drs-20230630

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 June 30, 2023

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

For the transition period from _______ to _______

Commission File Number 333-253583

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 August 1, 2023, there were 262 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			40
ITEM 4. Controls and Procedures			44
PART II. Other Information			41
ITEM 1. Legal Proceedings			41
ITEM 1A. Risk Factors			42
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds			43
ITEM 3. Defaults Upon Senior Securities			43
ITEM 4. Mine Safety Disclosures			44
ITEM 5. Other Information			44
ITEM 6. Exhibits			45
Signatures			46

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

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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 June 30,				Six Months Ended June 30,
(Dollars in millions, except per share amounts)	2023		2022		2023		2022
Revenues:
Products	$	590	$	549	$	1,110	$	1,090
Services	38		78		87		149
Total revenues	628		627		1,197		1,239
Cost of revenues:
Products	(458)		(445)		(861)		(867)
Services	(25)		(55)		(60)		(111)
Total cost of revenues	(483)		(500)		(921)		(978)
Gross profit	145		127		276		261
General and administrative expenses	(90)		(84)		(190)		(160)
Amortization of intangibles	(5)		(2)		(11)		(4)
Other operating expenses, net	(8)		1		(8)		1
Operating earnings	42		42		67		98
Interest expense	(9)		(10)		(17)		(18)
Other, net	—		—		(1)		—
Earnings before taxes	33		32		49		80
Income tax provision (benefit)	(2)		7		2		19
Net earnings	$	35	$	25	$	47	$	61

Net earnings per share from common stock:
Basic earnings per share:	$	0.14	$	0.12	0.18		0.29
Diluted earnings per share:	$	0.13	$	0.12	0.18		0.29

See accompanying Notes to Consolidated Financial Statements.

LEONARDO DRS, INC.

Consolidated Statements of Comprehensive Income (Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in millions)	2023		2022		2023		2022
Net earnings	$	35	$	25	$	47	$	61
Other comprehensive income (loss):
Foreign currency translation gain, net of income taxes	1		(1)		1		—
Gain from pension settlements	—		—		—		3
Net unrecognized gain (loss) on postretirement obligations, net of income taxes	1		(1)		1		1
Other comprehensive income (loss), net of income tax	2		(2)		2		4
Total comprehensive income	$	37	$	23	$	49	$	65

See accompanying Notes to Consolidated Financial Statements.

LEONARDO DRS, INC.

Consolidated Balance Sheets


	(Unaudited)
(Dollars in millions, except per share amounts)	June 30, 2023		December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	35	$	306
Accounts receivable, net	198		166
Contract assets	1,018		872
Inventories	378		319

Prepaid expenses	17		20
Other current assets	51		24
Total current assets	1,697		1,707
Noncurrent assets:
Property plant and equipment, net	402		404
Intangible assets, net	161		172
Goodwill	1,236		1,236
Deferred tax assets	68		66
Other noncurrent assets	98		92
Total noncurrent assets	1,965		1,970
Total assets	$	3,662	$	3,677
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current portion of long-term debt	$	136	$	29
Accounts payable	290		457
Contract liabilities

SEC Form 10-Q filed by Leonardo DRS Inc.