UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~March 31, 2021~~September 30, 2023

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission File Number ~~333-253583~~001-41565

Leonardo DRS, Inc.

(Exact Name of Registrant as Specified in its Charter)


Delaware			13-2632319
(State or Other Jurisdiction of Incorporation or Organization)			(I.R.S. Employer Identification Number)

2345 Crystal Drive

Suite 1000

Arlington, Virginia 22202

(703) 416-8000

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act: ~~None~~


Title of each class	Trading Symbol	Name of each exchange on which registered
Common stock, $0.01 par value	DRS	Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐☒ No ☒☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☐☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and an emerging growth company in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of ~~May 17, 2021,~~November 1, 2023, there were ~~145 million~~262,370,008 shares of the registrant’s common stock, par value of $0.01 per share, outstanding.

TABLE OF CONTENTS


			Page
PART I. Financial Information			1
ITEM 1. Financial Statements (Unaudited)			1
Consolidated Statements of Earnings			1
Consolidated Statements of Comprehensive Income			2
Consolidated Balance ~~Sheet~~Sheets			3
Consolidated Statements of Cash Flows			4
Consolidated Statements of ~~Shareholder~~’s Shareholders' Equity			5
Notes to Consolidated Financial Statements			6
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			2622
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk			4041
ITEM 4. Controls and Procedures			42
PART II. Other Information			43
ITEM 1. Legal Proceedings			43
ITEM 1A. Risk Factors			44
ITEM 2. Unregistered Sales of Equity Securities, ~~and~~ Use of Proceeds, and Issuer Purchases of Equity Securities			4446
ITEM 3. Defaults Upon Senior Securities			4446
ITEM 4. Mine Safety Disclosures			4446
ITEM 5. Other Information			4446
ITEM 6. Exhibits			4547
Signatures			4648

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION

~~This~~In this quarterly report on Form 10-Q (the “Quarterly Report”), when using the terms the “Company,” “DRS,” “we,” “us” and “our,” unless otherwise indicated or the context otherwise requires, we are referring to Leonardo DRS, Inc. This Quarterly Report contains forward-looking statements and cautionary statements within the meaning of the Private Securities Litigation Reform Act of 1995. Some of the forward-looking statements can be identified by the use of forward-looking terms such as “believes,” “expects,” “may,” “will,” “shall,” “should,” “would,” “could,” “seeks,” “aims,” “strives,” “targets,” “projects,” “intends,” “plans,” “estimates,” “anticipates” or other comparable terms. Forward-looking statements include, without limitation, all matters that are not historical facts. They appear in a number of places throughout this Quarterly Report and include, without limitation, statements regarding our intentions, beliefs, assumptions or current expectations concerning, among other things, financial goals, financial position, results of operations, cash flows, prospects, strategies or expectations, and the impact of prevailing economic conditions.

Forward-looking statements are subject to known and unknown risks and uncertainties, many of which may be beyond our control. We caution you that forward-looking statements are not guarantees of future performance or outcomes and that actual performance and outcomes may differ materially from those made in or suggested by the forward-looking statements contained in this Quarterly Report. In addition, even if future performance and outcomes are consistent with the forward-looking statements contained in this Quarterly Report, those results or developments may not be indicative of results or developments in subsequent periods. New factors emerge from time to time that may cause our business not to develop as we expect, and it is not possible for us to predict all of them. Factors that could cause actual results and outcomes to differ from those reflected in forward-looking statements include, without limitation:

•Disruptions or deteriorations in our relationship with the relevant agencies of the U.S. government, as well as any failure to pass routine audits or otherwise comply with governmental requirements including those related to security clearance or procurement rules, including the False Claims Act;

•Significant delays or reductions in appropriations for our programs and changes in U.S. government priorities and spending levels more broadly;

•Any failure to comply with the proxy agreement with the U.S. Department of Defense (the “DoD”);

•Our relationships with other industry participants, including any contractual disputes or the inability of our key suppliers to timely deliver our components, parts or services;

•Failure to properly contain a global pandemic in a timely manner could materially affect how we and our business partners operate;

•The ~~coronavirus pandemic (“COVID-19”) and related impacts~~effect of inflation on our ~~business, financial condition and results of operations;~~supply chain and/or our labor costs;

•Our mix of fixed-price, cost-plus and time-and-material type contracts and any resulting impact on our cash flows due to cost overruns;

•Failure to properly comply with various covenants of the agreements governing our debt could negatively impact our business;

•Our dependence on U.S. government contracts, which often are only partially funded and are subject to immediate termination, some of which are classified, and the concentration of our customer base in the U.S. defense industry;

•Our use of estimates in pricing and accounting for many of our programs that are inherently uncertain and which may not prove to be accurate;

•Our ability to realize the full value of our backlog;

•Our ability to predict future capital needs or to obtain additional financing if we need it;

•Our ability to respond to the rapid technological changes in the markets in which we compete;

•The effect of global and regional economic downturns and rising interest rates;

•Our ability to meet the requirements of being a public company;

•Our ability to maintain an effective system of internal control over financial reporting;

•Our inability to appropriately manage our inventory;

•Our inability to fully realize the value of our total estimated contract value or bookings;

•Our ability to compete efficiently, including due to U.S. government organizational conflict of interest rules which may limit new contract opportunities or require us to wind down existing contracts;

•~~Our relationships with other industry participants, including any contractual disputes or the inability of~~Preferences for set-asides for minority-owned, small and small disadvantaged businesses could impact our ~~key suppliers~~ability to ~~timely deliver our components, parts or services;~~be a prime contractor;

•Any failure to meet our contractual ~~obligations;~~obligations including due to potential impacts to our business from supply chain risks, such as longer lead times and shortages of electronics and other components;

•Any security breach, including any ~~cyber attack,~~cyber-attack, cyber intrusion, insider threat, or other significant disruption of our IT networks and related systems, or those of our customers, suppliers, vendors, subcontractors, partners, or other third parties, as well as any act of terrorism or other threat to our physical security and personnel;

•Our ability to fully exploit or obtain patents or other intellectual property protections necessary to secure our proprietary technology, including our ability to avoid infringing upon the intellectual property of third parties or prevent third parties from infringing upon our own intellectual property;

•The conduct of our employees, agents, affiliates, subcontractors, suppliers, business partners or joint ventures in which we participate which may impact our reputation and ability to do business;

•Our compliance with environmental laws and regulations, and any environmental liabilities that may affect our reputation or financial position;

•The outcome of litigation, arbitration, investigations, claims, disputes, enforcement actions and other legal proceedings in which we are involved;

•Various geopolitical and economic factors, laws and regulations including the Foreign Corrupt Practices Act, ~~(“FCPA”),~~ the Export Control Act, the International Traffic in Arms Regulations, ~~(“ITAR”),~~ the Export Administration Regulations, ~~(“EAR”),~~ and those that we are exposed to as a result of our international ~~business;~~business, including their impact on our ability to access certain raw materials;

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

•Our ability to obtain export licenses necessary to conduct certain operations abroad, including any attempts by Congress to prevent proposed sales to certain foreign governments;

•Our ability to attract and retain technical and other key personnel;

•The occurrence of prolonged work stoppages;

iiiii

•The unavailability or inadequacy of our insurance coverage, customer indemnifications or other liability protections to cover all of our significant risks or to pay for material losses we incur;

•Future changes in U.S. tax laws and regulations or interpretations thereof;

•Certain limitations on our ability to use our net operating losses to offset future taxable income;

•Termination of our leases or our inability to renew our leases on acceptable terms;

•Changes in estimates used in accounting for our pension plans, including in respect of the funding status thereof;

•Changes in future business or other market conditions that could cause business investments and/or recorded goodwill or other long-term assets to become impaired;

•Adverse consequences from any acquisitions such as operating difficulties, dilution and other harmful consequences or any modification, delay or prevention of any future acquisition or investment activity by the Committee on Foreign Investment in the United ~~States (“CFIUS”);~~States;

•Natural disasters or other significant disruptions; or

•Any conflict of interest that may arise because Leonardo US Holding, ~~Inc.~~LLC (“US Holding”), our ~~sole shareholder~~majority stockholder, or Leonardo S.p.A., our ultimate ~~parent,~~majority stockholder, may have interests that are different from, or conflict with, those of our other ~~shareholders,~~stockholders, including as a result of any ongoing business relationships Leonardo S.p.A. may have with us, and their significant ownership in us may discourage change of control ~~transactions.~~transactions (our amended and restated certificate of incorporation provides that we waive any interest or expectancy in corporate opportunities presented to Leonardo S.p.A); or

•Our obligations to provide certain services to Leonardo S.p.A., which may divert human and financial resources from our business.

You should read this Quarterly Report completely and with the understanding that actual future results may be materially different from expectations. All forward-looking statements made in this Quarterly Report are qualified by these cautionary statements. These forward-looking statements are made only as of the date of this filing, , and we do not undertake any obligation, other than as may be required by law, to update or revise any forward-looking or cautionary statements to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise, and changes in future operating results over time or otherwise.

Other risks, uncertainties and factors, including those discussed under “Risk Factors” in Part I, Item 1A of our ~~registration statement~~Annual Report on Form ~~S-1, as amended (Registration No. 333-253583), which was declared effective by~~10-K for the ~~Securities and Exchange Commission (“SEC”)~~year ended December 31, 2022, filed with the SEC on March ~~23, 2021,~~28, 2023 and those discussed under “Risk Factors” in Part II, Item 1A of this Quarterly Report, could cause our actual results to differ materially from those projected in any forward-looking statements we make. Readers should carefully read ~~carefully~~ the discussion of these factors to better understand the risks and uncertainties inherent in our business and underlying any forward-looking statements.

~~iii~~iv

PART I. FINANCIAL INFORMATION

ITEM 1. ~~UNAUDITED~~ FINANCIAL STATEMENTS (UNAUDITED)

LEONARDO DRS, INC.

Consolidated Statements of Earnings (Unaudited)

Three Months Ended March 31,
(Dollars in millions, except per share amounts) 2021 2020
Revenues:
Products $ 570 $ 503
Services 111 80
Total revenues 681 583
Cost of revenues:
Products (460) (418)
Services (85) (59)
Total cost of revenues (545) (477)
Gross profit 136 106
General and administrative expenses (79) (68)
Amortization of intangibles (2) (2)
Other operating expenses, net (4) (1)
Operating earnings 51 35
Interest expense (9) (15)
Other, net (1) (7)
Earnings before taxes 41 13
Income tax provision 12 3
Net earnings $ 29 $ 10
Net earnings per share from common stock:
Basic and diluted earnings per share: $ 0.20 $ 0.07


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions, except per share amounts)	2023		2022		2023		2022
Revenues:
Products	$	651	$	580	$	1,761	$	1,670
Services	52		54		139		203
Total revenues	703		634		1,900		1,873
Cost of revenues:
Products	(504)		(461)		(1,365)		(1,328)
Services	(37)		(43)		(97)		(154)
Total cost of revenues	(541)		(504)		(1,462)		(1,482)
Gross profit	162		130		438		391
General and administrative expenses	(96)		(101)		(286)		(261)
Amortization of intangibles	(5)		(3)		(16)		(7)
Other operating (expenses) income, net	(2)		350		(10)		351
Operating earnings	59		376		126		474
Interest expense	(10)		(9)		(27)		(27)
Other, net	(1)		—		(2)		—
Earnings before taxes	48		367		97		447
Income tax provision	1		88		3		107
Net earnings	$	47	$	279	$	94	$	340

Net earnings per share from common stock:
Basic earnings per share	$	0.18	$	1.33	$	0.36	$	1.62
Diluted earnings per share	$	0.18	$	1.33	$	0.36	$	1.62

See accompanying Notes to Consolidated Financial Statements.

LEONARDO DRS, INC.

Consolidated Statements of Comprehensive Income (Unaudited)

Three Months Ended March 31,
(Dollars in millions) 2021 2020
Net earnings $ 29 $ 10
Other comprehensive income (loss):
Foreign currency translation gain (loss), net of income taxes — —
Net unrealized gain on hedging derivatives, net of income taxes — —
Net unrecognized gain (loss) on postretirement obligations, net of income taxes (1) (14)
Other comprehensive loss, net of income tax (1) (14)
Total comprehensive income (loss) $ 28 $ (4)


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions)	2023		2022		2023		2022
Net earnings	$	47	$	279	$	94	$	340
Other comprehensive income (loss):
Foreign currency translation loss, net of income taxes	(1)		(3)		—		(3)
Gain from pension settlements	—		—		—		3
Net unrecognized gain on postretirement obligations, net of income taxes	1		—		2		1
Other comprehensive income (loss), net of income tax	—		(3)		2		1
Total comprehensive income	$	47	$	276	$	96	$	341

See accompanying Notes to Consolidated Financial Statements.

LEONARDO DRS, INC.

Consolidated Balance Sheets

(Unaudited)
(Dollars in millions, except per share amounts) March 31, 2021 December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents $ 30 $ 61
Accounts receivable, net 87 102
Contract assets 798 672
Inventories 262 247
Related party note receivable — 115
Prepaid expenses 26 33
Other current assets 34 33
Total current assets 1,237 1,263
Noncurrent assets:
Property plant and equipment, net 357 355
Intangible assets, net 58 60
Goodwill 1,057 1,057
Deferred tax assets 75 87
Other noncurrent assets 130 134
Total noncurrent assets 1,677 1,693
Total assets $ 2,914 $ 2,956
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Short-term borrowings and current portion of long-term debt $ 171 $ 53
Accounts payable 343 478
Contract liabilities 149 177
Other current liabilities 254 267
Total current liabilities 917 975
Noncurrent liabilities:
Long-term debt 373 374
Pension and other postretirement benefit plan liabilities 80 88
Other noncurrent liabilities 89 92
Total noncurrent liabilities $ 542 554
Shareholder's equity:
Preferred stock, $0.01 par value: 10,000,000 shares authorized; none issued $ — $ —
Common stock, $0.01 par value: 300,000,000 shares authorized; 145,000,000 shares issued and outstanding 1 1
Additional paid-in capital 4,633 4,633
Accumulated deficit (3,108) (3,137)
Accumulated other comprehensive loss (71) (70)
Total shareholder's equity 1,455 1,427
Total liabilities and shareholder's equity $ 2,914 $ 2,956


	(Unaudited)
(Dollars in millions, except per share amounts)	September 30, 2023		December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	47	$	306
Accounts receivable, net	200		166
Contract assets	1,061		872
Inventories	383		319

Prepaid expenses	17		20
Other current assets	32		24
Total current assets	1,740		1,707
Noncurrent assets:
Property, plant and equipment, net	399		404
Intangible assets, net	156		172
Goodwill	1,236		1,236
Deferred tax assets	87		66
Other noncurrent assets	95		92
Total noncurrent assets	1,973		1,970
Total assets	$	3,713	$	3,677
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current portion of long-term debt	$	132	$	29
Accounts payable	328		457
Contract liabilities	258		233
Other current liabilities	233		323
Total current liabilities	951		1,042
Noncurrent liabilities:
Long-term debt	351		365
Pension and other postretirement benefit plan liabilities	35		45
Deferred tax liabilities	8		—
Other noncurrent liabilities	126		98
Total noncurrent liabilities	520		508
Commitments and contingencies (Note 14)
Shareholders' 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; 262,039,337 and 260,234,033 issued as of September 30, 2023 and December 31, 2022, respectively	3		3
Additional paid-in capital	5,166		5,147
Accumulated deficit	(2,880)		(2,974)
Accumulated other comprehensive loss	(47)		(49)
Total shareholders' equity	2,242		2,127
Total liabilities and shareholders' equity	$	3,713	$	3,677

See accompanying Notes to Consolidated Financial Statements.

LEONARDO DRS, INC.

Consolidated Statements of Cash Flows (Unaudited)


		Three Months Ended March 31,					Nine Months Ended September 30,
(Dollars in millions)	(Dollars in millions)	2021		2020		(Dollars in millions)	2023		2022
Operating activities	Operating activities					Operating activities
Net earnings	Net earnings	$	29	$	10	Net earnings	$	94	$	340
Adjustments to reconcile net earnings to net cash used in operating activities:	Adjustments to reconcile net earnings to net cash used in operating activities:					Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization	Depreciation and amortization	14		13		Depreciation and amortization	63		48
Deferred income taxes	Deferred income taxes	12		2		Deferred income taxes	(13)		10
Gain from sale of business						Gain from sale of business	—		(350)
Other	Other	4		3		Other	13		—
Changes in assets and liabilities:	Changes in assets and liabilities:					Changes in assets and liabilities:
Accounts receivable	Accounts receivable	15		18		Accounts receivable	(34)		(17)
Contract assets	Contract assets	(126)		(36)		Contract assets	(189)		(174)
Inventories	Inventories	(15)		(50)		Inventories	(64)		(43)
Prepaid expenses	Prepaid expenses	7		3		Prepaid expenses	3		—
Other current assets	Other current assets	(2)		1		Other current assets	(8)		(2)
Other noncurrent assets	Other noncurrent assets	5		5		Other noncurrent assets	13		10
Defined benefit obligations	Defined benefit obligations	(8)		(1)		Defined benefit obligations	(8)		(4)
Other current liabilities	Other current liabilities	(16)		(42)		Other current liabilities	(82)		83
Other noncurrent liabilities	Other noncurrent liabilities	(5)		—		Other noncurrent liabilities	6		(3)
Accounts payable	Accounts payable	(135)		(209)		Accounts payable	(129)		(180)
Contract liabilities	Contract liabilities	(28)		(13)		Contract liabilities	25		36
Net cash used in operating activities	Net cash used in operating activities	$	(249)	$	(296)	Net cash used in operating activities	(310)		(246)
Investing activities	Investing activities					Investing activities
Capital expenditures	Capital expenditures	(13)		(13)		Capital expenditures	(42)		(35)
Repayments received (net of advances) on related party note receivable		115		96
Net cash provided by investing activities		$	102	$	83

Proceeds from sales of businesses						Proceeds from sales of businesses	—		483

Net cash (used in) provided by investing activities						Net cash (used in) provided by investing activities	(42)		448
Financing activities	Financing activities					Financing activities
Net (decrease) increase in third party borrowings (maturities of 90 days or less)		(8)		(27)
Net decrease in third party borrowings (maturities of 90 days or less)						Net decrease in third party borrowings (maturities of 90 days or less)	(11)		(12)
Repayment of third party debt						Repayment of third party debt	(454)		—
Borrowings of third party debt						Borrowings of third party debt	555		—
Repayment of related party debt	Repayment of related party debt	(250)		(230)		Repayment of related party debt	—		(640)
Borrowings from related parties	Borrowings from related parties	375		425		Borrowings from related parties	—		675
Dividend to US Holding						Dividend to US Holding	—		(396)

Proceeds from stock issuance						Proceeds from stock issuance	8		—
Cash outlay to reacquire equity instruments						Cash outlay to reacquire equity instruments	(1)		—
Other	Other	(1)		4		Other	(4)		(6)
Net cash provided by financing activities		$	116	$	172
Net cash provided by (used in) financing activities						Net cash provided by (used in) financing activities	93		(379)
Effect of exchange rate changes on cash and cash equivalents	Effect of exchange rate changes on cash and cash equivalents	—		—		Effect of exchange rate changes on cash and cash equivalents	—		—
Net (decrease) increase in cash and cash equivalents		$	(31)	$	(41)
Net decrease in cash and cash equivalents						Net decrease in cash and cash equivalents	(259)		(177)
Cash and cash equivalents at beginning of year	Cash and cash equivalents at beginning of year	61		85		Cash and cash equivalents at beginning of year	306		240
Cash and cash equivalents at end of period	Cash and cash equivalents at end of period	$	30	$	44	Cash and cash equivalents at end of period	$	47	$	63

See accompanying Notes to Consolidated Financial Statements.

LEONARDO DRS, INC.

Consolidated Statements of ~~Shareholder’s~~Shareholders’ Equity (Unaudited)

(Dollars in millions, except per share amounts) Common stock Additional paid- in capital Accumulated other comprehensive loss Accumulated deficit Total
Balance as of December 31, 2019 1 4,333 (93) (3,222) 1,019
Total comprehensive income (loss) $ — $ — $ (14) $ 10 $ (4)
Balance as of March 31, 2020 $ 1 $ 4,333 $ (107) $ (3,212) $ 1,015
Balance as of December 31, 2020 $ 1 $ 4,633 $ (70) $ (3,137) $ 1,427
Total comprehensive income (loss) — — (1) 29 28
Balance as of March 31, 2021 1 4,633 (71) (3,108) 1,455


(Dollars in millions)	Common stock		Additional paid- in capital		Accumulated other comprehensive loss		Accumulated deficit		Total
Balance as of December 31, 2021	$	1	$	4,633	$	(58)	$	(2,983)	$	1,593
Total comprehensive income	—		—		1		340		341
Dividend to US Holding	—		—		—		(396)		(396)
Balance as of September 30, 2022	$	1	$	4,633	$	(57)	$	(3,039)	$	1,538


Balance as of December 31, 2022	$	3	$	5,147	$	(49)	$	(2,974)	$	2,127
Total comprehensive income	—		—		2		94		96
Stock compensation expense	—		19		—		—		19
Balance as of September 30, 2023	$	3	$	5,166	$	(47)	$	(2,880)	$	2,242

See accompanying Notes to Consolidated Financial Statements.

LEONARDO DRS, INC.

NOTES TO UNAUDITED 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~~Company’s largest shareholder is ~~controlled by~~ Leonardo S.p.A (hereinafter, “Leonardo S.p.A.,” ~~“the Parent”~~), an Italian multi-national aerospace, defense and security company headquartered in Rome, Italy, through its ~~direct~~ultimate sole ownership of Leonardo US Holding, ~~Inc.~~LLC (“US Holding”). US Holding is the ~~direct and sole shareholder~~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 ~~soldier~~advanced sensing, ~~electronic warfare (“EW”), cyber security,~~ network computing, ~~communications,~~ force protection and electrical power ~~conversion~~ and propulsion.

These capabilities directly align with our ~~three~~two reportable segments: Advanced ~~Sensor Technologies, Network~~Sensing and Computing ~~& Communications~~ and Integrated Mission Systems. The U.S. ~~Department of Defense (“DoD”)~~DoD is our largest customer and accounts for approximately ~~86%~~80% and ~~83%~~82% of our total revenues as an end-user for the ~~periods~~nine months ended ~~March 31, 2021and March 31, 2020,~~September 30, 2023 and September 30, 2022, respectively. Specific international and commercial market opportunities exist within these segments and make up approximately ~~14%~~20% and ~~17%~~18% of our total revenues for the ~~periods~~nine months ended ~~March 31, 2021~~September 30, 2023 and ~~March 31, 2020.~~September 30, 2022, respectively. Our ~~three~~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 ~~Sensor Technologies (“AST”)~~Sensing and Computing

The ~~AST~~Advanced Sensing and Computing (“ASC”) segment ~~provides electro-optical sensor technologies, laser systems, EW systems~~designs, develops and ~~intelligence~~manufactures sensing and ~~surveillance solutions to U.S. military~~network computing technology that enables real-time situational awareness required for enhanced operational decision making and ~~intelligence community~~execution by our customers. ~~Major solutions include ground vehicle~~

Our leading sensing capabilities span applications including missions requiring advanced detection, precision targeting and surveillance ~~sensors, including electro-optical~~sensing, long range electro-optic/infrared (“EO/IR”), signals intelligence (“SIGINT”) and ~~advanced detection systems. Our~~other intelligence systems, electronic warfare (“EW”), ground vehicle sensing, next generation active electronically scanned array (“AESA”) tactical radars, dismounted soldier sensing and space sensing. Across our offering, we are focused on advancing sensor distance, precision, clarity, definition, spectral depth and effectiveness. Furthermore, we seek to leverage our multi-decade experience to optimize size, weight, power and cost tailored to our customers’ specific mission requirements, including in space-based applications ~~include infrared imaging solutions~~for earth surveillance and ~~precision targeting systems.~~ missile tracking.

Our ~~infrared focal plane array foundry produces small sized cryogenically cooled and uncooled infrared sensors. Beyond the~~sensing capabilities noted above, AST also provides aircraft training instrumentation equipment and high-performance radio frequency receivers and transceivers for U.S. and international customers. Our quantum cascade laser technology has military and commercial medical applications.

~~Network Computing & Communication (“NC&C”)~~

The NC&C segment provides defense electronics solutions across all domains of warfare. Our technologies and products can be integrated into legacy and new military platforms, end-to-end network communication systems, satellite servicesare complemented by our rugged, trusted and cyber ~~solutions. We are~~resilient network computing products. Our network computing offering is utilized across a ~~provider~~broad range of ~~ruggedized~~mission applications including platform computing ~~platforms. For~~on ground and shipboard (both surface ship and submarine) for advanced battle management, combat systems, radar, command and control (“C2”), tactical networks, tactical computing and communications. Our network computing products support the ~~U.S. Navy~~DoD’s need for greater situational understanding at the tactical edge and ~~its allies, we provide naval computing infrastructure, network and~~permits data ~~distribution, radar and rugged naval control systems, which are present on all naval surface and subsurface combatant vessels.~~ to be rapidly transmitted securely from command centers to forward-positioned defense assets.

Integrated Mission Systems

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

Integrated Mission Systems (“IMS”)

~~The IMS~~ segment ~~provides critical~~designs, develops, manufactures and integrates power conversion, control and distribution systems, ship propulsion systems, motors and variable frequency drives, force protection ~~vehicle integration,~~systems, transportation and logistics systems for the U.S. and ~~electrical conversion~~allied defense customers.

LEONARDO DRS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Our naval power and ~~ship~~ propulsion systems are providing next-generation power capabilities for the future fleet. DRS is currently a leading provider of next-generation electrical propulsion systems for the U.S. Navy. We provide power conversion, control, distribution and propulsion systems for the Navy’s top priority shipbuilding programs, including the Columbia Class ballistic missile submarine, the first modern U.S. electric drive submarine. We believe DRS is well positioned to meet the needs of an increasingly electrified fleet with our high-efficiency, power dense permanent magnet motors, energy storage systems and associated efficient, rugged and compact power conversion, electrical actuation systems, and advanced cooling technologies. DRS has a long history of providing a number of other critical products to the U.S. ~~military.~~Navy with a significant installed base on submarines, aircraft carriers and other surface ships including motor controllers, instrumentation and control equipment, electrical actuation systems, and thermal management systems for electronics and ship stores refrigeration.

Our technologies and systems help protect U.S. forces and assets against increasingly sophisticated and proliferating threats. DRS is an integrator of systems in ground vehicles for short-range air defense, counter-Unmanned Aerial Systems (“C-UAS”), and vehicle survivability and protection. This integrator role includes utilizing radars, EW equipment, reconnaissance and surveillance systems, modular combat vehicle turrets, and stabilized sensor suites, and kinetic countermeasures for short-range air defense. Our force protection systems, ~~protect service members and military assets from evolving threats and include~~including solutions for ~~counter-unmanned aerial systems,~~C-UAS, short-range air defense systems and active protection systems onused to defend ground ~~vehicles. We have military transportation~~combat vehicles help protect personnel and ~~logistics offerings and ground vehicle integration capabilities to support U.S. forces in a wide range of~~

~~LEONARDO DRS, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

~~operational environments. For the U.S. Navy, we continue to provide and support multi-generational power conversion and propulsion systems for our nation’s shipbuilding programs.~~defense assets from these growing threats.

Other

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

See Note 1516: Segment Information for further information regarding our business segments.

B.Basis of presentation

The accompanying unaudited 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 and contain all adjustments, which are of a normal and recurring nature, considered necessary by management to present fairly the financial position, results of operations and cash flows for the periods presented. 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. Certain prior year amounts have been reclassified to conform to current year presentation.

Interim Financial Statements. The unaudited Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange ~~Commission.~~Commission (“SEC”). These rules and regulations permit some of the information and footnote disclosures included in financial statements prepared in accordance with U.S. GAAP to be condensed or omitted.

These unaudited Consolidated Financial Statements should be read in conjunction with our audited Consolidated Financial Statements as of and for the year ended December 31, ~~2020~~2022 included in our ~~registration statement~~Annual Report on Form ~~S-1, as amended (Registration No. 333-253583), which was declared effective by~~10-K for the year ended December 31, 2022, filed with the SEC on March ~~23, 2021.~~28, 2023.

C.~~Use~~New Accounting Pronouncements

Disclosure of ~~Estimates~~Supplier Finance Program Obligations

~~The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect~~In September 2022, the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant of these estimates and assumptions relate to the recognition of contract revenues and estimated costs to complete contracts in process, recoverability of reported amounts of goodwill, long-lived assets and intangible assets, valuation of pensions and other postretirement benefits, the valuation of deferred tax assets and liabilities and the valuation of unrecognized tax benefits. Actual results could differ from these estimates.

D.~~Revenue Recognition~~

~~On January 1, 2018, we adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, and the related amendments of~~ Financial Accounting Standards Board ~~(“FASB”)~~issued Accounting Standards ~~Codification (“ASC”) Topic 606,~~Update 2022-04, Liabilities – Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations, which ~~supersedes most previous U.S. GAAP revenue recognition guidance. As~~is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The adoption of the date of adoption, we elected the practical expedient for contract modifications, which allows us to assume that the terms of the contract that existed at the beginning of the earliest period presentedthis standard did not have ~~been in place since the inception of the contract~~a material impact on the basis that it is not practical to separately evaluate the effects of all prior contract modifications). Our revenues consist of sales of products (tangible goods) and sales of services to customers. We recognize the majority of our revenue from contracts with customers using an over time, cost-to-cost method of accounting. On certain other contracts, primarily time and material (“T&M”) and cost-plus contracts, revenue is recognized using the right-to-invoice practical expedient as we are contractually able to bill our customer based on control transferred to the customer. See ~~Note 2~~.~~Revenue from Contracts with Customers~~ ~~for additional information regarding revenue recognition.~~financial statements.

LEONARDO DRS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

E.~~Cost~~Note 2. Business Acquisitions and Dispositions

Acquisitions

On June 21, 2022, the Company, entered into an Agreement and Plan of ~~Revenues~~

~~Cost~~Merger (the “Merger Agreement”) with RADA Electronic Industries, Ltd (“RADA”), a leading Israel-based provider of ~~revenues includes materials, labor and overhead costs incurred in~~small-form tactical radar, for an all-stock merger, with RADA surviving as a wholly owned subsidiary of 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.~~Research and Development Expenses~~

We conduct research and development (“R&D”) activities using our own funds (referred to as company-funded R&D or 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 contractsCompany. The Company acquired RADA 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~~Company’s goal to ~~the related customer contract. Substantially all R&D costs are charged to cost of revenues as incurred.~~

G.~~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 the periods ended March 31, 2021 and March 31, 2020 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 Sheet as a component of other comprehensive earnings.

H.~~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.~~

I.~~Accounts Receivable~~

~~Accounts receivable consist of amounts billed and currently due from customers. When events or conditions indicate that amounts outstanding from customers may~~ become ~~uncollectible, an allowance is estimated and recorded. See~~ ~~Note 3~~: ~~Accounts Receivable~~ ~~for additional information regarding accounts receivable.~~

J.~~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 4~~: ~~Inventories~~ ~~for additional information regarding inventories.~~

K.~~Property, Plant and Equipment~~

Property, plant and equipment is carried at cost less accumulated depreciation. Depreciation is calculated on 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 Sheet, 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

~~LEONARDO DRS, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

~~capitalized. See~~ ~~Note 5~~: ~~Property, Plant and Equipment~~ ~~for additional information regarding property, plant and equipment.~~

L.~~Goodwill~~

~~On January 1, 2018, we early adopted ASU 2017-04,~~ ~~Intangibles ‐ Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment~~. The standard simplifies the measurement of goodwill impairment by eliminating the requirement that an entity compute the implied fair value of goodwill based on the fair values of its assets and liabilities to measure impairment. Instead, goodwill impairment will be measured as the difference between the fair value and the carrying value of the reporting unit. 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 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. Based upon the aggregation criteria the Company concluded it had seven reporting units at both March 31, 2021 and December 31, 2020. The annual impairment test is conducted as of December 31. The Company did not identify any triggering events during the quarters ended March 31, 2021 or March 31, 2020. See ~~Note 7~~: ~~Goodwill~~ ~~for additional information regarding goodwill.~~

M.~~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 5~~: ~~Property, Plant and Equipment~~ ~~and~~ ~~Note 8~~: ~~Intangible Assets~~ ~~for additional information regarding long-lived assets and intangible assets.~~

N.~~Derivative Financial Instruments~~

The Company does not use derivative financial instruments for trading purposes. All derivative instruments are carried on the Consolidated Balance Sheet as either assets or liabilities at fair value. The classification of gains and losses resulting from changes in the fair values of derivatives depends on the intended use of the derivative and its resultant designation. The Company had no significant derivative or hedging instruments for the periods presented.

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, expected annual rates of salary increases for employee participants in the case of pension plans and expected annual increases in the costs of medical and other health care benefits in the case of postretirement benefit plans. These long-term assumptions are subject to revision based on changes in interest rates, financial market conditions, expected versus actual returns on plan assets, participant mortality rates and other actuarial assumptions, including future rates of salary increases, benefit formulas and levels, and rates of increase in the costs of benefits. Changes in these assumptions, if significant, can materially affect the amount of

~~LEONARDO DRS, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

annual net periodic benefit costs recognized in the Company's results of operations from one year to the next, the liabilities for the pension plans and postretirement benefit plans and the Company's annual cash requirements to fund these plans. See ~~Note 11: Pension and Other Postretirement Benefits~~ ~~for further information regarding our pension and postretirement plans.~~

P.~~Income Taxes~~

We and US Holding have entered into a Tax Allocation Agreement (“Tax Allocation Agreement”), dated as of November 16, 2020, with members of an affiliated group, as defined in Section 1504(a) of the U.S. Internal Revenue Code of 1986, as amended (the “Tax Code”), members of one or more consolidated, combined, unitary or similar state tax groups and additional parties who are part of an “expanded affiliated group” for certain tax purposes. The agreement provides for the method of computing and allocating the consolidated U.S. 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, 2020 and each subsequent year in which the parties are members of a group (whether federal or state). The agreement also provides for reimbursement of US Holding and/or DRS for payment of such tax liabilities, for compensation of any member for use of its “net operating loss” or “tax credits” in arriving at such tax liabilities and the allocation and payment of any refund arising from a carryback of net operating losses or tax credits from subsequent taxable years. Under the agreement, the parties have agreed to calculate and allocate their respective tax liabilities and other tax attributes for taxable years beginning with the first consolidated taxable year that included DRS (i.e., the taxable year ended December 31, 2008) as if the agreement was then in effect.

We calculate the provision for incomes taxes during interim periods by applying an estimate of our annual effective tax rate for the full year to “ordinary” income or loss (pretax income or loss excluding unusual or infrequently occurring discrete items.)

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. 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% 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.

~~LEONARDO DRS, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

~~See~~ ~~Note 9~~: ~~Income Taxes~~ ~~for additional information regarding income taxes.~~

Q.~~Earnings Per Share~~

Basic earnings per share (“EPS”) is computed by dividing net earnings by the weighted average number of shares of common stock outstanding during each period. The computation of diluted EPS includes the dilutive effect of outstanding stock-based compensation awards, only in periods in which such effect would have been dilutive for the period. In February 2021, the Company completed a forward stock split of 1,450,000 - for- 1 share of common stock. The consolidated financials statements have been adjusted to reflect the forward stock split for all periods presented. There were 100 shares and 145 million basic and diluted common shares outstanding before and after the forward stock split, respectively, for all periods presented.

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~~leader in advanced sensing and force protection.

The acquisition 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~~RADA has been accounted 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. Certain plan investments are measured at fair value using the net asset value (“NAV”) per share (or its equivalent) practical expedient and are therefore not categorized as Level 1, 2, or 3. NAV is defined as the total value of the fund divided by the number of the fund’s shares outstanding. See ~~Note 12: Pension and Other Postretirement Benefits~~ ~~for further information regarding our pension and postretirement plans.~~

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 Sheet at carrying value, which other than the 7.5% Term loan due November 30, 2022, approximate fair value. See ~~Note 11: Debt~~ ~~for further information regarding our debt.~~

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 in accordance with ASC 805, Business Combinations, with the Company as the accounting acquirer, which requires ~~that any~~the assets acquired and liabilities assumed be ~~measured~~recognized at their ~~respective~~acquisition date fair ~~values~~value. The acquisition was completed on ~~the acquisition date. The accounting~~November 28, 2022, when each issued and outstanding ordinary share of RADA was converted and exchanged for ~~business combinations requires the Company to make significant judgments and estimates. Any excess~~one share of common stock of the Company.

The total purchase consideration for RADA was $511 million and is comprised of the Company’s shares of common stock issued in exchange for all issued and outstanding ordinary shares of RADA, as well as $20 million of replacement stock compensation awards’ fair value ~~of consideration transferred over the assigned values~~attributable to pre-combination services.

The preliminary fair value estimates of the net assets acquired and liabilities assumed are based upon preliminary calculations and valuations, and those estimates and assumptions are subject to change as the Company obtains additional information during the measurement period (up to one year from the acquisition date). The Company has not yet finalized the determination of fair values allocated to the acquired assets and liabilities, including but not limited to the valuation of contract related assets and liabilities and related tax impacts of the opening balance sheet adjustments. The excess of the total consideration over the tangible assets, identifiable intangible assets, and assumed liabilities is ~~recognized~~recorded as goodwill.

~~There were no significant acquisitions that were completed for any~~ Identifiable intangibles assets of $131 million consist of $90 million of technology related assets while the remaining $41 million consists of customer and contractual relationships. The goodwill of $284 million arising from the acquisition is primarily attributable to the growth opportunities related to the RADA business. None of the ~~periods presented.~~goodwill resulting from the acquisition is deductible for tax purposes. All of the goodwill recognized related to the RADA acquisition was assigned to the ASC segment.

Dispositions

~~LEONARDO DRS, INC.~~ On March 21, 2022, the Company entered into a definitive agreement to sell its Global Enterprise Solutions (“GES”) business to SES Government Solutions, Inc., a wholly-owned subsidiary of SES S.A., for $450 million subject to certain working capital adjustments. The transaction was completed on August 1, 2022 and resulted in cash proceeds of $427 million after net working capital adjustments.

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

~~Investments~~

~~Investments where we have~~In February 2022, the ~~ability~~Company’s Board of Directors approved the strategic initiative to ~~exercise significant influence, but do not control, are accounted for under~~divest the ~~equity method of accounting and are included in other noncurrent assets on our Consolidated Balance Sheet. Significant influence typically exists if we have a 20% to 50% ownership~~Company’s interest in ~~the investee. Under this method of accounting,~~Advanced Acoustic Concepts (“AAC”). On April 19, 2022, we entered into a definitive sales agreement to divest our share of the net earnings or losses of the investee is included in operating profit in other income, net on our Consolidated Statements of Earnings since the activities of the investee are closely aligned with the operations of the business segment holding the investment. We evaluate our equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may be impaired. If a decline in the value of an equity method investment is determined to be other than temporary, a loss is therefore recorded during the current period.

~~The Company’s cost method investment consists of an~~ investment in ~~a private company~~AAC for $56 million to Thales Defense & Security, Inc., the minority partner in ~~which we do not have the ability to exercise significant influence over its operating~~AAC. The transaction was completed on July 8, 2022 and ~~financial activities. Management evaluates this investment for possible impairment quarterly.~~

~~Variable Interest Entities~~

~~The Company occasionally forms joint ventures and/or enters into arrangements with special purpose limited liability companies for the purpose~~resulted in proceeds 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 investment in VIEs for the periods presented.$56 million.

Note 2.3. 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. We classify revenues as products or services on our Consolidated Statements of Earnings based on the predominant attributes of the performance obligations. While the Company provides warranties on certain contracts, we typically do not

LEONARDO DRS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 time and material (“T&M&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 advanced 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 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.

~~LEONARDO DRS, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

Estimating the transaction price for an arrangement requires judgment and is based on expected results which are determined using the Company’s historical data. We estimate that the revenue that we expect to be entitled to receive from a customer to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur.

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

Revenues for the majority of our contracts are measured ~~as determined by~~using the ~~ratio~~over time, percentage of ~~cumulative costs incurred~~completion cost-to-cost method of accounting to ~~date to estimated total contract costs at completion (the "cost-to-cost method").~~calculate percentage of completion. We believe this is an appropriate measure of progress toward satisfaction of performance obligations as this measure most accurately depicts the progress of our work and transfer of control to our customers. Due to the long-term nature of many of our contracts, developing the estimated total cost at completion and total transaction price often requires judgment. Factors that must be considered in estimating the cost of the work to be 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 ~~at least quarterly.~~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 or in estimated total transaction price are determined, the related impact on revenue and operating income are recognized using the cumulative catch-up method, which recognizes in the current period the cumulative effect of such adjustments for all prior periods. Any anticipated losses on these contracts are fully recognized in the period in which the losses become evident.

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


		Three Months Ended March 31,							Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in millions)	(Dollars in millions)	2021			2020			(Dollars in millions)	2023			2022			2023			2022
Revenue	Revenue	$	(1)		$	(3)		Revenue	$	6		$	(11)		$	(14)		$	(22)
Total % of Revenue	Total % of Revenue	0		%	1		%	Total % of Revenue	0.9		%	1.8		%	0.7		%	1.2		%

The impacts noted above are attributed primarily to changes in our firm-fixed-price development type programs. As changes happen in the design required to achieve contractual specifications, those changes often result in the programs’ estimate and related profitability. The reductions to revenue for the period March 31, 2021 was attributed primarily to certain submarine electronic propulsion programs with in our IMS segment. The impact to revenue for the three months ended March 31, 2020 was driven by an international electronic warfare program within our AST segment.

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

LEONARDO DRS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Costs to obtain a contract are incremental direct costs incurred to obtain a contract with a customer, including sales commissions and dealer fees, and are capitalized if material. Costs to fulfill a contract include costs directly related to a contract or specific anticipated contract (e.g., certain design costs) that generate or enhance our ability to satisfy our performance obligations under these contracts. These costs are capitalized to the extent they are expected to be recovered from the associated contract.

Contract Assets and Liabilities

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

~~LEONARDO DRS, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

~~Sheet.~~ 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:


(Dollars in millions)	(Dollars in millions)	March 31, 2021		December 31, 2020		(Dollars in millions)	September 30, 2023		December 31, 2022
Contract assets	Contract assets	$	798	$	672	Contract assets	$	1,061	$	872
Contract liabilities	Contract liabilities	149		177		Contract liabilities	258		233
Net contract assets	Net contract assets	$	649	$	495	Net contract assets	$	803	$	639

Revenue recognized in the ~~periods~~nine months ending ~~March 31, 2021~~September 30, 2023 and ~~March 31, 2020~~September 30, 2022, that was included in the contract liability balance at the beginning of each period was ~~$69~~$157 million and ~~$56~~$121 million, respectively.

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

Contract assets related to amounts withheld by customers until contract completion are not considered a significant financing component of our contracts because the intent is to protect the customers from our failure to satisfactorily complete our performance obligations. Payments received from customers in advance of revenue recognition (contract liabilities) are not considered a significant financing component of our contracts because they are utilized to pay for contract costs within a one-year period or are requested by us to ensure the customers meet their payment obligations.

Value of Remaining Performance Obligations

The value of remaining performance obligations, which we also refer to as total backlog, includes the following components:

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

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

The following table summarizes the value of our total backlog as of ~~March 31, 2021,~~September 30, 2023, incorporating both funded and unfunded components:


~~Backlog:~~	~~March 31, 2021~~
(Dollars in millions)	September 30, 2023
Funded	$	3,356
Unfunded	1,363
Total Backlog	$	~~3,326~~ 4,719

We expect to recognize approximately ~~52%~~17% of our ~~March 31, 2021~~September 30, 2023 backlog as revenue over the next ~~nine~~three months, with the remainder to be recognized thereafter. Subsequent to the third quarter, the Company agreed to

LEONARDO DRS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

contract terms and pricing totaling over $3 billion, for the majority of our electric power and propulsion system on the remaining seven Columbia Class submarines. The award is not included in the backlog numbers noted above.

Disaggregation of Revenue

~~AST~~ASC: ~~AST~~ASC revenue is primarily derived from U.S. government development and production contracts and is generally recognized using the over time, ~~using the~~percentage of completion cost-to-cost ~~method.~~method of accounting. We disaggregate ~~AST revenue by geographical~~

~~LEONARDO DRS, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

~~region, customer relationship and contract type. We believe these categories best depict how the nature, amount, timing and uncertainty of AST revenue and cash flows are affected by economic factors:~~

Three Months Ended March 31,
(Dollars in millions) 2021 2020
Revenue by Geographical Region
United States $ 197 $ 160
International 21 19
Intersegment Sales 1 4
Total $ 219 $ 183
Revenue by Customer Relationship
Prime contractor $ 105 $ 85
Subcontractor 113 94
Intersegment Sales 1 4
Total $ 219 $ 183
Revenue by Contract Type
Firm Fixed Price $ 189 $ 155
Flexibly Priced(1)
29 24
Intersegment Sales 1 4
Total $ 219 $ 183

~~________________~~

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

~~NC&C: NC&C~~ ~~revenue is primarily derived from U.S. government development and production contracts and is generally recognized over time using the cost-to-cost method. We disaggregate NC&C~~ASC revenue by geographical region, customer relationship and contract type. We believe these categories best depict how the nature, amount, timing and uncertainty of ~~NC&C~~ASC revenue and cash flows are affected by economic factors:


		Three Months Ended March 31,					Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions)	(Dollars in millions)	2021		2020		(Dollars in millions)	2023		2022		2023		2022
Revenue by Geographical Region	Revenue by Geographical Region					Revenue by Geographical Region
United States	United States	$	249	$	194	United States	$	376	$	364	$	1,046	$	1,103
International	International	13		20		International	50		41		162		137
Intersegment Sales	Intersegment Sales	2		3		Intersegment Sales	5		3		18		8
Total	Total	$	264	$	217	Total	$	431	$	408	$	1,226	$	1,248
Revenue by Customer Relationship	Revenue by Customer Relationship					Revenue by Customer Relationship
Prime contractor	Prime contractor	$	172	$	123	Prime contractor	$	227	$	216	$	570	$	664
Subcontractor	Subcontractor	90		91		Subcontractor	199		189		638		576
Intersegment Sales	Intersegment Sales	2		3		Intersegment Sales	5		3		18		8
Total	Total	$	264	$	217	Total	$	431	$	408	$	1,226	$	1,248
Revenue by Contract Type	Revenue by Contract Type					Revenue by Contract Type
Firm Fixed Price	Firm Fixed Price	$	238	$	195	Firm Fixed Price	$	356	$	349	$	1,015	$	1,085
Flexibly Priced(1)	Flexibly Priced(1)	24		19		Flexibly Priced(1)	70		56		193		155
Intersegment Sales	Intersegment Sales	2		3		Intersegment Sales	5		3		18		8
Total	Total	$	264	$	217	Total	$	431	$	408	$	1,226	$	1,248

________________

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

~~LEONARDO DRS, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

IMS: IMS revenue is primarily derived from U.S. government development and production contracts and is generally recognized over time using the over time, percentage of completion cost-to-cost ~~method.~~method of accounting. We disaggregate IMS revenue by geographical region, customer relationship and contract type. We believe these

LEONARDO DRS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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


		Three Months Ended March 31,					Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions)	(Dollars in millions)	2021		2020		(Dollars in millions)	2023		2022		2023		2022
Revenue by Geographical Region	Revenue by Geographical Region					Revenue by Geographical Region
United States	United States	$	189	$	185	United States	$	272	$	222	$	680	$	612
International	International	12		5		International	5		7		12		21
Intersegment Sales	Intersegment Sales	—		—		Intersegment Sales	—		—		—		1
Total	Total	$	201	$	190	Total	$	277	$	229	$	692	$	634
Revenue by Customer Relationship	Revenue by Customer Relationship					Revenue by Customer Relationship
Prime contractor	Prime contractor	$	44	$	65	Prime contractor	$	62	$	41	$	156	$	110
Subcontractor	Subcontractor	157		125		Subcontractor	215		188		536		523
Intersegment Sales	Intersegment Sales	—		—		Intersegment Sales	—		—		—		1
Total	Total	$	201	$	190	Total	$	277	$	229	$	692	$	634
Revenue by Contract Type	Revenue by Contract Type					Revenue by Contract Type
Firm Fixed Price	Firm Fixed Price	$	170	$	161	Firm Fixed Price	$	234	$	195	$	572	$	542
Flexibly Priced(1)	Flexibly Priced(1)	31		29		Flexibly Priced(1)	43		34		120		91
Intersegment Sales	Intersegment Sales	—		—		Intersegment Sales	—		—		—		1
Total	Total	$	201	$	190	Total	$	277	$	229	$	692	$	634

________________

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

Note 3.4. Accounts Receivable

Accounts receivable represent amounts billed and currently due from customers. Payment is typically received from our customers either at periodic intervals (e.g., biweekly, or monthly) or upon achievement of contractual milestones.

Accounts receivable consist of the following:


(Dollars in millions)	(Dollars in millions)	March 31, 2021		December 31, 2020		(Dollars in millions)	September 30, 2023		December 31, 2022
Accounts receivable	Accounts receivable	$	89	$	104	Accounts receivable	$	201	$	168
Less allowance for doubtful accounts		(2)		(2)
Less allowance for credit losses						Less allowance for credit losses	(1)		(2)
Accounts receivable, net	Accounts receivable, net	$	87	$	102	Accounts receivable, net	$	200	$	166

The Company maintains certain agreements with financial institutions to sell certain trade receivables. See Note 5: Sale of Receivables ~~are derecognized in their entirety when sold, and the Company’s continuing involvement in the sold receivables~~for more information.

Note 5. Sale of Receivables

The Company is ~~limited~~party to ~~their servicing, for which the Company receives a fee commensurate~~factoring facilities with ~~the service provided.~~various financial institutions with an aggregate capacity of $275 million. Pursuant to the servicing agreements, ~~the Company collected approximately $19 million and $27 million at March 31, 2021 and December 31, 2020, respectively, of these~~collections on sold receivables that had not yet been remitted to ~~the financial institutions. These unremitted amounts collected on behalf of~~ the financial institutions are included within short-term borrowings and current portion of long-term debt in the Consolidated Balance ~~Sheet.~~Sheets. See Note 11: Debt for further information.

The receivables sold under the factoring facilities are without recourse for any customer credit risk and result in a true sale. Receivables are derecognized in their entirety when sold, and the Company’s continuing involvement is limited to their servicing, for which the Company receives a fee commensurate with the service provided and therefore no servicing asset or liability related to these receivables was recognized for any period presented. The fair

1612

LEONARDO DRS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

value of the sold receivables approximated their book value due to their short-term nature. Proceeds from the sold receivables are reflected in operating cash flows on the Consolidated Statements of Cash Flows.

During the periods ended September 30, 2023 and September 30, 2022, the Company incurred immaterial purchase discount fees which are presented in other general and administrative expenditures, net on the Consolidated Statements of Earnings.

The table below summarizes the activity under the factoring facilities:


	Nine Months Ended September 30,
(Dollars in millions)	2023		2022
Beginning balance	$	243	$	215
Sales of receivables	110		137
Cash returned to purchaser	(332)		(317)
Outstanding balance sold to purchasers(1)	21		35
Cash collected, not remitted to purchaser(2)	(1)		(3)
Remaining sold receivables	$	20	$	32

________________

(1)For the nine months ended September 30, 2023 and September 30, 2022, the Company recorded a net decrease to cash flows from operating activities of $222 million and $180 million, respectively, from sold receivables.

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

Note 4.6. Inventories

Inventories consists of the following:


(Dollars in millions)	(Dollars in millions)	March 31, 2021		December 31, 2020		(Dollars in millions)	September 30, 2023		December 31, 2022
Raw materials	Raw materials	$	54	$	52	Raw materials	$	76	$	83
Work in progress	Work in progress	206		193		Work in progress	293		224
Finished goods	Finished goods	2		2		Finished goods	14		12
Total	Total	$	262	$	247	Total	$	383	$	319

Note 5.7. Property, Plant and Equipment

Property, plant and equipment by major asset class consists of the following:


(Dollars in millions)	(Dollars in millions)	March 31, 2021		December 31, 2020		(Dollars in millions)	September 30, 2023		December 31, 2022
Land, buildings and improvements	Land, buildings and improvements	$	298	$	294	Land, buildings and improvements	$	342	$	321
Plant and machinery	Plant and machinery	186		186		Plant and machinery	201		190
Equipment and other	Equipment and other	286		276		Equipment and other	338		335
Total property, plant and equipment, at cost	Total property, plant and equipment, at cost	770		756		Total property, plant and equipment, at cost	881		846
Less accumulated depreciation	Less accumulated depreciation	(413)		(401)		Less accumulated depreciation	(482)		(442)
Total property, plant and equipment, net	Total property, plant and equipment, net	$	357	$	355	Total property, plant and equipment, net	$	399	$	404

Depreciation expense related to property, plant and equipment was ~~$12~~$47 million and ~~$11~~$41 million for the ~~periods~~nine months ended ~~March 31, 2021~~September 30, 2023 and ~~March 31, 2020,~~September 30, 2022, respectively.

LEONARDO DRS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 6.8. Other Liabilities

A summary of significant other liabilities by balance sheet caption follows:


(Dollars in millions)	(Dollars in millions)	March 31, 2021		December 31, 2020		(Dollars in millions)	September 30, 2023		December 31, 2022
Salaries, wages and accrued bonuses	Salaries, wages and accrued bonuses	$	46	$	61	Salaries, wages and accrued bonuses	$	64	$	63
Fringe benefits	Fringe benefits	71		71		Fringe benefits	63		76
Litigation	Litigation	10		10		Litigation	—		10
Restructuring costs	Restructuring costs	1		—		Restructuring costs	10		4
Provision for contract losses	Provision for contract losses	40		44		Provision for contract losses	41		54
Operating lease liabilities	Operating lease liabilities	22		22		Operating lease liabilities	23		25
Taxes payable						Taxes payable	2		31
Other(1)	Other(1)	64		59		Other(1)	30		60
Total other current liabilities	Total other current liabilities	$	254	$	267	Total other current liabilities	$	233	$	323
Retirement benefits				$	—
Operating lease liabilities	Operating lease liabilities	$	76	$	81	Operating lease liabilities	$	72	$	68
Other(2)		13		11
Taxes payable						Taxes payable	32		21
Other(1)						Other(1)	22		9
Total other noncurrent liabilities	Total other noncurrent liabilities	$	89	$	92	Total other noncurrent liabilities	$	126	$	98

________________

(1)Consists primarily of ~~taxes payable,~~ environmental remediation reserves and warranty reserves. See Note ~~15:~~14: Commitments and Contingencies for more information regarding the warranty provision.

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

~~LEONARDO DRS, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

~~Note 7. Goodwill~~

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

(Dollars in millions) AST NC&C IMS Total
Balance as of December 31, 2020 $ 363 $ 275 $ 419 $ 1,057
Acquisitions —
Balance as of March 31, 2021 363 275 419 1,057

Note 8.9. Intangible Assets

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

The following disclosure presents certain information regarding the Company's intangible assets as of ~~March 31, 2021~~September 30, 2023 and December 31, ~~2020.~~2022. All intangible assets are being amortized over their estimated useful lives, as indicated below, with no estimated residual values.


		March 31, 2021						December 31, 2020							September 30, 2023						December 31, 2022
(Dollars in millions)	(Dollars in millions)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		(Dollars in millions)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Customer relationships		$	957	$	(901)	$	56	$	957	$	(899)	$	58
Acquired Intangible Assets														Acquired Intangible Assets	$	1,087	$	(935)	$	152	$	1,087	$	(918)	$	169
Patents and licenses	Patents and licenses	7		(5)		2		7		(5)		2		Patents and licenses	10		(6)		4		9		(6)		3
Total intangible assets	Total intangible assets	$	964	$	(906)	$	58	$	964	$	(904)	$	60	Total intangible assets	$	1,097	$	(941)	$	156	$	1,096	$	(924)	$	172

LEONARDO DRS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Amortization expense related to intangible assets was $2$5 million and $16 million for the ~~periods~~three and nine months ended ~~March 31, 2021~~September 30, 2023, respectively, and ~~March 31, 2020.~~$3 million and $7 million for the three and nine months ended September 30, 2022, respectively.

Customer relationships are amortized on a straight-line basis over their estimated useful lives of 10 to 15 years. Patents and licenses are amortized on a straight-line basis over their estimated useful lives of 5 to 10 years.

~~LEONARDO DRS, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

Note 9.10. Income Taxes

Our effective tax rate for the three and nine months ended September 30, 2023 was 2.1% and 3.1%, respectively. For the three and nine months ended September 30, 2023 the effective tax rate was lower than the U.S. Federal statutory rate of 21%, primarily due to a favorable impact for increasing our Research and Development Credit on our recently filed 2022 U.S. tax return.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at September 30, 2023 and December 31, ~~2020 and 2019~~2022 is as follows:


(Dollars in millions)	(Dollars in millions)	March 31, 2021		December 31, 2020		(Dollars in millions)	September 30, 2023		December 31, 2022

Deferred tax assets	Deferred tax assets	$	142	$	153	Deferred tax assets	$	221	$	208
Valuation allowance		13		11
Less valuation allowance						Less valuation allowance	19		17
Deferred tax assets	Deferred tax assets	129		142		Deferred tax assets	202		191
Deferred tax liabilities	Deferred tax liabilities	54		55		Deferred tax liabilities	123		125
Net deferred tax asset	Net deferred tax asset	$	75	$	87	Net deferred tax asset	$	79	$	66

Our deferred tax balance associated with our retirement benefit plans includes a deferred tax asset of ~~$14~~$8 million and $8 million as ~~March 31, 2021~~September 30, 2023 and December 31, ~~2020 ,~~2022 respectively, that are recorded in accumulated other comprehensive earnings to recognize the funded status of our retirement plans. See Note ~~11:~~12: Pension and Other Postretirement Benefits for additional details.

Note ~~10.~~11. Debt

The Company’s debt consists of the following:


(Dollars in millions)	(Dollars in millions)	March 31, 2021		December 31, 2020		(Dollars in millions)	September 30, 2023		December 31, 2022
4.0% Term loan due December 31, 2021(1)		$	—	$	—
7.5% Term loan due November 30, 2022(1)		139		139
5.0% Daylight term loan due October 15, 2024(1)		98		98
Borrowings under revolving credit facility(1)		125		—
Term loan A						Term loan A	$	217	$	225
Outstanding revolver						Outstanding revolver	110		—
Finance lease and other	Finance lease and other	163		163		Finance lease and other	157		161
Short-term borrowings	Short-term borrowings	19		27		Short-term borrowings	1		10
Total debt principal	Total debt principal	544		427		Total debt principal	485		396
Less unamortized debt issuance costs and discounts	Less unamortized debt issuance costs and discounts	—		—		Less unamortized debt issuance costs and discounts	(2)		(2)
Total debt, net	Total debt, net	544		427		Total debt, net	483		394
Less short-term borrowings and current portion of long-term debt	Less short-term borrowings and current portion of long-term debt	(171)		(53)		Less short-term borrowings and current portion of long-term debt	(132)		(29)
Total long-term debt	Total long-term debt	$	373	$	374	Total long-term debt	$	351	$	365

~~________________~~

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

Term Loans

In ~~January 2009,~~November 2022, the Company entered into a senior unsecured credit agreement with ~~its ultimate parent company, Finmeccanica S.p.A. (presently Leonardo S.p.A.)~~Bank of America in the amount of ~~$2 billion~~$500 million (the ~~“2009~~“2022 Credit Agreement”)~~. The 2009 Credit Agreement was subsequently assigned to US Holding and has~~ with a maturity of November ~~30, 2022.~~29, 2027. The ~~2009~~2022 Credit Agreement provides for a term loan of $225 million bearing interest at a variable rate generally based on the Secured Overnight Financing Rate (“SOFR”), plus a spread ranging from 1.48% to 2.10% depending on the leverage ratio, as defined in the 2022 Credit Agreement, or an alternative variable rate based on the higher of ~~7.5%, with interest payments due semi-annually~~the Bank of America

LEONARDO DRS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

prime rate, the federal funds rate, or a rate generally based on ~~June 20 and December 20~~SOFR, in each ~~year (the “7.5%~~case subject to additional basis point spread as defined in the 2022 Credit Agreement (“2022 Term ~~loan”~~Loan A”). Interest is payable quarterly in arrears. The outstanding balance of the ~~7.5%~~2022 Term ~~loan~~Loan A at ~~March 31, 2021 and December 31, 2020~~September 30, 2023 was ~~$139~~$217 million. The fair value of ~~this term loan~~Term Loan A at ~~March 31, 2021 and December 31, 2020~~September 30, 2023 was ~~$181 million and $182 million, respectively;~~approximately $217 million; however, the Company has the ability to prepay the outstanding principal balance ~~at the carrying amount~~ without penalty. During 2020, US Holding forgave $300 million of related party debt. This was treated as a capital transaction and the amount was recorded in additional paid-in capital, as US Holding is the Company’s parent.

~~LEONARDO DRS, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

In June 2017, the Company entered into an unsecured term loan with US Holding in the principal amount of $137.5 million, the proceeds of which were used to finance the acquisition of Daylight Solutions, Inc. (the “Daylight Term Loan”). The Daylight Term Loan had an outstanding balance of $98 million at March 31, 2021 and December 31, 2020 which approximates its fair value. The Daylight Term Loan matures on October 15, 2024. The Daylight Term Loan has an interest rate of 5.0%, with interest payments due semi-annually on April 15 and October 15.

Credit Facilities

The ~~2009~~2022 Credit Agreement provides for a revolving credit facility available for working capital needs of the Company ~~(the “Revolving~~(“the 2022 Revolving Credit Facility”). As of ~~March 31, 2021~~September 30, 2023 and December 31, ~~2020,~~2022, the 2022 Revolving Credit Facility had a ~~credit~~ limit of ~~$450 million and~~$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 ~~interest~~alternative variable rate based on the higher of ~~LIBOR plus 3.5%. There is~~the Bank of America prime rate, the federal funds rate, or a rate generally based on SOFR, in each case subject to additional basis point spread as defined in the 2022 Credit Agreement. The Company also pays a commitment fee ~~of 0.25%~~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 and there are no compensating balance requirements.~~Facility. The outstanding balance as of ~~March 31, 2021~~September 30, 2023 was ~~$125~~$110 million and there was no outstanding balance on the 2022 Revolving Credit Facility as of December 31, ~~2020.~~2022. The weighted average interest rate on the 2022 Revolving Credit Facility as of September 30, 2023 was 6.29%.

The Company also maintains uncommitted working capital credit facilities with certain financial institutions in ~~the~~an aggregate of ~~$60~~$110 million and $65 million at ~~March 31, 2021~~September 30, 2023 and December 31, ~~2020,~~2022, respectively (the “Financial Institution Credit Facilities”). ~~The Financial Institution Credit Facilities are guaranteed by Leonardo S.p.A.~~

The primary purpose of the Financial Institution Credit Facilities is to support standby letter of credit issuances on contracts with ~~customers and~~customers. The Financial Institution Credit Facilities also ~~includes~~included a revolving facility with a maximum borrowing limit of $15 million, which ~~bears~~bore interest at LIBOR plus 0.5%. AtThe revolving facility was eliminated from the Financial Institution Credit Facilities as of March 31, ~~2021 and~~2023. As of December 31, ~~2020,~~2022, there was no balance outstanding on the revolving ~~facility.~~facility of the Financial Institution Credit Facilities. The Company had letters of credit outstanding of approximately ~~$31~~$42 million and $36 million as of ~~March 31, 2021~~September 30, 2023 and December 31, ~~2020,~~2022, which reduces the available capacity of the Financial Institution Credit Facilities by an equal amount.

Short-term Borrowings

As of ~~March 31, 2021~~September 30, 2023 and December 31, ~~2020,~~2022, the Company recognized ~~$19~~$1 million and ~~$27~~$10 million, respectively, collected on behalf of the buyers of our trade receivables pursuant to our factoring arrangements as short-term borrowings and current portion of long-term debt in the Consolidated Balance ~~Sheet,~~Sheets, which approximates its fair value. Refer to Note 3:4: Accounts Receivable and Note 5: Sale of Receivables for more information.

Note ~~11.~~12. 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 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~~U.S. Internal Revenue Code of 1986, as amended (the “Tax Code”) and regulations thereunder. For all periods presented, the Company made no discretionary pension contributions. Plan assets are invested primarily in equities, bonds (both corporate and U.S. government), U.S. government-sponsored entity instruments, cash and cash equivalents and real estate.

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

LEONARDO DRS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

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.

~~LEONARDO DRS, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

The following ~~table summarizes the components of net periodic benefit cost for~~tables provide certain information regarding the Company's pension, postretirement and supplemental retirement plans for the ~~three months ended March 31,:~~periods presented:


		Defined Benefit Pension Plans				Postretirement Benefit Plan				Supplemental Retirement Plans					Defined Benefit Pension Plans				Postretirement Benefit Plan				Supplemental Retirement Plans
(Dollars in millions)	(Dollars in millions)	March 31, 2021		March 31, 2020		March 31, 2021		March 31, 2020		March 31, 2021		March 31, 2020		(Dollars in millions)	Three Months Ended September 30, 2023		Three Months Ended September 30, 2022		Three Months Ended September 30, 2023		Three Months Ended September 30, 2022		Three Months Ended September 30, 2023		Three Months Ended September 30, 2022
Service cost	Service cost	$	—	$	—	$	—	$	—	$	—	$	—	Service cost	$	—	$	—	$	—	$	—	$	—	$	—
Interest cost	Interest cost	$	1	$	2	$	—	$	—	$	—	$	—	Interest cost	2		1		—		—		1		—
Expected return on plan assets		$	(2)	$	(1)	$	—	$	—	$	—	$	—
Less expected return on plan assets														Less expected return on plan assets	(2)		(1)		—		—		—		—
Amortization of net actuarial loss (gain)	Amortization of net actuarial loss (gain)	$	1	$	1	$	—	$	—	$	—	$	—	Amortization of net actuarial loss (gain)	—		—		—		—		—		—
Amortization of prior service cost	Amortization of prior service cost	$	—	$	—	$	—	$	—	$	—	$	—	Amortization of prior service cost	—		—		—		—		—		—
Settlement expense (income)	Settlement expense (income)	$	—	$	—	$	—	$	—	$	—	$	—	Settlement expense (income)	—		—		—		—		—		—
Net periodic benefit cost	Net periodic benefit cost	$	—	$	2	$	—	$	—	$	—	$	—	Net periodic benefit cost	$	—	$	—	$	—	$	—	$	1	$	—


	Defined Benefit Pension Plans				Postretirement Benefit Plan				Supplemental Retirement Plans
(Dollars in millions)	Nine Months Ended September 30, 2023		Nine Months Ended September 30, 2022		Nine Months Ended September 30, 2023		Nine Months Ended September 30, 2022		Nine Months Ended September 30, 2023		Nine Months Ended September 30, 2022
Service cost	$	—	$	—	$	—	$	—	$	—	$	—
Interest cost	6		4		—		—		1		1
Less expected return on plan assets	(5)		(5)		—		—		—		—
Amortization of net actuarial loss (gain)	1		1		—		—		—		—
Amortization of prior service cost	—		—		—		—		—		—
Settlement expense (income)	—		1		—		—		—		—
Net periodic benefit cost	$	2	$	1	$	—	$	—	$	1	$	1

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

LEONARDO DRS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 are reflected in the Total costs of revenues and General and administrative expenses on the Consolidated Statements of Earnings (unaudited).

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

Note ~~12. Share-based compensation plans~~13. Earnings Per Share


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions, except per share amounts; shares in millions)	2023		2022		2023		2022
Net earnings	$	47	$	279	$	94	$	340
Basic weighted average number of shares outstanding	262		210		261		210
Impact of dilutive share-based awards	3		—		3		—
Diluted weighted average number of shares outstanding	265		210		264		210
Earnings per share attributable to common shareholders - basic	$	0.18	$	1.33	$	0.36	$	1.62
Earnings per share attributable to common shareholders - diluted	$	0.18	$	1.33	$	0.36	$	1.62

For the three and nine months ended September 30, 2023, potential dilutive common shares primarily consisted of employee stock options, restricted stock units (“RSUs”) and performance restricted stock units (“PRSUs”); however, the amount of dilutive securities included in the diluted weighted average number of shares outstanding was immaterial. For the three and nine months ended September 30, 2022, the basic and diluted weighted average number of shares outstanding were equal as there were no dilutive securities.

The ~~Company does not have any share-based compensation plans. See~~ ~~Note 6~~: ~~Other Liabilities, for information regarding cash compensation.~~computation of diluted earnings per share (“EPS”) excludes the effect of the potential exercise of stock awards when the average market price of the common stock is lower than the exercise price of the stock awards during the period because the effect would be anti-dilutive. In addition, the computation of diluted EPS excludes stock awards whose issuance is contingent upon the satisfaction of certain performance vesting conditions. At September 30, 2023, there were 2.0 million stock awards excluded from the computation. At September 30, 2022 there were no anti-dilutive securities.

Note ~~13.~~14. Commitments and Contingencies

Commitments

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

LEONARDO DRS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.

Some environmental laws, such as the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (also known as “CERCLA” or the “Superfund law”) and similar state statutes, can impose liability upon former owners or operators for the entire cost of investigating and remediating contaminated sites regardless of the lawfulness of the original activities that led to the contamination. In July 2000, an entity which later became a

~~LEONARDO DRS, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

subsidiary of the Company received a Section 104(e) Request for Information (“RFI”) from the National Park Service (“NPS”), pursuant to CERCLA, regarding the presence of radioactive material at a site within a national park (“Orphan Mine”), which site was operated by an alleged predecessor to our subsidiary over 50 years ago. Following the subsidiary’s response to the RFI, the NPS directed it and another alleged former operator to perform an Engineering Evaluation and Cost Analysis (“EE/CA”) of a portion of the site. The Company’s subsidiary made a good faith offer to conduct an alternative EE/CA work plan, but the NPS rejected this offer and opted to perform the EE/CA itself. The NPS previously posted its intention to open a formal public comment period regarding the EE/CA at the end of 2019. To the Company’s knowledge, the EE/CA has not been released and a public comment period has yet to be opened.

~~Following completion~~The Environmental Protection Agency (“EPA”) episodically updates its electronic databases concerning pending Superfund sites. As of June 2023, the ~~EE/CA,~~entry in EPA’s Superfund database for this site states that this “[s]ite does not qualify for the ~~NPS may seek reimbursement for its investigative and remedial efforts to date,~~NPL [National Priorities List] based on existing information. The EPA has determined that no further federal action (NFFA) will be taken at this site.” As a result, DRS has eliminated the Orphan Mine reserve as a liability is no longer probable or ~~direct one or more of the potentially responsible parties to perform any remediation~~estimable. However, it remains possible that ~~may be required by CERCLA or may enter an alternative dispute resolution proceeding to attempt to resolve each party’s share. In addition,~~ the NPS may seek to recover damages, including for remediation and/or loss of use of certain natural resources. The Company believes that it has legitimate defenses to its subsidiary’s potential liability and that there are other potentially responsible parties for the environmental conditions at the site, including the U.S. government as owner, operator and arranger at the site. The potential liability associated with this matter could change substantially due to such factors as additional information on the nature or extent of contamination, methods of remediation that might be recommended or required, changes in the apportionment of costs among the responsible parties, whether the NPS seeks to recover additional damages, whether the NPS’s plans to investigate additional areas to identify a need for further remedial action for which the Company may be identified as a potentially responsible party and other actions by governmental agencies or private parties.

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

In the performance of our contracts we routinely request contract modifications that require additional funding from the customer. Most often, these requests are due to customer-directed changes in the scope of work. While we are entitled to recovery of these costs under our contracts, the administrative process with our customer may be protracted. Based on the circumstances, we periodically file requests for equitable adjustment (“REAs”) that are sometimes converted into claims. In some cases, these requests are disputed by our customer. We believe our outstanding modifications, REAs and other claims will be resolved without material impact to our results of operations, financial condition or cash flows.

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

LEONARDO DRS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

~~LEONARDO DRS, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

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 period ended ~~March 31, 2021:~~September 30, 2023:


(Dollars in millions)
Balance at December 31, ~~2020~~2022	$	17 18
Additional provision	5 12
Reversal and utilization	~~(3)~~(7)
Balance at ~~March 31, 2021~~September 30, 2023	19 $	23

Note ~~14.~~15. Related Party Transactions

Under our current proxy agreement, DRS remains largely independent from the Parent. Additionally, the Company provides services related to the US interface for the Parent and its other affiliates. These services include financial, tax, trade compliance, marketing and communications and legal.

The Company ~~also~~ has related-party sales with the ~~Parent~~ultimate majority stockholder and its other affiliates that occur in the regular course of business. Related-party sales for these transactions included in revenues were $11 million and $9 million for the three months ended September 30, 2023 and September 30, 2022, respectively, and $24 million and $63 million for the nine months ended September 30, 2023 and September 30, 2022, respectively. The Company has related-party purchases with the ultimate majority stockholder and its other affiliates that occur in the regular course of business. Related-party purchases for these transactions are included in cost of revenues and were $2 million and $8$2 million for the ~~periods~~three months ended ~~March 31, 2021~~September 30, 2023 and ~~March 31, 2020,~~September 30, 2022, respectively, and $3 million and $20 million for the nine months ended September 30, 2023 and September 30, 2022, respectively. The receivables related to these transactions with the ~~Parent~~ultimate majority stockholder and its other affiliates of $5$15 million and $5$14 million, respectively, and payables of $9$3 million and $8$1 million, respectively, are included in accounts receivable and accounts payable in our Consolidated Balance ~~Sheet~~Sheets as of ~~March 31, 2021~~September 30, 2023 and December 31, ~~2020.~~

~~The Company entered into~~2022. In addition, there was a ~~Surplus Treasury Agreement with US Holding (the “Surplus Agreement”)~~related-party balance in ~~December 2019. The Surplus Agreement allows the Company to advance excess funds to US Holding when funds are available. The advances bear interest~~contract assets of $4 million and $5 million at ~~LIBOR plus between 5 and 20 basis points depending on the tenor of the advance. As of March 31, 2021~~September 30, 2023 and December 31, ~~2020 the Company had advanced $—0 million and $115 million to US Holding, which is presented on the balance sheet as a related party note receivable.~~

During 2020, US Holding forgave $300 million of related party debt. This was treated as a capital transaction and the amount was recorded in additional paid-in capital, as US Holding is the Company’s parent.

~~The Company entered into Tax Allocation Agreement with US Holding, dated as of November 16, 2020. Refer to~~ ~~Note 1:Summary of Significant Accounting Policies~~ ~~for more information.~~2022, respectively.

Note ~~15.~~16. 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 and he uses a variety of measures to assess the performance of the Company as a whole, depending on the nature of the activity. ~~The~~Beginning in the first quarter of 2022, the Company’s operating and reportable segments ~~consist of AST, NC&C~~were revised into two reportable segments, ASC and ~~IMS.~~IMS, to align our market strategy and capital allocation decision making with our operating structure. Prior year information was revised to reflect the new segment structure. All other operations, which consists primarily of DRS ~~Corporate Headquarters~~corporate headquarters and certain non-operating subsidiaries of the Company, are grouped in Corporate & Eliminations.

We primarily use Adjusted EBITDA, a non-GAAP financial measure, to manage the Company and allocate resources. Adjusted EBITDA of our business segments includes our net earnings before income taxes, amortization of acquired intangible assets, depreciation, restructuring costs, interest, deal related transaction costs, ~~related to an anticipated offering of securities, acquisition and divestiture related~~other non-operating expenses such as foreign exchange, ~~COVID-19~~the coronavirus pandemic (“COVID-19”) response costs, non-service pension expenditures, legal liability accrual reversals, and other one-time non-operational ~~events.~~events as well as gains (losses) on business disposals. Adjusted EBITDA is used to facilitate a comparison of the ordinary, ongoing and customary course of our operations on a consistent basis from period to period and provide an additional understanding of factors and trends affecting our business segments. This measure assists the CODM in assessing segment operating performance consistently over time without the impact of our capital structure, asset base and items outside the control of the management team and expenses that do not relate to our core operations.

~~LEONARDO DRS, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

Certain information related to our segments for the periods ended ~~March 31, 2021~~September 30, 2023 and ~~March 31, 2020~~September 30, 2022 is presented in the following tables. Consistent accounting policies have been applied by all segments within the

LEONARDO DRS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Company, within all reporting periods. A description of our reportable segments as of ~~March 31, 2021~~September 30, 2023 and ~~March 31, 2020~~September 30, 2022 has been included in Note 1: Summary of Significant Accounting Policies. ~~Transactions between segments~~Intersegment sales are generally ~~are negotiated~~transferred at cost to the buying segment, and ~~accounted for under terms and conditions that are similar to other government and commercial contracts; however, these~~the sourcing segment does not recognize a profit. Such intercompany ~~transactions are~~operating income is eliminated in ~~consolidation.~~consolidation, so that the Company’s total revenues and operating earnings reflect only those transactions with external customers.

Total revenues and intersegment revenues by segment for the periods ended ~~March 31, 2021~~September 30, 2023 and ~~March 31, 2020~~September 30, 2022 consists of the following:


		Three Months Ended March 31,					Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions)	(Dollars in millions)	2021		2020		(Dollars in millions)	2023		2022		2023		2022
AST		$	219	$	183
NC&C		264		217
ASC						ASC	$	431	$	408	$	1,226	$	1,248
IMS	IMS	201		190		IMS	277		229		692		634
Corporate & Eliminations	Corporate & Eliminations	(3)		(7)		Corporate & Eliminations	(5)		(3)		(18)		(9)
Total revenue		$	681	$	583
Total revenues						Total revenues	$	703	$	634	$	1,900	$	1,873

(Dollars in millions) 2021 2020
AST $ 1 $ 4
NC&C 2 3
IMS — —
Total intersegment revenue $ 3 $ 7


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions)	2023		2022		2023		2022
ASC	$	5	$	3	$	18	$	8
IMS	—		—		—		1
Total intersegment revenues	$	5	$	3	$	18	$	9

~~Depreciation by segment as of March 31, 2021 and March 31, 2020 consists of the following:~~

Three Months Ended March 31,
(Dollars in millions) 2021 2020
AST $ 5 $ 5
NC&C 3 3
IMS 4 3
Total depreciation $ 12 $ 11

~~Total assets by segment as of March 31, 2021 and December 31, 2020 consist of the following:~~

(Dollars in millions) March 31, 2021 December 31, 2020
AST $ 908 $ 862
NC&C 719 691
IMS 1,015 963
Corporate & Eliminations 272 440
Total assets $ 2,914 $ 2,956

~~LEONARDO DRS, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

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


							Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions)	(Dollars in millions)	March 31, 2021		March 31, 2020		(Dollars in millions)	2023		2022		2023		2022
Adjusted EBITDA	Adjusted EBITDA					Adjusted EBITDA
AST		$	28	$	17
NC&C		26		19
ASC						ASC	$	48	$	36	$	121	$	125
IMS	IMS	18		15		IMS	34		22		72		73
Corporate & Eliminations	Corporate & Eliminations	(1)		(1)		Corporate & Eliminations	—		—		—		—
Total Adjusted EBITDA	Total Adjusted EBITDA	71		50		Total Adjusted EBITDA	$	82	$	58	$	193	$	198
Amortization of intangibles	Amortization of intangibles	(2)		(2)		Amortization of intangibles	(5)		(3)		(16)		(7)
Depreciation	Depreciation	(12)		(11)		Depreciation	(16)		(14)		(47)		(41)
Restructuring costs	Restructuring costs	—		(2)		Restructuring costs	(2)		—		(10)		—
Interest expense	Interest expense	(9)		(15)		Interest expense	(10)		(9)		(27)		(27)
Transaction costs related to an anticipated offering of securities		(4)		—
Acquisition and divestiture related expenses
Foreign exchange		—		(5)
COVID-19 response costs		(3)		—
Non-service pension expense		—		(2)
Deal related transaction costs						Deal related transaction costs	(1)		(16)		(4)		(26)
Gain on sale of business						Gain on sale of business	—		350		—		350
Other one-time non-operational events	Other one-time non-operational events			—		Other one-time non-operational events	—		1		8		—
Income tax (provision) benefit		(12)		(3)
Net earnings (loss)		$	29	$	10
Income tax provision						Income tax provision	(1)		(88)		(3)		(107)
Net earnings						Net earnings	$	47	$	279	$	94	$	340

2521

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read this discussion together with our ~~consolidated financial statements~~Consolidated Financial Statements and related notes thereto included elsewhere in this Quarterly Report.

This discussion and other parts of this Quarterly Report include forward-looking statements such as those relating to our plans, objectives, expectations and beliefs, which involve risks, uncertainties and assumptions. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties discussed under “Special Note Regarding Forward-Looking Statements and Information” and “Risk Factors” in this Quarterly Report and under “Risk Factors” in our ~~registration statement~~annual report on Form ~~S-1, as amended (Registration No. 333-253583), which was declared effective by~~10-K for the year ended December 31, 2022, filed with the SEC on March ~~23, 2021.~~28, 2023. Actual results may differ materially from those contained in any forward-looking statements.

Business Overview and Considerations

General

~~We are a leading~~DRS is an innovative and agile provider of advanced defense ~~products~~technology to U.S. national security customers and allies around the world. We specialize in the design, development and manufacture of advanced sensing, network computing, force protection, as well as electric power and propulsion. The strength of our market positioning in these technology areas have created a foundational and diverse base of programs across the Department of Defense (“DoD”). We believe these technologies ~~that are used across land, air, sea, space~~will not only support our customers in today’s mission but will also underpin their strategy to migrate towards more autonomous, dynamic, interconnected, and ~~cyber domains. Our diverse array of defense systems~~multi-domain capabilities needed to defend against evolving and solutions is offered to all branches of the U.S. military, major aerospace and defense prime contractors, government intelligence agencies and international military customers for deployment on a wide range of military platforms.emerging threats. We ~~focus our~~view more advanced capabilities in ~~areas of critical importance~~sensing, computing, self-protection and power as necessary to the U.S. military within three segments, Advanced Sensor Technologies, Network Computing & Communications and Integrated Mission Systems. Our revenue, earnings and cash flows are generated by a combination of developing, manufacturing and servicing advanced technology solutions that are designed to address mission critical challenges for the defense industryenable these strategic priorities.

Our overall strategy ~~is to be~~includes being a balanced and diversified company, less vulnerable to any one budgetary platform or service decision with a specific focus on establishing strong technical and market positions in areas of priority for the ~~Department of Defense (“DoD”).~~DoD. The DoD is our largest customer and for the ~~three~~nine months ended ~~March 31, 2021,~~September 30, 2023, accounted for approximately ~~86%~~80% of our business as an end-user, with revenues principally derived directly or indirectly from contracts with the U.S. Army and U.S. Navy, which represented ~~44%~~29% and ~~29%~~40%, respectively, of our total revenues for such period, which is consistent with historic trends.

Our operations and reporting are structured into the following ~~three~~two technology driven segments based on the capabilities and solutions offered to our customers:

Advanced ~~Sensor Technologies (“AST”)~~: Sensing and Computing

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

Our sensing capabilities span numerous applications, including missions requiring advanced detection, precision targeting and surveillance sensing, long range electro-optic/infrared (“EO/IR”), signals intelligence (“SIGINT”) and other intelligence systems, electronic warfare (“EW”), ground vehicle sensing, next generation active electronically scanned array (“AESA”) tactical radars, dismounted soldier sensing and space sensing. Across our offerings, we are focused on advancing sensor ~~technologies, laser~~distance and enhancing the precision, clarity, definition, spectral depth and effectiveness of our sensors. We also seek to leverage the knowledge and expertise built through our decades of experience to optimize size, weight, power and cost for our customers’ specific mission requirements.

Our sensing capabilities are complemented by our rugged, trusted and cyber resilient network computing products. Our network computing offerings are utilized across a broad range of mission applications including platform computing on ground and shipboard (both surface ship and submarine) for advanced battle management, combat systems, EWradar, command and control (“C2”), tactical networks, tactical computing and communications. These products help support the DoD’s need for greater situational understanding at the tactical edge by rapidly transmitting data securely between command centers and forward-positioned defense assets and personnel.

Integrated Mission Systems

Our Integrated Mission Systems (“IMS”) segment designs, develops, manufactures and integrates power conversion, control and distribution systems, ship propulsion systems, motors and variable frequency drives, force protection systems, and ~~intelligence~~transportation and ~~surveillance solutions to~~logistics systems for the U.S. military and ~~intelligence community~~allied defense customers. ~~We are~~

DRS is currently a leading provider of ~~ground vehicle targeting~~next-generation electrical propulsion systems for the U.S. Navy. We provide power conversion, control, distribution and ~~surveillance sensors,~~propulsion systems for the Navy’s top priority shipbuilding programs, including ~~electro-optical~~the Columbia Class ballistic missile submarine, the first modern U.S. electric drive submarine.

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

DRS has a ~~leading provider~~long history of ~~soldier sensor systems in high priority modernization areas such as infrared imaging and precision targeting systems. Our infrared focal plane array foundry is recognized as~~providing a ~~leading provider~~number of high performance and small sized cryogenically cooled and uncooled detector arrays. We are also a leading and world-recognized provider of aircraft training instrumentation equipment and high-performance radio frequency receivers and transceivers for U.S. and international customers. Our quantum cascade laser technology has promising military and commercial medical applications. Collectively, these sensor technologies provide our warfighters with a distinct battlefield advantage.

~~Network Computing & Communications (“NC&C”): Our Network Computing & Communications segment provides advanced defense electronics solutions across warfare domains. Our technologies and~~other critical products are used on legacy and new military platforms, end-to-end network communication systems, network services and cyber solutions. We are a leading provider of ruggedized computing equipment, having provided advanced tactical computing units for ground combat vehicles and command post operations for more than two decades. We also provideto the U.S. Navy with a significant installed base on submarines, aircraft carriers and ~~its allies, we provide naval computing infrastructure, network~~other surface ships including motor controllers, instrumentation and ~~data distribution, radar~~control equipment, electrical actuation systems, and ~~rugged naval control~~thermal management systems ~~which are present on naval surface and subsurface~~

~~F-26~~

combatant vessels. Across the full spectrum of our network computing capabilities, we have leadership positions at both the product and sub-systems levels. Our global communications network is a worldwide network of terrestrial and satellite bandwidth that ensures our customers’ data is secure and reliable. As a result of this capability, we are positioned as one of the leading providers of secured satellite communications to the U.S. military.

~~Integrated Mission Systems (“IMS”):~~ ~~Our Integrated Mission Systems segment provides critical force protection, vehicle integration, transportation and logistics and electrical conversion~~for electronics and ship ~~propulsion~~stores refrigeration.

DRS is also an integrator of complex systems in ground vehicles for short-range air defense, counter-unmanned aerial systems (“C-UAS”), and vehicle survivability and protection. Our short-range air defense systems integrate EW equipment, reconnaissance and surveillance systems, modular combat vehicle turrets, and stabilized sensor suites, as well as kinetic countermeasures to ~~the U.S. military.~~protect against evolving threats. Our force protection systems, ~~provide much needed protection for our service members and military assets from evolving threats and include advanced~~including solutions for ~~counter-unmanned aerial systems, short-range air defense systems~~C-UAS and active protection systems on ~~ground vehicles. We have military transportation~~army vehicles help protect personnel and logistics offerings and ground vehicle integration capabilities to support U.S. forces in a wide range of operational environments. Additionally, we provide power conversion and propulsion systems for the U.S. Navy’s top priority shipbuilding programs, building on our legacy of providing power components and systems for nearly all naval combat vessels for three decades, positioning us to continue as a leading provider of electrical ship propulsion systems and components for the U.S. Navy.defense assets from enemy combatants.

Focus on Customer and Execution

DRS and its employees focus on our end-customers – the men and women of the armed forces in the U.S. and its allies. We seek to provide high-quality equipment and services to support their mission success. We strive for excellence in everything we do, in every job in our Company, in order to satisfy our customers’ needs embedded in our contractual commitments. We seek to ensure that we learn from every lesson experienced in our Company and insist that these lessons affect all elements of our businesses. This approach permeates through the Company with a focus on continuous improvement at every level.

Part of this learning has resulted in institutionalizing our continuous improvement process through our Operational Excellence initiative called “Always Performing For Excellence,” or “APEX,” ~~program.~~program, which is transforming this year from Operational Excellence to Business Excellence. The APEX program’s goal is to strive for continuous improvement through unification of all of our business practices, tools and metrics, ongoing employee training and innovation. We believe that excellence is not a destination, but by constantly challenging ourselves to be better, we will improve, and ultimately approach excellence. We challenge ourselves to exceed our customers’ expectations and we partner with them to work to ensure that our execution meets their needs.

Continuous improvement through the APEX program also allows us to improve our efficiency, which we believe contributes to increased margins, helps us to remain competitive and allows us to make strategic investments, all while maintaining our focus on customer satisfaction. In these elements, our goals are aligned with those of our customers. We are humbled by the dedication and sacrifice that our ultimate customers have made to serve and we work to perform for them with excellence in everything we do.

Global Events and Business Impacts ~~of COVID-19 On Our Business~~

~~DRS remains committed to the safety, health, and well-being of our employees while ensuring the continuity of our operations. We do this by adhering~~COVID-19

The coronavirus pandemic caused certain disruptions to our ~~three primary goals: keeping our employees and their families safe; mitigating risk associated with interruption of suppliers’ materials; and maintaining our commitment~~business, including various adverse supply chain impacts which are anticipated to ~~our customers. We~~ continue to protect our employees in the facilities by maintaining physical separation of the essential employees into smaller work zones and quarantining of a zone when there is a concern of potential exposure. Our health and safety protocols continue with intra-shift sanitization at each facility, providing PPE to employees, and ensuring employees stay home when not feeling well or when potentially exposed at work or home by providing a special company-paid health emergency leave. For non-essential workers we continue to fully support teleworking, and providing the same healthcare leave for their use when needed. With the release of the COVID-19 vaccine, we have created a vaccine incentive program for employees where they earn an incentive award when fully vaccinated and may elect to receive the award or donate the award to the American Red Cross.

We continue to review our mitigation efforts to respond to the changing COVID-19 environment, and are engaged in planning and adapting to a future workforce for when there is a return to normalcy. As reported forthrough 2023.

2723

~~2020, we incurred $12 million~~Global Conflicts

In February 2022, Russia escalated its war with Ukraine by invading and occupying parts of ~~expenditures~~that country. Since that time, western powers, including the U.S., have pledged support with humanitarian and military aid. Some of that military aid pledged by the U.S. will result in increased efforts to ~~include paid leave, personal protective~~replace equipment and consumables. We have received orders from the U.S. and allies to both provide equipment in support of this effort, and to replace equipment pledged. We expect that these orders will continue until that support is no longer needed and the equipment pledged is replaced.

In October 2023, Hamas militants located in Gaza launched a terrorist attack on Israel. The ensuing, and ongoing, conflict has the potential to evolve quickly creating uncertainty in the broader Middle East region, along with the potential for disruptions to our Israeli operations in the region, including but not limited to workforce calls for duty, transportation and other ~~cleaning measures, facility filtration systems~~logistical impacts and ~~social~~reduced customer confidence. The U.S. and ~~physical distancing efforts, including~~other western powers have indicated military and funding support to Israel. DRS has direct exposure to Israel principally through its RADA operations with approximately 4% of the ~~use~~DRS workforce as of ~~zones and subzones~~September 30, 2023 residing in Israel. At this time, it is unclear whether supplemental funding for ~~manufacturing facilities. From January 1, 2021 through March 31, 2021, we have incurred an additional $3 million of expenditures related to ensuring a safe work environment~~Israel will impact demand for ~~our employees.~~DRS products.

Business Environment

Revenues derived directly, as a prime contractor, or indirectly, as a subcontractor, from contracts with the U.S. government represented ~~86%~~93% and 80% of our consolidated revenue for the three and nine months ended ~~March 31, 2021~~September 30, 2023, respectively, and 83% and 82% of our consolidated revenue for the three and nine months ended ~~March 31, 2020.~~September 30, 2022, respectively. Of these sales directly to the U.S. government, the Army and Navy are our largest customers. For the three ~~month~~and nine months ended ~~March 31, 2021 and 2020,~~September 30, 2023, U.S. government sales with the U.S. Army represented 30% and 29% and U.S. government sales with the U.S. Navy represented ~~44%~~ 48% and 40%, ~~29%,~~respectively, of our consolidated revenue. For the three and ~~42%,~~nine months ended September 30, 2022, U.S. government sales with the U.S. Army represented 40% and 35%, respectively, and U.S. government sales with the U.S. Navy represented 31% and 32%, respectively, of our consolidated revenue.

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

In March 2023, the U.S. President’s fiscal year 2024 budget request was released and included $842 billion for national defense programs, which marks continued growth from prior years. The most recent National Defense Strategy and annual defense budget request continue to prioritize a strategic focus on China as the pacing threat, countering other near peer adversaries, investing in the nuclear triad, and funding operations in Ukraine. In June 2023, the Fiscal Responsibility Act of 2023 was enacted, which suspends the federal debt ceiling until January 1, 2025, postponing the threat of a federal government default. Pursuant to this law, the President and Congress also agreed upon federal discretionary spending levels for defense and non-defense. For fiscal year 2024, defense spending levels were consistent with the President’s March budget request and reflect an approximately 3% increase over prior levels. For fiscal year 2025, the agreed upon defense spending increase is 1% from prior year levels. However, failure to pass all twelve full year appropriations by calendar year end will trigger 1% cuts from prior year enacted levels. We believe that the strategic priorities requiring more advanced and sophisticated defense technology capabilities create a favorable market environment for DRS.

To prevent a government shutdown at the end of fiscal year 2023, Congress passed a Continuing Resolution (CR) at the end of September, and the President signed the legislation into law on September 30, 2023. The extension is effective through November 17, 2023 allowing lawmakers more time to potentially complete the fiscal year 2024 appropriations bills. In the event of a U.S. government shutdown or an extended period of CR, our business, program performance and results of operations could be impacted by the resulting disruptions to federal government offices, workers, and operations, including but not limited to program cancellations, schedule delays, production halts and other disruptions and nonpayment, which could adversely affect our results of operations. The significance of these impacts will primarily be based on the length of the CR or shutdown.

Operating Performance Assessment and Reporting

For the majority of our contracts, revenues are recognized using the over time, percentage of completion cost-to-cost method of accounting, with revenue recognized based on the ratio of cumulative costs incurred to date to estimated total contract costs at completion. For contracts accounted for in this way, our reported revenues may contain amounts which we have not billed to customers if we have incurred costs, and recognized related profits, in excess of billed progress or performance-based payments.

Under U.S. GAAP, contract costs, including allowable general and administrative expenses on certain government contracts, are charged to work-in-progress inventory and are written off to costs and expenses as revenues are recognized. The Federal Acquisition Regulations (“FAR”) and the defense supplement (“DFARS”), incorporated by reference in U.S. government contracts, provide that internal research and development costs are allowable general and administrative expenses. Unallowable costs, pursuant to the FAR, are excluded from costs accumulated on U.S. government contracts.

Our defense contracts and subcontracts that require the submission of cost or pricing data are subject to audit, various profit and cost controls, and standard provisions for termination at the convenience of the customer. The Defense Contract Audit Agency (“DCAA”) performs these audits on behalf of the U.S. government. The DCAA has the right to perform audits on our incurred costs on cost-type or price redeterminable-type contracts on a yearly basis. Approval of an incurred cost submission can take from one to three years from the date of the submission of the contract cost.

U.S. government contracts are, by their terms, subject to termination by the U.S. government for either convenience or default by the contractor. Fixed-price contracts provide for payment upon termination for items delivered to and accepted by the U.S. government and, if the termination is for convenience, for payment of fair compensation of work performed plus the costs of settling and paying claims by terminated subcontractors, other settlement expenses and a reasonable profit on the costs incurred. Cost-plus contracts provide that, upon termination, the contractor is entitled to reimbursement of its allowable costs and, if the termination is for convenience, a total fee proportionate to the percentage of the work completed under the contract. If a contract termination is for default, however, the contractor is paid an amount agreed upon for completed and partially completed products and services accepted by the U.S. government. In these circumstances, the U.S. government is not liable for excess costs incurred by us in procuring undelivered items from another source.

In addition to the right of the U.S. government to terminate U.S. government contracts, such contracts are conditioned upon the continuing availability of Congressional appropriations. Congress usually appropriates funds for a given program on a September 30 fiscal year basis, even though contract performance may take many years. Consequently, at the outset of a major program, the contract is typically only partially funded, and additional funds normally are committed to the contract by the procuring agency only as appropriations are made by Congress for future fiscal years.

Components of Operations

Revenue

Revenue consists primarily of product related revenue, generating 93% and 93% of our total revenues ~~respectively, which~~for the three and nine months ended September 30, 2023, respectively. Our remaining revenue is generated from service related contracts. The percentage of product sales increased from 91% for the three months ended September 30, 2022 to 93% during the current quarter. The increased revenue allocation towards more product based sales is attributed to the disposition of our GES business in August of the 2022 fiscal year. Additionally, 84% and 84% of our revenue is derived from firm-fixed priced contracts for the three and nine months ended September 30, 2023, respectively. This is consistent with the prior ~~full~~ year ~~results.~~which realized firm-fixed sales of 86% and 87% for the three and nine months ended September 30, 2022, respectively.

Under flexibly priced contracts, we are reimbursed for allowable or otherwise defined total costs (defined as cost of revenues plus allowable general and administrative expenses) incurred, plus a fee. The contracts may also include incentives for various performance criteria, including quality, timeliness, cost-effectiveness or other factors.

For the three and nine months ended September 30, 2023, flexibly priced contracts represented 16% of our total revenues.

Please refer to Note 3: Revenue from Contracts with Customers in the Notes to our Consolidated Financial Statements.

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

General and Administrative Expenses

General and administrative expenses include general and administrative expenses not included within cost of revenues such as salaries, wages and fringe benefits, facility costs and other costs related to these indirect functions. Additionally, general and administrative expenses include internal research and development costs as well as expenditures related to bid and proposal efforts. We expect general and administrative expenses will continue to be impacted by the costs associated with being a publicly-traded company.

Results from Operations

The ~~first quarter~~following discussion of ~~calendar year 2021 began with~~operating results is intended to help the ~~Department of Defense operating with a full year authorization and appropriation for Fiscal Year 2021 (“FY21”). During~~reader understand the quarter, both Secretary of Defense Lloyd Austin and Deputy Secretary of Defense Kathleen Hicks were confirmed by the Senate. The Biden Administration’s national security team continues to take shape and assess programs and resources to ensure the Fiscal Year 2022, (“FY22”) budget aligns with the new Administration’s priorities. The President’s FY22 budget request was not released in February as is customary because of the change in Administration following the 2020 election. The Trump Administration in their FY21 submission had proposed an inflation adjusted increase for the DOD budget in FY22 yielding a $722B top-line; however, on April 9 the Biden Administration asked for a top-line budget of $715B, inclusive of Overseas Contingency Operations (“OCO”) funding. This budget request reflects a smaller decrease than was expected when adjusted for inflation.

~~Key Financial and Operating Measures~~

~~Overview~~

We measure our business using both key financial and operating data including key performance indicators (“KPIs”) and non-GAAP financial measures and use the following metrics to manage our business, monitor results of operations and ~~ensure proper allocation~~financial condition of ~~capital: (i) Revenue, (ii) Bookings, (iii) Backlog, (iv) Adjusted EBITDA, (v) Adjusted EBITDA Margin, (vi) Adjusted Earnings Per Share (“EPS”)~~the Company, for the three and ~~(vii) Free Cash Flow. We believe that these financial performance metrics represent~~nine months ended September 30, 2023, as compared to the ~~primary drivers~~three and nine months ended September 30, 2022. Given the nature of ~~value enhancement, balancing both short and long-term indicators of increased shareholder value. These are the metrics we use to measure our results and evaluate~~ our business, we believe revenue and ~~related contract performance. See “—Results~~earnings from ~~Operations” for further detail.~~

~~Financial and Operating Data~~

(Dollars in millions, except per share amounts) March 31, 2021 March 31, 2020
Total revenues $ 681 $ 583
Bookings $ 715 $ 678
Backlog $ 3,326 $ 2,945
Adjusted EBITDA(1)
71 50
Adjusted EBITDA Margin(1)
10% 9%
Adjusted EPS(1)(2)
$ 0.25 $ 0.07
Free Cash Flow(1)
$ (262) $ (309)
~~________________~~

~~(1)Note on non-GAAP financial measures: Throughout the discussion~~operations are most relevant to an understanding of our performance at a business and segment level. Our operating cycle is lengthy and involves various types of production contracts and varying delivery schedules. Accordingly, operating results in a particular period may not be indicative of operations we use non-GAAP financial measures including Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted EPS and Free Cash Flow, as measures of our overall performance. Definitions and reconciliations of these measures to the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP are included below.future operating results.

~~(2)~~


	Three Months Ended						September 30, 2023 vs. September 30, 2022
(Dollars in millions, except per share amounts)	September 30, 2023			September 30, 2022			$			%
Total revenues	$	703		$	634		$	69		10.9	%
Total cost of revenues	(541)			(504)			(37)			7.3	%
Gross profit	$	162		$	130		$	32		24.6	%
Gross margin	23.0		%	20.5		%	250		bps
General and administrative expenses	(96)			(101)			5			(5.0)	%
Amortization of intangibles	(5)			(3)			(2)			66.7	%
Other operating (expenses) income, net	(2)			350			(352)			(100.6)	%
Operating earnings	$	59		$	376		$	(317)		(84.3)	%
Interest expense	(10)			(9)			(1)			11.1	%
Other, net	(1)			—			(1)			NM
Earnings before taxes	$	48		$	367		$	(319)		(86.9)	%
Income tax provision	1			88			(87)			(98.9)	%
Net earnings	$	47		$	279		$	(232)		(83.2)	%

Basic EPS(1)	$	0.18		$	1.33		$	(1.15)		(86.5)	%
Diluted EPS(1)	$	0.18		$	1.33		$	(1.15)		(86.5)	%



Backlog	$	4,719		$	3,138		$	1,581		50.4	%
Bookings	$	1,055		$	874		$	181		20.7	%

____________

NM- percentage change not meaningful

(1)Gives effect to a 1,450,000-for-1 forward stock split on our common stock effected on February 25, ~~2021.~~2021 and a 1.451345331-for-1 forward stock split on our common stock effected November 23, 2022.


	Nine Months Ended						September 30, 2023 vs. September 30, 2022
(Dollars in millions, except per share amounts)	September 30, 2023			September 30, 2022			$			%
Total revenues	$	1,900		$	1,873		$	27		1.4	%
Total cost of revenues	(1,462)			(1,482)			20			(1.3)	%
Gross profit	$	438		$	391		$	47		12.0	%
Gross margin	23.1		%	20.9		%	220		bps
General and administrative expenses	(286)			(261)			(25)			9.6	%
Amortization of intangibles	(16)			(7)			(9)			128.6	%
Other operating (expenses) income, net	(10)			351			(361)			(102.8)	%
Operating earnings	$	126		$	474		$	(348)		(73.4)	%
Interest expense	(27)			(27)			—			—	%
Other, net	(2)			—			(2)			NM
Earnings before taxes	$	97		$	447		$	(350)		(78.3)	%
Income tax provision	3			107			(104)			(97.2)	%
Net earnings	$	94		$	340		$	(246)		(72.4)	%

Basic EPS(1)	$	0.36		$	1.62		$	(1.26)		(77.8)	%
Diluted EPS(1)	$	0.36		$	1.62		$	(1.26)		(77.8)	%



Backlog	$	4,719		$	3,138		$	1,581		50.4	%
Bookings	$	2,502		$	2,304		$	198		8.6	%

______________

NM- percentage change not meaningful

(1)Gives effect to a 1,450,000-for-1 forward stock split on our common stock effected on February 25, 2021 and a 1.451345331-for-1 forward stock split on our common stock effected November 23, 2022.

Revenue

Our revenue generation of $703 million for the three months ended September 30, 2023 represents an increase of $69 million or 10.9% as compared to the three months ended September 30, 2022. The revenue increase is primarily attributed to continued performance on our electric power and propulsion programs with the U.S. Navy which was offset in part by a reduction in Force Protection related revenues, both within our IMS segment, during the period.

Our revenue generation of $1,900 million for the nine months ended September 30, 2023 represents an increase of $27 million or 1.4% over the nine months ended September 30, 2022. The revenue increase was also driven by increased demand within our electric power and propulsion programs with the U.S. Navy for both submarine and surface ships within our IMS segment. This was offset in part by the difference in revenue contribution realized from our now disposed Global Enterprise Solutions (“GES”) operating unit as compared to the revenue generated from RADA, the “net divestiture impact.”

Cost of Revenues

Cost of revenues increased by $37 million or 7.3% from $504 million to $541 million for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022. The cost of revenue increase was primarily due to the increased revenue contribution realized during the period. This was offset in part by improved program performance within our laser sensing portfolio as well as the mix benefit realized from increased sales of our tactical radars acquired in the RADA acquisition. In total for the three months ended September 30, 2023, cost of revenues decreased as a percentage of revenues driving gross margin contribution to 23.0% as compared to 20.5% realized during the three months ended September 30, 2022.

Cost of revenue decreased by $20 million or 1.3% from $1,482 million to $1,462 million for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. The decrease was primarily due to the reduced cost of revenues attributed to favorable program mix and performance within both our IMS and ASC segments highlighted by the continued performance improvements realized within our laser program portfolio. Additionally the higher profit generation of the RADA revenue contribution further drove a reduction in the overall cost of revenues. For the year to date period, this was partially offset by the reduction of revenues noted above as well as certain programmatic cost growth realized on our dismounted soldier sensing programs.

Gross Profit

Gross profit increased by $32 million, or 24.6% to $162 million for the three months ended September 30, 2023 as compared to $130 million for the three months ended September 30, 2022, and gross profit increased by $47 million or 12.0% for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 resulting from the revenue and cost of revenue trends noted above.

General and Administrative Expenses

General and administrative expenses (“G&A”) decreased by $5 million or 5.0% for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 and increased by $25 million or 9.6% for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. The decrease in G&A for the three months ended September 30, 2023 is primarily attributed to transaction costs recorded in 2022, partially offset by increased investment in internal research and development (“IR&D”) of $2 million and public company operating costs. The increase in G&A for the nine months ended September 30, 2023 is primarily due to increased investment in IR&D expenditures of $18 million, the addition of the RADA commercial business model and increased public company operating costs also contributed to the year over year increase in G&A expenditures.

Amortization of Intangibles

Amortization of intangibles of $5 million for the three months ended September 30, 2023 increased $2 million as compared to the three months ended September 30, 2022. Amortization of intangibles of $16 million for the nine months ended September 30, 2023 increased $9 million as compared to the nine months ended September 30, 2022. This is attributed to the increased amortization generated from the RADA acquired intangible assets.

Other Operating (Expenses) Income, Net

Other operating (expenses) income decreased from an income of $350 million and $351 million for the three and nine months ended September 30, 2022, respectively, to an expense of $2 million and $10 million for the three and nine months ended September 30, 2023, respectively. The income for both the three and nine months in the prior year is primarily due to the gain on sale of the GES business and AAC Joint venture which totaled $350 million. The expense in the current year is largely attributed to restructuring efforts implemented in our ASC segment.

Operating Earnings

Operating earnings decreased by $317 million to $59 million for the three months ended September 30, 2023. For the nine months ended September 30, 2023, operating earnings decreased by $348 million from $474 million for nine months ended September 30, 2022 to $126 million for the nine months ended September 30, 2023. The decrease was driven by the gains on asset sales in the prior year, resulting from our dispositions of our GES and AAC operating units.

Interest Expense

Interest expense remained relatively consistent realizing an expense of $10 million for three months ended September 30, 2023, compared to $9 million for the three months ended September 30, 2022. For the nine months ended September 30, 2023 and September 30, 2022, interest expense remained consistent at $27 million.

Other, Net

Other, net increased $1 million for the three months ended September 30, 2023 when compared to the three months ended September 30, 2022, and increased $2 million for the nine months ended September 30, 2023 when compared to the nine months ended September 30, 2022.

Earnings Before Taxes

Earnings before taxes decreased by $319 million and $350 million to $48 million and $97 million for the three and nine months ended September 30, 2023, respectively, from $367 million and $447 million for the three and nine months ended September 30, 2022, respectively. This was primarily due to the decreases in operating earnings as noted above.

Income Tax Provision

Income tax provision decreased by $87 million and $104 million to $1 million and $3 million for the three and nine months ended September 30, 2023, respectively, from $88 million and $107 million for the three and nine months ended September 30, 2022, respectively. This was primarily attributable to the prior year tax expenditures on the gains realized on the disposition of GES and AAC in the prior year. This was compounded by the federal research and development credits recorded in the three and nine months ended September 30, 2023, which further reduced our tax expenditures for the three and nine months ended September 30, 2023.

Net Earnings

Net earnings decreased by $232 million to $47 million for the three months ended September 30, 2023 and decreased $246 million to $94 million for the nine months ended September 30, 2023, respectively, when compared to the three and nine months ended September 30, 2022. This was driven by a decrease in earnings before taxes offset by the income tax provision decreasing as noted above.

Backlog

Backlog - We define Backlog to include the following components:

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

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

Total backlog increased by $1,581 million to $4,719 million for nine months ended September 30, 2023, from $3,138 million for the nine months ended September 30, 2022. The backlog increase was driven primarily by the receipt of a multi-boat contract to support the electric propulsion efforts on the Columbia Class submarine program with the U.S. Navy. Subsequent to the third quarter, the Company agreed to contract terms and pricing totaling over $3 billion, for the majority of our electric power and propulsion system on the remaining seven Columbia Class submarines. The award is not included in the backlog numbers noted above.

Bookings

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

~~Backlog~~ - Bookings results for three months ended September 30, 2023 increased to $1,055 million as compared to $874 million for the three months ended September 30, 2022. Bookings for the nine months ended September 30, 2023

increased by 9% or $198 million to $2,502 million as compared to $2,304 million for the nine months ended September 30, 2022.

Key Non-GAAP Operating Measures

Overview

We ~~define Backlog~~measure our business using both key financial and operating data including key performance indicators (“KPIs”) and non-GAAP financial measures. In addition to ~~include~~the operational analysis detailed above, we also use the following ~~components:~~non-GAAP metrics to manage our business, monitor results of operations and ensure proper allocation of capital: (i) Adjusted EBITDA, (ii) Adjusted EBITDA Margin, (iii) Adjusted Diluted Earnings Per Share (“EPS”) and (iv) Free Cash Flow. We believe that these financial performance metrics represent the primary drivers of value enhancement, balancing both short and long-term indicators of increased shareholder value. These are the metrics we use to measure our results and evaluate our business and related contract performance.


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions, except per share amounts)	2023		2022		2023		2022



Adjusted EBITDA(1)	$	82	$	58	$	193	$	198
Adjusted EBITDA Margin(1)	11.7%		9.2%		10.2%		10.6%
Adjusted Diluted EPS(1)(2)	$	0.20	$	0.12	$	0.42	$	0.47
Free Cash Flow(1)					$	(335)	$	(262)

________________

(1)~~Funded - Funded backlog represents~~Note on non-GAAP financial measures: Throughout the ~~revenue value~~discussion of ~~orders for services under existing contracts for which funding is appropriated or otherwise authorized less revenue previously recognized~~our results of operations we use non-GAAP financial measures including Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Diluted EPS and Free Cash Flow, as measures of our overall performance. Definitions and reconciliations of these measures to the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP are included below.

(2)Gives effect to a 1,450,000-for-1 forward stock split on ~~these contracts.~~

~~(2)Unfunded - Unfunded backlog represents the revenue value of firm orders for products~~our common stock effected on February 25, 2021 and ~~services under existing contracts for which funding has not yet been appropriated less funding previously recognized~~a 1.451345331-for-1 forward stock split on ~~these contracts.~~

~~The unfunded and funded backlog combine to equal the total backlog as depicted in the table below at the respective date presented:~~


~~Backlog:~~	~~March 31, 2021~~
~~(Dollars in millions)~~
~~Total Backlog~~	$	~~3,326~~

our common stock effected November 23, 2022.

Non-GAAP Financial Measures

We believe the non-GAAP financial measures presented in this ~~Quarterly Report~~document will help investors understand our financial condition and operating results and assess our future prospects. We believe these non-GAAP financial measures, each of which is discussed in greater detail below, are important supplemental measures because they exclude unusual or non-recurring items as well as non-cash items that are unrelated to or may not be indicative of our ongoing operating results. Further, when read in conjunction with our U.S. GAAP results, these non-GAAP financial measures provide a baseline for analyzing trends in our underlying businesses and can be used by management as a tool to help make financial, operational and planning decisions. Finally, these measures are often used by analysts and other interested parties to evaluate companies in our industry by providing more comparable measures that are less affected by factors such as capital structure.

We recognize that these non-GAAP financial measures have limitations, including that they may be calculated differently by other companies or may be used under different circumstances or for different purposes, thereby affecting their comparability from company to company. In order to compensate for these and the other limitations discussed below, management does not consider these measures in isolation from or as alternatives to the comparable financial measures determined in accordance with U.S. GAAP. Readers should review the reconciliations below and should not rely on any single financial measure to evaluate our business.

We define these non-GAAP financial measures as:

Adjusted EBITDA and Adjusted EBITDA Margin -

We define Adjusted EBITDA as our net earnings before income taxes, amortization of acquired intangible assets, depreciation, restructuring costs, interest, deal related transaction costs, ~~related to an anticipated offering of securities, acquisition and divestiture related~~other non-operating expenses such as foreign exchange, COVID-19 response costs, non-service pension expenditures, legal liability accrual reversals, and other one-time non-operational ~~events.~~events as well as gains (losses) on business disposals. Adjusted EBITDA Margin is

calculated by dividing Adjusted EBITDA by revenue. Adjusted EBITDA and Adjusted EBITDA Margin are not measures calculated in accordance with U.S. GAAP, and they should not be considered an alternative to any financial measures that were calculated under U.S. GAAP. Adjusted EBITDA and Adjusted EBITDA Margin are 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. Adjusted EBITDA and Adjusted EBITDA Margin are driven by changes in volume, performance, contract mix and general and administrative expenses and investment levels. Performance, as used in this definition, refers to changes in profitability and is primarily based on adjustments to estimates at completion on individual contracts. These adjustments result from increases or decreases to the estimated value of the contract, the estimated costs to complete the contract, or both. These measures therefore assist management and our board and may be

useful to investors in comparing our operating performance consistently over time as they remove the impact of our capital structure, asset base and items outside the control of the management team and expenses that do not relate to our core operations. Adjusted EBITDA and Adjusted EBITDA Margin may not be comparable to similarly titled non-GAAP measures used by other companies as other companies may have calculated the measures differently. The reconciliation of Adjusted EBITDA to net earnings ~~(loss)~~ is provided below:

Consolidated Entity Adjusted EBITDA Reconciliation:


		Three Months Ended March 31,					Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions)	(Dollars in millions)	2021		2020		(Dollars in millions)	2023		2022		2023		2022
Net earnings (loss)		$	29	$	10
Income tax provision (benefit)		12		3
Net earnings						Net earnings	$	47	$	279	$	94	$	340
Income tax provision						Income tax provision	1		88		3		107
Amortization of intangibles	Amortization of intangibles	2		2		Amortization of intangibles	5		3		16		7
Depreciation	Depreciation	12		11		Depreciation	16		14		47		41
Restructuring costs	Restructuring costs	—		2		Restructuring costs	2		—		10		—
Interest expense	Interest expense	9		15		Interest expense	10		9		27		27
Transaction costs related to an anticipated offering of securities		4		—
Foreign exchange		—		5
COVID-19 response costs		3		—
Non-service pension expense		—		2
Deal related transaction costs						Deal related transaction costs	1		16		4		26
Gain on sale of business						Gain on sale of business	—		(350)		—		(350)

Other one-time non-operational events	Other one-time non-operational events	—		—		Other one-time non-operational events	—		(1)		(8)		—
Adjusted EBITDA	Adjusted EBITDA	$	71	$	50	Adjusted EBITDA	$	82	$	58	$	193	$	198
Adjusted EBITDA Margin						Adjusted EBITDA Margin	11.7%		9.2%		10.2%		10.6%

Adjusted EBITDA

Adjusted EBITDA increased by $24 million or 41.4% to $82 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The increase in Adjusted EBITDA for the three month period is primarily attributed to improved program performance noted above offset by increased IR&D investments and the impact of higher public company expenditures both residing in our G&A expense line item. For the nine months ended September 30, 2023, Adjusted EBITDA decreased $5 million or 2.5% to $193 million from $198 million for the nine months ended September 30, 2022. This is primarily attributed to the increase in IR&D and public company expenditures as well as the non- recurring ‘one-time’ increase in profitability on the Columbia Class program experienced in the nine months ended September 30, 2022.

Adjusted EBITDA Margin

Adjusted EBITDA Margin was 9.2% and 10.6% for the three and nine months ended September 30, 2022, respectively, and 11.7% and 10.2% for the three and nine months ended September 30, 2023, respectively. The increase for the quarter was primarily due to operational leverage realized on the 10.9% increase in revenue realized during the three months ended September 30, 2023 as compared to the three month period ended September 30, 2022. This was compounded by improved program performance further enhancing our adjusted EBITDA margin.

The decrease for the nine month period was primarily due to the increased G&A expenditures as well as the ‘one-time’ non-recurring profitability on the Columbia Class program mentioned above.

Adjusted Diluted EPS

Adjusted Diluted EPS – We calculate Adjusted Diluted EPS by excluding deal related transaction costs, ~~related to an anticipated offering~~amortization of ~~securities, acquisition and divestiture related~~acquired intangible assets, restructuring costs, other non-operating expenses ~~and~~such as foreign exchange, COVID-19 response costs, non-service pension expenditures, legal liability accrual reversals, and other one-time non-operational events as well as gains (losses) on business disposals (net of taxes) from our net earnings ~~(loss)~~and dividing by the diluted weighted average number of shares outstanding to arrive at Adjusted Diluted EPS. We believe that Adjusted Diluted EPS allows investors to effectively compare our core performance from period to period by excluding items that are not indicative of, or are unrelated to, results from our ongoing business operations such as our capital structure, significant non-cash expenses, the impacts of financing decisions on earnings, and items incurred outside the ordinary, ongoing and customary course of our business. Adjusted Diluted EPS has limitations as an analytical tool and does not represent and should not be considered an alternative to basic or diluted EPS as determined in accordance with U.S. GAAP. The reconciliation of Adjusted Diluted EPS to U.S. GAAP diluted EPS is shown below:

Consolidated Entity Reconciliation of Adjusted Diluted EPS:

Three Months Ended March 31,
(Dollars in millions, except per share amounts) 2021 2020
Net earnings (loss) $ 29 $ 10
Transaction costs related to an anticipated offering of securities 4 —
COVID-19 response costs 3 —
Adjusted net earnings (loss) $ 36 $ 10
Adjusted EPS (1)
$0.25 $0.07


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions, except per share amounts; shares in millions)	2023		2022		2023		2022
Net earnings	$	47	$	279	$	94	$	340
Deal related transaction costs	1		16		4		26
Amortization of intangibles	5		3		16		7
Restructuring costs	2		—		10		—
Gain on sale of business, net of taxes	—		(270)		—		(270)
Other one-time non-operational events	—		(1)		(8)		—
Tax effect of adjustments	(2)		(2)		(5)		(5)
Adjusted net earnings	$	53	$	25	$	111	$	98

Diluted weighted average number of shares outstanding	265		210		264		210
Diluted EPS(1)	$	0.18	$	1.33	$	0.36	$	1.62
Adjusted diluted EPS(1)	$	0.20	$	0.12	$	0.42	$	0.47

________________

Adjusted Diluted EPS

For the nine months ended September 30, 2023 there were 262,039,337 shares of common stock outstanding, an increase of 51,594,264 shares from the September 30, 2022 shares outstanding of 210,445,073. The increased share count is attributed to shares issued to consummate the RADA merger of 49,788,960 and equity vesting and stock option exercises of 1,805,304. Diluted shares as of September 30, 2023 totaled 3 million and 3 million for the three and nine months ended September 30, 2023, respectively, increasing from the prior year which predated equity award grants. The diluted shares are attributable to equity grants and unexercised stock options. There were no outstanding equity grants at September 30, 2022. Adjusted diluted EPS of $0.20 for the three months ended September 30, 2023 increased $0.08 as compared with the same period in the prior year. The increase is a product of the increased adjusted net earnings offset by the increased share count as noted above. Adjusted Diluted EPS of $0.42 for the nine months ended September 30, 2023 represents a decrease of $0.05 from $0.47 for the nine months ended September 30, 2022, which is attributed to the increase in shares outstanding noted above, partially offset by the adjusted net earnings increase as shown in the table above.

3033

Free Cash Flow

Free Cash Flow – We define free cash flow as the sum of the cash flows provided by (used in) operating activities, ~~and~~ the cash flows provided by (used in) ~~investment~~investing activities pertaining to capital expenditures, and proceeds generated from the sale of capital ~~assets.~~assets, less transaction related expenditures (net of tax).

We believe that free cash flow provides management and investors with an important measure of our ability to generate cash on a normalized basis. Free cash flow also provides insight into our flexibility to allocate capital and pursue opportunities that may enhance ~~shareholder~~stockholder value. We believe that while expenditures and dispositions of property, plant and equipment will fluctuate period to period, we seek to ensure that we have adequate capital on hand to maintain ongoing operations and enable growth of the business. Additionally, free cash flow is of limited usefulness, in that it does not represent residual cash flows available for discretionary expenditures, due to the fact the measures do not deduct the payments required for debt service and other contractual obligations or payments. The reconciliation between free cash flow and net cash provided by operating activities (the most comparable U.S. GAAP measure) is shown below:

Consolidated Entity Reconciliation of Free Cash Flow:


		Three Months Ended March 31,					Nine Months Ended September 30,
(Dollars in millions)	(Dollars in millions)	2021		2020		(Dollars in millions)		2023		2022
Net cash used in operating activities	Net cash used in operating activities	$	(249)	$	(296)	Net cash used in operating activities		$	(310)	$	(246)
Transaction related expenditures, net of tax						Transaction related expenditures, net of tax		17		19
Capital expenditures	Capital expenditures	(13)		(13)		Capital expenditures		(42)		(35)
Proceeds from sales of assets	Proceeds from sales of assets	—		—		Proceeds from sales of assets		—		—
Free cash flow	Free cash flow	$	(262)	$	(309)	Free cash flow		$	(335)	$	(262)

Free Cash Flow

Free cash flow usage increased by $73 million to $335 million for the nine months ended September 30, 2023 from $262 million for the nine months ended September 30, 2022. This was primarily due to cash used to fund working capital for the nine months ended September 30, 2023 when compared to nine months ended September 30, 2022.

Factors Impacting Our Performance

U.S. Government Spending and Federal Budget Uncertainty

Changes in the volume and relative mix of U.S. government spending as well as areas of spending growth could impact our business and results of operations. In particular, our results can be affected by shifts in strategies and priorities on homeland security, intelligence, defense-related programs, infrastructure and urbanization and continued increased spending on technology and innovation, including cybersecurity with respect to our and third parties’ information networks and related systems, artificial intelligence, connected communities and physical ~~infrastructure.~~infrastructure (for example, the potential impacts for the Russia / Ukraine conflict and the Israel-Hamas war). Cost-cutting and efficiency initiatives, current and future budget restrictions, spending cuts and other efforts to reduce government spending and shifts in overall priorities ~~(for example, in response to the COVID-19 pandemic)~~ could cause our government customers to reduce or delay funding or invest appropriated funds on a less consistent basis or not at all, and demand for our solutions or services could diminish. Furthermore, any disruption in the functioning of government agencies, including as a result of government closures and shutdowns, could have a negative impact on our operations and cause us to lose revenue or incur additional costs due to, among other things, our inability to maintain access and schedules for government testing or deploy our staff to customer locations or facilities as a result of such disruptions.

There is also uncertainty around the timing, extent, nature and effect of Congressional and other U.S. government actions to address budgetary constraints, caps on the discretionary budget for defense and non-defense departments and agencies, and the ability of Congress to determine how to allocate the available budget authority

and pass appropriations bills to fund both U.S. government departments and agencies that are, and those that are not,

subject to the caps. Additionally, budget deficits and the growing U.S. national debt, ~~including as a result of legislative actions in response to the COVID-19 pandemic,~~ may increase pressure on the U.S. government to reduce federal spending across all federal agencies, with uncertainty about the size and timing of those reductions. Furthermore, delays in the completion of future U.S. government budgets could in the future delay procurement of the federal government services we provide. A reduction in the amount of, or reductions, delays, or cancellations of funding for, services that we are contracted to provide to the U.S. government as a result of any of these impacts or related initiatives, legislation or otherwise could have a material adverse effect on our business and results of operations. See Part I, Item 1A, “Risk Factors—Risks Related to Our Business—Significant delays or reductions in appropriations for our programs and changes in U.S. government priorities and spending levels more broadly may negatively impact our business and could have a material adverse impact on our business, financial condition and results of operations” Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Overview and Considerations—Business Environment” in our Annual Report for the year ended December 31, 2022, filed with the SEC on March 28, 2023 and Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Overview and Considerations—Business Environment” in this Quarterly Report for further details on U.S. government spending’s impact on our business.

Operational Performance on Contracts

~~Revenue, earnings (margin)~~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 ~~timing~~Company’s contracts are accounted for as single performance obligations due to the complex and integrated nature of our ~~cash flows depend~~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. We classify revenues as products or services on our ~~ability~~Consolidated Statements of Earnings based on the predominant attributes of the performance obligations. While the Company provides warranties on certain contracts, we typically do not provide for services beyond standard assurances and therefore do not consider warranties to ~~perform~~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 in Note 3: Revenue from Contracts with Customers.

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 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 ~~our contracts. When agreeing~~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 ~~contractual terms, our management team makes assumptions and projections about future conditions and events. The accounting~~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 ~~programs~~transfer of control to our customers. Due to the long-term nature of many of our contracts, developing the estimated total cost at completion and total transaction price often requires ~~assumptions~~judgment. Factors that must be considered in estimating the cost of the work to be completed include the nature and ~~estimates about these conditions and events. These projections and estimates assess:~~

•~~the productivity and availability of labor;~~

•~~the allocation of indirect costs to labor and material costs incurred~~

•~~the~~ complexity of the work to be ~~performed;~~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 ~~availability of materials and components; and~~

•~~schedule requirements.~~

~~If there is a significant change in one or more of these circumstances, estimates or assumptions, or if the risks under~~performance on our ~~contracts are not managed adequately, the profitability of contracts could be adversely affected. This could affect earnings and margin materially.~~

In particular, profitability can fluctuate predicated on the type of contract awarded. Typically fixed-price development programs on complex systems represent a higher risk profile to complete on-budget. To the extent our fixed-price development efforts create a larger portion of our revenue output, this may result in reduced operating margins given the higher risk profile.ongoing contracts. The following represents the impact that ~~changing certain of~~changes in our estimates, particularly those regarding our fixed-price development programs, ~~would~~ have had ~~have~~ on our ~~revenues:~~revenues for the three and nine months ended September 30, 2023 and 2022, respectively:

Impact of Change in Estimates on our Revenue ~~Results~~Results:


		Three Months Ended March 31,							Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in millions)	(Dollars in millions)	2021			2020			(Dollars in millions)	2023			2022			2023			2022
Revenue	Revenue	$	(1)		$	(3)		Revenue	$	6		$	(11)		$	(14)		$	(22)
Total % of Revenue	Total % of Revenue	0		%	1		%	Total % of Revenue	0.9		%	1.8		%	0.7		%	1.2		%

Additionally, the timing of our cash flows is impacted by the timing of achievement of billable milestones on contracts. Historically, this has resulted and could continue to result in fluctuations in working capital levels and quarterly free cash flow results. As a result of such quarterly fluctuations in free cash flow results, we believe that quarter-to-quarter comparisons of our results of operations may not necessarily be meaningful and should not be relied upon as indicators of future performance.

Regulations

Increased audit, review, investigation and general scrutiny by U.S. government agencies of performance under government contracts and compliance with the terms of those contracts and applicable laws could affect our operating results. Negative publicity and increased scrutiny of government contractors in general, including us, relating to government expenditures for contractor services and incidents involving the mishandling of sensitive or classified information as well as the increasingly complex requirements of the DoD and the ~~United States~~

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

International & Commercial Sales

International revenue, including foreign military sales, foreign military financing, and direct commercial sales, accounted for approximately ~~14%~~7% and 20% of our revenue for the three and nine months ended ~~March, 31, 2021 which~~September 30, 2023, respectively, and 17% and 18% of our revenues for the three and nine months ended September 30, 2022, respectively. The increase is ~~consistent~~due in part to increased purchases resulting from continued military aid programs in support of Ukraine in its conflict with ~~prior year trends. Since~~Russia. Given that our focus is primarily with the DoD and our investments are focused as such, we anticipate that international sales will continue to account for a similar percentage of revenue in the future. We remain subject to the spending levels, pace and priorities of the U.S. government as well as international governments and commercial customers, and to general economic conditions that could adversely affect us, our customers and our suppliers.

Additionally, some international sales may expose us to foreign exchange fluctuations and changing dynamics of foreign competitiveness based on variations in the value of the U.S. dollar relative to other currencies. The impact of those fluctuations is reflected throughout our Consolidated Financial Statements, but in the aggregate, did not have a material impact on our results of operations for three and nine months ended ~~March 31, 2021.~~September 30, 2023.

Acquisitions

We consider the acquisition of businesses and investments that we believe will expand or complement our current portfolio and allow access to new customers or technologies. We also may explore the divestiture of businesses that no longer meet our needs or strategy or that could perform better outside of our organization.

~~Components of Operations~~

~~Revenue~~

Revenue consists primarily of product related revenue, generating 84%, of our total revenues for the period the three months ended March 31, 2021. Our remaining revenue is generated from service related contracts. Additionally, 88% of our revenue is derived from firm-fixed priced contracts for the three months ended March 31, 2021. This is consistent for both contract types when compared to product sales of 86% and firm-fixed sales of 88% for the three months ended March 31, 2020.

~~Please refer to~~ ~~Note 1. Summary of Significant Accounting Policies~~ ~~and~~ ~~Note 2. Revenue from Contracts with Customers~~ ~~in the Notes to our Consolidated Financial Statements.~~

~~Cost of Revenues~~

~~General and Administrative Expenses~~

3336

~~Additionally, general~~On November 28, 2022, the Company announced the successful completion of the all-stock merger between Leonardo DRS and ~~administrative expenses include internal research~~RADA, a leading Israel-based provider of small-form tactical radar, to become a combined public company. As previously disclosed, RADA shareholders retained approximately 19% ownership in the combined Company with Leonardo DRS’s parent company, Leonardo S.p.A., (MIL: LDO), owning the remaining 81%. Immediately following the closing, the Company began trading on the Nasdaq Stock Exchange and ~~development costs as well as expenditures related to bid and proposal efforts. We expect general and administrative expenses will be impacted by~~ the ~~costs associated~~Tel Aviv Stock Exchange under the ticker “DRS.”

The acquisition of RADA has been accounted for using the acquisition method of accounting in accordance with ~~being a publicly-traded company.~~

~~Results from Operations~~

~~The following discussion of operating results is intended to help the reader understand the results of operations and financial condition of~~ASC 805, Business Combinations, with the Company as ~~well as individual segments,~~the accounting acquirer, which requires the assets acquired and liabilities assumed be recognized at their acquisition date fair value. The acquisition was completed on November 28, 2022, when each issued and outstanding ordinary share of RADA was converted and exchanged for ~~the three months ended March 31, 2021, as compared to three months ended March 31, 2020. Given the nature~~one share of our business, we believe revenue and earnings from operations are most relevant to an understanding of our performance at a business and segment level. Our operating cycle is lengthy and involves various types of production contracts and varying delivery schedules. Accordingly, operating results in a particular year may not be indicative of future operating results.

March 31, 2021 vs.
March 31,2020
(Dollars in millions, except per share amounts) March 31, 2021 March 31, 2020 $ %
Total revenues $ 681 $ 583 $ 98 16.8 %
Total cost of revenues (545) (477) (68) 14.3 %
Gross profit $ 136 $ 106 30 28.3 %
Gross margin 20.0 % 18.2 % 1.8 % 9.8 %
General and administrative expenses (79) (68) (11) 16.2 %
Amortization of intangibles (2) (2) — — %
Other operating expenses, net (4) (1) (3) 300.0 %
Operating earnings $ 51 $ 35 16 45.7 %
Interest expense (9) (15) 6 (40.0) %
Other, net (1) (7) 6 (85.7) %
Earnings before taxes $ 41 $ 13 28 215.4 %
Income tax provision 12 3 9 300.0 %
Net earnings $ 29 $ 10 19 190.0 %
Shares outstanding(1)
145 145 $ — — %
Basic EPS(1)
$ 0.20 $ 0.07 $ 0.13 190.0 %
Diluted EPS(1)
$ 0.20 $ 0.07 $ 0.13 190.0 %
Adjusted EPS(1,2)
$ 0.25 $ 0.07 $ 0.18 260.0 %
Adjusted EBITDA(2)
$ 71 50 21 42.0 %
Adjusted EBITDA Margin(2)
10.4 % 8.6 % 1.8 % 21.6 %
Backlog(2)
$ 3,291 2,945 346 11.7 %
Bookings(2)
715 678 38 5.6 %
Free cash flow(2)
$ (262) $ (309) $ 47 (15.2) %

~~______________~~

~~NM- percentage change not meaningful~~

~~(1)Gives effect to a 1,450,000-for-1 forward stock split on our~~ common stock ~~effected on February 25, 2021.~~

~~(2)~~See “—Non-GAAP Financial Measures” above for definitions of these measures. Adjusted EPS, Adjusted EBITDA, Adjusted EBITDA Margin and free cash flow are non-GAAP measures. See “—Key Financial and Operating Measures—Non-GAAP Financial Measures” above for reconciliations of these measures to the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP.

Our operating results for the three months ended March 31, 2021 showed significant growth from three months ended March 31, 2020. We generated solid organic revenue growth along with improved profitability and improved cash flow for the three months ended March 31, 2021 when compared to the three months ended March 31, 2020 across all three of our operating segments. Additionally, we achieved a number of important program wins and performance milestones, all while keeping our employees as safe as possible.

Revenue of $681 million represented an increase of $98 million or 17% while operating earnings and net earnings grew $16 million (46%) and $19 million (190%) for the three months ending March 31, 2021 when compared to the three months ending March 31, 2020. Adjusted EBITDA increased by $21 million (42%) while adjusted EBITDA margins also increased by 22% to 10.4% for the three months ended March 31, 2021 when compared to the three months ended March 31, 2020.

~~Revenue~~

Our revenue generation of $681 million highlights our initiative to improve financial linearity evidenced by an increase of $98 million or 17% or over three months ended March 31, 2020. The revenue expansion is attributed to continued growth in all three segments of the ~~business. Our AST segment increased revenues by $36~~Company.

The total purchase consideration for RADA was $511 million ~~or 19% driven by increased sales~~and is comprised of ~~our ground vehicle sensing programs~~the Company’s shares issued in exchange for all issued and outstanding common shares of RADA, as well as the ~~successful progress~~portion of replacement stock compensation awards’ fair value attributable to pre-combination services. See Note 2: Business Acquisitions and Dispositions for additional information regarding the transaction.

Dispositions

On March 21, 2022, the Company entered into a definitive agreement to sell its Global Enterprise Solutions (“GES”) business to SES Government Solutions, Inc., a wholly-owned subsidiary of SES S.A., for $450 million subject to certain working capital adjustments. The transaction was completed on ~~our next generation weapon sight program.~~August 1, 2022 and resulted in cash proceeds of $427 million after net working capital adjustments. The NC&C segment also improved by $47 million or 22% driven by progress on newly awarded Naval shipboard launch systems and common display production programs. Additionally, IMS segment revenues increased by $11 million or 6% as compared to the prior year period primarily due to the increased deliveries on our counter drone production programs.

~~Cost of Revenues~~

Cost of revenue increased by $68 million or 14% from $477 million to $545 million primarily due to increase revenue as described above. Additionally improved contract performance decreased the cost of revenues as a percentage of revenue highlighted by improved performance on our electronic warfare program within our AST segment, combined with improved program performance across all segments.

~~Gross Profit~~

Gross profit increased by $30 million, or 28% to $136 million for the three months ended March 31, 2021 as compared to $106 million for the three months ended March 31, 2020. This was primarily due to increased revenue and improved program performance as noted above.

~~General and Administrative Expenses~~

General and administrative expenses increased by $11 million or 16% for the three months ending March 31, 2021 as compared to the three months ended March 31, 2020. As a percentage of revenue, general and administrative expenses decreased to 11.6% for the three months ended March 31, 2021 from 11.7% for the three months ended March 31, 2020. The primary driver for the increase in general and administrative expenses are additional investments in IR&D and bid and proposal efforts which increased $4 million and $1 million respectively as compared to the prior year. Additionally, we incurred $4 milliontransaction netted an aggregate pretax gain net of transaction costs ~~related~~of $309 million ($239 million after tax) of which $323 million was included in Other Operating income (expense) net partially reduced by aggregate transaction costs of $14 million included in Selling, General & Administrative costs and tax expenses of $70 million. GES, which was part of the ASC segment, provides commercial satellite communications to ~~an anticipated offering of securities~~the U.S. Government and delivers satellite communications and security solutions to customers worldwide.

The Company recorded operating income for the ~~three months ended March 31, 2021.~~

~~Other Operating Expenses, Net~~

~~Other operating expenses increased by $3 million from $1 million for three months ended March 31, 2020 to $4 million for three months ended March 31, 2021 primarily due to $3 million~~GES business of ~~employee safety costs related to COVID-19 .~~

~~Amortization of Intangibles~~

~~Amortization of intangibles of $2 million for three months ending March 31, 2021 were consistent with three months ending March 31, 2020 of $2 million.~~

~~Operating Earnings~~

Operating earnings increased by $16 million to $51 million or 46% for three months ended March 31, 2021 from $35 million for three months ended March 31, 2020. The increase was driven by a combination of increased revenue and improved program performance offset in part by increased general and administrative expenditures. All three segments achieved improvement over the prior year period as we begin to transition specific development programs to higher margin production programs.

~~Interest Expense~~

Interest expense decreased by $6 million or 40% to $9 million for ending three months March 31, 2021 from $15 million for ending three months March 31, 2020. This reduction was primarily due to forgiveness of $300 million of principal on our ‘7.5% Term Loan’ debt that occurred in December of 2020.

~~Other, Net~~

Other, net decreased by $6 million for the three month ended March 31, 2021 to $1 million from $7 million for the three months ended March 31, 2020. This was primarily due a reduction of $5 million in foreign exchange related charges realized during the period. In the three months ended March 31, 2020 our IMS segment realized a foreign exchange loss of $5 million related to revaluation of certain Canadian dollar denominated receivables.

~~Earnings Before Taxes~~

~~Earnings before taxes increased by $28 million to $41 million for three months ended March 31, 2021 from~~ $13 million ~~for three months ended March 31, 2020. This was primarily due to an increase in operating earnings of $16 million, a reduction in interest expense of $6 million~~ and ~~reduction of other costs of $6 million.~~

~~Income Tax Provision~~

Income tax provision increased by $9 million to $12 million for three months ended March 31, 2021 from $3 million for three months ended March 31, 2020. This was primarily attributable to an increase in earnings before taxes of $28 million as well as an increase in our estimated annual effective tax rate due to certain state law tax changes and an increase in estimated nondeductible expenses as compared to the prior year.

~~Net Earnings~~

~~Net earnings (loss) increased by $19 million to~~ $29 million for the ~~three months~~years ended ~~March~~December 31, 2022 and 2021, ~~when compared~~respectively.

On April 19, 2022, we entered into a definitive sales agreement to divest our share of our equity investment in Advanced Acoustic Concepts LLC (“AAC”) for $56 million to Thales Defense & Security, Inc., the ~~three months ended March 31, 2020. This~~minority partner in AAC. The transaction was ~~driven by increased earnings before taxes~~completed on July 8, 2022 and resulted in proceeds of ~~$28~~$56 million. The transaction netted an aggregate pretax gain of $31 million ($22 million net of taxes). The aggregate gain of $31 million is included in Other Operating income (expense) net offset by ~~increased in income~~ tax ~~provision~~expense of $9 ~~million as described above.~~

~~Adjusted EBITDA~~

Adjusted EBITDA increased by $21 million or 42% to $71 million from $50 million for the three months ended March 31, 2021 as compared to three months March 31, 2020. This was primarily due to the increase in gross profit attributed to revenue growth as described above and increased program performance across all three segments.

~~Adjusted EBITDA Margin~~

Adjusted EBITDA Margin increased from 8.6% for the three months ended March 31, 2020 to 10.4% for the three months ended March 31, 2021. This was primarily due to improved program performance and the transition of certain development programs into production driving margin expansion.

~~Adjusted EPS~~

For the three months ended March 31, 2021 there were no changes in the number of basic and diluted shares. No equity awards were issued during the period. As of March 31, 2021 there were 145,000,000 shares of common

~~stock outstanding resulting in EPS of $0.25. This increase of $0.18 from $0.07 for the three months ended March 31, 2020 is attributed to the net earnings growth described above.~~

~~Backlog~~

Backlog increased by $346 million to $3,326 million from $2,945 million for three months ended March 31, 2021 from three months ended March 31, 2020 The most significant award contributing to our growth in backlog was a multi-carrier power conversion contract partially offset by the continued production of the previously awarded advanced protection systems at our IMS segment. Additionally, contributing to the growth in backlog, our AST segment was awarded a contract to transition our development program to production for the next-generation weapon sights, with our NC&C segment receiving a contract award, continuing production in our ruggedized computing business.

~~Bookings~~

Bookings results for three month ended March 31, 2021 increased 5% or $38 million to $715 million as compared to $678 million for the three month ended March 31, 2020. The increase is primarily attributed to the IMS segment and receipt of the short range air defense program award for $46 million.

~~Free cash flow~~

~~Free cash flow improved by $47~~The proceeds generated from the GES and AAC divestitures resulted in a $396 million dividend to ~~$(262)~~US Holding, at that time, our sole stockholder. The $396 million ~~for three months ended March 31, 2021 from $(309) million for~~represents the ~~three months ended March 31, 2020. This~~proceeds generated net of our costs to sell and estimated tax obligations. The dividend was primarily due to the impact of higher net income as stated above of $19 million (excluding non cash items) and decrease in cash used to fund working capital for the three months ended March 31, 2021 when compared to three months ended March 31, 2020.issued on August 5, 2022.

Review of Operating Segments

The following is a discussion of operating results for each of our operating segments. We have elected to use Revenue, Adjusted EBITDA, Adjusted EBITDA Margin, and Bookings to provide detailed information on our

segment performance. Additional information regarding our segments can be found in Note ~~15:~~16: Segment ~~information~~Information within the unaudited Consolidated Financial Statements.


		Three Months Ended March 31,						March 31, 2021 vs. March 31, 2020 Variance						Three Months Ended September 30,						September 30, 2023 vs. September 30, 2022 Variance
(Dollars in millions)	(Dollars in millions)	2021			2020								(Dollars in millions)	2023			2022
Revenue:
AST		$	219		$	183		$	36		19.5	%
NC&C		264			217			$	47		21.8	%
Revenues:													Revenues:
ASC													ASC	$	431		$	408		$	23		5.6	%
IMS	IMS	201			190			$	11		5.8	%	IMS	277			229			48			21.0	%
Corporate & Eliminations	Corporate & Eliminations	(3)			(7)			$	4		(53.5)	%	Corporate & Eliminations	(5)			(3)			(2)			66.7	%
Total revenue		$	681		$	583		$	98		16.8	%
Total revenues													Total revenues	$	703		$	634		$	69		10.9	%
Adjusted EBITDA:	Adjusted EBITDA:												Adjusted EBITDA:
AST		$	28		$	17		$	11		64.7	%
NC&C		26			19			7			36.8	%
ASC													ASC	$	48		$	36		$	12		33.3	%
IMS	IMS	18			15			3			20.0	%	IMS	34			22			12			54.5	%
Corporate & Eliminations	Corporate & Eliminations	(1)			(1)			—			—	%	Corporate & Eliminations	—			—			—			NM
Total Adjusted EBITDA	Total Adjusted EBITDA	$	71		$	50		$	21		42.0	%	Total Adjusted EBITDA	$	82		$	58		$	24		41.4	%
Adjusted EBITDA Margin:	Adjusted EBITDA Margin:												Adjusted EBITDA Margin:
AST		12.8		%	9.3		%	3.5		%	37.9	%
NC&C		9.8		%	8.8		%	1.1		%	12.4	%
ASC													ASC	11.1		%	8.8		%	230		bps
IMS	IMS	9.0		%	7.9		%	1.1		%	13.4	%	IMS	12.3		%	9.6		%	270		bps
Bookings:	Bookings:												Bookings:
AST		$	164		$	168		$	(5)		(2.7)	%
NC&C		330			344			(14)			(4.1)	%
ASC													ASC	$	820		$	700		$	120		17.1	%
IMS	IMS	222			166			56			33.8	%	IMS	235			174			61			35.1	%
Total bookings	Total bookings	$	715		$	678		$	37		5.5	%	Total bookings	$	1,055		$	874		$	181		20.7	%

~~AST~~


	Nine Months Ended September 30,						September 30, 2023 vs. September 30, 2022 Variance
(Dollars in millions)	2023			2022
Revenues:
ASC	$	1,226		$	1,248		$	(22)		(1.8)	%
IMS	692			634			58			9.1	%
Corporate & Eliminations	(18)			(9)			(9)			100.0	%
Total revenues	$	1,900		$	1,873		$	27		1.4	%
Adjusted EBITDA:
ASC	$	121		$	125		$	(4)		(3.2)	%
IMS	72			73			(1)			(1.4)	%
Corporate & Eliminations	—			—			—			NM
Total Adjusted EBITDA	$	193		$	198		$	(5)		(2.5)	%
Adjusted EBITDA Margin:
ASC	9.9		%	10.0		%	(10)		bps
IMS	10.4		%	11.5		%	(110)		bps
Bookings:
ASC	$	1,693		$	1,573		$	120		7.6	%
IMS	809			731			78			10.7	%
Total bookings	$	2,502		$	2,304		$	198		8.6	%

ASC

Revenue:

The ~~AST~~ASC segment ~~continues to be a significant contributor to~~reported revenue ~~growth with~~of $431 million and $1,226 million for the three and nine months ended September 30, 2023, respectively, an increase of 6% or $23 million from the three months ended ~~March 31, 2021 increasing~~September 30,

2022. The increase is attributed to Naval and Land based network computing programs. This was offset in part by ~~19%~~a reduction in international dismounted soldier programs realized during the period.

The ASC segment realized a revenue decrease of 2% or ~~$36~~$22 million ~~to $219 million for three month ended March 31, 2020~~ from ~~$183 million for three~~the nine months ended ~~March 31, 2020.~~September 30, 2022. This ~~increase~~decrease is ~~primarily~~ attributed to the net divestiture impact, in which our disposed assets (GES) provided a higher revenue contribution than the acquired RADA asset for the year to date period. The net divestiture impact was offset in large part by increased ~~deliveries on~~revenue contributions within our ~~next generation weapon sight production program coupled with continued expansion of our second generation ground vehicle~~airborne sensing ~~programs~~ and ~~revenues realized on our Navy shipboard launch system components production contracts awarded in 2020.~~naval computing programs.

Adjusted EBITDA and Adjusted EBITDA Margin:

~~AST’s~~ASC’s Adjusted EBITDA increased by ~~$11~~$12 million or ~~65%,~~33% to $48 million from ~~$17~~$36 million for the three months ended ~~March 31, 2020~~September 30, 2023 when compared to ~~$28 million for~~the three months ended ~~March 31, 2021.~~ September 30, 2022. The increase was driven by increased revenue contribution, favorable mix and improved program performance. This was offset by an increase in G&A expenditures attributed to IR&D investments, incremental public company costs allocated to the segment, as well as the increased G&A attributed to the RADA commercial business model.

For the nine month period ended September 30, 2023 Adjusted EBITDA decreased $4 million or 3%, from $125 million to $121 million. The decrease in Adjusted EBITDA was driven by increased G&A expenditures attributed to IR&D investments, incremental public company costs allocated to the segment, as well as the increased G&A attributed to the RADA commercial business model. Additionally the ASC segment realized a reduction in revenue as compared to the prior nine month period ended September 30, 2022. These reductions were offset by increased gross margin contribution attributed in large part to the high margin realized on the RADA revenue contribution.

The increase in Adjusted EBITDA drove an increase in Adjusted EBITDA Margin ~~increasing~~ from 9%8.8% for the three months ended ~~March 31, 2020~~September 30, 2022 to ~~13%~~11.1% for the three months ended ~~March 31, 2021.~~September 30, 2023. The margin expansion is driven by the incremental revenue contribution during the period coupled with improved program performance as noted above. The increase was offset in part by the incremental G&A investments detailed above.

ASC realized a decrease in Adjusted EBITDA ~~and~~which drove a slight decrease in Adjusted EBITDA Margin ~~is primarily due~~from 10.0% for the nine months ended September 30, 2022 to ~~increased revenue volume creating increased~~9.9% for nine months ended September 30, 2023. The margin impact was attributed to the reduction in operational leverage from the reduction in revenues attributed to the net divestiture impact coupled with the increase in G&A expenditures as noted above. This was largely offset by the improved program performance ~~on certain electronic warfare programs.~~and higher margin contribution from the RADA tactical radar sales.

Bookings:

The ~~AST~~ASC segment ~~contributed $164 million~~generated a 17.1% increase in ~~new~~ bookings for the three months ended ~~March 31, 2021. Bookings were down slightly by 3% or $5~~September 30, 2023 increasing $120 million aswhen compared to the three months ended ~~March 31, 2020. This was primarily~~September 30, 2022. The increase in new awards is driven by increased demand for ground vehicle and airborne sensing programs. Bookings continue to exceed the revenue output driving an increase in backlog over the period.

~~due to full year production award received on certain aircraft force protection programs received during~~For the ~~three~~nine months ended ~~March 31, 2020.~~

~~NC&C~~

~~Revenue:~~

~~NC&C revenue~~September 30, 2023 bookings also increased ~~by $47~~$120 million or ~~22% to $264~~7.6% from the nine months ended September 30, 2022, driving a total booking contribution of $1,693 million for the three months ended March 31, 2021 from $217 million for the three months ended March 31, 2020. This increase was primarily due to increased deliveries on our recently awarded common display systems and ruggedized computing products for $25 million and $21 million, respectively.

~~Adjusted EBITDA and Adjusted EBITDA Margin:~~

NC&C’s Adjusted EBITDA increased by $7 million, or 37%, from $19 million for three months ended March 31, 2020 to $26 million for three months ended March 31, 2021. Adjusted EBITDA Margin increased from 9% for the three months ended March 31, 2020 to 10% for three months ended March 31, 2021.current period. The increase ~~in Adjusted EBITDA~~ is ~~primarily due to~~driven by ground vehicle sensing and naval computing programs awarded during the ~~increased revenue output generating improved operational leverage. . Additionally we realized improved program performance on Navy computing and displays programs driving further margin expansion.~~

~~Bookings:~~

The NC&C segment contributed $330 million of bookings for the three months ended March 31, 2021. Despite the solid quarterly results, bookings were down by 4% or $14 million as compared to the three months ended March 31, 2020. This was primarily due to ruggedized computing and diagnostic products were lower than the three months ended March 31, 2020 by $25 million. This was offset in part by increased bookings for certain naval electronics programs of $17 million.period.

IMS

Revenue:

IMS segment revenue increased by ~~$11~~$48 million or 6%21% to ~~$201~~$277 million for the three months ended ~~March 31, 2021~~September 30, 2023 from ~~$190~~$229 million for the three months ended ~~March 31, 2020. This increase~~September 30, 2022 attributed to continued momentum in our naval power and propulsion business. Additionally, the trend continued in the nine months ended September 30, 2023 with revenue growth of $58 million or 9% to $692 million for the nine months ended September 30, 2023 from $634 million for the nine months ended September 30, 2022. The growth for the nine

month period was ~~primarily due~~also attributed to ~~increased deliveries~~our naval power and propulsion business but was partially offset by the non-recurring impact of ~~$17 million~~the contract modification on ~~our force protection programs highlighted by newly awarded short range air defense programs.~~the Columbia program realized in the prior year.

Adjusted EBITDA and Adjusted EBITDA Margin:

IMS’s Adjusted EBITDA increased by $3$12 million or ~~20%~~55% to ~~$18 million for three months ended March 31, 2021 from $15~~$34 million for the three months ended ~~March 31, 2020. This was primarily due to increased revenue and related operational leverage generated by progress on force protection programs noted above.~~

~~Bookings:~~

~~Bookings increased by $56 million or 34% for the three months ended March 31, 2021 to $222 million~~September 30, 2023 from ~~$166~~$22 million for the three months ended ~~March 31, 2020.~~September 30, 2022. The increase for the quarter is attributed to operational leverage created by the increased revenue output as well as continued program improvement on our Columbia Class submarine program. This drove Adjusted EBITDA margin up 270 bps to 12.3% compared to the 9.6% realized during the three month period ended September 30, 2022.

For the nine months ended September 30, 2023, Adjusted EBITDA decreased $1 million or 1% to $72 million from $73 million for the nine months ended September 30, 2022. This was primarily due to the favorable financial impact realized from the 2nd ship-set contract modification on the Columbia program realized in the first quarter of 2022 ($25 million) largely offset by increased ~~bookings~~revenue contribution and the related operational leverage.

Bookings:

Booking contributions increased by $61 million and $78 million or 35.1% and 10.7% for the three and nine months ended September 30, 2023, respectively, to $235 million and $809 million from $174 million and $731 million for the three and nine months ended September 30, 2022, respectively. The increase for the quarter is largely attributed to our force protection ~~products when compared~~efforts in short range air defense and logistic support programs. For the year to date period the ~~three months ending March 31, 2020.~~bookings performance is largely attributed to continued funding progress on our Electronic Power & Propulsion contracts.

Liquidity and Capital Resources

We endeavor to ensure the most efficient conversion of operating income into cash for deployment in our business and to maximize ~~shareholder~~stockholder value through cash deployment activities. In addition to our cash position, we use various financial measures to assist in capital deployment decision-making, including cash provided by operating activities and free cash flow, a non-GAAP measure described in more detail below. We believe that the combination of our existing cash, access to credit facilities as described in~~Not~~e 1 0 : Note 11: Debt and future cash that we expect to generate from our operations will be sufficient to meet our short and long-term liquidity needs. There can

be no assurance, however, that our business will continue to generate cash flow at current levels or that anticipated operational improvements will be achieved. We may also pursue acquisitions or other strategic priorities that will require additional liquidity beyond the liquidity we generate through our operations. Our cash balance as of ~~March 31, 2021,~~September 30, 2023, was ~~$30~~$47 million compared to ~~$61~~$306 million as of December 31, ~~2020.~~2022.

The following table summarizes our cash flows for the periods presented:


		Three Months Ended March 31,					Nine Months Ended September 30,
(Dollars in millions)	(Dollars in millions)	2021		2020		(Dollars in millions)	2023		2022
Net cash used in operating activities	Net cash used in operating activities	$	(249)	$	(296)	Net cash used in operating activities	$	(310)	$	(246)
Net cash provided by investing activities		102		83
Net cash provided by financing activities		116		172
Net cash (used in) provided by investing activities						Net cash (used in) provided by investing activities	(42)		448
Net cash provided by (used in) financing activities						Net cash provided by (used in) financing activities	93		(379)
Effect of exchange rate changes on cash and cash equivalents	Effect of exchange rate changes on cash and cash equivalents	—		—		Effect of exchange rate changes on cash and cash equivalents	—		—
Net increase (decrease) in cash and cash equivalents		$	(31)	$	(41)
Net decrease in cash and cash equivalents						Net decrease in cash and cash equivalents	$	(259)	$	(177)
Free cash flow(1)	Free cash flow(1)	$	(262)	$	(309)	Free cash flow(1)	$	(335)	$	(262)

________________

(1)Free cash flow is a Non-GAAP measure. The reasons we use this Non-GAAP financial measure and its reconciliation to the most directly comparable U.S. GAAP financial measure is provided above under “—Key Financial and Operating Measures—Non-GAAP Financial Measures.”

Operating Activities

Cash ~~flows~~usage related to the operating activities ~~improved~~increased by ~~$47~~$64 million from ~~$(296)~~$246 million for the ~~three~~nine months ended ~~March 31, 2020~~September 30, 2022 to ~~$(249)~~$310 million for the ~~three~~nine months ended ~~March 31, 2021.~~September 30, 2023. This was primarily due to ~~higher net income as described above excluding non-cash items and a decrease in~~ cash used to fund working capital for the ~~three~~nine months ended ~~March 31, 2021~~September 30, 2023 when compared to ~~three month~~the nine months ended ~~March 31, 2020.~~September 30, 2022. The increased working capital was driven by incremental tax payments associated with the R&D capitalization requirements of Section 174 of the Tax Code coupled with incremental investments in inventory and contract assets to combat supply chain lead-times.

Investing Activities

Net cash ~~provided by~~used in investing activities increased by ~~$19~~$490 million for the ~~three~~nine months ended ~~March 31, 2021~~September 30, 2023 when compared to the ~~three~~nine months ended ~~March 31, 2020. The increase was~~September 30, 2022 primarily ~~attributable~~due to ~~an increase~~the prior year investing cash inflow generated from the disposition of ~~$15 million in the amount of the advance being repaid by US Holding.~~our GES and AAC operations.

Financing Activities

Net cash provided by financing activities ~~decreased~~increased by ~~$56~~$472 million for the ~~three~~nine months ended ~~March 31, 2021 versus March 31, 2020.~~September 30, 2023 compared to the nine months ended September 30, 2022. The ~~decrease~~increase was primarily related to ~~a decrease~~the dividend of our disposition proceeds to US Holding in the ~~net borrowings under or revolving credit facility due to improvements in profitability and working capital management as compared to the three months ended March 31, 2020.~~prior year.

Free Cash Flow

Free cash flow usage increased by ~~$47~~$73 million to ~~$(262)~~$335 million for ~~three month~~nine months ended ~~March 31, 2021~~September 30, 2023 from ~~$(309)~~$262 million for the ~~three~~nine months ended ~~March 31, 2020.~~September 30, 2022. This was primarily due to ~~the impact of higher net income as stated above of $19 million (excluding non cash items) and decrease in~~ cash used ~~to fund working capital~~in operating activities noted above for the ~~three~~nine months ended ~~March 31, 2021~~September 30, 2023 when compared to ~~three~~the nine months ended ~~March 31, 2020~~September 30, 2022.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK

Equity Risk

We currently have limited risk related to fluctuations in marketable securities. Outside of pension assets which are disclosed in Note ~~11:~~12: Pension and Other Postretirement Benefits to the Consolidated Financial Statements, the only investments the Company holds are overnight money market accounts. Fluctuations are unlikely and would have limited impact on the financial statements of the Company.

Interest Rate Risk

We are exposed to interest rate risk on variable-rate borrowings under our $225 million Term Loan A and our revolving credit facilities under which we had an outstanding balance of ~~$125~~$217 million and $110 million, respectively, as of ~~March 31, 2021. Our remaining~~September 30, 2023. A 0.5% increase or decrease in our weighted average interest rate on our variable debt ~~facilities are fixed rate obligations and not subject to fluctuations~~outstanding as of September 30, 2023 would result in an increase or decrease in our annual interest ~~rates.~~expense of approximately $2 million. The carrying values of the Company’s borrowings under the 2022 Credit Facility approximate their fair values at September 30, 2023. For additional information please refer to Note ~~10.~~11: Debt.

Foreign Currency Risk

In certain circumstances, we may be exposed to foreign currency risk. However, as the overwhelming majority of our revenue is derived from U.S. sources directly as a prime contractor or indirectly as a subcontractor for the U.S. government as end-customer, we have limited foreign currency exposure. Currently, our exposure is primarily with the Canadian dollar and limited to receivables owed of ~~$33~~$39 million as of ~~March 31, 2021.~~September 30, 2023. A 10% fluctuation in exchange rates would not have a material impact on our financial statements. We do not enter into or issue derivative instruments for trading purposes.

Inflation Risk

We have generally been able to anticipate increases in costs when pricing our contracts. Bids for longer-term firm fixed-price contracts typically include assumptions for labor and other cost escalations in amounts that historically have been sufficient to cover cost increases over the period of performance.

We have seen impacts due to inflation on isolated programs. These have largely been offset with our internal continuous improvement savings initiatives and improved program performance.

~~Item~~ITEM 4. ~~Controls and Procedures~~CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the quarterly period ended ~~March 31, 2021,~~September 30, 2023, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange ~~Act.~~Act of 1934, as amended. Based on this evaluation, our principal executive officer and principal financial officer has concluded that during the period covered by this report, our disclosure controls and procedures were effective.

Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the quarterly period ended ~~March 31, 2021~~September 30, 2023 covered by this Quarterly Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. ~~Legal Proceedings~~LEGAL PROCEEDINGS

For information relating to legal proceedings, see Note 13 14to the unaudited Consolidated Financial Statements in Part 1, Item 1.

ITEM 1A. ~~Risk Factors~~RISK FACTORS

We are susceptible to a security breach, through cyber-attack, cyber-intrusion, insider threats or otherwise, and to other significant disruptions of our IT networks and related systems, or those of our customers, suppliers, vendors, subcontractors, partners, or other third parties.

We are subject to the risks of cybersecurity incidents described in the section “Risk Factors—We are susceptible to a security breach, through cyber-attack, cyber-intrusion, insider threats or otherwise, and to other significant disruptions of our IT networks and related systems or of those we operate for our customers” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022. These risk include that safeguards put in place by third parties, including our customers, subcontractors, suppliers, vendors and partners, may not be effective to minimize the impact of cyber threats, security threats or other business disruptions. From time to time, these third parties have been and continue to be subject to breaches. For example, we are currently taking measures in response to a cyber-attack by a malicious actor impacting one of our suppliers. While this incident has not had a material impact on us at this time, our responses to this and similar incidents may disrupt our business relationships and could negatively affect our operations. Although we have processes designed to assess and confirm certain cybersecurity standards, we are and will remain at risk of a data breach due to the intentional or unintentional non-compliance by a third party’s employee or agent or the break-down of a third party’s data protection processes, which may not be as sophisticated as ours, or a cyber-attack on a third party’s information network or systems. There can be no assurance that cybersecurity incidents at our customers, suppliers, vendors, subcontractors, partners or other third parties will not have a material negative impact on our reputation, business and operations.

Our international business exposes us to additional risks, including risks related to geopolitical and economic factors, laws and regulations.

For the nine months ended September 30, 2023 and 2022, approximately 9% and 8%, respectively, and for the years ended December 31, 2022, 2021, and 2020, approximately 7%, 5% and 8%, respectively, of our revenue was derived from sales to customers located in foreign countries and foreign governments. We cannot assure you that we will maintain significant operations internationally or that any such operations will be successful. International business (including our participation in joint ventures and other joint business arrangements) is subject to numerous political and economic factors, legal requirements, cross-cultural considerations and other risks associated with doing business globally. These risks differ in some respects from those associated with our U.S. business and our exposure to such risks may increase if our international business continues to grow.

Our international business is subject to both U.S. and foreign laws and regulations, which may include, without limitation, laws and regulations relating to import-export controls (such as the ITAR, EAR, and customs laws), tariffs, embargoes, technology transfer restrictions, government contracts and procurement, data privacy and protection, investment, exchange rates and controls, the FCPA and other anti-corruption laws, including the UK Bribery Act and the Canadian Corruption of Foreign Public Officials Act, Article 5 of the Israeli Penal Law of 1977, the anti-boycott provisions under the EAR, U.S. economic sanctions administered by the Office of Foreign Assets Control and other federal agencies, labor and employment, works councils and other labor groups, anti-human trafficking, taxes, environment, immunity, security restrictions and intellectual property. If we or our employees, affiliates, partners or others with whom we work fail to comply with applicable laws and regulations we may be subject to administrative, civil, commercial or criminal penalties and liabilities, including suspension or debarment from government contracts or suspension of our export privileges. Our international business also exposes us to difficulties associated with repatriating cash generated or held abroad in a tax-efficient manner and changes in tax laws. Our customers outside of the U.S. generally have the ability to terminate contracts for default based on performance. Suspension or debarment, or termination of a contract due to default, in particular, could have a material adverse effect on our reputation, our ability to compete for other contracts and our financial position, results of operations and/or cash flows. New regulations and requirements, or changes to existing ones in the various countries in which we operate can significantly increase our costs and risks of doing business internationally. Any such future violations could have a material adverse impact on our reputation, business, results of operations and financial condition.

Changes in laws, regulations, political leadership and environment, or security risks may significantly affect our ability to conduct or continue to conduct business in international markets. Our international business may be impacted by changes in U.S. and foreign national policies and priorities, and geopolitical relationships, any of which may be influenced by changes in the threat environment, political leadership, geopolitical uncertainties, world events, acts of terrorism, bilateral and multi-lateral relationships, government budgets, and economic and political factors more generally, and any of which could impact funding for programs, alter export authorizations, or delay purchasing decisions or customer payments. These changes may affect the defense spending priorities and procurement policies of foreign governments which may affect our international military sales.

The Company is subject to risks associated with a dynamic geopolitical climate, including nation states that could take action to limit our access to key material and subcomponents used in our products. Recently enacted export controls by foreign governments covering rare elements could have a material adverse impact on our business, financial condition and results of operations.

Global economic conditions and fluctuations in foreign currency exchange rates could further impact our business. For example, the tightening of credit in financial markets outside of the U.S. could adversely affect the ability of our customers and suppliers to obtain financing and could result in a decrease in or cancellation of orders for our products and services or impact the ability of our customers to make payments. In addition, the majority of our foreign costs are denominated in local currencies. Over time, an increasing portion of our contracts with paid customers outside of the United States may be denominated in local currencies. Therefore, fluctuations in the value of the U.S. dollar and foreign currencies may affect our results of operations when translated into U.S. dollars. We do not currently engage in currency-hedging activities to limit the risk of exchange rate fluctuations. However, in the future, we may use derivative instruments, such as foreign currency forward and option contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates. The use of such hedging activities may not offset any or more than a portion of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place. Moreover, the use of hedging instruments may introduce additional risks if we are unable to structure effective hedges with such instruments.

Our contracts with non-U.S. customers may also include terms and reflect legal requirements that create additional risks including the risk of non-payment or delayed payment by foreign customers and governments. They may include industrial cooperation agreements requiring specific in-country purchases, investments, manufacturing agreements or other operational or financial obligations, including offset obligations, and provide for significant penalties if we fail to meet such requirements. They may also require us to enter into letters of credit, performance or surety bonds, bank guarantees and/or other financial arrangements to secure our performance obligations. We also increasingly are dependent on in-country suppliers and we face risks related to their failure to perform in accordance with the contracts and applicable laws, particularly where we rely on a sole source supplier. Our ability to sell products outside the U.S. could be adversely affected if we are unable to design our products for export on a cost-effective basis or to obtain and retain all necessary export licenses and authorizations on a timely basis.

Conducting business outside of the U.S. also exposes us to the complexity and necessity of using, and disruptions involving, our international dealers, distributors, sales representatives and consultants as well as the difficulties of managing a geographically dispersed organization and culturally diverse workforces, including compliance with applicable U.S. and local laws and practices, such as anti-corruption and anti-trust/competition laws. Contracts with international customers are significantly different than the contracts with our U.S. customers, and some are more complex and require different skills to manage. Our ability to conduct business outside of the U.S. also depends on our ability to attract and retain sufficient qualified personnel with the skills and/or security clearances in the markets in which we do business.

The products and services we provide internationally, including those provided by subsidiaries, subcontractors and joint ventures in which we have an interest, are sometimes in countries with unstable governments, economic or fiscal challenges, military or political conflicts and/or developing legal systems. This may increase the risk to our employees, subcontractors or other third parties, and/or increase the risk of a wide range of liabilities, as well as loss of property or damage to our products.

We are also closely monitoring developments in the war between Israel and Hamas that began on October 7, 2023. At this time, the conflict has the potential to evolve quickly creating uncertainty in the broader Middle East region, along with the potential for disruptions to our Israeli operations in the region including, but not limited to workforce calls for duty, transportation and other logistical impacts and reduced customer confidence.

The occurrence and impact of these factors is difficult to predict, but one or more of them could negatively impact our business, financial condition and results of operations.

As of the date of this Quarterly Report, there have been no other material changes to the risk factors discussed under “Risk Factors” in Part 1, Item 1A of our ~~registration statement~~Annual Report on Form ~~S-1, as amended (Registration No. 333-253583), which was declared effective by~~10-K for the year ended December 31, 2022, filed with the SEC on March ~~23, 2021.~~28, 2023.

ITEM 2. ~~Unregistered Sales of Equity Securities and Use of Proceeds~~UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES

None.

ITEM 3. ~~Defaults Upon Senior Securities~~DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. ~~Mine Safety Disclosures~~MINE SAFETY DISCLOSURES

Not Applicable

ITEM 5. ~~Other Information~~OTHER INFORMATION

~~None.~~(c) Furnish the information required by Item 408(a) of Regulation S-K (17 CFR 229.408(a)).

During the three months ended September 30, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

4446

ITEM 6. Exhibits


Exhibit Number						Exhibit Description
~~3.1~~99.1†						~~Amended and Restated Certificate of Incorporation of Leonardo DRS, Inc.~~ ~~(incorporated by reference to Exhibit 3.3 to Leonardo DRS’s registration statement on Form S-1 (Registration No. 333-253583), filed with the SEC on March 22, 2021)~~
~~3.2~~						~~Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Leonardo DRS, Inc.~~
~~3.3~~						~~Amended and Restated Bylaws of Leonardo DRS, Inc.~~ ~~(incorporated by reference to Exhibit 3.4 to Leonardo DRS’s registration statement on Form S-1 (Registration No. 333-253583), filed with the SEC on March 22, 2021)~~
~~10.1~~						~~Commitment Letter re~~ Leonardo DRS, Inc. ~~Commitment to Mitigate Foreign Ownership, Control or Influence,~~Incentive -Based Compensation Recoupment ~~by and among Leonardo DRS, Inc.~~Policy , ~~Leonardo US Holding, Inc., Leonardo – Societá per azioni and the U.S. Department of Defense~~effective October 2, 2023 ~~(incorporated by reference to Exhibit 10.3 to Leonardo DRS’s registration statement on Form S-1 (Registration No. 333-253583), filed with the SEC on March 22, 2021)~~
~~10.2†~~31.1						~~Leonardo DRS Incentive Compensation Plan~~ ~~(incorporated by reference to Exhibit 10.8 to Leonardo DRS’s registration statement on Form S-1 (Registration No. 333-253583), filed with the SEC on March 22, 2021)~~
~~31.1~~						Certification by principal executive officerpursuant to Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2						Certification by principal financial officerpursuant to Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1						Certification by principal executive officerpursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2						Certification by principal financial officerpursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*101.INS						XBRL Instance Document – the instance document does not appear on the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH*101.SCH						XBRL Taxonomy Extension Schema Document
101.CAL*101.CAL						XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*101.DEF						XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*101.LAB						XBRL Taxonomy Extension Label Linkbase Document
101.PRE*101.PRE						XBRL Taxonomy Extension Presentation Linkbase Document
104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

† Identifies each management contract or compensatory plan or arrangement.

~~_______________~~

*~~To be filed by amendment.~~

†~~Identifies each management contract or compensatory plan or arrangement.~~

4547

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: ~~May 17, 2021~~November 2, 2023


LEONARDO DRS, INC.


By:			/s/ William J. Lynn III
			Name: William J. Lynn III
			Title: Chief Executive Officer

4648


							March 31, 2021 vs. March 31,2020
(Dollars in millions, except per share amounts)	March 31, 2021			March 31, 2020			$			%
Total revenues	$	681		$	583		$	98		16.8	%
Total cost of revenues	(545)			(477)			(68)			14.3	%
Gross profit	$	136		$	106		30			28.3	%
Gross margin	20.0		%	18.2		%	1.8		%	9.8	%
General and administrative expenses	(79)			(68)			(11)			16.2	%
Amortization of intangibles	(2)			(2)			—			—	%
Other operating expenses, net	(4)			(1)			(3)			300.0	%
Operating earnings	$	51		$	35		16			45.7	%
Interest expense	(9)			(15)			6			(40.0)	%
Other, net	(1)			(7)			6			(85.7)	%
Earnings before taxes	$	41		$	13		28			215.4	%
Income tax provision	12			3			9			300.0	%
Net earnings	$	29		$	10		19			190.0	%
Shares outstanding(1)	145			145			$	—		—	%
Basic EPS(1)	$	0.20		$	0.07		$	0.13		190.0	%
Diluted EPS(1)	$	0.20		$	0.07		$	0.13		190.0	%
Adjusted EPS(1,2)	$	0.25		$	0.07		$	0.18		260.0	%
Adjusted EBITDA(2)	$	71		50			21			42.0	%
Adjusted EBITDA Margin(2)	10.4		%	8.6		%	1.8		%	21.6	%
Backlog(2)	$	3,291		2,945			346			11.7	%
Bookings(2)	715			678			38			5.6	%
Free cash flow(2)	$	(262)		$	(309)		$	47		(15.2)	%