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Item 8. Financial Statements and Supplementary Data

2024-02-28 compared with 2023-03-28 · 349 added, 392 removed, 1124 unchanged (40% of the section changed)

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Reports of Independent Registered Public Accounting Firms

Supplementary Dataindex to Consolidated Financial Statements

Consolidated Statements of Earnings

Consolidated Statements of Comprehensive Income

Consolidated Balance Sheets

Consolidated Statements of Cash Flows

Consolidated Statements of Shareholders’ Equity

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

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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.

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

(the Company) as of December 31, 2023 and 2022, the related consolidated statements of earnings, comprehensive income, shareholders' equity and cash flows for each of the two years in the period ended December 31, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with U.S.

generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 27, 2024 expressed an unqualified opinion thereon.

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.

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

We are a public accounting firm registered with the 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.

We conducted our audits 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.

Our audits 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

Our audits 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 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 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 financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of the 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.

Revenue recognition – Estimates to complete for certain long-term contracts

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.

Due to the long-term nature of many contracts, developing the estimated total cost at completion often requires judgment.

Factors that must be considered in estimating the cost of the work to be completed include the nature and complexity of the work to be performed, subcontractor performance and the risk and impact of delayed performance.

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.

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

Auditing the Company’s estimated costs at completion for certain 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.

How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of the controls related to the Company’s revenue recognition process, including controls over management’s review of the estimated costs at completion for the certain long-term contracts and related key assumptions.

We also tested certain internal controls that management executes to validate the data used in the estimated costs at completion was complete and accurate.

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

Our audit procedures also included, among others, evaluating the nature, timing and extent of the amounts of revenue and costs recorded to date, including any changes in estimated costs at completion from the prior period.

We also performed sensitivity analyses over the significant assumptions to evaluate the change in the profit margins resulting from changes in the assumptions.

/s/ Ernst & Young LLP

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Tysons, Virginia

March 28, 2023

February 27, 2024

Report of Independent Registered Public Accounting Firm

To the Shareholder and Board of Directors

To the Shareholders and Board of Directors

Leonardo DRS, Inc.:

Opinion on the Consolidated Financial Statements

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.

We have audited the accompanying consolidated statements of earnings, comprehensive income, shareholders’ equity, and cash flows of Leonardo DRS, Inc.

and subsidiaries (the Company) for the year 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 results of its operations and its cash flows for the year ended December 31, 2021, in conformity with U.S.

generally accepted accounting principles.

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These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

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

We conducted our audits in accordance with the standards of 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 consolidated financial statements are free of material misstatement, whether due to error or fraud.

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

Our audit included performing procedures to assess the risks of material misstatement of the consolidated 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 consolidated financial statements.

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

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

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

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

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

McLean, Virginia

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:

March 28, 2022, except for notes 1A, 1T, 3, 9, 17, and 19, as to which the date is August 2, 2022, and notes 1Q and 16, as to which the date is March 27, 2023

SUPPLEMENTARY DATAINDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Ernst & Young LLP , Tysons, Virginia , PCAOB ID No.

KPMG LLP , McLean, VA , PCAOB ID No.

LEONARDO DRS, INC.

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Amortization of intangibles ( 22 ) ( 10 ) ( 9 )

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

Other operating (expenses) income, net

( 11 ) 353 ( 9 )

Operating earnings

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Basic earnings per share $ 0.64 $ 1.88 $ 0.73

1.88 $ 0.73 $ 0.40

Diluted earnings per share

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$ 168 $ 405 $ 154

Other comprehensive income

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

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

Other comprehensive income, net of income tax

Other comprehensive income (loss):

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

Pension and other postretirement benefit plan adjustments, net of income taxes

Other comprehensive income, net of income taxes

Total comprehensive income

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Pension and other postretirement benefit plan liabilities 36 45

Deferred tax liabilities

Other noncurrent liabilities 129 98

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350,000,000 shares authorized;

260,234,033 shares issued and outstanding

262,525,390 and 260,234,033 shares issued and outstanding as of December 31, 2023 and 2022, respectively

Additional paid-in capital 5,175 5,147

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Net earnings $ 168 $ 405 $ 154

Adjustments to reconcile net earnings (loss) to net cash from operating activities:

Adjustments to reconcile net earnings to net cash provided by operating activities:

Depreciation and amortization 85 65 58

Deferred income taxes ( 52 ) ( 6 ) 31

Gain from divestitures ( 354 ) — —

Gain from sale of business

Share-based compensation expense 17 5 —

Changes in assets and liabilities:

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Proceeds from sales of businesses — 482 —

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

Net repayments received on related party note receivable — — 115

Cost method investment — — ( 2 )

Net cash provided by (used in) investing activities 436 39 ( 70 )

Net cash (used in) provided by investing activities ( 59 ) 436 39

Financing activities

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

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

20 ( 8 ) ( 18 )

Repayment of third party debt ( 727 ) — —

Borrowings of third party debt 715 223 —

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Dividend from investment — 3 —

Proceeds from stock issuance

Cash outlay to reacquire equity instruments

Other ( 4 ) ( 8 ) —

Net cash used in financing activities ( 403 ) ( 38 ) ( 80 )

Net cash provided by (used in) financing activities 15 ( 403 ) ( 38 )

Effect of exchange rate changes on cash and cash equivalents — — —

Net increase (decrease) in cash and cash equivalents 66 179 ( 24 )

Net increase in cash and cash equivalents 161 66 179

Cash and cash equivalents at beginning of year 306 240 61

Cash and cash equivalents at end of year $ 467 $ 306 $ 240

Supplemental disclosure of non-cash investing and financing activities

Year Ended December 31,

Forgiveness of related party debt $ — $ — $ 300

Additions of property plant and equipment and long-term debt for a build-to-suit lease $ — $ — $ 49

See accompanying Notes to Consolidated Financial Statements.

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Consolidated Statements of Shareholders’ Equity

(Dollars in millions, except per share amounts)

(Dollars in millions)

Common stock Additional paid- in capital Accumulated other comprehensive loss Accumulated deficit Total

Balance as of December 31, 2020 $ 2 $ 4,632 $ ( 70 ) $ ( 3,137 ) $ 1,427

Forgiveness of related party debt — 300 — — 300

Total comprehensive income (loss) — — 23 85 108

Balance as of December 31, 2020 2 4,632 ( 70 ) ( 3,137 ) 1,427

Forgiveness of related party debt — — — — —

Total comprehensive income

— — 12 154 166

Balance as of December 31, 2021

Forgiveness of related party debt — — — — —

2 4,632 ( 58 ) ( 2,983 ) 1,593

Total comprehensive income — — 9 405 414

Stock Compensation Expense — 5 — — 5

Share-based compensation expense

Issuance of stock in business combination 1 510 — — 511

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Balance as of December 31, 2022

3 5,147 ( 49 ) ( 2,974 ) 2,127

Total comprehensive income — — 2 168 170

Share-based compensation activity

Balance as of December 31, 2023

$ 3 $ 5,175 $ ( 47 ) $ ( 2,806 ) $ 2,325

See accompanying Notes to Consolidated Financial Statements.

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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 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”).

The Company’s largest shareholder is Leonardo S.p.A (hereinafter, “Leonardo S.p.A.”), 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.

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Department of Defense (“DoD”) is our largest customer and accounts for approximately 80 % and 84 % of our total revenues as an end-user for the years ended December 31, 2023 and 2022, 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.

Specific international and commercial market opportunities exist within these segments and comprise approximately 20 % and 16 % of our total revenues for the years ended December 31, 2023 and 2022, respectively.

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”)

Advanced Sensing and Computing

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 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 tactical radars, dismounted soldier sensing and space sensing.

Across our offerings, 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, including in space-based applications for earth surveillance and missile tracking.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Integrated Mission Systems (“IMS”)

Integrated Mission Systems

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

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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.

DRS is an integrator of systems in ground vehicles for short-range air defense, counter-unmanned aerial systems (“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.

Our force protection systems, including solutions for 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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All intercompany transactions and balances have been eliminated in consolidation.

Certain prior year amounts have been reclassified to conform to current year presentation.

Use of estimates

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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 acquired intangibles, accounting for business combinations, valuation of stock award grants, pensions

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 and intangible assets, valuation of acquired intangibles, accounting for business combinations, valuation of pensions 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.

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.

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.

Cost to Fulfill a Contract

Costs 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.

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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.

Capitalized costs to obtain or fulfill a contract were $ 52 million and $ 34 million at December 31, 2023 and 2022, respectively.

Research and Development Expenses

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Customer-funded R&D costs are charged directly to the related customer contract.

Substantially all R&D costs are charged to cost of revenues as incurred.

Company-funded R&D costs charged to cost of revenues totaled $ 58 million, $ 48 million and $ 41 million in 2022, 2021 and 2020, respectively.

R&D costs are expensed as incurred.

Company-funded R&D charged to general and administrative expenses totaled $ 82 million, $ 58 million, and $ 48 million in 2023, 2022 and 2021, respectively.

Foreign Currency

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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

dollars using weighted 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

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.

translation adjustments are included in the accompanying Consolidated Balance Sheets as a component of other comprehensive income.

Cash and Cash Equivalents

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Accounts Receivable

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

Accounts receivable consist of amounts currently due from customers.

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.

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Leasehold improvements are amortized over the shorter of the estimated useful life of the improvements or the remaining life of the lease.

When assets are retired or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the Consolidated Balance Sheet, and the net gain or loss is included in the determination of net earnings.

When assets are retired or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the Consolidated Balance Sheets, and the net gain or loss is included in the determination of net earnings.

Maintenance and repairs are charged to operations as incurred and renewals and improvements are capitalized.

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Two or more components of an operating segment may be aggregated and deemed a single reporting unit if the components have similar economic characteristics.

Based upon the aggregation criteria the Company concluded it had seven reporting units at both December 31, 2022 and 2021.

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

Based upon the aggregation criteria the Company concluded it had six and seven reporting units at December 31, 2023 and 2022, respectively.

Historically, we assessed the recoverability of our goodwill as the last day of our fourth quarter.

In 2023, we changed the date of our annual goodwill impairment assessment to the first day of our fourth quarter to better align with our strategic business planning process and allow for operational expediency.

The Company believes this change does not represent a material change to a method of applying an accounting principle.

This voluntary change in accounting principle, applied prospectively, is preferable as it aligns the annual goodwill impairment test date more closely with our internal budgeting process and did not delay, accelerate or avoid an impairment of our goodwill.

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 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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If, based on the quantitative fair value test, the Company concludes that the carrying value of the reporting unit exceeds its fair value, the Company will recognize a goodwill impairment loss in an amount equal to that excess.

The Company completed impairment tests as of December 31, 2022, 2021 and 2020 and no adjustment to the carrying value of goodwill was deemed to be necessary.

The Company completed impairment tests as of October 1, 2023 and December 31, 2022 and 2021 and no adjustment to the carrying value of goodwill was deemed to be necessary.

Goodwill for additional information regarding goodwill.

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Intangible Assets for additional information regarding long-lived assets and intangible assets.

Derivative Financial Instruments

The Company does not use derivative financial instruments for trading purposes.

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

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.

Pension and Other Postretirement Benefits

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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

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.

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.

See Note 14 :

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

We and US Holding have entered into a Tax Allocation Agreement (“Tax Allocation Agreement”), dated as of November 16, 2020, with members of an affiliated group, as defined in Section 1504(a) of the U.S.

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Beginning October 4, 2022, DRS began filing a consolidated return with only DRS and subsidiaries for federal and state purposes.

Prior to October 4, 2022, DRS was included in the U.S.

federal and state tax returns of US Holding.

DRS and US Holding had entered into a Tax Allocation Agreement (“Tax Allocation Agreement”), dated as of November 16, 2020, with members of an affiliated group, as defined in Section 1504(a) of the U.S.

Internal Revenue Code of 1986, as amended (the “Tax Code”), members of one or more consolidated, combined, unitary or similar state tax groups and additional parties who are part of an “expanded affiliated group” for certain tax purposes.

The agreement provides for the method of computing and allocating the consolidated U.S.

The agreement provided for the method of computing and allocating the consolidated U.S.

federal tax liability of the affiliated group among its members and of allocating any state group tax liabilities among the state members for the taxable year ending December 31, 2008 and each subsequent year in which the parties are members of a group (whether federal or state).

The agreement also provides for reimbursement of US Holding and/or DRS for payment of such tax liabilities, for compensation of any member for use of its “net operating loss” or “tax credits” in arriving at such tax liabilities and the allocation and payment of any refund arising from a carryback of net operating losses or tax credits from subsequent taxable years.

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.

The agreement also provided for reimbursement of US Holding and/or DRS for payment of such tax liabilities, for compensation of any member for use of its “net operating loss” or “tax credits” in arriving at such tax liabilities and the allocation and payment of any refund arising from a carryback of net operating losses or tax credits from subsequent taxable years.

Under the agreement, the parties 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.

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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.

Those positions are evaluated to determine whether they will more likely than not be sustained upon examination by the relevant taxing authorities.

Liabilities for unrecognized tax benefits are measured based on the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.

Liabilities for unrecognized tax benefits are measured based on the largest amount of benefit that is greater than 50%

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

likely of being realized upon ultimate settlement.

These unrecognized tax benefits are recorded as a component of income tax expense.

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 implementation of a modified territorial tax system by the Tax Cuts and Jobs Act of 2017 (“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.

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Basic earnings per share (“EPS”) is computed by dividing net earnings by the weighted average number of shares of common stock outstanding during each period.

The computation of diluted EPS includes the dilutive effect of outstanding stock-based compensation awards, only in periods in which such effect would have been dilutive for the period.

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

The computation of diluted EPS includes the dilutive effect of outstanding share-based compensation awards, only in periods in which such effect would have been dilutive for the period.

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

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.

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

In addition, 49,742,187 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.

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Certain plan investments are measured at fair value using the net asset value (“NAV”) per share (or its equivalent) practical expedient and are therefore not categorized as Level 1, 2, or 3.

NAV is defined as the total value of the fund divided by the number of the fund’s shares

NAV is defined as the total value of the fund divided by the number of the fund’s shares outstanding.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

The fair value of the Company’s outstanding debt obligations is calculated using Level 2 inputs, based on interest rates available for debt with terms and maturities similar to the Company’s existing debt arrangements.

Debt for further information regarding debt.

Financial Instruments

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 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.

Financial instruments are reported in the Consolidated Balance Sheets at carrying value as of December 31, 2023 and 2022.

Acquisitions, Investments, Variable Interest Entities and Divestitures

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(“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:

At the time of the transaction, RADA shareholders retained approximately 19 % ownership in the combined Company with Leonardo DRS’s parent company, Leonardo S.p.A., (MIL:

LDO), owning the remaining 81 %.

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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.

The purchase closed on July 28, 2021, for a purchase price of $ 11 million with an additional $ 5 million payable upon the achievement of certain financial and operational targets.

AES designs, develops and manufactures high-performance, stabilized, multi-sensor gimbal systems for the growing market of Group 1, 2 and 3 unmanned aerial systems (“UAS”) serving several branches of the DoD.

The Company is focused on gimbal payload opportunities in strategic U.S.

government programs including those intended to counter current and next-generation anti-access and area-denial systems.

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 ASC segment.

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.

Business Acquisition for additional information regarding the transaction.

Significant influence typically exists if we have a 20% to 50% ownership interest in the investee.

Under this method of accounting, our share of the net earnings or losses of the investee is included in operating profit in other income, net on our Consolidated Statements of Earnings (Loss) since the activities of the investee are closely aligned with the operations of the business segment holding the investment.

Under this method of accounting, our share of the net earnings or losses of the investee is included in operating profit in other income, net on our Consolidated Statements of Earnings since the activities of the investee are closely aligned with the operations of the business segment holding the investment.

We evaluate our equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may be impaired.

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.

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

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

LEONARDO DRS, INC.

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The Company’s cost method investment consists of an investment in a private company in which we do not have the ability to exercise significant influence over its operating and financial activities.

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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.

The transaction netted an aggregate pretax gain net of transaction costs of $ 309 million ($ 239 million after tax) of which $ 323 million was included in other operating income (expenses), net partially reduced by aggregate transaction costs of $ 14 million included in general and administrative costs and tax expenses of $ 70 million.

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

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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”).

In February 2022, the Company’s Board of Directors approved the strategic initiative to divest of the Company’s interest in Advanced Acoustic Concepts, LLC (“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 transaction netted an aggregate pretax gain of $ 31 million ($ 22 million net of taxes).

The aggregate gain of $ 31 million is included in other operating income (expenses), net offset by tax expense of $ 9 million.

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

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The dividend was issued on August 5, 2022.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Share-based Compensation

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

New Accounting Pronouncements

Recently Adopted Accounting Pronouncements

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Government Assistance

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:

In 2023, we received Enterprise Zone Tax Credits totaling approximately $ 3 million related to our investment in operations in Wisconsin which were recorded in other income.

New Accounting Pronouncements

Recently Adopted Accounting Pronouncements

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.

In September 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-04, Liabilities – Supplier Finance Programs (Subtopic 405-50):

Disclosure of Supplier Finance Program Obligations , which requires that a buyer that uses supplier finance programs to disclose the key terms, 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 rollforward of the obligations.

The guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the rollforward requirement, which is effective for fiscal years beginning after December 15, 2023.

We adopted ASU 2022-04 effective the first day of 2023.

The Company has a supplier finance program with a financial institution under which participating suppliers may, at their sole discretion, elect to receive payment for one or more of our payment obligations early at a discounted price from the financial institution.

Under this program, the financial institution agrees to terms with our suppliers, including amounts that are eligible for early payment, the timing of such payments and the discounts.

The financial institution then pays the supplier based on the payment terms agreed to.

The Company’s obligations to its suppliers, including amounts due and scheduled payment dates, are not affected by a participating supplier’s decision to participate in the program.

The amount of obligations outstanding under the program, which are included within accounts payable in the Consolidated Balance Sheets, were not significant as of December 31, 2023.

Accounting Guidance Issued but Not Yet Adopted as of December 31, 2023

Improvements to Reportable Segment Disclosures

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures , which requires enhanced disclosures about significant segment expenses.

The new standard is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024, on a retrospective basis.

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

Business Acquisitions and Dispositions

Improvements to Income Tax Disclosures

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740):

Improvements to Income Tax Disclosures , which requires additional disclosures regarding rate reconciliation, income taxes paid, and other income tax disclosures.

The new standard is effective for fiscal years beginning after December 15, 2024, on a prospective basis.

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

Business Acquisition

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

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

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

The Company acquired

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

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 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.

These costs were associated with advisory, legal, and consulting services and are presented in general and administrative expense in the Consolidated Statements of Earnings.

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

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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) :

Aggregate purchase consideration $ 511

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Purchase price allocation - The 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

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Goodwill $ 286

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

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

liabilities is recorded as goodwill.

During 2023, the Company completed the purchase price allocation for this transaction and adjusted the preliminary purchase price allocation to increase other current liabilities and goodwill by $ 2 million.

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

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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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Refer to the revenue disaggregation disclosures that follow.

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

For fixed-price contracts, customers agree to pay a fixed amount, negotiated in advanced for a specified scope of work.

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

Revenues for the majority of our contracts are measured using the the over time, percentage of completion cost-to-cost method of accounting to calculate percentage of completion.

Revenues for the majority of our contracts are measured using the over time, percentage of completion cost-to-cost method of accounting to calculate percentage of completion.

We believe this is an appropriate measure of progress toward satisfaction of performance obligations as this measure most accurately depicts the progress of our work and transfer of control to our customers.

Due to the long-term nature of many of our contracts, developing the estimated total cost at completion and total transaction price often requires judgment.

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

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

Due to the long-term nature of many of our contracts, developing the estimated total cost at completion often requires judgment.

After establishing the estimated total cost at completion, we follow a standard Estimate at Completion (“EAC”) process in which we review the progress and performance on our ongoing contracts on a routine basis.

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

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Total % of Revenue 1 % 1 % 1 %

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.

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

In 2023 the adjustments consist largely of changes in the designs required to achieve contractual specifications for fixed priced development programs and increased material cost within our IMS and ASC segments that resulted in a change in the programs’ estimate and related profitability.

The reductions to revenue for the year ended December 31, 2023, were related to certain masted surveillance and surface ship power and propulsion programs within our IMS segment as well as soldier sensing programs within our ASC segment.

These impacts were partially offset by improved contractual performance realized on our tactical computing programs during the period.

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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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Contract Assets and Liabilities

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheet.

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

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

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

Year Ended December 31,

Contract assets and contract liabilities as of the dates presented were:

(Dollars in millions) 2023 2022

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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.

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table summarizes the value of our backlog at December 31, 2023 and 2022, incorporating both funded and unfunded components:

Year Ended December 31,

(Dollars in millions) 2023 2022

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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)

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

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

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IMS revenue is primarily derived from U.S.

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

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

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

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.

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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.

Accounts Receivable

Accounts receivable represent amounts billed and currently due from customers.

Payment is typically received from our customers either at periodic intervals (e.g., biweekly, or monthly) or upon achievement of contractual milestones.

Accounts receivable consist of the following:

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

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 Company is party to factoring facilities with various financial institutions (the “purchasers”) with an aggregate capacity of $ 275 million.

Pursuant to the servicing agreements, collections on sold receivables that had not yet been remitted to the financial institutions are included within short-term borrowings and current portion of long-term debt in the Consolidated Balance Sheets.

Debt for further information.

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,

Receivables are derecognized in their entirety when sold, 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 Consolidated Statements of Cash Flows.

LEONARDO DRS, INC.

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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.

During the years ended December 31, 2023, 2022 and 2021, the Company incurred purchase discount fees of $ 5 million, $ 4 million, and $ 2 million, respectively, which are presented in other general and administrative expenditures, net on the Consolidated Statements of Earnings.

The table below summarizes the activity under the factoring facilities:

(Dollars in millions) 2023 2022

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Sales of receivables 303 373

Cash returned to purchaser ( 345 ) ( 693 )

Cash returned to purchasers ( 354 ) ( 345 )

Outstanding balance sold to purchasers (1)

Cash collected, not remitted to purchaser (2)

Cash collected, not remitted to purchasers (2)

( 35 ) ( 10 )

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________________

(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.

(1) For 2023, the Company recorded a net decrease to cash flows from operating activities of $ 51 million from sold receivables and for 2022 a net increase to cash flows from operating activities of $ 28 million.

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

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Total property, plant and equipment, net

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Depreciation expense related to property, plant and equipment was $ 63 million, $ 55 million, and $ 49 million for the years ended December 31, 2023, 2022 and 2021, respectively.

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Leases for additional information.

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.

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

As of December 31, 2023 and 2022, 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 land, building, and improvements in the above table.

Debt for additional information.

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Commitments and Contingencies for more information regarding the warranty provision.

(2) Consists primarily of workers’ compensation liabilities.

(2) Consists primarily of warranty reserves and provision for acquired onerous contract (noncurrent portions).

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

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Acquisitions 282 — 282

Dispositions ( 117 ) — ( 117 )

Balance at December 31, 2022

817 419 1,236

Acquisitions 282 — 282

Dispositions ( 117 ) $ — ( 117 )

Purchase price adjustments 2 — 2

Balance at December 31, 2023

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(1) Goodwill is reported net of $ 2,362 million and $ 606 million of accumulated impairments as of January 2022 for the ASC and IMS segments, respectively.

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Intangible Assets

Other intangible assets mainly refer to the fair value of existing customer contractual relationships attributable to the acquired business and patents which are being amortized over their respective lives.

The fair value of intangible assets typically is determined, as of the date of acquisition, based on estimates and judgments regarding expectations for the estimated future after-tax earnings and cash flows (including cash flows for working capital) arising from backlog and follow-on sales to the customer over their estimated lives, including the probability of expected future contract renewals and sales, less a contributory assets charge, all of which is discounted to present value.

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

over their estimated lives, including the probability of expected future contract renewals and sales, less a contributory assets charge, all of which is discounted to present value.

The following disclosure presents certain information regarding the Company's intangible assets as of December 31, 2023 and 2022.

6 unchanged sentences

$ 1,097 $ ( 946 ) $ 151 $ 1,096 $ ( 924 ) $ 172

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.

Amortization expense related to intangible assets was $ 22 million, $ 10 million, and $ 9 million for the years ended December 31, 2023, 2022 and 2021, respectively.

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

2 unchanged sentences

The estimated annual amortization expense related to intangible assets for the subsequent five years is as follows:

(in millions)

(Dollars in millions)

Year Ending December 31,

4 unchanged sentences

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.

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.

Right-of-use (“ROU”) assets and lease liabilities are recorded on the Consolidated Balance Sheets 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.

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.

The remaining lease cost is amortized over the

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.

The remaining lease cost is amortized over the remaining life of the lease on a straight-line basis.

remaining life of the lease on a straight-line basis.

We evaluate ROU assets for impairment consistent with the treatment of other long-lived assets.

3 unchanged sentences

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.

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

dollars on the general ledger.

1 unchanged sentence

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

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

We have analyzed the transaction and determined the criteria to recognize a sale has been met and we have derecognized the related assets.

The arrangement does not contain a repurchase option or other substantive obligations related to the property.

Further, we have determined that the underlying lease meets the criteria to be classified as an operating lease.

As a result, we have recognized an immaterial loss related to the transaction.

As of December 31, 2023, the Company has not entered into any significant leases that have not yet commenced.

14 unchanged sentences

________________

(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.

Operating lease cost includes short-term leases of approximately $ 3 million, $ 2 million, and $ 3 million and an insignificant amount of variable lease cost for 2023, 2022 and 2021, respectively.

(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 in the Consolidated Statements of Earnings.

LEONARDO DRS, INC.

12 unchanged sentences

________________

(1) Operating lease assets are included within other noncurrent assets and operating lease liabilities are included within other current liabilities (current portion) and other noncurrent liabilities (noncurrent portion) in the Company’s Consolidated Balance Sheet.

(2) Finance lease assets are included within property, plant and equipment, net and finance lease liabilities are included within short-term borrowings and current portion of long-term debt (current portion) and long-term debt (noncurrent portion) in the Company’s Consolidated Balance Sheet.

Supplemental Cash Flow Information

21 unchanged sentences

As of December 31, 2023, future minimum rental payments on leases with initial non-cancellable lease terms in excess of one year were due as follows:

(Dollars in millions) Operating Leases Finance Leases

(Dollars in millions)

Year Ending December 31,

Operating Leases Finance Leases

2024 $ 25 $ 17

5 unchanged sentences

Long-term lease obligations

Earnings (loss) before taxes consists of the following:

Earnings before taxes consists of the following:

Year Ended December 31,

6 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Income tax provision (benefit) consists of the following:

Income tax provision consists of the following:

Year Ended December 31,

1 unchanged sentence

Federal $ 61 $ 93 $ ( 1 )

State 14 24 —

Foreign 1 — 1

Total current

Federal ( 44 ) 5 43

1 unchanged sentence

Foreign ( 1 ) 4 ( 2 )

Total deferred

$ 24 $ 120 $ 46

44 unchanged sentences

As of December 31, 2023, and 2022 the Company had U.S.

federal net operating loss carryforwards of $ 31 million and $ 28 million, respectively, which we anticipate we will be able to apply prior to their expiration which commences in 2025.

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.

federal net operating loss carryforwards of $ 22 million and $ 25 million, respectively, which we anticipate we will be able to utilize prior to their expiration which commences in 2032.

The annual utilization of approximately $ 3 million of certain of our Federal net operating losses is subject to limitations under section 382 of the Internal Revenue Code.

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.

In 2023, we recorded an additional valuation allowance in Canada of $ 2 million.

As of December 31, 2023 and 2022, we had apportioned state net operating loss carryforwards of $ 145 million and $ 227 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 $ 2 million.

Cash paid for income taxes, net of refunds was $ 45 million, $ 89 million, and $ 16 million in 2023, 2022 and 2021, respectively.

LEONARDO DRS, INC.

5 unchanged sentences

all of which will impact the effective tax rate when recognized.

Approximately $ 2 million, $ 15 million and $ 22 million as of December 31, 2022, 2021 and 2020, respectively, have been recorded within (and as an offset to) deferred tax assets.

Approximately $ 2 million, $ 2 million and $ 15 million as of December 31, 2023, 2022 and 2021, respectively, was recorded within (and as an offset to) deferred tax assets.

In addition, the Company does not believe there are any tax positions for which it is reasonably possible that the unrecognized tax benefits will vary significantly over the next 12 months.

17 unchanged sentences

As of December 31, 2023, the Company has accumulated undistributed earnings generated by our foreign subsidiaries and most have been taxed in the U.S.

as a result of the Tax Cuts and Jobs Act of 2017 (the “TCJA”).

as a result of the TCJA.

The TCJA allows for a dividend received deduction for repatriation of foreign earnings.

2 unchanged sentences

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:

1 unchanged sentence

Term Loan A $ 214 $ 225

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

5.0 % Daylight term loan due October 15, 2024 (1)

Outstanding revolver — —

Finance lease and other 158 161

5 unchanged sentences

Total long-term debt

LEONARDO DRS, INC.

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 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.

1 unchanged sentence

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.

The outstanding balance of the 2022 Term Loan A at December 31, 2023 was $ 214 million.

The fair value of Term Loan A at December 31, 2023 was approximately $ 211 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.

14 unchanged sentences

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

Upon repayment the 2009 Credit Agreement was terminated.

Upon repayment the Daylight Term Loan was terminated.

Credit Facilities

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, 2023 the 2022 Revolving

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 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, 2023.

The weighted average interest rate on the 2022 Revolving Credit Facility as of December 31, 2023 and 2022 was 6.41 % and 4.58 %, respectively.

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

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

1 unchanged sentence

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, 2023 and 2022, respectively (the “Financial Institution Credit Facilities”).

The Financial Institution Credit Facilities are guaranteed by Leonardo S.p.A.

The primary purpose of the Financial Institution Credit Facilities is to support standby letter of credit issuances on contracts with customers and also includes a revolving facility with a maximum borrowing limit of $ 15 million, which bears interest at LIBOR plus 0.5 %.

At December 31, 2022 and 2021, there was no balance outstanding on the revolving facility.

The Financial Institution Credit Facilities were guaranteed by Leonardo S.p.A, through approximately January 2023.

As of December 31, 2023, none of the Financial Institution Credit facilities are guaranteed by Leonardo S.p.A.

The sole purpose of the Financial Institution Credit Facilities is to support standby letter of credit issuances on contracts with customers.

The Company had letters of credit outstanding of approximately $ 41 million and $ 36 million as of December 31, 2023 and 2022, 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

2 unchanged sentences

Short-term Borrowings

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.

Accounts Receivable and Note 5:

As of December 31, 2023 and 2022, the Company recognized $ 35 million and $ 10 million, respectively, collected on behalf of the purchasers of our trade receivables pursuant to our factoring arrangements as short-term borrowings and current portion of long-term debt in the Consolidated Balance Sheets, which approximates its fair value.

Sale of Receivables for more information.

2 unchanged sentences

Our effective interest rate was approximately 6.65 %, 5.57 % and 4.05 % for the years ended December 31, 2023, 2022 and 2021, respectively.

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

The interest expense attributable to the amortization of debt issuance costs in 2023 and 2022 was not material and not applicable for 2021.

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Maturities of debt as of December 31, 2023 are as follows:

(Dollars in millions)

Year Ending December 31,

Year Ending December 31, Total

Thereafter 113

3 unchanged sentences

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

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.

8 unchanged sentences

The Company's contractual arrangements with the U.S.

government provide for the recovery of contributions to a Voluntary Employees' Beneficiary Association (“VEBA”) trust and, for non-funded plans, recovery of claims on a pay-as-you-go basis, subject to the Tax Code and regulations thereunder, with the retiree generally paying a portion of the costs through contributions, deductibles and coinsurance provisions.

government provide for the recovery of contributions to a Voluntary Employees' Beneficiary Association trust and, for non-funded plans, recovery of claims on a pay-as-you-go basis, subject to the Tax Code and regulations thereunder, with the retiree generally paying a portion of the costs through contributions, deductibles and coinsurance provisions.

The Company also maintains certain non-contributory and unfunded supplemental retirement plans.

7 unchanged sentences

Benefit obligation at beginning of year $ 162 $ 215 $ 1 $ 2 $ 17 $ 22

Service cost — — — — — —

Interest cost 8 6 — — 1 1

Plan participants' contributions — — — — — —

Actuarial (gain) loss ( 45 ) ( 3 ) — — ( 5 ) ( 1 )

Actuarial loss (gain) 6 ( 45 ) — — — ( 5 )

Benefits paid ( 12 ) ( 9 ) — ( 1 ) ( 1 ) ( 1 )

(Gain) loss due to settlement 1 ( 5 ) — — — —

Plan amendments — — — — — —

Exchange rate differences and other — — — — — —

Benefit obligation at end of year $ 165 $ 162 $ 1 $ 1 $ 17 $ 17

2 unchanged sentences

Actual return on plan assets 12 ( 33 ) — — 1 ( 1 )

Plan participants' contributions — — — — — —

Employer contributions 10 3 — — 1 1

1 unchanged sentence

(Loss) gain due to settlement — ( 3 ) — — — —

Exchange rate differences and other — — — — — —

Fair value of plan assets at end of year 134 124 1 1 12 11

Contributions between measurement date and year end — — — — — —

Funded status of the plans at year end $ ( 31 ) $ ( 38 ) $ — $ — $ ( 5 ) $ ( 6 )

The amounts recognized in the Consolidated Balance Sheet, as of December 31, 2022 and 2021 consist of:

The amounts recognized in the Consolidated Balance Sheets as of December 31, 2023 and 2022 consist of:

Defined Benefit Pension Plans Postretirement Benefit Plans Supplemental Retirement Plans

1 unchanged sentence

Noncurrent assets $ — $ — $ — $ 1 $ — $ —

Current liabilities — — — — — —

Noncurrent liabilities ( 31 ) ( 38 ) — ( 1 ) ( 5 ) ( 6 )

1 unchanged sentence

$ ( 31 ) $ ( 38 ) $ — $ — $ ( 5 ) $ ( 6 )

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Amounts recognized in accumulated other comprehensive income (before taxes) at December 31, 2023 and 2022 consist of:

1 unchanged sentence

(Dollars in millions) 2023 2022 2023 2022 2023 2022

Prior service cost $ — $ — $ — $ — $ — $ —

Net actuarial loss (gain) $ 31 $ 31 $ ( 1 ) $ ( 1 ) $ 2 $ 2

Total amount recognized in accumulated other comprehensive losses (earnings) $ 31 $ 31 $ ( 1 ) $ ( 1 ) $ 2 $ 2

$ 31 $ 40 $ ( 1 ) $ ( 1 ) $ 2 $ 6

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The aggregate accumulated benefit obligation (“ABO”) for the Company's defined benefit pension plans combined was $ 182 million and $ 179 million at December 31, 2023 and 2022, respectively.

15 unchanged sentences

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

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

(Dollars in millions) 2023 2022 2021 2023 2022 2021 2023 2022 2021

Service cost $ — $ — $ — $ — $ — $ — $ — $ — $ —

Interest cost $ 8 $ 6 $ 5 $ — $ — $ — $ 1 $ 1 $ 1

1 unchanged sentence

Amortization of net actuarial loss (gain) 1 1 2 — — ( 1 ) — — —

Amortization of prior service cost $ — $ — $ — $ — $ — $ — $ — $ — $ —

Settlement expense (income) — 1 — — — — — — —

1 unchanged sentence

$ 2 $ 1 $ — $ — $ — $ ( 1 ) $ 1 $ 1 $ 1

The following table summarizes the other changes in plan assets and benefit obligations recognized in other comprehensive earnings for the Company's pension, postretirement and supplemental retirement benefit plans for the years ended December 31, 2022 and 2021 and 2020:

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Defined Benefit Pension Plans Postretirement Benefit Plans Supplemental Retirement Plans

(Dollars in millions) 2023 2022 2021 2023 2022 2021 2023 2022 2021

Net actuarial (gain) loss $ ( 8 ) $ ( 11 ) $ ( 21 ) $ — $ — $ ( 1 ) $ ( 4 ) $ ( 1 ) $ ( 1 )

Prior service cost — — — — — — — — —

Net actuarial loss (gain) $ 1 $ ( 8 ) $ ( 11 ) $ — $ — $ — $ — $ ( 4 ) $ ( 1 )

Amortization of net actuarial (loss) gain from prior years ( 1 ) ( 2 ) ( 2 ) — — 1 — — —

Amortization of prior service cost — — — — — — — — —

— — — — — — — — —

Total recognized in other comprehensive income

$ — $ ( 10 ) $ ( 13 ) $ — $ — $ 1 $ — $ ( 4 ) $ ( 1 )

________________

(1) Includes foreign exchange translation.

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table summarizes the weighted average actuarial assumptions used to determine our net periodic cost of the plans for the years ended December 31, 2023, 2022 and 2021:

10 unchanged sentences

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.

Pension related expenses are reflected in cost of revenues and general and administrative expenses on the Consolidated Statements 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.

1 unchanged sentence

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.

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

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.

1 unchanged sentence

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.

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

As the funding percentage increases the glide path reduces the amount of the assets invested in return seeking assets.

The table below represents all of the Company's funded pension plans' and postretirement benefit plans' weighted average asset allocation at December 31, 2023 and 2022 by asset category:

12 unchanged sentences

Other, primarily cash and cash equivalents and hedge funds 0 % - 10 %

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

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

do not have readily determined fair values.

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.

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

5 unchanged sentences

Equity securities 5 — — 5

Debt securities — — — —

Total $ 16 $ — $ — $ 16

9 unchanged sentences

Equity securities 5 — — 5

Debt securities — — — —

Total $ 15 $ — $ — $ 15

5 unchanged sentences

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

(Dollars in millions) Defined Benefit Pension Plans Postretirement Benefit Plans Supplemental Retirement Plans

(Dollars in millions)

Year Ending December 31,

Defined Benefit Pension Plans Postretirement Benefit Plans Supplemental Retirement Plans

2024 $ 13 $ — $ 1

5 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Equity Method Investments

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:

% of Ownership Carrying Value

(Dollars in millions) 2022 2021 2022 2021

Advanced Acoustics Concepts, LLC — % 51 % $ — $ 27

Share-based Compensation Plans

15 unchanged sentences

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

During 2023 the Company granted equity awards in the form of RSUs and PRSUs under the LTI program.

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:

rTSR, Revenue Growth, and ROIC.

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

2 unchanged sentences

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) :

Share-based compensation during the years ended December 31, 2023 and 2022, was recorded in the Consolidated Statements of Earnings within general and administrative expenses as shown in the following table:

Year Ended December 31,

(Dollars in millions) 2023 2022

Total share-based compensation expense $ 17 $ 5

Tax benefit recognized from share-based compensation 2 1

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

Stock Options

There was no share-based compensation expense recognized for the year ended December 31, 2021.

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:

Stock Options

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

Year Ended December 31,

9 unchanged sentences

(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:

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

There were no stock options granted or assumed during the year ended December 31, 2023.

The following table shows a summary of all option activity under the 2022 Equity Plan for the year ended December 31, 2023:

Number of Shares

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

(in years) Aggregate Intrinsic Value

(in millions)

Weighted Average Exercise Price Per Share Weighted Average Remaining Contractual Term

Aggregate Intrinsic Value

(Dollars in millions)

Outstanding as of January 1, 2023 5.34 $ 8.45 4 $ 23

Assumed 5.38 $ 8.42

Exercised ( 2.04 ) 5.66

4 unchanged sentences

As of December 31, 2023, total compensation expense not yet recognized related to unvested options was approximately $ 2 million, which is expected to be recognized over a weighted average period of 2 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:

The total intrinsic value of stock options exercised during the year ended December 31, 2023, was $ 21 million.

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

RSUs and PRSUs

The following table shows a summary of all RSU activity under the 2022 Equity Plan for the year ended December 31, 2023:

Number of Shares

(in millions) Weighted Average Grant Date Fair Value

(in millions)

Weighted Average Grant Date Fair Value

Unvested as of January 1, 2023 1.43 $ 9.87

Granted 0.86 14.87

Vested ( 0.36 ) 9.87

Forfeited ( 0.03 ) 11.67

1 unchanged sentence

As of December 31, 2023, total compensation expense not yet recognized related to unvested RSUs was approximately $ 14 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:

The fair value of RSUs that vested in 2023 was $ 5 million.

The following table shows a summary of all PRSU activity under the 2022 Equity Plan for the year ended December 31, 2023:

Number of Shares

(in millions) Weighted Average Grant Date Fair Value

(in millions)

Weighted Average Grant Date Fair Value

Unvested as of January 1, 2023 1.20 $ 7.20

2 unchanged sentences

Unvested as of December 31, 2023 1.75 $ 10.30

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,

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

Year Ended December 31,

Grant date stock price $ 14.74 $ 9.87

6 unchanged sentences

Earnings Per Share

Year Ended December 31,

(Dollars in millions, except per share amounts;

shares in millions)

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

2023 2022 2021

$ 168 $ 405 $ 154

Basic weighted average number of shares outstanding 261 215 210

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Earnings per share attributable to common shareholders - diluted $ 0.64 $ 1.88 $ 0.73

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.

For the years ended December 31, 2023 and 2022, potential dilutive common shares primarily consisted of employee stock options, RSUs and PRSUs.

Dilutive securities included in the diluted weighted average number of shares outstanding for 2022 was immaterial.

For the year ended December 31, 2021, 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.

In addition, the computation of diluted EPS excludes stock awards whose issuance is contingent upon the satisfaction of certain performance vesting conditions that have not yet been achieved.

Commitments and Contingencies

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

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

See Note 11 :

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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

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(“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.

The NPS previously posted its intention to open a formal public comment period regarding the EE/CA at the end of 2019.

To the Company’s knowledge, the EE/CA has not been released and a public comment period has yet to be opened.

Following completion of the EE/CA, the NPS may seek reimbursement for its investigative and remedial efforts to date, or direct one or more of the potentially responsible parties to perform any remediation that may be required by CERCLA or may enter an alternative dispute resolution proceeding to attempt to resolve each party’s share.

In addition, the NPS may seek to recover damages for loss of use of certain natural resources.

The Company believes that it has legitimate defenses to its subsidiary’s potential liability and that there are other potentially responsible parties for the environmental conditions at the site, including the U.S.

government as owner, operator and arranger at the site.

The potential liability associated with this matter could change substantially due to such factors as additional information on the nature or extent of contamination, methods of remediation that might be recommended or required, changes in the apportionment of costs among the responsible parties, whether the NPS seeks to recover additional damages, whether the NPS’s plans to investigate additional areas to identify a need for further remedial action for which the Company may be identified as a potentially responsible party and other actions by governmental agencies or private parties.

The Company has recorded its best estimate of damages and its share of remediation costs related to the site to reflect what we and our advisors reasonably believe we would be liable for based on the current information and circumstances of the claim, exclusive of other potential liabilities that may be asserted in the future.

The Company reviews the developments in contingencies that could affect the amount of the reserves that have been previously recorded.

The Company adjusts provisions and changes to disclosures accordingly to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and updated information.

Significant judgment is required to determine both the probability and the estimated amount of any potential losses.

In the performance of our contracts, we routinely request contract modifications that require additional funding from the customer.

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Based on the circumstances, we periodically file requests for equitable adjustment (“REAs”) that are sometimes converted into claims.

In some cases, these requests are disputed by our customer.

In some cases, these requests

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

are disputed by our customer.

We believe our outstanding modifications, REAs and other claims will be resolved without material impact to our results of operations, financial condition or cash flows.

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In connection with these restructuring initiatives, we recorded charges totaling $ 11 million, $ 3 million and $ 5 million for the years ended December 31, 2023, 2022 and 2021, respectively.

These costs were within our ASC segment for the periods presented.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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:

Charges were recorded within other operating expenses, net, on the Consolidated Statements of Earnings.

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

Year Ended December 31,

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Facility abandonment 2 1 —

Inventory — — —

Severance — — —

Facility abandonment — — 6

Inventory — — —

Severance — — —

Facility abandonment — — —

Inventory — — —

Total Corporate

The following is a summary of changes in the restructuring provision balance during the years ended December 31, 2023 and 2022:

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

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.

The Company also has related party sales and purchases with the ultimate majority stockholder and its other affiliates that occur in the regular course of business.

Related party sales for these transactions are included in revenues and were $ 40 million, $ 59 million and $ 11 million for the years ended December 31, 2023, 2022 and 2021, respectively.

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.

The Company has related party purchases with the ultimate 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 $ 4 million, $ 3 million and $ 4 million for the years ended December 31, 2023, 2022 and 2021, respectively.

The receivables related to transactions with the ultimate majority stockholder and its other affiliates of $ 8 million and $ 10 million, respectively, and payables of $ 4 million and $ 1 million, respectively, as of December 31, 2023 and 2022, are included in accounts receivable and accounts payable in our Consolidated Balance Sheets.

In addition, there was a related party balance in contract assets of $ 1 million at December 31, 2022.

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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.

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

Summary of Significant Accounting Policies for more information.

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

All other 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.

Adjusted EBITDA of our business segments includes our net earnings before income taxes, amortization of

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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.

Adjusted EBITDA of our business segments includes our net earnings before income taxes, amortization of acquired intangible assets, depreciation, restructuring costs, interest, deal related transaction costs, acquisition and divestiture related expenses, foreign exchange, COVID-19 response costs, non-service pension expenditures and other one-time non-operational events.

acquired intangible assets, depreciation, restructuring costs, interest, deal-related transaction costs, other non-operating expenses such as foreign exchange, COVID-19 response costs, non-service pension expenditures, legal liability accrual reversals, and other one-time non-operational events as well as gains (losses) on business disposals.

Adjusted EBITDA is used to facilitate a comparison of the ordinary, ongoing and customary course of our operations on a consistent basis from period to period and provide an additional understanding of factors and trends affecting our business segments.

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Corporate & Eliminations ( 26 ) ( 23 ) ( 20 )

Total revenue

Total revenues

$ 2,826 $ 2,693 $ 2,879

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ASC $ 25 $ 21 $ 19

Total intersegment revenue

Total intersegment revenues

$ 26 $ 23 $ 20

Depreciation by segment as of December 31, 2022, 2021 and 2020 consists of the following:

Depreciation by segment for the years ended December 31, 2023, 2022 and 2021, consists of the following:

(Dollars in millions) 2023 2022 2021

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Reconciliation of reportable segment Adjusted EBITDA to Net Earnings (loss) consists of the following:

Reconciliation of reportable segment adjusted EBITDA to net earnings for the years ended December 31, 2023, 2022 and 2021, consists of the following:

(Dollars in millions) 2023 2022 2021

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Deal-related transaction costs ( 7 ) ( 43 ) ( 5 )

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

Other one-time non-operational events 7 ( 2 ) ( 7 )

Gain on sale of dispositions — 354 —

1 unchanged sentence

$ 168 $ 405 $ 154

Subsequent Events

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

There were no subsequent events that require disclosure.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURE

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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