10-Q

`

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 September 30, 2022

☐     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 333-266494

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

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.

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 November 7, 2022, there were 145 million 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	3
Consolidated Balance Sheets	4
Consolidated Statements of Cash Flows	5
Consolidated Statements of Shareholder’s Equity	6
Notes to Consolidated Financial Statements	7
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk	46
ITEM 4. Controls and Procedures	48
PART II. Other Information	49
ITEM 1. Legal Proceedings	49
ITEM 1A. Risk Factors	50
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	50
ITEM 3. Defaults Upon Senior Securities	50
ITEM 4. Mine Safety Disclosures	50
ITEM 5. Other Information	50
ITEM 6. Exhibits	51
Signatures	52

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION

This quarterly report on Form 10-Q (the “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;

i

•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”);

•The coronavirus pandemic (“COVID-19”) and related impacts on our business, financial condition and results of operations;

•Our mix of fixed-price, cost-plus and time-and-material type contracts, which could subject us to losses due to cost overruns or a significant increase in or sustained period of increased inflation;

•Our dependence on U.S. government contracts, which often are only partially funded and are subject to immediate termination, 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 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 our key suppliers to timely deliver our components, parts or services;

•Any failure to meet our contractual 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 intrusion, insider threat, or other significant disruption of our IT networks and related systems 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;

•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;

ii

•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;

•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”);

•Natural disasters or other significant disruptions; or

•Any conflict of interest that may arise because Leonardo US Holding, LLC (“US Holding”), our sole shareholder, or Leonardo S.p.A., our ultimate parent, may have interests that are different from those of our other shareholders, 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.

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 Annual Report on Form 10-K for the year end December 31, 2021, filed with the SEC on March 28, 2022 (our “Annual Report”) and Part II, Item 1A of our Quarterly Report for the quarter ended June 30, 2022, filed with the SEC on August 15, 2022 (our “Second Quarter Form 10-Q”), could cause our actual results to differ materially from those projected in any forward-looking statements we make. Readers should 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

PART I. FINANCIAL INFORMATION

ITEM 1. UNAUDITED FINANCIAL STATEMENTS

Consolidated Statements of Earnings (Unaudited)

	Three Months Ended September 30,
(Dollars in millions, except per share amounts)	2022		2021
Revenues:
Products	$	580	$	606
Services	54		114
Total revenues	634		720
Cost of revenues:
Products	(461)		(495)
Services	(43)		(94)
Total cost of revenues	(504)		(589)
Gross profit	130		131
General and administrative expenses	(101)		(73)
Amortization of intangibles	(3)		(3)
Other operating income (expenses), net	350		(2)
Operating earnings	376		53
Interest expense	(9)		(9)
Other, net	—		(1)
Earnings before taxes	367		43
Income tax provision	88		8
Net earnings	$	279	$	35
Net earnings per share from common stock:
Basic and diluted earnings per share:	$	1.92	$	0.24

See accompanying Notes to Consolidated Financial Statements.

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LEONARDO DRS, INC.    

Consolidated Statements of Earnings (Unaudited)

	Nine Months Ended September 30,
(Dollars in millions, except per share amounts)	2022		2021
Revenues:
Products	$	1,670	$	1,738
Services	203		321
Total revenues	1,873		2,059
Cost of revenues:
Products	(1,328)		(1,425)
Services	(154)		(240)
Total cost of revenues	(1,482)		(1,665)
Gross profit	391		394
General and administrative expenses	(261)		(225)
Amortization of intangibles	(7)		(7)
Other operating income (expenses), net	351		(7)
Operating earnings	474		155
Interest expense	(27)		(27)
Other, net	—		(1)
Earnings before taxes	447		127
Income tax provision	107		31
Net earnings	$	340	$	96
Net earnings per share from common stock:
Basic and diluted earnings per share:	$	2.34	$	0.66

See accompanying Notes to Consolidated Financial Statements.

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LEONARDO DRS, INC.    

Consolidated Statements of Comprehensive Income (Unaudited)

	Three Months Ended September 30,
(Dollars in millions)	2022		2021
Net earnings	$	279	$	35
Other comprehensive income (loss):
Foreign currency translation gain (loss), net of income taxes	(3)		(3)
Net unrecognized gain (loss) on postretirement obligations, net of income taxes	—		(2)
Gain from pension settlements	—		—
Other comprehensive income (loss), net of income tax	(3)		(5)
Total comprehensive income	$	276	$	30

See accompanying Notes to Consolidated Financial Statements.

	Nine Months Ended September 30,
(Dollars in millions)	2022		2021
Net earnings	$	340	$	96
Other comprehensive income (loss):
Foreign currency translation gain (loss), net of income taxes	(3)		—
Net unrecognized gain (loss) on postretirement obligations, net of income taxes	1		7
Gain from pension settlements	3		—
Other comprehensive income (loss), net of income tax	1		7
Total comprehensive income	$	341	$	103

See accompanying Notes to Consolidated Financial Statements.

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LEONARDO DRS, INC.    

Consolidated Balance Sheets

	(Unaudited)
(Dollars in millions, except per share amounts)	September 30, 2022		December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents	$	63	$	240
Accounts receivable, net	170		156
Contract assets	913		743
Inventories	246		205
Other current assets	39		45
Total current assets	1,431		1,389
Noncurrent assets:
Property, plant and equipment, net	362		364
Intangible assets, net	45		52
Goodwill	952		1,071
Deferred tax assets, net	49		56
Other noncurrent assets	92		137
Total noncurrent assets	1,500		1,680
Total assets	$	2,931	$	3,069
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Short-term borrowings and current portion of long-term debt	$	67	$	41
Accounts payable	285		479
Contract liabilities	195		174
Other current liabilities	365		295
Total current liabilities	912		989
Noncurrent liabilities:
Long-term debt	350		352
Pension and other postretirement benefit plan liabilities	56		61
Other noncurrent liabilities	75		74
Total noncurrent liabilities	$	481	487
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	(3,039)		(2,983)
Accumulated other comprehensive loss	(57)		(58)
Total shareholder's equity	1,538		1,593
Total liabilities and shareholder's equity	$	2,931	$	3,069

See accompanying Notes to Consolidated Financial Statements.

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LEONARDO DRS, INC.    

Consolidated Statements of Cash Flows (Unaudited)

	Nine Months Ended September 30,
(Dollars in millions)	2022		2021
Operating activities
Net earnings	$	340	$	96
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization	48		44
Deferred income taxes	10		33
Gain from sale of business	(350)		—
Other	—		(1)
Changes in assets and liabilities:
Accounts receivable	(17)		6
Contract assets	(174)		(116)
Inventories	(43)		32
Other current assets	(2)		23
Other noncurrent assets	10		19
Defined benefit obligations	(4)		(12)
Other current liabilities	83		(7)
Other noncurrent liabilities	(3)		(18)
Accounts payable	(180)		(193)
Contract liabilities	36		(17)
Net cash used in operating activities	$	(246)	$	(111)
Investing activities
Capital expenditures	(35)		(42)
Business acquisitions, net of cash acquired	—		(14)
Proceeds from sales of businesses	483		—
Repayments received on related party note receivable	—		115
Investment in unconsolidated affiliate	—		(1)
Net cash provided by investing activities	$	448	$	58
Financing activities
Net decrease in third party borrowings (maturities of 90 days or less)	(12)		(4)
Repayment of related party debt	(640)		(725)
Borrowings from related parties	675		800
Dividend to US Holding	(396)		—
Other	(6)		(1)
Net cash provided by financing activities	$	(379)	$	70
Effect of exchange rate changes on cash and cash equivalents	—		—
Net change in cash and cash equivalents	$	(177)	$	17
Cash and cash equivalents at beginning of year	240		61
Cash and cash equivalents at end of period	$	63	$	78

See accompanying Notes to Consolidated Financial Statements.

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LEONARDO DRS, INC.    

Consolidated Statements of Shareholder’s 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, 2020	$	1	$	4,633	$	(70)	$	(3,137)	$	1,427
Total comprehensive income	—		—		7		96		103
Balance as of September 30, 2021	$	1	$	4,633	$	(63)	$	(3,041)	$	1,530
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

See accompanying Notes to Consolidated Financial Statements.

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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 is controlled by Leonardo S.p.A (hereinafter, “Leonardo S.p.A.,” or “the Parent”), an Italian multi-national aerospace, defense and security company headquartered in Rome, Italy, through its ownership of Leonardo US Holding, LLC (“US Holding”). US Holding is the direct and sole shareholder of the Company.

DRS is a provider of defense products and technologies that are used across land, air, sea, space and cyber domains. Our diverse array of defense systems and solutions are offered to all branches of the U.S. military, major aerospace and defense prime contractors, government intelligence agencies, international military customers and industrial markets for deployment on a wide range of military platforms. We focus our capabilities in areas of critical importance to the U.S. military, such as advanced sensing, network computing, force protection and electrical power and propulsion.

These capabilities directly align with our two reportable segments: Advanced Sensing and Computing and Integrated Mission Systems. The U.S. Department of Defense (“DoD”) is our largest customer and accounts for approximately 83% and 82% of our total revenues as an end-user for the third quarter and nine months of 2022, respectively, and 84% and 85% for the third quarter and nine months of 2021, respectively. Specific international and commercial market opportunities exist within these segments and make up approximately 17% and 18% of our total revenues for the third quarter and nine months of 2022, respectively, and 16% and 15% for the third quarter and nine months of 2021, respectively. Our two reportable segments reflect the way performance is assessed and resources are allocated by our Chief Executive Officer, who is our chief operating decision maker (“CODM”).

Advanced Sensing and Computing (“ASC”)

The ASC segment provides sensing and computing system and subsystem solutions to the U.S. military and allied nations focused on solving the most complex threat dynamics facing our service men and women today. We provide world class sensing products in all warfighting domains along with the computation systems to provide situational understanding.

Our technologies and products are deployed on nearly all military platforms across land, sea, air, cyberspace, and space on individual soldiers, ground vehicles, ships, aircraft, and satellites. We have market leading capabilities in electro-optic and infrared imaging, advanced lasers, electronic warfare and cyber, communications, and computing in these domains.

Integrated Mission Systems (“IMS”)

The IMS segment provides critical force protection, platform integration, transportation and logistics and power conversion and propulsion systems to the U.S. military and its allies. Our force protection systems provide much needed protection for our service members and military assets from evolving and proliferating threats and include advanced solutions for counter-unmanned aerial systems, short-range air defense systems and active protection systems on ground vehicles. 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 and its allies.

Other

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

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LEONARDO DRS, INC.    

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

See Note 15: 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 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 (“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, 2021 filed as Exhibit 99.1 to the Current Report on Form 8-K filed on August 2, 2022.

C.Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. 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

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 measured by the ratio of cumulative costs incurred to date to estimated total contract costs at completion (the "cost-to-cost method"). On certain other contracts, primarily time and material (“T&M”) and cost-plus contracts, revenue is recognized using the right-to-invoice practical expedient as we are contractually able to bill our customer based on control transferred to the customer. See Note 2. Revenue from Contracts with Customers for additional information regarding revenue recognition.

E.Cost of Revenues

Cost of revenues includes materials, labor and overhead costs incurred in the manufacturing, design, and provision of products and services sold in the period as well as warranty costs. Material costs include raw materials, purchased components and sub-assemblies, outside processing and inbound freight costs. Labor and overhead costs consist of direct and indirect manufacturing costs, including wages and fringe benefits, operating supplies, depreciation and amortization, occupancy costs, and purchasing, receiving and inspection costs.

F.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 products, solutions, and technologies. R&D costs include basic research, applied research, concept formulation studies,

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LEONARDO DRS, INC.    

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

design, development, and related test activities. IR&D costs are allocated to customer contracts as part of the general and administrative overhead costs and generally recoverable on our customer contracts with the U.S. Government. Customer-funded R&D costs are charged directly to the related 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 third quarter and first nine months of 2022 and 2021 were immaterial to the Company's results of operations. The operations of the Company's foreign subsidiaries are translated from the local (functional) currencies into U.S. dollars using weighted average rates of exchange during each monthly period. The rates of exchange at each balance sheet date are used for translating certain balance sheet accounts and gains or losses resulting from these translation adjustments are included in the accompanying Consolidated Balance Sheets as a component of 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. We maintain an allowance recorded in the Allowance for Credit Losses account that is estimated and recorded utilizing relevant information about past events, including historical experience, current conditions and a reasonable and supportable forecast that affects the collectability of the related financial asset. 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 Sheets, and the net gain or loss is included in the determination of net earnings. Maintenance and repairs are charged to operations as incurred and renewals and improvements are capitalized. See Note 5: Property, Plant and Equipment for additional information regarding property, plant and equipment.

L.Goodwill

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 six and seven reporting units at September 30, 2022 and December 31, 2021, respectively. The annual impairment test is conducted as of December

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LEONARDO DRS, INC.    

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

31. The Company did not identify any triggering events during the nine months ended September 30, 2022 or September 30, 2021. 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 Sheets 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 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

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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.

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 financial 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 of observable inputs and minimize the use of unobservable inputs in measuring fair value, and to utilize a three-level fair value

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hierarchy that prioritizes the inputs used to measure fair value. The three hierarchical levels used to measure fair value are as follows:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs other than quoted prices that are directly or indirectly observable.

Level 3 — Significant inputs to the valuation model are unobservable.

In certain instances, fair value is determined through information obtained from third parties using the latest available market data. In obtaining such data from third parties, we have evaluated the methodologies used to develop the estimate of fair value in order to assess whether such valuations are representative of fair value. The Company categorizes plan assets for disclosure purposes in accordance with this fair value hierarchy. 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 Sheets at carrying value, which other than the 7.5% Term loan due November 30, 2023, 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, which requires that any assets acquired and liabilities assumed be measured at their respective fair values on the acquisition date. The accounting for business combinations requires the Company to make significant judgments and estimates. Any excess of the fair value of consideration transferred over the assigned values of the net assets acquired is recognized as goodwill.

As previously announced, on June 21, 2022, we entered into the Agreement and Plan of Merger, dated as of June 21, 2022 (the “merger agreement”), by and among the Company, RADA Electronic Industries Ltd (“RADA”) and Blackstart Ltd, a company organized under the laws of the State of Israel and a wholly owned subsidiary of DRS (“Merger Sub”). Upon the terms and subject to the conditions of the merger agreement, and in accordance with the Companies Law, 5759-1999, of the State of Israel, at the effective time of the merger contemplated by the merger agreement (the “merger”), Merger Sub will be merged with and into RADA, with RADA as the surviving company of the merger and thereby becoming a wholly owned subsidiary of DRS. At the effective time of the merger (the “effective time”), each ordinary share of RADA, par value New Israeli Shekel 0.03 per share (“RADA shares”), issued and outstanding immediately prior to the effective time will be converted into and become exchangeable for one share of common stock of DRS, par value $0.01 per share (“DRS common stock”). Immediately prior to the effective time, the shares of DRS common stock held by US Holding, the current sole stockholder of DRS, will be split (rounded up to the nearest whole share), as necessary, such that, immediately following the effective time and the issuance of the shares of DRS common stock to holders of RADA shares and the treatment of options to purchase RADA shares: (A) US Holding will hold 80.5% of the issued and outstanding shares of DRS common stock on a fully diluted basis (with US Holding’s ownership percentage including 50% of any awards or other equity interests that DRS may issue pursuant to entitlements under any grants of certain one-time special awards of restricted stock units (the “One-Time Awards”) and the foregoing percentage calculation excluding any awards or other equity interests that DRS may issue pursuant to entitlements under the DRS’s long term incentive plan and 50% of any awards or other equity interests that DRS may issue pursuant to entitlements in

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connection with any grants of One-Time Awards, and such foregoing percentage will assume a reference price for RADA options equal to the volume-weighted average price of the RADA shares on the NASDAQ for the ten trading days immediately prior to the closing date); and (B) the holders of RADA shares, RADA vested options and RADA unvested options (or DRS options issued pursuant to the provisions of the merger agreement) will hold or have entitlements to 19.5% of the issued and outstanding shares of DRS common stock on a fully diluted basis (the foregoing percentage calculation excluding any awards or other equity interests that DRS may issue pursuant to entitlements under the DRS long-term incentive plan or the issuance of any One-Time Awards). Each of DRS’s and RADA’s obligation to consummate the merger is subject to the satisfaction or waiver of a number of conditions specified in the merger agreement.

On August 3, 2022, we filed a registration statement on Form S-4 with the SEC for the shares of DRS common stock to be issued in the merger, which (as amended) was declared effective by the SEC on September 13, 2022. On October 19, 2022, RADA’s shareholders voted to approve the transaction, and on October 24, 2022, we received the required approval from the Committee on Foreign Investment in the United States (CFIUS). We anticipate closing near the end of November or early December 2022.

Investments

Investments where we have the ability to exercise significant influence, but do not control, are accounted for under the equity method of accounting and are included in other noncurrent assets on our Consolidated Balance Sheets. Significant influence typically exists if we have a 20% to 50% ownership interest in the investee. Under this method of accounting, our share of the net earnings or losses of the investee is included in operating profit in other income, net on our Consolidated Statements of Earnings since the activities of the investee are closely aligned with the operations of the business segment holding the investment. We evaluate our equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may be impaired. If a decline in the value of an equity method investment is determined to be other than temporary, a loss is therefore recorded during the current period. The Company sold its interest in its only investment accounted for under the equity method on July 8, 2022.

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

Variable Interest Entities

The Company occasionally forms joint ventures and/or enters into arrangements with special purpose limited liability companies for the purpose of bidding and executing on specific projects. The Company analyzes each such arrangement to determine whether it represents a variable interest entity (“VIE”). If the arrangement is determined to be a VIE, the Company assesses whether it is the primary beneficiary of the VIE and if it is, consequently required to consolidate the VIE. The Company did not have any investment in VIEs for the periods presented.

Divestitures

On March 21, 2022, the Company entered into a definitive agreement to sell its Global Enterprise Solutions (“GES”) business to SES Government Solutions, Inc., a wholly-owned subsidiary of SES S.A., for a selling price of $450 million subject to certain working capital adjustments. The transaction was completed on August 1, 2022 and resulted in cash proceeds of $427 million after net working capital adjustments. The transaction netted an aggregate pretax gain net of transaction costs of $305 million ($234 million after tax) of which $319 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 $71 million. GES, which was part of the ASC segment, provides commercial satellite communications to the U.S. Government and delivers satellite communications and security solutions to customers worldwide. SES S.A. has guaranteed the payment of the purchase price and performance of all other obligations of SES Government Solutions, Inc. under the agreement.

The company recorded operating income for the GES business of $13 million and $23 million for the nine months ended September 30, 2022 and the nine months ended September 30, 2021, respectively.

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In February 2022, the Company’s Board of Directors approved the strategic initiative to divest of the Company’s interest in Advanced Acoustic Concepts (“AAC”). On April 19, 2022, we entered into a definitive sales agreement to divest our share of our equity investment in AAC for $56 million to Thales Defense & Security, Inc., the minority partner in the joint venture. The transaction was completed on July 8, 2022 and resulted in proceeds of $56 million. The transaction netted an aggregate pretax gain of $31 million ($22 million net of taxes), The aggregate gain of $31 million is included in Other Operating income (expense) net offset by tax expense of $9 million.

The proceeds generated from the GES and AAC divestitures resulted in a $396 million dividend to US Holding, our sole shareholder. The $396 million represents the proceeds generated net of our costs to sell and estimated tax obligations. The dividend was issued on August 5, 2022.

Note 2. Revenue from Contracts with Customers

The Company recognizes revenue for each separately identifiable performance obligation in a contract representing an obligation to transfer a distinct good or service to a customer. In most cases, goods and services provided under the Company’s contracts are accounted for as single performance obligations due to the complex and integrated nature of our products and services. These contracts generally require significant integration of a group of goods and/or services to deliver a combined output. In some contracts, the Company provides multiple distinct goods or services to a customer. In those cases, the Company accounts for the distinct contract deliverables as separate performance obligations and allocates the transaction price to each performance obligation based on its relative standalone selling price, which is generally estimated using cost plus a reasonable margin. We classify revenues as products or services on our Consolidated Statements of Earnings based on the predominant attributes of the performance obligations. While the Company provides warranties on certain contracts, we typically do not provide for services beyond standard assurances and therefore do not consider warranties to be separate performance obligations. Generally, we enter into three types of contracts: fixed-price contracts, cost-plus contracts and T&M contracts (cost-plus contracts and T&M contracts are aggregated below as flexibly priced contracts). The majority of our total revenues are derived from fixed-price contracts; refer to the revenue disaggregation disclosures that follow.

For fixed-price contracts, customers agree to pay a fixed amount, negotiated in 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.

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 using the cost-to-cost method. 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.

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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. 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 September 30,						Nine Months Ended September 30,
(Dollars in millions)	2022			2021			2022			2021
Revenue	$	(11)		$	(11)		$	(22)		$	(20)
Total % of Revenue	1.8		%	1.6		%	1.2		%	1.0		%

The impacts noted above are attributed primarily to changes in our firm-fixed-price development type programs as well as the impacts of inflation on certain fixed price production programs. They consist of changes in the designs required to achieve contractual specifications for fixed priced development programs and inflationary cost increases on certain naval production programs that resulted in a change in the programs’ estimate and related profitability. The reduction to revenue for the three and nine month periods ended September 30, 2022 and September 30, 2021 was attributed primarily to certain cost impacts on surface ship programs within our IMS segment and inflationary pressures on naval programs within our ASC 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".

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 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.

(Dollars in millions)	September 30, 2022		December 31, 2021
Contract assets	$	913	$	743
Contract liabilities	195		174
Net contract assets	$	718	$	569

Revenue recognized in the three and nine month periods ended September 30, 2022 that was included in the contract liability balance at the beginning of each period was $14 million and $121 million, respectively. Revenue

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recognized in the three and nine month periods ended September 30, 2021 that was included in the contract liability balance at the beginning of each period was $11 million and $100 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 funded and unfunded components. 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 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 September 30, 2022, incorporating both funded and unfunded components:

Backlog:	September 30, 2022
(Dollars in millions)
Total Backlog	$	3,138

We expect to recognize approximately 21% of our September 30, 2022 backlog as revenue over the next three months, with the remainder to be recognized thereafter.

Disaggregation of Revenue

ASC: ASC 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 ASC revenue by geographical

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

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions)	2022		2021		2022		2021
Revenue by Geographical Region
United States	$	364	$	484	$	1,103	$	1,385
International	41		27		137		90
Intersegment Sales	3		6		8		13
Total	$	408	$	517	$	1,248	$	1,488
Revenue by Customer Relationship
Prime contractor	$	216	$	346	$	664	$	901
Subcontractor	189		165		576		574
Intersegment Sales	3		6		8		13
Total	$	408	$	517	$	1,248	$	1,488
Revenue by Contract Type
Firm Fixed Price	$	349	$	438	$	1,085	$	1,283
Flexibly Priced(1)	56		73		155		192
Intersegment Sales	3		6		8		13
Total	$	408	$	517	$	1,248	$	1,488

________________

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

IMS: IMS 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 IMS revenue by geographical region, customer relationship and contract type

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

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions)	2022		2021		2022		2021
Revenue by Geographical Region
United States	$	222	$	198	$	612	$	547
International	7		11		21		37
Intersegment Sales	—		—		1		—
Total	$	229	$	209	$	634	$	584
Revenue by Customer Relationship
Prime contractor	$	41	$	41	$	110	$	127
Subcontractor	188		168		523		457
Intersegment Sales	—		—		1		—
Total	$	229	$	209	$	634	$	584
Revenue by Contract Type
Firm Fixed Price	$	195	$	179	$	542	$	495
Flexibly Priced(1)	34		30		91		89
Intersegment Sales	—		—		1		—
Total	$	229	$	209	$	634	$	584

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________________

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

Note 3. 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)	September 30, 2022		December 31, 2021
Accounts receivable	$	171	$	157
Less allowance for credit losses	(1)		(1)
Accounts receivable, net	$	170	$	156

The Company maintains certain agreements with financial institutions to sell certain trade receivables. Receivables are derecognized in their entirety when sold, and the Company’s continuing involvement in the sold receivables is limited to their servicing, for which the Company receives a fee commensurate with the service provided. Pursuant to the servicing agreements, the Company collected approximately $3 million and $15 million at September 30, 2022 and December 31, 2021, respectively, of these sold receivables that had not yet been remitted to the financial institutions. These unremitted amounts collected on behalf of the financial institutions are included within short-term borrowings and current portion of long-term debt in the Consolidated Balance Sheets.

Note 4. Inventories

Inventories consists of the following:

(Dollars in millions)	September 30, 2022		December 31, 2021
Raw materials	$	50	$	43
Work in progress	194		161
Finished goods	2		1
Total	$	246	$	205

Note 5. Property, Plant and Equipment

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

(Dollars in millions)	September 30, 2022		December 31, 2021
Land, buildings and improvements	$	321	$	312
Plant and machinery	190		191
Equipment and other	317		298
Total property, plant and equipment, at cost	828		801
Less accumulated depreciation	(466)		(437)
Total property, plant and equipment, net	$	362	$	364

Depreciation expense related to property, plant and equipment was $14 million and $41 million for the three and nine month periods ended September 30, 2022, and $13 million and $37 million for the three and nine month periods ended September 30, 2021, respectively.

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Note 6. Other Liabilities

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

(Dollars in millions)	September 30, 2022		December 31, 2021
Salaries, wages and accrued bonuses	$	63	$	70
Fringe benefits	68		74
Litigation	10		10
Restructuring costs	1		4
Provision for contract losses	55		48
Operating lease liabilities	25		24
Taxes Payable	87		—
Other(1)	56		65
Total other current liabilities	$	365	$	295
Operating lease liabilities	$	61	$	73
Other	14		1
Total other noncurrent liabilities	$	75	$	74

________________

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

Note 7. Goodwill

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

(Dollars in millions)	ASC		IMS		Total
Balance as of December 31, 2021	$	652	$	419	$	1,071
Reduction for Divestitures	(117)				(117)
Acquisition adjustment	(2)		—		(2)
Balance as of September 30, 2022	533		419		952

Note 8. 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 September 30, 2022 and December 31, 2021. All intangible assets are being amortized over their estimated useful lives, as indicated below, with no estimated residual values.

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	September 30, 2022						December 31, 2021
(Dollars in millions)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Customer relationships	$	957	$	(915)	$	42	$	957	$	(908)	$	49
Patents and licenses	9		(6)		3		9		(6)		3
Total intangible assets	$	966	$	(921)	$	45	$	966	$	(914)	$	52

Amortization expense related to intangible assets was $3 million and $7 million for the three and nine month periods ended September 30, 2022 and was $3 million and $7 million for the three and nine month periods ended September 30, 2021.

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.

Note 9. Income Taxes

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at September 30, 2021 and December 31, 2020 is as follows:

(Dollars in millions)	September 30, 2022		December 31, 2021
Gross deferred tax assets	$	110	$	120
Less valuation allowance	10		10
Deferred tax assets	100		110
Deferred tax liabilities	51		54
Deferred tax assets, net	$	49	$	56

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

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Note 10. Debt

The Company’s debt consists of the following:

(Dollars in millions)	September 30, 2022		December 31, 2021
7.5% Term loan due November 30, 2023(1)	$	139	$	139
5.0% Daylight term loan due October 15, 2024(1)	78		78
Borrowings under revolving credit facility(1)	35		—
Finance lease and other	162		161
Short-term borrowings	3		15
Total debt principal	417		393
Less unamortized debt issuance costs and discounts	—		—
Total debt, net	417		393
Less short-term borrowings and current portion of long-term debt	(67)		(41)
Total long-term debt	$	350	$	352

________________

(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, the Company entered into a credit agreement with its ultimate parent company, Finmeccanica S.p.A. (presently Leonardo S.p.A.) in the amount of $2 billion (the “2009 Credit Agreement”). The 2009 Credit Agreement was subsequently assigned to US Holding and has a maturity of November 30, 2023. The 2009 Credit Agreement provides for a term loan bearing interest at a rate of 7.5%, with interest payments due semi-annually on June 20 and December 20 in each year (the “7.5% Term loan”). The outstanding balance of the 7.5% Term loan at September 30, 2022 and December 31, 2021 was $139 million. The fair value of this term loan at September 30, 2022 and December 31, 2021 was $129 million and $182 million, respectively; however, the Company has the ability to prepay the outstanding principal balance at the carrying amount without penalty.

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 $78 million and $78 million at September 30, 2022 and December 31, 2021, respectively, 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 Credit Agreement provides for a revolving credit facility available for working capital needs of the Company (the “Revolving Credit Facility”). As of September 30, 2022 and December 31, 2021, the Revolving Credit Facility had a credit limit of $450 million and an interest rate of LIBOR plus 3.5%. There is a commitment fee of 0.25% applied to the unused balance of the Revolving Credit Facility and there are no compensating balance requirements. The outstanding balance as of September 30, 2022 was $35 million and there was no balance on the Revolving Credit Facility as of December 31, 2021.

The Company also maintains uncommitted working capital credit facilities with certain financial institutions in the aggregate of $75 million and $65 million at September 30, 2022 and December 31, 2021, respectively (the “Financial Institution Credit Facilities”). The Financial Institution Credit Facilities are guaranteed by Leonardo S.p.A. The primary purpose of the Financial Institution Credit Facilities is to support standby letter of credit issuances on contracts with customers and also includes a revolving facility with a maximum borrowing limit of $15 million, which bears interest at LIBOR plus 0.5%. At September 30, 2022 and December 31, 2021, there was no

21

LEONARDO DRS, INC.    

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

balance outstanding on the revolving facility. The Company had letters of credit outstanding of approximately $31 million and $35 million as of September 30, 2022, and December 31, 2021, which reduces the available capacity of the Financial Institution Credit Facilities by an equal amount.

Short-term Borrowings

As of September 30, 2022 and December 31, 2021, the Company recognized $3 million and $15 million, respectively, collected on behalf of the buyers of our trade receivables pursuant to our factoring arrangements as short-term borrowings and current portion of long-term debt in the Consolidated Balance Sheets, which approximates its fair value. Refer to Note 3: Accounts Receivable for more information.

Note 11. 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 Code and regulations thereunder. 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 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.

The following table summarizes the components of net periodic benefit cost for the Company's pension, postretirement and supplemental retirement plans for the three months ended September 30:

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

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LEONARDO DRS, INC.    

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table summarizes the components of net periodic benefit cost for the Company's pension, postretirement and supplemental retirement plans for the nine months ended September 30,:

	Defined Benefit Pension Plans				Postretirement Benefit Plan				Supplemental Retirement Plans
(Dollars in millions)	Nine Months Ended September 30, 2022		Nine Months Ended September 30, 2021		Nine Months Ended September 30, 2022		Nine Months Ended September 30, 2021		Nine Months Ended September 30, 2022		Nine Months Ended September 30, 2021
Service cost	$	—	$	—	$	—	$	—	$	—	$	—
Interest cost	$	4	$	4	—		—		1		—
Less Expected return on plan assets	$	(5)	$	(6)	—		—		—		—
Amortization of net actuarial loss (gain)	$	1	$	1	—		(1)		—		—
Amortization of prior service cost	$	—	$	—	—		—		—		—
Settlement expense (income)	$	1	$	—	—		—		—		—
Net periodic benefit cost	$	1	$	(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 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 Costs of revenues and General and administrative expenses on the Consolidated Statement 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

The Company does not have any share-based compensation plans. See Note 6: Other Liabilities, for information regarding cash compensation.

Note 13. Commitments and Contingencies

Commitments

The Company’s commitments are primarily related to our lease 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

23

LEONARDO DRS, INC.    

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

results of operations and/or cash flows from operating activities for a particular reporting period. We establish reserves for specific legal matters when we determine that the likelihood of an unfavorable outcome is probable and the loss is reasonably estimable.

Some environmental laws, such as the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (also known as “CERCLA” or the “Superfund law”) and similar state statutes, can impose liability upon former owners or operators for the entire cost of investigating and remediating contaminated sites regardless of the lawfulness of the original activities that led to the contamination. In July 2000, an entity which later became a subsidiary of the Company received a Section 104(e) Request for Information (“RFI”) from the National Park Service (“NPS”), pursuant to CERCLA, regarding the presence of radioactive material at a site within a national park, which site was operated by an alleged predecessor to our subsidiary over 50 years ago. Following the subsidiary’s response to the RFI, the NPS directed it and another alleged former operator to perform an Engineering Evaluation and Cost Analysis (“EE/CA”) of a portion of the site. The Company’s subsidiary made a good faith offer to conduct an alternative EE/CA work plan, but the NPS rejected this offer and opted to perform the EE/CA itself. The NPS previously posted its intention to open a formal public comment period regarding the EE/CA at the end of 2019. To the Company’s knowledge, the EE/CA has not been released and a public comment period has yet to be opened.

Following completion of the EE/CA, the NPS may seek reimbursement for its investigative and remedial efforts to date, or direct one or more of the potentially responsible parties to perform any remediation that may be required by CERCLA or may enter an alternative dispute resolution proceeding to attempt to resolve each party’s share. In addition, the NPS may seek to recover damages for loss of use of certain natural resources. The Company believes that it has legitimate defenses to its subsidiary’s potential liability and that there are other potentially responsible parties for the environmental conditions at the site, including the U.S. government as owner, operator and arranger at the site. The potential liability associated with this matter could change substantially due to such factors as additional information on the nature or extent of contamination, methods of remediation that might be recommended or required, changes in the apportionment of costs among the responsible parties, whether the NPS seeks to recover additional damages, whether the NPS’s plans to investigate additional areas to identify a need for further remedial action for which the Company may be identified as a potentially responsible party and other actions by governmental agencies or private parties.

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

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.

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.

24

LEONARDO DRS, INC.    

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Accrued warranty costs are reduced as these costs are incurred and as the warranty period expires, and otherwise may be modified as specific product performance issues are identified and resolved. The following is a summary of changes in the product warranty balances during the period ended September 30, 2022:

(Dollars in millions)
Balance as of December 31, 2021	$	19
Additional provision	8
Reversal and utilization	(8)
Balance as of September 30, 2022	19

Note 14. Related Party Transactions

The Company provides services related to certain of the U.S. operations of our parent and certain other of its affiliates. These services include financial, tax, trade compliance, marketing and communications and legal.

The Company also has related-party sales with the Parent and its other affiliates that occur in the regular course of business.

Related-party sales for these transactions are included in revenues and were $63 million and $7 million for the nine-month periods ended September 30, 2022 and September 30, 2021, respectively and $9 million and $3 million for the three-month periods ended September 30, 2022 and September 30, 2021, respectively.

The Company has related-party purchases with the Parent 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 $20 million and $22 million for the nine-month periods ended September 30, 2022 and September 30, 2021, respectively and related-party purchases for these transactions are included in cost of revenues for the three -month periods ended September 30, 2022 and September 30, 2021 were $2 million and $16 million, respectively.

The receivables related to these transactions with the Parent and its other affiliates of $33 million and $2 million, respectively, and payables of $7 million and $1 million , respectively, are included in accounts receivable and accounts payable in our Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021. In addition there was a related party balance in contract assets of $8 million and $0 million at September 30, 2022 and December 31, 2021, respectively.

The Company entered into a Surplus Treasury Agreement with US Holding (the “Surplus Agreement”) in December 2019. The Surplus Agreement allows the Company to advance excess funds to US Holding when funds are available. The advances bear interest at LIBOR plus between 5 and 20 basis points depending on the tenor of the advance. As of September 30, 2022 and December 31, 2021 the Company did not advance any amount to US Holding.

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 and Note 16: Subsequent Events more information.

Note 15. 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. Beginning in the first quarter of 2022, the Company’s operating and reportable segments were revised into two reportable segments, ASC and IMS, to align our market strategy and capital allocation decision making with our operating structure. Prior year information was revised to reflect the new

25

LEONARDO DRS, INC.    

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

segment structure. All other operations, which consists primarily of DRS Corporate Headquarters and certain non-operating subsidiaries of the Company, are grouped in Corporate & Eliminations.

We primarily use Adjusted EBITDA to manage the Company and allocate resources. Adjusted EBITDA of our business segments includes our net earnings before income taxes, amortization of acquired intangible assets, depreciation, restructuring costs, interest, transaction costs related to an anticipated offering of securities, acquisition and divestiture related expenses, foreign exchange, COVID-19 response costs, non-service pension expenditures and other one-time non-operational events. 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.

Certain information related to our segments for the three and nine month periods ended September 30, 2022 and September 30, 2021 is presented in the following tables. Consistent accounting policies have been applied by all segments within the Company, within all reporting periods. A description of our reportable segments as of September 30, 2022 and September 30, 2021 has been included in Note 1: Summary of Significant Accounting Policies. Transactions between segments generally are negotiated and accounted for under terms and conditions that are similar to other government and commercial contracts; however, these intercompany transactions are eliminated in consolidation.

Total revenues and intersegment revenues by segment for the three and nine month periods ended September 30, 2022 and, September 30, 2021 consists of the following:

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions)	2022		2021		2022		2021
ASC	$	408	$	517	$	1,248	$	1,488
IMS	229		209		634		584
Corporate & Eliminations	(3)		(6)		(9)		(13)
Total revenue	$	634	$	720	$	1,873	$	2,059

(Dollars in millions)	2022		2021		2022		2021
ASC	$	3	$	6	$	8	$	13
IMS	—		—		1		—
Total intersegment revenue	$	3	$	6	$	9	$	13

Depreciation by segment for the three and nine month periods ended September 30, 2022 and September 30, 2021 consists of the following:

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions)	2022		2021		2022		2021
ASC	$	9	$	9	$	27	$	25
IMS	5		4		14		12
Total depreciation	$	14	$	13	$	41	$	37

26

LEONARDO DRS, INC.    

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Total assets by segment as of September 30, 2022 and December 31, 2021 consist of the following:

(Dollars in millions)	September 30, 2022		December 31, 2021
ASC	$	1,661	$	1,545
IMS	1,121		1,145
Corporate & Eliminations	149		379
Total assets	$	2,931	$	3,069

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)	2022		2021		2022		2021
Adjusted EBITDA
ASC	$	36	$	56	$	125	$	171
IMS	22		14		73		39
Corporate & Eliminations	—		—		—		—
Total Adjusted EBITDA	58		70		198		210
Amortization of intangibles	(3)		(3)		(7)		(7)
Depreciation	(14)		(13)		(41)		(37)
Interest expense	(9)		(9)		(27)		(27)
Deal related transaction costs	(16)		—		(26)		(4)
Gain on sale of business	350		—		350		—
COVID-19 response costs	—		(1)		—		(6)
Other non-operational events	1		(1)		—		(2)
Income tax (provision) benefit	(88)		(8)		(107)		(31)
Net earnings	$	279	$	35	$	340	$	96

Note 16. Subsequent Events

The Company has evaluated subsequent events through November 7, 2022, which represents the date on which the Consolidated Financial Statements were issued.

On October 3, 2022, US Holding converted from a Corporation to a Limited Liability Company under Delaware law. Accordingly, US Holding will be taxed as a partnership and the Company will no longer be included in the US Consolidated tax filings of US Holding. Prospectively, the Company will file a consolidated return with Leonardo DRS, Inc. as the parent company and will include the US Subsidiaries of Leonardo DRS, Inc.

As previously announced, on June 21, 2022, we entered into the Agreement and Plan of Merger, dated as of June 21, 2022 (the “merger agreement”), by and among the Company, RADA Electronic Industries Ltd (“RADA”) and Blackstart Ltd, a company organized under the laws of the State of Israel and a wholly owned subsidiary of DRS (“Merger Sub”). In connection with this transaction, which is detailed in Note 1 Summary of Significant Accounting Policies,on October 19, 2022, RADA’s shareholders voted to approve the transaction, and on October 24, 2022, we received the required approval from the Committee on Foreign Investment in the United States (CFIUS). We anticipate closing near the end of November or early December 2022.

27

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 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 this Quarterly Report, and under “Risk Factors” in Part I, Item 1A of our Annual Report and Part II, Item 1A. “Risk Factors” in our Second Quarter Form 10-Q. Actual results may differ materially from those contained in any forward-looking statements.

Business Overview and Considerations

General

DRS is a leading provider of defense products and technologies that provide battlefield superiority today while shaping the battlefield of tomorrow for the U.S. military and our allies abroad. We offer a broad portfolio of products and services in our core technologies including advanced sensing, network computing, force protection, and electric power conversion and propulsion. Our leadership positions in these markets have created a foundational base of programs within the DoD that has yielded five straight years of organic revenue growth. We believe these technologies will not only support our Armed Services in today’s mission but will also underpin the DoD’s strategy to migrate towards more autonomous, dynamic, interconnected, and multi-domain capabilities needed to win in tomorrow’s battlefield. We expect that the DoD’s focus on effectively countering growing peer threats from China and Russia while simultaneously pursuing a counter-terrorism strategy against asymmetrical organizations and actors will increase its reliance on the core technologies that DRS provides, reinforcing our position in our high growth markets.

Our overall strategy is to be a balanced and diversified company, less vulnerable to any one budgetary platform or service decision with a specific focus on establishing strong technical and market positions in areas of priority for the U.S. Department of Defense (“DoD”). The DoD is our largest customer. For the third quarter and first nine months of 2022, the DoD accounted for approximately 83% and 82%, respectively, of our business as an end-user. The revenues for the three and nine month periods ended September 30, 2022 are principally derived directly or indirectly from contracts with the U.S. Army, which represented 40% and 35%, respectively, and the U.S. Navy, which represented 31% and 32%, respectively, of our consolidated revenue, in each case consistent with historic trends.

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

Advanced Sensing and Computing (“ASC”): Our Advanced Sensing and Computing segment is organized to provide equipment that enables the sensing and understanding of the battlefield to ensure our armed forces are equipped with real-time intelligence required to deliver enhanced decision making and execution in theater. From leading long-range sensing capabilities, expanding our reach, to rugged, trusted, and cyber resilient computing, our ASC products provide our customers with the ability to be successful in their mission.

Our ASC segment provides ground vehicle systems including third generation infrared sensors, long-range threat detection, situational awareness, targeting and vehicle protection. Additionally, we offer a full complement of soldier systems, including next generation sensors, and targeting systems to improve infantry combat effectiveness. Our sensing technologies also support aircraft survivability through advanced two-color infrared sensors and our quantum cascade lasers which detect and protect aircraft from missile attacks.

In addition to our optical sensing systems, we provide state of the art technology in Electronic Warfare and cyber systems to enable our customer’s integrated capabilities for multi-domain operations to supplement

28

kinetic warfare. Our mounted and dismounted EW systems and intelligence solutions across a broad range of platforms bring world-class capability to our customers.

Our sensing capabilities are complemented by our network computing and communications products. We are the leading global supplier of battle management systems and mounted computing hardware for ground forces worldwide. For the U.S. and allied naval customers, we provide naval computing systems and networks, shipboard communications, radar, surface ship and submarine combat and command and control systems.

Integrated Mission Systems (“IMS”): Our Integrated Mission Systems segment consists of both land and naval system integration capabilities. The IMS segment provides critical force protection, vehicle integration, transportation and logistics and electrical control, distribution and conversion, and ship propulsion systems to the U.S. military and allied forces.

Our force protection systems provide protection for our service members and military assets from evolving threats and include advanced solutions for counter-unmanned aerial systems, short-range air defense systems and active protection systems on ground vehicles.

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.

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. The APEX program’s goal is to strive for continuous improvement through unification 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 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.

Impacts of COVID-19 On Our Business

The coronavirus (“COVID-19) pandemic continued to impact national and global economies in the first nine months of 2022. The emergence of the Omicron variant in late 2021 and resulting increase in COVID cases in early 2022 has had an impact on our operations and our supply chain. The recovery has been slower than anticipated, in particular supply chain impacts which are anticipated to continue into 2023. We continue to closely monitor COVID-19 impacts on all aspects of our business and geographies, including on our workforce, supply chain and customers.

The United States has taken several steps to respond to the pandemic. On September 9, 2021, President Biden announced a COVID-19 action plan, including an executive order, the Safer Workforce Task Force guidance issued on September 24, 2021 and the DoD’s Force Health Protection guidance. This executive order and guidance (as

29

amended) contained a clause that required covered federal contractors and subcontractors to implement federally required vaccine mandates. This clause was implemented into several of our applicable federal contracts. In light of certain of certain court orders, however, the Office of Management and Budget has stated that the U.S Government will not take action to enforce this clause until further notice. If ultimately upheld and enforced, this federal contract requirement may impact several of our contracts and the locations where those contracts are performed. We are continuing to evaluate these evolving requirements, especially as our customers determine if, when, and how to implement these potential contractual requirements. We cannot at this stage predict the various impacts they may have on our workforce, our suppliers, or our company. These evolving government requirements, along with broader impacts of the continuing pandemic, could impact our workforce and performance, as well as those of our suppliers.

We continue to follow the practice started in the first quarter of 2022 that any remaining additional costs to operate our business in response to the COVID-19 environment should be reported as part of our normal business operations and not separately identified as an adjustment to EBITDA. In addition to the challenges that COVID-19 is presenting to the industry and our Company, significant adverse supply chain disruptions continue throughout the industry and for the Company, including delays in the receipt and delivery of materials.

Business Environment

Revenues derived directly, as a prime contractor, or indirectly, as a subcontractor, from contracts with the U.S. government represented 83% and 82% of our consolidated revenue for the third quarter and first nine months of 2022, respectively, and 84% and 85% of our consolidated revenue for the third quarter and first nine months of 2021. Of these sales directly to the U.S. government, the Army and Navy are our largest customers. For the three and nine month periods ended September 30, 2022, U.S. government sales with the U.S. Army represented 40% and 35% and U.S. government sales with the U.S. Navy represented 31% and 32%, respectively, of our consolidated revenue. For the three and nine month periods ended September 30, 2021, U.S. government sales with the U.S. Army represented 33% and 36% and U.S. government sales with the U.S. Navy represented 31% and 31%, respectively, of our consolidated revenue.

The Third Quarter was highlighted by continued congressional work on the Fiscal Year 2023 (“FY 23”) authorizations and appropriations legislation following the President’s FY 23 budget request in the first quarter of the calendar year. The House of Representatives passed a FY 23 National Defense Authorization Act (NDAA) on July 14, 2022. The Senate Armed Services Committee released their committee-passed mark of their NDAA on July 18, 2022 which increased the top line authorization level by approximately $45 billion compared to the President’s FY 23 budget request. The bill was not considered on the Senate floor during the quarter.

To prevent a government shutdown at the end of 2022, Congress passed a Continuing Resolution (CR) at the end of September, and the President signed the legislation into law on September 30, 2022. The extension is effective through December 16, 2022 allowing lawmakers more time to complete the FY 23 appropriations bills.

In February 2022, Russian forces invaded Ukraine. In response, the United States and several other countries imposed economic and trade sanctions, export controls and other restrictions targeting Russia and Belarus. The conflict and these sanctions have caused disruptions to global economies and some global businesses, including heightened cybersecurity risks, supply chain challenges, increased energy costs, foreign currency exchange rate fluctuations, as well as an exacerbation of existing inflationary pressures. In addition, the Russia-Ukraine conflict has created supply chain challenges for our Company and our suppliers, which we will continue to monitor and work to mitigate.

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 of capital: (i) Revenue, (ii) Bookings, (iii) Backlog, (iv) Adjusted

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EBITDA, (v) Adjusted EBITDA Margin, (vi) Adjusted Earnings Per Share (“EPS”) and (vii) 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. See “—Results from Operations” for further detail.

Financial and Operating Data

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions, except per share amounts)	2022		2021		2022		2021
Total revenues	$	634	$	720	$	1,873	$	2,059
Bookings	874		484		2,304		1,919
Backlog	3,138		3,152		3,138		3,152
Adjusted EBITDA(1)	58		70		198		210
Adjusted EBITDA Margin(1)	9.2%		9.8%		10.6%		10.2%
Adjusted EPS(1)(2)	$	0.17	$	0.25	$	0.66	$	0.73
Free Cash Flow(1)	$	(3)	$	109	$	(262)	$	(149)

________________

(1)Note on non-GAAP financial measures: Throughout the discussion of our results 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.

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

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 - The value of remaining performance obligations, which we also refer to as total backlog, includes the funded and unfunded components. 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 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 unfunded and funded backlog combine to equal the total backlog as depicted in the table below at the respective date presented:

Backlog:	September 30, 2022
(Dollars in millions)
Total Backlog	$	3,138

Non-GAAP Financial Measures

We believe the non-GAAP financial measures presented in this Quarterly Report 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

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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, transaction costs related to an anticipated offering of securities, acquisition and divestiture related expenses, foreign exchange, COVID-19 response costs, non-service pension expenditures and other one-time non-operational events. 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 September 30,				Nine Months Ended September 30,
(Dollars in millions)	2022		2021		2022		2021
Net earnings (loss)	$	279	$	35	$	340	$	96
Income tax provision (benefit)	$	88	$	8	$	107	$	31
Amortization of intangibles	$	3	$	3	$	7	$	7
Depreciation	14		13		41		37
Interest expense	9		9		27		27
Deal related transaction costs	16		—		26		4
Gain on sale of business	(350)		—		(350)		—
COVID-19 response costs	—		1		—		6
Other non-operational events	(1)		1		—		2
Adjusted EBITDA	$	58	$	70	$	198	$	210

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Adjusted EPS – We calculate Adjusted EPS by excluding transaction costs related to an anticipated offering of securities, acquisition and divestiture related expenses, COVID-19 response costs and gains on sale of businesses net of tax from our net earnings (loss) to arrive at Adjusted EPS. We believe that Adjusted 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 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 EPS to U.S. GAAP EPS is shown below:

Consolidated Entity Reconciliation of Adjusted EPS:

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions, except per share amounts)	2022		2021		2022		2021
Net earnings (loss)	$	279	$	35	$	340	$	96
Deal related transaction costs	$	16	$	—	$	26	$	4
Gain on sale net of taxes	$	(270)	$	—	$	(270)	$	—
COVID-19 response costs	$	—	$	1	$	—	$	6
Adjusted net earnings (loss)	$	25	$	36	$	96	$	106
Adjusted EPS (1)	$0.17		$0.25		$0.66		$0.73

________________

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

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

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 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 September 30,				Nine Months Ended September 30,
(Dollars in millions)	2022		2021		2022		2021
Net Cash provided by (used in) operating activities	$	(4)	$	138	$	(246)	$	(111)
Transaction related expenditures	14		—		19		4
Capital expenditures	(13)		(29)		(35)		(42)
Proceeds from sales of assets	—		—		—		—
Free cash flow	$	(3)	$	109	$	(262)	$	(149)

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

Operational Performance on Contracts

Revenue, earnings (margin) and the timing of our cash flows depend on our ability to perform on our contracts. When agreeing to contractual terms, our management team makes assumptions and projections about future conditions and events. The accounting for our contracts and programs requires assumptions 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;

•the cost 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 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. The following represents the impact that changing certain of our estimates, which are primarily attributed to changes in our firm-fixed-price type programs and inflation related cost impacts on

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certain fixed price production programs. Cost changes consist of changes in the designs required to achieve contractual specifications for fixed priced development programs and inflationary impacts on certain naval production programs that resulted in a change in the programs’ estimate and related profitability. The reduction to revenue for the three- and nine-month periods ended September 30, 2022 and September 30, 2021 was attributed primarily to certain cost impacts on surface ship programs within our IMS segment and inflationary pressures on naval programs within our ASC segment.

Impact of Change in Estimates on our Revenue Results

	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in millions)	2022			2021			2022			2021
Revenue	$	(11)		$	(11)		$	(22)		$	(20)
Total % of Revenue	1.8		%	1.6		%	1.2		%	1.0		%

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

International & Commercial Sales

International and Commercial revenue, including foreign military sales, foreign military financing, and direct commercial sales, accounted for approximately 17% and 18% of our revenue for the three and nine months ended September 30, 2022, respectively, and 16% and 15% of our revenue for the three and nine months ended September 30, 2021, respectively. The increase is due in part to increased purchases resulting from new and expanded military aid programs in support of Ukraine in its conflict with Russia. Since our focus is primarily with the DoD and our investments are focused as such, we anticipate that international sales will continue to account for a similar percentage of revenue in the future. 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 month periods ended September 30, 2022.

Acquisitions and Divestitures

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. On March 22, 2022, we announced the signing of a definitive sale agreement for 100% of the stock of our Global Enterprise Solutions (“GES”) operating unit, which was completed on August 1, 2022 and on April 19, 2022, we

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signed a definitive sale agreement for our 51% ownership stake in our Advanced Acoustics Concepts Joint Venture with Thales (“AAC”), which was completed on July 8, 2022.

Components of Operations

Revenue

Revenue consists primarily of product related revenue, generating 91% and 89%, respectively, of our total revenues for the third quarter and first nine months of 2022. Our remaining revenue is generated from service related contracts. Additionally, 86% and 87%, respectively, of our revenue is derived from firm-fixed priced contracts for both the three and nine month periods ended September 30, 2022. This is consistent for both contract types when compared to product sales and firm-fixed priced sales of 86% and 86%, respectively, for the three and nine months ended September 30, 2021.

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 third quarter and first nine months of 2022, flexible priced contracts represented 14% and 13% of our total revenues, respectively. This consistent for flexible priced contracts sales of 14% for both three months and nine months ended September 30, 2021.

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

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, expenditures related to bid and proposal efforts and expenditures to support non-routine acquisitions and dispositions executed throughout the year. We expect general and administrative expenses will be impacted by the costs associated 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 the Company, as well as individual segments, for the third quarter and first nine months of 2022, as compared to the third quarter and first nine months of 2021. Given the nature of our business, we believe revenue and earnings from operations are most relevant to an understanding of our performance at a business and segment level. Our operating cycle is lengthy and involves various types of production contracts and varying delivery schedules. Accordingly, operating results in a particular year may not be indicative of future operating results.

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							September 30, 2022 vs. September 30, 2021 Variance
(Dollars in millions, except per share amounts)	Three Months Ended September 30, 2022			Three Months Ended September 30, 2021
Total revenues	$	634		$	720		$	(86)		(11.9)	%
Total cost of revenues	(504)			(589)			$	85		(14.4)	%
Gross profit	$	130		$	131		$	(1)		(0.8)	%
Gross margin	20.5		%	18.2		%	2.3		%	12.7	%
General and administrative expenses	(101)			(73)			$	(28)		38.6	%
Amortization of intangibles	(3)			(3)			$	—		7.1	%
Other operating income (expenses), net	350			(2)			$	352		(17610.0)	%
Operating earnings	$	376		$	53		$	323		606.8	%
Interest expense	$	(9)		$	(9)		$	—		1.8	%
Other, net	$	—		$	(1)		$	1		(100.0)	%
Earnings before taxes	$	367		$	43		$	324		749.2	%
Income tax provision	$	88		$	8		$	80		1000.0	%
Net earnings	$	279		$	35		$	244		696.7	%
Shares outstanding(1)	145			145			$	—		—	%
Basic EPS(1)	$	1.92		$	0.24		$	1.68		696.7	%
Diluted EPS(1)	$	1.92		$	0.24		$	1.68		696.7	%
Adjusted EPS(1,2)	$	0.17		$	0.25		$	(0.08)		30.8	%
Adjusted EBITDA(2)	$	58		$	70		$	(12)		(17.3)	%
Adjusted EBITDA Margin(2)	9.2		%	9.8		%	(0.6		%)	(6.1)	%
Backlog(2)	$	3,138		$	3,152		$	(14)		(0.4	%)
Bookings(2)	$	874		$	484		$	390		80.6	%
Free cash flow(2)	$	(3)		$	109		$	(112)		(103.1)	%

______________

(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.

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							September 30, 2022 vs. September 30, 2021 Variance
(Dollars in millions, except per share amounts)	Nine Months Ended September 30, 2022			Nine Months Ended September 30, 2021
Total revenues	$	1,873		$	2,059		$	(186)		(9.0)	%
Total cost of revenues	(1,482)			(1,665)			$	183		(11.0)	%
Gross profit	$	391		$	394		$	(3)		(0.8)	%
Gross margin	20.9		%	19.1		%	1.7		%	9.1	%
General and administrative expenses	(261)			(225)			$	(36)		16.1	%
Amortization of intangibles	(7)			(7)			$	—		2.9	%
Other operating income (expenses), net	351			(7)			$	358		(5117.1)	%
Operating earnings	$	474		$	155		$	319		205.4	%
Interest expense	$	(27)		$	(27)		$	—		—	%
Other, net	$	—		$	(1)		$	1		(100.0)	%
Earnings before taxes	$	447		$	127		$	320		251.4	%
Income tax provision	$	107		$	31		$	76		245.2	%
Net earnings	$	340		$	96		$	244		254.2	%
Shares outstanding(1)	145			145			$	—		—	%
Basic EPS(1)	$	2.34		$	0.66		$	1.68		254.2	%
Diluted EPS(1)	$	2.34		$	0.66		$	1.68		254.2	%
Adjusted EPS(1,2)	$	0.66		$	0.73		$	(0.07)		9.6	%
Adjusted EBITDA(2)	$	198		$	210		$	(12)		(5.9)	%
Adjusted EBITDA Margin(2)	10.6		%	10.2		%	0.4		%	3.5	%
Backlog(2)	$	3,138		$	3,152		$	(14)		(0.4)	%
Bookings(2)	$	2,304		$	1,919		$	385		20.1	%
Free cash flow(2)	$	(262)		$	(149)		$	(113)		(75.8)	%

______________

(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 nine months ended September 30, 2022 showed mixed results when compared to the nine months ended September 30, 2021. We reported new bookings that exceeded the prior year by over 20%, underpinning future revenue growth. Revenue and Adjusted EBITDA both fell below prior year attributed primarily to the August 1, 2022 disposition of our GES operating unit and the impact of micro-electronic component availability within our ASC segment which has delayed the receipt of material and therefore negatively impacted program progress and revenue realization. Despite the reduced revenue volume and additional inflationary cost pressures impacting Adjusted EBITDA, our Adjusted EBITDA Margin increased 36 bps as compared to the prior year, highlighting our ability to continue to demonstrate margin expansion. The margin expansion is largely attributed to improved program performance on our submarine electric propulsion programs with the US Navy. Net earnings showed a significant increase to prior year driven by gains recorded on the sale of our GES business and AAC joint venture. Our cash usage increased for the nine months ended September 30, 2022 when compared to the

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nine months ended September 30, 2021 attributed to an increase in inventory and contract assets to combat extending supply chain lead-times.

Revenue of $1,873 million represented a decrease of $186 million or (9.0%) with operating earnings increasing $319 million or 205% driving a net earnings increase of $244 million (254%) for the nine months ended September 30, 2022 when compared to the nine months ended September 30, 2021. Adjusted EBITDA decreased by $12 million (6%) while adjusted EBITDA margins increased by 35 bps to 10.6% for the nine months ended September 30, 2022 when compared to the nine months ended September 30, 2021.

Revenue

Our revenue of $634 million decreased $86 million or (11.9)% over the three months ended September 30, 2021 while our nine month revenue of $1,873 million decreased $186 million or (9)% over the nine months ended September 30, 2021. The revenue decrease for the nine months ended September 30, 2022 is attributed to a decline in our ASC segment, partially offset by an increase in our IMS segment. Our ASC segment decreased revenues by $240 million or (16.1%) driven by the August 1, 2022 sale of our GES operating unit and the availability of micro-electronic components across the segment, which resulted in delayed material receipts, reducing program progress and revenue recognition. Additionally on certain ruggedized computing programs with the US Army we realized a reduction in new orders and revenue attributed to reduced customer installation staffing capabilities stemming from COVID impacts to the on-site workforce. These reductions were partially offset by increased demand for our International Weapon Sight programs, resulting from the Russian invasion of Ukraine. Our IMS segment revenues increased by $50 million or 8.6% as compared to the prior year period primarily due to the increased deliveries in the Force Protection market, highlighted by our counter unmanned aerial threat production program with the U.S. Army and continued progress on our submarine electric propulsion programs with the U.S. Navy.

Cost of Revenues

Cost of revenue for the three months ended September 30, 2022 decreased $85 million or (14)% from $589 million to $504 million when compared to the three months ended September 30, 2021, exceeding the reduction attributed to the decreased revenue output and the inflationary impacts to our material procurements realized during the period, resulting in increased margin. Cost of revenue for the nine months ended September 30, 2022 decreased by $183 million or (11)% from $1,665 million to $1,482 million which has also outpaced the decrease resulting from the revenue and inflation impacts as described above, increasing our gross profit contribution. The year over year cost of revenue decrease and the corresponding increase in our margin profile is attributed to improved contract performance, decreasing the cost of revenues as a percentage of revenue highlighted by continued cost savings generated from our operational excellence program, APEX, and the continued transition of development programs into production. The program transition and improved profitability is highlighted by our submarine electric propulsion programs within our IMS sector.

Gross Profit

Gross profit decreased by $1 million or (0.8)% to $130 million for the third quarter despite a revenue decline of over 12% driving gross margin 231 bps higher than the prior year third quarter results. Similarly, our nine months ended September 30, 2022 gross profit declined $3 million, or (1)% to $391 million for the nine months ended September 30, 2022. The 2% gross profit decline for the nine months ended September 30, 2022 compares to a revenue decline of (9)%, increasing gross margin by 174 bps. The increased profitability is attributed to the improved program performance noted above.

General and Administrative Expenses

General and administrative expenses for the three months ended September 30, 2022 increased by $28 million or 28% as compared to the three months ended September 30, 2021 and increased by $36 million or 14% for the nine-months ended September 30, 2022 as compared to the nine months ended September 30, 2021. As a percentage of revenue, general and administrative expenses increased to 14% for the nine months ended September 30, 2022 from 11% for the nine months ended September 30, 2021. The principal driver of the increase is attributed to non-recurring expenditures to support our recently closed divestitures and our pending merger with RADA Electronic

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Industries Ltd. in the fourth quarter. These costs resulted in incremental General and Administrative expenditures of $16 million and $26 million for the three and nine month periods ended September 30, 2022, respectively, compared to the $0 million and $4 million realized in the prior year to support non-recurring transactions. The remaining increase excluding the deal related investments, is attributed to increased internal research and development (IRAD) costs and deal related transaction costs which increased $6 million and $12 million when compared to the three and nine months ended September 30, 2021, respectively.

Other Operating Income and Expenses, Net

Other operating income (expenses) increased by $352 million to $350 million income in the three months ended September 30, 2022 when compared to $2 million expense for the three months ended September 30, 2021. For the nine months ended September 30, 2022 other operating income (expenses) increased by $358 million from $7 million expense for nine months ended September 30, 2021 to $351 million income for nine months ended September 30, 2022. The increase for both the quarter and nine months is primarily due to the gain on sale of the GES business and AAC Joint venture which totaled $350 million. In addition, employee safety costs related to COVID-19 investments of $1 million and $6 million, respectively, were incurred in the prior year. In the current year, we no longer classify COVID-19 expenditures separately and expenses incurred are reflected in Cost of Revenues or General and Administrative Expenses.

Amortization of Intangibles

Amortization of intangibles of $3 million and $7 million for three and nine months ended September 30, 2022 were consistent with three and nine months ended September 30, 2021.

Operating Earnings

Operating earnings increased by $323 million and $319 million to $376 million and $474 million for three and nine months ended September 30, 2022 from $53 and $155 million for the three and nine months ended September 30, 2021. The increase was driven mainly by the gains on asset sales, resulting from our dispositions of our GES and AAC operating units, offset slightly by increased general and administrative expenditures resulting from increased transaction related expenditures and IRAD, as previously mentioned above.

Interest Expense

There was no change in interest expense for the three and nine months ended September 30, 2022 from the prior year of $27 million of interest expenditures realized for the nine months ended September 30, 2021.

Other, Net

Other, net decreased for the nine months ended September 30, 2022 to $0 million from $1 million for the nine months ended September 30, 2021.

Earnings Before Taxes

Earnings before taxes increased by $324 million and $320 million to $367 million and $447 million for the three and nine months ended September 30, 2022, respectively, from $43 million and $127 million for the three and nine months ended September 30, 2021. The improved profitability resulted in a 251% increase in earnings before taxes for the nine months ended September 30, 2021 as compared to the prior year period. The increase was primarily driven by the gains from business sales noted above offset partially by an increase in general and administrative expenses as discussed above.

Income Tax Provision

Income tax provision increased by $80 million and $76 million to $88 million and $107 million for the three and nine months ended September 30, 2022, respectively, from $8 million and $31 million for the three and nine months ended September 30, 2021. This was primarily attributable to an increase in earnings before taxes of $324 million and $320 million for the third quarter and nine months ended September 30, 2022, respectively, and

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unfavorable discrete tax expense recorded during the six months ended June 30, 2021. The discrete items were due to certain state law tax changes and an increase in estimated nondeductible expenses.

Net Earnings

Net earnings increased by $244 million and $244 million to $279 million and $340 million for the three and nine months ended September 30, 2022, respectively, when compared to the three and nine months ended September 30, 2021. The increase for the three months ended September 30, 2022 was driven by increased earnings before taxes of $324 million offset by decreased income tax provision of $80 million, as described above.

Adjusted EBITDA

Adjusted EBITDA decreased by $12 million or (17%) to $58 million for the three months ended September 30, 2022 and $12 million or (6%) to $198 million for the nine months ended September 30, 2022 when compared to $70 million and $210 million for the three and nine months ended September 30, 2021, respectively. The decrease is driven by lower gross profit as noted above driven by lower revenue volumes and disposition of our GES and AAC operating units, which was offset by improved profitability through improved program performance.

Adjusted EBITDA Margin

Adjusted EBITDA Margin decreased from 9.8% for the three months ended September 30, 2021 to 9.2% for the three months ended September 30, 2022 while increasing 35 bps from 10.2% for the nine months ended September 30, 2021 to 10.6% for the nine months ended September 30, 2022. This was primarily due to improved program performance driven by the transition of certain development programs into production driving margin expansion most notably on our submarine electric propulsion programs within our IMS sector.

Adjusted EPS

For the three and nine month periods ended September 30, 2022, there were no changes in the number of basic and diluted shares. No equity awards were issued during the period. As of September 30, 2022 there were 145,000,000 shares of common stock outstanding resulting in Adjusted EPS of $0.66, a decrease of $(0.07) from $0.73 for the nine months ended September 30, 2021. The consistent Adjusted EPS reduction is driven by consistent by the reduced by the reduction of revenue and profit contributions from our disposed operating units and lower revenue realized during the respective periods as noted above.

Backlog

Backlog decreased by $14 million to $3,138 million for the nine months ended September 30, 2022 from $3,152 million for the nine months ended September 30, 2021. The decrease is due in part to the removal of backlog related to the recently sold GES business partially offset by strong bookings in the nine months ended September 30, 2022. Excluding the impact of the GES disposition, backlog expanded year over year by approximately 4%, attributed to strong new orders received during the nine months, evidenced by bookings exceeding revenue by 23%.

Bookings

Bookings for the nine months ended September 30, 2022 increased by 20% or $385 million to $2,304 million as compared to $1,919 million for the nine month ended September 30, 2021. The increase is attributable to increased demand at both our ASC and IMS segments. The increase was driven by new awards in our ASC segment for International Weapon Sights and other Eastern European demand for our sensing and computing products as defense investment has increased following the Russian invasion of Ukrainian. In our IMS segment, we also realized an increase in bookings driven by the definitization of certain Counter UAS and Short Range Air Defense programs with the U.S. Army, missile transport and fire control awards to support international sales of the Patriot Missile and additional funding received on our Next Generation Ballistic Submarine program with the U.S. Navy. All partially offset by a reduction of ground vehicle awards received on our ruggedized computing programs with the U.S. Army in our ASC segment, resulting from reduced customer installation readiness subsequent to the COVID-19 impact on the workforce.

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Free cash flow

Free cash flow decreased by $113 million to $(262) million for the nine months ended September 30, 2022 from $(149) million for the nine months ended September 30, 2021. This was primarily due to investments in supply chain readiness driving an increase in inventory and contract related assets, increased payments to vendors reducing our Accounts Payable balance and a reduction in net earnings, excluding the gain realized on the GES and AAC dispositions.

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

42

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

							Three Months Ended September 30, 2022 vs. September 30, 2021 Variance
	Three Months Ended September 30, 2022
(Dollars in millions)	2022			2021
Revenue:
ASC	$	408		$	517		$	(109)		(21.1	%)
IMS	$	229		$	209		$	20		9.6	%
Corporate & Eliminations	$	(3)		$	(6)		$	3		(50.0	%)
Total revenue	$	634		$	720		$	(86)		(12.0	%)
Adjusted EBITDA:
ASC	$	36		$	56		$	(20)		(35.4	%)
IMS	$	22		$	14		$	8		57.1	%
Corporate & Eliminations	$	—		$	—		$	—		—	%
Total Adjusted EBITDA	$	58		$	70		$	(12)		(16.8	%)
Adjusted EBITDA Margin:
ASC	8.8		%	10.8		%	(2.0		%)	(18.1	%)
IMS	9.6		%	6.7		%	2.9		%	(43.4	%)
Bookings:
ASC	$	700		$	385		$	315		81.8	%
IMS	$	174		$	99		$	75		75.9	%
Total bookings	$	874		$	484		$	390		80.6	%

							Nine Months Ended September 30, 2022 vs. September 30, 2021 Variance
	Nine Months Ended September 30,
(Dollars in millions)	2022			2021
Revenue:
ASC	$	1,248		$	1,488		$	(240)		(16.1	%)
IMS	$	634		$	584		$	50		8.6	%
Corporate & Eliminations	$	(9)		$	(13)		$	4		(30.8	%)
Total revenue	$	1,873		$	2,059		$	(186)		(9.0	%)
Adjusted EBITDA:
ASC	$	125		$	171		$	(46)		(26.8	%)
IMS	$	73		$	39		$	34		87.2	%
Corporate & Eliminations	$	—		$	—		$	—		—	%
Total Adjusted EBITDA	$	198		$	210		$	(12)		(5.6	%)
Adjusted EBITDA Margin:
ASC	10.0		%	11.5		%	(1.5		%)	(12.7	%)
IMS	11.5		%	6.7		%	4.8		%	72.4	%
Bookings:
ASC	$	1,573		$	1,359		$	214		15.7	%
IMS	$	731		$	560		$	171		30.4	%
Total bookings	$	2,304		$	1,919		$	385		20.0	%

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ASC

Revenue:

The ASC segment reported revenue decreases in the three months ended September 30, 2022 decreasing by (21.1%) or $109 million to $408 million from $517 million for three months ended September 30, 2021. The ASC contribution to revenue for the nine months ended September 30, 2022 were also down resulting in a decrease in revenue by (16.1%) or $240 million to $1,248 million from $1,488 million for the nine months ended September 30, 2021. This decrease is attributed to the disposition of our GES operating unit during the quarter coupled with continued supply chain delays impacting revenue generation on various programs within the U.S. Army. Additionally on our ruggedized computing programs, we realized a reduction of order quantities and revenue attributed to extended installation timelines within the U.S. Army. The expanded installation timeframe is attributed to the availability of on-site work force stemming from the impacts of COVID-19. The slower pace of installation lengthened the ‘time to field the units’, resulting a year over year reduction in order quantities. Within our Naval programs in our ASC segment, we realized delays in the receipt of awards on certain components to support computing hardware for naval systems negatively impacting our revenue for the period; however as anticipated in the third quarter, we experienced an increase in new awards which should positively impact Q4 results.

Adjusted EBITDA and Adjusted EBITDA Margin:

ASC’s Adjusted EBITDA decreased by $20 million or 35%, from $56 million for three months ended September 30, 2021 to $36 million for three months ended September 30, 2022. Adjusted EBITDA margin also decreased for three months ended September 30, 2022, decreasing 200bps to 8.8% from 10.8% realized during the three months ended September 30, 2021. The EBITA reduction is attributed to the disposition of our GES operating unit during the quarter, and the reduced revenue output noted above.

ASC’s Adjusted EBITDA also decreased in the nine months ended September 30, 2022 with Adjusted EBITDA decreasing by $46 million or (26.8%) from $171 million for the nine months ended September 30, 2021 to $125 million for the nine months ended September 30, 2022. The Adjusted EBITDA reduction is attributed to the decreased revenue output as noted above, allowing for less absorption of general and administrative and other fixed costs reducing our Adjusted EBITDA Margins 150 bps to 10.0% from the 11.5% for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.

Bookings:

The ASC segment contributed $700 million and $1,573 million in new bookings for three and nine months ended September 30, 2022, respectively. Bookings increased for both the three and nine months ended September 30, 2022, by 82% or $315 million and 16% or $214 million as compared to the three and nine months ended September 30, 2021. The increase is primarily due to additional international orders under new and expanded military aid programs in support of Ukraine and other Eastern European countries, including awards for thermal weapon sights and ground vehicle sensing for the Poland M1 Abrams tank award. Domestically, we have also realized an increase in new awards driven by our next generation thermal weapon sight domestic program with the U.S. Army and our upgrade awards received on our legacy ground vehicle sensing franchise. This was partially offset by reduced order quantities on our ruggedized computing programs due to a delay in installation capabilities attributed to COVID-19 employment within the U.S. Army as noted above, and a reduction attributed to the disposition of our GES operating unit during the quarter.

IMS

Revenue:

IMS segment revenue increased by $20 million or 10% to $229 million for the three months ended September 30, 2022 from $209 million for the three months ended September 30, 2021. Overall, IMS revenue increased for the nine months ended September 30, 2022 by $50 million or 9% to $634 million from $584 million

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for the nine months ended September 30, 2021. This increase was primarily attributed to improved progress on our submarine programs with the US Navy and on our counter short range air defense programs with the US Army.

Adjusted EBITDA and Adjusted EBITDA Margin:

IMS’s Adjusted EBITDA increased by $8 million or 57% to $22 million for three months ended September 30, 2022 from $14 million for the three months ended September 30, 2021 with the trend continuing for the nine months ended September 30, 2022. Adjusted EBITDA increased by $34 million or 87% from $39 million for the nine month ended September 30, 2021 to $73 million for the nine months ended September 30, 2022. Adjusted EBITDA Margin increased from 7% for the three months ended September 30, 2021 to 10% for three months ended September 30, 2022 and we realized an increase of 450 bps from 7% to 12% for the nine months ended September 30, 2021 to the nine months ended September 30, 2022, respectively. The increased profitability is primarily due to improved performance on key design programs including our submarine electric propulsion programs, increased revenue and related operational leverage generated by progress on force protection programs noted above and continued program performance improvements as our development programs transition to production.

Bookings:

The IMS segment contributed $174 million and $731 million in new bookings for three and nine months ended September 30, 2022 respectively. Bookings increased for both the three and nine months ended September 30, 2022 by 76% or $75 million and 30% or $171 million as compared to the three and nine months ended September 30, 2021. This was primarily due to increased bookings for our force protection products including the definitization of 124 mission equipment package (MEP) contract to provide short range air defense for the U.S. Army. In addition to providing short range air defense solutions, our IMS segment also received new awards to support ballistic missile defense on the Patriot missile defense system, further driving the increase in bookings as compared to the prior year. Additionally, IMS continues to realize increased funding on the Next Generation Ballistic Submarine program as we transition from development into production.

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 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 Note 10: 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 September 30, 2022, was $63 million compared to $240 million as of December 31, 2021.

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

	Nine Months Ended September 30,
(Dollars in millions)	2022		2021
Net cash used in operating activities	$	(246)	$	(111)
Net cash provided by investing activities	448		58
Net cash provided by financing activities	(379)		70
Effect of exchange rate changes on cash and cash equivalents	—		—
Net increase (decrease) in cash and cash equivalents	$	(177)	$	17
Free cash flow(1)	$	(262)	$	(149)

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________________

(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 related to the operating activities decreased by $135 million, increasing cash usage from $111 million for the nine months ended September 30, 2021 to $246 million for the nine months ended September 30, 2022. The increase in contract assets and inventory are attributable to advanced procurements to combat the extending lead times impacting supply chain.

Investing Activities

Net cash provided by investing activities increased by $390 million for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. The increased cash generation was attributed to the net proceeds from the sale of the GES business and AAC Venture offset by the pay-back of the Surplus Treasury Agreement with US Holding. For the year ended December 31, 2020, we advanced US Holding $115 million which was subsequently repaid in the three months ended March 31, 2021 driving the decrease in investing cash generation as compared to the nine months September 30, 2021.

Financing Activities

Net cash provided by financing activities decreased by $449 million for the nine months ended September 30, 2022 versus September 30, 2021. The decrease was primarily related to the $396 million dividend paid to US Holding on August 5, 2022 and a decrease in the net borrowings under our revolving credit facility due to working capital management as compared to the nine months ended September 30, 2021.

Free Cash Flow

Free cash flow decreased by $113 million to $(262) million for nine months ended September 30, 2022 from $(149) million for the nine months ended September 30, 2021. This was primarily due to the decrease in cash used to fund working capital for the nine months ended September 30, 2022 when compared to nine months ended September 30, 2021.

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: 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 revolving credit facilities, which had an outstanding balance of $35 million as of September 30, 2022. Our remaining debt facilities are fixed rate obligations and not subject to fluctuations in interest rates. For additional information please refer to Note 10. 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 $50 million as of September 30, 2022. 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.

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Inflation Risk

Given the broader inflation in the economy, we are monitoring the risk inflation presents to active and future contracts. To the extent feasible, we have consistently followed the practice of adjusting our estimated cost at completion to reflect the impact of inflation on salaries and fringe benefits for employees and the cost of purchased materials and services. These adjustments are reflected in our September 30, 2022, financial results and we have not seen broad based increases in costs from inflation that are material to the business as a whole, however in certain naval programs we have seen moderate supplier pricing impact our overall profit levels. If we begin to experience greater than expected supply chain and labor inflation, our profits and margins under our contracts, in particular fixed price contracts, could be adversely affected. 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.

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Item 4. 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 nine-month period ended September 30, 2022, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. 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 three month period ended September 30, 2022 covered by this Quarterly Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

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

49

ITEM 1A. Risk Factors

You should carefully review and consider the information regarding certain factors that could materially affect our business, results of operations, and financial condition as set forth under “Risk Factors” in Part I, Item 1A of our Annual Report and our Second Quarter Form 10-Q. We do not believe that there have been any material changes to the risk factors previously disclosed in our Annual Report and our Second Quarter Form 10-Q. We may disclose changes to such risk factors or disclose additional risk factors from time to time in our future filings with the SEC. Additional risks and uncertainties not presently known to us or that we currently believe not to be material also may adversely impact our business, financial condition and results of operations.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4. Mine Safety Disclosures

Not Applicable

ITEM 5. Other Information

None.

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ITEM 6. Exhibits

Exhibit Number	Exhibit Description
2.1	Waiver and Amendment to Agreement and Plan of Merger, dated as of August 25, 2022, by and among Leonardo DRS, Inc., Blackstart Ltd and RADA Electronic Industries Ltd. (incorporated by reference to Exhibit 2.1(a) of Amendment No. 1 to the Company’s Registration Statement on Form S-4 filed on September 2, 2022).
31.1	Certification by principal executive officer pursuant 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 officer pursuant 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 officer pursuant 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 officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

51

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: November 7, 2022

LEONARDO DRS, INC.
By:	/s/ William J. Lynn III
	Name: William J. Lynn III
	Title: Chief Executive Officer

52

EX-31.1

Certification of Principal Executive Officer

Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) as

Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, William J. Lynn III, certify that:

1.    I have reviewed this Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 of Leonardo DRS, Inc.;

2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.    The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a.        Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.    [Paragraph intentionally omitted in accordance with SEC Release Nos. 34-47986 and 34-54942];

c.    Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.    Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s third fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.    The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.    Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 7, 2022

/s/ William J. Lynn III

William J. Lynn III

Chief Executive Officer

(Principle Executive Officer)

EX-31.2

Certification of Principal Financial Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) as

Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Michael D. Dippold, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 of Leonardo DRS, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.[Paragraph intentionally omitted in accordance with SEC Release Nos. 34-47986 and 34-54942];

c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s third fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

e.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

f.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 7, 2022

/s/ Michael D. Dippold

Michael D. Dippold

Chief Financial Officer

(Principle Financial Officer)

EX-32.1

Certification of Principal Executive Officer

Pursuant to 18 U.S.C. Section 1350 as

Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, William J. Lynn III, Chief Executive Officer of Leonardo DRS, Inc. (the “Company”), hereby certify, that, to my knowledge:

1.    the Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 (the “Report”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and

2.    the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 7, 2022

/s/ William J. Lynn III

William J. Lynn III

Chief Executive Officer

(Principle Executive Officer)

EX-32.2

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 as

Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Michael D. Dippold, Chief Financial Officer of Leonardo DRS, Inc. (the “Company”), hereby certify, that, to my knowledge:

1.the Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 (the “Report”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and

2.the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 7, 2022

/s/ Michael D. Dippold

Michael D. Dippold

Chief Financial Officer

(Principle Financial Officer)

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Cover - shares shares in Millions	9 Months Ended
	Sep. 30, 2022	Nov. 07, 2022
Cover [Abstract]
Document Type	10-Q
Document Quarterly Report	true
Document Period End Date	Sep. 30, 2022
Document Transition Report	false
Entity File Number	333-266494
Entity Registrant Name	Leonardo DRS, Inc.
Entity Incorporation, State or Country Code	DE
Entity Tax Identification Number	13-2632319
Entity Address, Address Line One	2345 Crystal Drive
Entity Address, Address Line Two	Suite 1000
Entity Address, City or Town	Arlington
Entity Address, State or Province	VA
Entity Address, Postal Zip Code	22202
City Area Code	703
Local Phone Number	416-8000
Title of 12(b) Security
Trading Symbol
Security Exchange Name
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Non-accelerated Filer
Entity Small Business	false
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		145
Amendment Flag	false
Document Fiscal Year Focus	2022
Document Fiscal Period Focus	Q3
Entity Central Index Key	0001833756
Current Fiscal Year End Date	--12-31

XML

Consolidated Statements of Earnings (Unaudited) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Revenues:
Total revenues	$ 634	$ 720	$ 1,873	$ 2,059
Cost of revenues:
Total cost of revenues	(504)	(589)	(1,482)	(1,665)
Gross profit	130	131	391	394
General and administrative expenses	(101)	(73)	(261)	(225)
Amortization of intangibles	(3)	(3)	(7)	(7)
Other operating income (expenses), net	350	(2)	351	(7)
Operating earnings	376	53	474	155
Interest expense	(9)	(9)	(27)	(27)
Other, net	0	(1)	0	(1)
Earnings before taxes	367	43	447	127
Income tax provision	88	8	107	31
Net earnings	$ 279	$ 35	$ 340	$ 96
Net earnings per share from common stock:
Basic earnings per share (in dollars per share)	$ 1.92	$ 0.24	$ 2.34	$ 0.66
Diluted earnings per share (in dollars per share)	$ 1.92	$ 0.24	$ 2.34	$ 0.66
Products
Revenues:
Total revenues	$ 580	$ 606	$ 1,670	$ 1,738
Cost of revenues:
Total cost of revenues	(461)	(495)	(1,328)	(1,425)
Services
Revenues:
Total revenues	54	114	203	321
Cost of revenues:
Total cost of revenues	$ (43)	$ (94)	$ (154)	$ (240)

XML

Consolidated Statements of Comprehensive Income (Unaudited) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Statement of Comprehensive Income [Abstract]
Net earnings	$ 279	$ 35	$ 340	$ 96
Other comprehensive income (loss):
Foreign currency translation gain (loss), net of income taxes	(3)	(3)	(3)	0
Net unrecognized gain (loss) on postretirement obligations, net of income taxes	0	(2)	1	7
Gain from pension settlements	0	0	3	0
Other comprehensive income (loss), net of income tax	(3)	(5)	1	7
Total comprehensive income	$ 276	$ 30	$ 341	$ 103

XML

Consolidated Balance Sheets - USD ($) $ in Millions	Sep. 30, 2022	Dec. 31, 2021
Current assets:
Cash and cash equivalents	$ 63	$ 240
Accounts receivable, net	170	156
Contract assets	913	743
Inventories	246	205
Other current assets	39	45
Total current assets	1,431	1,389
Noncurrent assets:
Property, plant and equipment, net	362	364
Intangible assets, net	45	52
Goodwill	952	1,071
Deferred tax assets, net	49	56
Other noncurrent assets	92	137
Total noncurrent assets	1,500	1,680
Total assets	2,931	3,069
Current liabilities:
Short-term borrowings and current portion of long-term debt	67	41
Accounts payable	285	479
Contract liabilities	195	174
Other current liabilities	365	295
Total current liabilities	912	989
Noncurrent liabilities:
Long-term debt	350	352
Pension and other postretirement benefit plan liabilities	56	61
Other noncurrent liabilities	75	74
Total noncurrent liabilities	481	487
Shareholder's equity:
Preferred stock, $0.01 par value: 10,000,000 shares authorized; none issued	0	0
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	(3,039)	(2,983)
Accumulated other comprehensive loss	(57)	(58)
Total shareholder's equity	1,538	1,593
Total liabilities and shareholder's equity	$ 2,931	$ 3,069

XML

Consolidated Balance Sheets (Parenthetical) - $ / shares	Sep. 30, 2022	Dec. 31, 2021
Shareholder's equity:
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, authorized (in shares)	10,000,000	10,000,000
Preferred stock, issued (in shares)	0	0
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, authorized (in shares)	300,000,000	300,000,000
Common stock, issued (in shares)	145,000,000	145,000,000
Common stock, outstanding (in shares)	145,000,000	145,000,000

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Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Millions	9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021
Operating activities
Net earnings	$ 340	$ 96
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization	48	44
Deferred income taxes	10	33
Gain from sale of business	(350)	0
Other	0	(1)
Changes in assets and liabilities:
Accounts receivable	(17)	6
Contract assets	(174)	(116)
Inventories	(43)	32
Other current assets	(2)	23
Other noncurrent assets	10	19
Defined benefit obligations	(4)	(12)
Other current liabilities	83	(7)
Other noncurrent liabilities	(3)	(18)
Accounts payable	(180)	(193)
Contract liabilities	36	(17)
Net cash used in operating activities	(246)	(111)
Investing activities
Capital expenditures	(35)	(42)
Business acquisitions, net of cash acquired	0	(14)
Proceeds from sales of businesses	483	0
Repayments received on related party note receivable	0	115
Investment in unconsolidated affiliate	0	(1)
Net cash provided by investing activities	448	58
Financing activities
Net decrease in third party borrowings (maturities of 90 days or less)	(12)	(4)
Repayment of related party debt	(640)	(725)
Borrowings from related parties	675	800
Dividend to US Holding	(396)	0
Other	(6)	(1)
Net cash provided by financing activities	(379)	70
Effect of exchange rate changes on cash and cash equivalents	0	0
Net change in cash and cash equivalents	(177)	17
Cash and cash equivalents at beginning of year	240	61
Cash and cash equivalents at end of period	$ 63	$ 78

XML

Consolidated Statements of Shareholder's Equity (Unaudited) - USD ($) $ in Millions	Total	Common stock	Additional paid- in capital	Accumulated other comprehensive loss	Accumulated deficit
Balance at beginning of period at Dec. 31, 2020	$ 1,427	$ 1	$ 4,633	$ (70)	$ (3,137)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Total comprehensive income	103			7	96
Balance at end of period at Sep. 30, 2021	1,530	1	4,633	(63)	(3,041)
Balance at beginning of period at Dec. 31, 2021	1,593	1	4,633	(58)	(2,983)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Total comprehensive income	341			1	340
Dividend to US Holding	(396)				(396)
Balance at end of period at Sep. 30, 2022	$ 1,538	$ 1	$ 4,633	$ (57)	$ (3,039)

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Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2022

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

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 is controlled by Leonardo S.p.A (hereinafter, “Leonardo S.p.A.,” or “the Parent”), an Italian multi-national aerospace, defense and security company headquartered in Rome, Italy, through its ownership of Leonardo US Holding, LLC (“US Holding”). US Holding is the direct and sole shareholder of the Company.

DRS is a provider of defense products and technologies that are used across land, air, sea, space and cyber domains. Our diverse array of defense systems and solutions are offered to all branches of the U.S. military, major aerospace and defense prime contractors, government intelligence agencies, international military customers and industrial markets for deployment on a wide range of military platforms. We focus our capabilities in areas of critical importance to the U.S. military, such as advanced sensing, network computing, force protection and electrical power and propulsion.

These capabilities directly align with our two reportable segments: Advanced Sensing and Computing and Integrated Mission Systems. The U.S. Department of Defense (“DoD”) is our largest customer and accounts for approximately 83% and 82% of our total revenues as an end-user for the third quarter and nine months of 2022, respectively, and 84% and 85% for the third quarter and nine months of 2021, respectively. Specific international and commercial market opportunities exist within these segments and make up approximately 17% and 18% of our total revenues for the third quarter and nine months of 2022, respectively, and 16% and 15% for the third quarter and nine months of 2021, respectively. Our two reportable segments reflect the way performance is assessed and resources are allocated by our Chief Executive Officer, who is our chief operating decision maker (“CODM”).

Advanced Sensing and Computing (“ASC”)

The ASC segment provides sensing and computing system and subsystem solutions to the U.S. military and allied nations focused on solving the most complex threat dynamics facing our service men and women today. We provide world class sensing products in all warfighting domains along with the computation systems to provide situational understanding.

Our technologies and products are deployed on nearly all military platforms across land, sea, air, cyberspace, and space on individual soldiers, ground vehicles, ships, aircraft, and satellites. We have market leading capabilities in electro-optic and infrared imaging, advanced lasers, electronic warfare and cyber, communications, and computing in these domains.

Integrated Mission Systems (“IMS”)

The IMS segment provides critical force protection, platform integration, transportation and logistics and power conversion and propulsion systems to the U.S. military and its allies. Our force protection systems provide much needed protection for our service members and military assets from evolving and proliferating threats and include advanced solutions for counter-unmanned aerial systems, short-range air defense systems and active protection systems on ground vehicles. 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 and its allies.

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 15: 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 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 (“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, 2021 filed as Exhibit 99.1 to the Current Report on Form 8-K filed on August 2, 2022.

C.Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. 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

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 measured by the ratio of cumulative costs incurred to date to estimated total contract costs at completion (the "cost-to-cost method"). On certain other contracts, primarily time and material (“T&M”) and cost-plus contracts, revenue is recognized using the right-to-invoice practical expedient as we are contractually able to bill our customer based on control transferred to the customer. See Note 2. Revenue from Contracts with Customers for additional information regarding revenue recognition.

E.Cost of Revenues

Cost of revenues includes materials, labor and overhead costs incurred in the manufacturing, design, and provision of products and services sold in the period as well as warranty costs. Material costs include raw materials, purchased components and sub-assemblies, outside processing and inbound freight costs. Labor and overhead costs consist of direct and indirect manufacturing costs, including wages and fringe benefits, operating supplies, depreciation and amortization, occupancy costs, and purchasing, receiving and inspection costs.

F.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 products, solutions, and technologies. R&D costs include basic research, applied research, concept formulation studies,

design, development, and related test activities. IR&D costs are allocated to customer contracts as part of the general and administrative overhead costs and generally recoverable on our customer contracts with the U.S. Government. Customer-funded R&D costs are charged directly to the related 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 third quarter and first nine months of 2022 and 2021 were immaterial to the Company's results of operations. The operations of the Company's foreign subsidiaries are translated from the local (functional) currencies into U.S. dollars using weighted average rates of exchange during each monthly period. The rates of exchange at each balance sheet date are used for translating certain balance sheet accounts and gains or losses resulting from these translation adjustments are included in the accompanying Consolidated Balance Sheets as a component of 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. We maintain an allowance recorded in the Allowance for Credit Losses account that is estimated and recorded utilizing relevant information about past events, including historical experience, current conditions and a reasonable and supportable forecast that affects the collectability of the related financial asset. 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 Sheets, and the net gain or loss is included in the determination of net earnings. Maintenance and repairs are charged to operations as incurred and renewals and improvements are capitalized. See Note 5: Property, Plant and Equipment for additional information regarding property, plant and equipment.

L.Goodwill

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 six and seven reporting units at September 30, 2022 and December 31, 2021, respectively. The annual impairment test is conducted as of December

31. The Company did not identify any triggering events during the nine months ended September 30, 2022 or September 30, 2021. 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 Sheets 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 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.

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 financial 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 of observable inputs and minimize the use of unobservable inputs in measuring fair value, and to utilize a three-level fair value

hierarchy that prioritizes the inputs used to measure fair value. The three hierarchical levels used to measure fair value are as follows:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs other than quoted prices that are directly or indirectly observable.

Level 3 — Significant inputs to the valuation model are unobservable.

In certain instances, fair value is determined through information obtained from third parties using the latest available market data. In obtaining such data from third parties, we have evaluated the methodologies used to develop the estimate of fair value in order to assess whether such valuations are representative of fair value. The Company categorizes plan assets for disclosure purposes in accordance with this fair value hierarchy. 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 Sheets at carrying value, which other than the 7.5% Term loan due November 30, 2023, 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, which requires that any assets acquired and liabilities assumed be measured at their respective fair values on the acquisition date. The accounting for business combinations requires the Company to make significant judgments and estimates. Any excess of the fair value of consideration transferred over the assigned values of the net assets acquired is recognized as goodwill.

As previously announced, on June 21, 2022, we entered into the Agreement and Plan of Merger, dated as of June 21, 2022 (the “merger agreement”), by and among the Company, RADA Electronic Industries Ltd (“RADA”) and Blackstart Ltd, a company organized under the laws of the State of Israel and a wholly owned subsidiary of DRS (“Merger Sub”). Upon the terms and subject to the conditions of the merger agreement, and in accordance with the Companies Law, 5759-1999, of the State of Israel, at the effective time of the merger contemplated by the merger agreement (the “merger”), Merger Sub will be merged with and into RADA, with RADA as the surviving company of the merger and thereby becoming a wholly owned subsidiary of DRS. At the effective time of the merger (the “effective time”), each ordinary share of RADA, par value New Israeli Shekel 0.03 per share (“RADA shares”), issued and outstanding immediately prior to the effective time will be converted into and become exchangeable for one share of common stock of DRS, par value $0.01 per share (“DRS common stock”). Immediately prior to the effective time, the shares of DRS common stock held by US Holding, the current sole stockholder of DRS, will be split (rounded up to the nearest whole share), as necessary, such that, immediately following the effective time and the issuance of the shares of DRS common stock to holders of RADA shares and the treatment of options to purchase RADA shares: (A) US Holding will hold 80.5% of the issued and outstanding shares of DRS common stock on a fully diluted basis (with US Holding’s ownership percentage including 50% of any awards or other equity interests that DRS may issue pursuant to entitlements under any grants of certain one-time special awards of restricted stock units (the “One-Time Awards”) and the foregoing percentage calculation excluding any awards or other equity interests that DRS may issue pursuant to entitlements under the DRS’s long term incentive plan and 50% of any awards or other equity interests that DRS may issue pursuant to entitlements in

connection with any grants of One-Time Awards, and such foregoing percentage will assume a reference price for RADA options equal to the volume-weighted average price of the RADA shares on the NASDAQ for the ten trading days immediately prior to the closing date); and (B) the holders of RADA shares, RADA vested options and RADA unvested options (or DRS options issued pursuant to the provisions of the merger agreement) will hold or have entitlements to 19.5% of the issued and outstanding shares of DRS common stock on a fully diluted basis (the foregoing percentage calculation excluding any awards or other equity interests that DRS may issue pursuant to entitlements under the DRS long-term incentive plan or the issuance of any One-Time Awards). Each of DRS’s and RADA’s obligation to consummate the merger is subject to the satisfaction or waiver of a number of conditions specified in the merger agreement.

On August 3, 2022, we filed a registration statement on Form S-4 with the SEC for the shares of DRS common stock to be issued in the merger, which (as amended) was declared effective by the SEC on September 13, 2022. On October 19, 2022, RADA’s shareholders voted to approve the transaction, and on October 24, 2022, we received the required approval from the Committee on Foreign Investment in the United States (CFIUS). We anticipate closing near the end of November or early December 2022.

Investments

Investments where we have the ability to exercise significant influence, but do not control, are accounted for under the equity method of accounting and are included in other noncurrent assets on our Consolidated Balance Sheets. Significant influence typically exists if we have a 20% to 50% ownership interest in the investee. Under this method of accounting, our share of the net earnings or losses of the investee is included in operating profit in other income, net on our Consolidated Statements of Earnings since the activities of the investee are closely aligned with the operations of the business segment holding the investment. We evaluate our equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may be impaired. If a decline in the value of an equity method investment is determined to be other than temporary, a loss is therefore recorded during the current period. The Company sold its interest in its only investment accounted for under the equity method on July 8, 2022.

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

Variable Interest Entities

The Company occasionally forms joint ventures and/or enters into arrangements with special purpose limited liability companies for the purpose of bidding and executing on specific projects. The Company analyzes each such arrangement to determine whether it represents a variable interest entity (“VIE”). If the arrangement is determined to be a VIE, the Company assesses whether it is the primary beneficiary of the VIE and if it is, consequently required to consolidate the VIE. The Company did not have any investment in VIEs for the periods presented.

Divestitures

On March 21, 2022, the Company entered into a definitive agreement to sell its Global Enterprise Solutions (“GES”) business to SES Government Solutions, Inc., a wholly-owned subsidiary of SES S.A., for a selling price of $450 million subject to certain working capital adjustments. The transaction was completed on August 1, 2022 and resulted in cash proceeds of $427 million after net working capital adjustments. The transaction netted an aggregate pretax gain net of transaction costs of $305 million ($234 million after tax) of which $319 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 $71 million. GES, which was part of the ASC segment, provides commercial satellite communications to the U.S. Government and delivers satellite communications and security solutions to customers worldwide. SES S.A. has guaranteed the payment of the purchase price and performance of all other obligations of SES Government Solutions, Inc. under the agreement.

The company recorded operating income for the GES business of $13 million and $23 million for the nine months ended September 30, 2022 and the nine months ended September 30, 2021, respectively.

In February 2022, the Company’s Board of Directors approved the strategic initiative to divest of the Company’s interest in Advanced Acoustic Concepts (“AAC”). On April 19, 2022, we entered into a definitive sales agreement to divest our share of our equity investment in AAC for $56 million to Thales Defense & Security, Inc., the minority partner in the joint venture. The transaction was completed on July 8, 2022 and resulted in proceeds of $56 million. The transaction netted an aggregate pretax gain of $31 million ($22 million net of taxes), The aggregate gain of $31 million is included in Other Operating income (expense) net offset by tax expense of $9 million.The proceeds generated from the GES and AAC divestitures resulted in a $396 million dividend to US Holding, our sole shareholder. The $396 million represents the proceeds generated net of our costs to sell and estimated tax obligations. The dividend was issued on August 5, 2022

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Revenue from Contracts with Customers

9 Months Ended

Sep. 30, 2022

Revenue from Contract with Customer [Abstract]

Revenue from Contracts with Customers

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 provide for services beyond standard assurances and therefore do not consider warranties to be separate performance obligations. Generally, we enter into three types of contracts: fixed-price contracts, cost-plus contracts and T&M contracts (cost-plus contracts and T&M contracts are aggregated below as flexibly priced contracts). The majority of our total revenues are derived from fixed-price contracts; refer to the revenue disaggregation disclosures that follow.

For fixed-price contracts, customers agree to pay a fixed amount, negotiated in 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.

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 using the cost-to-cost method. 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. 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 September 30,						Nine Months Ended September 30,
(Dollars in millions)	2022			2021			2022			2021
Revenue	$	(11)		$	(11)		$	(22)		$	(20)
Total % of Revenue	1.8		%	1.6		%	1.2		%	1.0		%

The impacts noted above are attributed primarily to changes in our firm-fixed-price development type programs as well as the impacts of inflation on certain fixed price production programs. They consist of changes in the designs required to achieve contractual specifications for fixed priced development programs and inflationary cost increases on certain naval production programs that resulted in a change in the programs’ estimate and related profitability. The reduction to revenue for the three and nine month periods ended September 30, 2022 and September 30, 2021 was attributed primarily to certain cost impacts on surface ship programs within our IMS segment and inflationary pressures on naval programs within our ASC 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".

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 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.

(Dollars in millions)	September 30, 2022		December 31, 2021
Contract assets	$	913	$	743
Contract liabilities	195		174
Net contract assets	$	718	$	569

Revenue recognized in the three and nine month periods ended September 30, 2022 that was included in the contract liability balance at the beginning of each period was $14 million and $121 million, respectively. Revenue

recognized in the three and nine month periods ended September 30, 2021 that was included in the contract liability balance at the beginning of each period was $11 million and $100 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 funded and unfunded components. 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 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 September 30, 2022, incorporating both funded and unfunded components:

Backlog:	September 30, 2022
(Dollars in millions)
Total Backlog	$	3,138

We expect to recognize approximately 21% of our September 30, 2022 backlog as revenue over the next three months, with the remainder to be recognized thereafter.

Disaggregation of Revenue

ASC: ASC 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 ASC revenue by geographical

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

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions)	2022		2021		2022		2021
Revenue by Geographical Region
United States	$	364	$	484	$	1,103	$	1,385
International	41		27		137		90
Intersegment Sales	3		6		8		13
Total	$	408	$	517	$	1,248	$	1,488
Revenue by Customer Relationship
Prime contractor	$	216	$	346	$	664	$	901
Subcontractor	189		165		576		574
Intersegment Sales	3		6		8		13
Total	$	408	$	517	$	1,248	$	1,488
Revenue by Contract Type
Firm Fixed Price	$	349	$	438	$	1,085	$	1,283
Flexibly Priced(1)	56		73		155		192
Intersegment Sales	3		6		8		13
Total	$	408	$	517	$	1,248	$	1,488

________________

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

IMS: IMS 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 IMS revenue by geographical region, customer relationship and contract type

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

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions)	2022		2021		2022		2021
Revenue by Geographical Region
United States	$	222	$	198	$	612	$	547
International	7		11		21		37
Intersegment Sales	—		—		1		—
Total	$	229	$	209	$	634	$	584
Revenue by Customer Relationship
Prime contractor	$	41	$	41	$	110	$	127
Subcontractor	188		168		523		457
Intersegment Sales	—		—		1		—
Total	$	229	$	209	$	634	$	584
Revenue by Contract Type
Firm Fixed Price	$	195	$	179	$	542	$	495
Flexibly Priced(1)	34		30		91		89
Intersegment Sales	—		—		1		—
Total	$	229	$	209	$	634	$	584

________________

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

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Accounts Receivable

9 Months Ended

Sep. 30, 2022

Receivables [Abstract]

Accounts Receivable

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)	September 30, 2022		December 31, 2021
Accounts receivable	$	171	$	157
Less allowance for credit losses	(1)		(1)
Accounts receivable, net	$	170	$	156

The Company maintains certain agreements with financial institutions to sell certain trade receivables. Receivables are derecognized in their entirety when sold, and the Company’s continuing involvement in the sold receivables is limited to their servicing, for which the Company receives a fee commensurate with the service provided. Pursuant to the servicing agreements, the Company collected approximately $3 million and $15 million at September 30, 2022 and December 31, 2021, respectively, of these sold receivables that had not yet been remitted to the financial institutions. These unremitted amounts collected on behalf of the financial institutions are included within short-term borrowings and current portion of long-term debt in the Consolidated Balance Sheets.

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Inventories

9 Months Ended

Sep. 30, 2022

Inventory Disclosure [Abstract]

Inventories

Inventories

Inventories consists of the following:

(Dollars in millions)	September 30, 2022		December 31, 2021
Raw materials	$	50	$	43
Work in progress	194		161
Finished goods	2		1
Total	$	246	$	205

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Property, Plant and Equipment

9 Months Ended

Sep. 30, 2022

Property, Plant and Equipment [Abstract]

Property, Plant and Equipment

Property, Plant and Equipment

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

(Dollars in millions)	September 30, 2022		December 31, 2021
Land, buildings and improvements	$	321	$	312
Plant and machinery	190		191
Equipment and other	317		298
Total property, plant and equipment, at cost	828		801
Less accumulated depreciation	(466)		(437)
Total property, plant and equipment, net	$	362	$	364

Depreciation expense related to property, plant and equipment was $14 million and $41 million for the three and nine month periods ended September 30, 2022, and $13 million and $37 million for the three and nine month periods ended September 30, 2021, respectively.

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Other Liabilities

9 Months Ended

Sep. 30, 2022

Other Liabilities Disclosure [Abstract]

Other Liabilities

Other Liabilities

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

(Dollars in millions)	September 30, 2022		December 31, 2021
Salaries, wages and accrued bonuses	$	63	$	70
Fringe benefits	68		74
Litigation	10		10
Restructuring costs	1		4
Provision for contract losses	55		48
Operating lease liabilities	25		24
Taxes Payable	87		—
Other(1)	56		65
Total other current liabilities	$	365	$	295
Operating lease liabilities	$	61	$	73
Other	14		1
Total other noncurrent liabilities	$	75	$	74

________________

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

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Goodwill

9 Months Ended

Sep. 30, 2022

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill

Goodwill

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

(Dollars in millions)	ASC		IMS		Total
Balance as of December 31, 2021	$	652	$	419	$	1,071
Reduction for Divestitures	(117)				(117)
Acquisition adjustment	(2)		—		(2)
Balance as of September 30, 2022	533		419		952

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Intangible Assets

9 Months Ended

Sep. 30, 2022

Goodwill and Intangible Assets Disclosure [Abstract]

Intangible Assets

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 September 30, 2022 and December 31, 2021. All intangible assets are being amortized over their estimated useful lives, as indicated below, with no estimated residual values.

	September 30, 2022						December 31, 2021
(Dollars in millions)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Customer relationships	$	957	$	(915)	$	42	$	957	$	(908)	$	49
Patents and licenses	9		(6)		3		9		(6)		3
Total intangible assets	$	966	$	(921)	$	45	$	966	$	(914)	$	52

Amortization expense related to intangible assets was $3 million and $7 million for the three and nine month periods ended September 30, 2022 and was $3 million and $7 million for the three and nine month periods ended September 30, 2021.

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.

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Income Taxes

9 Months Ended

Sep. 30, 2022

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at September 30, 2021 and December 31, 2020 is as follows:

(Dollars in millions)	September 30, 2022		December 31, 2021
Gross deferred tax assets	$	110	$	120
Less valuation allowance	10		10
Deferred tax assets	100		110
Deferred tax liabilities	51		54
Deferred tax assets, net	$	49	$	56

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

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Debt

9 Months Ended

Sep. 30, 2022

Debt Disclosure [Abstract]

Debt

Debt

The Company’s debt consists of the following:

(Dollars in millions)	September 30, 2022		December 31, 2021
7.5% Term loan due November 30, 2023(1)	$	139	$	139
5.0% Daylight term loan due October 15, 2024(1)	78		78
Borrowings under revolving credit facility(1)	35		—
Finance lease and other	162		161
Short-term borrowings	3		15
Total debt principal	417		393
Less unamortized debt issuance costs and discounts	—		—
Total debt, net	417		393
Less short-term borrowings and current portion of long-term debt	(67)		(41)
Total long-term debt	$	350	$	352

________________

(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, the Company entered into a credit agreement with its ultimate parent company, Finmeccanica S.p.A. (presently Leonardo S.p.A.) in the amount of $2 billion (the “2009 Credit Agreement”). The 2009 Credit Agreement was subsequently assigned to US Holding and has a maturity of November 30, 2023. The 2009 Credit Agreement provides for a term loan bearing interest at a rate of 7.5%, with interest payments due semi-annually on June 20 and December 20 in each year (the “7.5% Term loan”). The outstanding balance of the 7.5% Term loan at September 30, 2022 and December 31, 2021 was $139 million. The fair value of this term loan at September 30, 2022 and December 31, 2021 was $129 million and $182 million, respectively; however, the Company has the ability to prepay the outstanding principal balance at the carrying amount without penalty.

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 $78 million and $78 million at September 30, 2022 and December 31, 2021, respectively, 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 Credit Agreement provides for a revolving credit facility available for working capital needs of the Company (the “Revolving Credit Facility”). As of September 30, 2022 and December 31, 2021, the Revolving Credit Facility had a credit limit of $450 million and an interest rate of LIBOR plus 3.5%. There is a commitment fee of 0.25% applied to the unused balance of the Revolving Credit Facility and there are no compensating balance requirements. The outstanding balance as of September 30, 2022 was $35 million and there was no balance on the Revolving Credit Facility as of December 31, 2021.

The Company also maintains uncommitted working capital credit facilities with certain financial institutions in the aggregate of $75 million and $65 million at September 30, 2022 and December 31, 2021, respectively (the “Financial Institution Credit Facilities”). The Financial Institution Credit Facilities are guaranteed by Leonardo S.p.A. The primary purpose of the Financial Institution Credit Facilities is to support standby letter of credit issuances on contracts with customers and also includes a revolving facility with a maximum borrowing limit of $15 million, which bears interest at LIBOR plus 0.5%. At September 30, 2022 and December 31, 2021, there was no

balance outstanding on the revolving facility. The Company had letters of credit outstanding of approximately $31 million and $35 million as of September 30, 2022, and December 31, 2021, which reduces the available capacity of the Financial Institution Credit Facilities by an equal amount.

Short-term Borrowings

As of September 30, 2022 and December 31, 2021, the Company recognized $3 million and $15 million, respectively, collected on behalf of the buyers of our trade receivables pursuant to our factoring arrangements as short-term borrowings and current portion of long-term debt in the Consolidated Balance Sheets, which approximates its fair value. Refer to Note 3: Accounts Receivable for more information.

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Pension and Other Postretirement Benefits

9 Months Ended

Sep. 30, 2022

Retirement Benefits [Abstract]

Pension and Other Postretirement Benefits

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 Code and regulations thereunder. 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 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.

The following table summarizes the components of net periodic benefit cost for the Company's pension, postretirement and supplemental retirement plans for the three months ended September 30:

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

The following table summarizes the components of net periodic benefit cost for the Company's pension, postretirement and supplemental retirement plans for the nine months ended September 30,:

	Defined Benefit Pension Plans				Postretirement Benefit Plan				Supplemental Retirement Plans
(Dollars in millions)	Nine Months Ended September 30, 2022		Nine Months Ended September 30, 2021		Nine Months Ended September 30, 2022		Nine Months Ended September 30, 2021		Nine Months Ended September 30, 2022		Nine Months Ended September 30, 2021
Service cost	$	—	$	—	$	—	$	—	$	—	$	—
Interest cost	$	4	$	4	—		—		1		—
Less Expected return on plan assets	$	(5)	$	(6)	—		—		—		—
Amortization of net actuarial loss (gain)	$	1	$	1	—		(1)		—		—
Amortization of prior service cost	$	—	$	—	—		—		—		—
Settlement expense (income)	$	1	$	—	—		—		—		—
Net periodic benefit cost	$	1	$	(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 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 Costs of revenues and General and administrative expenses on the Consolidated Statement 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.

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Share-based compensation plans	9 Months Ended
	Sep. 30, 2022
Share-Based Payment Arrangement [Abstract]
Share-based compensation plans	Share-based compensation plansThe Company does not have any share-based compensation plans. See Note 6: Other Liabilities, for information regarding cash compensation.

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Commitment and Contingencies

9 Months Ended

Sep. 30, 2022

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

Commitments and Contingencies

Commitments

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

Contingencies

From time to time, we are subject to certain legal proceedings and claims in the ordinary course of business. These matters are subject to many uncertainties and it is possible that some of these matters ultimately could be decided, resolved or settled in a manner adverse to us. Although the precise amount of liability that may result from these matters is not ascertainable, the Company believes that any amounts exceeding the Company's recorded accruals should not materially adversely affect the Company's financial condition or liquidity. It is possible, however, that the ultimate resolution of those matters could result in a material adverse effect on the Company's

results of operations and/or cash flows from operating activities for a particular reporting period. We establish reserves for specific legal matters when we determine that the likelihood of an unfavorable outcome is probable and the loss is reasonably estimable.

Some environmental laws, such as the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (also known as “CERCLA” or the “Superfund law”) and similar state statutes, can impose liability upon former owners or operators for the entire cost of investigating and remediating contaminated sites regardless of the lawfulness of the original activities that led to the contamination. In July 2000, an entity which later became a subsidiary of the Company received a Section 104(e) Request for Information (“RFI”) from the National Park Service (“NPS”), pursuant to CERCLA, regarding the presence of radioactive material at a site within a national park, which site was operated by an alleged predecessor to our subsidiary over 50 years ago. Following the subsidiary’s response to the RFI, the NPS directed it and another alleged former operator to perform an Engineering Evaluation and Cost Analysis (“EE/CA”) of a portion of the site. The Company’s subsidiary made a good faith offer to conduct an alternative EE/CA work plan, but the NPS rejected this offer and opted to perform the EE/CA itself. The NPS previously posted its intention to open a formal public comment period regarding the EE/CA at the end of 2019. To the Company’s knowledge, the EE/CA has not been released and a public comment period has yet to be opened.

Following completion of the EE/CA, the NPS may seek reimbursement for its investigative and remedial efforts to date, or direct one or more of the potentially responsible parties to perform any remediation that may be required by CERCLA or may enter an alternative dispute resolution proceeding to attempt to resolve each party’s share. In addition, the NPS may seek to recover damages for loss of use of certain natural resources. The Company believes that it has legitimate defenses to its subsidiary’s potential liability and that there are other potentially responsible parties for the environmental conditions at the site, including the U.S. government as owner, operator and arranger at the site. The potential liability associated with this matter could change substantially due to such factors as additional information on the nature or extent of contamination, methods of remediation that might be recommended or required, changes in the apportionment of costs among the responsible parties, whether the NPS seeks to recover additional damages, whether the NPS’s plans to investigate additional areas to identify a need for further remedial action for which the Company may be identified as a potentially responsible party and other actions by governmental agencies or private parties.

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

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.

Product Warranties

Product warranty costs generally are accrued in proportion to product revenue realized in conjunction with our over-time revenue recognition policy. Product warranty expense is recognized based on the term of the product warranty, generally one year to three years, and the related estimated costs, considering historical claims expense.

Accrued warranty costs are reduced as these costs are incurred and as the warranty period expires, and otherwise may be modified as specific product performance issues are identified and resolved. The following is a summary of changes in the product warranty balances during the period ended September 30, 2022:

(Dollars in millions)
Balance as of December 31, 2021	$	19
Additional provision	8
Reversal and utilization	(8)
Balance as of September 30, 2022	19

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Related Party Transactions

9 Months Ended

Sep. 30, 2022

Related Party Transactions [Abstract]

Related Party Transactions

Related Party Transactions

The Company provides services related to certain of the U.S. operations of our parent and certain other of its affiliates. These services include financial, tax, trade compliance, marketing and communications and legal.

The Company also has related-party sales with the Parent and its other affiliates that occur in the regular course of business.

Related-party sales for these transactions are included in revenues and were $63 million and $7 million for the nine-month periods ended September 30, 2022 and September 30, 2021, respectively and $9 million and $3 million for the three-month periods ended September 30, 2022 and September 30, 2021, respectively.

The Company has related-party purchases with the Parent 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 $20 million and $22 million for the nine-month periods ended September 30, 2022 and September 30, 2021, respectively and related-party purchases for these transactions are included in cost of revenues for the three -month periods ended September 30, 2022 and September 30, 2021 were $2 million and $16 million, respectively.

The receivables related to these transactions with the Parent and its other affiliates of $33 million and $2 million, respectively, and payables of $7 million and $1 million , respectively, are included in accounts receivable and accounts payable in our Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021. In addition there was a related party balance in contract assets of $8 million and $0 million at September 30, 2022 and December 31, 2021, respectively.

The Company entered into a Surplus Treasury Agreement with US Holding (the “Surplus Agreement”) in December 2019. The Surplus Agreement allows the Company to advance excess funds to US Holding when funds are available. The advances bear interest at LIBOR plus between 5 and 20 basis points depending on the tenor of the advance. As of September 30, 2022 and December 31, 2021 the Company did not advance any amount to US Holding.

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 and Note 16: Subsequent Events more information.

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Segment Information

9 Months Ended

Sep. 30, 2022

Segment Reporting [Abstract]

Segment Information

Segment InformationOperating 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. Beginning in the first quarter of 2022, the Company’s operating and reportable segments were revised into two reportable segments, ASC and 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 and certain non-operating subsidiaries of the Company, are grouped in Corporate & Eliminations.

We primarily use Adjusted EBITDA to manage the Company and allocate resources. Adjusted EBITDA of our business segments includes our net earnings before income taxes, amortization of acquired intangible assets, depreciation, restructuring costs, interest, transaction costs related to an anticipated offering of securities, acquisition and divestiture related expenses, foreign exchange, COVID-19 response costs, non-service pension expenditures and other one-time non-operational events. 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.

Certain information related to our segments for the three and nine month periods ended September 30, 2022 and September 30, 2021 is presented in the following tables. Consistent accounting policies have been applied by all segments within the Company, within all reporting periods. A description of our reportable segments as of September 30, 2022 and September 30, 2021 has been included in Note 1: Summary of Significant Accounting Policies. Transactions between segments generally are negotiated and accounted for under terms and conditions that are similar to other government and commercial contracts; however, these intercompany transactions are eliminated in consolidation.

Total revenues and intersegment revenues by segment for the three and nine month periods ended September 30, 2022 and, September 30, 2021 consists of the following:

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions)	2022		2021		2022		2021
ASC	$	408	$	517	$	1,248	$	1,488
IMS	229		209		634		584
Corporate & Eliminations	(3)		(6)		(9)		(13)
Total revenue	$	634	$	720	$	1,873	$	2,059

(Dollars in millions)	2022		2021		2022		2021
ASC	$	3	$	6	$	8	$	13
IMS	—		—		1		—
Total intersegment revenue	$	3	$	6	$	9	$	13

Depreciation by segment for the three and nine month periods ended September 30, 2022 and September 30, 2021 consists of the following:

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions)	2022		2021		2022		2021
ASC	$	9	$	9	$	27	$	25
IMS	5		4		14		12
Total depreciation	$	14	$	13	$	41	$	37

Total assets by segment as of September 30, 2022 and December 31, 2021 consist of the following:

(Dollars in millions)	September 30, 2022		December 31, 2021
ASC	$	1,661	$	1,545
IMS	1,121		1,145
Corporate & Eliminations	149		379
Total assets	$	2,931	$	3,069

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)	2022		2021		2022		2021
Adjusted EBITDA
ASC	$	36	$	56	$	125	$	171
IMS	22		14		73		39
Corporate & Eliminations	—		—		—		—
Total Adjusted EBITDA	58		70		198		210
Amortization of intangibles	(3)		(3)		(7)		(7)
Depreciation	(14)		(13)		(41)		(37)
Interest expense	(9)		(9)		(27)		(27)
Deal related transaction costs	(16)		—		(26)		(4)
Gain on sale of business	350		—		350		—
COVID-19 response costs	—		(1)		—		(6)
Other non-operational events	1		(1)		—		(2)
Income tax (provision) benefit	(88)		(8)		(107)		(31)
Net earnings	$	279	$	35	$	340	$	96

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Subsequent Events

9 Months Ended

Sep. 30, 2022

Subsequent Events [Abstract]

Subsequent Events

Subsequent Events

The Company has evaluated subsequent events through November 7, 2022, which represents the date on which the Consolidated Financial Statements were issued.

On October 3, 2022, US Holding converted from a Corporation to a Limited Liability Company under Delaware law. Accordingly, US Holding will be taxed as a partnership and the Company will no longer be included in the US Consolidated tax filings of US Holding. Prospectively, the Company will file a consolidated return with Leonardo DRS, Inc. as the parent company and will include the US Subsidiaries of Leonardo DRS, Inc.

As previously announced, on June 21, 2022, we entered into the Agreement and Plan of Merger, dated as of June 21, 2022 (the “merger agreement”), by and among the Company, RADA Electronic Industries Ltd (“RADA”) and Blackstart Ltd, a company organized under the laws of the State of Israel and a wholly owned subsidiary of DRS (“Merger Sub”). In connection with this transaction, which is detailed in Note 1 Summary of Significant Accounting Policies,on October 19, 2022, RADA’s shareholders voted to approve the transaction, and on October 24, 2022, we received the required approval from the Committee on Foreign Investment in the United States (CFIUS). We anticipate closing near the end of November or early December 2022.

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Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2022

Accounting Policies [Abstract]

Segment Reporting

Our two reportable segments reflect the way performance is assessed and resources are allocated by our Chief Executive Officer, who is our chief operating decision maker (“CODM”).

Advanced Sensing and Computing (“ASC”)

The ASC segment provides sensing and computing system and subsystem solutions to the U.S. military and allied nations focused on solving the most complex threat dynamics facing our service men and women today. We provide world class sensing products in all warfighting domains along with the computation systems to provide situational understanding.

Our technologies and products are deployed on nearly all military platforms across land, sea, air, cyberspace, and space on individual soldiers, ground vehicles, ships, aircraft, and satellites. We have market leading capabilities in electro-optic and infrared imaging, advanced lasers, electronic warfare and cyber, communications, and computing in these domains.

Integrated Mission Systems (“IMS”)

The IMS segment provides critical force protection, platform integration, transportation and logistics and power conversion and propulsion systems to the U.S. military and its allies. Our force protection systems provide much needed protection for our service members and military assets from evolving and proliferating threats and include advanced solutions for counter-unmanned aerial systems, short-range air defense systems and active protection systems on ground vehicles. 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 and its allies.

Other

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

Basis of Presentation

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 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 (“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, 2021 filed as Exhibit 99.1 to the Current Report on Form 8-K filed on August 2, 2022.

Use of Estimates

Use of EstimatesThe preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. 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.

Revenue Recognition and Cost of Revenues

Revenue RecognitionOur 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 measured by the ratio of cumulative costs incurred to date to estimated total contract costs at completion (the "cost-to-cost method"). On certain other contracts, primarily time and material (“T&M”) and cost-plus contracts, revenue is recognized using the right-to-invoice practical expedient as we are contractually able to bill our customer based on control transferred to the customer. Cost of RevenuesCost of revenues includes materials, labor and overhead costs incurred in the manufacturing, design, and provision of products and services sold in the period as well as warranty costs. Material costs include raw materials, purchased components and sub-assemblies, outside processing and inbound freight costs. Labor and overhead costs consist of direct and indirect manufacturing costs, including wages and fringe benefits, operating supplies, depreciation and amortization, occupancy costs, and purchasing, receiving and inspection costs.

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 provide for services beyond standard assurances and therefore do not consider warranties to be separate performance obligations. Generally, we enter into three types of contracts: fixed-price contracts, cost-plus contracts and T&M contracts (cost-plus contracts and T&M contracts are aggregated below as flexibly priced contracts). The majority of our total revenues are derived from fixed-price contracts; refer to the revenue disaggregation disclosures that follow.

For fixed-price contracts, customers agree to pay a fixed amount, negotiated in 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.

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 using the cost-to-cost method. 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. 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.

Conversely, if the requirements for the recognition of contracts over time are not met, revenue is recognized at a point in time when control transfers to the customer, which is generally upon transfer of title. In such cases, the production that is in progress and costs that will be recognized at a future point in time are reported within "inventories".

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

Contract Assets and Liabilities

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheets. Amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., biweekly or monthly) or upon achievement of contractual milestones. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, we sometimes receive advances or deposits from our customers before revenue is recognized, resulting in contract liabilities.

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 funded and unfunded components. 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 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.

Research and Development Expenses

Research and Development ExpensesWe 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 products, solutions, and technologies. R&D costs include basic research, applied research, concept formulation studies, design, development, and related test activities. IR&D costs are allocated to customer contracts as part of the general and administrative overhead costs and generally recoverable on our customer contracts with the U.S. Government. Customer-funded R&D costs are charged directly to the related customer contract. Substantially all R&D costs are charged to cost of revenues as incurred.

Foreign Currency

Foreign CurrencySignificant 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 third quarter and first nine months of 2022 and 2021 were immaterial to the Company's results of operations. The operations of the Company's foreign subsidiaries are translated from the local (functional) currencies into U.S. dollars using weighted average rates of exchange during each monthly period. The rates of exchange at each balance sheet date are used for translating certain balance sheet accounts and gains or losses resulting from these translation adjustments are included in the accompanying Consolidated Balance Sheets as a component of other comprehensive earnings.

Cash and Cash Equivalents

Cash and Cash EquivalentsCash 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.

Accounts Receivable

Accounts ReceivableAccounts receivable consist of amounts billed and currently due from customers. We maintain an allowance recorded in the Allowance for Credit Losses account that is estimated and recorded utilizing relevant information about past events, including historical experience, current conditions and a reasonable and supportable forecast that affects the collectability of the related financial asset.

Inventories

InventoriesInventories 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.

Property, Plant and Equipment

Property, Plant and EquipmentProperty, 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 Sheets, and the net gain or loss is included in the determination of net earnings. Maintenance and repairs are charged to operations as incurred and renewals and improvements are capitalized.

Goodwill

Goodwill 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 six and seven reporting units at September 30, 2022 and December 31, 2021, respectively. The annual impairment test is conducted as of December 31. The Company did not identify any triggering events during the nine months ended September 30, 2022 or September 30, 2021.

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.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.

Long-Lived Assets

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.

Derivative Financial Instruments

Derivative Financial InstrumentsThe Company does not use derivative financial instruments for trading purposes. All derivative instruments are carried on the Consolidated Balance Sheets 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.

Pension and Other Postretirement Benefits

Pension and Other Postretirement BenefitsThe 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 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.

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 Code and regulations thereunder. 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 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.

The expected long-term return on plan assets assumption represents the average rate that the Company expects to earn over the long-term on the assets of the Company's benefit plans, including those from dividends, interest income and capital appreciation. The assumption has been determined based on expectations regarding future rates of return for the plans' investment portfolio, with consideration given to the allocation of investments by asset class and historical rates of return for each individual asset class.Pension related expenses are reflected in the Costs of revenues and General and administrative expenses on the Consolidated Statement of Earnings (unaudited).

Income Taxes

Income TaxesWe 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.

Earnings Per Share

Earnings Per ShareBasic 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 financial 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.

Fair Value Measurements

Fair Value MeasurementsFair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant on the measurement date. We are required to maximize the use of observable inputs and minimize the use of unobservable inputs in measuring fair value, and to utilize a three-level fair value

hierarchy that prioritizes the inputs used to measure fair value. The three hierarchical levels used to measure fair value are as follows:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs other than quoted prices that are directly or indirectly observable.

Level 3 — Significant inputs to the valuation model are unobservable.

In certain instances, fair value is determined through information obtained from third parties using the latest available market data. In obtaining such data from third parties, we have evaluated the methodologies used to develop the estimate of fair value in order to assess whether such valuations are representative of fair value. The Company categorizes plan assets for disclosure purposes in accordance with this fair value hierarchy. 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.

Financial Instruments

Financial InstrumentsOur financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses and other current liabilities. Financial instruments are reported in the Consolidated Balance Sheets at carrying value, which other than the 7.5% Term loan due November 30, 2023, approximate fair value.

Acquisitions

AcquisitionsOur consolidated financial statements include the operations of acquired businesses from the date of acquisition. We account for acquired businesses using the acquisition method of accounting, which requires that any assets acquired and liabilities assumed be measured at their respective fair values on the acquisition date. The accounting for business combinations requires the Company to make significant judgments and estimates. Any excess of the fair value of consideration transferred over the assigned values of the net assets acquired is recognized as goodwill.

Investments

Investments

Investments where we have the ability to exercise significant influence, but do not control, are accounted for under the equity method of accounting and are included in other noncurrent assets on our Consolidated Balance Sheets. Significant influence typically exists if we have a 20% to 50% ownership interest in the investee. Under this method of accounting, our share of the net earnings or losses of the investee is included in operating profit in other income, net on our Consolidated Statements of Earnings since the activities of the investee are closely aligned with the operations of the business segment holding the investment. We evaluate our equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may be impaired. If a decline in the value of an equity method investment is determined to be other than temporary, a loss is therefore recorded during the current period. The Company sold its interest in its only investment accounted for under the equity method on July 8, 2022.

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

Variable Interest Entities

Variable Interest Entities

The Company occasionally forms joint ventures and/or enters into arrangements with special purpose limited liability companies for the purpose of bidding and executing on specific projects. The Company analyzes each such arrangement to determine whether it represents a variable interest entity (“VIE”). If the arrangement is determined to be a VIE, the Company assesses whether it is the primary beneficiary of the VIE and if it is, consequently required to consolidate the VIE. The Company did not have any investment in VIEs for the periods presented.

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Revenue from Contracts with Customers (Tables)

9 Months Ended

Sep. 30, 2022

Revenue from Contract with Customer [Abstract]

Schedule of Change in Estimate at Completion Adjustments

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

	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in millions)	2022			2021			2022			2021
Revenue	$	(11)		$	(11)		$	(22)		$	(20)
Total % of Revenue	1.8		%	1.6		%	1.2		%	1.0		%

Schedule of Contract Assets and Contract Liabilities

(Dollars in millions)	September 30, 2022		December 31, 2021
Contract assets	$	913	$	743
Contract liabilities	195		174
Net contract assets	$	718	$	569

Schedule of Remaining Performance Obligations, Expected Timing of Satisfaction

The following table summarizes the value of our total backlog as of September 30, 2022, incorporating both funded and unfunded components:

Backlog:	September 30, 2022
(Dollars in millions)
Total Backlog	$	3,138

Schedule of Disaggregation of Revenue

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

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions)	2022		2021		2022		2021
Revenue by Geographical Region
United States	$	364	$	484	$	1,103	$	1,385
International	41		27		137		90
Intersegment Sales	3		6		8		13
Total	$	408	$	517	$	1,248	$	1,488
Revenue by Customer Relationship
Prime contractor	$	216	$	346	$	664	$	901
Subcontractor	189		165		576		574
Intersegment Sales	3		6		8		13
Total	$	408	$	517	$	1,248	$	1,488
Revenue by Contract Type
Firm Fixed Price	$	349	$	438	$	1,085	$	1,283
Flexibly Priced(1)	56		73		155		192
Intersegment Sales	3		6		8		13
Total	$	408	$	517	$	1,248	$	1,488

________________

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

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

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions)	2022		2021		2022		2021
Revenue by Geographical Region
United States	$	222	$	198	$	612	$	547
International	7		11		21		37
Intersegment Sales	—		—		1		—
Total	$	229	$	209	$	634	$	584
Revenue by Customer Relationship
Prime contractor	$	41	$	41	$	110	$	127
Subcontractor	188		168		523		457
Intersegment Sales	—		—		1		—
Total	$	229	$	209	$	634	$	584
Revenue by Contract Type
Firm Fixed Price	$	195	$	179	$	542	$	495
Flexibly Priced(1)	34		30		91		89
Intersegment Sales	—		—		1		—
Total	$	229	$	209	$	634	$	584

________________

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

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Accounts Receivable (Tables)

9 Months Ended

Sep. 30, 2022

Receivables [Abstract]

Schedule of Accounts Receivable

Accounts receivable consist of the following:

(Dollars in millions)	September 30, 2022		December 31, 2021
Accounts receivable	$	171	$	157
Less allowance for credit losses	(1)		(1)
Accounts receivable, net	$	170	$	156

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Inventories (Tables)

9 Months Ended

Sep. 30, 2022

Inventory Disclosure [Abstract]

Schedule of Inventory, Current

Inventories consists of the following:

(Dollars in millions)	September 30, 2022		December 31, 2021
Raw materials	$	50	$	43
Work in progress	194		161
Finished goods	2		1
Total	$	246	$	205

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Property, Plant and Equipment (Tables)

9 Months Ended

Sep. 30, 2022

Property, Plant and Equipment [Abstract]

Schedule of Property, Plant and Equipment

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

(Dollars in millions)	September 30, 2022		December 31, 2021
Land, buildings and improvements	$	321	$	312
Plant and machinery	190		191
Equipment and other	317		298
Total property, plant and equipment, at cost	828		801
Less accumulated depreciation	(466)		(437)
Total property, plant and equipment, net	$	362	$	364

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Other Liabilities (Tables)

9 Months Ended

Sep. 30, 2022

Other Liabilities Disclosure [Abstract]

Other Liabilities

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

(Dollars in millions)	September 30, 2022		December 31, 2021
Salaries, wages and accrued bonuses	$	63	$	70
Fringe benefits	68		74
Litigation	10		10
Restructuring costs	1		4
Provision for contract losses	55		48
Operating lease liabilities	25		24
Taxes Payable	87		—
Other(1)	56		65
Total other current liabilities	$	365	$	295
Operating lease liabilities	$	61	$	73
Other	14		1
Total other noncurrent liabilities	$	75	$	74

________________

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

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Goodwill (Tables)

9 Months Ended

Sep. 30, 2022

Goodwill and Intangible Assets Disclosure [Abstract]

Schedule of Goodwill

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

(Dollars in millions)	ASC		IMS		Total
Balance as of December 31, 2021	$	652	$	419	$	1,071
Reduction for Divestitures	(117)				(117)
Acquisition adjustment	(2)		—		(2)
Balance as of September 30, 2022	533		419		952

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Intangible Assets (Tables)

9 Months Ended

Sep. 30, 2022

Goodwill and Intangible Assets Disclosure [Abstract]

Schedule of Finite-Lived Intangible Assets

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

	September 30, 2022						December 31, 2021
(Dollars in millions)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Customer relationships	$	957	$	(915)	$	42	$	957	$	(908)	$	49
Patents and licenses	9		(6)		3		9		(6)		3
Total intangible assets	$	966	$	(921)	$	45	$	966	$	(914)	$	52

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Income Taxes (Tables)

9 Months Ended

Sep. 30, 2022

Income Tax Disclosure [Abstract]

Schedule of Deferred Tax Assets and Liabilities

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at September 30, 2021 and December 31, 2020 is as follows:

(Dollars in millions)	September 30, 2022		December 31, 2021
Gross deferred tax assets	$	110	$	120
Less valuation allowance	10		10
Deferred tax assets	100		110
Deferred tax liabilities	51		54
Deferred tax assets, net	$	49	$	56

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Debt (Tables)

9 Months Ended

Sep. 30, 2022

Debt Disclosure [Abstract]

Schedule of Debt

The Company’s debt consists of the following:

(Dollars in millions)	September 30, 2022		December 31, 2021
7.5% Term loan due November 30, 2023(1)	$	139	$	139
5.0% Daylight term loan due October 15, 2024(1)	78		78
Borrowings under revolving credit facility(1)	35		—
Finance lease and other	162		161
Short-term borrowings	3		15
Total debt principal	417		393
Less unamortized debt issuance costs and discounts	—		—
Total debt, net	417		393
Less short-term borrowings and current portion of long-term debt	(67)		(41)
Total long-term debt	$	350	$	352

________________

(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.

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Pension and Other Postretirement Benefits (Tables)

9 Months Ended

Sep. 30, 2022

Retirement Benefits [Abstract]

Schedule of Net Benefit Costs

The following table summarizes the components of net periodic benefit cost for the Company's pension, postretirement and supplemental retirement plans for the three months ended September 30:

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

The following table summarizes the components of net periodic benefit cost for the Company's pension, postretirement and supplemental retirement plans for the nine months ended September 30,:

	Defined Benefit Pension Plans				Postretirement Benefit Plan				Supplemental Retirement Plans
(Dollars in millions)	Nine Months Ended September 30, 2022		Nine Months Ended September 30, 2021		Nine Months Ended September 30, 2022		Nine Months Ended September 30, 2021		Nine Months Ended September 30, 2022		Nine Months Ended September 30, 2021
Service cost	$	—	$	—	$	—	$	—	$	—	$	—
Interest cost	$	4	$	4	—		—		1		—
Less Expected return on plan assets	$	(5)	$	(6)	—		—		—		—
Amortization of net actuarial loss (gain)	$	1	$	1	—		(1)		—		—
Amortization of prior service cost	$	—	$	—	—		—		—		—
Settlement expense (income)	$	1	$	—	—		—		—		—
Net periodic benefit cost	$	1	$	(1)	$	—	$	(1)	$	1	$	—

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Commitment and Contingencies (Tables)

9 Months Ended

Sep. 30, 2022

Commitments and Contingencies Disclosure [Abstract]

Schedule of Product Warranty Liability

The following is a summary of changes in the product warranty balances during the period ended September 30, 2022:

(Dollars in millions)
Balance as of December 31, 2021	$	19
Additional provision	8
Reversal and utilization	(8)
Balance as of September 30, 2022	19

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Segment Information (Tables)

9 Months Ended

Sep. 30, 2022

Segment Reporting [Abstract]

Schedule of Total Revenues and Intersegment Revenues by Segment

Total revenues and intersegment revenues by segment for the three and nine month periods ended September 30, 2022 and, September 30, 2021 consists of the following:

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions)	2022		2021		2022		2021
ASC	$	408	$	517	$	1,248	$	1,488
IMS	229		209		634		584
Corporate & Eliminations	(3)		(6)		(9)		(13)
Total revenue	$	634	$	720	$	1,873	$	2,059

(Dollars in millions)	2022		2021		2022		2021
ASC	$	3	$	6	$	8	$	13
IMS	—		—		1		—
Total intersegment revenue	$	3	$	6	$	9	$	13

Schedule of Depreciation, Assets by Segment and EBITDA Reconciliation to Net Earnings

Depreciation by segment for the three and nine month periods ended September 30, 2022 and September 30, 2021 consists of the following:

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in millions)	2022		2021		2022		2021
ASC	$	9	$	9	$	27	$	25
IMS	5		4		14		12
Total depreciation	$	14	$	13	$	41	$	37

Total assets by segment as of September 30, 2022 and December 31, 2021 consist of the following:

(Dollars in millions)	September 30, 2022		December 31, 2021
ASC	$	1,661	$	1,545
IMS	1,121		1,145
Corporate & Eliminations	149		379
Total assets	$	2,931	$	3,069

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)	2022		2021		2022		2021
Adjusted EBITDA
ASC	$	36	$	56	$	125	$	171
IMS	22		14		73		39
Corporate & Eliminations	—		—		—		—
Total Adjusted EBITDA	58		70		198		210
Amortization of intangibles	(3)		(3)		(7)		(7)
Depreciation	(14)		(13)		(41)		(37)
Interest expense	(9)		(9)		(27)		(27)
Deal related transaction costs	(16)		—		(26)		(4)
Gain on sale of business	350		—		350		—
COVID-19 response costs	—		(1)		—		(6)
Other non-operational events	1		(1)		—		(2)
Income tax (provision) benefit	(88)		(8)		(107)		(31)
Net earnings	$	279	$	35	$	340	$	96

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Summary of Significant Accounting Policies - Concentration Risk (Details) - segment	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Concentration Risk [Line Items]
Number of reportable segments			2
U.S. Department Of Defense | Revenue from Contract with Customer Benchmark | Government Contracts Concentration Risk
Concentration Risk [Line Items]
Concentration risk, percentage	83.00%	85.00%	82.00%	84.00%
International And Commercial Customers | Revenue from Contract with Customer Benchmark | Customer Concentration Risk
Concentration Risk [Line Items]
Concentration risk, percentage	17.00%	16.00%	18.00%	15.00%

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Summary of Significant Accounting Policies - Property, Plant and Equipment (Details)	9 Months Ended
	Sep. 30, 2022
Plant and machinery | Minimum
Property, Plant and Equipment [Line Items]
Useful life (in years)	3 years
Plant and machinery | Maximum
Property, Plant and Equipment [Line Items]
Useful life (in years)	10 years
Building and Building Improvements | Minimum
Property, Plant and Equipment [Line Items]
Useful life (in years)	15 years
Building and Building Improvements | Maximum
Property, Plant and Equipment [Line Items]
Useful life (in years)	40 years

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Summary of Significant Accounting Policies - Goodwill (Details) - reporting_unit	9 Months Ended	12 Months Ended
	Sep. 30, 2022	Dec. 31, 2021
Accounting Policies [Abstract]
Number of reporting units	6	7

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Summary of Significant Accounting Policies - Earnings Per Share (Details)	1 Months Ended
	Feb. 28, 2021 shares	Sep. 30, 2022 shares	Dec. 31, 2021 shares	Jan. 31, 2021 shares
Accounting Policies [Abstract]
Stockholders' Equity Note, Stock Split, Conversion Ratio	1,450,000
Basic and Diluted common shares outstanding (in shares)	145,000,000	145,000,000	145,000,000	100

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Summary of Significant Accounting Policies - Financial Instruments (Details)	Sep. 30, 2022
Term Loan | Line of Credit
Debt Instrument [Line Items]
Stated interest rate (as percent)	7.50%

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Summary of Significant Accounting Policies - Acquisitions (Details)	Sep. 30, 2022 $ / shares	Jun. 21, 2022 $ / shares	Jun. 21, 2022 ₪ / shares	Dec. 31, 2021 $ / shares
Business Acquisition [Line Items]
Common stock, par value (in monetary per share) | $ / shares	$ 0.01	$ 0.01		$ 0.01
Common stock, exchange ratio		1	1
Holders Of RADA's Equity Interests
Business Acquisition [Line Items]
Business combination, percent of ownership after transaction		19.50%	19.50%
RADA Electronic Industries Ltd
Business Acquisition [Line Items]
Common stock, par value (in monetary per share) | ₪ / shares			₪ 0.03
US Holdings
Business Acquisition [Line Items]
Business combination, percent of ownership after transaction		80.50%	80.50%
Business combination, percent of ownership of one time awards		50.00%	50.00%

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Summary of Significant Accounting Policies - Divestitures (Details) - USD ($) $ in Millions			3 Months Ended		9 Months Ended
	Aug. 01, 2022	Jul. 08, 2022	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021	Mar. 21, 2022
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
Gain (loss) on disposition of business, before transaction cost			$ 350	$ 0	$ 350	$ 0
Advanced Acoustic Concepts
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
Proceeds from sale of equity investments		$ 56
Gain (loss) on sale of equity investments		31
Gain (loss) on sale of equity investments, net of tax		22
Gain (loss) on sale of equity investments, income tax		9
US Holdings
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
Dividends payable		$ 396
Global Enterprise Solutions | Disposal Group, Disposed of by Sale, Not Discontinued Operations
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
Sale of business, consideration to be received							$ 450
Proceeds from divestiture of businesses	$ 427
Gain (loss) on disposition of business	305
Gain (loss) on disposition of business, net of tax	234
Gain (loss) on disposition of business, before transaction cost	319
Disposal group, including discontinued operation, transaction cost	14
Gain (loss) on disposition of business, income tax expense	$ (71)
Operating income from disposed business					$ 13	$ 23

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Revenue from Contracts with Customers - Estimate at Completion Adjustments (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Change in Accounting Estimate [Line Items]
Revenue	$ 634	$ 720	$ 1,873	$ 2,059
Contracts Accounted for under Percentage of Completion
Change in Accounting Estimate [Line Items]
Revenue	$ (11)	$ (11)	$ (22)	$ (20)
Total % of Revenue	1.80%	1.60%	1.20%	1.00%

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Revenue from Contracts with Customers - Contract Assets and Liabilities (Details) - USD ($) $ in Millions	Sep. 30, 2022	Dec. 31, 2021
Revenue from Contract with Customer [Abstract]
Contract assets	$ 913	$ 743
Contract liabilities	195	174
Net contract assets	$ 718	$ 569

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Revenue from Contracts with Customers - Narrative (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Revenue from Contract with Customer [Abstract]
Contract with customer, liability, revenue recognized	$ 14	$ 11	$ 121	$ 100

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Revenue from Contracts with Customers - Remaining Performance Obligations, Backlog Schedule (Details) $ in Millions	Sep. 30, 2022 USD ($)
Revenue from Contract with Customer [Abstract]
Total Backlog	$ 3,138

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Revenue from Contracts with Customers - Remaining Performance Obligations, Narrative (Details) - Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2022-10-01	Sep. 30, 2022
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items]
Revenue, remaining performance obligation, percentage	21.00%
Revenue, remaining performance obligation, expected timing of satisfaction, period	3 months

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Revenue from Contracts with Customers - Disaggregation of Revenue (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Disaggregation of Revenue [Line Items]
Total revenues	$ 634	$ 720	$ 1,873	$ 2,059
Intersegment Sales
Disaggregation of Revenue [Line Items]
Total revenues	(3)	(6)	(9)	(13)
ASC | Prime contractor
Disaggregation of Revenue [Line Items]
Total revenues	216	346	664	901
ASC | Subcontractor
Disaggregation of Revenue [Line Items]
Total revenues	189	165	576	574
ASC | Firm Fixed Price
Disaggregation of Revenue [Line Items]
Total revenues	349	438	1,085	1,283
ASC | Flexibly Priced
Disaggregation of Revenue [Line Items]
Total revenues	56	73	155	192
ASC | Intersegment Sales
Disaggregation of Revenue [Line Items]
Total revenues	3	6	8	13
ASC | Operating Segments
Disaggregation of Revenue [Line Items]
Total revenues	408	517	1,248	1,488
IMS | Prime contractor
Disaggregation of Revenue [Line Items]
Total revenues	41	41	110	127
IMS | Subcontractor
Disaggregation of Revenue [Line Items]
Total revenues	188	168	523	457
IMS | Firm Fixed Price
Disaggregation of Revenue [Line Items]
Total revenues	195	179	542	495
IMS | Flexibly Priced
Disaggregation of Revenue [Line Items]
Total revenues	34	30	91	89
IMS | Intersegment Sales
Disaggregation of Revenue [Line Items]
Total revenues	0	0	1	0
IMS | Operating Segments
Disaggregation of Revenue [Line Items]
Total revenues	229	209	634	584
United States | ASC
Disaggregation of Revenue [Line Items]
Total revenues	364	484	1,103	1,385
United States | IMS
Disaggregation of Revenue [Line Items]
Total revenues	222	198	612	547
International | ASC
Disaggregation of Revenue [Line Items]
Total revenues	41	27	137	90
International | IMS
Disaggregation of Revenue [Line Items]
Total revenues	$ 7	$ 11	$ 21	$ 37

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Accounts Receivable (Details) - USD ($) $ in Millions	Sep. 30, 2022	Dec. 31, 2021
Receivables [Abstract]
Accounts receivable	$ 171	$ 157
Less allowance for credit losses	(1)	(1)
Accounts receivable, net	$ 170	$ 156

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Accounts Receivable - Narrative (Details) - USD ($) $ in Millions	Sep. 30, 2022	Dec. 31, 2021
Receivables [Abstract]
Collection of sold receivables	$ 3	$ 15

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Inventories (Details) - USD ($) $ in Millions	Sep. 30, 2022	Dec. 31, 2021
Inventory Disclosure [Abstract]
Raw materials	$ 50	$ 43
Work in progress	194	161
Finished goods	2	1
Total	$ 246	$ 205

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Property, Plant and Equipment - Components of Property, Plant and Equipment (Details) - USD ($) $ in Millions	Sep. 30, 2022	Dec. 31, 2021
Property, Plant and Equipment [Line Items]
Total property, plant and equipment, at cost	$ 828	$ 801
Less accumulated depreciation	(466)	(437)
Total property, plant and equipment, net	362	364
Land, buildings and improvements
Property, Plant and Equipment [Line Items]
Total property, plant and equipment, at cost	321	312
Plant and machinery
Property, Plant and Equipment [Line Items]
Total property, plant and equipment, at cost	190	191
Equipment and other
Property, Plant and Equipment [Line Items]
Total property, plant and equipment, at cost	$ 317	$ 298

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Property, Plant and Equipment - Narrative (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Property, Plant and Equipment [Abstract]
Depreciation	$ 14	$ 13	$ 41	$ 37

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Other Liabilities (Details) - USD ($) $ in Millions	Sep. 30, 2022	Dec. 31, 2021
Other Liabilities Disclosure [Abstract]
Salaries, wages and accrued bonuses	$ 63	$ 70
Fringe benefits	68	74
Litigation	10	10
Restructuring costs	1	4
Provision for contract losses	55	48
Operating lease liabilities	25	24
Taxes Payable	87	0
Other	$ 56	$ 65
Operating Lease, Liability, Current, Statement of Financial Position [Extensible Enumeration]	Total other current liabilities	Total other current liabilities
Total other current liabilities	$ 365	$ 295
Operating lease liabilities	61	73
Other	$ 14	$ 1
Operating Lease, Liability, Noncurrent, Statement of Financial Position [Extensible Enumeration]	Total other noncurrent liabilities	Total other noncurrent liabilities
Total other noncurrent liabilities	$ 75	$ 74

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Goodwill - Schedule of Goodwill (Details) $ in Millions	9 Months Ended
	Sep. 30, 2022 USD ($)
Goodwill [Roll Forward]
Beginning balance	$ 1,071
Reduction for Divestitures	(117)
Acquisition adjustment	(2)
Ending balance	952
ASC
Goodwill [Roll Forward]
Beginning balance	652
Reduction for Divestitures	(117)
Acquisition adjustment	(2)
Ending balance	533
IMS
Goodwill [Roll Forward]
Beginning balance	419
Reduction for Divestitures
Acquisition adjustment	0
Ending balance	$ 419

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Intangible Assets (Details) - USD ($) $ in Millions	Sep. 30, 2022	Dec. 31, 2021
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Amount	$ 966	$ 966
Accumulated Amortization	(921)	(914)
Net Carrying Amount	45	52
Customer relationships
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Amount	957	957
Accumulated Amortization	(915)	(908)
Net Carrying Amount	42	49
Patents and licenses
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Amount	9	9
Accumulated Amortization	(6)	(6)
Net Carrying Amount	$ 3	$ 3

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Intangible Assets - Additional Information (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Finite-Lived Intangible Assets [Line Items]
Amortization of intangibles	$ (3)	$ (3)	$ (7)	$ (7)
Minimum | Customer relationships
Finite-Lived Intangible Assets [Line Items]
Finite-lived intangible asset, useful life			10 years
Minimum | Patents and licenses
Finite-Lived Intangible Assets [Line Items]
Finite-lived intangible asset, useful life			5 years
Maximum | Customer relationships
Finite-Lived Intangible Assets [Line Items]
Finite-lived intangible asset, useful life			15 years
Maximum | Patents and licenses
Finite-Lived Intangible Assets [Line Items]
Finite-lived intangible asset, useful life			10 years

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Income Taxes - Deferred Tax Assets and Deferred Tax Liabilities (Details) - USD ($) $ in Millions	Sep. 30, 2022	Dec. 31, 2021
Income Tax Disclosure [Abstract]
Gross deferred tax assets	$ 110	$ 120
Less valuation allowance	10	10
Deferred tax assets	100	110
Deferred tax liabilities	51	54
Deferred tax assets, net	$ 49	$ 56

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Income Taxes - Narrative (Details) - USD ($) $ in Millions	Sep. 30, 2022	Dec. 31, 2021
Income Tax Disclosure [Abstract]
Tax deferred asset	$ 11	$ 11

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Debt - Schedule of Long-Term Debt (Details) $ in Millions	Sep. 30, 2022 USD ($) loan	Dec. 31, 2021 USD ($)	Jan. 31, 2009
Debt Instrument [Line Items]
Finance lease and other	$ 162	$ 161
Short-term borrowings	3	15
Total debt principal	417	393
Less unamortized debt issuance costs and discounts	0	0
Total debt, net	417	393
Less short-term borrowings and current portion of long-term debt	(67)	(41)
Total long-term debt	$ 350	352
7.5% Term Loan due November 30, 2023 | Notes Payable, Other Payables
Debt Instrument [Line Items]
Stated interest rate (as percent)	7.50%		7.50%
Long-term debt, gross	$ 139	139
5.0% Daylight Term Loan due October 15, 2024 | Notes Payable, Other Payables
Debt Instrument [Line Items]
Stated interest rate (as percent)	5.00%
Long-term debt, gross	$ 78	78
Revolving Credit Facility | Line of Credit
Debt Instrument [Line Items]
Long-term debt, gross	$ 35	$ 0
Term Loan | Notes Payable, Other Payables | Affiliated Entity | US Holdings
Debt Instrument [Line Items]
Number of term loans | loan	2
Term Loan | Line of Credit
Debt Instrument [Line Items]
Stated interest rate (as percent)	7.50%

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Debt - Narrative (Details) - USD ($)	9 Months Ended	12 Months Ended
	Sep. 30, 2022	Dec. 31, 2021	Jun. 30, 2017	Jan. 31, 2009
Debt Instrument [Line Items]
Collection of sold receivables	$ 3,000,000	$ 15,000,000
Line of Credit | Revolving Credit Facility
Debt Instrument [Line Items]
Credit limit	450,000,000	450,000,000
Line of credit outstanding	$ 35,000,000	$ 0
Line of Credit | Revolving Credit Facility | LIBOR
Debt Instrument [Line Items]
Variable rate percentage	3.50%	3.50%
Commitment fee percentage	0.25%
7.5% Term Loan due November 30, 2023 | Notes Payable, Other Payables
Debt Instrument [Line Items]
Principal amount				$ 2,000,000,000
Stated interest rate (as percent)	7.50%			7.50%
Long-term debt, gross	$ 139,000,000	$ 139,000,000
Fair value of long-term debt	$ 129,000,000	182,000,000
5.0% Daylight Term Loan due October 15, 2024 | Notes Payable, Other Payables
Debt Instrument [Line Items]
Principal amount			$ 137,500,000
Stated interest rate (as percent)	5.00%
Long-term debt, gross	$ 78,000,000	78,000,000
Financial Institution Credit Facilities | Line of Credit
Debt Instrument [Line Items]
Credit limit	75,000,000	65,000,000
Letters of credit outstanding	31,000,000	35,000,000
Financial Institution Credit Facilities | Line of Credit | Revolving Credit Facility
Debt Instrument [Line Items]
Credit limit	15,000,000
Line of credit outstanding	$ 0	$ 0
Financial Institution Credit Facilities | Line of Credit | Revolving Credit Facility | LIBOR
Debt Instrument [Line Items]
Variable rate percentage	0.50%

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Pension and Other Postretirement Benefits (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Defined Benefit Pension Plans
Defined Benefit Plan Disclosure [Line Items]
Service cost	$ 0	$ 0	$ 0	$ 0
Interest cost	1	1	4	4
Less Expected return on plan assets	(1)	(2)	(5)	(6)
Amortization of net actuarial loss (gain)	0	0	1	1
Amortization of prior service cost	0	0	0	0
Settlement expense (income)	0	0	1	0
Net periodic benefit cost	0	(1)	1	(1)
Postretirement Benefit Plan
Defined Benefit Plan Disclosure [Line Items]
Service cost	0	0	0	0
Interest cost	0	0	0	0
Less Expected return on plan assets	0	0	0	0
Amortization of net actuarial loss (gain)	0	0	0	(1)
Amortization of prior service cost	0	0	0	0
Settlement expense (income)	0	0	0	0
Net periodic benefit cost	0	0	0	(1)
Supplemental Retirement Plans
Defined Benefit Plan Disclosure [Line Items]
Service cost	0	0	0	0
Interest cost	0	0	1	0
Less Expected return on plan assets	0	0	0	0
Amortization of net actuarial loss (gain)	0	0	0	0
Amortization of prior service cost	0	0	0	0
Settlement expense (income)	0	0	0	0
Net periodic benefit cost	$ 0	$ 0	$ 1	$ 0

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Commitment and Contingencies - Product Warranties (Details) $ in Millions	9 Months Ended
	Sep. 30, 2022 USD ($)
Movement in Standard Product Warranty Accrual [Roll Forward]
Beginning balance	$ 19
Additional provision	8
Reversal and utilization	(8)
Ending balance	$ 19
Minimum
Product Warranty Liability [Line Items]
Product warranty term	1 year
Maximum
Product Warranty Liability [Line Items]
Product warranty term	3 years

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Related Party Transactions (Details) - USD ($) $ in Millions	1 Months Ended	3 Months Ended		9 Months Ended
	Dec. 31, 2019	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021	Dec. 31, 2021
Related Party Transaction [Line Items]
Contract assets		$ 913		$ 913		$ 743
Affiliated Entity | Leonardo S.p.A.
Related Party Transaction [Line Items]
Revenue from related parties		9	$ 3	63	$ 7
Related parties amount in cost of sales		2	$ 16	20	$ 22
Receivables		33		33		2
Payables		7		7		1
Contract assets		$ 8		$ 8		$ 0
Affiliated Entity | US Holdings | Minimum | Surplus Agreement Receivable
Related Party Transaction [Line Items]
Variable rate spread	0.05%
Affiliated Entity | US Holdings | Maximum | Surplus Agreement Receivable
Related Party Transaction [Line Items]
Variable rate spread	0.20%

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Segment Information - Narrative (Details)	9 Months Ended
	Sep. 30, 2022 segment
Segment Reporting [Abstract]
Number of reportable segments	2

XML

Segment Information - Revenues and Intersegment Revenues (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Segment Reporting Information [Line Items]
Revenue	$ 634	$ 720	$ 1,873	$ 2,059
Operating Segments | ASC
Segment Reporting Information [Line Items]
Revenue	408	517	1,248	1,488
Operating Segments | IMS
Segment Reporting Information [Line Items]
Revenue	229	209	634	584
Total intersegment revenue
Segment Reporting Information [Line Items]
Revenue	(3)	(6)	(9)	(13)
Total intersegment revenue | ASC
Segment Reporting Information [Line Items]
Revenue	3	6	8	13
Total intersegment revenue | IMS
Segment Reporting Information [Line Items]
Revenue	$ 0	$ 0	$ 1	$ 0

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Segment Information - Depreciation and Assets (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021	Dec. 31, 2021
Segment Reporting Information [Line Items]
Depreciation	$ 14	$ 13	$ 41	$ 37
Assets	2,931		2,931		$ 3,069
ASC
Segment Reporting Information [Line Items]
Depreciation	9	9	27	25
IMS
Segment Reporting Information [Line Items]
Depreciation	5	$ 4	14	$ 12
Operating Segments | ASC
Segment Reporting Information [Line Items]
Assets	1,661		1,661		1,545
Operating Segments | IMS
Segment Reporting Information [Line Items]
Assets	1,121		1,121		1,145
Corporate & Eliminations
Segment Reporting Information [Line Items]
Assets	$ 149		$ 149		$ 379

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Segment Information - EBITDA Reconciliation to Net Earnings (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2022	Sep. 30, 2021	Sep. 30, 2022	Sep. 30, 2021
Adjusted EBITDA
Adjusted EBITDA	$ 58	$ 70	$ 198	$ 210
Amortization of intangibles	(3)	(3)	(7)	(7)
Depreciation	(14)	(13)	(41)	(37)
Interest expense	(9)	(9)	(27)	(27)
Deal Related Transaction Costs	(16)	0	(26)	(4)
Gain on sale of business	350	0	350	0
COVID-19 response costs	0	(1)	0	(6)
Other non-operational events	1	(1)	0	(2)
Income tax (provision) benefit	(88)	(8)	(107)	(31)
Net earnings	279	35	340	96
ASC
Adjusted EBITDA
Depreciation	(9)	(9)	(27)	(25)
IMS
Adjusted EBITDA
Depreciation	(5)	(4)	(14)	(12)
Operating Segments | ASC
Adjusted EBITDA
Adjusted EBITDA	36	56	125	171
Operating Segments | IMS
Adjusted EBITDA
Adjusted EBITDA	22	14	73	39
Corporate & Eliminations
Adjusted EBITDA
Adjusted EBITDA	$ 0	$ 0	$ 0	$ 0