What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2025-03-03 compared with 2024-02-28 · 292 added, 331 removed, 1142 unchanged (35% of the section changed)

1 unchanged sentence

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Reports of Independent Registered Public Accounting Firms

Supplementary Dataindex to Consolidated Financial Statements

Reports of Independent Registered Public Accounting Firm (PCAOB ID No.

Consolidated Statements of Earnings

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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.

(the Company) as of December 31, 2024 and 2023, the related consolidated statements of earnings, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2024, 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, 2024 and 2023, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2024, 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.

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, 2024, 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 March 3, 2025 expressed an unqualified opinion thereon.

Basis for Opinion

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(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.

Description of the Matter As described in Note 3 to the consolidated financial statements, revenues for the majority of contracts are recognized using the over-time percentage of completion cost-to-cost method of accounting measured by the ratio of cumulative costs incurred to date to estimated contract costs at completion (the “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 often requires judgment.

Due to the long-term nature of contracts, developing the estimated total cost at completion often requires management to make judgments.

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 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, 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.

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 these contracts and as experience is gained and more information is obtained by management.

Auditing the Company’s estimated costs at completion for certain long-term contracts that recognize revenue using the cost-to-cost method of accounting was complex due to the judgment involved in evaluating management’s estimates.

Estimates of total cost at completion for long-term contracts are affected by management’s assessment of the current status of the contract and expectation for performance on the contract, as well as historical experience.

How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design, and tested the operating effectiveness of the relevant internal controls related to the Company’s revenue recognition process.

For example, we tested internal controls over management’s review of the estimate at completion analysis and the estimated total costs at completion for certain long-term contracts.

We also tested management’s controls to validate that the data used in the estimate at completion analysis was complete and accurate.

To test the Company’s estimates of the costs at completion for certain long-term contracts, our audit procedures included, among other things, evaluating management’s cost estimates by comparing planned costs to actual costs incurred to date and meeting with program management to confirm our understanding of the risks associated with the contract and current contract performance.

/s/ Ernst & Young LLP

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Tysons, Virginia

February 27, 2024

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors

Leonardo DRS, Inc.:

Opinion on the Consolidated Financial Statements

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.

Basis for Opinion

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 audit.

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

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

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

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

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 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, 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.

March 3, 2025

LEONARDO DRS, INC.

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(Dollars in millions, except per share amounts) 2024 2023 2022

Products $ 2,631 $ 2,443 $ 2,505

Services 195 250 374

Total revenues 2,826 2,693 2,879

3,234 2,826 2,693

Cost of revenues

Products ( 2,044 ) ( 1,928 ) ( 2,067 )

Services ( 134 ) ( 190 ) ( 265 )

Total cost of revenues ( 2,178 ) ( 2,118 ) ( 2,332 )

( 2,498 ) ( 2,178 ) ( 2,118 )

Gross profit 736 648 575

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Other comprehensive income (loss):

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

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

( 1 ) 1 ( 2 )

Pension and other postretirement benefit plan adjustments, net of income taxes — 1 11

Other, net of income taxes

Other comprehensive income, net of income taxes

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Defined benefit obligations ( 2 ) ( 8 ) ( 4 )

Other current liabilities ( 26 ) 14 28

Other noncurrent liabilities 8 ( 8 ) ( 36 )

Accounts payable 15 ( 59 ) ( 14 )

Contract liabilities 64 102 72

Other current liabilities ( 39 ) ( 26 ) 14

Other noncurrent liabilities ( 20 ) 8 ( 8 )

Net cash provided by operating activities 271 205 33

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Proceeds from sales of businesses — — 482

Net repayments received on related party note receivable — — 115

Cost method investment — — ( 2 )

Net cash (used in) provided by investing activities ( 84 ) ( 59 ) 436

Financing activities

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

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

( 32 ) 20 ( 8 )

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Cash outlay to reacquire equity instruments

( 19 ) ( 1 ) —

Other ( 10 ) ( 4 ) ( 8 )

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

Net cash (used in) provided by financing activities ( 56 ) 15 ( 403 )

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

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— — 9 405 414

Balance as of December 31, 2021

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

Total comprehensive income — — 9 405 414

Share-based compensation expense

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

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

Total comprehensive income — — 2 168 170

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Balance as of December 31, 2023 3 5,175 ( 47 ) ( 2,806 ) 2,325

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

Total comprehensive income — — — 213 213

Share-based compensation activity

Balance as of December 31, 2024 $ 3 $ 5,194 $ ( 47 ) $ ( 2,593 ) $ 2,557

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’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”).

The Company’s largest shareholder is 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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We focus our capabilities in areas of critical importance to the U.S.

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

These capabilities directly align with our two reportable segments:

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

These capabilities directly align with our two reportable operating segments:

Advanced Sensing and Computing and Integrated Mission Systems.

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.

Department of Defense (the “DoD”) is our largest customer and accounts for approximately 79 %, 80 %, and 84 % of our total revenues as an end-user for the years ended December 31, 2024, 2023 and 2022, respectively.

Specific international and commercial market opportunities exist within these segments and comprise approximately 21 %, 20 %, and 16 % of our total revenues for the years ended December 31, 2024, 2023 and 2022, respectively.

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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 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 tactical radars, dismounted soldier sensing and space sensing.

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

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

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.

frequency drives, force protection systems, transportation and logistics systems for the U.S.

and allied defense customers.

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

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

We provide power conversion, control, distribution and propulsion systems for the U.S.

Navy’s top priority shipbuilding programs, including the Columbia Class ballistic missile submarine, the first modern U.S.

electric drive submarine.

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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.

See Note 19 :

Segment Information for further information regarding our business segments.

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

Segment Information for further information regarding our operating segments.

Basis of Presentation

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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 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.

These estimates and assumptions include those relating 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.

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Revenue Recognition

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

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

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

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

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

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

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Labor and overhead costs consist of direct and indirect manufacturing costs, including wages and fringe benefits, operating supplies, depreciation and amortization, occupancy costs, and purchasing, receiving and inspection costs.

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.

Costs to Obtain or Fulfill a Contract

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

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

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

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

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

Capitalized costs to obtain or fulfill a contract were $ 38 million and $ 52 million at December 31, 2024 and 2023, respectively.

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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.

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

Accounts Receivable for additional information regarding accounts receivable.

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Property, plant and equipment is carried at cost less accumulated depreciation.

Depreciation is calculated on the straight-line method.

Depreciation is calculated using the straight-line method.

The estimated useful lives of plant, machinery and equipment and building and building improvements generally range from 3 to 10 years and 15 to 40 years, respectively.

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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 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)

Based upon the aggregation criteria the Company concluded it had six reporting units at December 31, 2024 and 2023.

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.

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In order to compute the fair value of our reporting units, we primarily use the income approach based on the discounted cash flows that each reporting unit expects to generate in the future, consistent with our operating plans.

Determining the fair value of our reporting units requires significant judgments, including the timing and amount of future cash flows, long-term growth rates, determination of the weighted average cost of capital and terminal value assumptions.

Determining the fair value of our

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

reporting units requires significant judgments, including the timing and amount of future cash flows, long-term growth rates, determination of the weighted average cost of capital and terminal value assumptions.

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 October 1, 2023 and December 31, 2022 and 2021 and no adjustment to the carrying value of goodwill was deemed to be necessary.

The Company completed impairment tests as of October 1, 2024 and 2023, and December 31, 2022 and no adjustment to the carrying value of goodwill was deemed to be necessary.

Goodwill for additional information regarding goodwill.

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Assets to be disposed of, including those of discontinued operations, are reported at the lower of the carrying amount or fair value, less the costs to sell.

Property, Plant and Equipment and Note 10 :

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

Property, Plant and Equipment , Note 10 :

Intangible Assets and Note 11:

Leases for additional information regarding long-lived assets and intangible assets.

Pension and Other Postretirement Benefits

The obligations for the Company's pension plans and postretirement benefit plans and the related annual costs of employee benefits are calculated based on several long-term assumptions, including discount rates for employee benefit liabilities, rates of return on plan assets, expected annual rates of salary increases for employee participants in the case of pension plans and expected annual increases in the costs of medical and other health care benefits in the case of postretirement benefit plans.

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.

The obligations for the Company's pension plans and postretirement benefit plans and the related annual costs of employee benefits are calculated based on several long-term assumptions, including discount rates for employee benefit liabilities, rates of return on plan assets, and expected annual increases in the costs of medical and other health care benefits in the case of postretirement benefit plans.

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 benefit formulas and levels, and rates of increase in the costs of benefits.

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

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

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.

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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).

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

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

ending December 31, 2008 and each subsequent year in which the parties are members of a group (whether federal or state).

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.

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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%

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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% 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 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.

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

The Company has elected to use the period cost method.

The Company treats the global intangible low-taxed income ("GILTI") tax as a period cost when incurred.

See Note 12 :

Income Taxes for additional information regarding income taxes.

Earnings Per Share

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.

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Earnings Per Share (“EPS”)

Basic 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 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.

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

The Consolidated Financial Statements were retroactively adjusted as necessary to reflect the November 23, 2022 forward stock split for all periods presented.

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

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.

See Note 16 :

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The Company categorizes plan assets for disclosure purposes in accordance with this fair value hierarchy.

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 outstanding.

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

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.

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

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

Financial instruments are reported in the Consolidated Balance Sheets at carrying value, which approximates fair value, as of December 31, 2024 and 2023.

Acquisitions, Investments, Variable Interest Entities and Divestitures

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We account for acquired businesses using the acquisition method of accounting, which requires that any assets acquired, and liabilities assumed be measured at their respective fair values on the acquisition date.

The accounting for business combinations requires the Company to make significant judgments and estimates.

The accounting for business combinations requires the Company to make significant

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

judgments and estimates.

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

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

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

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

Business Acquisition for additional information regarding the transaction.

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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 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 operating 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.

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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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.

Management evaluates this investment for possible impairment quarterly.

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

The Company has an investment in a private company in which we do not have the ability to exercise significant influence.

This investment is carried at cost and we evaluate for possible impairment quarterly.

Variable Interest Entities

2 unchanged sentences

If the arrangement is determined to be a VIE, the Company assesses whether it is the primary beneficiary of the VIE and if it is, consequently required to consolidate the VIE.

The Company did not have any investment in VIEs as of December 31, 2023 or 2022.

The Company did not have any investments in VIEs as of December 31, 2024 and 2023.

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

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

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

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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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under the agreement.

The Company recorded operating income for the GES business of $ 13 million and $ 29 million for the years ended December 31, 2022 and 2021, respectively.

The Company recorded operating earnings for the GES business of $ 13 million for the year ended December 31, 2022.

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”).

2 unchanged sentences

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 aggregate gain of $ 31 million is included in other operating (expenses) income, 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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For purposes of measuring compensation expense, the amount of shares ultimately expected to vest is estimated at each reporting date based on Company's expectations regarding the relevant service or performance criteria.

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

For awards with a service condition only, the Company recognizes the compensation expense on a straight-line basis.

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

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Government Assistance

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

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 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

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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.

We adopted the new standard effective December 31, 2024 and applied the disclosure requirements on a retrospective basis to all prior periods presented in the Consolidated Financial Statements.

Segment Information .

Accounting Guidance Issued but Not Yet Adopted as of December 31, 2024

Improvements to Income Tax Disclosures

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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 and plan to adopt these amendments using the prospective approach for annual disclosures in fiscal year 2025.

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Disaggregation of Income Statement Expenses

In November 2024, the FASB issued ASU 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40):

Disaggregation of Income Statement Expenses , which requires disclosure of specified information about certain costs and expenses.

The new standard is effective for fiscal years beginning after December 15, 2026 and interim periods within fiscal years beginning after December 15, 2027, on a prospective basis.

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

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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

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

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.

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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) :

Purchase consideration - The following summarizes the purchase consideration transferred to RADA shareholders:

(in millions, except per share data)

RADA ordinary shares outstanding as of November 28, 2022 50

7 unchanged sentences

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) :

Purchase price allocation - The allocation of the purchase consideration to assets acquired and liabilities assumed is based on the estimated fair values as follows:

(Dollars in millions)

Cash and cash equivalents

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

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

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

Revenue from Contracts with Customers

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In those cases, the Company accounts for the distinct contract deliverables as separate performance obligations and allocates the transaction price to each performance obligation based on its relative standalone selling price, which is generally estimated using cost plus a reasonable margin.

We classify revenues as products or services on our Consolidated Statements of Earnings based on the predominant attributes of the performance obligations.

While the Company provides warranties on certain contracts, we typically do not provide for services beyond standard assurances and therefore do not consider warranties to be separate performance obligations.

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fixed-price contracts, cost-plus contracts and T&M contracts (cost-plus contracts and T&M contracts are aggregated below as flexibly priced contracts).

The majority of our total revenues are derived from fixed-price contracts.

Refer to the revenue disaggregation disclosures that follow.

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.

majority of our total revenues are derived from fixed-price contracts.

Refer to the revenue disaggregation disclosures that follow.

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

For cost-plus contracts, typically we are reimbursed for allowable or otherwise defined total costs (defined as cost of revenues plus allowable general and administrative expenses) incurred, plus a fee.

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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 often requires judgment.

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

The estimated transaction price may include variable consideration such as performance incentives, requests for equitable adjustment (“REAs”) and claims.

Variable consideration is included in the estimated transaction price only to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

1 unchanged sentence

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

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

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

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

Year Ended December 31,

(Dollars in millions) 2024 2023 2022

Revenue $ ( 23 ) $ ( 26 ) $ ( 34 )

Revenue and operating earnings $ ( 25 ) $ ( 23 ) $ ( 26 )

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 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.

Net earnings ( 20 ) ( 18 ) ( 19 )

Impact on diluted earnings per share $ ( 0.07 ) $ ( 0.07 ) $ ( 0.09 )

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In 2024 the adjustments consist largely of changes in the designs required to achieve contractual specifications for fixed price development programs and increased material cost within our IMS and ASC segments that resulted in a change in the programs’ estimates and related profitability.

The reductions to revenue for the year ended December 31, 2024, 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 propulsion contracts on the Columbia Class submarine contracts.

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.

In such cases, the production that is in progress and costs that will be recognized at a future point in time are reported within inventories.

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

Costs to fulfill a contract include costs directly related to a contract or specific anticipated contract (e.g., certain design costs) that generate or enhance our ability to satisfy our performance obligations under these contracts.

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

Contract Assets and Liabilities

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Contract liabilities 399 335

Net contract assets

Revenue recognized in 2024 and 2023 that was included in the contract liability balance at the beginning of each year was $ 288 million and $ 180 million, respectively.

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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.

As of December 31, 2024 and 2023, our total backlog was $ 8,509 million and $ 7,751 million, respectively.

We expect to recognize approximately 29 % of our December 31, 2024 backlog as revenue

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:

(Dollars in millions) 2023 2022

Funded $ 3,397 $ 2,783

Unfunded 4,354 1,486

Total Backlog

$ 7,751 $ 4,269

We expect to recognize approximately 27 % of our December 31, 2023 backlog as revenue over the next 12 months, with the remainder to be recognized thereafter.

over the next twelve months , with the remainder to be recognized thereafter.

Approximately 50 % of our total backlog relates to long-term contracts on electric power and propulsion programs with the U.S.

Navy, which are expected to be recognized as revenue over a span of up to 15 years.

Disaggregation of Revenue

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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 of accounting.

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

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

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

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

Sale of Receivables for additional information.

Sale of Receivables

The Company is party to factoring facilities with various financial institutions (the “purchasers”) with an aggregate capacity of $ 225 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.

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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.

Proceeds from the sold receivables are primarily reflected in operating cash flows on the Consolidated Statements of Cash Flows.

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.

During the years ended December 31, 2024, 2023 and 2022, the Company incurred purchase discount fees of $ 2 million, $ 5 million, and $ 4 million, respectively, which are presented in general and administrative expenses on the Consolidated Statements of Earnings.

The table below summarizes the activity under the factoring facilities:

5 unchanged sentences

Cash collected, not remitted to purchasers (1)

( 35 ) ( 10 )

Remaining sold receivables $ 130 $ 157

________________

(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.

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

This balance is included within short-term borrowings and current portion of long-term debt in the Consolidated Balance Sheets.

Inventories consists of the following:

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Leases for additional information.

As of December 31, 2024 and 2023, the Company accounted for our manufacturing facility in Menomonee Falls, WI as a financing arrangement and is included in land, building, and improvements in the above table.

Debt for additional information.

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.

Other Liabilities

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Fringe benefits 63 63

Litigation 2 10

Restructuring costs 1 10

2 unchanged sentences

Taxes payable 24 46

Warranty reserves 19 12

Total other current liabilities

Operating lease liabilities $ 66 $ 68

Taxes payable 36 21

Unrecognized tax benefits 46 36

Warranty reserves 10 14

Total other noncurrent liabilities

________________

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

Commitments and Contingencies for more information regarding the warranty provision.

(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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$ 817 $ 419 $ 1,236

Acquisitions 282 — 282

Dispositions ( 117 ) — ( 117 )

Purchase price adjustments for the year ended December 31, 2023 2 — 2

Balance at December 31, 2023

819 419 1,238

Purchase price adjustments 2 — 2

Balance at December 31, 2024

3 unchanged sentences

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.

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.

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

Intangible assets consists of the following:

December 31, 2024 December 31, 2023

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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)

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

The remaining lease cost is amortized over the 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.

Some of our leases include options to extend the lease terms or to terminate the lease early.

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

We include the impact of the option in the determination of the ROU assets and liabilities when it is

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

reasonably certain that we will exercise the option.

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

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As of December 31, 2024, the Company has not entered into any significant leases that have not yet commenced.

We elected not to recognize a ROU asset and lease liability for leases with an initial term of 12 months or less.

We elected not to recognize a ROU asset and lease liability for leases with an initial term of twelve months or less.

These leases are expensed on a straight-line basis over the lease term.

12 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 Consolidated Statements of Earnings.

(1) Operating lease expense is included within cost of revenues or general and administrative expenses, dependent upon the nature and use of the ROU asset, in the Consolidated Statements of Earnings.

Operating lease cost includes short-term leases of approximately $ 2 million, $ 3 million, and $ 2 million and an insignificant amount of variable lease cost for 2024, 2023 and 2022, 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.

(2) Finance lease expense is recorded as depreciation and amortization expense within cost of revenues 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.

75 unchanged sentences

Research & development credit, net of reserves ( 7.1 ) % ( 18.0 ) % ( 0.5 ) %

Excess tax benefits from share-based compensation ( 1.2 ) % ( 0.1 ) % — %

Nondeductible officer compensation 1.2 % 0.8 % 0.3 %

Nondeductible expenses 0.6 % 0.2 % 0.1 %

2 unchanged sentences

Change in tax reserves 0.2 % 1.1 % — %

Purchase tax credits ( 0.7 ) % — % — %

Divestiture impact — % 4.7 % ( 1.9 ) %

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Right-of-use assets $ ( 40 ) $ ( 50 )

Long-term contracts ( 55 ) —

Intangible assets ( 39 ) ( 41 )

Fixed assets ( 25 ) ( 21 )

Property, plant and equipment, net ( 23 ) ( 25 )

Other ( 2 ) ( 2 )

2 unchanged sentences

Net deferred tax asset

Our deferred tax balance associated with our retirement benefit plans includes a deferred tax asset of $ 9 million and $ 8 million as of December 31, 2023 and 2022, respectively, that are recorded in accumulated other comprehensive earnings to recognize the funded status of our retirement plans.

Pension and Other Postretirement Benefits for additional details.

As of December 31, 2024, and 2023 the Company had U.S.

federal net operating loss carryforwards of $ 18 million and $ 22 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.

The annual utilization of our federal NOL is limited to approximately $ 3 million pursuant to Section 382 of the Tax Code.

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

2 unchanged sentences

Our state net operating losses have expirations ranging from 2024 to 2041 and are offset by a valuation allowance of $ 2 million.

On August 16, 2022, the U.S.

government enacted the Inflation Reduction Act of 2022 (the “IRA”) which, among other items, allows a company to purchase transferable tax credits.

During 2024, the Company purchased $ 25 million in tax credits for approximately $ 23 million in cash.

These credits were used to offset the Company’s federal tax liability for 2023.

Cash paid for income taxes, net of refunds was $ 71 million, $ 45 million, and $ 89 million in 2024, 2023 and 2022, respectively.

7 unchanged sentences

Approximately $ 2 million, $ 2 million and $ 2 million as of December 31, 2024, 2023 and 2022, 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.

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 twelve months.

The table below summarizes the activity associated with our unrecognized tax benefits:

6 unchanged sentences

Lapse of statute of limitations — — ( 1 )

Settlements with taxing authorities — — —

Balance at December 31,

5 unchanged sentences

Substantially all material state and local matters have been concluded for years through the tax year ended December 31, 2017.

The Company has substantially concluded all material tax matters in foreign jurisdictions for years through the tax years ending during 2017.

The Company has substantially concluded all material tax matters in foreign jurisdictions for years through the tax years ending 2017.

As of December 31, 2024, 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 TCJA.

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

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

16 unchanged sentences

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

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

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

Interest is payable quarterly in arrears.

The outstanding balance of the 2022 Term Loan A at December 31, 2024 was $ 203 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.

The fair value of the 2022 Term Loan A at December 31, 2024 was approximately $ 199 million, however the Company has the ability to prepay the outstanding principal balance without penalty.

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

(presently Leonardo S.p.A.

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

and indirect majority stockholder) in the amount of $ 2 billion (the “2009 Credit Agreement”).

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

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

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

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

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

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

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

2 unchanged sentences

(the “Daylight Term Loan”).

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

The Daylight Term Loan matures on October 15, 2024.

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

The Daylight Term Loan had a maturity of October 15, 2024 and had an interest rate of 5.0 %, with interest payments due semi-annually on April 15 and October 15.

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

1 unchanged sentence

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

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

As of December 31, 2024 the 2022 Revolving Credit Facility had a limit of $ 275 million.

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.

on the SOFR, in each case subject to an 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, 2024 and 2023.

The weighted average interest rate on the 2022 Revolving Credit Facility as of December 31, 2024 and 2023 was 6.72 % and 6.41 %, respectively.

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

The 2009 Credit Agreement provided for a revolving credit facility available for the 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 %.

8 unchanged sentences

Finance Lease and Other

As of December 31, 2023, finance lease and other of $ 158 million includes approximately $ 111 million related to finance lease liabilities and $ 47 million related to our Menomonee Falls, WI manufacturing facility, which has been accounted for as a build-to-suit lease with a failed sale leaseback.

Approximately $ 10 million has been recognized as the current portion of long-term debt for the finance lease liabilities and financing liability related to the build-to-suit arrangement.

As of December 31, 2024, finance lease and other of $ 159 million includes approximately $ 113 million related to finance lease liabilities and $ 46 million related to our Menomonee Falls, WI manufacturing facility, which has been accounted for as a financing arrangement.

Approximately $ 10 million has been recognized as the current portion of long-term debt for the finance lease liabilities and aforementioned financing arrangement.

Short-term Borrowings

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.

As of December 31, 2024 and 2023, the Company recognized $ 4 million and $ 35 million, respectively, related to our factoring facilities as short-term borrowings and current portion of long-term debt in the Consolidated Balance Sheets.

Sale of Receivables for more information.

2 unchanged sentences

Our effective interest rate was approximately 6.80 %, 6.65 % and 5.57 % for the years ended December 31, 2024, 2023 and 2022, respectively.

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

The interest expense attributable to the amortization of debt issuance costs in 2024, 2023 and 2022 was not material.

LEONARDO DRS, INC.

22 unchanged sentences

Eligibility for participation in the supplemental retirement plans is limited, and benefits generally are based on the participant's compensation and/or years of service.

In April 2024, the Company purchased group annuity contracts to transfer approximately $ 24 million of gross defined benefit pension plan obligations and related plan assets for certain of its qualified defined benefit pension plans to an insurance company for approximately 700 U.S.

retirees and beneficiaries.

In June 2024, the Company made lump sum distributions from plan assets for terminated vested participants in certain of its defined pension benefit plans in the amount of approximately $ 8 million.

Settlement charges related to these activities were immaterial.

LEONARDO DRS, INC.

6 unchanged sentences

Interest cost 7 8 — — 1 1

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

Actuarial (gain) loss ( 4 ) 6 — — — —

Benefits paid (1)

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

( 41 ) ( 12 ) — — ( 1 ) ( 1 )

Loss due to settlement — 1 — — — —

Benefit obligation at end of year $ 127 $ 165 $ 1 $ 1 $ 17 $ 17

4 unchanged sentences

Benefits paid (1)

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

( 41 ) ( 12 ) — — ( 1 ) ( 1 )

Fair value of plan assets at end of year 100 134 1 1 13 12

Funded status of the plans at year end $ ( 27 ) $ ( 31 ) $ — $ — $ ( 4 ) $ ( 5 )

________________

(1) The 2024 amounts include the purchase of group annuity contracts to transfer certain benefit obligations and related plan assets of $ 24 million to an insurance company and lump sum payments to certain participants of $ 8 million.

The amounts recognized in the Consolidated Balance Sheets as of December 31, 2024 and 2023 consist of:

24 unchanged sentences

Discount rate 5.5 % 4.8 % 5.4 % 4.7 % 5.3 % 4.8 %

Increase in future compensation levels N/A N/A N/A N/A N/A N/A

Expected long-term return on plan assets 6.4 % 6.5 % 6.4 % 6.5 % N/A N/A

8 unchanged sentences

Expected return on plan assets ( 5 ) ( 7 ) ( 7 ) — — — — — —

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

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

Amortization of net actuarial loss 1 1 1 — — — — — —

Settlement expense — — 1 — — — — — —

Net periodic benefit cost

6 unchanged sentences

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

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

Amortization of net actuarial loss from prior years

( 1 ) ( 1 ) ( 2 ) — — — — — —

Total recognized in other comprehensive income

6 unchanged sentences

Expected long-term return on plan assets 6.5 % 7.2 % 5.9 % 6.5 % 7.2 % 5.9 % N/A N/A N/A

Increase in future compensation levels N/A N/A N/A N/A N/A N/A N/A N/A N/A

Health care trend rate assumed for next year N/A N/A N/A 6.0 % 5.3 % 5.5 % N/A N/A N/A

7 unchanged sentences

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

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

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

As part of the policy statement the Company has implemented a glide path which adjusts the percentage of assets invested in

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.

As part of the policy statement the Company has implemented a glide path which adjusts the percentage of assets invested in return seeking assets based upon the attainment of specific funding percentages.

return seeking assets based upon the attainment of specific funding percentages.

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

14 unchanged sentences

Other, primarily cash and cash equivalents and hedge funds 0 % - 4 %

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.

December 31, 2024

4 unchanged sentences

Equity securities 6 — — 6

Total $ 16 $ — $ — $ 16

Investments measured at NAV:

Collective trust funds — 100 — 100

Equity and fixed income funds —

$ 16 $ — $ — $ 147

Total $ 14 $ 100 $ — $ 114

December 31, 2023

4 unchanged sentences

Equity securities 5 — — 5

Total $ 15 $ — $ — $ 15

Investments measured at NAV:

Collective trust funds — 131 — 131

Equity and fixed income funds —

$ 15 $ — $ — $ 136

Total $ 16 $ 131 $ — $ 147

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Prior year amounts for investments in collective trust funds, previously categorized as not subject to leveling in the fair value hierarchy, have been corrected to categorize these investments as Level 2.

For collective trust funds not traded on a public exchange, the trustee obtains quotes from the fund manager, which are based on the net asset value of the funds, which is the price the funds stand ready to purchase and sell units of the fund.

This change is not material as it did not affect the prior year financial statements nor the total plan assets previously reported.

For the year ended December 31, 2025, the Company expects to contribute $ 6 million to its pension plans and an inconsequential amount to its postretirement plans.

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

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

(Dollars in millions)

6 unchanged sentences

The Company's contributions to these plans for the years ended December 31, 2024, 2023 and 2022, amounted to $ 31 million, $ 28 million, and $ 22 million, respectively.

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Share-based Compensation Plans

1 unchanged sentence

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

In May 2024, the 2022 Equity Plan was amended and restated to increase the common stock available for issuance under the plan by 8,100,000 shares and to extend the terms of the plan to expire on the tenth anniversary of the amended and restated plan’s effective date.

As of December 31, 2024, there were 10 million shares of the Company’s common stock reserved for future issuances under the 2022 Equity Plan.

10 unchanged sentences

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:

The PRSUs are subject to both time and performance-based vesting based upon the achievement of three

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

financial metrics over a three-year period:

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

3 unchanged sentences

rTSR, Revenue Growth, and ROIC.

During 2024, 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, Adjusted Diluted EPS, 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 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:

In May 2024, the Company established the Employee Stock Purchase Plan (the “ESPP”).

The ESPP allows eligible employees to purchase shares of the Company’s stock at 90 % of the fair market value on the date of purchase.

As of December 31, 2024, there were 2 million shares of the Company’s common stock reserved for future issuances under the ESPP.

Share-based compensation, which was recorded in the Consolidated Statements of Earnings within general and administrative expenses, and the related tax benefits recognized for the periods presented consists of the following:

Year Ended December 31,

1 unchanged sentence

Total share-based compensation expense $ 22 $ 17 $ 5

Tax benefit recognized from share-based compensation 2 1

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

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Tax benefits recognized from share-based compensation 6 2 1

Stock Options

12 unchanged sentences

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.

There were no stock options granted or assumed during the years ended December 31, 2024 and 2023.

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table shows a summary of all option activity under the 2022 Equity Plan for the year ended December 31, 2024:

10 unchanged sentences

Vested and expected to vest as of December 31, 2024 1.57 $ 10.39 3 $ 34

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.

As of December 31, 2024, total compensation expense not yet recognized related to unvested options was approximately $ 1 million, which is expected to be recognized over a weighted average period of 1 year.

The total intrinsic value of stock options exercised during the year ended December 31, 2024, was $ 26 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, 2024:

9 unchanged sentences

The fair value of RSUs that vested in 2024 was $ 30 million.

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table shows a summary of all PRSU activity under the 2022 Equity Plan for the year ended December 31, 2024:

4 unchanged sentences

Granted 0.39 24.72

Vested ( 0.56 ) 4.07

Forfeited ( 0.07 ) 15.32

2 unchanged sentences

Year Ended December 31,

2024 2023 2022

Grant date stock price $ 21.51 $ 14.74 $ 9.87

3 unchanged sentences

As of December 31, 2024, total compensation expense not yet recognized related to unvested PRSUs was approximately $ 11 million, which is expected to be recognized over a weighted average period of 2 years.

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The fair value of PRSUs that vested in 2024 was $ 19 million.

Earnings Per Share

Year Ended December 31,

(Dollars in millions, except per share amounts;

shares in millions)

2023 2022 2021

(In millions, except per share amounts) 2024 2023 2022

$ 213 $ 168 $ 405

4 unchanged sentences

Earnings per share attributable to common shareholders - diluted $ 0.80 $ 0.64 $ 1.88

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 that have not yet been achieved.

The computation of diluted EPS includes the dilutive effect of outstanding share-based compensation awards (which primarily consist of employee stock options, RSUs and PRSUs).

Commitments and Contingencies

3 unchanged sentences

Debt for additional information on our leases and credit agreements.

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Contingencies

7 unchanged sentences

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.

Most often, these requests are due to customer-directed changes in the scope of work.

While we are entitled to recovery of these costs under our contracts, the administrative process with our customer may be protracted.

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

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.

As a government contractor, with customers including the U.S.

5 unchanged sentences

In connection with these restructuring initiatives, we recorded charges totaling $ 8 million, $ 11 million and $ 3 million for the years ended December 31, 2024, 2023 and 2022, respectively.

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

These restructuring initiatives were within our ASC segment and were substantially completed as of December 31, 2024.

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, on the Consolidated Statements of Earnings.

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

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

3 unchanged sentences

Facility abandonment 2 2 1

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following is a summary of changes in the restructuring provision balance during the years ended December 31, 2024 and 2023:

10 unchanged sentences

Product warranty expense is recognized based on the term of the product warranty, generally one year to three years , and the related estimated costs, considering historical claims expense.

Accrued warranty costs are reduced as these costs are incurred and as the warranty period expires, and otherwise may be modified as specific product performance issues are

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

identified and resolved.

Accrued warranty costs are reduced as these costs are incurred and as the warranty period expires, and otherwise may be modified as specific product performance issues are identified and resolved.

The following is a summary of changes in the product warranty balances during the years ended December 31, 2023 and 2024:

14 unchanged sentences

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

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 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.

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

Related party sales are included in revenues and were $ 30 million, $ 40 million and $ 59 million for the years ended December 31, 2024, 2023 and 2022, respectively.

Related party purchases are included in cost of revenues and were $ 7 million, $ 4 million and $ 3 million for the years ended December 31, 2024, 2023 and 2022, respectively.

The receivables with the indirect majority stockholder and its other affiliates of $ 19 million and $ 8 million, respectively, and payables of $ 4 million and $ 4 million, respectively, as of December 31, 2024 and 2023, are included in accounts receivable, net and accounts payable in our Consolidated Balance Sheets.

In addition, there was a related party balance in contract assets of $ 12 million at December 31, 2024.

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

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

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

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

Summary of Significant Accounting Policies for more information.

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Segment Information

4 unchanged sentences

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

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.

This measure assists the CODM in assessing segment operating performance consistently over time without the impact of our capital structure, asset base and items outside the control of the management team and expenses that do not relate to our core operations.

Effective for the fourth quarter of 2024, operating earnings is the segment profit measure the CODM primarily uses to manage the Company and allocate resources.

Operating earnings 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.

Prior year information was revised to reflect operating earnings as the segment profit measure.

Certain information related to our segments for the years ended December 31, 2024, 2023 and 2022, is presented in the following tables.

4 unchanged sentences

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

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

Revenues, expenses, and operating earnings by segment and the reconciliation to earnings before taxes for the years ended December 31, 2024, 2023 and 2022, consists of the following:

(Dollars in millions) 2024 2023 2022

4 unchanged sentences

$ 3,234 $ 2,826 $ 2,693

Cost of revenues

$ 1,598 $ 1,370 $ 1,335

Corporate & Eliminations

( 22 ) ( 26 ) ( 23 )

Total cost of revenues

$ 2,498 $ 2,178 $ 2,118

General and administrative

$ 234 $ 226 $ 194

Corporate & Eliminations

Total general and administrative

$ 322 $ 302 $ 299

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Company-funded research and development

$ 74 $ 66 $ 44

Corporate & Eliminations

Total company-funded research and development

$ 92 $ 82 $ 58

Amortization of intangibles

$ 22 $ 22 $ 10

Corporate & Eliminations

Total amortization of intangibles

$ 22 $ 22 $ 10

Other segment items

$ 7 $ 11 $ ( 353 )

Corporate & Eliminations

Total other segment items (1)

$ 7 $ 11 $ ( 353 )

Operating earnings

$ 183 $ 136 $ 503

Corporate & Eliminations

( 7 ) 3 ( 43 )

Total operating earnings

$ 293 $ 231 $ 561

Interest expense

( 21 ) ( 36 ) ( 34 )

( 8 ) ( 3 ) ( 2 )

Earnings before taxes

$ 264 $ 192 $ 525

________________

(1) Includes ASC restructuring costs for 2024, 2023 and 2022 and ASC gain on divestitures for 2022.

Total intersegment revenues by segment for the years ended December 31, 2024, 2023 and 2022, consists of the following:

(Dollars in millions) 2024 2023 2022

7 unchanged sentences

$ 69 $ 63 $ 55

Total assets by segment as of December 31, 2023 and 2022, consist of the following:

(Dollars in millions) 2023 2022

ASC $ 2,244 $ 2,167

IMS 1,146 1,152

Corporate & Eliminations 531 358

$ 3,921 $ 3,677

LEONARDO DRS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

Total assets by segment as of December 31, 2024 and 2023, consists of the following:

(Dollars in millions) 2024 2023

Adjusted EBITDA

ASC $ 2,249 $ 2,244

1 unchanged sentence

Corporate & Eliminations 710 531

Total adjusted EBITDA

$ 4,184 $ 3,921

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

Depreciation ( 63 ) ( 55 ) ( 49 )

Restructuring costs ( 11 ) ( 3 ) ( 5 )

Interest expense ( 36 ) ( 34 ) ( 35 )

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

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

Gain on sale of dispositions — 354 —

Income tax provision ( 24 ) ( 120 ) ( 46 )

$ 168 $ 405 $ 154

Subsequent Events

Share Repurchase Program

On February 20, 2025, the Company announced that its Board of Directors approved a share repurchase program that allows the Company to purchase up to $ 75 million of its outstanding common stock through March 4, 2027, subject to market conditions.

All repurchased shares are expected to be retired.

Payment of Dividends

On February 20, 2025, the Company announced that its Board of Directors approved a cash dividend of $ .09 per share of common stock payable on March 27, 2025 to shareholders of record as of the close of business on March 13, 2025.

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