drs-20240630

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, 2024

☐ 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 001-41565

Leonardo DRS, Inc.

(Exact name of registrant as specified in its charter)


Delaware			13-2632319
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

2345 Crystal Drive

Suite 1000

Arlington, Virginia 22202

(703) 416-8000

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

Securities registered pursuant to Section 12(b) of the Act:


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

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

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

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

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 13(a) of the Exchange 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 July 29, 2024, there were 263,702,807 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 Shareholders' Equity			5
Notes to Consolidated Financial Statements			6
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk			37
ITEM 4. Controls and Procedures			37
PART II. Other Information			39
ITEM 1. Legal Proceedings			39
ITEM 1A. Risk Factors			39
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds			39
ITEM 3. Defaults Upon Senior Securities			39
ITEM 4. Mine Safety Disclosures			39
ITEM 5. Other Information			39
ITEM 6. Exhibits			40
Signatures			41

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;

•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;

iii

•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;

•Any conflict of interest that may arise because Leonardo US Holding, LLC, 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 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 ended December 31, 2023, could cause our actual results to differ materially from those projected in any forward-looking statements we make. Readers should read the discussion of these factors carefully to better understand the risks and uncertainties inherent in our business and underlying any forward-looking statements.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

LEONARDO DRS, INC.

Consolidated Statements of Earnings (Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in millions, except per share amounts)	2024		2023		2024		2023
Revenues:
Products	$	731	$	590	$	1,354	$	1,110
Services	22		38		87		87
Total revenues	753		628		1,441		1,197
Cost of revenues:
Products	(572)		(458)		(1,060)		(861)
Services	(12)		(25)		(59)		(60)
Total cost of revenues	(584)		(483)		(1,119)		(921)
Gross profit	169		145		322		276
General and administrative expenses	(107)		(90)		(208)		(190)
Amortization of intangibles	(6)		(5)		(11)		(11)
Other operating expenses, net	(1)		(8)		(5)		(8)
Operating earnings	55		42		98		67
Interest expense	(7)		(9)		(12)		(17)
Other, net	(1)		—		(2)		(1)
Earnings before taxes	47		33		84		49
Income tax provision (benefit)	9		(2)		17		2
Net earnings	$	38	$	35	$	67	$	47

Net earnings per share from common stock:
Basic earnings per share	$	0.14	$	0.14	$	0.25	$	0.18
Diluted earnings per share	$	0.14	$	0.13	$	0.25	$	0.18

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)	2024		2023		2024		2023
Net earnings	$	38	$	35	$	67	$	47
Other comprehensive income (loss):
Foreign currency translation (loss) gain, net of income taxes	(1)		1		(1)		1
Pension and other postretirement benefit plan adjustments, net of income taxes	1		1		1		1
Other comprehensive income (loss), net of income taxes	—		2		—		2
Total comprehensive income	$	38	$	37	$	67	$	49

See accompanying Notes to Consolidated Financial Statements.

LEONARDO DRS, INC.

Consolidated Balance Sheets


	(Unaudited)
(Dollars in millions, except per share amounts)	June 30, 2024		December 31, 2023
ASSETS
Current assets:
Cash and cash equivalents	$	149	$	467
Accounts receivable, net	188		151
Contract assets	1,037		908
Inventories	367		329

Prepaid expenses	31		21
Other current assets	33		42
Total current assets	1,805		1,918
Noncurrent assets:
Property, plant and equipment, net	419		402
Intangible assets, net	144		151
Goodwill	1,238		1,238
Deferred tax assets	122		123
Other noncurrent assets	91		89
Total noncurrent assets	2,014		2,003
Total assets	$	3,819	$	3,921
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current portion of long-term debt	$	22	$	57
Accounts payable	263		398
Contract liabilities	348		335
Other current liabilities	263		288
Total current liabilities	896		1,078
Noncurrent liabilities:
Long-term debt	351		349
Pension and other postretirement benefit plan liabilities	36		36
Deferred tax liabilities	4		4
Other noncurrent liabilities	126		129
Total noncurrent liabilities	517		518
Commitments and contingencies (Note 13)
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; 263,660,716 and 262,525,390 issued and outstanding as of June 30, 2024 and December 31, 2023, respectively	3		3
Additional paid-in capital	5,189		5,175
Accumulated deficit	(2,739)		(2,806)
Accumulated other comprehensive loss	(47)		(47)
Total shareholders' equity	2,406		2,325
Total liabilities and shareholders' equity	$	3,819	$	3,921

See accompanying Notes to Consolidated Financial Statements.

LEONARDO DRS, INC.

Consolidated Statements of Cash Flows (Unaudited)


	Six Months Ended June 30,
(Dollars in millions)	2024		2023
Operating activities
Net earnings	$	67	$	47
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization	45		42
Deferred income taxes	1		6

Share-based compensation expense	11		8
Other	1		—
Changes in assets and liabilities:
Accounts receivable	(37)		(32)
Contract assets	(129)		(146)
Inventories	(38)		(59)
Prepaid expenses	(10)		3
Other current assets	9		(25)
Other noncurrent assets	14		6
Defined benefit obligations	—		(2)
Other current liabilities	(28)		(91)
Other noncurrent liabilities	(15)		5
Accounts payable	(135)		(167)
Contract liabilities	13		59
Net cash used in operating activities	(231)		(346)
Investing activities
Capital expenditures	(44)		(27)


Proceeds from sales of assets	—		1

Net cash used in investing activities	(44)		(26)
Financing activities
Net decrease in third party borrowings (maturities of 90 days or less)	(35)		(4)
Repayment of third party debt	(141)		(291)
Borrowings of third party debt	135		395





Proceeds from stock issuance	7		6
Cash outlay to reacquire equity instruments	(4)		(1)
Other	(5)		(4)
Net cash (used in) provided by financing activities	(43)		101
Effect of exchange rate changes on cash and cash equivalents	—		—
Net decrease in cash and cash equivalents	(318)		(271)
Cash and cash equivalents at beginning of year	467		306
Cash and cash equivalents at end of period	$	149	$	35

See accompanying Notes to Consolidated Financial Statements.

LEONARDO DRS, INC.

Consolidated Statements of Shareholders’ Equity (Unaudited)


(Dollars in millions)	Common stock		Additional paid-in capital		Accumulated other comprehensive loss		Accumulated deficit		Total
Balance as of December 31, 2022	$	3	$	5,147	$	(49)	$	(2,974)	$	2,127
Total comprehensive income	—		—		2		47		49
Share-based compensation activity	—		13		—		—		13
Balance as of June 30, 2023	$	3	$	5,160	$	(47)	$	(2,927)	$	2,189


Balance as of December 31, 2023	$	3	$	5,175	$	(47)	$	(2,806)	$	2,325
Total comprehensive income	—		—		—		67		67
Share-based compensation activity	—		14		—

SEC Form 10-Q filed by Leonardo DRS Inc.