Leonardo DRS, Inc.DRS
Leonardo DRS, Inc. Income Taxes Disclosure
Income Taxes
Earnings before taxes consists of the following:
| Year Ended December 31, | |||||||||||||||||
| (Dollars in millions) | 2025 | 2024 | 2023 | ||||||||||||||
| Earnings before taxes | |||||||||||||||||
| Domestic | $ | 324 | $ | 236 | $ | 197 | |||||||||||
| Foreign | 12 | 28 | (5) | ||||||||||||||
Total | $ | 336 | $ | 264 | $ | 192 | |||||||||||
Income tax provision consists of the following:
| Year Ended December 31, | |||||||||||||||||
| (Dollars in millions) | 2025 | 2024 | 2023 | ||||||||||||||
| Current: | |||||||||||||||||
| Federal | $ | 17 | $ | 15 | $ | 61 | |||||||||||
| State | 8 | 11 | 14 | ||||||||||||||
| Foreign | 5 | 2 | 1 | ||||||||||||||
Total current | 30 | 28 | 76 | ||||||||||||||
| Deferred: | |||||||||||||||||
| Federal | 27 | 16 | (44) | ||||||||||||||
| State | 4 | 4 | (7) | ||||||||||||||
| Foreign | (3) | 3 | (1) | ||||||||||||||
Total deferred | 28 | 23 | (52) | ||||||||||||||
Total | $ | 58 | $ | 51 | $ | 24 | |||||||||||
The reconciliation from the statutory federal income tax rate to our effective income tax rate for the year ended December 31, 2025 follows:
| Year Ended December 31, 2025 | |||||||||||
| (Dollars in millions) | $ | % | |||||||||
| U.S. federal statutory income tax rate | $ | 71 | 21.0 | % | |||||||
Domestic state & local, net of federal benefit(1) | 11 | 3.2 | % | ||||||||
| Tax credits: | |||||||||||
| Research and development | (20) | (5.8) | % | ||||||||
| Other | (4) | (1.3) | % | ||||||||
| Nontaxable and nondeductible items, net: | |||||||||||
| Excess tax benefit on stock-based compensation | (8) | (2.4) | % | ||||||||
| Nondeductible officer compensation | 6 | 1.8 | % | ||||||||
| Other | 1 | 0.3 | % | ||||||||
| Cross-border taxes: | |||||||||||
| Global intangible low-taxed income | 3 | 1.0 | % | ||||||||
| Other | (1) | (0.3) | % | ||||||||
| Foreign reconciling items: | |||||||||||
| Canada | |||||||||||
| Changes in valuation allowance | 3 | 1.0 | % | ||||||||
| Israel | |||||||||||
| Rate differential | (2) | (0.6) | % | ||||||||
| Other | (2) | (0.6) | % | ||||||||
| Income tax provision and effective tax rate | $ | 58 | 17.3 | % | |||||||
________________
(1)State taxes in Connecticut, Florida, and Pennsylvania comprise the majority (greater than 50 percent) of the taxes in this category.
The reconciliation from the statutory federal income tax rate to our effective income tax rate for the years ended December 31, 2024 and 2023 (as previously disclosed, prior to the adoption of ASU 2023-09) follows:
| Year Ended December 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Statutory federal rate | 21.0 | % | 21.0 | % | |||||||
| State rate, net of federal benefit | 4.2 | % | 2.5 | % | |||||||
| Foreign rate differential | (1.5) | % | 0.1 | % | |||||||
| Research and development credit, net of reserves | (7.1) | % | (18.0) | % | |||||||
| Excess tax benefit on stock-based compensation | (1.2) | % | (0.1) | % | |||||||
| Nondeductible officer compensation | 1.2 | % | 0.8 | % | |||||||
| Nondeductible expenses | 0.6 | % | 0.2 | % | |||||||
| Global intangible low-taxed income | 2.1 | % | 0.2 | % | |||||||
| Change in valuation allowance | 0.7 | % | 1.0 | % | |||||||
| Change in tax reserves | 0.2 | % | 1.1 | % | |||||||
| Purchase tax credits | (0.7) | % | — | % | |||||||
| Divestiture impact | — | % | 4.7 | % | |||||||
| Other | (0.2) | % | (1.0) | % | |||||||
| Effective tax rate | 19.3 | % | 12.5 | % | |||||||
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2025 and 2024 are as follows:
| December 31, | |||||||||||
| (Dollars in millions) | 2025 | 2024 | |||||||||
| Deferred tax assets: | |||||||||||
| Federal net operating loss | $ | 1 | $ | 1 | |||||||
| State net operating loss | 6 | 6 | |||||||||
| Foreign net operating loss | 11 | 7 | |||||||||
| Tax credit carryforwards | 24 | 19 | |||||||||
| Lease liabilities | 48 | 44 | |||||||||
| Capitalized R&D, net of amortization | 77 | 143 | |||||||||
| Accrued compensation and benefits | 29 | 27 | |||||||||
| Contract liabilities | 20 | 20 | |||||||||
| Accrued expenses | 4 | 3 | |||||||||
| Pension and postretirement plans | 9 | 12 | |||||||||
| Inventory capitalization | 9 | 8 | |||||||||
| Other | 14 | 7 | |||||||||
Total gross deferred tax assets | 252 | 297 | |||||||||
| Less valuation allowance | 36 | 25 | |||||||||
| Deferred tax assets | 216 | 272 | |||||||||
| Deferred tax liabilities: | |||||||||||
| Right-of-use assets | (43) | (40) | |||||||||
| Long-term contracts | (30) | (55) | |||||||||
| Intangible assets | (33) | (39) | |||||||||
| Property, plant and equipment, net | (22) | (23) | |||||||||
| Other | (3) | (2) | |||||||||
Deferred tax liabilities | (131) | (159) | |||||||||
Net deferred tax asset | $ | 85 | $ | 113 | |||||||
As of December 31, 2025, and 2024 the Company had U.S. federal net operating loss carryforwards of $15 million and $18 million, respectively, which we anticipate we will be able to utilize prior to their expiration which commences in 2032. The annual utilization of our federal NOL is limited to approximately $3 million pursuant to Section 382 of the Tax Code. Our foreign net operating losses have expirations ranging from 2041 to indefinite. We recorded an additional valuation allowance in Canada of $4 million and $2 million in 2025 and 2024, respectively. As of December 31, 2025 and 2024, we had apportioned state net operating loss carryforwards of $108 million and $105 million, respectively, which are associated with jurisdictions in which we currently file and the Company expects to utilize prior to expiration except for those for which we have recorded a valuation allowance. Our state net operating losses have expirations ranging from 2025 to 2041 and are offset by a valuation allowance of $2 million.
On August 16, 2022, the U.S. government enacted the Inflation Reduction Act of 2022 (the “IRA”) which, among other items, allows a company to purchase transferable tax credits. During 2024, the Company purchased $25 million in tax credits for approximately $23 million in cash. These credits were used to offset the Company’s federal tax liability for 2023.
On July 4, 2025, the reconciliation bill, commonly referred to as the One Big Beautiful Bill Act (the “OBBBA”), was enacted, which includes a broad range of tax reform provisions. The OBBBA provides for an elective deduction for domestic research and development expenses starting in 2025, a reinstatement
of elective 100% first-year bonus depreciation, and changes to existing international tax provisions. Due to the nature of the tax law changes, the Company has not realized a material impact in the Consolidated Statements of Earnings for the year ended December 31, 2025. For the year ended December 31, 2025 the Company reduced both income taxes payable and deferred tax assets by approximately $66 million as a result of the election to deduct a portion of previously capitalized research and development costs. We will continue to monitor the impact of the OBBBA and the range of potential outcomes, which will depend on our circumstances in each year and anticipated guidance from the U.S. Department of the Treasury.
Cash paid for income taxes, net of refunds, in 2025 consists of the following:
| (Dollars in millions) | Year Ended December 31, 2025 | ||||
| Federal | $ | 12 | |||
| State and local | |||||
| Pennsylvania | 4 | ||||
| New Jersey | 3 | ||||
| California | 2 | ||||
| Other | 3 | ||||
| Cash paid for income taxes, net of refunds | $ | 24 | |||
Cash paid for income taxes, net of refunds, was $71 million, and $45 million in 2024 and 2023, respectively (as previously disclosed, prior to the adoption of ASU 2023-09).
Tax Uncertainties
The Company maintains reserves for uncertain tax positions related to unrecognized income tax benefits. These reserves involve considerable judgment and estimation and are evaluated by management at least quarterly based on the best information available. The Company’s total liability for unrecognized tax benefits as of December 31, 2025, 2024 and 2023 was approximately $52 million, $48 million and $40 million, respectively; all of which will impact the effective tax rate when recognized. Approximately $2 million, $2 million and $2 million as of December 31, 2025, 2024 and 2023, respectively, was recorded within (and as an offset to) deferred tax assets. The table below summarizes the activity associated with our unrecognized tax benefits:
| (Dollars in millions) | 2025 | 2024 | 2023 | ||||||||||||||
Balance at January 1, | $ | 48 | $ | 40 | $ | 24 | |||||||||||
| Increase related to prior year tax positions | 1 | 2 | 11 | ||||||||||||||
| Increase related to current year tax positions | 5 | 6 | 6 | ||||||||||||||
| Decreases related to prior year tax positions | (2) | — | (1) | ||||||||||||||
Balance at December 31, | $ | 52 | $ | 48 | $ | 40 | |||||||||||
The Company is subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. The Company has substantially concluded all U.S. federal income tax matters for years through the tax year ended December 31, 2018 except as it relates to the net operating loss carryforward and tax credit carryforwards. Substantially all material state and local matters have been concluded for years through the tax year ended December 31, 2017. The Company has substantially concluded all material tax matters in foreign jurisdictions for years through the tax years ending 2018.
As of December 31, 2025, the Company has accumulated undistributed earnings generated by our foreign subsidiaries and most have been taxed in the U.S. as a result of the Tax Cuts and Jobs Act of 2017 (“TCJA”). The TCJA allows for a dividend received deduction for repatriation of foreign earnings. We intend to indefinitely reinvest these earnings. Should the Company’s undistributed earnings from its
investment in non‐U.S. subsidiaries be distributed in the future in the form of dividends or otherwise, the Company may be subject to foreign and domestic income taxes and withholding taxes.Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 27, 2026 | Showing above |
| 2024 | Mar 3, 2025 | |
| 2023 | Feb 28, 2024 | |
| 2022 | Mar 28, 2023 | |
| 2021 | Mar 28, 2022 | |
About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.