DRS 10-K & 10-Q changes, risk factors and insider trading

You should carefully consider the risks and uncertainties described below, as well as other information contained in this Annual Report, including the notes to our consolidated financial statements and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” when evaluating our business. The risks described below are not the only ones facing us, and are not necessarily presented in the order of importance. The list of summary risk factors below should be read in conjunction with the remainder of this “Risk Factors” section and should not be relied upon as an exhaustive summary of the material risks we face. The occurrence of any of the following risks or additional risks and uncertainties not presently known to us or that we currently believe to be immaterial could materially and adversely affect our business, financial condition and results of operations. In any such case, the trading price of our common stock could decline. This Annual Report also contains forward-looking statements and estimates that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of a number of factors, including the risks and uncertainties described below.

•We depend on U.S. defense spending for the vast majority of our revenues. DisruptionsDisruptions, including from government shutdowns, or deteriorations in our relationships with the relevant agencies of the U.S. government could have a material adverse impact on our business, financial condition and results of operations.

•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.

•Our results of operations and cash flows are substantially affected by our mix of fixed-price, cost-plus and time-and-materialsT&M type contracts. In particular, fixed-price contracts subject us to the risk of loss in the event of cost overruns or higher than anticipated inflation.

•We are subject to the U.S. government’s requirements, including the DoD’sDoW’s National Industrial Security Program Operating Manual, for our facility security clearances, which are prerequisites to our ability to perform on classified contracts for the U.S. government.

•We aremay be susceptible to a security breach, through cyber-attack, cyber-intrusion, insider threats or otherwise, and to other significant disruptions of our IT networks and related systems, or those of our customers, suppliers, vendors, subcontractors, partners, or other third parties.

•We have significant operations in locations that could be materially and adversely impacted in the event of a natural disasterdisaster, severe weather or other significant disruption.

•We operate under aan amended and restated proxy agreement with the DoDDoW that regulates significant areas of our governance. If we fail to comply with the amended and restated proxy agreement our classified U.S. government contracts could be terminated, which could have a material adverse impact on our business, financial condition and results of operations.

We depend on revenues from contracts and subcontracts with the U.S. government, including defense-related programs with the DoDDoW and a broad range of programs with all branches of the U.S. military. Revenues derived directly or indirectly from contracts with the U.S. government represented approximately 79%,80%, 80%79% and 84%80% of our total revenues for the years ended December 31, 2025, 2024, 2023, and 2022,2023, respectively, with revenues principally derived directly or indirectly from contracts with the U.S. Navy and U.S. Army, which represented 37%36% and 32%,36%, respectively, of our total revenues for the year ended December 31, 2024.2025. Because our customer base is concentrated within the U.S. defense industry, any disruption or deterioration in our relationship with the U.S. government and its prime contractors, or any change in the U.S. government’s willingness to commit substantial resources to the continued purchase of our products, could significantly reduce our revenues and have a material adverse impact on our business, financial condition and results of operations.

Significant delaysdelays, including from government shutdowns, 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.

The availability of U.S. government funding for significant programs in which we participate may be impacted by a number of factors beyond our control including full or partial government shutdowns, the overall federal budget, changes in spending priorities and defense spending levels, sequestration, the appropriations process, use of continuing resolutions (with restrictions, e.g., on starting new programs) and the permissible level of federal debt. These factors may also delay or adversely impact purchasing or payment decisions by our customers. In the event government funding for significant programs in which we participate becomes unavailable, or is reduced or delayed, our contract or subcontract under such programs may be terminated or adjusted by the U.S. government or the prime contractor. U.S. government priorities and spending levels have fluctuated and may continue to fluctuate over time. We cannot predict the impact on existing, follow-on, replacement or future programs from potential changes in priorities whether due to changes in defense spending levels, the threat environment, procurement strategy, the evolution of warfare, military strategy and planning and/or changes in social, economic or political priorities. As the DoDDoW budget represents the largest part of the federal discretionary budget, it is possible that the various legislative actions might exert downward pressure on defense spending, as well as other non-defense discretionary outlays. The U.S. government may also delay, modify or cancel ongoing competitive bidding processes, procurements and programs, as well as change its acquisition strategy. A significant shift in government priorities, programs or acquisition strategies could have a material adverse impact on our business, financial condition and results of operations.

Considerable uncertainty exists regarding future budget and program decisions, including U.S. defense spending priorities, what challenges budget reductions will present for the defense industry, whether annual appropriations bills for all agencies will be enacted for U.S. government fiscal year 2025FY2027 and thereafter, and how the current administration will approach those decisions through the budgeting process. Additionally,While the currentFY2026 U.S.DoW administrationbudget haswas discussedapproved, various changes to defense spending levels ranging from across-the-board percentage cuts, to a change in spending allocations in favor of new priorities, and potential increases in the top-line spending profile. Itthere remains unclearuncertainty whetherwith andregard to what extent the DoD’s budget may change and, if it does, to what extent our business, financial condition and results of operations may be affected. Additionally, the U.S. government’s budget deficit and the national debt could also significantly affect government budgeting priorities and could have an adverse impact on our business, financial condition and results of operations in a number of ways, including the following:

Our results of operations and cash flows are substantially affected by our mix of fixed-price, cost-plus and time-and-materialsT&M type contracts. In particular, fixed-price contracts subject us to the risk of loss in the event of cost overruns or higher than anticipated inflation.

We generate revenue through various fixed-price, cost-plus and time-and-materialsT&M type contracts. For a general description of our U.S. government contracts and subcontracts, including a discussion of revenue generated thereunder and of cost-reimbursable versus fixed-price contracts, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report.

We are subject to the U.S. government’s requirements, including the DoD’sDoW’s National Industrial Security Program Operating Manual, for our facility security clearances, which are prerequisites to our ability to perform on classified contracts for the U.S. government.

We require a facility security clearance to perform on classified contracts for the DoDDoW and certain other agencies of the U.S. government. Security clearances are subject to regulations and requirements including, among others, the National Industrial Security Program Operating Manual (the “NISPOM”), which specifies the requirements for the protection of classified information released or disclosed in connection with classified U.S. government contracts. The Defense Counterintelligence and Security Agency (the “DCSA”) manages the facility clearance process under the NISPOM and conducts various facility audits and inspections throughout the lifecycle of a respective facility clearance.

Leonardo S.p.A., an Italian company listed on the Milan Stock Exchange, owns the entire share capital of US Holding which, in turn, owns approximately 72%71% of the voting power of our outstanding common stock. As a result, we are deemed to be under FOCI. Furthermore, the Italian state beneficially owns approximately 30.2% of Leonardo S.p.A.’s voting power (through its ownership of approximately 30.2% of the outstanding ordinary shares of Leonardo S.p.A.). In order to be permitted to maintain our security clearances and our access to classified data and to perform or bid on classified programs, we are required to mitigate FOCI through a proxy agreement, which we have done by entering into an interimamended and restated proxy agreement, with the DoD. We are currently operating under an interim proxy agreement while we seek to enter into a new proxy agreement with the DoD.DoW. The terms of any new proxy agreement or other mitigation agreements could impose heightened or new restrictions, which could further impact our business operations. Proxy agreements, including ours, typically have limited duration and need to be renewed on a regular basis. For additional information on the terms and requirements of the amended and restated proxy agreement, see “—Risks Relating to Our Ownership and Status under the Amended and Restated Proxy Agreement—We operate under aan amended and restated proxy agreement with the DoDDoW that regulates significant areas of our governance. If we fail to comply with the amended and restated proxy agreementagreement, our classified U.S. government contracts could be terminated, which could have a material adverse impact on our business, financial condition and results of operations.”

While we currently mitigate FOCI under the interimamended and restated proxy agreement, the DoDDoW reserves the right to terminate thesuch proxy agreement or impose such additional security safeguards as it believes necessary in order to prevent unauthorized access to classified and controlled unclassified information and any U.S. government agency may deny or revoke our access to classified and controlled unclassified information under its jurisdiction if it considers it necessary to protect national security. Failure to maintain an agreement with the DoDDoW regarding the appropriate FOCI mitigation arrangement could result in invalidation or termination of our facility security clearances, which in turn would mean that we would not be able to perform under current or enter into future contracts with the U.S. government requiring facility security clearances.

We depend on revenues from contracts and subcontracts with the U.S. government, including defense-related programs with the DoDDoW and a broad range of programs with each of the service branches. Revenues derived directly or indirectly from contracts with the U.S. government were approximately 79%,80%, 80%79% and 84%80% for the years ended December 31, 2025, 2024, 2023, and 2022,2023, respectively. If we fail to maintain an agreement with the DoDDoW regarding the appropriate FOCI mitigation arrangement or otherwise fail to comply with the NISPOM, this could have a material adverse impact on our business, financial condition and results of operations. For further information, see “—Risks Relating to Our Business—We depend on U.S. defense spending for the vast majority of our revenues. Disruptions or deteriorations in our relationships with the relevant agencies of the U.S. government could have a material adverse impact on our business, financial condition and results of operations.”

Furthermore, the President Trump issued an Executive Order in January 2025, which requires, in relevant part, that every Federal contract or grant award include a clause that requires the contractor or grant recipient to (1) agree that its compliance with all applicable federal anti-discrimination laws is material to the government’s payment decisions on such contract or grant for purposes of the False Claims Act, and (2) certify that it does not operate any programs promoting diversity, equity and inclusion that violate any applicable federal anti-discrimination laws. The Executive Order increases our compliance risk through an increased risk of civil False Claims Act liabilityliability, if our current practices are deemed to violate the federal anti-discrimination laws.

We depend on U.S. government contracts, which are heavily regulated and subject to audit by the U.S. government and its agencies, such as the Defense Contract Audit Agency (“DCAA”), Defense Contract Management Agency, the DoDDoW Inspector General, and others. These agencies review performance on government contracts, direct and indirect rates and pricing practices, and compliance with applicable contracting and procurement laws, regulations and standards. They also review compliance with government standards for our business systems and the adequacy of our internal control systems and policies. Negative findings related to our business and accounting systems and financial controls and capability could result in our ineligibility for future cost-plus contracts. Costs ultimately disallowed or found to be improperly allocated to a specific contract will not be reimbursed or must be refunded if already reimbursed. We record contract revenue based on costs on which we expect to be paid after any final audit. However, we do not know the outcome of any future audits and adjustments in advance, and we may be required to reduce our revenue or profits materially upon completion and final negotiation of audits. As a result of certain cost reduction initiatives across our industry, we have experienced and may continue to experience an increased number of audits and/or a lengthened period of time required to close open audits. For example, the thresholds for certain allowable costs in the U.S., including compensation costs, have been significantly reduced and the allowability of other types of costs are being challenged, debated and, in certain cases, modified, all with potentially significant financial costs to the Company.

We (including our subcontractors and others with whom we do business) are also subject to, and expected to perform in compliance with, a vast array of federal, state, local and international laws, regulations and requirements related to our industry, our products and the businesses we operate. These laws and regulations include, but are not limited to, the Anti-Kickback Act, the Arms Export Control Act, including the ITAR, the Communications Act, the Defense Federal Acquisition Regulations, the EAR (which includes anti-boycott provisions), the False Claims Act, the Federal Acquisition Regulation, the FCPA, the Lobbying Disclosure Act, the Procurement Integrity Act, the Truthful Cost or Pricing Data Act, the Foreign Trade Regulations, the Foreign Investment Risk Review Modernization Act, the International Emergency Economic Powers Act, the Trading with the Enemy Act, and Executive Orders and regulations, administered by the U.S. Department of the Treasury, DoW, Office of Foreign Assets Control, as well as rules and regulations administered by the U.S. Customs and Border Protection and the Bureau of Alcohol, Tobacco, Firearms and Explosives. While we have implemented compliance programs that are intended to avoid violations of these laws, regulations and requirements, given the nature of our operations and the constant evolution of applicable laws, regulations and requirements, we may not be able to prevent future violations. If we are found to have violated such laws, regulations or requirements, we may be subject to: reductions of the value of contracts; contract modifications or termination; the withholding of payments from our customer; the loss of export privileges; administrative or civil judgments and liabilities; criminal judgments or convictions, liabilities and consent or other voluntary decrees or agreements; other sanctions; the assessment of penalties, fines, or compensatory, treble or other damages or non-monetary relief or actions; or suspension or debarment.

Considerable uncertainty exists regarding future legislation and regulations as the current administration has issued changing guidance on a wide array of topics including the Executive Order issued in January 2025, which requires, in relevant part, that every Federal contract or grant award include a clause that requires the contractor or grant recipient to (1) agree that its compliance with all applicable federal anti-discrimination laws is material to the government’s payment decisions on such contract or grant for purposes of the False Claims Act, and (2) certify that it does not operate any programs promoting diversity, equity and inclusion that violate any applicable federal anti-discrimination laws.topics. Future legislation and regulations may increase the restrictions in current organizational conflicts of interest regulations and rules. To the extent that organizational conflicts of interest laws, regulations and rules limit our ability to successfully compete for new contracts or task orders with the U.S. government and/or commercial entities, or require us to exit certain existing contracts or wind down certain existing contracts, either because of organizational conflicts of interest issues arising from our business or because companies with which we are affiliated, including Leonardo S.p.A. and its subsidiaries (including US Holding), or with which we otherwise conduct business create organizational conflicts of interest issues for us, our business, financial condition, results of operations and prospects could be materially and adversely affected.

Our industry has experienced, and we expect will continue to experience, significant changes to business practices globally as a result of an increased focus on affordability, efficiencies, business systems, recovery of costs and a reprioritization of available defense funds to key areas for future defense spending. For example, the current administration implemented an Executive Order in January 2025 creating the Department of Government Efficiency which has the stated purpose of modernizing Federal technology and software to maximize governmental efficiency and productivity. TheseAny initiatives and changes to procurement practices may change the way U.S. government contracts are solicited, negotiated and managed, which may affect whether and how we pursue opportunities to provide our products and services to the U.S. government, including the terms and conditions under which we do so. For example, in connection with these cost reduction initiatives the U.S. government is pursuing alternatives to shift additional responsibility and performance risks to the contractor. Changes in procurement practices favoring incentive-based fee arrangements, different award criteria, non-traditional contract provisions and government contract negotiation offers also may affect our results of operations and predictability. The U.S. government has been pursuing and may continue to pursue these and other policies that could negatively impact our profitability and adversely impact our business, financial condition and results of operations.

Our total backlog consists of funded and unfunded amounts. Funded backlog represents the revenue value of orders for products and services under existing contracts for which funding is appropriated or otherwise authorized less revenue previously recognized on these contracts. Unfunded backlog represents the revenue value of firm orders for products and services under existing contracts for which funding has not yet been appropriated less funding previously recognized on these contracts. We evaluate bookings which we define as the total value of contract awards received from the U.S. government for which it has appropriated funds and legally obligated such funds to the Company through a contract or purchase order, plus the funded value of contract awards and orders received from customers other than the U.S. government. As of December 31, 2024,2025, our total remaining contract value was approximately $8,509$8,448 million with bookings for the year of $4,077$4,245 million. We historically have not realized all of the revenue included in our total contract value or bookings, and we may not realize all of the revenue included in our total contract value or bookings in the future. There is a higher degree of risk in this regard with respect to unfunded backlog. In addition, there can be no assurance that our total bookings will result in actual revenue in any particular period. This is because the actual receipt, timing, and amount of revenue under contracts included in total contract value and bookings are subject to various contingencies, including Congressional appropriations, many of which are beyond our control. The actual receipt of revenue from contracts included in total estimated contract value and bookings may never occur or may be delayed because: a program schedule could change or the program could be canceled; a contract’s funding or scope could be reduced, modified, delayed, de-obligated or terminated early, including as a result of a lack of appropriated funds or cost cutting initiatives and other efforts to reduce U.S. government spending and/or the automatic federal defense spending cuts required by sequestration; in the case of funded backlog, the period of performance for the contract has expired or the U.S. government has exercised its unilateral right to cancel multi-year contracts and related orders or terminate existing contracts for convenience or default; in the case of unfunded backlog, funding may not be available. Our failure to replace canceled or reduced bookings could have a material adverse impact on our business, financial condition and results of operations.

We cannot predict future capital needs, the sufficiency of our current financing or our ability to obtain additional financing if weneeded, needon it.terms acceptable to us, if at all.

Our operations are capital intensive, and we rely heavily on financing, including working capital financing, such as factoring and supply chain financing. We may also enter into other types of financings in the future, including bank and bond financing. Although we believe that our available cash resources, together with our access to credit facilitiesfacilities, as described in Note 1312: Debt to the Consolidated Financial Statements, and future cash that we expect to generate from our operations, are sufficient to meet our presently anticipated liquidity needs and capital expenditure requirements, we might in the future need to raise additional funds to, among other things:

We cannot guarantee that we will continue to be able to extend existing working capital financing on commercially reasonable terms or at all and we might be unable to obtain additional financing, if needed, on terms acceptable to us, if at all. If sufficient funds are not available or are not available on terms acceptable to us, our ability to fund our current operations, fund expansion, take advantage of acquisition opportunities, develop or enhance services or products, or otherwise respond to competitive pressures would be significantly limited. We may be required to obtain the consent of US Holding in order to obtain financing and there is no guarantee that their consent will be granted. See “—Risks Relating to Our Ownership and Status under the Amended and Restated Proxy Agreement—Our indirect majority stockholder, Leonardo S.p.A., may have interests that are different from, or conflict with, those of our other stockholders, and their majority ownership in us may discourage change of control transactions.” The existing debt obligations of Leonardo S.p.A., which contain restrictions applicable to subsidiaries of Leonardo S.p.A., including us, may also negatively impact our ability to obtain additional financing on terms acceptable to us, if at all. In addition, any decline in the ratings of our corporate credit or any indications from the rating agencies that their ratings on our corporate credit are under surveillance or review with possible negative implications could adversely impact our ability to access capital. These limitations could have a material adverse impact on our business, financial condition and results of operations.

As a public reporting company, we are required to establish and maintain an effective system of internal control over financial reporting. Failure to establishmaintain suchan internaleffective control, or any failuresystem of such internal control onceover established,financial reporting could adversely impact our public disclosures regarding our business, financial condition or results of operations. Any such failure of our internal control over financial reporting could also prevent us from maintaining accurate accounting records and discovering accounting errors and financial frauds. Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act require annual assessment of our internal control over financial reporting. The standards that must be met for management to assess the internal control over financial reporting as effective are complex, and require significant documentation, testing and possible remediation to meet the detailed standards. Any assessment by management that there are weaknesses in our internal control over financial reporting may raise concerns for investors. Any actual or perceived weaknesses and conditions that need to be addressed in the internal controls over financial reporting (including those weaknesses identified in periodic reports), or disclosure of management’s assessment of the internal controls over financial reporting may have an adverse impact on the price of our common stock.

Our financing arrangementsarrangements, including our senior unsecured credit agreement, contain restrictions, covenants and events of default that, among other things, require us to satisfy certain financial tests and maintain certain financial ratios and restrict our ability to incur additional indebtedness and to refinance our existing indebtedness.

Some of our variable-ratevariable rate indebtedness uses the Secured Overnight Financing Rate (“SOFR”) as a benchmark for establishing the rate. Our business may not generate sufficient cash flow from operations, and future borrowings may not be available to us in an amount sufficient, to enable us to pay our anticipated indebtedness or to fund our other liquidity needs. We may need to refinance all or a portion of our anticipated indebtedness on or before maturity. We may not be able to refinance any of our anticipated debt on commercially reasonable terms, or at all.

Our customers’ requirements change and evolve regularly. Accordingly, our future performance depends, in part, on our ability to adapt to changing customer needs rapidly, identify emerging technological trends, develop and manufacture innovative products and services efficiently and bring those offerings to market quickly at cost-effective prices. This includes efforts to provide solutions that integrate capabilities and resources. Artificial IntelligenceAI technologies have rapidly developed, and our business may be adversely affected if we cannot successfully integrate the technology into our internal business processes and product and service offerings in a timely, cost-effective, compliant and responsible manner.

Many of our larger competitors have significantly greater financial resources than we do and have more extensive or more specialized engineering, manufacturing and marketing capabilities than we do in some areas, including as a result of substantial industry consolidation, which increased the market share of certain of our competitors and enabled them to take advantage of economies of scale and develop new technologies. These larger competitors may also benefit from supply chain leverage and pricing flexibility, including, in some cases, the ability to price contracts at a loss, due to their size. Larger competitors, for example, may decide to pursue contracts typically won by mid-tier contractors, such as us. A number of these competitors are also our suppliers and customers. Additionally, some customers, including the DoD,DoW, are increasingly purchasing “off the shelf” components from commercial suppliers in lieu of using traditional defense contractors to design and manufacture such items.

Preferences or set-asides for minority-owned, small andor small disadvantaged businesses could impact our ability to be a prime contractor and limit our opportunity to work as a subcontractor on certain governmental procurements.

As a result of the Small Business Administration (“SBA”) set-aside program, the federal government may decide to restrict certain procurements only to bidders that qualify as minority-owned, small,small or small disadvantaged businesses. We would not be eligible to perform as a prime contractor on those programs and in general would be restricted to no more than 49% of the work as a subcontractor on those programs. An increase in the amount of procurements under the SBA set-aside program may impact our ability to bid on new procurements as a prime contractor, limit our opportunity to work as a subcontractor or restrict our ability to compete on incumbent work that is placed in the set-aside program.

We aremay be susceptible to a security breach, through cyber-attack, cyber-intrusion, insider threats or otherwise, and to other significant disruptions of our IT networks and related systems, or those of our customers, suppliers, vendors, subcontractors, partners, or other third parties.

We store sensitive data, including information relating to national security and other sensitive government functions, intellectual property and technology, proprietary business information, and confidential employee information such as personally identifiable or protected health information on our servers and databases. We are subject to laws and rules issued by U.S. and non-U.S. governments and agencies concerning safeguarding and maintaining information confidentiality including extensive and evolving cyber requirements of the DoD.DoW. We face the risk of a security breach with respect to that data, whether through cyber-attack, cyber-intrusion or insider threat via the Internet, malware, e-mail attachments, persons inside our organization or with access to systems inside our organization, threats to the physical security of our facilities and employees or other significant disruption of our IT networks and related systems or those of our suppliers or subcontractors. As an advanced technology-based solutions provider, and particularly as a government contractor with access to national security and other sensitive government information, we face a heightened risk of a security breach or disruption from threats to gain unauthorized access to our and our customers’ proprietary or classified information on our IT networks and related systems and to the IT networks and related systems that we operate and maintain for certain of our customers. These types of information and IT networks and related systems are critical to the operation of our business and essential to our ability to perform day-to-day operations, and, in some cases, are critical to the operations of certain of our customers. We make significant efforts to maintain the security and integrity of these types of information and IT networks and related systems and have implemented various measures to manage the risk of a security breach or disruption. As is the case with many other companies, we have experienced cybersecurity incidents in the past, including denial-of-service attacks, ransomware, and attacks from suspected nation state actors. Our efforts and measures have not been effective in the case of every incident, but no incident has had a material negative impact on us to date. In addition, the rapid evolution and increased adoption of AI or machine learning technologies may intensify our cybersecurity risks. Sensitive data saved on networks, systems and facilities therefore remain vulnerable because of the risk that cybersecurity incidents, including, but not limited to, attempts to gain unauthorized access to data; potential security breaches, particularly cyber-attacks and cyber-intrusions; or disruptions, will occur in the future, and because the techniques used in such attempts are constantly evolving and generally are not recognized until launched against a target. In some cases these attempts are designed not to be detected and, in fact, may not be detected. In some cases, the resources of foreign governments may be behind such attacks due to the nature of our business and the industries in which we operate. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures. Thus, it is impossible for us to entirely mitigate this risk, and there can be no assurance that future cybersecurity incidents will not have a material negative impact on us. A security breach or other significant disruption involving these types of information and IT networks and related systems could:

Additionally, a failure to comply with the National Institute of Standards and Technology Special Publication 800-171 or other DoDDoW cybersecurity requirements including the Cybersecurity Material Model Certificate (“CMMC”), whether or not resulting in a security breach or disruption, could restrict our ability to bid for, be awarded and perform on DoDDoW contracts. DoDDoW requirements to comply with the CMMC now and in the future, and any obligations that may be imposed on us under the CMMC that may be different from or in addition to those otherwise required by applicable laws and regulations, may cause additional expense for compliance.

We must also rely on the safeguards put in place by customers, suppliers, vendors, subcontractors, partners in teaming arrangements or other third parties to minimize the impact of cyber threats, other security threats or business disruptions. These third parties may have varying levels of cybersecurity expertise and safeguards, and their relationships with government contractors, such as our company, may increase the likelihood that they are targeted by the same cyber threats, including from foreign governments. In the event of a breach affecting these third parties, our business and financial results could suffer materially. With respect to our commercial arrangements with these third parties, we have processes designed to require that the third parties and their employees and agents agree to maintain certain standards for the storage, protection and transfer of confidential, personal and proprietary information. However, we remain at risk of a data breach due to the intentional or unintentional non-compliance by a third party’sthird-party’s employee or agent, the breakdown of a third party’sthird-party’s data protection processes, which may not be as sophisticated as ours, or a cyber-attack on a third party’sthird-party’s information network or systems.

As a defense contractor, we may be more likely than other companies to be a direct target of, or indirectly damaged by, physical attacks including by active shooters, terrorists or terrorist organizations. It is impossible to predict accurately the likelihood or impact of any attack on our industry generally or on our business. While we have implemented significant physical security protection measures, business continuity plans and established backup sites, in the event of an attack or a threat of an attack, these security measures and contingency plans may be inadequate to prevent significant disruptions in our business, technology or access to the infrastructure necessary to maintain our business. Such attack may harm our personnel, close our facilities or render our backup data and recovery systems inoperable. Damage to our facilities due to attacks may be significantly in excess of any amount of insurance recovery, and we may not be able to insure against such damage at a reasonable price or at all. The threat of attacks may also negatively affect our ability to attract and retain employees. Any of these events could have a material adverse effect on our business, financial condition and results of operations.

The markets in which we compete are characterized by rapid technological developments and frequent new product introductions, enhancements and modifications. This includes efforts to provide solutions that integrate ArtificialAI Intelligencetechnologies, technologiesincluding AI-optimized open architecture software that have rapidly developed,developed and are continuously evolving, and our business may be adversely affected if we cannot successfully integrate the technology into our internal business processes and product and service offerings in a timely, cost-effective, compliant and responsible manner. Additionally, our ability to develop other new products and technologies that anticipate changing customer requirements, reduce costs and otherwise retain or enhance our competitive position in existing and new markets will be an important factor in our future results of operations. We will continue to make substantial capital expenditures and incur significant R&D costs aimed at improving our manufacturing capability, reducing costs, and developing and introducing new products and enhancements. If we fail to develop and introduce new products and technologies in a timely manner it could have a material adverse effect on our business, financial condition and results of operations. In addition, we cannot be certain that our new products and technologies will be successful or that customers will accept any of our new products.

In addition, our products cannot be tested and proven in all situations and are otherwise subject to unforeseen problems. Examples of unforeseen problems that could negatively affect revenue, schedule and results of operations include premature failure of products that cannot be accessed for repair or replacement, failure to perform in anticipated or unanticipated battlefield conditions, unintended explosions or similar events, problems with design, quality and workmanship, inadequate delivery of subcontractor components or services and degradation of product performance. These failures could result, either directly or indirectly, in loss of life or property. Among the factors that may affect revenue and results of operations could be inaccurate cost estimates, design issues, human factors, unforeseen costs and expenses not covered by insurance or indemnification from the customer, diversion of management focus in responding to unforeseen problems, loss of follow-on work, and, in the case of certain contracts, repayment to the government customer of contract cost and fee payments we previously received, or replacement obligations. See also “—Risks Relating to Our Business—Our results of operations and cash flows are substantially affected by our mix of fixed-price, cost-plus and time-and-materials type contracts. In particular, fixed-price contracts subject us to the risk of loss in the event of cost overruns or higher than anticipated inflation.inflation” and “—Risks Relating to Our Business—We use estimates in pricing and accounting for many of our programs, and changes in our estimates could adversely impact our business, financial condition and results of operations.”

Claims of intellectual property infringement might also require us to enter into costly royalty or license agreements. There can be no assurance that any of our patents and other intellectual property will not be challenged, invalidated, misappropriated or circumvented by third parties. Moreover, we may not be able to obtain royalty or license agreements on terms acceptable to us, or at all. We also may be subject to significant damages or injunctions against development and sale of certain of our products, services and solutions. Our success depends in large part on our proprietary technology. We rely on a combination of patents, copyrights, trademarks, trade secrets, know-how, confidentiality provisions and licensing arrangements to establish and protect our intellectual property rights. Our efforts, however, to protect our intellectual property and proprietary rights may not be sufficient. In addition, the laws concerning intellectual property vary among nations and the protection provided to our intellectual property by the laws and courts of foreign nations may differ from and be more limited than the protection provided in the U.S. If we fail to successfully protect and enforce these rights, our competitive position could suffer. Our pending patent and trademark registration applications may not be issued, and/or competitors may challenge the validity or scope of our patents or trademark registrations. In addition, our patents may not provide us a significant competitive advantage. We may be required to spend significant resources to monitor and enforce our intellectual property rights. Litigation to determine the scope of intellectual property rights, even if ultimately successful, could be costly and could divert management’s attention away from other aspects of our business. Further, in some cases the USU.S. government is unilaterally empowered to use, or allow our competitors to use, patented technology, subject only to the obligation to pay reasonable compensation.

The size, nature and complexity of our business make us susceptible to investigations, claims, disputes, agency audits, enforcement actions, subpoenas, litigation and other legal proceedings, particularly those involving government authorities. From time to time, we are and may become subject to investigations, claims, disputes, enforcement actions and administrative, civil or criminal litigation, arbitration or other legal proceedings globally and across a broad array of matters, including, but not limited to, government contracts, commercial transactions, false claims, false statements, mischarging, contract performance, fraud, procurement integrity, products liability, warranty liability, the use of hazardous materials, personal injury claims, environmental matters, shareholder-derivativestockholder-derivative actions, prior acquisitions and divestitures, intellectual property, tax, employees, export/import, anti-corruption, labor, health and safety, accidents, employee benefits and plans, including plan administration, and improper payments, as well as matters relating to our acquisition of assets or companies and other matters. These actions may divert financial and management resources that would otherwise be used to benefit our operations. No assurances can be given that the results of these or any other matters will be favorable to us. Although we maintain insurance policies, these policies may not be adequate to protect us from all material judgments and expenses related to current or future claims and may not cover the conduct that is the subject of the litigation or arbitration. Desired levels of insurance may not be available in the future at economical prices or at all. Although we believe that we have meritorious defenses to the claims made in the litigation matters in which we have been named a party and intend to contest each lawsuit vigorously, no assurances can be given that the results of these matters will be favorable to us. An adverse resolution or outcome of any of these investigations, claims, disputes, enforcement actions, litigation and other legal proceedings could have an adverse impact on our business, financial condition and results of operations. From time to time, the Company may deem it appropriate to take legal action (or threaten to take such action) against a customer, supplier, former employee, subcontractor or other industry participant to protect its contractual and other legal rights. The outcome of such litigation is inherently uncertain, often costly and could adversely impact the Company’s commercial relationships and reputation.

For the years ended December 31, 2025, 2024, and 2023, and 2022, approximately 13%,8%, 10%13% and 7%,10%, respectively, of our revenue was derived from sales to customers located in foreign countries and foreign governments. We cannot assure you that we will maintain significant operations internationally or that any such operations will be successful. International business (including our participation in joint ventures and other joint business arrangements) is subject to numerous political and economic factors, legal requirements, cross-cultural considerations and other risks associated with doing business globally. These risks differ in some respects from those associated with our U.S. business and our exposure to such risks may increase if our international business continues to grow.

As part of our strategy to tap into emerging markets and expand our global footprint, we may localize our business operations in several new territories. While this expansion presents growth opportunities, it also exposes us to various risks inherent in unfamiliar markets, including: compliance and regulatory risk; cultural and language differences; operational challenges; economic and political instability; foreign currency exchange risk:; risk of intellectual property infringement; market competition and consumer preferences; as well as talent acquisition and integration risk. The expansion into new territories requires substantial management attention and financial resources, and any setbacks encountered in these new markets could delay or impede our growth strategy. If we are not able to successfully manage the risks of international expansion, or our investments in these regions do not yield expected returns, our business, financial condition, and operating results may be adversely affected.

We have unfunded obligations under our pension, postretirement and supplemental retirement plans, see Note 1413: Pension and Other Postretirement Benefits to the Consolidated Financial Statements. The process of determining the funded status of these plans and our pension plan expense or income involves significant judgment, particularly with respect to our long-term return on pension assets and discount-ratediscount rate assumptions. If our discount-ratediscount rate assumption or long-term return on assets (“ROA”) (which is used to determine the funded status of our pension plans) is decreased due to changes in our assumptions or other reasons, our pension plan funded status and expense could increase which would negatively impact our results of operations. In addition, if our actual return on assets differs from our long-term ROA assumption, our pension plan funded status and pension expense would be impacted.

DRS is an innovative and agile provider of advanced defense technology to U.S. national security customers and allies around the world. We specialize in the design, development and manufacture of advanced sensing, network computing, force protection, as well asand electric power and propulsion.propulsion technologies and solutions. The strength of our market positioning in these technology areas have created a foundational and diverse base of programs across the U.S.DoW Departmentand ofits Defense (the “DoD”).allies. We believe these technologies will not only support our customers in today’s mission but will also underpin their strategy to migrate towards more autonomous, dynamic, interconnected, and multi-domain capabilities needed to address evolving and emerging threats. We view more advanced capabilities in sensing, computing, self-protection and power as necessary to enable these strategic priorities.

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 DoD.DoW. The DoDU.S. government, primarily with the DoW, is our largest customer and, for the years ended December 31, 20242025 and 2023,2024, accounted for approximately 79%80% and 80%,79%, respectively, 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%36% and 32%,36%, respectively, of our total revenues for the year ended December 31, 20242025 and 38%37% and 31%,32%, respectively, for the year ended December 31, 2023.2024.

Our 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.customers across increasingly complex and contested operating environments.

Our sensing capabilities span numerous applications, including missions requiring advanced detection, precision targeting and surveillance sensing, long range electro-optic/infrared (“EO/IR”),infrared, signals intelligence (“SIGINT”) and other intelligence systems, electronic warfare (“EW”),warfare, ground vehicle sensing, next generation active electronically scanned array tactical radars, dismounted soldier sensing and space sensing. Across our offerings, we are focused on advancing sensor distancerange and enhancing the precision, clarity, definition, spectral depth and effectiveness of our sensors.sensors to deliver actionable information in time-sensitive mission scenarios in combination with AI, enabled by our advanced edge processing solutions. We also seek to leverage the knowledge and expertise built through our decades of experience to optimize size, weight, power and cost for our customers’ specific mission requirements.requirements and to support integration onto a wide range of tactical platforms, including mobile and power-constrained systems.

Our sensing capabilities are complemented by our rugged, trusted and cyber resilient network edge computing products.products that support data processing, fusion, and dissemination at the tactical edge. Our network computing offerings are 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”),control, tactical networks, tactical computing and communications. These products help support the DoD’sDoW’s need for greater situational understanding and faster decision-making at the tactical edge by leveraging AI and AI-optimized open architecture software, SAGEcore™, to rapidly transmittingshare, synthesize and transmit data securely between command centers and forward-positioned defense assets and personnel.personnel, while supporting reduced latency, operational continuity, and interoperability through modular, open-system architectures.

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, and transportation and logistics systems for the U.S. military and allied defense customers.

We believe DRS is well positioned to meet the needs of an increasingly electrified and power-intensive fleet with ourthrough high-efficiency, power densepower-dense permanent magnet motors, energy storage systemssystems, and associated efficient, rugged and compact power conversion, electrical actuation systems,actuation, and advanced coolingthermal management technologies. These capabilities support higher onboard power demands, improved efficiency, and enhanced platform performance across next-generation naval systems.

DRS is also an integrator of complex systems in ground vehicles for short-range air defense, counter-unmanned aerial systems (“C-UAS”),C-UAS, and vehicle survivability and protection. Our short-range air defense systems integrate advanced AESA radars, EW equipment, reconnaissance and surveillance systems, mission command capabilities, modular combat vehicle turrets, and stabilized sensor suites, as well as kinetic countermeasures to protect against evolving threats. Our force protection systems, including solutions for C-UAS and active protection systems on army vehicles,C-UAS, help protect personnel and defense assets from enemy combatants.

Revenues derived directly, as a prime contractor, or indirectly, as a subcontractor, from contracts with the U.S. government represented 79%,80%, 80%79% and 84%80% of our total revenues for the years ended December 31, 2024,2025, 20232024 and 2022,2023, respectively. Our U.S. government sales are highly concentrated within our DoDDoW customers, which made up the overwhelming majority of our U.S. government revenue for the year ended December 31, 2024,2025, and are principally derived directly or indirectly from contracts with the U.S. Navy and U.S. Army, which represented 37%36% and 32%,36%, respectively, of our total revenues for the year ended December 31, 2024.2025. Therefore, our revenue is highly correlated to changes in U.S. government spending levels, especially within the DoD.

government spending levels, especially within the DoW. The DoDDoW budget is the largest defense budget in the world.

Revenue consists primarily of product related revenue, which represented 94%, 93%94% and 91%93% of our total revenues for the periodsyears ended December 31, 2024,2025, 20232024 and 2022,2023, respectively. The remaining revenue was generated from service related contracts. Additionally, 84%,88%, 84% and 87%84% of our revenue for the years ended December 31, 2024,2025, 20232024 and 2022,2023, respectively, was derived from firm-fixed price contracts. For a firm-fixed price contract, customers agree to pay a fixed amount, negotiated in advance, for a specified scope of work. Revenue on fixed-price contracts is generally recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred costs represent work performed that corresponds with and thereby best depicts the transfer of control to the customer.

Under flexibly priced contracts, which consisted of 16%,12%, 16% and 13%16% of our total revenues for the years ended December 31, 2024,2025, 20232024 and 2022,2023, respectively, 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. In addition, costs are generally subject to review by clients and regulatory audit agencies, and such reviews could result in costs being disputed as non-reimbursable under the terms of the contract. Revenue for flexibly priced contracts are generally recognized as services are performed and are contractually billable.

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

General and administrative (“G&A”) expenses include general and administrativeG&A expenses not included within cost of revenues such as salaries, wages and fringe benefits, facility costs and other costs related to these indirect functions. Additionally, general and administrativeG&A expenses include internalcompany-funded independent research and development costs as well as expenditures related to bid and proposal (“B&P”) efforts.

The following discussion of operating results is intended to help the reader understand the results of operations and financial condition of the Company, as well as individual segments, for the yearperiods ended December 31, 2024 as compared to the year ended December 31, 2023, and for the year ended December 31, 2023 compared to December 31, 2022.presented. Given the nature of our business, we believe revenue and earnings from operations are most relevant to an understanding of our performance at a business and segment level. Our operating cycle is lengthy and involves various types of production contracts and varying delivery schedules. Accordingly, operating results in a particular year may not be indicative of future operating results.

Our operating results for the year ended December 31, 2024,2025, are highlighted by our recordstrong $8.5$8.4 billion of backlog and over $4$4.2 billion of new orders, demonstrating the strong customer demand for our mission critical technologies. Embedded in the recordour backlog is a diversified, balanced portfolio supported by foundational programs strongly aligned in areas of, in our view, growing importance within the DoDDoW budget priorities. Our backlog position is highlighted by theour recent awards receivedcontract to support the electric power and propulsion system for the Columbia Class production programprogram, as well as continued demand in our Forceforce Protection,protection, Networknetwork Computingcomputing, and Advancedadvanced Sensingsensing programs. We believe the performance on these and other programs within our portfolio will support continued revenue growth while the transition from development efforts to production will continue our trend of earnings growth and margin expansion.growth.

Revenue of $3,234$3,648 million for the year ended December 31, 20242025 represented an increase of $408$414 million (14.4%12.8%) driven by increased demand across our program portfolio. Our gross profit of $736$869 million increased $88$133 million (13.6%18.1%) from the prior year results attributed to the increased volume.volume Despiteand thishigher growth,profitability levels. This contributed to a gross margin sawincrease of 100 bps attributed to a slightquantum decreasecascade oflaser 10license bpsfor drivenspecific use in partthe byquantum space, positive program related impacts from our Ground Surveillance program and unfavorable revenue mix, offset in part by improved program executionperformance on our Columbia Class program.program and favorable revenue mix as we realized increased revenue from our tactical radars. These benefits were offset in large part by the negotiated conclusion of the work on a legacy ground surveillance program, which triggered a program charge. Our operating earnings and net earnings increased $62$55 million (26.8%18.8%) and $45$65 million (26.8%30.5%) from the year ended December 31, 2023,2024, respectively, attributed to the higher gross profit, and lower net interest expense, offset slightly by higher tax expense.

For the year ended December 31, 2024,2025, revenue increased by $408$414 million, or 14.4%,12.8%, to $3,234$3,648 million from $2,826$3,234 million for year ended December 31, 2023.2024. The revenue increase in 20242025 was attributed to increased customer demand across our portfolio, includinghighlighted ourby increased revenue contribution from internationalour customersnaval power and propulsion efforts, continued counter drone and short-range air defense (“SHORAD”) programs, as well as athe stabilizedquantum supplylaser chainlicense enablingnoted more efficient execution.above. The revenue growth is attributed to both of our operating segmentssegments, and is highlighted by our Force Protection and Electric Power and Propulsion programs within our IMS segment and Advanced Sensing in our ASC segment. Seesee “—Review of Operating Segments” below for additional detail.

Cost of revenues increased $320$281 million, or 14.7%,11.2%, from $2,178$2,498 million to $2,498$2,779 million for the year ended December 31, 2024,2025, due to the 14.4%12.8% increase in revenue as described above. The increase11.2% increase, which was furtherslightly lower than the 12.8% revenue increase, was impacted by realizedimproved adjustmentsprogram onperformance and favorable revenue mix, due in part to the quantum laser license, which was offset by increased cost at completion estimatesestimates, which negatively impacted earnings with net charges totaling approximately 1%2% of revenue for the year ended December 31, 2024, relatively consistent with the prior year2025 (see Note 32: Revenue from Contracts with Customers to the Consolidated Financial Statements for further detail),. whichThe increased cost at completion includes the aforementioned legacy ground vehicle surveillance program noted above. Additionally, revenue mixabove and the impact of cost increases tied to germanium used in our optics and infrared programs that increased our cost of revenues for the period within our ASC segment. This impact was largely offset by improved performance on our Columbia Class submarine program efforts.

Gross profit increased $88$133 million, or 13.6%,18.1%, from $648 million for the year ended December 31, 2023, to $736 million for the year ended December 31, 20242024, to $869 million for the year ended December 31, 2025, attributed to increased volume offset by the program impacts for the legacy ground surveillance program and optics and infrared programs noted above.

OtherG&A operatingexpenses expenses,increased netby decreased$83 $4million, millionor 20.0%, from $11$414 million for the year ended December 31, 20232024, to $7$497 million for the year ended December 31, 2024.2025. The expense in both periodsincrease is largely attributed to restructuringenhanced IR&D expenditures, B&P expenditures, stock-based compensation expenses and G&A efforts implementedto inexpand ourthe ASCbusiness segment.internationally.

Interest ExpenseExpense, Net

InterestNet interest expense decreased by $15$13 million to $8 million for the year ended December 31, 2025, from $21 million for the year ended December 31, 2024, from $36 million for the year ended December 31, 2023.2024. The decrease is primarily attributed to increased interest income as a result of higher cash balances during the year and a decrease in borrowings on our revolving credit facility. See Note 1312: Debt to the Consolidated Financial Statements for further information regarding our debt.

Other, net increaseddecreased to $4 million for the year ended December 31, 2025, from $8 million for the year ended December 31, 2024, from $3 million for the year ended December 31, 20232024 driven by higherlower foreign exchange rate impacts.

Earnings before taxes increased by $72 million to $336 million for the year ended December 31, 2025, from $264 million for the year ended December 31, 2024, from $192 million for the year ended December 31, 2023.2024. This was primarily due to increased operating earnings of $62$55 million, the decrease of $15$13 million in net interest expense and the increasedecrease in other, net costs of $5$4 millionmillion, as described above.

Income tax provision increased by $27$7 million to $58 million for the year ended December 31, 2025, from $51 million for the year ended December 31, 2024, from $24 million for the year ended December 31, 2023.2024. This was primarily due to an increase in earnings before taxestaxes, andpartially theoffset absence of a multi-year catch-up on the R&D tax credit that benefited 2023. These two items resulted inby an increase in ourtax overallcredits. Our effective tax rate ofwas 19.3%17.3% for 2025 compared to 12.5%19.3% infor 2023.2024.

Net earnings increased by $45$65 million to $213$278 million for the year ended December 31, 2024,2025, when compared to the year ended December 31, 2023.2024. This was driven by increased earnings before taxes of $72 million offset by the increased income tax provision of $27$7 millionmillion, as described above.

For the year ended December 31, 2024,2025, the weighted average shares outstanding totaled 263.7265.9 million and 267.7268.7 million for basic and diluted shares, respectively.respectively, Thean weightedincrease average basic and diluted share count increasedof approximately 2 million and 41 million shares, respectively,shares as compared to the prior year basic and diluted weighted average shares outstanding, respectively.year. The increase in weighted average shares outstanding is attributed to equity vesting and stock option exercises.exercises, Theoffset increasedslightly by shares outstandingrepurchased resultedthroughout inthe $0.81course andof $0.80the foryear. basicBasic and diluted EPS,earnings per share (“EPS”) was $1.05 and $1.03 for the year ended December 31, 2025, respectively, as compared to the prior year results of $0.64 for both basic and diluted EPS.EPS of $0.81 and $0.80, respectively. The increase in basic and diluted EPS is attributed to the increased net earnings described above, partially offset by the increased weighted average shares outstanding.

•Funded - Funded backlog represents the revenue value of orders for products and services under existing contracts for which funding is appropriated or otherwise authorized less revenue previously recognized on these contracts.

Backlog increased by $758$180 million, or 9.8%,2.2%, from $7,751$8,268 million as of December 31, 2023,2024, to $8,509$8,448 million as of December 31, 2024. The backlog increase was attributed to increased demand across both of our operating segments.2025. The backlog increase is largely attributed to increased demand in airborne,space, navalground vehicle, and dismounted soldierairborne sensing programs as well as navallogistic andsupport land based computing effortsprograms within our ASC segment.segment, Withinpartially theoffset IMSby segmenta backlog increasedreduction in bothnew ourawards Navalfor powertactical computing and propulsiondismounted programssoldier andsensing for our Short-Range Air Defense solutions with the U.S. Army.programs. See “—Review of Operating Segments” below for a more detailed analysis.

We define bookings as the total value of contract awards received from the U.S. government for which it has appropriated funds and legally obligated such funds to the Company through a contract or purchase order, plus the funded value of contract awards and orders received from customers other than the U.S. government.

For the year ended December 31, 2024,2025, we generated bookings of $4,077$4,245 million, a 16.0%4.1% increase over the $3,516$4,077 million realized during the year ended December 31, 2023.2024. The bookings increase is attributed to increased customer demand across both of our segments withwithin our IMS and ASC segmentssegment realizing bookings growth of 21.4%21.7%, andwhich 13.1%,was respectively.offset in part by ASC new orders which declined from the prior year (5.7%). The bookings increase was mostdriven notableby instrong performance within both our airborneforce protection (counter drone and SHORAD) and naval sensing programs as well as navalpower and groundpropulsion tactical computing and network programs within our ASC segment. The growth in the IMS segment is attributed to our Columbia Class efforts along with increased demand for surface ship power solutions.programs. These increases were offset in part by lower new awards received onat certainour infraredASC counter measures that were accelerated into the prior year.segment. See “—Review of Operating Segments” below for a more detailed analysis.

Changes in the volume and relative mix of U.S. and allied government spending as well as areas of spending growthgrowth, including due to the evolution of warfare, could impact our business and results of operations. In particular, our results can be affected by shifts in strategies and priorities on homeland security, intelligence, defense-related programs, infrastructure and urbanization and continued increased spending on technology and innovation, including cybersecurity with respect to our and third parties' information networks and related systems, artificial intelligence,AI, connected communities and physical infrastructure (for example, the potential impacts for the Russia / Ukraine conflict and the Israel-Hamas war). Cost-cutting and efficiency initiatives, increasing nationalization efforts, current and future budget restrictions, spending cuts and other efforts to reduce government spending and shifts in overall priorities could cause our government customers to reduce or delay funding or invest appropriated funds on a less consistent basis or not at all, and demand for our solutions or services could diminish. Existing contracts could also be canceled due to changes in need and prioritization. Furthermore, any disruption in the functioning of government agencies, including as a result of government closures and shutdowns, could have a negative impact on our operations and cause us to lose revenue or incur additional costs due to, among other things, our inability to maintain access and schedules for government testing or deploy our staff to customer locations or facilities as a result of such disruptions.

There is also uncertainty around the timing, extent, nature and effect of Congressional and other U.S. government actions to address budgetary constraints, caps on thecertain discretionary budget for defense and non-defense departments and agencies,budgets, and the ability of Congress to determine how to allocate the available budget authority and pass appropriations bills to fund both U.S. government departments and agencies that are, and those that are not, subject to the caps.agencies. Additionally, budget deficits and the growing U.S. national debt,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 delaysdelays, including government shutdowns, 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 this Annual Report for further details on U.S. government spending’s impact on our business.

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 threesix months ended MarchJune 31,30, 2026, accounted for approximately 79%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 39%37% and 35%,33%, respectively, of our total revenues for such period, which is consistent with historic trends.

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

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

The ongoing conflict in Ukraine, continued instability in parts of Latin America, and increasing risks across the Middle East and the Western Pacific have heightened global tensions and underscored evolving security requirements in Europe, the Middle East, Indo-Pacific, Latin America and within the U.S. In particular, the conflict involving Iran and associated regional escalation, including heightened maritime security risks and disruptions affecting commercial shipping and energy markets, has further amplified geopolitical uncertainty and the need for enhanced deterrence, integrated air and missile defense, cyber resilience, intelligence, surveillance, and reconnaissance, EW and secure communications. These developments have resulted inin, and may continue to result in, increased demand for defense products and services.

Revenues derived directly, as a prime contractor, or indirectly, as a subcontractor, from contracts with the U.S. government represented 79%82% and 78%80% of our total revenues for the threesix months ended MarchJune 31,30, 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 39%37% and 35%,33%, respectively, of our total revenues for the threesix months ended MarchJune 31,30, 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.

Given the reliance on the U.S. government, funding for our programs areis 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.

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 willis proceedproceeding through the standard congressional authorization and appropriations processprocess, (includingthough developmentprogress has been uneven and considerationthe 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 thea FY2027government NDAA and annual appropriations measures), alongside any separate reconciliation legislation if pursued.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 if annual appropriations are not completed by the start of the fiscal year on October 1, 2026.resolutions.

For the threesix months ended MarchJune 31,30, 2026, 87%86% of our revenue was derived from fixed-price contracts. This was consistent with the threesix months ended MarchJune 31,30, 2025, which realized revenue from fixed-price contracts of 86%.2025.

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 threesix months ended MarchJune 31,30, 2026 and 2025, flexibly priced contracts represented 13% and 14% of our total revenues, respectively.revenues.

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

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 MarchJune 31,30, 20262026, as compared to the three and six months ended MarchJune 31,30, 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.

Our revenue generation of $846$913 million for the three months ended MarchJune 31,30, 2026 represents an increase of $47$84 million, or 5.9%,10.1%, as compared to the three months ended MarchJune 31,30, 2025. The revenue increase is primarily attributed to continuedthe conversion of our funded backlog along with higher demand across each of our operating segments. This is highlighted by ourincreased effortsoutput within advanced sensing,our electric power and propulsion and force protection program activities.

Cost of revenues increased by $16$44 million, or 2.6%,7.0%, to $634$676 million for the three months ended MarchJune 31,30, 20262026, as compared to $618$632 million for the three months ended MarchJune 31,30, 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.

Gross profit increased by $31$40 million, or 17.1%,20.3%, to $212$237 million for the three months ended MarchJune 31,30, 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 periodperiods in the prior year, resulting from the revenue and cost of revenues trends noted above. The gross profit increase,increases, favorable mix and overall program performance drove an expansion of 240220 basis points and 230 basis points in our gross margin for the three and six months ended MarchJune 31,30, 2026.2026, respectively.

G&A expenses increased by $13$8 million, or 11.1%,6.6%, for the three months ended MarchJune 31,30, 20262026, as compared to the three months ended MarchJune 31,30, 2025, primarily due to increased IR&D expenditures and costs related to bid and proposal efforts for new contractual pursuits.

Amortization of acquired intangible assets was consistent for the three and six months ended MarchJune 31,30, 20262026, as compared to the three and six months ended MarchJune 31,30, 2025.

Operating earnings increased by $18$32 million to $77$102 million for the three months ended MarchJune 31,30, 2026 and increased by $50 million to $179 million for the six months ended June 30, 2026, as compared to the same periodperiods in the prior year. The increaseincreases waswere driven by the higher gross profit impacts offset in part by the G&A expense increases both noted above.

Interest Expense,Income (Expense), Net

Net interest expenseincome decreasedwas by $1$2 million to zero for the three and six months ended MarchJune 31,30, 2026 as2026, compared to the same period in the prior year. The reduction in 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.

Earnings before taxes increased by $19$33 million to $77$100 million for the three months ended MarchJune 31,30, 2026 and increased by $52 million to $177 million for the six months ended June 30, 2026, as compared to the same periodperiods in the prior year. This was primarily due to the increase in operating earnings and decreasedchange in net interest income (expense) as noted above.

Income tax provision increased by $7$1 million and $8 million for the three and six months ended MarchJune 31,30, 2026, respectively, as compared to the same periodperiods in the prior year. This was primarily attributable to an increase in earnings before taxes asand notedchanges above. Additionallyin our effective tax rate increased as compared tofor the period. For the three month period ended June 30, 2026, the income tax provision increase was largely offset by a reduction in our overall effective tax rate for the period. For the six month period ended June 30, 2026 our effective tax rate was largely in line with prior year due to the timing of certain stock-based discrete tax benefits which did not anniversary.levels. Our effective tax rate was 19.5%14.0% and 16.4% for the three and six months ended MarchJune 31,30, 2026, respectively, compared to 13.8%19.4% and 16.8% for the three and six months ended MarchJune 31,30, 2025.2025, respectively.

Net earnings increased by $12$32 million to $62$86 million for the three months ended MarchJune 31,30, 2026 and increased by $44 million to $148 million for the six months ended June 30, 2026, as compared to the same periodperiods 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.

Backlog and Bookings

Backlog increased by $10$421 million to $8,382$8,787 million as of MarchJune 31,30, 2026, from $8,372$8,366 million as of MarchJune 31,30, 2025. The backlog increase was driven primarily by the receipt of new awards within our IMS segment.segment which realized bookings in excess of revenue for the period.

Bookings for the three months ended MarchJune 31,30, 2026 decreasedincreased to $885$1,085 millionmillion, as compared to $991$853 million for the three months ended MarchJune 31,30, 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 decreaseincrease in new orders for the six months ended June 30, 2026 was driven within our ASCIMS segment and offset in part by IMSa bookingsreduction expansion.in new orders within our ASC segment. See “—Review of Operating Segments” below for more detail.

International revenue, including foreign military sales, foreign military financing, and direct commercial sales, accounted for approximately 12% and 7%8% of our revenue for the threesix months ended MarchJune 31,30, 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.

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 threesix months ended MarchJune 31,30, 2026.

The ASC segment reported revenue of $559$587 million for the three months ended MarchJune 31,30, 2026, an increase of 9.4%,8.3%, or $48$45 million, from the three months ended MarchJune 31,30, 2025. The revenue increase is attributed to our advanced sensing and tactical radars used in space based, force protection and counter drone applications.applications, reflecting execution of our backlog programs coupled with increased customer demand driven by the elevated global threat environment.

For the three months ended MarchJune 31,30, 2026, operating earnings increased by $15$12 million, or 60.0%,32.4%, to $40$49 million for the three months ended MarchJune 31,30, 2026, from $25$37 million for the three months ended MarchJune 31,30, 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 7.2%8.3% for the three months ended MarchJune 31,30, 2026, compared to the 4.9%6.8% realized during the three months ended MarchJune 31,30, 2025.

For the three months ended MarchJune 31,30, 2026, bookings decreasedincreased $240$132 million, or 35.9%,23.6%, from the three months ended MarchJune 31,30, 2025 to $429$691 million. The decreaseincrease in new awards is largely attributed to aincreased large multi-year award received in the prior yearorders for nextour generationtactical groundradar vehicleand sensing.infrared sensing programs. This reduction was offset in part by demanda forreduction ourin tacticalnaval radar sensor programs coupled with additionalcomputing awards receivedrealized forduring pilotthe training efforts.period.

IMS segment revenue increased by $4$43 million, or 1.4%,14.8%, to $295$333 million for the three months ended MarchJune 31,30, 2026, from $291$290 million for the three months ended MarchJune 31,30, 2025, which is attributed to increased revenue generated from our naval power programs, partially offset by a reduction inand force protection generatedrelated revenues.programs during the period.

For the three months ended MarchJune 31,30, 2026, operating earnings increased by $3$20 million, or 8.8%,60.6%, to $37$53 million for the three months ended MarchJune 31,30, 2026, from $34$33 million for the three months ended MarchJune 31,30, 2025. The increase for the period is attributed to operational leverage created by continued program improvement onwithin ourboth Columbialand Classand submarinenaval program,programs coupled with the benefits of operational leverage generated from the increased volume noted above, resulting in a net operating margin increase to 12.5%,15.9%, compared to the 11.7%11.4% realized during the three months ended MarchJune 31,30, 2025.

For the three months ended MarchJune 31,30, 2026, bookings increased by $134$100 million, or 41.6%,34.0%, from the three months ended MarchJune 31,30, 2025 to $456$394 million. The increase for the three months ended MarchJune 31,30, 2026 is largely attributed to increased demand for our force protection efforts as well as funding received for our naval power and propulsion efforts as well as increased demand for our force protection efforts.

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 MarchJune 31,30, 2026, was $328$270 million compared to $647 million as of December 31, 2025.

Cash usage related to operating activities decreased by $72$135 million to $66$31 million for the threesix months ended MarchJune 31,30, 2026, from $138$166 million for the threesix months ended MarchJune 31,30, 2025. This was primarily due to increased earnings and lower cash used to fund working capital for the threesix months ended MarchJune 31,30, 2026 when compared to the threesix months ended MarchJune 31,30, 2025.

Net cash used in investing activities decreased by $3$2 million for the threesix months ended MarchJune 31,30, 2026 when compared to the threesix months ended MarchJune 31,30, 2025, primarily due to slightly lower capital expenditures.

Net cash used in financing activities for the threesix months ended MarchJune 31,30, 2026 was $224$288 million, compared to $48$94 million for the threesix months ended MarchJune 31,30, 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.2026.