Leonardo DRS, Inc.

Previous wording

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 DoW. The U.S. government, primarily with the DoW, is our largest customer and, for the three months ended March 31, 2026, accounted for approximately 79% of our business as an end-user, with revenues principally derived directly or indirectly from contracts with the U.S. Navy and U.S. Army, which represented 39% and 35%, respectively, of our total revenues for such period, which is consistent with historic trends.

Current wording

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 DoW. The U.S. government, primarily with the DoW, is our largest customer and, for the six months ended June 30, 2026, accounted for approximately 82% of our business as an end-user, with revenues principally derived directly or indirectly from contracts with the U.S. Navy and U.S. Army, which represented 37% and 33%, respectively, of our total revenues for such period, which is consistent with historic trends.

Previous wording

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.

Current wording

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 business. This approach permeates through the Company with a focus on continuous improvement at every level.

Previous wording

Revenues derived directly, as a prime contractor, or indirectly, as a subcontractor, from contracts with the U.S. government represented 79% and 78% of our total revenues for the three months ended March 31, 2026 and 2025, respectively. Our U.S. government sales are highly concentrated within our DoW customers, which made up the overwhelming majority of our U.S. government revenue for the periods presented and are principally derived directly or indirectly from contracts with the U.S. Navy and U.S. Army, which represented 39% and 35%, respectively, of our total revenues for the three months ended March 31, 2026. Therefore, our revenue is highly correlated to changes in U.S. government spending levels, especially within the DoW. The DoW budget is the largest defense budget in the world.

Current wording

Revenues derived directly, as a prime contractor, or indirectly, as a subcontractor, from contracts with the U.S. government represented 82% and 80% of our total revenues for the six months ended June 30, 2026 and 2025, respectively. Our U.S. government sales are highly concentrated within our DoW customers, which made up the overwhelming majority of our U.S. government revenue for the periods presented and are principally derived directly or indirectly from contracts with the U.S. Navy and U.S. Army, which represented 37% and 33%, respectively, of our total revenues for the six months ended June 30, 2026. Therefore, our revenue is highly correlated to changes in U.S. government spending levels, especially within the DoW. The DoW budget is the largest defense budget in the world.

Previous wording

Given the reliance on the U.S. government, funding for our programs are subject to a variety of factors that can affect our business, including: the President’s budget requests and procurement priorities and policies; the annual congressional budget authorization and appropriations process; and other U.S. government domestic and international priorities. U.S. government spending levels, particularly defense spending and the timing of funding, can affect our financial performance over the short and long term.

Current wording

Given the reliance on the U.S. government, funding for our programs is subject to a variety of factors that can affect our business, including: the President’s budget requests and procurement priorities and policies; the annual congressional budget authorization and appropriations process; and other U.S. government domestic and international priorities. U.S. government spending levels, particularly defense spending and the timing of funding, can affect our financial performance over the short and long term.

Previous wording

For FY2027, the Administration released topline details of the President’s budget request on April 3, 2026, proposing a significantly higher level of national defense resources, including approximately $1.15 trillion in base (discretionary) funding for the national defense function and an additional $350 billion in proposed reconciliation (mandatory) funding, subject to congressional action. The FY2027 budget will proceed through the standard congressional authorization and appropriations process (including development and consideration of the FY2027 NDAA and annual appropriations measures), alongside any separate reconciliation legislation if pursued. The timing and outcome of FY2027 enactment will depend on congressional negotiations, including potential continuing resolutions if annual appropriations are not completed by the start of the fiscal year on October 1, 2026.

Current wording

For FY2027, the Administration released topline details of the President’s budget request on April 3, 2026, proposing a significantly higher level of national defense resources, including approximately $1.15 trillion in base (discretionary) funding for the national defense function and an additional $350 billion in proposed reconciliation (mandatory) funding, subject to congressional action. The FY2027 budget is proceeding through the standard congressional authorization and appropriations process, though progress has been uneven and the outcome remains uncertain. Congress is not expected to complete all FY2027 appropriations before the fiscal year begins on October 1, 2026, making one or more continuing resolutions likely and leaving some risk of a government shutdown. The timing and outcome of FY2027 enactment will continue to depend on congressional negotiations, including the resolution of topline disputes and the potential use of continuing resolutions.

Previous wording

For the three months ended March 31, 2026, 87% of our revenue was derived from fixed-price contracts. This was consistent with the three months ended March 31, 2025, which realized revenue from fixed-price contracts of 86%.

Current wording

For the six months ended June 30, 2026, 86% of our revenue was derived from fixed-price contracts. This was consistent with the six months ended June 30, 2025.

Previous wording

Under flexibly priced contracts, we are reimbursed for allowable or otherwise defined total costs (defined as cost of revenues plus allowable general and administrative expenses) incurred, plus a fee. The contracts may also include incentives for various performance criteria, including quality, timeliness, cost-effectiveness or other factors. For the three months ended March 31, 2026 and 2025, flexibly priced contracts represented 13% and 14% of our total revenues, respectively.

Current wording

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 six months ended June 30, 2026 and 2025, flexibly priced contracts represented 14% of our total revenues.

Previous wording

The following discussion of operating results is intended to help the reader understand the results of operations and financial condition of the Company for the three months ended March 31, 2026 as compared to the three months ended March 31, 2025. Given the nature of our business, we believe revenue and operating earnings are most relevant to an understanding of our performance at an enterprise and segment level. Our operating cycle is longer term in nature and involves various types of production contracts and varying delivery schedules. Accordingly, operating results in a particular period may not be indicative of future operating results.

Current wording

The following discussion of operating results is intended to help the reader understand the results of operations and financial condition of the Company for the three and six months ended June 30, 2026, as compared to the three and six months ended June 30, 2025. Given the nature of our business, we believe revenue and operating earnings are most relevant to an understanding of our performance at an enterprise and segment level. Our operating cycle is longer term in nature and involves various types of production contracts and varying delivery schedules. Accordingly, operating results in a particular period may not be indicative of future operating results.

Previous wording

Our revenue generation of $846 million for the three months ended March 31, 2026 represents an increase of $47 million, or 5.9%, as compared to the three months ended March 31, 2025. The revenue increase is primarily attributed to continued demand across each of our operating segments. This is highlighted by our efforts within advanced sensing, electric power and propulsion and force protection activities.

Current wording

Our revenue generation of $913 million for the three months ended June 30, 2026 represents an increase of $84 million, or 10.1%, as compared to the three months ended June 30, 2025. The revenue increase is primarily attributed to the conversion of our funded backlog along with higher demand across each of our operating segments. This is highlighted by increased output within our electric power and propulsion and force protection program activities.

Previous wording

Cost of revenues increased by $16 million, or 2.6%, to $634 million for the three months ended March 31, 2026 as compared to $618 million for the three months ended March 31, 2025. The cost of revenues increase was due to the increased revenue contribution realized during the period. This increase was offset in part by improved program performance and favorable program mix across both of our operating segments.

Current wording

Cost of revenues increased by $44 million, or 7.0%, to $676 million for the three months ended June 30, 2026, as compared to $632 million for the three months ended June 30, 2025. The cost of revenues increase was due to the increased revenue contribution realized during the period. This increase was offset in part by improved program performance and favorable program mix across both of our operating segments.

Previous wording

Gross profit increased by $31 million, or 17.1%, to $212 million for the three months ended March 31, 2026 as compared to the same period in the prior year, resulting from the revenue and cost of revenues trends noted above. The gross profit increase, favorable mix and overall program performance drove an expansion of 240 basis points in our gross margin for the three months ended March 31, 2026.

Current wording

Gross profit increased by $40 million, or 20.3%, to $237 million for the three months ended June 30, 2026 and increased by $71 million, or 18.8%, to $449 million for the six months ended June 30, 2026, as compared to the same periods in the prior year, resulting from the revenue and cost of revenues trends noted above. The gross profit increases, favorable mix and overall program performance drove an expansion of 220 basis points and 230 basis points in our gross margin for the three and six months ended June 30, 2026, respectively.

Previous wording

G&A expenses increased by $13 million, or 11.1%, for the three months ended March 31, 2026 as compared to the three months ended March 31, 2025, primarily due to increased IR&D expenditures and costs related to bid and proposal efforts for new contractual pursuits.

Current wording

G&A expenses increased by $8 million, or 6.6%, for the three months ended June 30, 2026, as compared to the three months ended June 30, 2025, primarily due to increased IR&D expenditures and costs related to bid and proposal efforts for new contractual pursuits.

Previous wording

Amortization of acquired intangible assets was consistent for the three months ended March 31, 2026 as compared to the three months ended March 31, 2025.

Current wording

Amortization of acquired intangible assets was consistent for the three and six months ended June 30, 2026, as compared to the three and six months ended June 30, 2025.

Previous wording

Operating earnings increased by $18 million to $77 million for the three months ended March 31, 2026 as compared to the same period in the prior year. The increase was driven by the gross profit impacts offset in part by the G&A expense increases noted above.

Current wording

Operating earnings increased by $32 million to $102 million for the three months ended June 30, 2026 and increased by $50 million to $179 million for the six months ended June 30, 2026, as compared to the same periods in the prior year. The increases were driven by the higher gross profit offset in part by the G&A expense increases both noted above.

Previous wording

Net interest expense decreased by $1 million to zero for the three months ended March 31, 2026 as compared to the same period in the prior year. The reduction in net interest expense is attributed to increased interest income as a result of higher cash balances and reduced interest expense with the repayment and termination of the 2022 Term Loan A in January 2026.

Current wording

Net interest income was $2 million for the three and six months ended June 30, 2026, compared to net interest expense of $2 million and $3 million for the three and six months ended June 30, 2025, respectively. The change is attributed to increased interest income as a result of higher cash balances and reduced interest expense with the repayment and termination of the 2022 Term Loan A in January 2026.

Previous wording

Earnings before taxes increased by $19 million to $77 million for the three months ended March 31, 2026, as compared to the same period in the prior year. This was primarily due to the increase in operating earnings and decreased net interest expense as noted above.

Current wording

Earnings before taxes increased by $33 million to $100 million for the three months ended June 30, 2026 and increased by $52 million to $177 million for the six months ended June 30, 2026, as compared to the same periods in the prior year. This was primarily due to the increase in operating earnings and change in net interest income (expense) as noted above.

Previous wording

Net earnings increased by $12 million to $62 million for the three months ended March 31, 2026, as compared to the same period in the prior year. This was driven by an increase in earnings before taxes coupled with the changes in our effective tax rate as noted above.

Current wording

Net earnings increased by $32 million to $86 million for the three months ended June 30, 2026 and increased by $44 million to $148 million for the six months ended June 30, 2026, as compared to the same periods in the prior year. This was driven by an increase in earnings before taxes coupled with the changes in our effective tax rate as noted above.

Previous wording

Backlog increased by $10 million to $8,382 million as of March 31, 2026, from $8,372 million as of March 31, 2025. The backlog increase was driven primarily by the receipt of new awards within our IMS segment.

Current wording

Backlog increased by $421 million to $8,787 million as of June 30, 2026, from $8,366 million as of June 30, 2025. The backlog increase was driven primarily by the receipt of new awards within our IMS segment which realized bookings in excess of revenue for the period.

Previous wording

Bookings for the three months ended March 31, 2026 decreased to $885 million as compared to $991 million for the three months ended March 31, 2025. The decrease in new orders was driven within our ASC segment and offset in part by IMS bookings expansion. See“—Review of Operating Segments” below for more detail.

Current wording

Bookings for the three months ended June 30, 2026 increased to $1,085 million, as compared to $853 million for the three months ended June 30, 2025. Bookings for the six months ended June 30, 2026 increased to $1,970 million, as compared to $1,844 million for the six months ended June 30, 2025. The increase in new orders for the six months ended June 30, 2026 was driven within our IMS segment and offset in part by a reduction in new orders within our ASC segment. See“—Review of Operating Segments” below for more detail.

Previous wording

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 certain discretionary budgets, and the ability of Congress to determine how to allocate the available budget authority and pass appropriations bills to fund U.S. government departments and agencies. 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. See Part I, Item 1A, “Risk Factors—Risks Related to Our Business—Significant delays or reductions in appropriations for our programs and changes in U.S. government priorities and spending levels more broadly may negatively impact our business and could have a material adverse impact on our business, financial condition and results of operations” and Part II, Item 7,“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Overview and Considerations—Business Environment” in our Annual Report on Form 10-K for the year ended December 31, 2025, and Part I, Item 2,“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Overview and Considerations—Business Environment” in this Quarterly Report for further details on U.S. government spending’s impact on our business.

Current wording

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 certain discretionary budgets, and the ability of Congress to determine how to allocate the available budget authority and pass appropriations bills to fund U.S. government departments and agencies. 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. See Part I, Item 1A, “Risk Factors—Risks Related to Our Business—Significant delays or reductions in appropriations for our programs and changes in U.S. government priorities and spending levels more broadly may negatively impact our business and could have a material adverse impact on our business, financial condition and results of operations” and Part II, Item 7,“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Overview and Considerations—Business Environment” in our Annual Report on Form 10-K for the year ended December 31, 2025, and Part I, Item 2,“Management’s Discussion and Analysis of Financial

Previous wording

International revenue, including foreign military sales, foreign military financing, and direct commercial sales, accounted for approximately 12% and 7% of our revenue for the three months ended March 31, 2026 and 2025, respectively. The increase in international sales is due in part to the global demand for our tactical radars used in counter drone and short-range air defense applications.

Current wording

International revenue, including foreign military sales, foreign military financing, and direct commercial sales, accounted for approximately 12% and 8% of our revenue for the six months ended June 30, 2026 and 2025, respectively. The increase in international sales is due in part to the global demand for our tactical radars used in counter drone and short-range air defense applications.

Previous wording

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 the three months ended March 31, 2026.

Current wording

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 the six months ended June 30, 2026.

Previous wording

The ASC segment reported revenue of $559 million for the three months ended March 31, 2026, an increase of 9.4%, or $48 million, from the three months ended March 31, 2025. The revenue increase is attributed to our advanced sensing and tactical radars used in force protection and counter drone applications.

Current wording

The ASC segment reported revenue of $587 million for the three months ended June 30, 2026, an increase of 8.3%, or $45 million, from the three months ended June 30, 2025. The revenue increase is attributed to our advanced sensing and tactical radars used in space based, force protection and counter drone applications, reflecting execution of our backlog programs coupled with increased customer demand driven by the elevated global threat environment.

Previous wording

For the three months ended March 31, 2026, operating earnings increased by $15 million, or 60.0%, to $40 million for the three months ended March 31, 2026, from $25 million for the three months ended March 31, 2025. The increase was driven by increased revenue contribution, favorable program mix and better program execution. The net of these impacts drove operating margin to 7.2% for the three months ended March 31, 2026, compared to the 4.9% realized during the three months ended March 31, 2025.

Current wording

For the three months ended June 30, 2026, operating earnings increased by $12 million, or 32.4%, to $49 million for the three months ended June 30, 2026, from $37 million for the three months ended June 30, 2025. The increase was driven by increased revenue contribution, favorable program mix and better program execution. The net of these impacts drove operating margin to 8.3% for the three months ended June 30, 2026, compared to the 6.8% realized during the three months ended June 30, 2025.

Previous wording

For the three months ended March 31, 2026, bookings decreased $240 million, or 35.9%, from the three months ended March 31, 2025 to $429 million. The decrease in new awards is largely attributed to a large multi-year award received in the prior year for next generation ground vehicle sensing. This reduction was offset in part by demand for our tactical radar sensor programs coupled with additional awards received for pilot training efforts.

Current wording

For the six months ended June 30, 2026, bookings decreased $108 million, or 8.8%, from the six months ended June 30, 2025 to $1,120 million. The decrease in new awards is largely attributed to a large multi-year award received in the prior year for next generation ground vehicle sensing. This reduction was offset in part by demand for our tactical radar sensor programs.

Previous wording

IMS segment revenue increased by $4 million, or 1.4%, to $295 million for the three months ended March 31, 2026, from $291 million for the three months ended March 31, 2025, which is attributed to increased revenue generated from our naval power programs, partially offset by a reduction in force protection generated revenues.

Current wording

IMS segment revenue increased by $43 million, or 14.8%, to $333 million for the three months ended June 30, 2026, from $290 million for the three months ended June 30, 2025, which is attributed to increased revenue generated from our naval power and force protection related programs during the period.

Previous wording

For the three months ended March 31, 2026, operating earnings increased by $3 million, or 8.8%, to $37 million for the three months ended March 31, 2026, from $34 million for the three months ended March 31, 2025. The increase for the period is attributed to operational leverage created by continued program improvement on our Columbia Class submarine program, resulting in a net operating margin increase to 12.5%, compared to the 11.7% realized during the three months ended March 31, 2025.

Current wording

For the three months ended June 30, 2026, operating earnings increased by $20 million, or 60.6%, to $53 million for the three months ended June 30, 2026, from $33 million for the three months ended June 30, 2025. The increase for the period is attributed to continued program improvement within both land and naval programs coupled with the benefits of operational leverage generated from the increased volume noted above, resulting in a net operating margin increase to 15.9%, compared to the 11.4% realized during the three months ended June 30, 2025.

Previous wording

For the three months ended March 31, 2026, bookings increased by $134 million, or 41.6%, from the three months ended March 31, 2025 to $456 million. The increase for the three months ended March 31, 2026 is largely attributed to funding received for our naval power and propulsion efforts as well as increased demand for our force protection efforts.

Current wording

For the three months ended June 30, 2026, bookings increased by $100 million, or 34.0%, from the three months ended June 30, 2025 to $394 million. The increase for the three months ended June 30, 2026 is largely attributed to increased demand for our force protection efforts as well as funding received for our naval power and propulsion efforts.

Previous wording

We endeavor to ensure the most efficient conversion of operating earnings into cash for deployment in our business and to maximize stockholder value through cash deployment activities. In addition to our cash position, we use various financial measures to assist in capital deployment decision-making, including cash provided by (used in) operating activities. We believe that the combination of our existing cash, access to credit facilities as described in Note 10: Debt to the Consolidated Financial Statements, and future cash that we expect to generate from our operations will be sufficient to meet our short and long-term liquidity needs. There can be no assurance, however, that our business will continue to generate cash flow at current levels or that anticipated operational improvements will be achieved. We may also pursue acquisitions or other strategic priorities that will require additional liquidity beyond the liquidity we generate through our operations. Our cash balance as of March 31, 2026, was $328 million compared to $647 million as of December 31, 2025.

Current wording

We endeavor to ensure the most efficient conversion of operating earnings into cash for deployment in our business and to maximize stockholder value through cash deployment activities. In addition to our cash position, we use various financial measures to assist in capital deployment decision-making, including cash provided by (used in) operating activities. We believe that the combination of our existing cash, access to credit facilities as described in Note 10: Debt to the Consolidated Financial Statements, 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 June 30, 2026, was $270 million compared to $647 million as of December 31, 2025.

Previous wording

Cash usage related to operating activities decreased by $72 million to $66 million for the three months ended March 31, 2026, from $138 million for the three months ended March 31, 2025. This was primarily due to lower cash used to fund working capital for the three months ended March 31, 2026 when compared to the three months ended March 31, 2025.

Current wording

Cash usage related to operating activities decreased by $135 million to $31 million for the six months ended June 30, 2026, from $166 million for the six months ended June 30, 2025. This was primarily due to increased earnings and lower cash used to fund working capital for the six months ended June 30, 2026 when compared to the six months ended June 30, 2025.

Previous wording

Net cash used in investing activities decreased by $3 million for the three months ended March 31, 2026 when compared to the three months ended March 31, 2025, primarily due to lower capital expenditures.

Current wording

Net cash used in investing activities decreased by $2 million for the six months ended June 30, 2026 when compared to the six months ended June 30, 2025, primarily due to slightly lower capital expenditures.

Previous wording

Net cash used in financing activities for the three months ended March 31, 2026 was $224 million, compared to $48 million for the three months ended March 31, 2025. The change was primarily due to the repayment and termination of the 2022 Term Loan A in January 2026, partially offset by payments of employee taxes withheld from stock-based awards in the prior period.

Current wording

Net cash used in financing activities for the six months ended June 30, 2026 was $288 million, compared to $94 million for the six months ended June 30, 2025. The change was primarily due to the repayment and termination of the 2022 Term Loan A in January 2026.