drs-20230331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2023

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

For the transition period from _______ to _______

Commission File Number 333-253583

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:


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

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

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

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

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☐

Emerging growth company

☐

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

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

As of May 1, 2023, there were 261 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			2
Consolidated Balance Sheets			3
Consolidated Statements of Cash Flows			4
Consolidated Statements of Shareholder’s Equity			5
Notes to Consolidated Financial Statements			6
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk			37
ITEM 4. Controls and Procedures			39
PART II. Other Information			40
ITEM 1. Legal Proceedings			40
ITEM 1A. Risk Factors			41
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds			41
ITEM 3. Defaults Upon Senior Securities			41
ITEM 4. Mine Safety Disclosures			41
ITEM 5. Other Information			41
ITEM 6. Exhibits			42
Signatures			43

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION

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

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

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

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

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

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

•The effect of inflation on our supply chain and/or our labor costs;

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

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

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

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

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

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

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

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

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

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

•Our inability to appropriately manage our inventory;

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

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

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

•Preferences for set-asides for minority-owned, small and small disadvantaged businesses could impact our ability to be a prime contractor;

•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, the Export Control Act, the International Traffic in Arms Regulations, the Export Administration Regulations, 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;

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

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

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

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

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

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

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

•Natural disasters or other significant disruptions; or

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

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

You should read this Quarterly Report completely and with the understanding that actual future results may be materially different from expectations. All forward-looking statements made in this Quarterly Report are qualified by these cautionary statements. These forward-looking statements are made only as of the date of this filing, and we

iii

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, 2022, filed with the SEC on March 28, 2023, 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.

PART I. FINANCIAL INFORMATION

ITEM 1. UNAUDITED FINANCIAL STATEMENTS

Consolidated Statements of Earnings (Unaudited)


	Three Months Ended March 31,
(Dollars in millions, except per share amounts)	2023		2022
Revenues:
Products	$	520	$	541
Services	49		71
Total revenues	569		612
Cost of revenues:
Products	(403)		(422)
Services	(35)		(56)
Total cost of revenues	(438)		(478)
Gross profit	131		134
General and administrative expenses	(100)		(76)
Amortization of intangibles	(6)		(2)
Other operating expenses, net	—		—
Operating earnings	25		56
Interest expense	(8)		(8)
Other, net	(1)		—
Earnings before taxes	16		48
Income tax provision	4		12
Net earnings	$	12	$	36

Net earnings per share from common stock:
Basic earnings per share:	$	0.05	$	0.17
Diluted earnings per share:	$	0.05	$	0.17

See accompanying Notes to Consolidated Financial Statements.

LEONARDO DRS, INC.

Consolidated Statements of Comprehensive Income (Unaudited)


	Three Months Ended March 31,
(Dollars in millions)	2023		2022
Net earnings	$	12	$	36
Other comprehensive income (loss):
Foreign currency translation gain, net of income taxes	—		1
Gain from pension settlements	—		3
Net unrecognized gain (loss) on postretirement obligations, net of income taxes	—		2
Other comprehensive income (loss), net of income tax	—		6
Total comprehensive income	$	12	$	42

See accompanying Notes to Consolidated Financial Statements.

LEONARDO DRS, INC.

Consolidated Balance Sheets


	(Unaudited)
(Dollars in millions, except per share amounts)	March 31, 2023		December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	174	$	306
Accounts receivable, net	158		166
Contract assets	968		872
Inventories	364		319

Prepaid expenses	19		20
Other current assets	29		24
Total current assets	1,712		1,707
Noncurrent assets:
Property plant and equipment, net	402		404
Intangible assets, net	167		172
Goodwill	1,236		1,236
Deferred tax assets	72		66
Other noncurrent assets	92		92
Total noncurrent assets	1,969		1,970
Total assets	$	3,681	$	3,677
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current portion of long-term debt	$	250	$	29
Accounts payable	258		457
Contract liabilities	247		233
Other current liabilities	264		323
Total current liabilities	1,019		1,042
Noncurrent liabilities:
Long-term debt	360		365
Pension and other postretirement benefit plan liabilities	42		45
Deferred tax liabilities	6		—
Other noncurrent liabilities	111		98
Total noncurrent liabilities	$	519	$	508
Commitments and contingencies (Note 14)
Shareholders' equity
Preferred stock,$0.01 par value: 10,000,000 shares authorized; none issued	$	—	$	—
Common stock, $0.01 par value: 350,000,000 shares authorized; 260,553,101 issued	3		3
Additional paid-in capital	5,151		5,147
Accumulated deficit	(2,962)		(2,974)
Accumulated other comprehensive loss	(49)		(49)
Total shareholders' equity	2,143		2,127
Total liabilities and shareholders' equity	$	3,681	$	3,677

See accompanying Notes to Consolidated Financial Statements.

LEONARDO DRS, INC.

Consolidated Statements of Cash Flows (Unaudited)


	Three Months Ended March 31,
(Dollars in millions)	2023		2022
Operating activities
Net earnings	$	12	$	36
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization	22		15
Deferred income taxes	—		11
Other	4		—
Changes in assets and liabilities:
Accounts receivable	8		13
Contract assets	(96)		(80)
Inventories	(45)		(30)
Prepaid expenses	1		(1)
Other current assets	(5)		(3)
Other noncurrent assets	5		21
Defined benefit obligations	(3)		1
Other current liabilities	(59)		(14)
Other noncurrent liabilities	7		(21)
Accounts payable	(199)		(215)
Contract liabilities	14		12
Net cash used in operating activities	$	(334)	$	(255)
Investing activities
Capital expenditures	(15)		(13)
Proceeds from sales of assets	1		—

Net cash used in investing activities	$	(14)	$	(13)
Financing activities
Net (decrease) increase in third party borrowings (maturities of 90 days or less)	6		(9)
Repayment of third party debt	(128)		—
Borrowings of third party debt	340		—
Repayment of related party debt	—		(135)
Borrowings from related parties	—		285



Proceeds from stock issuance	1		—
Cash outlay to reacquire equity instruments	(1)		—
Other	(2)		—
Net cash provided by financing activities	$	216	$	141
Effect of exchange rate changes on cash and cash equivalents	—		—
Net decrease in cash and cash equivalents	$	(132)	$	(127)
Cash and cash equivalents at beginning of year	306		240
Cash and cash equivalents at end of period	$	174	$	113

See accompanying Notes to Consolidated Financial Statements.

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, 2021	$	1	$	4,633	$	(58)	$	(2,983)	$	1,593
Total comprehensive income	—		—		6		36		42
Balance as of March 31, 2022	$	1	$	4,633	$	(52)	$	(2,947)	$	1,635


Balance as of December 31, 2022	$	3	$	5,147	$	(49)	$	(2,974)	$	2,127
Total comprehensive income	—		—		—		12		12
Stock compensation expense	$	—	$	4	$	—	$	—	$	4
Balance as of March 31, 2023	$	3	$	5,151	$	(49)	$	(2,962)	$	2,143

See accompanying Notes to Consolidated Financial Statements.

LEONARDO DRS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

A.Organization

Leonardo DRS, Inc., together with its wholly owned subsidiaries (hereinafter, “DRS,” “the Company,” “us,” “our,” or “we”) is a supplier of defense electronics products, systems and military support services. The Company is controlled by Leonardo S.p.A (hereinafter, “Leonardo S.p.A.,”), an Italian multi-national aerospace, defense and security company headquartered in Rome, Italy, through its ultimate sole ownership of Leonardo US Holding. US Holding is the majority stockholder of the Company.

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

These capabilities directly align with our two reportable segments: Advanced Sensing and Computing and Integrated Mission Systems. The U.S. DoD is our largest customer and accounts for approximately 80% and 85% of our total revenues as an end-user for the periods ended March 31, 2023 and March 31, 2022, respectively. Specific international and commercial market opportunities exist within these segments and make up approximately 20% and 15% of our total revenues for the periods ended March 31, 2023 and March 31, 2022, 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 Advanced Sensing and Computing (“ASC”) segment designs, develops and manufactures sensing and network computing technology that enables real-time situational awareness required for enhanced operational decision making and execution by our customers.

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

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

Integrated Mission Systems (“IMS”)

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

LEONARDO DRS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

Our technologies and systems help protect U.S. forces and assets against increasingly sophisticated and proliferating threats. DRS is an integrator of systems in ground vehicles for short-range air defense, counter-UAS (“C-UAS”), and vehicle survivability and protection. This integrator role includes utilizing radars, EW equipment, reconnaissance and surveillance systems, modular combat vehicle turrets, and stabilized sensor suites, and kinetic countermeasures for short-range air defense. Our force protection systems, including solutions for counter-unmanned aerial systems (C-UAS), short-range air defense systems and active protection systems used to defend ground combat vehicles help protect personnel and defense assets from these growing threats.

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 16: 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 and contain all adjustments, which are of a normal and recurring nature, considered necessary by management to present fairly the financial position, results of operations and cash flows for the periods presented. Interests in 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, 2022 included in our Annual Report on Form 10-K for the year end December 31, 2022, filed with the SEC on March 28, 2023.

SEC Form 10-Q filed by Leonardo DRS Inc.