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Item 8. Financial Statements and Supplementary Data

2023-03-28 compared with 2022-03-28 · 551 added, 290 removed, 965 unchanged (47% of the section changed)

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Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Leonardo DRS, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Leonardo DRS, Inc.

(the Company) as of December 31, 2022, the related consolidated statements of earnings, comprehensive income, cash flows and shareholders' equity for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022, and the results of its operations and its cash flows for the year then ended in conformity with U.S.

generally accepted accounting principles.

Basis for Opinion

These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audit.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.

Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audit provides a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Revenue recognition based on the percentage of completion method

Description of the Matter As described in Note 3 to the consolidated financial statements, revenues for the majority of contracts are recognized over time using the percentage of completion cost-to-cost method of accounting.

Under this method, the costs incurred represent an appropriate measure of progress toward satisfaction of performance obligations as this measure most accurately depicts the progress of work performed and transfer of control to the customers.

Due to the long-term nature of many 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.

Adjustments to original estimates for a contract's revenue, estimated costs at completion and estimated profit or loss often are required as work progresses under a contract, as experience is gained and as more information is obtained, even though the scope of work required under the contract may not change.

When adjustments in estimated total costs at completion or in estimated total transaction price are determined, the related impact on revenue and operating income are recognized using the cumulative catch-up method, which recognizes in the current period the cumulative effect of such adjustments for all prior periods.

Anticipated losses on contracts are recognized in full in the period in which losses become probable and estimable.

Auditing the Company’s estimated costs at completion for long-term contracts that recognize revenue over time using the cost-to-cost method of accounting was challenging and complex due to the judgment involved in evaluating management’s assumptions and key estimates over the duration of these long-term contracts.

The estimated costs at completion for these long-term contracts consider risks surrounding the Company’s ability to achieve the technical requirements and specifications of the contract, schedule, and other cost elements of the contract, and depend on whether the Company is able to successfully complete the various aspects of the contract.

How We Addressed the Matter in Our Audit We obtained an understanding of the Company’s revenue recognition process, including management’s review of the estimated costs at completion for a sample of long-term contracts.

To test the accuracy of the Company’s estimated costs at completion for these long-term contracts, our audit procedures included, among other things, evaluating the key assumptions used by management to determine such estimates.

This included evaluating the historical accuracy of management’s estimates by comparing planned costs to actual costs incurred to date.

We also tested the completeness and accuracy of the underlying data back to source documents and contracts.

Valuation of acquired intangible assets

Description of the Matter As described in Note 2 to the consolidated financial statements, the Company completed an acquisition during the year ended December 31, 2022.

The Company’s accounting for the acquisition included determining the fair value of the intangible assets acquired, including technology and contract assets intangibles.

Auditing the Company's accounting for certain acquired intangible assets involved subjective auditor judgment due to the significant estimation required in management’s determination of the fair value of intangible assets.

The significant estimations were primarily due to the sensitivity of the respective fair values to underlying assumptions including discount rates, projected revenue growth rates, obsolescence factors and profit margins.

These assumptions relate to the future performance of certain of the acquired businesses, are forward-looking and could be affected by future economic and market conditions.

How We Addressed the Matter in Our Audit We obtained an understanding of the Company’s process for accounting for certain acquired intangible assets including management’s review of the valuation of intangible assets, the valuation model and the assumptions used in the valuation.

To test the fair value of the acquired intangible assets, our audit procedures included, among others, evaluating the Company's use of valuation methodologies, evaluating the prospective financial information, and testing the completeness and accuracy of underlying data.

We utilized our valuation specialists to assist in testing the significant assumptions used to value the acquired intangible assets.

For example, we compared the significant assumptions to current industry, market and economic trends, historical results of the acquired business and to other relevant factors.

We also performed sensitivity analyses of the significant assumptions to evaluate the change in the fair value resulting from changes in the assumptions.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2022.

Tysons, Virginia

March 28, 2023

Report of Independent Registered Public Accounting Firm

To the Shareholder and Board of Directors

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Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Leonardo DRS, Inc.

and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of earnings, comprehensive income (loss), shareholder’s equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with U.S.

We have audited the accompanying consolidated balance sheet of Leonardo DRS, Inc.

and subsidiaries (the Company) as of December 31, 2021, the related consolidated statements of earnings, comprehensive income, shareholder’s equity, and cash flows for each of the years in the two-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021, in conformity with U.S.

generally accepted accounting principles.

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Estimation of costs to complete for certain long-term contracts

As discussed in Notes 1(D) and 2 to the consolidated financial statements, the Company recognizes revenues for the majority of contracts determined using the ratio of cumulative costs incurred to date to estimated total contract costs at completion.

The accounting for long-term contracts involves estimation of the costs to complete a contract in order to accurately recognize the associated revenues.

Developing the estimated total contract costs to complete a contract

often requires judgment related to the nature and complexity of the work to be performed, subcontractor performance and the risk and impact of delayed performance.

We identified the assessment of the estimation of costs to complete for certain long-term contracts in the Integrated Mission Systems segment as a critical audit matter.

The evaluation of the costs to complete for certain contracts required a high level of subjective auditor judgment, due to the nature and complexity of the work to be performed for these contracts, subcontractor performance and the risk and impact of delayed performance.

Changes to the estimated costs to complete each contract could have a significant impact on the estimated revenues recorded during the period.

The following are the primary procedures we performed to address this critical audit matter.

We evaluated the design of certain internal controls related to the estimation of costs to complete the selected long-term contracts.

For certain contracts, we compared the Company’s historical estimates of costs to actual costs incurred to assess the Company’s ability to estimate accurately.

Based on the nature of the individual contract, we evaluated the Company’s estimated costs to complete by:

• reading the underlying contract and related amendments to obtain an understanding of the contractual requirements and related performance obligations

• assessing costs incurred to-date compared to estimated total contract costs at completion and the relative progress toward satisfying the performance obligation(s) of the contract

• assessing, if relevant, the estimated costs to complete on similar or predecessor contracts and programs

• inquiring of financial and operational personnel of the Company to identify factors that should be considered within the estimated cost to complete or indications of potential management bias

• inspecting correspondence, if any, between the Company and the customer regarding actual to-date and expected performance

• analyzing the sufficiency of the Company’s assessment of contract performance risks included within the estimated costs to complete.

We have served as the Company’s auditor since 2012.

We served as the Company’s auditor from 2012 to 2022.

McLean, Virginia

March 28, 2022

March 28, 2022, except for notes 1A, 1U, 3, 9, 15, 18, and 20, as to which the date is August 2, 2022, and note 1R, as to which the date is March 27, 2023

SUPPLEMENTARY DATAINDEX TO FINANCIAL STATEMENTS

Ernst & Young LLP Tysons, Virginia Auditor ID:

KPMG LLP, McLean, VA, Auditor ID:

LEONARDO DRS, INC.

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Total cost of revenues ( 2,118 ) ( 2,332 ) ( 2,284 )

Gross profit 575 547 494

General and administrative expenses ( 357 ) ( 293 ) ( 283 )

Amortization of intangibles ( 10 ) ( 9 ) ( 9 )

Other operating expenses, net ( 9 ) ( 21 ) ( 10 )

Other operating income (expenses), net 353 ( 9 ) ( 21 )

Operating earnings

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Net earnings per share from common stock

Basic and diluted earnings per share:

Basic earnings per share:

1.88 $ 0.73 $ 0.40

Diluted earnings per share:

1.88 $ 0.73 $ 0.40

See accompanying Notes to Consolidated Financial Statements.

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$ 405 $ 154 $ 85

Other comprehensive income (loss):

Other comprehensive income

Foreign currency translation (loss) gain, net of income taxes ( 2 ) 2 1

Net unrecognized gain (loss) on postretirement obligations, net of income taxes 10 22 ( 15 )

Other comprehensive income (loss), net of income tax

Net unrecognized gain on postretirement obligations, net of income taxes 11 10 22

Other comprehensive income, net of income tax

Total comprehensive income

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Inventories 319 205

Related party note receivable — 115

Prepaid expenses 20 23

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$ 3,677 $ 3,069

LIABILITIES AND SHAREHOLDER'S EQUITY

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

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Total noncurrent liabilities $ 508 487

Shareholder's equity:

Commitments and contingencies (Note 18 )

Shareholders' equity

Preferred stock, $ 0.01 par value:

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Accumulated other comprehensive loss ( 49 ) ( 58 )

Total shareholder's equity

Total liabilities and shareholder's equity

Total shareholders' equity

Total liabilities and shareholders' equity

$ 3,677 $ 3,069

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Deferred income taxes ( 6 ) 31 30

Gain from divestitures ( 354 ) — —

Changes in assets and liabilities:

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Proceeds from sales of assets — — 5

Proceeds from sales of businesses 482 — —

Net repayments received (advances) on related party note receivable — 115 ( 15 )

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Net (decrease) increase in third party borrowings (maturities of 90 days or less) ( 8 ) ( 18 ) ( 11 )

Borrowings of third party debt 223 — —

Repayment of related party debt ( 992 ) ( 950 ) ( 1,170 )

Borrowings from related parties 775 930 1,105

Dividend to US Holding ( 396 ) — —

Dividend from investment 3 — —

Other ( 8 ) — ( 4 )

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Supplemental disclosure of non-cash investing and financing activities

Year Ended December 31,

Forgiveness of related party debt $ — $ — $ 300

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LEONARDO DRS, INC.

Consolidated Statements of Shareholder’s Equity

Consolidated Statements of Shareholders’ Equity

(Dollars in millions, except per share amounts)

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Balance as of December 31, 2019 $ 2 $ 4,332 $ ( 93 ) $ ( 3,222 ) $ 1,019

$ 1 $ 4,333 $ ( 81 ) $ ( 3,297 ) $ 956

Forgiveness of related party debt — 300 — — 300

Total comprehensive income (loss) — — 23 85 108

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Balance as of December 31, 2021 2 4,632 ( 58 ) ( 2,983 ) 1,593

Forgiveness of related party debt — — — — —

Total comprehensive income — — 9 405 414

Stock Compensation Expense — 5 — — 5

Issuance of stock in business combination 1 510 — — 511

Dividend to US Holding — — — ( 396 ) ( 396 )

Balance as of December 31, 2022 $ 3 $ 5,147 $ ( 49 ) $ ( 2,974 ) $ 2,127

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Leonardo DRS, Inc., together with its wholly owned subsidiaries (hereinafter, “DRS,” “the Company,” “us,” “our,” or “we”) is a supplier of defense electronics products, systems and military support services.

The Company is controlled by Leonardo S.p.A (hereinafter, “Leonardo S.p.A.,” “the Parent”), an Italian multi-national aerospace, defense and security company headquartered in Rome, Italy, through its direct sole ownership of Leonardo US Holding, Inc.

(“US Holding”).

US Holding is the direct and sole shareholder of the Company.

The Company is controlled by Leonardo S.p.A (hereinafter, “Leonardo S.p.A.,” “the Majority Stockholder”), an Italian multi-national aerospace, defense and security company headquartered in Rome, Italy, through its ultimate sole ownership of Leonardo US Holding, LLC (“US Holding”).

US Holding is the majority stockholder of the Company.

DRS is a provider of defense products and technologies that are used across land, air, sea, space and cyber domains.

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We focus our capabilities in areas of critical importance to the U.S.

military, such as sensing, electronic warfare (“EW”), network computing and communications, force protection and electrical power conversion and propulsion.

These capabilities directly align with our three reportable segments:

Advanced Sensor Technologies, Network Computing & Communications and Integrated Mission Systems.

military, such as advanced sensing, network computing, force protection and electrical power and propulsion.

These capabilities directly align with our two reportable segments:

Advanced Sensing and Computing and Integrated Mission Systems.

Department of Defense (“DoD”) is our largest customer and accounts for approximately 84 % and 86 % of our total revenues as an end-user for the years ended December 31, 2022 and 2021, respectively.

Specific international and commercial market opportunities exist within these segments and comprise approximately 16 % and 14 % of our total revenues for the years ended December 31, 2022 and 2021.

Our three reportable segments reflect the way performance is assessed and resources are allocated by our Chief Executive Officer, who is our chief operating decision maker (“CODM”).

Advanced Sensor Technologies (“AST”)

The AST segment provides electro-optical sensor technologies, laser systems, EW systems and intelligence and surveillance solutions to U.S.

military and intelligence community customers.

Major solutions include ground vehicle targeting and surveillance sensors, including electro-optical and advanced detection systems.

Our soldier sensing applications include infrared imaging solutions and precision targeting systems.

Our infrared focal plane array foundry produces small sized cryogenically cooled and uncooled infrared sensors.

AST also provides aircraft training instrumentation equipment and high-performance radio frequency receivers and transceivers for U.S.

and international customers.

Our quantum cascade laser technology is being used in military and commercial medical applications.

Network Computing & Communication (“NC&C”)

The NC&C segment provides defense electronics solutions across all domains of warfare.

Our technologies and products can be integrated into legacy and new military platforms, end-to-end network communication systems, satellite services and cyber solutions.

We are also a provider of ruggedized computing platforms.

Navy and its allies, we provide naval computing infrastructure, network and data distribution, radar and rugged naval control systems, which are present on all U.S.

naval surface and subsurface combatant vessels.

Our global communications network is a worldwide network of terrestrial and satellite bandwidth that ensures our customers’ data is secure and reliable.

Integrated Mission Systems (“IMS”)

The IMS segment provides critical force protection, vehicle integration, transportation and logistics, and electrical conversion and ship propulsion systems to the U.S.

Our force protection systems

Our two reportable segments reflect the way performance is assessed and resources are allocated by our Chief Executive Officer, who is our chief operating decision maker (“CODM”).

Advanced Sensing and Computing (“ASC”)

The 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 leading sensing capabilities span applications including missions requiring advanced detection, precision targeting and surveillance sensing, long range electro-optic/infrared (“EO/IR”), signals intelligence (“SIGINT) and other intelligence systems, electronic warfare (“EW”), ground vehicle sensing, next generation active electronically scanned array (“AESA”) tactical radars, dismounted soldier sensing and space sensing.

Across our offering, we are focused on advancing sensor distance, precision, clarity, definition, spectral depth and effectiveness.

Furthermore, we seek to leverage our multi-decade experience to optimize size, weight, power and cost tailored to our customers’ specific mission requirements.

Our sensing capabilities are complemented by our rugged, trusted and cyber resilient network computing products.

Our network computing offering is 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.

Our network computing products support the DoD’s need for greater situational understanding at the tactical edge and permits data to be rapidly transmitted securely from command centers to forward-positioned defense assets.

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

protect service members and military assets from evolving and proliferating threats and include solutions for counter-unmanned aerial systems, short-range air defense systems, and active protection systems on ground vehicles.

We have military transportation and logistics offerings and ground vehicle integration capabilities to support U.S.

forces in a wide range of operational environments.

Navy, we provide and support multi-generational power conversion and propulsion systems for our nation’s shipbuilding programs.

Integrated Mission Systems (“IMS”)

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, transportation and logistics systems for the U.S.

and allied defense customers.

Our naval power and propulsion systems are providing next-generation power capabilities for the future fleet.

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

We provide power conversion, control, distribution and propulsion systems for the Navy’s top priority shipbuilding programs, including the Columbia Class ballistic missile submarine, the first modern U.S.

electric drive submarine.

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

DRS has a long history of providing a number of other critical products to the U.S.

Navy with a significant installed base on submarines, aircraft carriers and other surface ships including motor controllers, instrumentation and control equipment, electrical actuation systems, and thermal management systems for electronics and ship stores refrigeration.

Our technologies and systems help protect U.S.

forces and assets against increasingly sophisticated and proliferating threats.

DRS is an integrator of systems in ground vehicles for short-range air defense, counter-UAS (“C-UAS”), and vehicle survivability and protection.

This integrator role includes utilizing radars, EW equipment, reconnaissance and surveillance systems, modular combat vehicle turrets, and stabilized sensor suites, and kinetic countermeasures for short-range air defense.

Our force protection systems, including solutions for counter-unmanned aerial systems (C-UAS), short-range air defense systems and active protection systems used to defend ground combat vehicles help protect personnel and defense assets from these growing threats.

The Company separately presents the unallocable costs associated with corporate functions and certain non-operating subsidiaries of the Company as Corporate & Eliminations.

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GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

The most significant of these estimates and assumptions relate to the recognition of contract revenues and estimated costs to complete contracts in process, recoverability of reported amounts of goodwill, long-lived assets and intangible assets, valuation of pensions and other postretirement benefits, the valuation of deferred tax assets and liabilities and the valuation of unrecognized tax benefits.

The most significant of these estimates and assumptions relate to the recognition of contract revenues and estimated costs to complete contracts in process, recoverability of reported amounts of goodwill, long-lived assets and intangible assets, valuation of acquired intangibles, accounting for business combinations, valuation of stock award grants, pensions

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

and other postretirement benefits, the valuation of deferred tax assets and liabilities and the valuation of unrecognized tax benefits.

Actual results could differ from these estimates.

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Our revenues consist of sales of products (tangible goods) and sales of services to customers.

We recognize the majority of our revenue from contracts with customers using an over time, cost-to-cost method of accounting.

On certain other contracts, primarily time and material (“T&M”) and cost-plus contracts, revenue is recognized using the right-to-invoice practical expedient as we are contractually able to bill our customer based on control transferred to the customer.

We recognize the majority of our revenue from contracts with customers using an over time, percentage of completion, cost-to-cost method of accounting measured by the ratio of cumulative costs incurred to date to estimated total contract costs at completion (the "cost-to-cost method").

Revenue from Contracts with Customers for additional information regarding revenue recognition.

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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 and inspection costs.

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Cost to Fulfill a Contract

Costs to fulfill a contract that are incremental direct costs incurred to fulfill a contract with a customer, including sales commissions and dealer fees, and are capitalized if material.

Costs to fulfill a contract include costs directly related to a contract or a specific anticipated contract (for example, mobilization, set-up and certain design costs) that generate or enhance our ability to satisfy our performance obligations under these contracts.

These costs are capitalized to the extent they are expected to be recovered from the associated contract.

Capitalized costs to obtain or fulfill a contract are amortized to expense over the expected period of benefit for contracts with terms greater than one year on a systematic basis that is consistent with the pattern of transfer of the associated goods and services to the customer.

As a practical expedient, capitalized costs to obtain or fulfill a contract with a term of one year or less are expensed as incurred.

Capitalized costs to obtain or fulfill a contract were $ 34 million at December 30, 2022 and $ 40 million at December 31, 2021.

Research and Development Expenses

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The operations of the Company's foreign subsidiaries are translated from the local (functional) currencies into U.S.

dollars using weighted average rates of exchange during each monthly period.

dollars using weighted

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

average rates of exchange during each monthly period.

The rates of exchange at each balance sheet date are used for translating certain balance sheet accounts and gains or losses resulting from these translation adjustments are included in the accompanying Consolidated Balance Sheet as a component of other comprehensive income.

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Accounts receivable consist of amounts billed and currently due from customers.

When events or conditions indicate that amounts outstanding from customers may become uncollectible, an allowance is estimated and recorded.

We maintain an allowance recorded in the Allowance for Credit Losses account that is estimated and recorded utilizing relevant information about past events, including historical experience, current conditions and a reasonable and supportable forecast that affects the collectability of the related financial asset.

Accounts Receivable for additional information regarding accounts receivable.

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Property, Plant and Equipment for additional information regarding property, plant and equipment.

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

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The annual impairment test is typically performed after completion of the Company's annual financial operating plan, which occurs as of December 31.

The Company uses quantitative assessments and qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value.

The Company uses quantitative assessments and qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

less than its carrying value.

If the optional qualitative assessment is performed (Step 0) and the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, an additional quantitative fair value test (Step 1) is performed.

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All derivative instruments are carried on the Consolidated Balance Sheet as either assets or liabilities at fair value.

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

classification of gains and losses resulting from changes in the fair values of derivatives depends on the intended use of the derivative and its resultant designation.

The classification of gains and losses resulting from changes in the fair values of derivatives depends on the intended use of the derivative and its resultant designation.

The Company had no significant derivative or hedging instruments during the years ended December 31, 2022, 2021 or 2020.

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These long-term assumptions are subject to revision based on changes in interest rates, financial market conditions, expected versus actual returns on plan assets, participant mortality rates and other actuarial assumptions, including future rates of salary increases, benefit formulas and levels, and rates of increase in the costs of benefits.

Changes in these assumptions, if significant, can materially affect the amount of annual net periodic benefit costs recognized in the Company's results of operations from one year to the next, the liabilities for the pension plans and postretirement benefit plans and the Company's annual cash requirements to fund these plans.

Changes in these assumptions, if significant, can materially affect the amount of

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

annual net periodic benefit costs recognized in the Company's results of operations from one year to the next, the liabilities for the pension plans and postretirement benefit plans and the Company's annual cash requirements to fund these plans.

See Note 14 :

Pension and Other Postretirement Benefits for further information regarding our pension and postretirement plans.

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Under the agreement, the parties have agreed to calculate and allocate their respective tax liabilities and other tax attributes for taxable years beginning with the first consolidated taxable year that included DRS (i.e., the taxable year ended December 31, 2008) as if the agreement was then in effect.

Although DRS will file its federal consolidated return outside of US Holding post October 3, 2022, the Tax Allocation Agreement will remain in effect for all historic unaudited periods (federal or state) and all applicable prospective periods where the expanded affiliated relationship may warrant it.

The provision for income taxes is determined using the asset and liability approach of accounting for income taxes.

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In general, the taxable income of DRS is included in the consolidated U.S.

federal and state tax returns of US Holding.

federal and state tax returns of US Holding for the short taxable year ended October 3, 2022.

Where applicable, US Holding’s current portion of U.S.

federal income taxes payable were offset against DRS’ net operating loss carryforwards in the period the related tax expense was recorded.

Consequently, our net operating loss carryforwards are deemed to have been settled with

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

US Holding in each year in an amount commensurate with the carrying value of the tax effected net operating loss utilized.

Consequently, our net operating loss carryforwards are deemed to have been settled with US Holding in each year in an amount commensurate with the carrying value of the tax effected net operating loss utilized.

If management determines that some portion or all of a deferred tax asset is not “more likely than not” to be realized, a valuation allowance is recorded as a component of the income tax provision to reduce the deferred tax asset to the amounts expected to be realized.

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We believe it is more likely than not that we will generate sufficient taxable income in future periods to realize our deferred tax assets, subject to the valuation allowances recognized.

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company assesses its tax positions for all periods open to examination by tax authorities based on the latest available information.

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Interest and penalties related to unrecognized tax benefits are not material.

The implementation of a modified territorial tax system by the TCJA subjects us to tax on our Global Intangible Low-Taxed Income (“GILTI”) starting with fiscal 2019.

The FASB has permitted companies to make an accounting policy decision to either (1) treat taxes due on future GILTI inclusions in U.S.

taxable income as a current-period expense when incurred (“period cost method”) or (2) factor such amounts into the measurement of its deferred taxes.

The Company has elected to use the period cost method.

See Note 12 :

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In February 2021, the Company completed a forward stock split of 1-for- 1,450,000 shares of common stock.

The consolidated financial statements have been retroactively adjusted as necessary to reflect the forward stock split for all periods presented.

There were 100 shares and 145.00 million basic and diluted common shares outstanding before and after the forward stock split, respectively, for all periods presented.

Additionally, on November 23, 2022, the Company completed a forward stock split of 1.451345331 -for-1 share of common stock.

The consolidated financial statements have been retroactively adjusted as necessary to reflect the November 23, 2022 forward stock split for all periods presented.

In addition 49,742,187 million shares of common stock were issued in connection with the RADA merger on November 28, 2022.

There were 145 million and 210 million basic and diluted common shares outstanding before and after the November 23, 2022 forward stock split, respectively, for all periods presented.

See Note 17 :

Earnings Per Share for additional information regarding earnings per share.

Fair Value Measurements

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Our financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses and other current liabilities.

Financial instruments are reported in the Consolidated Balance Sheet at carrying value, which other than the 7.5 % Term loan due November 30, 2023, approximate fair value.

Financial instruments are reported in the Consolidated Balance Sheet at carrying value as of December 31, 2022.

However as of December 31, 2021 all of the Financial instruments are reported in the Consolidated Balance Sheet at carrying value which approximates fair value except for the 7.5 % Term loan.

Debt for further information regarding our debt.

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Any excess of the fair value of consideration transferred over the assigned values of the net assets acquired is recognized as goodwill.

On November 28, 2022, the Company announced the successful completion of the all-stock merger between Leonardo DRS and RADA Electronic Industries Ltd.

(“RADA”), a leading Israel-based provider of small-form tactical radar, to become a combined public company.

As previously disclosed, RADA shareholders retained approximately 19 % ownership in the combined Company with Leonardo DRS’s parent company, Leonardo S.p.A., (MIL:

LDO), owning the remaining 81 %.

The acquisition of RADA has been accounted for using the acquisition method of accounting in accordance with ASC 805, Business Combinations, with the Company as the accounting acquirer, which requires the assets acquired and liabilities assumed be recognized at their acquisition date fair value.

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

The total purchase consideration for RADA was $ 511 million and is comprised of Company’s shares issued in exchange for all issued and outstanding common shares of RADA, as well as the portion of replacement stock compensation awards’ fair value attributable to pre-combination services.

Business Acquisitions and Dispositions for additional information regarding the transaction.

During the third quarter of 2021 the Company acquired substantially all the assets of Ascendant Engineering Solutions (“AES”), an advanced gimbal producer located in Austin, TX.

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We believe this acquisition enables the integration of our own Electro-Optical and Infrared systems with the gimbals of AES and is a strategic investment, offering an integrated solution for our customers in the market for lightweight military platforms including small unmanned aerial systems.

The acquisition has been accounted for as a business combination and has been integrated into our Advanced Sensor Technologies segment.

The acquisition has been accounted for as a business combination and has been integrated into our ASC segment.

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Investments where we have the ability to exercise significant influence, but do not control, are accounted for under the equity method of accounting and are included in other noncurrent assets on our Consolidated Balance Sheet.

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If a decline in the value of an equity method investment is determined to be other than temporary, a loss is therefore recorded during the current period.

The Company sold its interest in its only investment accounted for under the equity method on July 8, 2022.

Equity Method Investments for further information regarding our equity method investments.

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Management evaluates this investment for possible impairment quarterly.

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Variable Interest Entities

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The Company did not have any investment in VIEs as of December 31, 2022 or 2021.

On March 21, 2022, the Company entered into a definitive agreement to sell its Global Enterprise Solutions (“GES”) business to SES Government Solutions, Inc., a wholly-owned subsidiary of SES S.A., for a selling price of $ 450 million subject to certain working capital adjustments.

The transaction was completed on August 1, 2022 and resulted in cash proceeds of $ 427 million after net working capital adjustments.

The transaction netted an aggregate pretax gain net of transaction costs of $ 309 million ($ 239 million after tax) of which $ 323 million was included in Other operating income (expense) net partially reduced by aggregate transaction costs of $ 14 million included in Selling, General & Administrative costs and tax expenses of $ 70 million.

GES, which was part of the ASC segment, provides commercial satellite communications to the U.S.

Government and delivers satellite communications and security solutions to customers worldwide.

has guaranteed the payment of the purchase price and performance of all other obligations of SES Government Solutions, Inc.

under the agreement.

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.

In February 2022, the Company’s Board of Directors approved the strategic initiative to divest of the Company’s interest in Advanced Acoustic Concepts (“AAC”).

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 the joint venture.

The transaction was completed on July 8, 2022 and resulted in proceeds of $ 56 million.

The transaction netted an aggregate pretax gain of $ 31 million ($ 22 million net of taxes), The aggregate gain of $ 31 million is included in Other Operating income (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 the time, our sole shareholder.

The $ 396 million represents the proceeds generated net of our costs to sell and estimated tax obligations.

The dividend was issued on August 5, 2022.

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Share-based Compensation

The fair value of stock awards is determined based on the closing market price of the Company's common stock on the grant date.

Compensation expense for stock awards is measured based on the grant date fair value and recognized over the vesting period.

For purposes of measuring compensation expense, the amount of shares ultimately expected to vest is estimated at each reporting date based on Company's expectations regarding the relevant service or performance criteria.

For awards with a service condition only, the Company has made a policy election to recognize the compensation expense on a straight line basis.

Share-based Compensation Plans for further information regarding our share-based compensation plans.

New Accounting Pronouncements

Recently Adopted Accounting Pronouncements

Changes to Disclosure Requirements for Defined Benefit Plans

In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20):

Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans .

Specifically, the amendment removes disclosure requirements for amounts classified in accumulated other comprehensive income expected to be recognized over the next year and the effects of a one-percentage-point change in the assumed health care cost trend rate on service cost, interest cost and the benefit obligation for postretirement benefits.

The amendment also requires additional disclosure around weighted-average interest crediting rates for cash balance plans, a narrative description of the reasons for significant gains and losses, and an explanation of any other significant changes in the benefit obligation or plan assets.

The adoption of the standard as of January 1, 2021 did not have a material impact on our consolidated financial statements.

Simplifying the Accounting for Income Taxes

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes which removes certain exceptions to the general principles in Topic 740 for:

recognizing deferred taxes for investments, performing intra-period allocations and calculating taxes in interim periods.

The amendments also improve consistent application of and simplify U.S.

GAAP for other areas of Topic 740 by clarifying and amending existing guidance.

The standard is effective for fiscal years beginning after December 15, 2020.

The adoption of the standard as of January 1, 2021 did not have a material impact on our consolidated financial statements.

Accounting Guidance Issued but Not Yet Adopted as of December 31, 2021:

Government Assistance

In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832):

Disclosure by Business Entities about Government Assistance which requires certain disclosures to be included with respect to the types of assistance, the accounting for the assistance as well as the effect on the financial statements of the assistance.

The purposes of the ASU is to increase transparency and eliminate disparity of accounting for and reporting of the receipt of government assistance.

The standard is effective for fiscal periods beginning after December 15, 2021.

The Company does not expect the adoption to have a material impact on our disclosures.

In 2022, we adopted Accounting Standards Update (ASU) 2021-10, Government Assistance , which requires certain disclosures for those government assistance transactions for which we have applied a grant accounting model.

Certain states and localities in which we operate offer or have offered various business incentives related to investment and/or job creation.

Between 2018 and 2022, we received Enterprise Zone Tax Credits totaling approximately $ 10 million related to our investment in operations in Wisconsin.

The credits were recorded in Other Income in the year that each of the requirements for the credits are achieved.

DRS can earn as much $ 8 million in additional credits through 2025.

Accounting Guidance Issued but Not Yet Adopted as of December 31, 2022:

Disclosure of Supplier Finance Program Obligations

In September 2022, the FASB issued ASU 2022-04, Liabilities – Supplier Finance Programs (Subtopic 405-50):

Disclosure of Supplier Finance Program Obligations , which requires that a buyer in a supplier finance program disclose the key terms of supplier finance programs, the amount of obligations outstanding at the end of the reporting period that the entity has confirmed as valid to the finance provider, where these obligations are recorded in the balance sheet, and a roll forward of the obligations.

The new standard is effective for fiscal years beginning after December 15, 2022, on a retrospective basis, including interim periods within those fiscal years.

We are currently evaluating the impact of adopting this new pronouncement.

Business Acquisitions and Dispositions

On June 21, 2022, the Company, entered into an Agreement and Plan of Merger (the “Merger Agreement”) with RADA, a leading Israel-based provider of small-form tactical radar, for an all-stock merger, with RADA surviving as a wholly owned subsidiary of the Company.

The Company acquired RADA as part of the Company’s goal to become a market leader in advanced sensing and force protection.

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

The total purchase consideration for RADA was $ 511 million and is comprised of the Company’s shares of common stock issued in exchange for all issued and outstanding ordinary shares of RADA, as

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

well as the portion of replacement stock compensation awards’ fair value attributable to pre-combination services.

The Company recognized transaction costs of $ 27 million in the year ended December 31, 2022.

These costs were associated with advisory, legal, and consulting services and are presented in general and administrative expense in the consolidated statement of earnings.

Purchase consideration - The following summarizes the purchase consideration transferred to RADA shareholders ( in millions, except per share data) :

RADA ordinary shares outstanding as of November 28, 2022 50

Share exchange ratio 1

Total Company shares issued 50

Fair value of the Company common stock (RADA share price on November 28, 2022) $ 9.87

Total fair value of the Company common stock issued $ 491

Replacement share-based payment awards pre-combination vesting expense 20

Preliminary aggregate purchase consideration $ 511

Preliminary purchase price allocation - The preliminary allocation of the purchase consideration to assets acquired and liabilities assumed is based on the estimated fair values as follows ( in millions) :

Cash and cash equivalents $ 19

Accounts receivable, net 12

Inventories 72

Prepaid expenses 3

Other current assets 4

Property, plant and equipment, net 26

Intangible Assets 131

Other noncurrent assets 14

Total identifiable assets acquired $ 281

Accounts payable $ 6

Contract liabilities 2

Other current liabilities 19

Deferred tax liabilities 5

Other noncurrent liabilities 22

Total liabilities assumed $ 54

Net assets acquired, excluding goodwill 227

Goodwill $ 284

The preliminary fair value estimates of the net assets acquired and liabilities assumed are based upon preliminary calculations and valuations, and those estimates and assumptions are subject to change as the Company obtains additional information during the measurement period (up to one year from the acquisition date).

The Company has not yet finalized the determination of fair values allocated to the acquired assets and liabilities, including but not limited to the valuation of acquired intangible assets.

The excess of the total consideration over the tangible assets, identifiable intangible assets, and assumed

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liabilities is recorded as goodwill.

Identifiable intangibles assets of $ 131 million consist of $ 90 million of technology related assets while the remaining $ 41 million consists of customer and contractual relationships.

The goodwill of $ 284 million arising from the acquisition is primarily attributable to the growth opportunities related to the RADA business.

None of the goodwill resulting from the acquisition is deductible for tax purposes.

All of the goodwill recognized related to the RADA acquisition will be assigned to the ASC segment.

Total revenue and operating earnings for RADA for the period from November 28, 2022, through December 31, 2022 were not significant.

Revenue from Contracts with Customers

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These contracts generally require significant integration of a group of goods and/or services to deliver a combined output.

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In some contracts, the Company provides multiple distinct goods or services to a customer.

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The fixed labor rates on T&M contracts include amounts for the cost of direct labor, indirect contract costs and profit.

Estimating the transaction price for an arrangement requires judgment and is based on expected results which are determined using the Company’s historical data.

We estimate that the revenue that we expect to be entitled to receive from a customer to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur.

Revenue from contracts with customers is recognized when the performance obligations are satisfied through the transfer of control over the good or service to the customer, which may occur either over time or at a point in time.

Revenues for the majority of our contracts are measured as determined by the ratio of cumulative costs incurred to date to estimated total contract costs at completion (the "cost-to-cost method").

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.

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.

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 at least quarterly.

Factors that must be considered in estimating the cost of the work to be

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completed include the nature and complexity of the work to be performed, subcontractor performance and the risk and impact of delayed performance.

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Any anticipated losses on these contracts are fully recognized in the period in which the losses become evident.

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EAC adjustments had the following impacts to revenue for the periods presented:

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Total % of Revenue 1 % 1 % 3 %

The impacts noted above are attributed primarily to changes in our firm-fixed-price development type programs.

As changes happen in the design required to achieve contractual specifications, those changes often result in the programs’ estimate and related profitability.

The reductions to revenue for the years ended December 31, 2021, 2020 and 2019 were related to certain masted surveillance and submarine electric propulsion programs within our IMS segment, solider sensing programs within our AST segment and adjustments to the measurement of variable consideration related to certain requests for equitable adjustment with the U.S.

Navy within our NC&C segment.

The impacts noted above are attributed primarily to changes in our firm-fixed-price development type programs as well as the impacts of inflation on certain fixed price production programs.

In 2022, the adjustments consist of changes in the designs required to achieve contractual specifications for fixed priced development programs and inflationary cost increases on certain surface ship and radar programs within the Navy that resulted in a change in the programs’ estimate and related profitability.

The reductions to revenue for the years ended December 31, 2021 and 2020 were related to certain masted surveillance and submarine electric propulsion programs within our IMS segment, soldier sensing programs within our ASC segment and adjustments to the measurement of variable consideration related to certain requests for equitable adjustment with the U.S.

Navy also within our ASC segment.

Conversely, if the requirements for the recognition of contracts over time are not met, revenue is recognized at a point in time when control transfers to the customer, which is generally upon transfer of title.

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Amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., biweekly or monthly) or upon achievement of contractual milestones.

Generally, billing occurs subsequent to revenue recognition, resulting in contract assets.

Generally, billing occurs subsequent to revenue recognition, resulting in contract

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However, we sometimes receive advances or deposits from our customers before revenue is recognized, resulting in contract liabilities.

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Revenue recognized in 2022 and 2021 that was included in the contract liability balance at the beginning of each year was $ 129 million and $ 108 million, respectively.

The change in the balances of the Company’s contract assets and liabilities primarily results from timing differences between revenue recognition and customer billings and/or payments.

Contract assets related to amounts withheld by customers until contract completion are not considered a significant financing component of our contracts because the intent is to protect the customers from our failure to satisfactorily complete our performance obligations.

Payments received from customers in advance of revenue recognition (contract liabilities) are not considered a significant financing component of our contracts because they are utilized to pay for contract costs within a one-year period or are requested by us to ensure the customers meet their payment obligations.

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Value of Remaining Performance Obligations

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

The following table summarizes the value of our backlog at December 31, 2021 and 2020:

The following table summarizes the value of our backlog at December 31, 2022 and 2021, incorporating both funded and unfunded components:

Year Ended December 31,

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Disaggregation of Revenue

AST revenue is primarily derived from U.S.

government development and production contracts and is generally recognized over time using the cost-to-cost method.

We disaggregate AST revenue by geographical region, customer relationship and contract type.

We believe these categories best depict how the nature, amount, timing and uncertainty of AST revenue and cash flows are affected by economic factors:

Year Ended December 31,

(Dollars in millions) 2021 2020 2019

Revenue by Geographical Region

United States $ 880 $ 821 $ 711

International 76 107 58

Intersegment Sales 14 12 12

$ 970 $ 940 $ 781

Revenue by Customer Relationship

Prime contractor $ 505 $ 443 $ 372

Subcontractor 451 485 397

Intersegment Sales 14 12 12

$ 970 $ 940 $ 781

Revenue by Contract Type

Firm Fixed Price

$ 822 $ 813 $ 614

Flexibly Priced (1)

Intersegment Sales 14 12 12

$ 970 $ 940 $ 781

________________

(1) Includes revenue derived from time-and-materials contracts.

ASC revenue is primarily derived from U.S.

government development and production contracts and is generally recognized using the over time, percentage of completion cost-to-cost method of accounting.

We disaggregate ASC revenue by geographical region, customer relationship and contract

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NC&C revenue is primarily derived from U.S.

government development and production contracts and is generally recognized over time using the cost-to-cost method.

We disaggregate NC&C revenue by geographical region, customer relationship and contract type.

We believe these categories best depict how the nature, amount, timing and uncertainty of NC&C revenue and cash flows are affected by economic factors:

We believe these categories best depict how the nature, amount, timing and uncertainty of ASC revenue and cash flows are affected by economic factors:

Year Ended December 31,

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________________

(1) Includes revenue derived from time-and-materials contracts.

(1) Includes revenue derived from cost type and time-and-materials contracts.

IMS revenue is primarily derived from U.S.

government development and production contracts and is generally recognized over time using the cost-to-cost method.

We disaggregate IMS revenue by geographical region, customer relationship and contract type.

We believe these categories best depict

government development and production contracts and is generally recognized over time using the over time, percentage of completion cost-to-cost method

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how the nature, amount, timing and uncertainty of IMS revenue and cash flows are affected by economic factors:

of accounting.

We disaggregate IMS revenue by geographical region, customer relationship and contract type.

We believe these categories best depict how the nature, amount, timing and uncertainty of IMS revenue and cash flows are affected by economic factors:

Year Ended December 31,

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Accounts receivable $ 168 $ 157

Less allowance for doubtful accounts ( 1 ) ( 2 )

Less allowance for credit losses ( 2 ) ( 1 )

Accounts receivable, net

The Company maintains certain agreements with financial institutions to sell certain trade receivables.

Receivables are derecognized in their entirety when sold, and the Company’s continuing involvement in the sold receivables is limited to their servicing, for which the Company receives a fee commensurate with the service provided.

Pursuant to the servicing agreements, the Company collected approximately $ 10 million and $ 15 million at December 31, 2022 and 2021, respectively, of these sold receivables that had not yet been remitted to the financial institutions.

These unremitted amounts collected on behalf of the financial institutions are included within short-term borrowings and current portion of long-term debt in the Consolidated Balance Sheet.

Sale of Receivables for additional information on the sale of receivables.

Sale of Receivables

The Company is party to factoring facilities with various financial institutions with an aggregate capacity of $ 325 million.

The receivables sold under the factoring facilities are without recourse for any customer credit risk and result in a true sale.

Receivables are derecognized in their entirety when sold,

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and the Company’s continuing involvement is limited to their servicing, for which the Company receives a fee commensurate with the service provided and therefore no servicing asset or liability related to these receivables was recognized for any period presented.

The fair value of the sold receivables approximated their book value due to their short-term nature.

Proceeds from the sold receivables are reflected in operating cash flows on the statement of cash flows.

During the years ended December 31, 2022 and 2021, the Company incurred purchase discount fees of $ 4 million and $ 2 million, respectively, which are presented in other general and administrative expenditures, net on the consolidated statements of earnings.

(Dollars in millions) 2022 2021

Beginning balance $ 215 $ 262

Sales of receivables 373 646

Cash returned to purchaser ( 345 ) ( 693 )

Outstanding balance sold to purchasers (1)

Cash collected, not remitted to purchaser (2)

( 10 ) ( 15 )

Remaining sold receivables $ 233 $ 200

________________

(1) For the calendar year 2022, the Company recorded a net increase to cash flows from operating activities of $ 28 million and for calendar year 2021 a decrease to cash flow from operating activities of $ 47 million.

(2) Represents cash collected on behalf of purchasers and not yet remitted.

Inventories consists of the following:

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Total property, plant and equipment, net

LEONARDO DRS, INC.

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Depreciation expense related to property, plant and equipment was $ 55 million, $ 49 million and $ 44 million for the years ended December 31, 2022, 2021 and 2020, respectively.

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Leases for additional information.

As of December 31, 2021, the Company accounted for our manufacturing facility in Menomonee Falls, WI as a build-to-suit lease with a failed sale-leaseback and is included in the Land, building, and improvements in the above table.

As of December 31, 2022 and 2021, respectively, the Company accounted for our manufacturing facility in Menomonee Falls, WI as a build-to-suit lease with a failed sale-leaseback and is included in the Land, building, and improvements in the above table.

Debt for additional information.

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Other Liabilities

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Operating lease liabilities 25 24

Taxes Payable 31 —

Total other current liabilities

Retirement benefits $ — $ —

Operating lease liabilities $ 68 $ 73

Taxes Payable 21 —

Total other noncurrent liabilities

________________

(1) Consists primarily of taxes payable, environmental remediation reserves and warranty reserves.

(1) Consists primarily of environmental remediation reserves and warranty reserves.

Commitments and Contingencies for more information regarding the warranty provision

(2) Consists primarily of workers’ compensation liabilities and certain payroll taxes deferred under the CARES Act.

(2) Consists primarily of workers’ compensation liabilities.

Changes in the carrying amount of goodwill by reportable segment are as follows:

(Dollars in millions) AST NC&C IMS Total

(Dollars in millions) ASC IMS Total

Balance at January 1, 2021 (1)

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Acquisitions 282 — 282

Dispositions ( 117 ) $ — ( 117 )

Balance at December 31, 2022

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________________

(1) Goodwill is reported net of $ 1,313 million, $ 1,049 million and $ 606 million of accumulated impairments as of January 2020 for the AST, NC&C and IMS segments, respectively.

(1) Goodwill is reported net of $ 2,362 million and $ 606 million of accumulated impairments as of January 2021 for the ASC and IMS segments, respectively.

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Intangible Assets

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All intangible assets are being amortized over their estimated useful lives, as indicated below, with no estimated residual values.

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December 31, 2022 December 31, 2021

(Dollars in millions) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount

Customer relationships $ 957 $ ( 908 ) $ 49 $ 957 $ ( 899 ) $ 58

Acquired Intangible Assets $ 1,087 $ ( 918 ) $ 169 $ 957 $ ( 908 ) $ 49

Patents and licenses 9 ( 6 ) 3 9 ( 6 ) 3

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Amortization expense related to intangible assets was $ 10 million, $ 9 million, and $ 9 million respectively, for the years ended December 31, 2022, 2021 and 2020.

Customer relationships are amortized on a straight-line basis over their estimated useful lives of 10 to 15 years.

Acquired intangible assets are amortized on a straight-line basis over their estimated useful lives of 10 to 15 years.

The net acquired intangible asset balances consists primarily of technology related intangibles of $ 118 million and customer related assets of $ 49 million as of December 31, 2022.

Patents and licenses are amortized on a straight-line basis over their estimated useful lives of 5 to 10 years.

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Estimated Annual Amortization

The Company leases various real estate for manufacturing facilities, administrative offices and warehouses under both finance leases and operating leases.

In addition, the Company leases vehicles, machinery and office equipment under operating leases.

The Company leases various real estate for manufacturing facilities, administrative offices, warehouses and machinery under both finance leases and operating leases.

In addition, the Company leases vehicles and office equipment under operating leases.

We determine whether our contracts are or contain a lease at the inception of such arrangements.

A contract is or contains a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

ROU assets and lease liabilities are recorded on the Consolidated Balance Sheet as of the lease commencement based on the present value of the future lease payments over the lease term.

As our leases do not generally explicitly state the discount rate implicit in the lease, we use our incremental borrowing rate, which is determined based on the rate of interest that the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term as of the lease commencement date.

Right of use assets (“ROU”) and lease liabilities are recorded on the Consolidated Balance Sheet as of the lease commencement based on the present value of the future lease payments over the lease term.

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have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term as of the lease commencement date.

In addition to the present value of the future lease payments, the calculation of the ROU asset also includes lease payments made at or before the commencement date of the lease, less any lease incentives received.

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We include the impact of the option in the determination of the ROU assets and liabilities when it is reasonably certain that we will exercise the option.

Our lease payments are largely fixed, but may include variable payments that do not depend on an index or rate, such as usage-based amounts, and are recorded as a lease expense in the period incurred.

and Canadian lease payments are largely fixed, but may include variable payments that do not depend on an index or rate, such as usage-based amounts, and are recorded as a lease expense in the period incurred.

The lease payments in Israel are tied to the Consumer Price Index (“CPI”) as published by Israel’s Central Bureau of Statistics.

These leases are paid in Israeli New Shekels (“ISL”), but recorded in U.S.

Dollars on the general ledger.

These leases are recalculated each quarter to recognize the changes in both the CPI and the ISL.

The Company’s lease agreements do not contain any material residual value guarantees or restrictive covenants.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In 2019, we have entered into a sale-leaseback transaction related to a facility in Milwaukee, WI.

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Operating lease cost (1)

$ 25 $ 26 $ 24

Finance lease cost (2) :

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$ 40 $ 39 $ 36

(1) Operating lease expense is included within cost of products, cost of services or general and administrative expenses, dependent upon the nature and use of the ROU asset, in the Company’s Consolidated Statements of Earnings Operating lease cost includes short-term leases of approximately $ 3 million and $ 5 million and an insignificant amount of variable lease cost for both 2021 and 2020 .

________________

(1) Operating lease expense is included within cost of products, cost of services or general and administrative expenses, dependent upon the nature and use of the ROU asset, in the Company’s Consolidated Statements of Earnings Operating lease cost includes short-term leases of approximately $ 2 million, $ 3 million and $ 5 million and an insignificant amount of variable lease cost for 2022, 2021 and 2020 .

(2) Finance lease expense is recorded as depreciation and amortization expense within cost of products, cost of services or general and administrative expenses, dependent upon the nature and use of the ROU asset and interest expense, net in the Company’s Consolidated Statements of Earnings.

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Supplemental Balance Sheet Information

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Total lease liabilities

LEONARDO DRS, INC.

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________________

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Finance leases 8 4 46

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Weighted Average Lease Term and Discount Rate

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Finance leases 4.5 % 4.6 %

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Maturity of Lease Liabilities:

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$ 525 $ 200 $ 112

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Income tax provision (benefit) consists of the following:

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Federal 5 43 24

State ( 6 ) 5 —

Foreign 4 ( 2 ) ( 2 )

$ 120 $ 46 $ 27

LEONARDO DRS, INC.

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The reconciliation from the statutory federal income tax rate to our effective income tax rate follows:

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Change in tax reserves — % ( 0.4 ) % 2.2 %

Divestiture impact ( 1.9 ) % — % — % — %

Other ( 0.1 ) % ( 0.3 ) % 0.7 %

Effective tax rate 22.9 % 23.0 % 24.1 %

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2021 and 2020 is as follows:

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2022 and 2021 are as follows:

(Dollars in millions) 2022 2021

Deferred tax assets:

Federal net operating losses $ 5 $ 18

State net operating losses 16 21

Federal net operating loss $ 4 $ 3

State net operating loss 14 16

Foreign net operating loss $ 10 $ 2

Tax credit carryforwards 4 21

Lease liabilities $ 61 $ 59

Capitalized R&D, net of amortization 32 —

Accrued compensation and benefits 23 23

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Deferred tax liabilities:

Right of use assets $ ( 57 ) $ ( 56 )

Intangible assets ( 45 ) ( 41 )

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The annual utilization of approximately $ 25 million of certain our Federal net operating losses is subject to limitations under section 382 of the Internal Revenue Code.

As of December 31, 2021 and

Our foreign net operating losses have expirations ranging from 2041 to indefinite.

During 2022 we recorded a valuation allowance in Canada due to a change in the Company’s judgement regarding the realizability of their deferred tax assets, including a valuation allowance of $ 6 million against the foreign net operating losses.

As of December 31, 2022 and 2021 we had apportioned state net operating loss carryforwards of $ 227 million and $ 239 million, respectively, which are associated with jurisdictions in which we currently file and the Company expects to utilize prior to expiration except for those for which we have recorded a valuation allowance.

Our state net operating losses have expirations ranging from 2024 to 2041 and are offset by a valuation allowance of $ 5 million.

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2020 we had apportioned state net operating loss carryforwards of $ 239 million and $ 327 million, respectively, which are associated with jurisdictions in which we currently file and the Company expects to utilize prior to expiration except for those for which we have recorded a valuation allowance.

We have federal tax credit carryforwards that commence expiring in 2032, which we anticipate being able to utilize prior to their expiration.

Tax Uncertainties

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subsidiaries be distributed in the future in the form of dividends or otherwise, the Company may be subject to foreign and domestic income taxes and withholding taxes.

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company’s debt consists of the following:

(Dollars in millions) 2022 2021

Term Loan A $ 225 $ —

7.5 % Term loan due November 30, 2023 (1)

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Total long-term debt

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

________________

(1) The Company’s debt with related parties consists of two term loans and a working capital credit facility with US Holding, as described below.

In January 2009, the Company entered into a credit agreement with its ultimate parent company, Finmeccanica S.p.A.

(presently Leonardo S.p.A.) in the amount of $ 2 billion (the “2009 Credit Agreement”).

The 2009 Credit Agreement was subsequently assigned to US Holding and has a maturity of November 30, 2023.

The 2009 Credit Agreement provides for a term loan bearing interest at a rate of 7.5 %, with interest payments due semi-annually on June 20 and December 20 in each year (the “ 7.5 % Term loan”).

The outstanding balance of the 7.5 % Term loan at December 31, 2021 and 2020 was $ 139 million and $ 139 million, respectively.

The fair value of this term loan at December 31, 2021 and 2020 was $ 182 million and $ 182 million, respectively;

however the Company has the ability to prepay the outstanding principal balance at the carrying amount without penalty.

During 2020, US Holding forgave $ 300 million of related party debt.

This was treated as a capital transaction and the amount was recorded in additional paid-in capital, as US Holding is a related party.

In November 2022, the Company entered into a senior unsecured credit agreement with Bank of America in the amount of $ 500 million (the “2022 Credit Agreement”) with a maturity of November 29, 2027.

The 2022 Credit Agreement provides for a term loan of $ 225 million bearing interest at a variable rate generally based on the Secured Overnight Financing Rate, (“SOFR”), plus a spread ranging from 1.48 % to 2.10 % depending on the leverage ratio, as defined in the 2022 Credit Agreement, or an alternative variable rate based on the higher of the Bank of America prime rate, the federal funds rate, or a rate generally based on SOFR, in each case subject to additional basis point spread as defined in the 2022 Credit Agreement, (“2022 Term Loan A”).

Interest is payable quarterly in arrears.

The outstanding balance of the 2022 Term Loan A at December 31, 2022 was $ 223 million.The fair value of Term Loan A at December 31, 2022 was approximately $ 223 million, however the Company has the ability to prepay the outstanding principal balance without penalty.

In January 2009, the Company entered into a credit agreement with Finmeccanica S.p.A.

(presently Leonardo S.p.A.

and Majority Stockholder) in the amount of $ 2 billion (the “2009 Credit Agreement”).

The 2009 Credit Agreement was subsequently assigned to US Holding and had a maturity of November 30, 2023.

The 2009 Credit Agreement provided for a term loan that bore interest at a rate of 7.5 %, with interest payments due semi-annually on June 20 and December 20 in each year (the “ 7.5 % Term loan”).

The outstanding balance of the 7.5 % Term loan at December 31, 2021 was $ 139 million.

The fair value of this term loan at December 31, 2021 was $ 182 million;

however the Company had the ability to prepay the outstanding principal balance at the carrying amount without penalty.

In November 2022, the Company repaid the aggregate principal amount of $ 139 million.

Upon repayment the 2009 Credit Agreement was terminated.

In June 2017, the Company entered into an unsecured term loan with US Holding in the principal amount of $ 137.5 million, the proceeds of which were used to finance the acquisition of Daylight Solutions, Inc.

(the “Daylight Term Loan”).

The Daylight Term Loan had an outstanding balance of $ 78 million and $ 98 million at December 31, 2021 and 2020, respectively, which approximates its fair value.

The Daylight Term Loan had an outstanding balance of $ 78 million at December 31, 2021, which approximated its fair value.

The Daylight Term Loan matures on October 15, 2024.

The Daylight Term Loan has an interest rate of 5.0 %, with interest payments due semi-annually on April 15 and October 15.

During April 2018, the Company was advanced an additional $ 50 million by US Holding under a term loan.

This term loan bears interest at 4.0 % and had an initial maturity date of December 31, 2018, which was extended until December 31, 2021.

This term loan was repaid in full, with no prepayment penalty, on December 19, 2020.

The Daylight Term Loan had an interest rate of 5.0 %, with interest payments due semi-annually on April 15 and October 15.

During 2022, the Company repaid the aggregate principal amount of $ 78 million.

Upon repayment the 2009 Credit Agreement was terminated.

Credit Facilities

The 2009 Credit Agreement provides for a revolving credit facility available for working capital needs of the Company (the “Revolving Credit Facility”).

As of December 31, 2021 and 2020, the Revolving Credit Facility had a credit limit of $ 450 million and $ 450 million, respectively, and an interest rate of LIBOR plus 3.5 %.

There is a commitment fee of 0.25 % applied to the unused balance of the Revolving Credit Facility and there are no compensating balance requirements.

There was no balance on the Revolving Credit Facility as of December 31, 2021 and 2020.

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The 2009 Credit Agreement provided for a revolving credit facility available for working capital needs of the Company (the “Revolving Credit Facility”).

As of December 31, 2021, the Revolving Credit Facility had a credit limit of $ 450 million, and an interest rate of LIBOR plus 3.5 %.

There was a commitment fee of 0.25 % applied to the unused balance of the Revolving Credit Facility and there was no compensating balance requirements.

There was no balance on the Revolving Credit Facility as of December 31, 2021.

The 2009 Credit Agreement was terminated in November 2022.

The Company also maintains uncommitted working capital credit facilities with certain financial institutions in the aggregate of $ 65 million and $ 65 million at December 31, 2022 and 2021, respectively (the “Financial Institution Credit Facilities”).

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The Company had letters of credit outstanding of approximately $ 36 million and $ 35 million as of December 31, 2022 and 2021, respectively, which reduces the available capacity of the Financial Institution Credit Facilities by an equal amount.

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The 2022 Credit Agreement provides for a revolving credit facility available for working capital needs of the Company, (“the 2022 Revolving Credit Facility”).

As of December 31, 2022 the 2022 Revolving Credit Facility had a limit of $ 275 million loans under the 2022 Revolving Credit Facility bear interest at a variable rate generally based on the Secured Overnight Financing Rate, (“SOFR”), plus a spread ranging from 1.48 % to 2.10 % depending on the leverage ratio, as defined in the 2022 Credit Agreement, or an alternative variable rate based on the higher of the Bank of America prime rate, the federal funds rate, or a rate generally based on SOFR, in each case subject to additional basis point spread as defined in the 2022 Credit Agreement, The Company also pays a commitment fee ranging between 0.20 % and 0.35 % depending on the Company’s leverage ratio applied to the unused balance of the 2022 Revolving Credit Facility.

There was no outstanding balance on the 2022 Revolving Credit Facility as of December 31, 2022.

The weighted average interest rate on the 2022 Revolving Credit Facility as of December 31, 2022 and 2021 was 4.58 % and 3.67 %, respectively.

Finance Lease and Other

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As of December 31, 2022 and 2021, the Company recognized $ 10 million and $ 15 million, respectively, collected on behalf of the buyers of our trade receivables pursuant to our factoring arrangements as short-term borrowings and current portion of long-term debt in the Consolidated Balance Sheet, which approximates its fair value.

Refer to Note 3:

Accounts Receivable for more information.

Accounts Receivable and Note 5:

Sale of Receivables for more information.

Interest Paid

Total interest paid associated with our debt was $ 34 million, $ 35 million and $ 64 million in 2022, 2021 and 2020, respectively.

Maturities of long-term debt as of December 31, 2021 are as follows:

Our effective interest rate was approximately 5.57 %, 4.05 % and 5.19 % for the years ended December 31, 2002, 2021 and 2020, respectively.

The interest expense attributable to the amortization of debt issuance costs in 2022 was not material and not applicable for 2021 and 2020.

Maturities of debt as of December 31, 2022 are as follows:

(Dollars in millions)

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The Company maintains multiple pension plans, both contributory and non-contributory, covering employees at certain locations.

Eligibility requirements for participation in the plans vary, and benefits generally are based on the participant's compensation and years of service, as defined in the respective plan.

The Company's funding policy generally is to contribute in accordance with cost accounting standards that affect government contractors, subject to the Tax Code and regulations thereunder.

Eligibility requirements for participation in the plans vary and benefits generally are based on the participant's compensation and years of service, as defined in the respective

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

assets are invested primarily in equities, bonds (both corporate and U.S.

The Company's funding policy generally is to contribute in accordance with cost accounting standards that affect government contractors, subject to the Tax Code and regulations thereunder.

With respect to U.S.

qualified pension plans, we intend to contribute annually not less than the required minimum funding thresholds.

For all periods presented, the Company made no discretionary pension contributions.

Plan assets are invested primarily in equities, bonds (both corporate and U.S.

government), U.S.

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The table below presents information for the pension plans with an ABO and PBO in excess of the fair value of plan assets at December 31, 2022 and 2021.

(Dollars in millions) December 31, 2021 December 31, 2020

(Dollars in millions) 2022 2021

Projected benefit obligation $ 179 $ 237

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Year rate reaches ultimate trend rate N/A N/A 2037 2031 N/A N/A

The following table summarizes the components of net periodic benefit cost for the Company's pension, postretirement and supplemental retirement plans for the years ended December 31, 2022 and 2021 and 2020.

Net actuarial gains and losses are amortized to expense when they exceed the 10%

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

accounting corridor, based on the greater of the plan assets or benefit obligations, over the average future lifetime for all plans that are frozen, and over the average remaining service period for active plans.

Defined Benefit Pension Plans Postretirement Benefit Plans Supplemental Retirement Plans

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The assumption has been determined based on expectations regarding future rates of return for the plans' investment portfolio, with consideration given to the allocation of investments by asset class and historical rates of return for each individual asset class.

Pension related expenses are reflected in the Costs of revenues and General and administrative expenses on the Consolidated Statement of Earnings.

A one percentage increase or decrease in healthcare trend rates in the table above would have an insignificant impact to our service and interest cost and the postretirement medical obligations.

The Company is responsible for formulating the investment policies and strategies for each plan's assets.

The Retirement Committee has been authorized by the Company’s management to manage the strategic oversight of our defined benefit plan assets held in trust.

The Retirement Committee has adopted an investment policy and provides oversight of a third party investment manager who reports to the Retirement Committee on a regular basis.

The outsourced third party manager develops investment strategies and makes all of the day to day investment decisions related to the defined benefit plan assets in accordance with the investment policy and target asset allocation targets, therein.

Presently all of the plans are governed by a single investment policy and are uniformly invested.

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The non-return seeking assets are invested primarily in bonds with maturities closely matching the anticipated payment of benefits.

As the funding percentage increase the glide path reduce the amount of the assets invested in return seeking assets.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The table below represents all of the Company's funded pension plans' and postretirement benefit plans' weighted-average asset allocation at December 31, 2022 and 2021 by asset category:

5 unchanged sentences

Other, primarily cash and cash equivalents, and hedge funds 8 % 6 %

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The table below presents the target allocation ranges for each major asset category for the Company's benefit plans for the years ended December 31, 2022 and 2021.

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The following tables provides the fair value of plan assets held by our defined benefit plan by asset category and by fair value hierarchy level.

Certain investments are measured at their NAV per share and do not have readily determined fair values.

Certain investments are measured at their NAV per share and

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

do not have readily determined fair values.

As such, these investments are not subject to leveling in the fair value hierarchy.

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Investments measured at fair value:

$ — $ — $ — $ —

Cash and cash equivalents $ 10 $ — $ — $ 10

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For the year ended December 31, 2023, the Company expects to contribute $ 8 million to its pension plans and an inconsequential amount to its postretirement plans.

During 2020 the Company deferred approximately $ 7 million in pension contributions until 2021 under the CARES Act and IRS Notice 2020-82, which was included in the total pension contributions for 2021 of $ 13 million.

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table presents expected pension and postretirement benefit payments over the next 10 years:

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The Company's contributions to these plans for the years ended December 31, 2022, 2021 and 2020 amounted to $ 22 million, $ 22 million and $ 21 million, respectively.

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Equity Method Investments

Our share of net earnings related to our equity method investments was $ 2 million, $ 3 million and $ 2 million for the years ended December 31, 2021, 2020 and 2019, respectively, which was included in our Network Computing & Communications business segment operating profit.

Our share of net earnings related to our equity method investments was $ 1 million, $ 2 million and $ 3 million for the years ended December 31, 2022, 2021 and 2020, respectively, which was included in our Advanced Sensing and Computing business segment operating profit.

Below is a list of the entities accounted for under the equity method and recorded in other noncurrent assets on our Consolidated Balance Sheet:

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Share-based Compensation Plans

The Company does not have any share-based compensation plans.

Other Liabilities , for information regarding cash compensation.

In November 2022, the Company established the 2022 Omnibus Equity Compensation Plan (the “2022 Equity Plan”).

The 2022 Equity Plan allows for grants of stock options, stock appreciation rights, restricted shares, restricted stock units and performance-based awards.

As of December 31, 2022, there were 4 million shares of the Company’s common stock reserved for future issuances under the 2022 Equity Plan.

Under the 2022 Equity Plan, the Company granted restricted stock units (“RSUs”) and performance-based restricted stock units (“PRSUs”), referred to as a one-time founders award.

The RSUs are subject to time-based vesting over a two -year period.

The PRSUs are subject to both time and performance-based vesting based on the Company’s share price metric market condition over a two -year period.

In November 2022, in conjunction with the acquisition of RADA, the Company assumed 5.4 million stock options.

In accordance with the Merger Agreement, the outstanding stock options were exchanged into options to purchase the Company’s common stock.

The assumed stock options are subject to the same terms and conditions as the original awards, including time-based vesting.

The options are generally exercisable for 48 months following the date of vesting.

In November 2022, in conjunction with the acquisition of RADA, the Company converted the 2022 long-term incentive (“LTI”) program from a cash-based plan to an equity plan.

The conversion was treated as a liability to equity modification.

Following the modification, equity awards were granted in the form of RSUs and PRSUs.

The RSUs are subject to annual time-based vesting over a three -year period.

The PRSUs are subject to both time and performance-based vesting based upon the achievement of three financial metrics over a three -year period:

Relative Total Shareholder Return (“rTSR”), Revenue Growth, and Return on Invested Capital (“ROIC”).

The fair value of stock options is measured on the date of the acquisition of RADA using the Black-Scholes option pricing model.

The fair value of market condition PRSUs is measured on the date of grant using the Monte Carlo Simulation Model.

Expense for time-based awards is recognized on a straight-line basis over the requisite service period.

Forfeitures are recognized as they occur.

Share-based compensation during the fiscal year ended December 31, 2022 was recorded in the Consolidated Statements of Earnings within general and administrative expenses as shown in the following table (in millions) :

Total Share-Based Compensation Expense $ 5

Tax benefit recognized from Share-Based Compensation 1

There was no share-based compensation expense recognized for the fiscal years ended December 31, 2021 and 2020.

Stock Options

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The assumptions used in valuing stock options during the period are set forth in the following table:

Year Ended December 31,

Expected term (1)

0.04 – 5.18 years

Expected volatility (2)

Risk-free interest rate (3)

Expected dividend yield (4)

(1) The expected term is based upon historical experience and represents the period of time between when the options are granted and when they are expected to be exercised.

(2) The computation of expected volatility is based on a blend of historical RADA volatility and leverage-adjusted historical volatility of the Company’s publicly traded peers.

(3) The risk-free interest rate is based on the bootstrap adjusted U.S.

Treasury Rate Yield Curve Rate as of the valuation date, term matched with expected life of the awards.

(4) The expected dividend yield is based on the Company’s historical experience and expectation of future dividend payouts and may be subject to changes in the future.

The weighted-average valuation date fair values for options assumed during the fiscal year ended December 31, 2022 was $ 4.58 .

The following table shows a summary of all option activity under the 2022 Equity Plan:

Number of Shares

(in millions) Weighted Average Exercise Price Per Share Weighted Average Remaining Contractual Term

(in years) Aggregate Intrinsic Value

(Dollars in millions)

Outstanding as of January 1, 2022 — $ —

Assumed 5.38 $ 8.42

Exercised ( 0.04 ) $ 3.34

Forfeited — —

Outstanding as of December 31, 2022 5.34 $ 8.45 4 $ 23

Exercisable as of December 31, 2022 4.11 $ 8.07 4 $ 20

Vested and expected to vest as of December 31, 2022 5.34 $ 8.45 4 $ 23

As of December 31, 2022, total compensation expense not yet recognized related to unvested options was approximately $ 4 million, which is expected to be recognized over a weighted average period of 3 years.

The total intrinsic value of stock options exercised during the fiscal year ended December 31, 2022, was insignificant.

RSUs and PRSUs

The following table shows a summary of all RSU activity under the 2022 Equity Plan:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Number of Shares

(in millions) Weighted Average Grant Date Fair Value

Unvested as of January 1, 2022 — $ —

Granted 1.43 $ 9.87

Forfeited — $ —

Unvested as of December 31, 2022 1.43 $ 9.87

As of December 31, 2022, total compensation expense not yet recognized related to unvested RSUs was approximately $ 11 million, which is expected to be recognized over a weighted average period of 2 years.

The following table shows a summary of all PRSU activity under the 2022 Equity Plan:

Number of Shares

(in millions) Weighted Average Grant Date Fair Value

Unvested as of January 1, 2022 — $ —

Granted 1.20 $ 7.20

Forfeited — $ —

Unvested as of December 31, 2022 1.20 $ 7.20

The Monte Carlo Model assumptions used in valuing market condition PRSUs during the period are set forth in the following table:

Year Ending December 31,

Grant Date Stock Price $ 9.87

Expected volatility 40.0 %

Risk-free interest rate 4.4 %

Expected dividend yield (4) — %

As of December 31, 2022, total compensation expense not yet recognized related to unvested PRSUs was approximately $ 7 million, which is expected to be recognized over a weighted average period of 2 years.

LEONARDO DRS, INC.

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Earnings Per Share

(Dollars in millions, except per share amounts;

shares in millions 2022 2021 2020

Net earnings attributable to common shareholders $ 405 $ 154 $ 85

Basic weighted average number of shares outstanding 215 210 210

Impact of dilutive share-based awards — — —

Diluted weighted average number of shares outstanding 215 210 210

Earnings per share attributable to common shareholders - basic $ 1.88 $ 0.73 $ 0.40

Earnings per share attributable to common shareholders - diluted $ 1.88 $ 0.73 $ 0.40

For the year ended December 31, 2022, potential dilutive common shares primarily consisted of employee stock options, RSUs and PRSUs, however, the amount of dilutive securities included in the diluted weighted average number of shares outstanding was immaterial.

For the years ended December 31, 2021 and 2020, the basic and diluted weighted average number of shares outstanding were equal as there were no dilutive securities.

The computation of diluted EPS excludes the effect of the potential exercise of stock awards when the average market price of the common stock is lower than the exercise price of the stock awards during the period because the effect would be anti-dilutive.

In addition, the computation of diluted EPS excludes stock awards whose issuance is contingent upon the satisfaction of certain performance vesting conditions.

During the year ended December 31, 2022, there were 3 million stock awards excluded from the computation.

During the years ended December 31, 2021, and 2020 there were no anti-dilutive securities.

Commitments and Contingencies

The Company’s commitments are primarily related to our lease and credit agreements.

See Note 11 :

Leases and Note 13 :

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It is possible, however, that the ultimate resolution of those matters could result in a material adverse effect on the Company's results of operations and/or cash flows from operating activities for a particular reporting period.

We establish reserves for specific legal matters

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

when we determine that the likelihood of an unfavorable outcome is probable and the loss is reasonably estimable.

We establish reserves for specific legal matters when we determine that the likelihood of an unfavorable outcome is probable, and the loss is reasonably estimable.

Some environmental laws, such as the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (also known as “CERCLA” or the “Superfund law”) and similar state statutes, can impose liability upon former owners or operators for the entire cost of investigating and remediating contaminated sites regardless of the lawfulness of the original activities that led to the contamination.

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.

Following the subsidiary’s response to the RFI, the NPS directed it and another alleged former operator to perform an Engineering Evaluation and Cost Analysis (“EE/CA”) of a portion of the site.

Following the subsidiary’s response to the RFI, the NPS directed it and another alleged former operator to perform an Engineering Evaluation and Cost Analysis

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(“EE/CA”) of a portion of the site.

The Company’s subsidiary made a good faith offer to conduct an alternative EE/CA work plan, but the NPS rejected this offer and opted to perform the EE/CA itself.

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Management believes that adequate provisions for such potential audits, investigations, claims and contract adjustments, if any, have been made in the Consolidated Financial Statements.

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Restructuring costs

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Costs incurred were related to employee termination and severance costs, as well as costs related to discontinuing product lines or closing down of locations.

Charges were recorded within other operating expenses, net, with the exception of costs incurred related to the write-down of inventory, which were recorded in cost of products.

Charges were recorded within other operating expenses, net, with the exception of costs incurred related

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to the write-down of inventory, which were recorded in cost of products.

See the table below for a breakout of restructuring costs incurred by segment and by nature of cost incurred:

10 unchanged sentences

Inventory — — —

Severance — — —

Facility abandonment — — 1

Inventory — — —

Total Corporate

$ 5 $ 12 $ 20

The following is a summary of changes in the restructuring provision balance during the years ended December 31, 2021 and 2022:

7 unchanged sentences

Balance at December 31, 2022 $ 4

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Product Warranties

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Product warranty expense is recognized based on the term of the product warranty, generally one year 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

identified and resolved.

The following is a summary of changes in the product warranty balances during the years ended December 31, 2021 and 2022:

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Related Party Transactions

Under our current proxy agreement, DRS remains largely independent from the Parent.

Additionally, the Company provides services related to the US interface for the Parent and its other affiliates.

Although we operate largely independently from Leonardo S.p.A.

and the proxy agreement contains limitations on services that we may provide to and receive from Leonardo S.p.A.

and its affiliates, we have historically provided, and expect to continue to provide, certain services to Leonardo S.p.A.

and its affiliates to support its U.S.

operations (aside from us).

These services include financial, tax, trade compliance, marketing and communications and legal.

The Company also has related-party sales with the Parent and its other affiliates that occur in the regular course of business.

The Company also has related-party sales and purchases with the Majority Stockholder and its other affiliates that occur in the regular course of business.

The Company also hold an approximately 10 % interest in Hoverfly Technologies, Inc.

(“Hoverfly”), which designs, develops and manufactures power-tethered unmanned aerial systems and related products.

The Company is also party to an exclusive manufacturing and teaming agreement with Hoverfly where we have related-party sales and purchases with Hoverfly.

Related-party sales for these transactions are included in revenues and were $ 67 million, $ 11 million and $ 26 million for the years ended December 31, 2022, 2021 and 2020, respectively.

The receivables related to these transactions with the Parent and its other affiliates of $ 2 million and $ 5 million, respectively, and payables of $ 1 million and $ 8 million, respectively, are included in accounts receivable and accounts payable in our Consolidated Balance Sheet as of December 31, 2021 and 2020.

The Company entered into a Surplus Treasury Agreement with US Holding (the “Surplus Agreement”) in December 2019.

The Surplus Agreement allows the Company to advance excess funds to US Holding when funds are available.

The advances bear interest at LIBOR plus between 5 and 20 basis points depending on the tenor of the advance.

As of December 31, 2021 and 2020, the Company had advanced $ 0 million and $ 115 million to US Holding, which is presented on the balance sheet as a related party note receivable.

During 2020, US Holding forgave $ 300 million of related party debt.

This was treated as a capital transaction and the amount was recorded in additional paid-in capital, as US Holding is a related party.

The Company has related-party purchases with the Majority Stockholder and its other affiliates that occur in the regular course of business.

Related-party purchases for these transactions are included in cost of revenues and were $ 5 million and $ 4 million for the years ended December 31, 2022 and 2021, respectively.

The receivables and payables related to transactions with the Majority Stockholder and its other affiliates of $ 14 million and $ 2 million, respectively, and payables of $ 1 million and $ 1 million, respectively, are included in accounts receivable and accounts payable in our Consolidated Balance Sheet as of December 31, 2022 and 2021.

In addition, there was a related-party balance in contract assets of $ 5 million at December 31, 2022.

Prior to acquiring RADA on November 28, 2022, the Company considered RADA a related party due to a common Board Member.

As of November 28, 2022, the Company purchased $ 17 million from RADA and had paid the invoices.

After November 28, 2022, all transactions with RADA are eliminated in consolidation.

The Company entered into Tax Allocation Agreement with US Holding, dated as of November 16, 2020.

Refer to Note 1:

Summary of Significant Accounting Policies for more information.

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Our Chief Executive Officer is our CODM and he uses a variety of measures to assess the performance of the Company as a whole, depending on the nature of the activity.

The Company’s operating and reportable segments consist of AST, NC&C and IMS.

All other operations, which consists primarily of DRS Corporate Headquarters and certain non-operating subsidiaries of the Company, are grouped in Corporate & Eliminations.

Beginning in the first quarter of 2022, the Company’s operating and reportable segments were revised into two reportable segments, ASC and IMS, to align our market strategy and capital allocation decision making with our operating structure.

Prior year information was revised to reflect the new segment structure.

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

operations, which consists primarily of DRS Corporate Headquarters and certain non-operating subsidiaries of the Company, are grouped in Corporate & Eliminations.

We primarily use Adjusted EBITDA to manage the Company and allocate resources.

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Summary of Significant Accounting Policies .

Transactions between segments generally are negotiated and accounted for under terms and conditions that are similar to other government and commercial contracts;

however, these intercompany transactions are eliminated in consolidation.

Intersegment sales are generally transferred at cost to the buying segment, and the sourcing segment does not recognize a profit.

Such intercompany operating income is eliminated in consolidation, so that the Company’s total revenues and operating earnings reflect only those transactions with external customers.

Total revenues and intersegment revenues by segment for the years ended December 31, 2022, 2021 and 2020 consists of the following:

(Dollars in millions) 2022 2021 2020

AST $ 970 $ 940 $ 781

NC&C 972 1,026 1,053

ASC $ 1,733 $ 1,940 $ 1,958

IMS 983 959 834

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(Dollars in millions) 2022 2021 2020

AST $ 14 $ 12 $ 12

ASC $ 21 $ 19 $ 13

Total intersegment revenue

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(Dollars in millions) 2022 2021 2020

AST $ 20 $ 19 $ 19

NC&C 13 11 10

ASC $ 36 $ 33 $ 30

Total depreciation

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(Dollars in millions) 2022 2021

AST $ 929 $ 864

ASC $ 2,167 $ 1,545

IMS 1,152 1,145

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$ 3,677 $ 3,069

(1) The 2020 amounts have been adjusted to reflect the correction of the allocation of certain assets within each segment.

LEONARDO DRS, INC.

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Adjusted EBITDA

AST $ 125 $ 123 $ 94

NC&C 95 90 75

ASC $ 199 $ 220 $ 213

IMS 119 90 55

Corporate & Eliminations — — —

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Deal related transaction costs ( 43 ) ( 5 ) ( 9 )

Acquisition and divestiture related expenses — — —

Foreign exchange ( 1 ) ( 1 ) —

COVID-19 response costs ( 6 ) ( 12 ) —

Non-service pension expense — ( 5 ) ( 3 )

Other one-time non-operational events — — —

Other non-operating expense ( 2 ) ( 7 ) ( 18 )

Gain on sale of dispositions 354 — —

Income tax provision ( 120 ) ( 46 ) ( 27 )

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The Company has evaluated subsequent events through March 28, 2023, which represents the date on which the Consolidated Financial Statements were issued.

On March 21, 2022, the Company entered into a definitive agreement to sell its Global Enterprise Solutions (GES) business to SES Government Solutions, Inc., a wholly-owned subsidiary of SES S.A., for $ 450 million in cash.

GES, which is part of the NC&C segment, provides commercial satellite communications to the U.S.

Government and delivers satellite communications and security solutions to customers worldwide.

has guaranteed the payment of the purchase price and performance of all other obligations of SES Government Solutions, Inc.

under the agreement.

The transaction is subject to customary closing conditions, including approvals under the Hart-Scott-Rodino Antitrust Improvements Act (HSR) and by The Committee on Foreign Investment in the United States (CFIUS) and The Federal Communications Commission (FCC).

There were no subsequent events that require disclosure.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data