Leonardo DRS, Inc. — Q2 2021 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and six months ended June 30, 2021, compared with the same 2020 periods. DRS supplies defense electronics, systems and support services through Advanced Sensor Technologies (AST), Network Computing & Communications (NC&C), and Integrated Mission Systems (IMS). The U.S. Department of Defense accounted for approximately 85% of Q2 revenue and 86% of first-half revenue.
Financial results and key metrics
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $658 million | $650 million | $1,339 million | $1,233 million |
| Gross profit / margin | $127 million / 19.3% | $109 million / 16.8% | $263 million / 19.6% | $215 million / 17.4% |
| Operating earnings | $51 million | $30 million | $102 million | $65 million |
| Net earnings | $32 million | $13 million | $61 million | $23 million |
| Diluted EPS | $0.22 | $0.09 | $0.42 | $0.16 |
| Adjusted EBITDA / margin | $69 million / 10.5% | $45 million / 6.9% | $140 million / 10.4% | $95 million / 7.7% |
| Bookings | $719 million | $914 million | $1,435 million | $1,592 million |
| Free cash flow | $48 million | $50 million | $(214) million | $(259) million |
Cash, debt and liquidity. Cash was $91 million at June 30, up from $61 million at December 31, 2020. First-half operating cash flow was negative $185 million, while investing activities provided $84 million and financing activities provided $132 million. The investing inflow included $115 million of repayments on the related-party note receivable. Total debt principal was $561 million, including $150 million drawn on a $450 million revolving facility; $188 million was classified as short-term/current and $373 million as long-term debt. The company said cash, credit access and expected operating cash generation should meet liquidity needs, while cautioning that future cash generation is not assured.
Changes versus prior periods
- First-half revenue rose 8.6%; each segment grew: AST by 14.6%, NC&C by 5.3%, and IMS by 4.2%. Q2 revenue increased only 1.2%, as NC&C revenue declined 7.9% and growth in AST and IMS partly offset the decline.
- Profitability improved substantially. First-half operating earnings rose 56.9%, and adjusted EBITDA increased 47.2%, supported by improved contract performance, development programs moving into production, and operational-efficiency efforts.
- Interest expense fell to $18 million for the first half from $32 million, mainly reflecting the parent’s forgiveness of $300 million of debt in December 2020 and lower revolving-credit borrowing costs.
- First-half bookings declined 9.9%, although backlog was $3.387 billion, up $171 million from June 2020. DRS expects to recognize about 36% of that backlog as revenue over the next six months.
- First-half operating cash use improved by $42 million year over year but remained significant. Free cash flow was negative $214 million, with working-capital timing and contract activity affecting cash conversion.
Outlook, commentary and risks
- Guidance: The filing provides no specific company revenue, earnings or cash-flow guidance. Management cited the FY22 presidential DoD budget request of $715 billion, approximately 1.6% above the prior enacted level, and said its priorities align with DRS markets. The Senate Armed Services Committee markup added $25 billion to the request; the budget process remained ongoing.
- Management commentary: Management attributed margin gains to better program execution, APEX efficiency initiatives, increased revenue volume and transitions from development to production. It reported $5 million of COVID-19-related costs in the first half of 2021 and continued employee-safety and supplier-risk mitigation measures.
- Contract and customer risks: Heavy U.S. government and DoD exposure, appropriations delays or shifts in defense priorities, contract audits, and the possibility of termination or partial funding may affect results. Fixed-price development contracts, cost estimates, supplier availability and longer component lead times can pressure margins, schedules and cash flows. Q2 and first-half estimate-at-completion adjustments reduced revenue by $8 million and $9 million, respectively, primarily on submarine electric propulsion programs.
- Contingencies and unusual items: The company described potential CERCLA environmental liability relating to a former site; the investigation and possible remediation remain unresolved, and the ultimate exposure is uncertain. It said other legal and contract claims are not expected to materially affect its financial position, though a particular period’s results or cash flows could be affected. On July 28, 2021, after quarter-end, DRS acquired substantially all assets of Ascendant Engineering Solutions for $11 million plus up to $5 million in contingent consideration.
- Other disclosures: Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing reported no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether backlog converts into revenue and cash as expected, and whether new bookings sustain or reverse their first-half decline.
- Whether stronger margins persist as programs transition to production, particularly on fixed-price development and submarine propulsion contracts.
- Working-capital and contract-asset movements: contract assets increased to $755 million from $672 million at year-end, while first-half operating cash flow remained negative.
- Debt maturity, borrowing costs and reliance on related-party financing and the parent’s support; confirm available revolving capacity and covenant terms in the full filing.
- Potential exposure from the environmental matter, government audits or claims, supply-chain disruption, and the post-quarter AES acquisition and contingent payment terms.
Adjusted EBITDA, adjusted EPS and free cash flow are non-GAAP measures; they should be considered alongside, not as substitutes for, GAAP results.