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Item 7. Management’s Discussion and Analysis

2026-02-27 compared with 2025-03-03 · 171 added, 191 removed, 301 unchanged (55% of the section changed)

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national security customers and allies around the world.

We specialize in the design, development and manufacture of advanced sensing, network computing, force protection, as well as electric power and propulsion.

The strength of our market positioning in these technology areas have created a foundational and diverse base of programs across the U.S.

Department of Defense (the “DoD”).

We specialize in the design, development and manufacture of advanced sensing, network computing, force protection, and electric power and propulsion technologies and solutions.

The strength of our market positioning in these technology areas have created a foundational and diverse base of programs across the DoW and its allies.

We believe these technologies will not only support our customers in today’s mission but will also underpin their strategy to migrate towards more autonomous, dynamic, interconnected, and multi-domain capabilities needed to address evolving and emerging threats.

We view more advanced capabilities in sensing, computing, self-protection and power as necessary to enable these strategic priorities.

Our overall strategy is to be a balanced and diversified company, less vulnerable to any one budgetary platform or service decision with a specific focus on establishing strong technical and market positions in areas of priority for the DoD.

The DoD is our largest customer and, for the years ended December 31, 2024 and 2023, accounted for approximately 79% and 80%, respectively, of our business as an end-user, with revenues principally derived directly or indirectly from contracts with the U.S.

government, primarily with the DoW, is our largest customer and, for the years ended December 31, 2025 and 2024, accounted for approximately 80% and 79%, respectively, of our business as an end-user, with revenues principally derived directly or indirectly from contracts with the U.S.

Navy and U.S.

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Advanced Sensing and Computing

Our Advanced Sensing and Computing (“ASC”) segment designs, develops and manufactures sensing and network computing technology that enables real-time situational awareness required for enhanced operational decision making and execution by our customers.

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

Across our offerings, we are focused on advancing sensor distance and enhancing the precision, clarity, definition, spectral depth and effectiveness of our sensors.

We also seek to leverage the knowledge and expertise built through our decades of experience to optimize size, weight, power and cost for our customers’ specific mission requirements.

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

Our network computing offerings are utilized across a broad range of mission applications including platform computing on ground and shipboard (both surface ship and submarine) for advanced battle management, combat systems, radar, command and control (“C2”), tactical networks, tactical computing and communications.

These products help support the DoD’s need for greater situational understanding at the tactical edge by rapidly transmitting data securely between command centers and forward-positioned defense assets and personnel.

Our 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 across increasingly complex and contested operating environments.

Our sensing capabilities span numerous applications, including missions requiring advanced detection, precision targeting and surveillance sensing, long range electro-optic/infrared, signals intelligence and other intelligence systems, electronic warfare, ground vehicle sensing, next generation active electronically scanned array tactical radars, dismounted soldier sensing and space sensing.

Across our offerings, we are focused on advancing sensor range and enhancing the precision, clarity, definition, spectral depth and effectiveness of our sensors to deliver actionable information in time-sensitive mission scenarios in combination with AI, enabled by our advanced edge processing solutions.

We also seek to leverage the knowledge and expertise built through our decades of experience to optimize size, weight,

power and cost for our customers’ specific mission requirements and to support integration onto a wide range of tactical platforms, including mobile and power-constrained systems.

Our sensing capabilities are complemented by our rugged, trusted and cyber resilient network edge computing products that support data processing, fusion, and dissemination at the tactical edge.

Our network computing offerings are utilized across a broad range of mission applications including platform computing on ground and shipboard (both surface ship and submarine) for advanced battle management, combat systems, radar, command and control, tactical networks, tactical computing and communications.

These products help support the DoW’s need for greater situational understanding and faster decision-making at the tactical edge by leveraging AI and AI-optimized open architecture software, SAGEcore™, to rapidly share, synthesize and transmit data securely between command centers and forward-positioned defense assets and personnel, while supporting reduced latency, operational continuity, and interoperability through modular, open-system architectures.

Within ASC, we are increasingly combining sensing, computing, and software to support applications such as C-UAS, electronic warfare, and networked sensing, where performance depends on the ability to detect, process, and act on data in real time.

These integrated capabilities are designed to support evolving operational concepts that emphasize distributed operations, resilient communications, and decision advantage at the tactical edge.

Integrated Mission Systems

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

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

military and allied defense customers.

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electric drive submarine.

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

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

These capabilities support higher onboard power demands, improved efficiency, and enhanced platform performance across next-generation naval systems.

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

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

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

Our short-range air defense systems integrate EW equipment, reconnaissance and surveillance systems, modular combat vehicle turrets, and stabilized sensor suites, as well as kinetic countermeasures to protect against evolving threats.

Our force protection systems, including solutions for C-UAS and active protection systems on army vehicles, help protect personnel and defense assets from enemy combatants.

DRS is also an integrator of complex systems in ground vehicles for short-range air defense, C-UAS, and vehicle survivability and protection.

Our short-range air defense systems integrate advanced AESA radars, EW equipment, reconnaissance and surveillance systems, mission command capabilities, modular combat vehicle turrets, and stabilized sensor suites, as well as kinetic countermeasures to protect against evolving threats.

Our force protection systems, including solutions for C-UAS, help protect personnel and defense assets from enemy combatants.

Focus on Customer and Execution

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We strive for excellence in everything we do, in every job in our Company, in order to satisfy our customers’ needs embedded in our contractual commitments.

We seek to ensure that we learn from every lesson experienced in our Company and insist that these lessons affect all elements of our businesses.

We seek to ensure that we learn from every lesson experienced in our Company and insist that these lessons affect all elements of our

This approach permeates through the Company with a focus on continuous improvement at every level.

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We challenge ourselves to exceed our customers’ expectations and we partner with them to work to ensure that our execution meets their needs.

Continuous improvement, through the APEX program also allows us to improve our efficiency, which we believe contributes to increased margins, helps us to remain competitive and allows us to make

strategic investments, all while maintaining our focus on customer satisfaction.

Continuous improvement, through the APEX program also allows us to improve our efficiency, which we believe contributes to increased margins, helps us to remain competitive and allows us to make strategic investments, all while maintaining our focus on customer satisfaction.

In these elements, our goals are aligned with those of our customers.

We are humbled by the dedication and sacrifice that our ultimate customers have made to serve and we work to perform for them with excellence in everything we do.

Over the past 12 months, the Company has invested to accelerate both increased capacity and the pacing of innovation.

Throughout 2025, we increased capital expenditures over 60% and IR&D by over 40%.

The investments were highlighted by the opening of a 140,000 square foot naval power and propulsion manufacturing and testing facility in South Carolina, increasing capacity for U.S.

Navy submarine and shipbuilding programs.

This investment was complemented by $45 million of funding for an incremental 40,000 square feet of capacity expansion.

Global Events and Business Impacts

Global Conflicts

In February 2022, Russia invaded and began occupying parts of Ukraine.

Since that time, western powers, including the U.S., have pledged support with humanitarian and military aid.

Some of that military aid pledged by the U.S.

will result in increased efforts to replace equipment and consumables.

We have received orders from the U.S.

and allies to both provide equipment in support of this effort, and to replace equipment pledged.

The ongoing conflicts in Israel and the broader Middle East region have the potential to evolve quickly creating uncertainty, along with the potential for disruptions to our Israeli operations in the region, including, but not limited to, workforce calls for duty, transportation and other logistical impacts and reduced customer confidence.

To date, the conflict has not had a material impact to our operations.

and other western powers have directed military and funding support to Israel.

DRS has direct exposure to Israel principally through its RADA operations with approximately 5% of our workforce as of December 31, 2024 residing in Israel.

and its allies continue to face a global security environment marked by heightened tensions and instability, including threats from state and non-state actors—particularly major powers—as well as terrorist organizations, and diverse regional security challenges and political instability.

Demand for defense products, services, and solutions worldwide is driven by these complex and evolving security conditions, considered in the broader context of political and socioeconomic circumstances and priorities.

These events, including periods of global unrest, can affect our operations and financial performance and influence demand for our products and services.

The ongoing conflict in Ukraine, recent events in Venezuela, and threats elsewhere—particularly in the Middle East and the Western Pacific—have increased global tensions and highlighted evolving security requirements in Europe, the Middle East, the Pacific region, Latin America, and the U.S.

These developments have resulted in, and may continue to result in, increased demand for defense products and services.

We believe the current global security environment continues to underscore the need for strong deterrence and robust defense capabilities.

We are actively evaluating both opportunities and risks associated with these conditions.

Business Environment

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government represented 80%, 79% and 80% of our total revenues for the years ended December 31, 2025, 2024 and 2023, respectively.

government sales are highly concentrated within our DoD customers, which made up the overwhelming majority of our U.S.

government sales are highly concentrated within our DoW customers, which made up the overwhelming majority of our U.S.

government revenue for the year ended December 31, 2025, and are principally derived directly or indirectly from contracts with the U.S.

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Therefore, our revenue is highly correlated to changes in U.S.

government spending levels, especially within the DoD.

The DoD budget is the largest defense budget in the world.

In March 2024, the U.S.

President’s fiscal year (“FY”) 2025 budget request was released and included $850 billion in base funding for national defense programs, which is largely flat over prior year levels.

Following that, the FY 2025 National Defense Authorization Act (“NDAA”) was passed by Congress late in 2024 and signed into law by the President in December 2024.

The NDAA authorizes $850 billion in defense spending, including increases in procurement, research, development, testing and engineering.

To prevent a government shutdown at the end of fiscal year 2024, Congress passed two Continuing Resolutions (“CRs”) to fund the government.

The most recent CR was passed into law on December 21, 2024.

The new measure creates extensions effective through March 14, 2025, allowing lawmakers more time to potentially complete the fiscal year 2025 appropriations bills.

In the event of a U.S.

government shutdown or an extended period of CR, our business, program performance and results of operations could be impacted by the resulting disruptions to federal government offices, workers, and operations, including, but not limited to, program cancellations, schedule delays, production halts and other disruptions and nonpayment, which could adversely affect our results of operations.

The significance of these impacts will primarily be based on the length of the CR or shutdown.

Additionally, the current U.S.

administration has discussed various changes to defense spending levels ranging from across-the-board percentage cuts, to a change in spending allocations in favor of new priorities, and potential increases in the top-line spending profile.

It remains unclear whether and to what extent the DoD’s budget may

change and, if it does, to what extent our business, financial condition and results of operations may be affected.

government spending levels, especially within the DoW.

The DoW budget is the largest defense budget in the world.

Given the reliance on the U.S.

government, funding for our programs are subject to a variety of factors that can affect our business, including:

the President’s budget requests and procurement priorities and policies;

the annual congressional budget authorization and appropriations process;

and other U.S.

government domestic and international priorities.

government spending levels, particularly defense spending and the timing of funding, can affect our financial performance over the short and long term.

The President’s FY2026 budget request was published in June 2025.

The request includes $848 billion in base (discretionary) funding and $113 billion in reconciliation (mandatory) funding.

The OBBBA was signed by the President on July 4, 2025, and provides more than $150 billion in mandatory funding (including the $113 billion reconciliation funding) for national defense, available through September 30, 2029.

Separately, the NDAA for FY2026 was signed into law on December 18, 2025.

The NDAA authorizes $901 billion for defense, including an $8 billion increase over the President’s DoW budget request from June 2025.

On November 12, 2025, the President signed a continuing resolution to fund the U.S.

government, including the DoW, through January 30, 2026.

On January 20, 2026, Congress unveiled its final appropriations package, which included the Defense Appropriations Act conference report.

This legislation provides $839 billion in funding for the DoW, representing an $8 billion increase over the topline in the President’s DoW budget request.

On February 3, 2026, Congress passed and the President signed the Consolidated Appropriations Act, 2026, providing funding for the government through the end of the government’s fiscal year, including authority for defense accounts.

Operating Performance Assessment and Reporting

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Cost-plus contracts provide that, upon termination, the contractor is entitled to reimbursement of its allowable costs and, if the termination is for convenience, a total fee proportionate to the percentage of the work completed under the contract.

If a contract termination is for default, however, the contractor is paid an amount agreed upon for completed and partially completed products and services accepted by the U.S.

If a contract termination is for default, however, the contractor is

paid an amount agreed upon for completed and partially completed products and services accepted by the U.S.

In these circumstances, the U.S.

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Components of Operations

Revenue consists primarily of product related revenue, which represented 94%, 93% and 91% of our total revenues for the periods ended December 31, 2024, 2023 and 2022, respectively.

Revenue consists primarily of product related revenue, which represented 94%, 94% and 93% of our total revenues for the years ended December 31, 2025, 2024 and 2023, respectively.

The remaining revenue was generated from service related contracts.

Additionally, 84%, 84% and 87% of our revenue for December 31, 2024, 2023 and 2022, respectively, was derived from firm-fixed price contracts.

Additionally, 88%, 84% and 84% of our revenue for the years ended December 31, 2025, 2024 and 2023, respectively, was derived from firm-fixed price contracts.

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

Revenue on fixed-price contracts is generally recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our

performance obligations.

Revenue on fixed-price contracts is generally recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations.

Incurred costs represent work performed that corresponds with and thereby best depicts the transfer of control to the customer.

Under flexibly priced contracts, which consisted of 16%, 16% and 13% of our total revenues for December 31, 2024, 2023 and 2022, respectively, we are reimbursed for allowable or otherwise defined total costs (defined as cost of revenues plus allowable general and administrative expenses) incurred, plus a fee.

Under flexibly priced contracts, which consisted of 12%, 16% and 16% of our total revenues for the years ended December 31, 2025, 2024 and 2023, respectively, we are reimbursed for allowable or otherwise defined total costs (defined as cost of revenues plus allowable general and administrative expenses) incurred, plus a fee.

The contracts may also include incentives for various performance criteria, including quality, timeliness, cost-effectiveness or other factors.

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Material costs include raw materials, purchased components and sub-assemblies and outside processing and inbound freight.

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

General and Administrative Expenses

General and administrative (“G&A”) expenses include general and administrative expenses not included within cost of revenues such as salaries, wages and fringe benefits, facility costs and other costs related to these indirect functions.

Additionally, general and administrative expenses include internal research and development costs as well as expenditures related to bid and proposal efforts.

General and administrative (“G&A”) expenses include G&A expenses not included within cost of revenues such as salaries, wages and fringe benefits, facility costs and other costs related to these indirect functions.

Additionally, G&A expenses include company-funded independent research and development costs as well as expenditures related to bid and proposal (“B&P”) efforts.

Results of Operations

The following discussion of operating results is intended to help the reader understand the results of operations and financial condition of the Company, as well as individual segments, for the year ended December 31, 2024 as compared to the year ended December 31, 2023, and for the year ended December 31, 2023 compared to December 31, 2022.

Given the nature of our business, we believe revenue and earnings from operations are most relevant to an understanding of our performance at a business and segment level.

Our operating cycle is lengthy and involves various types of production

contracts and varying delivery schedules.

Our operating cycle is lengthy and involves various types of production contracts and varying delivery schedules.

Accordingly, operating results in a particular year may not be indicative of future operating results.

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General and administrative expenses (497) (414) (384) (83) 20.0 % (30) 7.8 %

Amortization of intangibles (22) (22) (10) — — % (12) 120.0 %

Other operating (expenses) income, net (7) (11) 353 4 (36.4) % (364) (103.1) %

Amortization of acquired intangible assets (22) (22) (22) — — % — — %

Other operating expenses, net (2) (7) (11) 5 (71.4) % 4 (36.4) %

Operating earnings $ 348 $ 293 $ 231 $ 55 18.8 % $ 62 26.8 %

Interest expense (21) (36) (34) 15 (41.7) % (2) 5.9 %

Interest expense, net (8) (21) (36) 13 (61.9) % 15 (41.7) %

Other, net (4) (8) (3) 4 (50.0) % (5) 166.7 %

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Basic EPS $ 1.05 $ 0.81 $ 0.64 $ 0.24 29.6 % $ 0.17 26.6 %

$ 0.81 $ 0.64 $ 1.88 $ 0.17 26.6 % $ (1.24) (66.0) %

Diluted EPS $ 1.03 $ 0.80 $ 0.64 $ 0.23 28.8 % $ 0.16 25.0 %

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$ 4,245 $ 4,077 $ 3,516 $ 168 4.1 % $ 561 16.0 %

$ 4,077 $ 3,516 $ 3,156 $ 561 16.0 % $ 360 11.4 %

______________

(1) Gives effect to a 1.451345331-for-1 forward stock split on our common stock effected November 23, 2022.

(2) See Part I, Item 1A, “ Risk Factors—Risks Relating to Our Business—We may not realize the full value of our total estimated contract value or bookings, including as a result of reduction of funding or cancellation of our U.S.

government contracts, which could have a material adverse impact on our business, financial condition and results of operations ” in this Annual Report.

Year Ended December 31, 2024 Compared With Year Ended December 31, 2023

Our operating results for the year ended December 31, 2024, are highlighted by our record $8.5 billion of backlog and over $4 billion of new orders, demonstrating the strong customer demand for our mission critical technologies.

Embedded in the record backlog is a diversified, balanced portfolio supported by foundational programs strongly aligned in areas of, in our view, growing importance within the DoD budget priorities.

Our backlog position is highlighted by the recent awards received to support the electric power and propulsion system for the Columbia Class production program as well as continued demand in our Force Protection, Network Computing and Advanced Sensing programs.

We believe the performance on these and other programs within our portfolio will support continued revenue growth while the transition from development efforts to production will continue our trend of earnings growth and margin expansion.

Year Ended December 31, 2025 Compared to the Year Ended December 31, 2024

Our operating results for the year ended December 31, 2025, are highlighted by our strong $8.4 billion of backlog and over $4.2 billion of new orders, demonstrating the strong customer demand for our mission critical technologies.

Embedded in our backlog is a diversified, balanced portfolio supported by foundational programs strongly aligned in areas of, in our view, growing importance within the DoW budget priorities.

Our backlog position is highlighted by our contract to support the electric power and propulsion system for the Columbia Class production program, as well as continued demand in our force protection, network computing, and advanced sensing programs.

We believe the performance on these and other programs within our portfolio will support continued revenue growth.

Revenue of $3,648 million for the year ended December 31, 2025 represented an increase of $414 million (12.8%) driven by increased demand across our program portfolio.

Our gross profit of $736 million increased $88 million (13.6%) from the prior year results attributed to the increased volume.

Despite this growth, gross margin saw a slight decrease of 10 bps driven in part by program related impacts from our Ground Surveillance program and unfavorable revenue mix, offset in part by improved program execution on our Columbia Class program.

Our operating earnings and net earnings increased $62 million (26.8%)

and $45 million (26.8%) from the year ended December 31, 2023, respectively, attributed to the higher gross profit, and lower interest expense, offset slightly by higher tax expense.

Our gross profit of $869 million increased $133 million (18.1%) from the prior year results attributed to the increased volume and higher profitability levels.

This contributed to a gross margin increase of 100 bps attributed to a quantum cascade laser license for specific use in the quantum space, positive program performance on our Columbia Class program and favorable revenue mix as we realized increased revenue from our tactical radars.

These benefits were offset in large part by the negotiated conclusion of the work on a legacy

ground surveillance program, which triggered a program charge.

Our operating and net earnings increased $55 million (18.8%) and $65 million (30.5%) from the year ended December 31, 2024, respectively, attributed to the higher gross profit, and lower net interest expense, offset slightly by higher tax expense.

For the year ended December 31, 2025, revenue increased by $414 million, or 12.8%, to $3,648 million from $3,234 million for year ended December 31, 2024.

The revenue increase in 2024 was attributed to increased customer demand across our portfolio, including our increased revenue contribution from international customers as well as a stabilized supply chain enabling more efficient execution.

The revenue growth is attributed to both of our operating segments and is highlighted by our Force Protection and Electric Power and Propulsion programs within our IMS segment and Advanced Sensing in our ASC segment.

See “— Review of Operating Segments ” below for additional detail.

The revenue increase in 2025 was attributed to increased customer demand across our portfolio, highlighted by increased revenue contribution from our naval power and propulsion efforts, continued counter drone and short-range air defense (“SHORAD”) programs, as well as the quantum laser license noted above.

The revenue growth is attributed to both of our operating segments, see “— Review of Operating Segments ” below for additional detail.

Cost of Revenues

Cost of revenues increased $281 million, or 11.2%, from $2,498 million to $2,779 million for the year ended December 31, 2025, due to the 12.8% increase in revenue as described above.

The increase was further impacted by realized adjustments on cost at completion estimates which negatively impacted earnings with net charges totaling approximately 1% of revenue for the year ended December 31, 2024, relatively consistent with the prior year (see Note 3:

Revenue from Contracts with Customers to the Consolidated Financial Statements for further detail), which includes the aforementioned ground vehicle surveillance program noted above.

Additionally, revenue mix and the impact of cost increases tied to germanium used in our optics and infrared programs increased our cost of revenues for the period within our ASC segment.

This impact was largely offset by improved performance on our Columbia Class submarine program efforts.

Gross profit increased $88 million, or 13.6%, from $648 million for the year ended December 31, 2023, to $736 million for the year ended December 31, 2024 attributed to increased volume offset by the program impacts noted above.

The 11.2% increase, which was slightly lower than the 12.8% revenue increase, was impacted by improved program performance and favorable revenue mix, due in part to the quantum laser license, which was offset by increased cost at completion estimates, which negatively impacted earnings with net charges totaling approximately 2% of revenue for the year ended December 31, 2025 (see Note 2:

Revenue from Contracts with Customers to the Consolidated Financial Statements for further detail).

The increased cost at completion includes the aforementioned legacy ground surveillance program noted above and the impact of cost increases tied to germanium used in our optics and infrared programs that increased our cost of revenues for the period within our ASC segment.

Gross profit increased $133 million, or 18.1%, from $736 million for the year ended December 31, 2024, to $869 million for the year ended December 31, 2025, attributed to increased volume offset by the program impacts for the legacy ground surveillance program and optics and infrared programs noted above.

General and Administrative Expenses

G&A expenses increased by $83 million, or 20.0%, from $414 million for the year ended December 31, 2024, to $497 million for the year ended December 31, 2025.

The increase is largely attributed to enhanced internal research and development (IR&D) expenditures as well as a ‘one-time’ prior year reserve adjustment in 2023 related to an environmental claim that impacted the year over year compare.

Amortization of Intangibles

Amortization of intangibles for the year ended December 31, 2024 of $22 million remained consistent with the year ended December 31, 2023.

Other Operating (Expenses) Income, Net

The increase is largely attributed to enhanced IR&D expenditures, B&P expenditures, stock-based compensation expenses and G&A efforts to expand the business internationally.

Amortization of Acquired Intangible Assets

Amortization of acquired intangible assets for the year ended December 31, 2025 of $22 million remained consistent with the year ended December 31, 2024.

Other Operating Expenses, Net

Other operating expenses, net decreased $5 million from $7 million for the year ended December 31, 2024 to $2 million for the year ended December 31, 2025.

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Operating earnings increased by $55 million, or 18.8%, to $348 million for the year ended December 31, 2025, from $293 million for the year ended December 31, 2024, driven by the higher gross profit offset by the impacts of G&A expenditures.

Interest Expense

Interest expense decreased by $15 million to $21 million for the year ended December 31, 2024, from $36 million for the year ended December 31, 2023.

The decrease is primarily attributed to a decrease in borrowings on our revolving credit facility.

Interest Expense, Net

Net interest expense decreased by $13 million to $8 million for the year ended December 31, 2025, from $21 million for the year ended December 31, 2024.

The decrease is primarily attributed to increased interest income as a result of higher cash balances during the year and a decrease in borrowings on our revolving credit facility.

Se e Note 12:

Debt to the Consolidated Financial Statements for further information regarding our debt.

Other, net increased to $8 million for the year ended December 31, 2024, from $3 million for the year ended December 31, 2023 driven by higher foreign exchange rate impacts.

Other, net decreased to $4 million for the year ended December 31, 2025, from $8 million for the year ended December 31, 2024 driven by lower foreign exchange rate impacts.

Earnings Before Taxes

Earnings before taxes increased by $72 million to $336 million for the year ended December 31, 2025, from $264 million for the year ended December 31, 2024.

This was primarily due to increased operating earnings of $62 million, the decrease of $15 million in interest expense and the increase in other, net costs of $5 million as described above.

This was primarily due to increased operating earnings of $55 million, the decrease of $13 million in net interest expense and the decrease in other, net costs of $4 million, as described above.

Income Tax Provision

Income tax provision increased by $7 million to $58 million for the year ended December 31, 2025, from $51 million for the year ended December 31, 2024.

This was primarily due to an increase in earnings before taxes and the absence of a multi-year catch-up on the R&D tax credit that benefited 2023.

These two items resulted in an increase in our overall effective tax rate of 19.3% compared to 12.5% in 2023.

This was primarily due to an increase in earnings before taxes, partially offset by an increase in tax credits.

Our effective tax rate was 17.3% for 2025 compared to 19.3% for 2024.

Net earnings increased by $65 million to $278 million for the year ended December 31, 2025, when compared to the year ended December 31, 2024.

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Basic and Diluted EPS

For the year ended December 31, 2024, the weighted average shares outstanding totaled 263.7 million and 267.7 million for basic and diluted shares, respectively.

The weighted average basic and diluted share count increased approximately 2 million and 4 million shares, respectively, as compared to the prior year basic and diluted weighted average shares outstanding, respectively.

The increase in weighted average shares outstanding is attributed to equity vesting and stock option exercises.

The increased shares outstanding resulted in $0.81 and $0.80 for basic and diluted EPS, respectively, as compared to the prior year results of $0.64 for both basic and diluted EPS.

For the year ended December 31, 2025, the weighted average shares outstanding totaled 265.9 million and 268.7 million for basic and diluted shares, respectively, an increase of approximately 2 million and 1 million shares as compared to the prior year.

The increase in weighted average shares outstanding is attributed to equity vesting and stock option exercises, offset slightly by shares repurchased throughout the course of the year.

Basic and diluted earnings per share (“EPS”) was $1.05 and $1.03 for the year ended December 31, 2025, respectively, as compared to the prior year basic and diluted EPS of $0.81 and $0.80, respectively.

The increase in basic and diluted EPS is attributed to the increased net earnings described above, partially offset by the increased weighted average shares outstanding.

Total backlog includes the following components:

• Funded - Funded backlog represents the revenue value of orders for services under existing contracts for which funding is appropriated or otherwise authorized less revenue previously recognized on these contracts.

• Funded - Funded backlog represents the revenue value of orders for products and services under existing contracts for which funding is appropriated or otherwise authorized less revenue previously recognized on these contracts.

• 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.

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Backlog increased by $180 million, or 2.2%, from $8,268 million as of December 31, 2024, to $8,448 million as of December 31, 2025.

The backlog increase was attributed to increased demand across both of our operating segments.

The backlog increase is largely attributed to increased demand in airborne, naval and dismounted soldier sensing programs as well as naval and land based computing efforts within our ASC segment.

Within the IMS segment backlog increased in both our Naval power and propulsion programs and for our Short-Range Air Defense solutions with the U.S.

The backlog increase is largely attributed to increased demand in space, ground vehicle, and airborne sensing programs as well as logistic support programs within our ASC segment, partially offset by a reduction in new awards for tactical computing and dismounted soldier sensing programs.

See “— Review of Operating Segments ” below for a more detailed analysis.

At December 31, 2025 we changed our remaining performance obligations / backlog.

The change resulted in an immaterial impact on prior year and prior quarter amounts.

The following table summarizes the adjusted value of our backlog for each of the five quarters in the period ended December 31, 2025:

(Dollars in millions) Q4 Q3 Q2 Q1 Q4

Funded $ 4,643 $ 4,678 $ 4,355 $ 4,354 $ 4,177

Unfunded 3,805 3,991 4,011 4,018 4,091

Total backlog $ 8,448 $ 8,669 $ 8,366 $ 8,372 $ 8,268

We define bookings as the total value of contract awards received from the U.S.

government for which it has appropriated funds and legally obligated such funds to the Company through a contract or purchase order, plus the value of contract awards and orders received from customers other than the U.S.

government for which it has appropriated funds and legally obligated such funds to the Company through a contract or purchase order, plus the funded value of contract awards and orders received from customers other than the U.S.

For the year ended December 31, 2025, we generated bookings of $4,245 million, a 4.1% increase over the $4,077 million realized during the year ended December 31, 2024.

The bookings increase is attributed to increased customer demand across both of our segments with our IMS and ASC segments realizing bookings growth of 21.4% and 13.1%, respectively.

The bookings increase was most notable in our airborne and naval sensing programs as well as naval and ground tactical computing and network programs within our ASC segment.

The growth in the IMS segment is attributed to our Columbia Class efforts along with increased demand for surface ship power solutions.

These increases were offset in part by lower new awards received on certain infrared counter measures that were accelerated into the prior year.

The bookings increase is attributed to increased customer demand within our IMS segment realizing bookings growth of 21.7%, which was offset in part by ASC new orders which declined from the prior year (5.7%).

The bookings increase was driven by strong performance within both our force protection (counter drone and SHORAD) and naval power and propulsion programs.

These increases were offset in part by lower new awards received at our ASC segment.

See “— Review of Operating Segments ” below for a more detailed analysis.

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Changes in the volume and relative mix of U.S.

government spending as well as areas of spending growth could impact our business and results of operations.

In particular, our results can be affected by shifts in strategies and priorities on homeland security, intelligence, defense-related programs, infrastructure and urbanization and continued increased spending on technology and innovation, including cybersecurity with respect to our and third parties' information networks and related systems, artificial intelligence, connected communities and physical infrastructure (for example, the potential impacts for the Russia / Ukraine conflict and the Israel-Hamas war).

Cost-cutting and efficiency initiatives, current and future budget restrictions, spending cuts and other efforts to reduce government spending and shifts in overall priorities could cause our government customers to reduce or delay funding or invest appropriated funds on a less consistent basis or not at all, and demand for our solutions or services could diminish.

and allied government spending as well as areas of spending growth, including due to the evolution of warfare, could impact our business and results of operations.

information networks and related systems, AI, connected communities and physical infrastructure (for example, the potential impacts for the Russia / Ukraine conflict and the Israel-Hamas war).

Cost-cutting and efficiency initiatives, increasing nationalization efforts, current and future budget restrictions, spending cuts and other efforts to reduce government spending and shifts in overall priorities could cause our government customers to reduce or delay funding or invest appropriated funds on a less consistent basis or not at all, and demand for our solutions or services could diminish.

Existing contracts could also be canceled due to changes in need and prioritization.

Furthermore, any disruption in the functioning of government agencies, including as a result of government closures and shutdowns, could have a negative impact on our operations and cause us to lose revenue or incur additional costs due to, among other things, our inability to maintain access and schedules for government testing or deploy our staff to customer locations or facilities as a result of such disruptions.

There is also uncertainty around the timing, extent, nature and effect of Congressional and other U.S.

government actions to address budgetary constraints, caps on the discretionary budget for defense and non-defense departments and agencies, and the ability of Congress to determine how to allocate the available budget authority and pass appropriations bills to fund both U.S.

government departments and agencies that are, and those that are not, subject to the caps.

government actions to address budgetary constraints, caps on certain discretionary budgets, and the ability of Congress to determine how to allocate the available budget authority and pass appropriations bills to fund U.S.

government departments and agencies.

Additionally, budget deficits and the growing U.S.

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government as a result of any of these impacts or related initiatives, legislation or otherwise could have a material adverse effect on our business and results of operations.

See Part I, Item 1A, “ Risk Factors—Risks Related to Our Business—Significant delays or reductions in appropriations for our programs and changes in U.S.

See Part I, Item 1A, “ Risk Factors—Risks Related to Our Business—Significant delays, including government shutdowns, or reductions in appropriations for our programs and changes in U.S.

government priorities and spending levels more broadly may negatively impact our business and could have a material adverse impact on our business, financial condition and results of operations ” and Part II, Item 7, “ Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Overview and Considerations—Business Environment ” in this Annual Report for further details on U.S.

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Typically, we enter into three types of contracts:

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

fixed-price contracts, cost-plus contracts and T&M contracts.

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

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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.

The contracts may also include incentives for various performance criteria, including quality, timeliness and cost-effectiveness.

The contracts may also include incentives for various performance criteria, including quality, timeliness

and cost-effectiveness.

In addition, costs are generally subject to review by clients and regulatory audit agencies, and such reviews could result in costs being disputed as non-reimbursable under the terms of the contract.

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

The following represents the net impact that changes in our estimates, particularly those regarding our fixed-price development programs, have had on our revenues for the 2024, 2023 and 2022 periods, respectively:

The following represents the net impact that changes in our estimates, particularly those regarding our fixed-price programs, have had on our revenues for the periods presented:

Year Ended December 31,

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Increased audit, review, investigation and general scrutiny by U.S.

government agencies of performance under government contracts and compliance with the terms of those contracts and applicable laws could affect our operating results.

Negative publicity and increased scrutiny of government contractors in general, including us, relating to government expenditures for contractor services and incidents involving the mishandling of sensitive or classified information as well as the increasingly complex requirements of the DoD and the United States intelligence community, including those related to cybersecurity, could impact our ability to perform in the markets we serve.

government agencies of performance under government contracts and compliance with the terms of those contracts and applicable laws, including executive orders, could affect our operating results.

intelligence community, including those related to cybersecurity, could impact our ability to perform in the markets we serve.

International Sales

International revenue, including foreign military sales, foreign military financing, and direct commercial sales, accounted for approximately 8%, 13% and 10% of our revenue for the years ended December 31, 2025, 2024 and 2023, respectively.

The increase is due in part to incremental demand resulting from higher defense spending within Eastern Europe, compounded by continued military aid programs in support of Ukraine in its conflict with Russia.

These efforts are highlighted by demand for our battle management, weapon sights and tactical radar solutions.

Since our focus is primarily with the DoD and our investments are focused as such, we anticipate that international sales will continue to account for a similar percentage of revenue in the future.

The reduction in international sales is due in part to the reduction of exposure to the Ukraine conflict coupled with the decrease in revenue on the legacy ground surveillance program noted above.

We believe that despite the reduction, international sales will be an important growth opportunity driven by higher defense spending within Europe and recent foreign military sales agreements signed between the U.S.

and allied nations in the Middle East.

We remain subject to the spending levels, pace and priorities of the U.S.

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We also may explore the divestiture of businesses that no longer meet our needs or strategy or that could perform better outside of our organization.

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

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

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

LDO), owning the remaining 81%.

Immediately following the closing, the Company began trading on the Nasdaq Stock Exchange under the ticker “DRS.”

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

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

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

Business Acquisition to the Consolidated Financial Statements for additional information regarding the transaction.

On March 21, 2022, the Company entered into a definitive agreement to sell its GES business to SES Government Solutions, Inc., a wholly-owned subsidiary of SES S.A., for $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 expenses, net partially reduced by aggregate transaction costs of $14 million included in general and administrative costs and tax expenses of $70 million.

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

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

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

On April 19, 2022, we entered into a definitive sales agreement to divest our share of our equity investment in AAC for $56 million to Thales Defense & Security, Inc., the minority partner in this joint venture.

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

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 expenses, net offset by tax expense of $9 million.

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

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

The dividend was issued on August 5, 2022.

Review of Operating Segments

The following is a discussion of operating results for each of our operating segments.

We have elected to use revenue, operating earnings, operating margin, bookings and backlog to provide detailed information on our segment performance.

We have elected to use revenue, operating earnings, operating margin, bookings and backlog to provide detailed

information on our segment performance.

Additional information regarding our segments can be found in Note 18:

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In total, ASC segment revenue increased $237 million, or 11.2%, from $2,118 million for the year ended December 31, 2024 to $2,355 million for the year ended December 31, 2025.

The increase is primarily attributed to the increased demand realized throughout the segment.

Major drivers include continued expansion of dismounted sensing and tactical radar programs in both our domestic and international markets.

This was offset in part by a reduction in infrared counter measure programs which were accelerated into 2023.

The increase is attributed to the quantum laser license as well as increased demand realized throughout the segment.

Major drivers include continued expansion of dismounted and ground vehicle sensing, tactical radar programs for C-UAS applications and naval computing programs across the portfolio.

Operating Earnings and Operating Margin

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Operating margin increased from 8.6% for the year ended December 31, 2024 to 10.2% for the year ended December 31, 2025.

The increase in operating earnings is driven by the increase in overall revenue contribution noted above.

The increase in operating earnings and operating margin is driven by the increase in overall revenue contribution noted above, coupled with the profit increase associated with the quantum laser license.

This was offset in part by increased G&A expenditures and increased IR&D investments during the period.

ASC’s bookings increased by $302 million, or 13.1%, from $2,307 million for the year ended December 31, 2023 to $2,609 million for the year ended December 31, 2024.

The increase in new awards is driven by our alignment of customer priorities to combat the emerging threats our service men and women face in today’s environment, driving a book to bill ratio of 1.2 to 1 for the year.

The increase compared to the prior year is highlighted by increased demand across nearly all of our sensing domains, including airborne, dismounted soldier, naval and electronic warfare.

Additionally we saw increased demand for our tactical computing programs.

These results were offset in part by a reduction on infrared counter measure (IRCM) and ground vehicle sensing programs where awards were accelerated into the prior year.

ASC’s bookings decreased by $150 million, or 5.7%, from $2,609 million for the year ended December 31, 2024 to $2,459 million for the year ended December 31, 2025.

The decrease in new awards is a result of certain multi-year bookings realized in the prior year on naval and airborne

computing programs that did not recur in 2025.

Despite the decline in new orders, the ASC segment realized a book to bill ratio of 1.0 to 1 for the year ended December 31, 2025, continuing to demonstrate a strong foundation for growth.

New bookings were highlighted by demand in airborne and ground vehicle sensing coupled with continued need for tactical radars for SHORAD and counter drone activities.

ASC’s backlog increased by $258 million, or 8.6%, from $2,992 million for the year ended December 31, 2024 to $3,250 million for the year ended December 31, 2025.

This was attributed to the increased demand and new awards realized (noted above) which were 1.2x that of the revenue generated during the period, driving an increase in the backlog position.

This was attributed to the increased demand and new awards realized (noted above) which were 1.0x that of the revenue generated during the period, coupled with increased unfunded backlog attributed to our recent SDA missile tracking award, driving an increase in the overall backlog position.

IMS revenue increased by $169 million, or 14.9%, from $1,138 million for the year ended December 31, 2024 to $1,307 million for the year ended December 31, 2025.

The increase is attributed primarily to our increased output within our electric power and propulsion programs with the U.S.

Navy’s premier submarine initiative, the Columbia Class submarine.

The naval growth was compounded by efforts for fire system support programs including the Patriot Missile program.

This was offset by the timing of contract awards and revenue realized on our surface ship power and propulsion programs within the segment.

The increase is attributed primarily to our increased output within our power and propulsion programs with the U.S.

Navy’s surface and submarine platforms.

The naval growth was compounded by force protection efforts for SHORAD and counter drone programs.

This was offset by the decrease in revenue related to the negotiated conclusion of a legacy ground surveillance program of approximately $67 million in the period.

Operating Earnings and Operating Margin

In total, IMS’s operating earnings increased by $25 million, or 27.2%, from $92 million for the year ended December 31, 2023 to $117 million for the year ended December 31, 2024, driven by the increased revenue output noted above.

As a result, operating margin increased 130bps from 9.0% for the year ended December 31, 2023 to 10.3% for the year ended December 31, 2024.

This increase in operating earnings and operating margin is attributed to operational leverage realized on the expanding revenue base coupled with improved program performance on our Columbia Class program, offset in part by costs realized on our Land Surveillance program along with minor increases in G&A and IR&D expenditures.

In total, IMS’s operating earnings decreased by $2 million, or 1.7%, from $117 million for the year ended December 31, 2024 to $115 million for the year ended December 31, 2025, driven by the negotiated conclusion of work on a legacy ground surveillance program noted earlier.

The impact was offset by increased revenue output noted above.

Operating margin decreased 150 bps from 10.3% for the year ended December 31, 2024 to 8.8% for the year ended December 31, 2025.

This decrease in operating margin is attributed to the impact of the legacy ground surveillance program noted above and minor increases in G&A and IR&D expenditures which were largely offset by operational leverage realized on the expanding revenue base coupled with improved program performance on our Columbia Class program.

Bookings for the year ended December 31, 2025 were $1,786 million, an increase of $318 million as compared to the year ended December 31, 2024, driving a book to bill ratio of 1.4 to 1.

The new awards are highlighted by the receipt of awards totaling approximately $580 million for new Columbia Class funding, approximately $570 million of additional naval power awards outside of the Columbia Class programs and approximately $323 million of short-range air defense and C-UAS programs during the period.

Backlog increased by $168 million, or 3.1%, to $5,517 million for the year ended December 31, 2024 from $5,349 million for the year ended December 31, 2023.

The backlog increase is largely attributed to awards received on surface ship programs within our power and propulsion line of business.

Backlog decreased by $78 million, or 1.5%, to $5,198 million for the year ended December 31, 2025, from $5,276 million for the year ended December 31, 2024.

The backlog decrease is largely attributed to a reduction in unfunded backlog as awards were received on Columbia Class programs within our power and propulsion line of business.

Liquidity and Capital Resources

We endeavor to ensure the most efficient conversion of operating income into cash for deployment in our business and to maximize stockholder value through cash deployment activities.

In addition to our cash position, we use various financial measures to assist in capital deployment decision-making, including cash provided by operating activities.

We endeavor to ensure the most efficient conversion of operating earnings into cash for deployment in our business and to maximize stockholder value through cash deployment activities.

In addition to our cash position, we use various financial measures to assist in capital deployment decision-making,

including cash provided by operating activities.

We believe that the combination of our existing cash, access to credit facilities as described in Note 12:

Debt and future cash that we expect to generate from our operations will be sufficient to meet our short and long-term liquidity needs.

Debt to the Consolidated Financial Statements, and future cash that we expect to generate from our operations will be sufficient to meet our short and long-term liquidity needs.

There can be no assurance, however, that our business will continue to generate cash flow at current levels or that anticipated operational improvements will be achieved.

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Net cash provided by operating activities $ 366 $ 271 $ 205

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

Net cash used in investing activities (154) (84) (59)

Net cash (used in) provided by financing activities (163) (56) 15

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We generated cash from operating activities of $366 million for the year ended December 31, 2025, as compared to $271 million for the year ended December 31, 2024.

The increase in cash from operating activities is attributed to improved profit generation during the period, partially offset by increased investments in working capital to facilitate future growth.

The increase in cash from operating activities is attributed to improved profit generation during the period and lower cash used to fund working capital.

In total our changes in our assets and liabilities absorbed $65 million of cash for the year ended December 31, 2025, compared to $79 million for the year ended December 31, 2024.

The cash usage in the working capital accounts is driven primarily from increased inventory levels ($29 million) to support enhanced customer demand as well as increased accounts receivables ($102 million) attributed to timing of our customer payments.

Conversely, we realized a reduction in our net contract assets and an increase in our contract liabilities of $36 million and $64 million, respectively.

Investing Activities

Investing activities used $154 million of cash during the year ended December 31, 2025 as compared to $84 million during the year ended December 31, 2024.

The $25 million increase is attributed mainly to investments in our new South Carolina manufacturing facility.

The $70 million increase is primarily due to higher capital expenditures attributed to capacity expansion throughout the portfolio, highlighted by our new naval power facility project in South Carolina and a $15 million investment to extend our ownership stake in Hoverfly, a power-tethered unmanned aerial systems company.

Financing Activities

Cash used in financing activities for the year ended December 31, 2024 was $56 million compared to cash provided by financing activities for the year ended December 31, 2023 of $15 million.

The primary cash outflow for the current year is driven by our $43 million of debt repayments made during the period.

Additionally the Company reacquired equity instruments related to employee stock vesting of $19 million.

These outflows were offset in part by $16 million of cash proceeds received upon the exercise of stock options.

The financing cash inflow in the prior year was primarily attributed to the exercise of stock options during the year.

Cash used in financing activities for the year ended December 31, 2025 was $163 million compared to $56 million for the year ended December 31, 2024.

The change was primarily due to cash outlays related to dividends paid in the current period and share buy backs under the share repurchase program announced in the first quarter of 2025.

These outflows were offset in part by higher debt repayments in the prior year period.

Material Cash Requirements

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Finance leases and other (2)

Post-retirement obligations (3)

Postretirement obligations (3)

Purchase commitments (4)

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Debt to the Consolidated Financial Statements.

(3) Post-retirement obligations include those amounts we expect to pay out in benefit payments and are further explained in Note 14:

(3) Postretirement obligations include those amounts we expect to pay out in benefit payments and are further explained in Note 13:

Pension and Other Postretirement Benefits to the Consolidated Financial Statements.

(4) Purchase commitments include open purchase orders with vendors for which the Company is contractually obligated.

Subsequent to year-end, the Company terminated the senior unsecured credit agreement with Bank of America (the “2022 Credit Agreement”), repaid the remaining outstanding balance of the term loan under the 2022 Credit Agreement (the “2022 Term Loan A”), and entered into a new credit agreement.

Debt to the Consolidated Financial Statements for further information.

Off-Balance Sheet Arrangements

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We believe the following critical accounting policies contain the more significant judgments and estimates used in the preparation of our Consolidated Financial Statements:

• Revenue Recognition and Contract Estimates

• Business Combinations

• Revenue Recognition on Contracts and Contract Estimates

• Income Taxes

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Revenue from Contracts with Customers to the Consolidated Financial Statements.

Business Combinations

We record all tangible and intangible assets acquired and liabilities assumed in a business combination at fair value as of the acquisition date, with any excess purchase consideration recorded as goodwill.

Determining the fair value of acquired assets and liabilities assumed, including intangible assets specific to technology and contract asset intangibles, requires management to make significant judgments about expected future cash flows, weighted average cost of capital, discount rates, and expected long-term growth rates.

During the measurement period, not to exceed one year from the acquisition date, we may adjust provisional amounts recorded to reflect new information subsequently obtained regarding facts and circumstances that existed as of the acquisition date.

We account for income taxes under the asset and liability method in accordance with the accounting standard for income taxes.

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If we were to determine that we would be able to realize our deferred income tax assets in the future in excess of their net recorded amount or would no longer be able to realize our deferred income tax assets in the future as currently recorded, we would make an adjustment to the valuation allowance which would decrease or increase the provision for income taxes.

The provision for federal, state, foreign and local income taxes is calculated on income before income taxes based on current tax law and includes the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities.

The provision for federal, state, foreign and local income taxes is calculated on earnings before taxes based on current tax law and includes the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities.

Such provision differs from the amounts currently payable because certain items of income and expense are recognized in different reporting periods for financial reporting purposes than for income tax purposes.

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The deferred tax assets principally relate to capitalized R&D, benefit accruals, inventory obsolescence, tax benefit carryforwards and contract reserves.

The deferred tax assets as of December 31, 2024 and 2023 include $7 million and $11 million, respectively, related to tax benefit carryforwards associated with net operating losses.

The increase in the deferred tax asset as compared to the prior year is primarily attributed to the capitalization of R&D expenditures pursuant to Section 174 of the Tax Code.

This section was a part of the Tax Cuts and Jobs Act of 2017 and became effective for tax years beginning in 2022.

Accounting Standards Updates (ASU)

The deferred tax assets as of

December 31, 2025 and 2024 include $7 million related to tax benefit carryforwards associated with net operating losses.

The decrease in the deferred tax asset as compared to the prior year is primarily attributed to the deduction of previously capitalized R&D expenditures pursuant to Section 174 of the Tax Code.

The OBBBA allows taxpayers to make elections to deduct the capitalized expenditures over certain periods.

Accounting Standards Updates

Summary of Significant Accounting Policies to the Consolidated Financial Statements for information regarding accounting standards we adopted in 2025 and other new accounting standards that have been issued by the Financial Accounting Standards Board but are not effective until after December 31, 2025.

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 7. Management’s Discussion and Analysis