Leonardo DRS, Inc.DRS
Leonardo DRS, Inc. Revenue Disclosure
Revenue from Contracts with Customers
The Company recognizes revenue for each separately identifiable performance obligation in a contract representing an obligation to transfer a distinct good or service to a customer. In most cases, goods and services provided under the Company’s contracts are accounted for as single performance obligations due to the complex and integrated nature of our products and services. These contracts generally require significant integration of a group of goods and/or services to deliver a combined output. In some contracts, the Company provides multiple distinct goods or services to a customer. In those cases, the Company accounts for the distinct contract deliverables as separate performance obligations and allocates the transaction price to each performance obligation based on its relative standalone selling price, which is generally estimated using cost plus a reasonable margin. While the Company provides warranties on certain contracts, we typically do not provide for services beyond standard assurances and therefore do not consider warranties to be separate performance obligations.
Typically, we enter into three types of contracts: fixed-price contracts, cost-plus contracts and T&M contracts (cost-plus contracts and T&M contracts are aggregated below as flexibly priced contracts). The majority of our total revenues are derived from fixed-price contracts. Refer to the revenue disaggregation disclosures that follow.
For fixed-price contracts, customers agree to pay a fixed amount, negotiated in advance for a specified scope of work.
For cost-plus contracts, typically 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 and cost-effectiveness. 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.
T&M contracts provide for reimbursement of labor hours expended at a contractual fixed labor rate per hour, plus the actual costs of material and other direct non-labor costs. The fixed labor rates on T&M contracts include amounts for the cost of direct labor, indirect contract costs and profit.
Revenue from contracts with customers is recognized when the performance obligations are satisfied through the transfer of control over the good or service to the customer, which may occur either over time or at a point in time.
Revenues for the majority of our contracts are measured using the over time, percentage of completion cost-to-cost method of accounting to calculate percentage of completion. We believe this is an appropriate measure of progress toward satisfaction of performance obligations as this measure most accurately depicts the progress of our work and transfer of control to our customers. Due to the long-term nature of many of our contracts, developing the estimated transaction price and total cost at completion often requires judgment. The estimated transaction price may include variable consideration such as performance incentives, requests for equitable adjustment (“REAs”) and claims. Variable consideration is included in the estimated transaction price only to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Factors that must be considered in estimating the cost of the work to be completed include the nature and complexity of the work to be performed, subcontractor performance and the risk and impact of delayed performance.
After establishing the estimated total cost at completion, we follow a standard Estimate at Completion (“EAC”) process in which we review the progress and performance on our ongoing contracts on a routine basis. Adjustments to original estimates for a contract's revenue, estimated costs at completion and estimated profit or loss often are required as work progresses under a contract, as experience is gained and as more information is obtained, even though the scope of work required under the contract may not change and are also required if contract modifications occur. When adjustments in estimated total costs at completion are determined, the related impact on revenue and operating earnings are recognized using the cumulative catch-up method, which recognizes in the current period the cumulative effect of such adjustments for all prior periods. Any anticipated losses on these contracts are fully recognized in the period in which the losses become evident.
Net EAC adjustments had the following impacts to revenue for the periods presented:
| Year Ended December 31, | |||||||||||||||||
| (Dollars in millions) | 2025 | 2024 | 2023 | ||||||||||||||
| Revenue and operating earnings | $ | (59) | $ | (25) | $ | (23) | |||||||||||
| Total % of revenue | 2 | % | 1 | % | 1 | % | |||||||||||
| Net earnings | (47) | (20) | (18) | ||||||||||||||
| Impact on diluted earnings per share | $ | (0.17) | $ | (0.07) | $ | (0.07) | |||||||||||
The impacts noted above are attributed primarily to changes in our fixed-price development type programs as well as the impacts of inflation and production inefficiencies on certain fixed-price production programs. In 2025, the adjustments are largely attributed to a negotiated conclusion of a legacy ground surveillance program triggering a revision in the anticipated recovery on the contract as well as the impact of raw material pricing on certain fixed price programs. These impacts were partially offset by improved contractual performance realized on our propulsion contracts on the Columbia Class submarine contracts.
Conversely, if the requirements for the recognition of contracts over time are not met, revenue is recognized at a point in time when control transfers to the customer, which is generally upon transfer of
title. In such cases, the production that is in progress and costs that will be recognized at a future point in time are reported within inventories.
Contract Assets and Liabilities
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheets. Amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., biweekly or monthly) or upon achievement of contractual milestones. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, we sometimes receive advances or deposits from our customers before revenue is recognized, resulting in contract liabilities. Contract assets and contract liabilities as of the dates presented were:
| December 31, | |||||||||||
| (Dollars in millions) | 2025 | 2024 | |||||||||
| Contract assets | $ | 931 | $ | 872 | |||||||
| Contract liabilities | 585 | 399 | |||||||||
Revenue recognized in 2025 and 2024 that was included in the contract liability balance at the beginning of each year was $298 million and $288 million, respectively.
Contract assets related to amounts withheld by customers until contract completion are not considered a significant financing component of our contracts because the intent is to protect the customers from our failure to satisfactorily complete our performance obligations. Payments received from customers in advance of revenue recognition (contract liabilities) are not considered a significant financing component of our contracts because they are utilized to pay for contract costs within a one-year period or are requested by us to ensure the customers meet their payment obligations.
Value of Remaining Performance Obligations
As of December 31, 2025 the total value of our remaining performance obligations was $8,448 million. We expect to recognize approximately 33% of our December 31, 2025 remaining performance obligations as revenue over the next twelve months, with the remainder to be recognized thereafter. Approximately 50% of our remaining performance obligations relates to long-term contracts on electric power and propulsion programs with the U.S. Navy, which are expected to be recognized as revenue over a span of up to 11 years.
At December 31, 2025, we changed our remaining performance obligations. The change had an immaterial impact on the prior year amount and there was no impact on the Consolidated Financial Statements.
Disaggregation of Revenue
ASC: ASC revenue is primarily derived from U.S. government development and production contracts and is generally recognized using the over time, percentage of completion cost-to-cost method of accounting. We disaggregate ASC revenue by geographical region, customer relationship and contract
type. We believe these categories best depict how the nature, amount, timing and uncertainty of ASC revenue and cash flows are affected by economic factors.
| Year Ended December 31, | |||||||||||||||||
| (Dollars in millions) | 2025 | 2024 | 2023 | ||||||||||||||
| Revenue by Geographical Region | |||||||||||||||||
| United States | $ | 2,018 | $ | 1,685 | $ | 1,537 | |||||||||||
| International | 325 | 412 | 269 | ||||||||||||||
| Intersegment sales | 12 | 21 | 25 | ||||||||||||||
Total | $ | 2,355 | $ | 2,118 | $ | 1,831 | |||||||||||
| Revenue by Customer Relationship | |||||||||||||||||
| Prime contractor | $ | 1,056 | $ | 925 | $ | 858 | |||||||||||
| Subcontractor | 1,287 | 1,172 | 948 | ||||||||||||||
| Intersegment sales | 12 | 21 | 25 | ||||||||||||||
Total | $ | 2,355 | $ | 2,118 | $ | 1,831 | |||||||||||
| Revenue by Contract Type | |||||||||||||||||
Firm-fixed price | $ | 2,056 | $ | 1,762 | $ | 1,522 | |||||||||||
Flexibly priced(1) | 287 | 335 | 284 | ||||||||||||||
| Intersegment sales | 12 | 21 | 25 | ||||||||||||||
Total | $ | 2,355 | $ | 2,118 | $ | 1,831 | |||||||||||
________________
(1)Includes revenue derived from cost-type and time-and-materials contracts.
IMS: IMS revenue is primarily derived from U.S. government development and production contracts and is generally recognized using the over time, percentage of completion cost-to-cost method of accounting. We disaggregate IMS revenue by geographical region, customer relationship and contract type. We believe these categories best depict how the nature, amount, timing and uncertainty of IMS revenue and cash flows are affected by economic factors.
| Year Ended December 31, | |||||||||||||||||
| (Dollars in millions) | 2025 | 2024 | 2023 | ||||||||||||||
| Revenue by Geographical Region | |||||||||||||||||
| United States | $ | 1,326 | $ | 1,117 | $ | 1,006 | |||||||||||
| International | (21) | 20 | 14 | ||||||||||||||
| Intersegment sales | 2 | 1 | 1 | ||||||||||||||
Total | $ | 1,307 | $ | 1,138 | $ | 1,021 | |||||||||||
| Revenue by Customer Relationship | |||||||||||||||||
| Prime contractor | $ | 351 | $ | 259 | $ | 252 | |||||||||||
| Subcontractor | 954 | 878 | 768 | ||||||||||||||
| Intersegment sales | 2 | 1 | 1 | ||||||||||||||
Total | $ | 1,307 | $ | 1,138 | $ | 1,021 | |||||||||||
| Revenue by Contract Type | |||||||||||||||||
Firm-fixed price | $ | 1,149 | $ | 948 | $ | 851 | |||||||||||
Flexibly priced(1) | 156 | 189 | 169 | ||||||||||||||
| Intersegment sales | 2 | 1 | 1 | ||||||||||||||
Total | $ | 1,307 | $ | 1,138 | $ | 1,021 | |||||||||||
________________
(1)Includes revenue derived from cost-type and time-and-materials contracts.
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 Revenue Disclosures
Revenue disclosures under ASC 606 explain how a company identifies performance obligations, allocates transaction prices, and determines when revenue is recognized. This section is essential for understanding whether reported revenue reflects genuine economic activity or aggressive accounting choices. Analysts examine the mix of point-in-time versus over-time recognition, which directly affects revenue timing and comparability.
Key signals: rising contract liabilities (deferred revenue) suggest strong future revenue visibility, while declining contract assets may indicate slowing project milestones. Watch for variable consideration estimates — rebates, returns, and performance bonuses that require management judgment. Significant changes in disaggregated revenue by geography or product line can reveal shifting business mix before it appears in headline numbers. Compare revenue growth against contract liability growth to assess sustainability, and scrutinize any changes in the timing of recognition that coincide with earnings pressure.