Leonardo DRS, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Reports of Independent Registered Public Accounting Firm (PCAOB ID No. 42 ) 75 Consolidated Statements of Earnings 77 Consolidated Statements of Comprehensive Income 78 Consolidated Balance Sheets 79 Consolidated Statements of Cash Flows 80 Consolidated Statements of Stockholders’ Equity 81 Notes to Consolidated Financial Statements 82 74 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Leonardo DRS, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Leonardo DRS, Inc. (the Company) as of December 31, 2025 and 2024, the related consolidated statements of earnings, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2025, 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, 2025 and 2024, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2025, 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, 2025, 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 26, 2026 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates. 75 Revenue recognition – Estimates to complete for certain long-term contracts Description of the Matter As described in Note 2 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 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 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 historical cost experience of similar contracts, agreeing underlying data to source documents, and meeting with program management to confirm our understanding of the risks associated with the contract and current contract performance. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2022. Tysons, Virginia February 26, 2026 76 LEONARDO DRS, INC. Consolidated Statements of Earnings Year Ended December 31, (Dollars in millions, except per share amounts) 2025 2024 2023 Revenues 3,648 3,234 2,826 Cost of revenues ( 2,779 ) ( 2,498 ) ( 2,178 ) Gross profit 869 736 648 General and administrative expenses ( 497 ) ( 414 ) ( 384 ) Amortization of acquired intangible assets ( 22 ) ( 22 ) ( 22 ) Other operating expenses, net ( 2 ) ( 7 ) ( 11 ) Operating earnings 348 293 231 Interest expense, net ( 8 ) ( 21 ) ( 36 ) Other, net ( 4 ) ( 8 ) ( 3 ) Earnings before taxes 336 264 192 Income tax provision ( 58 ) ( 51 ) ( 24 ) Net earnings $ 278 $ 213 $ 168 Net earnings per share from common stock: Basic earnings per share $ 1.05 $ 0.81 $ 0.64 Diluted earnings per share $ 1.03 $ 0.80 $ 0.64 See accompanying Notes to Consolidated Financial Statements. 77 LEONARDO DRS, INC. Consolidated Statements of Comprehensive Income Year Ended December 31, (Dollars in millions) 2025 2024 2023 Net earnings $ 278 $ 213 $ 168 Other comprehensive income (loss), net of income taxes: Foreign currency translation (loss) gain — ( 1 ) 1 Pension and other postretirement benefit plan adjustments 2 — 1 Net unrealized gain on derivative instruments 4 1 — Other comprehensive income, net of income taxes 6 — 2 Total comprehensive income $ 284 $ 213 $ 170 See accompanying Notes to Consolidated Financial Statements. 78 LEONARDO DRS, INC. Consolidated Balance Sheets December 31, (Dollars in millions, except per share amounts) 2025 2024 ASSETS Current assets: Cash and cash equivalents $ 647 $ 598 Accounts receivable, net 334 253 Contract assets 931 872 Inventories 352 358 Prepaid expenses 26 27 Other current assets 36 55 Total current assets 2,326 2,163 Noncurrent assets: Property, plant and equipment, net 512 440 Intangible assets, net 112 132 Goodwill 1,238 1,238 Deferred tax assets 88 120 Other noncurrent assets 210 91 Total noncurrent assets 2,160 2,021 Total assets $ 4,486 $ 4,184 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings and current portion of long-term debt $ 26 $ 25 Accounts payable 351 426 Contract liabilities 585 399 Other current liabilities 269 266 Total current liabilities 1,231 1,116 Noncurrent liabilities: Long-term debt 321 340 Pension and other postretirement benefit plan liabilities 35 34 Deferred tax liabilities 3 7 Other noncurrent liabilities 166 130 Total noncurrent liabilities 525 511 Commitments and contingencies (Note 16) Stockholders' equity: Preferred stock, $ 0.01 par value: 10,000,000 shares authorized; none issued — — Common stock, $ 0.01 par value: 350,000,000 shares authorized; 265,822,404 and 265,064,755 shares issued and outstanding as of December 31, 2025 and 2024, respectively 3 3 Additional paid-in capital 5,083 5,194 Accumulated deficit ( 2,315 ) ( 2,593 ) Accumulated other comprehensive loss ( 41 ) ( 47 ) Total stockholders' equity 2,730 2,557 Total liabilities and stockholders' equity $ 4,486 $ 4,184 See accompanying Notes to Consolidated Financial Statements. 79 LEONARDO DRS, INC. Consolidated Statements of Cash Flows Year Ended December 31, (Dollars in millions) 2025 2024 2023 Operating activities Net earnings $ 278 $ 213 $ 168 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 93 91 85 Deferred income taxes 28 23 ( 52 ) Stock-based compensation expense 32 22 17 Other — 1 1 Changes in assets and liabilities: Accounts receivable ( 81 ) ( 102 ) 15 Contract assets ( 59 ) 36 ( 36 ) Inventories 6 ( 29 ) ( 10 ) Prepaid expenses 1 ( 6 ) ( 1 ) Other current assets 23 ( 13 ) ( 18 ) Other noncurrent assets ( 44 ) 17 19 Defined benefit obligations ( 10 ) ( 2 ) ( 8 ) Accounts payable ( 79 ) 15 ( 59 ) Contract liabilities 186 64 102 Other current liabilities 3 ( 39 ) ( 26 ) Other noncurrent liabilities ( 11 ) ( 20 ) 8 Net cash provided by operating activities 366 271 205 Investing activities Capital expenditures ( 139 ) ( 85 ) ( 60 ) Proceeds from sales of assets — 1 1 Purchases of investments ( 15 ) — — Net cash used in investing activities ( 154 ) ( 84 ) ( 59 ) Financing activities Net increase (decrease) in borrowings (maturities of 90 days or less) 1 ( 32 ) 20 Repayments of borrowings ( 11 ) ( 291 ) ( 727 ) Proceeds from borrowings — 280 715 Proceeds from stock issuance 9 16 12 Repurchases of common stock ( 35 ) — — Payments of employee taxes withheld from stock-based awards ( 21 ) ( 19 ) ( 1 ) Dividends paid ( 28 ) — — Dividends paid to related party ( 68 ) — — Other ( 10 ) ( 10 ) ( 4 ) Net cash (used in) provided by financing activities ( 163 ) ( 56 ) 15 Effect of exchange rate changes on cash and cash equivalents — — — Net increase in cash and cash equivalents 49 131 161 Cash and cash equivalents at beginning of year 598 467 306 Cash and cash equivalents at end of year $ 647 $ 598 $ 467 See accompanying Notes to Consolidated Financial Statements. 80 LEONARDO DRS, INC. Consolidated Statements of Stockholders’ Equity (Dollars in millions) Common stock Additional paid- in capital Accumulated other comprehensive loss Accumulated deficit Total Balance as of December 31, 2022 $ 3 $ 5,147 $ ( 49 ) $ ( 2,974 ) $ 2,127 Total comprehensive income — — 2 168 170 Stock-based compensation activity — 28 — — 28 Balance as of December 31, 2023 3 5,175 ( 47 ) ( 2,806 ) 2,325 Total comprehensive income — — — 213 213 Stock-based compensation activity — 19 — — 19 Balance as of December 31, 2024 3 5,194 ( 47 ) ( 2,593 ) 2,557 Total comprehensive income — — 6 278 284 Stock-based compensation activity — 14 — — 14 Issuances of stock under employee stock purchase plan — 6 — — 6 Cash dividends of $ 0.36 per share — ( 96 ) — — ( 96 ) Repurchases of common stock — ( 35 ) — — ( 35 ) Balance as of December 31, 2025 $ 3 $ 5,083 $ ( 41 ) $ ( 2,315 ) $ 2,730 See accompanying Notes to Consolidated Financial Statements. 81 LEONARDO DRS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Summary of Significant Accounting Policies A. Organization 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 stockholder 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. DRS is a provider of defense products and technologies that are used across land, air, sea, space and cyber domains. Our diverse array of defense systems and solutions are offered to all branches of the U.S. military, major aerospace and defense prime contractors, government intelligence agencies, international military customers and industrial markets for deployment on a wide range of military platforms. We focus our capabilities in areas of critical importance to the U.S. 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 (“ASC”) and Integrated Mission Systems (“IMS”). The U.S. government is our largest customer and accounts for approximately 80 %, 79 %, and 80 % of our total revenues as an end-user for the years ended December 31, 2025, 2024 and 2023, respectively. Our U.S. government revenues are highly concentrated with the U.S. Department of War, also known as the U.S. Department of Defense (the “DoW”). Specific international and commercial market opportunities exist within these segments and comprise approximately 20 %, 21 %, and 20 % of our total revenues for the years ended December 31, 2025, 2024 and 2023, respectively. Our two reportable segments reflect the way performance is assessed and resources are allocated by our Chief Executive Officer, who is our chief operating decision maker (“CODM”). Advanced Sensing and Computing 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 (“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 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 artificial intelligence (“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 (“C2”), tactical networks, tactical computing and communications. These products help support the DoW’s need for greater situational understanding and 82 LEONARDO DRS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 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. DRS is a leading provider of next-generation electrical propulsion systems for the U.S. Navy. 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. 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, C-UAS, and vehicle survivability and protection. Our short-range air defense systems integrate advanced active electronically scanned array (“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. Other 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. See Note 18: Segment Information for further information regarding our operating segments. B. Basis of Presentation The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the accounts of DRS, its wholly owned subsidiaries and its controlling interests. Interests in joint ventures that are controlled by the Company, or for which the Company is otherwise deemed to be the primary beneficiary, are consolidated. For joint ventures in which the Company does not have a controlling interest, but exerts significant influence, the Company applies the equity method of accounting. All intercompany transactions and balances have been eliminated in consolidation. 83 LEONARDO DRS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) C. Use of Estimates The preparation of financial statements in conformity with U.S. 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. 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. D. Revenue Recognition 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-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. See Note 2 : Revenue from Contracts with Customers for additional information regarding revenue recognition. E. Cost of Revenues Cost of revenues includes materials, labor and overhead costs incurred in the manufacturing, design, and provision of products and services sold in the period as well as warranty costs. Material costs include raw materials, purchased components and sub-assemblies, outside processing and inbound freight costs. 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. F. 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. These costs are capitalized to the extent they are expected to be recovered from the associated contract. Capitalized costs to obtain or fulfill a contract are amortized to expense over the expected period of benefit for contracts with terms greater than one year on a systematic basis that is consistent with the pattern of transfer of the associated goods and services to the customer. As a practical expedient, capitalized costs to obtain a contract with a term of one year or less are expensed as incurred. Capitalized costs to obtain or fulfill a contract were $ 21 million and $ 38 million at December 31, 2025 and 2024, respectively. G. Research and Development Expenses We conduct research and development (“R&D”) activities using our own funds (referred to as company-funded independent research and development (“IR&D”)) and under contractual arrangements with our customers (referred to as customer-funded R&D) to enhance existing products and services and to develop future technologies. R&D costs include basic research, applied research, concept formulation studies, design, development, and related test activities. IR&D costs are allocated to customer contracts as part of the general and administrative overhead costs and generally recoverable on our customer contracts with the U.S. government. Customer-funded R&D costs are charged directly to the related 84 LEONARDO DRS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) customer contract. R&D costs are expensed as incurred. IR&D charged to general and administrative expenses totaled $ 129 million, $ 92 million, and $ 82 million in 2025, 2024 and 2023, respectively. H. Foreign Currency Significant transactions in foreign currencies are translated into U.S. dollars at the approximate prevailing rate at the time of the transaction. Foreign exchange transaction gains and losses in 2025, 2024 and 2023 were immaterial to the Company's results of operations. The operations of the Company's foreign subsidiaries are translated from the local (functional) currencies into U.S. dollars using weighted average rates of exchange during each monthly period. The rates of exchange at each balance sheet date are used for translating certain balance sheet accounts and gains or losses resulting from these translation adjustments are included in the accompanying Consolidated Balance Sheets as a component of accumulated other comprehensive loss. I. Cash and Cash Equivalents Cash and cash equivalents include cash on hand, deposits with banks or other short-term, highly liquid investments with original maturities of three months or less. J. Accounts Receivable Accounts receivable consist of amounts currently due from customers. 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. See Note 3 : Accounts Receivable for additional information regarding accounts receivable. K. Inventories Inventories are recorded at the lower of cost (determined by either actual, weighted average or first-in, first-out methods) or net realizable value, and include direct production costs as well as indirect costs, such as factory overhead. The net realizable value is calculated as the expected sales price in the course of normal operations net of estimated costs to finish and sell the goods. See Note 5 : Inventories for additional information regarding inventories. L. Property, Plant and Equipment Property, plant and equipment is carried at cost less accumulated depreciation. 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. Leasehold improvements are amortized over the shorter of the estimated useful life of the improvements or the remaining life of the lease. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the Consolidated Balance Sheets, and the net gain or loss is included in the determination of net earnings. Maintenance and repairs are charged to operations as incurred and renewals and improvements are capitalized. See Note 6 : Property, Plant and Equipment for additional information regarding property, plant and equipment. M. Goodwill Goodwill represents the excess purchase price paid to acquire a business over the fair value of net assets acquired. Goodwill is assigned to reporting units and is reviewed for impairment at the reporting unit level on an annual basis, or whenever changes in circumstances indicate that the carrying amount may not be recoverable. A reporting unit is an operating segment, or one level below that operating segment (the component level) if discrete financial information is prepared and regularly reviewed by the 85 LEONARDO DRS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) segment manager. Two or more components of an operating segment may be aggregated and deemed a single reporting unit if the components have similar economic characteristics. The Company uses quantitative assessments and qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If a qualitative assessment is performed and the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then a quantitative assessment is performed. When performing a quantitative assessment, we compare the fair values of each of our reporting units to their respective carrying values. 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. If, based on the quantitative assessment, 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, 2025, 2024, and 2023 and no adjustment to the carrying value of goodwill was deemed to be necessary. See Note 8 : Goodwill for additional information regarding goodwill. N. Long-Lived Assets and Acquired Identifiable Intangible Assets Identifiable intangible assets represent assets acquired as part of the Company's business acquisitions and include customer and program/contract-related assets. The values assigned to acquired identifiable intangible assets are determined as of the date of acquisition based on estimates and judgments regarding expectations for the estimated future after-tax cash flows from those assets over their lives, including the probability of expected future contract renewals and revenues, all of which are discounted to present value. The Company assesses the recoverability of the carrying value of its long-lived assets and intangible assets with finite useful lives whenever events or changes in circumstances indicate that the carrying amount of the assets or asset group may not be recoverable. If there are any indicators of impairment present, the Company then evaluates the recoverability of the potentially impaired long-lived assets and acquired identifiable intangible assets based upon expectations of undiscounted net cash flows from such assets. If the sum of the expected future undiscounted net cash flows is less than the carrying amount of the asset or asset group, a loss is recognized for the difference between the estimated fair value and the carrying amount of the assets. 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. See Note 6 : Property, Plant and Equipment , Note 9 : Intangible Assets and Note 10: Leases for additional information regarding long-lived assets and intangible assets. O. 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, 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. See Note 13 : Pension and Other Postretirement Benefits for further information regarding our pension and postretirement plans. 86 LEONARDO DRS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) P. Income Taxes Beginning October 4, 2022, DRS began filing a consolidated return with only DRS and subsidiaries for federal and state purposes. Prior to October 4, 2022, DRS was included in the U.S. federal and state tax returns of US Holding. DRS and US Holding had entered into a Tax Allocation Agreement (“Tax Allocation Agreement”), dated as of November 16, 2020, with members of an affiliated group, as defined in Section 1504(a) of the U.S. Internal Revenue Code of 1986, as amended (the “Tax Code”), members of one or more consolidated, combined, unitary or similar state tax groups and additional parties who are part of an “expanded affiliated group” for certain tax purposes. The agreement provided for the method of computing and allocating the consolidated U.S. federal tax liability of the affiliated group among its members and of allocating any state group tax liabilities among the state members for the taxable year ending December 31, 2008 and each subsequent year in which the parties are members of a group (whether federal or state). The agreement also provided for reimbursement of US Holding and/or DRS for payment of such tax liabilities, for compensation of any member for use of its “net operating loss” or “tax credits” in arriving at such tax liabilities and the allocation and payment of any refund arising from a carryback of net operating losses or tax credits from subsequent taxable years. Under the agreement, the parties agreed to calculate and allocate their respective tax liabilities and other tax attributes for taxable years beginning with the first consolidated taxable year that included DRS (i.e., the taxable year ended December 31, 2008) as if the agreement was then in effect. Although DRS filed its federal consolidated return outside of US Holding post October 3, 2022, the Tax Allocation Agreement will remain in effect for all historic unaudited periods (federal or state) and all applicable prospective periods where the expanded affiliated relationship may warrant it. The provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. Income taxes as presented attribute deferred income taxes of US Holding to DRS in a manner that is systematic, rational and consistent with the asset and liability method and the governing Tax Allocation Agreement which allocates the tax liability amongst the entities, including DRS. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial and tax basis of DRS’ assets and liabilities and are adjusted for changes in tax rates and tax laws when such changes are enacted. In general, the taxable income of DRS is included in the consolidated U.S. federal and state tax returns of US Holding for the short taxable year ended October 3, 2022. Where applicable, US Holding’s current portion of U.S. federal income taxes payable were offset against DRS’ net operating loss carryforwards in the period the related tax expense was recorded. Consequently, our net operating loss carryforwards are deemed to have been settled with US Holding in each year in an amount commensurate with the carrying value of the tax effected net operating loss utilized. If management determines that some portion or all of a deferred tax asset is not “more likely than not” to be realized, a valuation allowance is recorded as a component of the income tax provision to reduce the deferred tax asset to the amounts expected to be realized. In determining whether the Company’s deferred tax assets are realizable, management considers all evidence, both positive and negative, including the history of financial reporting earnings, existing taxable temporary differences and their projected reversals, as well as projected future income and tax planning strategies. We believe it is more likely than not that we will generate sufficient taxable income in future periods to realize our deferred tax assets, subject to the valuation allowances recognized. The Company assesses its tax positions for all periods open to examination by tax authorities based on the latest available information. Those positions are evaluated to determine whether they will more likely than not be sustained upon examination by the relevant taxing authorities. Liabilities for unrecognized tax benefits are measured based on the largest amount of benefit that is greater than 50% 87 LEONARDO DRS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) likely of being realized upon ultimate settlement. These unrecognized tax benefits are recorded as a component of income tax expense. Interest and penalties related to unrecognized tax benefits are not material. The Company treats the global intangible low-taxed income (“GILTI”) tax as a period cost when incurred. See Note 11 : Income Taxes for additional information regarding income taxes. Q. 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 stock-based compensation awards, only in periods in which such effect would have been dilutive for the period. See Note 15 : Earnings Per Share, Stock Repurchases, and Dividends for additional information regarding earnings per share. R. Fair Value Measurements Fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant on the measurement date. We are required to maximize the use of observable inputs and minimize the use of unobservable inputs in measuring fair value, and to utilize a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The three hierarchical levels used to measure fair value are as follows: Level 1 — Quoted prices in active markets for identical assets or liabilities. Level 2 — Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs other than quoted prices that are directly or indirectly observable. Level 3 — Significant inputs to the valuation model are unobservable. In certain instances, fair value is determined through information obtained from third parties using the latest available market data. In obtaining such data from third parties, we have evaluated the methodologies used to develop the estimate of fair value in order to assess whether such valuations are representative of fair value. The Company categorizes plan assets for disclosure purposes in accordance with this fair value hierarchy. See Note 13: Pension and Other Postretirement Benefits for further information regarding our pension and postretirement plans. The fair value of the Company’s outstanding debt obligations is calculated using Level 2 inputs, based on interest rates available for debt with terms and maturities similar to the Company’s existing debt arrangements. See Note 12: Debt for further information regarding debt. S. Financial Instruments Our financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses and other current liabilities. Financial instruments are reported in the Consolidated Balance Sheets at carrying value, which approximates fair value, as of December 31, 2025 and 2024. T. Acquisitions, Investments, and Variable Interest Entities Acquisitions Our Consolidated Financial Statements include the operations of acquired businesses from the date of acquisition. 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 88 LEONARDO DRS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) the acquisition date. The accounting for business combinations requires the Company to make significant 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. Investments The Company has an equity investment in the preferred stock of a private company of $ 21 million at December 31, 2025 that is included in other noncurrent assets in our Consolidated Balance Sheets. As there is not a readily determinable fair value, the investment is recorded at cost and will be adjusted if we identify an observable price change or an impairment when a qualitative impairment assessment is performed. Variable Interest Entities The Company occasionally forms joint ventures and/or enters into arrangements with special purpose limited liability companies for the purpose of bidding and executing on specific projects. The Company analyzes each such arrangement to determine whether it represents a variable interest entity (“VIE”). 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 investments in VIEs as of December 31, 2025 and 2024. U. Stock-based Compensation The fair value of stock awards is determined based on the closing market price of the Company's common stock on the grant date. Compensation expense for stock awards is recorded based on the grant date fair value and recognized over the vesting period. For purposes of measuring compensation expense, the amount of shares ultimately expected to vest is estimated at each reporting date based on Company's expectations regarding the relevant service or performance criteria. For awards with a service condition only, the Company recognizes the compensation expense on a straight-line basis. See Note 14: Stock-based Compensation Plans for further information regarding our stock-based compensation plans. V. Derivative Instruments Derivative instruments are recorded on the Consolidated Balance Sheets at fair value. Unrealized gains and losses on derivatives designated as cash flow hedges are reported in other comprehensive income (loss) and reclassified to earnings in a manner that matches the timing of the earnings impact of the hedged transactions. Settlement amounts related to derivatives designated as cash flow hedges are presented within operating activities on the Consolidated Statements of Cash Flows. W. New Accounting Pronouncements Recently Adopted Accounting Pronouncements Improvements to Income Tax Disclosures In December 2023, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures , which requires additional disclosures regarding rate reconciliation, income taxes paid, and other income tax disclosures. We adopted the new standard effective December 31, 2025 and applied the disclosure requirements on a prospective basis. See Note 11: Income Taxes . 89 LEONARDO DRS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Accounting Guidance Issued but Not Yet Adopted as of December 31, 2025 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. Targeted Improvements to the Accounting for Internal-Use Software In September 2025, the FASB issued ASU 2025-06, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Targeted Improvements to the Accounting for Internal-Use Software , which removes references to project stages, requiring companies to capitalize internal-use software costs when management commits to funding the software project and it is probable the project will be completed. The new standard is effective for fiscal years beginning after December 15, 2027 and interim periods within those fiscal years, and may be applied on a prospective, modified transition, or retrospective transition basis. We are currently evaluating the impact of adopting this new pronouncement. Accounting for Government Grants Received by Business Entities In December 2025, the FASB issued ASU 2025-10, Government Grants (Topic 832)—Accounting for Government Grants Received by Business Entities , which establishes the accounting for government grants received by business entities. The new standard is effective for fiscal years beginning after December 15, 2028 and interim periods within those fiscal years, and may be applied on a modified prospective, modified retrospective, or retrospective transition basis. We are currently evaluating the impact of adopting this new pronouncement. Note 2. Revenue from Contracts with Customers The Company recognizes revenue for each separately identifiable performance obligation in a contract representing an obligation to transfer a distinct good or service to a customer. In most cases, goods and services provided under the Company’s contracts are accounted for as single performance obligations due to the complex and integrated nature of our products and services. These contracts generally require significant integration of a group of goods and/or services to deliver a combined output. In some contracts, the Company provides multiple distinct goods or services to a customer. 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. 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. 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). The 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. 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 90 LEONARDO DRS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) agencies, and such reviews could result in costs being disputed as non-reimbursable under the terms of the contract. T&M contracts provide for reimbursement of labor hours expended at a contractual fixed labor rate per hour, plus the actual costs of material and other direct non-labor costs. The fixed labor rates on T&M contracts include amounts for the cost of direct labor, indirect contract costs and profit. Revenue from contracts with customers is recognized when the performance obligations are satisfied through the transfer of control over the good or service to the customer, which may occur either over time or at a point in time. Revenues for the majority of our contracts are measured using the over time, percentage of completion cost-to-cost method of accounting to calculate percentage of completion. We believe this is an appropriate measure of progress toward satisfaction of performance obligations as this measure most accurately depicts the progress of our work and transfer of control to our customers. Due to the long-term nature of many of our contracts, developing the estimated 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. 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. After establishing the estimated total cost at completion, we follow a standard Estimate at Completion (“EAC”) process in which we review the progress and performance on our ongoing contracts on a routine basis. 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 and are also required if contract modifications occur. 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. Net EAC adjustments had the following impacts to revenue for the periods presented: Year Ended December 31, (Dollars in millions) 2025 2024 2023 Revenue and operating earnings $ ( 59 ) $ ( 25 ) $ ( 23 ) Total % of revenue 2 % 1 % 1 % Net earnings ( 47 ) ( 20 ) ( 18 ) Impact on diluted earnings per share $ ( 0.17 ) $ ( 0.07 ) $ ( 0.07 ) The impacts noted above are attributed primarily to changes in our fixed-price development type programs as well as the impacts of inflation and production inefficiencies on certain fixed-price production programs. In 2025, the adjustments are largely attributed to a negotiated conclusion of a legacy ground surveillance program triggering a revision in the anticipated recovery on the contract as well as the impact of raw material pricing on certain fixed price programs. 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 91 LEONARDO DRS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. Contract Assets and Liabilities The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheets. Amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., biweekly or monthly) or upon achievement of contractual milestones. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, we sometimes receive advances or deposits from our customers before revenue is recognized, resulting in contract liabilities. Contract assets and contract liabilities as of the dates presented were: December 31, (Dollars in millions) 2025 2024 Contract assets $ 931 $ 872 Contract liabilities 585 399 Revenue recognized in 2025 and 2024 that was included in the contract liability balance at the beginning of each year was $ 298 million and $ 288 million, respectively. Contract assets related to amounts withheld by customers until contract completion are not considered a significant financing component of our contracts because the intent is to protect the customers from our failure to satisfactorily complete our performance obligations. Payments received from customers in advance of revenue recognition (contract liabilities) are not considered a significant financing component of our contracts because they are utilized to pay for contract costs within a one-year period or are requested by us to ensure the customers meet their payment obligations. Value of Remaining Performance Obligations As of December 31, 2025 the total value of our remaining performance obligations was $ 8,448 million. We expect to recognize approximately 33 % of our December 31, 2025 remaining performance obligations as revenue over the next twelve months , with the remainder to be recognized thereafter. Approximately 50 % of our remaining performance obligations 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 11 years. At December 31, 2025, we changed our remaining performance obligations. The change had an immaterial impact on the prior year amount and there was no impact on the Consolidated Financial Statements. Disaggregation of Revenue ASC : ASC revenue is primarily derived from U.S. government development and production contracts and is generally recognized using the over time, percentage of completion cost-to-cost method of accounting. We disaggregate ASC revenue by geographical region, customer relationship and contract 92 LEONARDO DRS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) type. We believe these categories best depict how the nature, amount, timing and uncertainty of ASC revenue and cash flows are affected by economic factors. Year Ended December 31, (Dollars in millions) 2025 2024 2023 Revenue by Geographical Region United States $ 2,018 $ 1,685 $ 1,537 International 325 412 269 Intersegment sales 12 21 25 Total $ 2,355 $ 2,118 $ 1,831 Revenue by Customer Relationship Prime contractor $ 1,056 $ 925 $ 858 Subcontractor 1,287 1,172 948 Intersegment sales 12 21 25 Total $ 2,355 $ 2,118 $ 1,831 Revenue by Contract Type Firm-fixed price $ 2,056 $ 1,762 $ 1,522 Flexibly priced (1) 287 335 284 Intersegment sales 12 21 25 Total $ 2,355 $ 2,118 $ 1,831 ________________ (1) Includes revenue derived from cost-type and time-and-materials contracts. 93 LEONARDO DRS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) IMS : IMS revenue is primarily derived from U.S. government development and production contracts and is generally recognized using the over time, percentage of completion cost-to-cost method of accounting. We disaggregate IMS revenue by geographical region, customer relationship and contract type. We believe these categories best depict how the nature, amount, timing and uncertainty of IMS revenue and cash flows are affected by economic factors. Year Ended December 31, (Dollars in millions) 2025 2024 2023 Revenue by Geographical Region United States $ 1,326 $ 1,117 $ 1,006 International ( 21 ) 20 14 Intersegment sales 2 1 1 Total $ 1,307 $ 1,138 $ 1,021 Revenue by Customer Relationship Prime contractor $ 351 $ 259 $ 252 Subcontractor 954 878 768 Intersegment sales 2 1 1 Total $ 1,307 $ 1,138 $ 1,021 Revenue by Contract Type Firm-fixed price $ 1,149 $ 948 $ 851 Flexibly priced (1) 156 189 169 Intersegment sales 2 1 1 Total $ 1,307 $ 1,138 $ 1,021 ________________ (1) Includes revenue derived from cost-type and time-and-materials contracts. Note 3. Accounts Receivable Accounts receivable, net consists of the following: December 31, (Dollars in millions) 2025 2024 Accounts receivable $ 335 $ 254 Less allowance for credit losses ( 1 ) ( 1 ) Accounts receivable, net $ 334 $ 253 The Company records accounts receivable that is not expected to be collected within one year as other noncurrent assets. As of December 31, 2025, the Company had $ 53 million of noncurrent accounts receivable. The Company maintains certain agreements with financial institutions to sell certain trade receivables. See Note 4: Sale of Receivables for additional information. Note 4. Sale of Receivables The Company is party to factoring facilities with various financial institutions (the “purchasers”) with an aggregate capacity of $ 225 million. The receivables sold under the factoring facilities are without recourse for any customer credit risk and result in a true sale. Receivables are derecognized in their entirety when sold, and the Company’s continuing involvement is limited to their servicing, for which the Company receives a fee commensurate 94 LEONARDO DRS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) with the service provided and therefore no servicing asset or liability related to these receivables was recognized for any period presented. The fair value of the sold receivables approximated their book value due to their short-term nature. Proceeds from the sold receivables are primarily reflected in operating cash flows on the Consolidated Statements of Cash Flows. During the years ended December 31, 2025, 2024 and 2023, the Company incurred purchase discount fees of $ 1 million, $ 2 million, and $ 5 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: December 31, (Dollars in millions) 2025 2024 Beginning balance $ 130 $ 192 Sales of receivables 130 190 Cash returned to purchasers ( 190 ) ( 252 ) Outstanding balance sold to purchasers 70 130 Cash collected, not remitted to purchasers (1) ( 1 ) — Remaining sold receivables $ 69 $ 130 ________________ (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. Note 5. Inventories Inventories consists of the following: December 31, (Dollars in millions) 2025 2024 Raw materials $ 112 $ 86 Work in progress 225 264 Finished goods 15 8 Total $ 352 $ 358 Note 6. Property, Plant and Equipment Property, plant and equipment by major asset class consists of the following: December 31, (Dollars in millions) 2025 2024 Land, buildings and improvements $ 389 $ 380 Plant and machinery 212 203 Equipment and other 487 382 Total property, plant and equipment, at cost 1,088 965 Less accumulated depreciation ( 576 ) ( 525 ) Total property, plant and equipment, net $ 512 $ 440 Depreciation expense related to property, plant and equipment was $ 71 million, $ 69 million, and $ 63 million for the years ended December 31, 2025, 2024 and 2023, respectively. 95 LEONARDO DRS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Land, buildings and improvements include assets under finance leases in the amount of $ 89 million and $ 97 million as of December 31, 2025 and 2024, respectively. See Note 10: Leases for additional information. As of December 31, 2025 and 2024, the Company accounted for our manufacturing facility in Menomonee Falls, WI as a financing arrangement and is included in land, buildings and improvements in the above table. See Note 12: Debt for additional information. Note 7. Other Liabilities A summary of significant other liabilities by balance sheet caption follows: December 31, (Dollars in millions) 2025 2024 Salaries, wages and accrued bonuses $ 85 $ 75 Fringe benefits 60 63 Provision for contract losses 35 43 Operating lease liabilities 28 27 Taxes payable 10 24 Warranty reserves 24 19 Other 27 15 Total other current liabilities $ 269 $ 266 Operating lease liabilities $ 95 $ 66 Unrecognized tax benefits 50 46 Warranty reserves 9 10 Other 12 8 Total other noncurrent liabilities $ 166 $ 130 Note 8. Goodwill A summary of the carrying amount of goodwill by reportable segment follows: (Dollars in millions) ASC IMS Total Balance at December 31, 2024 $ 819 $ 419 $ 1,238 Balance at December 31, 2025 $ 819 $ 419 $ 1,238 Goodwill as of the periods presented is reported net of $ 2,362 million and $ 606 million of accumulated impairments for the ASC and IMS segments, respectively. Note 9. Intangible Assets Intangible assets mainly refer to the fair value of existing customer contractual relationships attributable to an acquired business and patents and licenses 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. 96 LEONARDO DRS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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, 2025 December 31, 2024 (Dollars in millions) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Acquired intangible assets $ 1,087 $ ( 984 ) $ 103 $ 1,087 $ ( 962 ) $ 125 Patents and licenses 18 ( 9 ) 9 14 ( 7 ) 7 Total intangible assets $ 1,105 $ ( 993 ) $ 112 $ 1,101 $ ( 969 ) $ 132 Amortization expense related to acquired intangible assets was $ 22 million, $ 22 million, and $ 22 million for the years ended December 31, 2025, 2024 and 2023, respectively. Acquired intangible assets are amortized on a straight-line basis over their estimated useful lives of 10 to 15 years. The net acquired intangible asset balances consists primarily of technology related intangibles of $ 72 million and customer related assets of $ 31 million as of December 31, 2025. Patents and licenses are amortized on a straight-line basis over their estimated useful lives of 5 to 10 years. The estimated annual amortization expense related to intangible assets for the subsequent five years is as follows: (Dollars in millions) Year Ending December 31, Estimated Annual Amortization 2026 $ 24 2027 20 2028 15 2029 14 2030 14 Note 10. Leases The Company leases various real estate for manufacturing facilities, administrative offices, warehouses and machinery under both finance leases and operating leases. In addition, the Company leases vehicles and office equipment under operating leases. We determine whether our contracts are or contain a lease at the inception of such arrangements. A contract is or contains a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Right-of-use (“ROU”) assets and lease liabilities are recorded on the Consolidated Balance Sheets as of the lease commencement based on the present value of the future lease payments over the lease term. As our leases generally do not provide an implicit rate, we use our incremental borrowing rate, which is determined based on the rate of interest that the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term as of the lease commencement date. In addition to the present value of the future lease payments, the calculation of the ROU asset also includes lease payments made at or before the commencement date of the lease, less any lease incentives received. The remaining lease cost is amortized over the 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 97 LEONARDO DRS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) reasonably certain that we will exercise the option. Our U.S. 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 cost in the period incurred. Lease payments in Israel are tied to the Consumer Price Index (“CPI”) as published by Israel’s Central Bureau of Statistics. These leases are paid in Israeli New Shekels (“ISL”) but are recorded in U.S. dollars on the general ledger. These leases are recalculated each quarter to recognize the changes in both the CPI and the ISL. The Company’s lease agreements do not contain any material residual value guarantees or restrictive covenants. 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. The Company elected the practical expedient to not separate lease and non-lease components and to instead account for them as a single component. We have elected this practical expedient for all classes of assets. As of December 31, 2025, the Company had approximately $ 28 million of operating lease commitments for a facility lease that has not yet commenced. The lease is expected to commence in 2028 with a lease term of 10 years. Lease Cost The Company’s total lease cost consists of the following: Year Ended December 31, (Dollars in millions) 2025 2024 2023 Operating lease cost (1) $ 29 $ 24 $ 26 Finance lease cost (2) : Amortization of right-of-use assets 12 12 10 Interest on lease liabilities 6 6 5 Total lease cost $ 47 $ 42 $ 41 ________________ (1) Operating lease cost 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 $ 1 million, $ 2 million, and $ 3 million and an insignificant amount of variable lease cost for 2025, 2024 and 2023, respectively. (2) Finance lease cost 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, net in the Consolidated Statements of Earnings. 98 LEONARDO DRS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Supplemental Balance Sheet Information Supplemental balance sheet information related to leases is as follows: December 31, (Dollars in millions) 2025 2024 ROU assets Operating leases (1) $ 107 $ 79 Finance leases (2) 89 97 Total leased assets $ 196 $ 176 Lease liabilities Current lease liabilities: Operating (1) $ 28 $ 27 Finance (2) 10 10 Noncurrent lease liabilities: Operating (1) 95 66 Finance (2) 96 103 Total lease liabilities $ 229 $ 206 ________________ (1) Operating lease ROU assets are included within other noncurrent assets and operating lease liabilities are included within other current liabilities (current portion) and other noncurrent liabilities (noncurrent portion) in the Consolidated Balance Sheets. (2) Finance lease ROU assets are included within property, plant and equipment, net and finance lease liabilities are included within short-term borrowings and current portion of long-term debt (current portion) and long-term debt (noncurrent portion) in the Consolidated Balance Sheets. Supplemental Cash Flow Information Supplemental cash flow information related to leases is as follows: Year Ended December 31, (Dollars in millions) 2025 2024 2023 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 24 $ 26 $ 28 Operating cash flows from finance leases 6 6 5 Financing cash flows from finance leases 10 9 8 Right-of-use assets obtained in exchange for new lease liabilities: Operating leases 47 25 17 Finance leases 2 11 6 99 LEONARDO DRS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Weighted Average Lease Term and Discount Rate Lease terms and discount rates related to leases are as follows: December 31, 2025 2024 Weighted average remaining lease term: Operating leases 6 years 5 years Finance leases 13 years 14 years Weighted average discount rate: Operating leases 5.5 % 4.6 % Finance leases 5.9 % 5.2 % Maturity of Lease Liabilities As of December 31, 2025, future minimum rental payments on leases with initial non-cancellable lease terms in excess of one year were due as follows: (Dollars in millions) Year Ending December 31, Operating Leases Finance Leases 2026 $ 27 $ 16 2027 26 13 2028 24 12 2029 18 11 2030 14 11 Thereafter 29 95 Total lease payments 138 158 Less: imputed interest 15 52 Present value of lease liabilities 123 106 Less: current maturities 28 10 Long-term lease obligations $ 95 $ 96 Note 11. Income Taxes Earnings before taxes consists of the following: Year Ended December 31, (Dollars in millions) 2025 2024 2023 Earnings before taxes Domestic $ 324 $ 236 $ 197 Foreign 12 28 ( 5 ) Total $ 336 $ 264 $ 192 100 LEONARDO DRS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Income tax provision consists of the following: Year Ended December 31, (Dollars in millions) 2025 2024 2023 Current: Federal $ 17 $ 15 $ 61 State 8 11 14 Foreign 5 2 1 Total current 30 28 76 Deferred: Federal 27 16 ( 44 ) State 4 4 ( 7 ) Foreign ( 3 ) 3 ( 1 ) Total deferred 28 23 ( 52 ) Total $ 58 $ 51 $ 24 The reconciliation from the statutory federal income tax rate to our effective income tax rate for the year ended December 31, 2025 follows: Year Ended December 31, 2025 (Dollars in millions) $ % U.S. federal statutory income tax rate $ 71 21.0 % Domestic state & local, net of federal benefit (1) 11 3.2 % Tax credits: Research and development ( 20 ) ( 5.8 ) % Other ( 4 ) ( 1.3 ) % Nontaxable and nondeductible items, net: Excess tax benefit on stock-based compensation ( 8 ) ( 2.4 ) % Nondeductible officer compensation 6 1.8 % Other 1 0.3 % Cross-border taxes: Global intangible low-taxed income 3 1.0 % Other ( 1 ) ( 0.3 ) % Foreign reconciling items: Canada Changes in valuation allowance 3 1.0 % Israel Rate differential ( 2 ) ( 0.6 ) % Other ( 2 ) ( 0.6 ) % Income tax provision and effective tax rate $ 58 17.3 % ________________ (1) State taxes in Connecticut, Florida, and Pennsylvania comprise the majority (greater than 50 percent) of the taxes in this category. 101 LEONARDO DRS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The reconciliation from the statutory federal income tax rate to our effective income tax rate for the years ended December 31, 2024 and 2023 (as previously disclosed, prior to the adoption of ASU 2023-09) follows: Year Ended December 31, 2024 2023 Statutory federal rate 21.0 % 21.0 % State rate, net of federal benefit 4.2 % 2.5 % Foreign rate differential ( 1.5 ) % 0.1 % Research and development credit, net of reserves ( 7.1 ) % ( 18.0 ) % Excess tax benefit on stock-based compensation ( 1.2 ) % ( 0.1 ) % Nondeductible officer compensation 1.2 % 0.8 % Nondeductible expenses 0.6 % 0.2 % Global intangible low-taxed income 2.1 % 0.2 % Change in valuation allowance 0.7 % 1.0 % Change in tax reserves 0.2 % 1.1 % Purchase tax credits ( 0.7 ) % — % Divestiture impact — % 4.7 % Other ( 0.2 ) % ( 1.0 ) % Effective tax rate 19.3 % 12.5 % 102 LEONARDO DRS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2025 and 2024 are as follows: December 31, (Dollars in millions) 2025 2024 Deferred tax assets: Federal net operating loss $ 1 $ 1 State net operating loss 6 6 Foreign net operating loss 11 7 Tax credit carryforwards 24 19 Lease liabilities 48 44 Capitalized R&D, net of amortization 77 143 Accrued compensation and benefits 29 27 Contract liabilities 20 20 Accrued expenses 4 3 Pension and postretirement plans 9 12 Inventory capitalization 9 8 Other 14 7 Total gross deferred tax assets 252 297 Less valuation allowance 36 25 Deferred tax assets 216 272 Deferred tax liabilities: Right-of-use assets ( 43 ) ( 40 ) Long-term contracts ( 30 ) ( 55 ) Intangible assets ( 33 ) ( 39 ) Property, plant and equipment, net ( 22 ) ( 23 ) Other ( 3 ) ( 2 ) Deferred tax liabilities ( 131 ) ( 159 ) Net deferred tax asset $ 85 $ 113 As of December 31, 2025, and 2024 the Company had U.S. federal net operating loss carryforwards of $ 15 million and $ 18 million, respectively, which we anticipate we will be able to utilize prior to their expiration which commences in 2032. 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. We recorded an additional valuation allowance in Canada of $ 4 million and $ 2 million in 2025 and 2024, respectively. As of December 31, 2025 and 2024, we had apportioned state net operating loss carryforwards of $ 108 million and $ 105 million, respectively, which are associated with jurisdictions in which we currently file and the Company expects to utilize prior to expiration except for those for which we have recorded a valuation allowance. Our state net operating losses have expirations ranging from 2025 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. On July 4, 2025, the reconciliation bill, commonly referred to as the One Big Beautiful Bill Act (the “OBBBA”), was enacted, which includes a broad range of tax reform provisions. The OBBBA provides for an elective deduction for domestic research and development expenses starting in 2025, a reinstatement 103 LEONARDO DRS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) of elective 100% first-year bonus depreciation, and changes to existing international tax provisions. Due to the nature of the tax law changes, the Company has not realized a material impact in the Consolidated Statements of Earnings for the year ended December 31, 2025. For the year ended December 31, 2025 the Company reduced both income taxes payable and deferred tax assets by approximately $ 66 million as a result of the election to deduct a portion of previously capitalized research and development costs. We will continue to monitor the impact of the OBBBA and the range of potential outcomes, which will depend on our circumstances in each year and anticipated guidance from the U.S. Department of the Treasury. Cash paid for income taxes, net of refunds, in 2025 consists of the following: (Dollars in millions) Year Ended December 31, 2025 Federal $ 12 State and local Pennsylvania 4 New Jersey 3 California 2 Other 3 Cash paid for income taxes, net of refunds $ 24 Cash paid for income taxes, net of refunds, was $ 71 million, and $ 45 million in 2024 and 2023, respectively (as previously disclosed, prior to the adoption of ASU 2023-09). Tax Uncertainties The Company maintains reserves for uncertain tax positions related to unrecognized income tax benefits. These reserves involve considerable judgment and estimation and are evaluated by management at least quarterly based on the best information available. The Company’s total liability for unrecognized tax benefits as of December 31, 2025, 2024 and 2023 was approximately $ 52 million, $ 48 million and $ 40 million, respectively; all of which will impact the effective tax rate when recognized. Approximately $ 2 million, $ 2 million and $ 2 million as of December 31, 2025, 2024 and 2023, respectively, was recorded within (and as an offset to) deferred tax assets. The table below summarizes the activity associated with our unrecognized tax benefits: (Dollars in millions) 2025 2024 2023 Balance at January 1, $ 48 $ 40 $ 24 Increase related to prior year tax positions 1 2 11 Increase related to current year tax positions 5 6 6 Decreases related to prior year tax positions ( 2 ) — ( 1 ) Balance at December 31, $ 52 $ 48 $ 40 The Company is subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. The Company has substantially concluded all U.S. federal income tax matters for years through the tax year ended December 31, 2018 except as it relates to the net operating loss carryforward and tax credit carryforwards. 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 2018. As of December 31, 2025, the Company has accumulated undistributed earnings generated by our foreign subsidiaries and most have been taxed in the U.S. as a result of the Tax Cuts and Jobs Act of 2017 (“TCJA”). The TCJA allows for a dividend received deduction for repatriation of foreign earnings. We intend to indefinitely reinvest these earnings. Should the Company’s undistributed earnings from its 104 LEONARDO DRS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) investment in non‐U.S. subsidiaries be distributed in the future in the form of dividends or otherwise, the Company may be subject to foreign and domestic income taxes and withholding taxes. Note 12. Debt The Company’s debt consists of the following: December 31, (Dollars in millions) 2025 2024 2022 Term Loan A $ 191 $ 203 Finance lease and other 152 159 Short-term borrowings related to factoring facilities (Note 4) 5 4 Total debt principal 348 366 Less unamortized debt issuance costs and discounts ( 1 ) ( 1 ) Total debt, net 347 365 Less short-term borrowings and current portion of long-term debt ( 26 ) ( 25 ) Total long-term debt $ 321 $ 340 Term Loan 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 (the “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, 2025 was $ 191 million. The fair value of the 2022 Term Loan A was approximately $ 190 million and $ 199 million at December 31, 2025 and 2024, respectively; however the Company has the ability to prepay the outstanding principal balance without penalty. Subsequent to year-end, in January 2026, the Company repaid the remaining outstanding balance of the 2022 Term Loan A in the amount of $ 191 million. The was no prepayment penalty or other fee associated with prepaying the principal balance. Credit Facilities 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, 2025, the 2022 Revolving Credit Facility had a limit of $ 275 million. Loans under the 2022 Revolving Credit Facility bear interest at a variable rate generally based on the 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. 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, 2025 and 2024. The weighted average interest rate on the 2022 Revolving Credit Facility as of December 31, 2024 was 6.72 %. Subsequent to year-end, in January 2026, the Company terminated the 2022 Credit Agreement and entered into a new senior unsecured credit agreement (the “2026 Credit Agreement”). The 2026 Credit 105 LEONARDO DRS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Agreement provides for a revolving credit facility available for working capital requirements of the Company (the “2026 Revolving Credit Facility”). The 2026 Revolving Credit Facility has a limit of $ 500 million and expires in January 2031. Loans under the 2026 Revolving Credit Facility bear interest at a variable rate generally based on the SOFR, plus a spread ranging from 1.25 % to 1.63 % depending on the leverage ratio, as defined in the 2026 Credit Agreement, or an alternative variable rate based on the higher of the prime rate, as defined in the 2026 Credit Agreement, 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 2026 Credit Agreement. The Company also pays a commitment fee ranging between 0.15 % and 0.30 % depending on the Company’s leverage ratio applied to the unused balance of the 2026 Revolving Credit Facility. The Company also maintains uncommitted working capital credit facilities with certain financial institutions in the aggregate of $ 105 million and $ 130 million at December 31, 2025 and 2024, respectively (the “Financial Institution Credit Facilities”). The sole purpose of the Financial Institution Credit Facilities is to support standby letter of credit issuances on contracts with customers. The Company had letters of credit outstanding of approximately $ 54 million and $ 36 million as of December 31, 2025 and 2024, respectively, which reduces the available capacity of the Financial Institution Credit Facilities by an equal amount. Finance Lease and Other As of December 31, 2025, finance lease and other of $ 152 million includes approximately $ 106 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. Interest Paid Total interest paid associated with our debt was $ 21 million, $ 27 million, and $ 38 million in 2025, 2024 and 2023, respectively. Our effective interest rate was approximately 5.71 %, 6.80 % and 6.65 % for the years ended December 31, 2025, 2024 and 2023, respectively. The interest expense attributable to the amortization of debt issuance costs in 2025, 2024 and 2023 was not material. Maturities Maturities of debt as of December 31, 2025 are as follows: (Dollars in millions) Year Ending December 31, Total 2026 $ 26 2027 189 2028 8 2029 8 2030 9 Thereafter 108 Total principal payments $ 348 Note 13. Pension and Other Postretirement Benefits Retirement Plan Summary Information The Company maintains multiple pension plans, both contributory and non-contributory, covering employees at certain locations. Eligibility requirements for participation in the plans vary and benefits 106 LEONARDO DRS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) generally are based on the participant's compensation and years of service, as defined in the respective plan. The Company's funding policy generally is to contribute in accordance with cost accounting standards that affect government contractors, subject to the Tax Code and regulations thereunder. With respect to U.S. qualified pension plans, we intend to contribute annually not less than the required minimum funding thresholds. For all periods presented, the Company made no discretionary pension contributions. Plan assets are invested primarily in collective trust funds, which are primarily invested in bonds (both corporate and U.S. government), U.S. government-sponsored entity instruments, and cash and cash equivalents. The Company also provides postretirement medical benefits for certain retired employees and dependents at certain locations. Participants are eligible for these benefits when they retire from active service and meet the eligibility requirements for the Company's postretirement benefit plans. The Company's contractual arrangements with the U.S. government provide for the recovery of contributions to a Voluntary Employees' Beneficiary Association trust and, for non-funded plans, recovery of claims on a pay-as-you-go basis, subject to the Tax Code and regulations thereunder, with the retiree generally paying a portion of the costs through contributions, deductibles and coinsurance provisions. The Company also maintains certain non-contributory and unfunded supplemental retirement plans. 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. The following tables provide certain information regarding the Company's pension plans as of December 31, 2025 and 2024. In addition to the defined benefit pension plan information shown below, pension and other postretirement benefit plan liabilities on the Consolidated Balance Sheets includes other immaterial postretirement benefit plan and supplemental retirement plan liabilities. Defined Benefit Pension Plans (Dollars in millions) 2025 2024 Change in benefit obligation: Benefit obligation at beginning of year $ 127 $ 165 Interest cost 7 7 Actuarial loss (gain) 3 ( 4 ) Benefits paid (1) ( 8 ) ( 41 ) Benefit obligation at end of year $ 129 $ 127 Change in plan assets: Fair value of plan assets at beginning of year $ 100 $ 134 Actual return on plan assets 8 — Employer contributions 12 7 Benefits paid (1) ( 8 ) ( 41 ) Fair value of plan assets at end of year 112 100 Funded status of the plans at year end $ ( 17 ) $ ( 27 ) ________________ (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. 107 LEONARDO DRS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The amounts recognized in the Consolidated Balance Sheets as of December 31, 2025 and 2024 consist of: Defined Benefit Pension Plans (Dollars in millions) 2025 2024 Noncurrent assets $ 1 $ 2 Noncurrent liabilities ( 18 ) ( 29 ) Net liability recognized $ ( 17 ) $ ( 27 ) Amounts recognized in accumulated other comprehensive loss (before taxes) at December 31, 2025 and 2024 consist of: Defined Benefit Pension Plans (Dollars in millions) 2025 2024 Net actuarial loss (gain) $ 28 $ 30 Total amount recognized in accumulated other comprehensive loss $ 28 $ 30 The aggregate accumulated benefit obligation (“ABO”) for the Company's defined benefit pension plans combined was $ 119 million and $ 144 million at December 31, 2025 and 2024, respectively. The ABO represents benefits accrued without assuming future compensation increases to plan participants and is approximately equal to our projected benefit obligation (“PBO”). The table below presents information for the pension plans with an ABO and PBO in excess of the fair value of plan assets at December 31, 2025 and 2024: (Dollars in millions) 2025 2024 Projected benefit obligation $ 119 $ 144 Accumulated benefit obligation 119 144 Fair value of plan assets 101 113 The following table summarizes the weighted average actuarial assumptions used to determine our benefit obligations at December 31, 2025 and 2024: Defined Benefit Pension Plans 2025 2024 Rate assumptions Discount rate 5.2 % 5.5 % Expected long-term return on plan assets 5.8 % 6.4 % The following table summarizes the components of net periodic benefit cost for the Company's pension plans for the years ended December 31, 2025, 2024 and 2023. Net actuarial gains and losses are amortized to expense when they exceed the 10% accounting corridor, based on the greater of the 108 LEONARDO DRS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) plan assets or benefit obligations, over the average future lifetime for all plans that are frozen, and over the average remaining service period for active plans. Defined Benefit Pension Plans (Dollars in millions) 2025 2024 2023 Interest cost $ 7 $ 7 $ 8 Expected return on plan assets ( 4 ) ( 5 ) ( 7 ) Amortization of net actuarial loss 1 1 1 Net periodic benefit cost $ 4 $ 3 $ 2 The following table summarizes the other changes in plan assets and benefit obligations recognized in other comprehensive income for the Company's pension plans for the years ended December 31, 2025, 2024 and 2023: Defined Benefit Pension Plans (Dollars in millions) 2025 2024 2023 Net actuarial (gain) loss $ ( 1 ) $ 1 $ 1 Amortization of net actuarial loss from prior years ( 1 ) ( 1 ) ( 1 ) Total recognized in other comprehensive income $ ( 2 ) $ — $ — The following table summarizes the weighted average actuarial assumptions used to determine our net periodic benefit cost of the pension plans for the years ended December 31, 2025, 2024 and 2023: Defined Benefit Pension Plans 2025 2024 2023 Rate assumptions Discount rate 5.5 % 4.8 % 5.0 % Expected long-term return on plan assets 6.4 % 6.5 % 7.2 % The expected long-term return on plan assets assumption represents the average rate that the Company expects to earn over the long-term on the assets of the Company's benefit plans, including those from dividends, interest income and capital appreciation. The assumption has been determined based on expectations regarding future rates of return for the plans' investment portfolio, with consideration given to the allocation of investments by asset class and historical rates of return for each individual asset class. Pension related expenses, other than service cost, are reflected in other, net on the Consolidated Statements of Earnings. Plan Assets The Retirement Committee has been authorized by the Company’s management to manage the strategic oversight of our defined benefit plan assets held in trust. The Retirement Committee has adopted an investment policy and provides oversight of a third-party investment manager who reports to the Retirement Committee on a regular basis. The outsourced third-party manager develops investment strategies and makes all of the day to day investment decisions related to the defined benefit plan assets in accordance with the investment policy and target asset allocation targets, therein. Presently all of the plans are governed by a single investment policy and are uniformly invested. 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. The non-return seeking assets are invested primarily in bonds with maturities closely matching the anticipated payment of 109 LEONARDO DRS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) benefits. As the funding percentage increases the glide path reduces the amount of the assets invested in return seeking assets. The table below represents all of the Company's funded pension plans' weighted average asset allocation at December 31, 2025 and 2024 by asset category: Asset Allocation 2025 2024 Asset Category Equity securities — % 18 % Debt securities 94 % 72 % Other, primarily cash and cash equivalents, and hedge funds 6 % 10 % The table below presents the target allocation ranges for each major asset category for the Company's pension plans for the years ended December 31, 2025 and 2024: Target Asset Allocation Range 2025 2024 Asset Category Equity securities 0 % 11 % - 19 % Debt securities 96 % - 100 % 75 % - 91 % Other, primarily cash and cash equivalents and hedge funds 0 % - 4 % 0 % - 4 % The following tables provides the fair value of plan assets held by our pension plans by asset category and by fair value hierarchy level. December 31, 2025 (Dollars in millions) Level 1 Level 2 Level 3 Total Asset category Investments measured at fair value: Collective trust funds $ — $ 112 $ — $ 112 Total $ — $ 112 $ — $ 112 December 31, 2024 (Dollars in millions) Level 1 Level 2 Level 3 Total Asset category Investments measured at fair value: Cash and cash equivalents $ 8 $ — $ — $ 8 Equity securities 6 — — 6 Collective trust funds — 100 — 100 Total $ 14 $ 100 $ — $ 114 110 LEONARDO DRS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) For the year ended December 31, 2026, the Company expects to contribute $ 6 million to its pension plans. The following table presents expected pension benefit payments over the next ten years: (Dollars in millions) Year Ending December 31, Defined Benefit Pension Plans 2026 $ 9 2027 9 2028 10 2029 10 2030 10 2031-2035 49 Defined Contribution Plans The Company maintains defined contribution plans covering substantially all domestic full-time eligible employees. The Company's contributions to these plans for the years ended December 31, 2025, 2024 and 2023, amounted to $ 35 million, $ 31 million, and $ 28 million, respectively. Note 14. Stock-based Compensation Plans The Company’s 2022 Omnibus Equity Compensation Plan (the “2022 Equity Plan”) allows for grants of stock options, stock appreciation rights, restricted shares, restricted stock units (“RSUs”) 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, 2025, there were 9 million shares of the Company’s common stock reserved for future issuances under the 2022 Equity Plan. In November 2022, in conjunction with the acquisition of RADA Electronic Industries Ltd (“RADA”), the Company assumed 5.4 million stock options. The outstanding stock options were exchanged into options to purchase the Company’s common stock. The assumed stock options are subject to the same terms and conditions as the original awards, including time-based vesting. The options are generally exercisable for 48 months following the date of vesting. During 2023, the Company granted equity awards in the form of RSUs and performance-based restricted stock units (“PRSUs”) under the 2022 Equity Plan. The RSUs are subject to annual time-based vesting over a three-year period. The PRSUs are subject to both time and performance-based vesting based upon the achievement of three financial metrics over a three-year period: Relative Total Shareholder Return (“rTSR”), Revenue Growth, and Return on Invested Capital (“ROIC”). During 2024 and 2025, the Company granted equity awards in the form of RSUs and PRSUs under the 2022 Equity Plan. 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. The fair value of market condition PRSUs is measured on the date of grant using the Monte Carlo Simulation Model. Expense for time-based awards is recognized on a straight-line basis over the requisite service period. Forfeitures are recognized as they occur. 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 111 LEONARDO DRS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) the date of purchase. As of December 31, 2025, there were 2 million shares of the Company’s common stock reserved for future issuances under the ESPP. Stock-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, (Dollars in millions) 2025 2024 2023 Total stock-based compensation expense $ 32 $ 22 $ 17 Tax benefits recognized from stock-based compensation 6 6 2 Stock Options The following table shows a summary of all option activity under the 2022 Equity Plan for the year ended December 31, 2025: Number of Shares (in millions) Weighted Average Exercise Price Per Share Weighted Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (Dollars in millions) Outstanding as of January 1, 2025 1.57 $ 10.39 3 $ 34 Exercised ( 0.36 ) 10.28 Forfeited ( 0.02 ) 10.66 Outstanding as of December 31, 2025 1.19 $ 10.42 2 $ 28 Exercisable as of December 31, 2025 1.14 $ 10.43 2 $ 27 Vested and expected to vest as of December 31, 2025 1.19 $ 10.42 2 $ 28 There were no stock options granted or assumed during 2025. As of December 31, 2025, 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 less than one year . The total intrinsic value of stock options exercised during the year ended December 31, 2025, was $ 11 million. RSUs The following table shows a summary of all RSU activity under the 2022 Equity Plan for the year ended December 31, 2025: Number of Shares (in millions) Weighted Average Grant Date Fair Value Unvested as of January 1, 2025 1.31 $ 16.89 Granted 0.46 33.23 Vested ( 0.73 ) 15.18 Forfeited ( 0.03 ) 24.91 Unvested as of December 31, 2025 1.01 $ 25.39 As of December 31, 2025, total compensation expense not yet recognized related to unvested RSUs was approximately $ 12 million, which is expected to be recognized over a weighted average period of 2 years. The fair value of RSUs that vested in 2025 was $ 25 million. 112 LEONARDO DRS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) PRSUs The following table shows a summary of all PRSU activity under the 2022 Equity Plan for the year ended December 31, 2025: Number of Shares (in millions) Weighted Average Grant Date Fair Value Unvested as of January 1, 2025 1.51 $ 16.19 Granted 0.28 37.96 Vested ( 0.99 ) 10.25 Forfeited ( 0.04 ) 25.61 Performance adjustments 0.39 10.68 Unvested as of December 31, 2025 1.15 $ 21.74 The Monte Carlo Model assumptions used in valuing market condition PRSUs during the periods presented are set forth in the following table: Year Ended December 31, 2025 2024 2023 Grant date stock price $ 32.71 $ 21.51 $ 14.74 Expected volatility 37.4 % 36.0 % 51.2 % Risk-free interest rate 3.7 % 4.9 % 4.0 % Expected dividend yield — % — % — % As of December 31, 2025, total compensation expense not yet recognized related to unvested PRSUs was approximately $ 12 million, which is expected to be recognized over a weighted average period of 2 years. The fair value of PRSUs that vested in 2025 was $ 19 million. Note 15. Earnings Per Share, Stock Repurchases, and Dividends EPS Year Ended December 31, (In millions, except per share amounts) 2025 2024 2023 Net earnings $ 278 $ 213 $ 168 Basic weighted average number of shares outstanding 265.9 263.7 261.5 Impact of dilutive stock-based awards 2.8 4.0 2.7 Diluted weighted average number of shares outstanding 268.7 267.7 264.2 Basic earnings per share $ 1.05 $ 0.81 $ 0.64 Diluted earnings per share $ 1.03 $ 0.80 $ 0.64 The computation of diluted EPS includes the dilutive effect of outstanding stock-based compensation awards (which primarily consist of employee stock options, RSUs and PRSUs). Stock Repurchases On February 20, 2025, the Company announced that its Board of Directors (the “Board”) approved a stock 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. As of December 31, 2025, the 113 LEONARDO DRS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Company has repurchased approximately $ 35 million under the program. The Company retires its common stock upon repurchase with the excess over par value allocated to additional paid-in capital. Dividends The Company declared and paid a quarterly dividend of $ .09 per share of its common stock each quarter during 2025. Subsequent to quarter end, the Company’s Board declared a cash dividend of $ .09 per share of common stock payable on March 24, 2026 to stockholders of record as of the close of business on March 10, 2026. Note 16. Commitments and Contingencies Commitments The Company’s commitments are primarily related to our lease agreements, purchase obligations, and credit agreements. See Note 10 : Leases and Note 12 : Debt for additional information on our leases and credit agreements. Contingencies From time to time, we are subject to certain legal proceedings and claims in the ordinary course of business. These matters are subject to many uncertainties, and it is possible that some of these matters ultimately could be decided, resolved or settled in a manner adverse to us. Although the precise amount of liability that may result from these matters is not ascertainable, the Company believes that any amounts exceeding the Company's recorded accruals should not materially adversely affect the Company's financial condition or liquidity. It is possible, however, that the ultimate resolution of those matters could result in a material adverse effect on the Company's results of operations and/or cash flows from operating activities for a particular reporting period. We establish reserves for specific legal matters when we determine that the likelihood of an unfavorable outcome is probable, and the loss is reasonably estimable. The Company reviews the developments in contingencies that could affect the amount of the reserves that have been previously recorded. The Company adjusts provisions and changes to disclosures accordingly to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and updated information. Significant judgment is required to determine both the probability and the estimated amount of any potential losses. As a government contractor, with customers including the U.S. government as well as various state and local government entities, the Company may be subject to audits, investigations and claims with respect to its contract performance, pricing, costs, cost allocations and procurement practices. Additionally, amounts billed under such contracts, including direct and indirect costs, are subject to potential adjustments before final settlement. Management believes that adequate provisions for such potential audits, investigations, claims and contract adjustments, if any, have been made in the Consolidated Financial Statements. Restructuring costs We engage in targeted restructuring initiatives in order to rationalize headcount and align our operations in a more strategic and cost-efficient structure. In connection with these restructuring initiatives, we recorded charges totaling $ 2 million, $ 8 million and $ 11 million for the years ended December 31, 2025, 2024 and 2023, respectively. These restructuring initiatives were within our ASC segment and were substantially completed as of December 31, 2025. 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 114 LEONARDO DRS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Consolidated Statements of Earnings. See the table below for a breakout of restructuring costs by nature of cost incurred: Year Ended December 31, (Dollars in millions) 2025 2024 2023 Severance $ 2 $ 6 $ 9 Facility abandonment — 2 2 Total $ 2 $ 8 $ 11 The following is a summary of changes in the restructuring provision balance during the years ended December 31, 2025 and 2024: (Dollars in millions) Balance at January 1, 2024 $ 10 Additional provision 8 Reversal and utilization ( 17 ) Balance at December 31, 2024 1 Additional provision 2 Reversal and utilization ( 2 ) Balance at December 31, 2025 $ 1 Product Warranties Product warranty costs generally are accrued in proportion to product revenue realized in conjunction with our over time revenue recognition policy. Product warranty expense is recognized based on the term of the product warranty, generally one year to three years , and the related estimated costs, considering historical claims expense. Accrued warranty costs are reduced as these costs are incurred and as the warranty period expires, and otherwise may be modified as specific product performance issues are identified and resolved. The following is a summary of changes in the product warranty balances during the years ended December 31, 2025 and 2024: (Dollars in millions) Balance at January 1, 2024 $ 26 Additional provision 16 Reversal and utilization ( 13 ) Balance at December 31, 2024 $ 29 Additional provision 25 Reversal and utilization ( 21 ) Balance at December 31, 2025 $ 33 Note 17. Related Party Transactions Although we operate largely independently from Leonardo S.p.A., our indirect majority stockholder, and the amended and restated proxy agreement contains limitations on services that we may provide to and receive from Leonardo S.p.A. and its affiliates, we have historically provided, and expect to continue to provide, certain services to Leonardo S.p.A. and its affiliates to support its U.S. operations (aside from us). These services include financial, tax, trade compliance, marketing and communications and legal. The Company also has related party sales 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 $ 29 million, $ 30 million and $ 40 million for the years ended December 31, 2025, 2024 115 LEONARDO DRS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) and 2023, respectively. Related party purchases are included in cost of revenues and were $ 7 million, $ 7 million and $ 4 million for the years ended December 31, 2025, 2024 and 2023, respectively. The receivables with the indirect majority stockholder and its other affiliates of $ 5 million and $ 19 million, respectively, and payables of $ 5 million and $ 4 million, respectively, as of December 31, 2025 and 2024, 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 $ 16 million and $ 12 million, respectively, as of December 31, 2025 and 2024. The Company entered into a Tax Allocation Agreement with US Holding, dated as of November 16, 2020. See Note 1: Summary of Significant Accounting Policies for more information. The Company has an investment in the preferred stock of a private company and holds two board seats in the investee. Related party sales to this company were $ 6 million for the year ended December 31, 2025. The Company also had $ 6 million of related party balances in contract assets with this company at December 31, 2025. Note 18. Segment Information Operating segments represent components of an enterprise for which separate financial information is available that is regularly reviewed by the CODM in determining how to allocate resources and assess performance. Our Chief Executive Officer is our CODM. The Company’s operating and reportable segments consist of ASC and IMS. All other operations, which consists primarily of DRS corporate headquarters and certain non-operating subsidiaries of the Company, are grouped in Corporate & Eliminations. See Note 1: Summary of Significant Accounting Policies for a description of our reportable segments. The CODM primarily uses operating earnings 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. Certain information related to our segments for the years ended December 31, 2025, 2024 and 2023, is presented in the following tables. Consistent accounting policies have been applied by all segments within the Company, within all reporting periods. Intersegment sales are generally transferred at cost to the buying segment, and the sourcing segment does not recognize a profit. Such intercompany operating earnings is eliminated in consolidation, so that the Company’s total revenues and operating earnings reflect only those transactions with external customers. Revenues, expenses, and operating earnings by segment and the reconciliation to earnings before taxes for the years ended December 31, 2025, 2024 and 2023, consists of the following: (Dollars in millions) 2025 2024 2023 Revenues ASC $ 2,355 $ 2,118 $ 1,831 IMS 1,307 1,138 1,021 Corporate & Eliminations ( 14 ) ( 22 ) ( 26 ) Total revenues $ 3,648 $ 3,234 $ 2,826 116 LEONARDO DRS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Cost of revenues ASC $ 1,727 $ 1,598 $ 1,370 IMS 1,066 922 834 Corporate & Eliminations ( 14 ) ( 22 ) ( 26 ) Total cost of revenues $ 2,779 $ 2,498 $ 2,178 General and administrative ASC $ 260 $ 234 $ 226 IMS 101 81 79 Corporate & Eliminations 7 7 ( 3 ) Total general and administrative $ 368 $ 322 $ 302 Company-funded independent research and development ASC $ 104 $ 74 $ 66 IMS 25 18 16 Corporate & Eliminations — — — Total company-funded independent research and development $ 129 $ 92 $ 82 Amortization of acquired intangible assets ASC $ 22 $ 22 $ 22 IMS — — — Corporate & Eliminations — — — Total amortization of acquired intangible assets $ 22 $ 22 $ 22 Other segment items ASC $ 2 $ 7 $ 11 IMS — — — Corporate & Eliminations — — — Total other segment items (1) $ 2 $ 7 $ 11 Operating earnings ASC $ 240 $ 183 $ 136 IMS 115 117 92 Corporate & Eliminations ( 7 ) ( 7 ) 3 Total operating earnings $ 348 $ 293 $ 231 Interest expense ( 8 ) ( 21 ) ( 36 ) Other, net ( 4 ) ( 8 ) ( 3 ) Earnings before taxes $ 336 $ 264 $ 192 ________________ (1) Includes ASC restructuring costs for the periods presented. 117 LEONARDO DRS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Total intersegment revenues by segment for the years ended December 31, 2025, 2024 and 2023, consists of the following: (Dollars in millions) 2025 2024 2023 ASC $ 12 $ 21 $ 25 IMS 2 1 1 Total intersegment revenues $ 14 $ 22 $ 26 Depreciation by segment for the years ended December 31, 2025, 2024 and 2023, consists of the following: (Dollars in millions) 2025 2024 2023 ASC $ 49 $ 48 $ 44 IMS 22 21 19 Total depreciation $ 71 $ 69 $ 63 Total assets by segment as of December 31, 2025 and 2024, consists of the following: (Dollars in millions) 2025 2024 ASC $ 2,451 $ 2,249 IMS 1,300 1,225 Corporate & Eliminations 735 710 Total assets $ 4,486 $ 4,184 118 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.