193 | $198 | | Adjusted EBITDA Margin | 11.7% | 9.2% | 10.2% | 10.6% | | Adjusted Diluted EPS | $0.20 | $0.12 | $0.42 | $0.47 | | Free Cash Flow | N/A | N/A | $(335) | $(262) | - Q3 Adjusted EBITDA increased due to improved program performance and operational leverage, offset by higher IR&D investments[198](index=198&type=chunk) - YTD Adjusted Diluted EPS decreased due to a higher number of outstanding shares following the RADA merger and increased G&A expenses[203](index=203&type=chunk) [Review of Operating Segments](index=43&type=section&id=Review%20of%20Operating%20Segments) In Q3 2023, ASC revenue grew 5.6% with Adjusted EBITDA up 33.3%, while IMS revenue surged 21.0% with Adjusted EBITDA jumping 54.5%, both segments showing strong booking increases Segment Performance (Q3 2023 vs Q3 2022) | (Dollars in millions) | ASC | IMS | | :--- | :--- | :--- | | **Revenues** | $431 (+5.6%) | $277 (+21.0%) | | **Adjusted EBITDA** | $48 (+33.3%) | $34 (+54.5%) | | **Bookings** | $820 (+17.1%) | $235 (+35.1%) | - ASC's YTD revenue decreased by **2%** due to the 'net divestiture impact,' where the disposed GES business had higher revenue contribution than the acquired RADA business for the period[234](index=234&type=chunk) - IMS's YTD Adjusted EBITDA decreased slightly by **1.4%** primarily due to a favorable, non-recurring contract modification on the Columbia program in Q1 2022[244](index=244&type=chunk) [Liquidity and Capital Resources](index=47&type=section&id=Liquidity%20and%20Capital%20Resources) Cash and cash equivalents decreased to $47 million, with net cash used in operating activities increasing to $310 million due to higher working capital needs and tax payments Cash Flow Summary (Nine Months Ended Sep 30) | (Dollars in millions) | 2023 | 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(310) | $(246) | | Net cash (used in) provided by investing activities | $(42) | $448 | | Net cash provided by (used in) financing activities | $93 | $(379) | | **Net decrease in cash and cash equivalents** | **$(259)** | **$(177)** | - The increase in cash used for operations was primarily due to funding working capital, including incremental tax payments for R&D capitalization and inventory investments to combat supply chain lead-times[248](index=248&type=chunk) [Quantitative and Qualitative Disclosures about Market Risk](index=48&type=section&id=ITEM%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company faces market risks primarily from interest rates on variable debt, limited foreign currency exposure mainly to the Canadian dollar, and manages inflation through contract pricing - The company is exposed to interest rate risk on **$327 million** of variable-rate debt (**$217M** Term Loan A and **$110M** revolver); a **0.5%** change in the weighted average interest rate would result in an approximate **$2 million** change in annual interest expense[253](index=253&type=chunk) - Foreign currency exposure is limited, with the primary risk related to receivables in Canadian dollars totaling **$39 million** as of September 30, 2023[254](index=254&type=chunk) - Inflation risk is managed by including cost escalation assumptions in bids for longer-term firm fixed-price contracts[255](index=255&type=chunk) [Controls and Procedures](index=49&type=section&id=ITEM%204.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal control over financial reporting during the quarter - Based on an evaluation as of September 30, 2023, the principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective[256](index=256&type=chunk) - No material changes to the internal control over financial reporting occurred during the third quarter of 2023[258](index=258&type=chunk) [PART II. Other Information](index=50&type=section&id=PART%20II.%20Other%20Information) [Legal Proceedings](index=50&type=section&id=ITEM%201.%20Legal%20Proceedings) The company is subject to various legal proceedings, notably eliminating its reserve for the 'Orphan Mine' Superfund site after EPA's no-further-action determination, though the National Park Service may still seek damages - The company eliminated its reserve for the 'Orphan Mine' Superfund site after the EPA determined in June 2023 that no further federal action would be taken; however, the National Park Service (NPS) may still seek to recover damages[120](index=120&type=chunk)[121](index=121&type=chunk) [Risk Factors](index=51&type=section&id=ITEM%201A.%20Risk%20Factors) The company faces updated risks including cybersecurity threats through its supply chain, geopolitical instability impacting international operations, and potential disruptions from foreign export controls on key materials - The company is at risk of cybersecurity incidents through its third-party suppliers and is currently responding to a cyber-attack that impacted one of its suppliers[263](index=263&type=chunk) - International business exposes the company to geopolitical risks, including the war between Israel and Hamas, which could disrupt its Israeli operations through workforce calls for duty, logistical impacts, and reduced customer confidence[272](index=272&type=chunk) - The company is subject to risks from dynamic geopolitical climates, including recently enacted export controls by foreign governments on rare elements which could materially impact the business[267](index=267&type=chunk) [Unregistered Sales of Equity Securities and Issuer Purchases](index=53&type=section&id=ITEM%202.%20Unregistered%20Sales%20of%20Equity%20Securities,%20Use%20of%20Proceeds,%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company reported no unregistered sales of equity securities, use of proceeds, or issuer purchases of equity securities during the period - None[274](index=274&type=chunk) [Other Information](index=53&type=section&id=ITEM%205.%20Other%20Information) No director or officer of the company adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the third quarter of 2023 - No director or officer adopted or terminated a Rule 10b5-1 trading arrangement during the three months ended September 30, 2023[276](index=276&type=chunk) [Exhibits](index=54&type=section&id=ITEM%206.%20Exhibits) The report lists several exhibits filed with the Form 10-Q, including the company's Incentive-Based Compensation Recoupment Policy and certifications by the CEO and CFO - Exhibits filed include CEO and CFO certifications (31.1, 31.2, 32.1, 32.2) and the company's new Incentive-Based Compensation Recoupment Policy (99.1)[278](index=278&type=chunk)