Leonardo DRS, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparisons are with the three months ended March 31, 2023 unless noted. Leonardo DRS supplies defense electronics, systems and support services through its Advanced Sensing and Computing (ASC) and Integrated Mission Systems (IMS) segments. The U.S. Department of Defense represented approximately 81% of revenue.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $688 million | $569 million | +20.9% |
| Gross profit / margin | $153 million / 22.2% | $131 million / 23.0% | Profit +16.8%; margin -80 bps |
| Operating earnings | $43 million | $25 million | +72.0% |
| Net earnings | $29 million | $12 million | +141.7% |
| Diluted EPS | $0.11 | $0.05 | +$0.06 |
| Adjusted EBITDA and margin (non-GAAP) | $70 million / 10.2% | $49 million / 8.6% | +42.9%; +160 bps |
| Operating cash flow | $(265) million | $(334) million | $69 million less cash used |
| Free cash flow (non-GAAP) | $(275) million | $(346) million | $71 million less cash used |
Revenue growth was primarily driven by continued performance on U.S. Navy electric power and propulsion programs. IMS revenue rose 38.1% to $261 million and adjusted EBITDA increased to $29 million from $12 million; its adjusted EBITDA margin improved to 11.1% from 6.3%. ASC revenue grew 10.7% to $433 million, with adjusted EBITDA of $41 million versus $37 million and a steady 9.5% margin. Company-wide gross margin declined despite higher gross profit.
Cash and cash equivalents were $160 million at March 31, 2024, down from $467 million at December 31, 2023. Total debt principal was $387 million, including $211 million outstanding on Term Loan A; the $275 million revolving facility had no borrowings. Current assets were $1.772 billion and current liabilities were $902 million. Operating cash use reflected working-capital needs, including increased contract assets and lower accounts payable. Capital expenditures were $10 million.
Material changes and operating indicators
- Total backlog was $7.845 billion, up from $4.272 billion a year earlier. The increase was primarily attributed to a multi-boat Columbia Class submarine electric propulsion contract. Backlog included $3.509 billion funded and $4.336 billion unfunded; the filing expects approximately 25% to convert to revenue over the following nine months.
- Bookings increased 8.8% to $815 million. ASC bookings rose 45.3% to $587 million, while IMS bookings fell 33.9% to $228 million, largely due to timing of Columbia program funding.
- International revenue represented approximately 14% of revenue, versus 9% a year earlier; management attributed the increase in part to Eastern European demand and support related to Ukraine.
- Net estimate-at-completion adjustments reduced revenue and operating earnings by $9 million and net earnings by $7 million, or $0.03 per diluted share, in both Q1 2024 and Q1 2023; these were primarily associated with firm-fixed-price development programs.
Outlook, commentary and risks
The filing provides no specific company-wide revenue or earnings guidance. Management said it expects international sales to remain a similar percentage of revenue. It cited the FY2025 U.S. defense budget request of $850 billion and the April 2024 national-security supplemental package, while noting that appropriations, priorities and funding timing remain uncertain.
Current-quarter other operating expenses included $4 million, largely related to continuing ASC restructuring efforts. Management reported that the Israel conflict had not materially affected operations as of the filing, but noted potential regional workforce and logistics disruption; approximately 4% of employees were in Israel. The company also identifies exposure to U.S. government customer concentration, contract cost-estimation uncertainty, supply-chain and inflation pressures, fixed-price contract execution, audits and claims, and variable interest rates. A 0.5% rate change on variable-rate debt outstanding was estimated to change annual interest expense by approximately $1 million.
Management stated that cash, credit-facility access and expected operating cash generation should be sufficient for short- and long-term liquidity needs, while cautioning that cash generation and anticipated operational improvements are not assured. It reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported.
Investor verification checklist
- Track conversion of the large, partly unfunded backlog into funded awards, bookings and recognized revenue, particularly for Columbia Class programs.
- Monitor working capital, contract assets, accounts payable and cash balances given the substantial quarterly operating cash outflow.
- Assess whether IMS growth and margin improvements continue, and whether company gross margin stabilizes after its year-over-year decline.
- Review future estimate-at-completion adjustments and performance on firm-fixed-price development contracts.
- Verify the effects of U.S. budget and appropriation timing, geopolitical developments, inflation and supply-chain conditions on demand, costs and execution.
- Distinguish reported GAAP results from management’s non-GAAP adjusted EBITDA, adjusted EPS and free-cash-flow measures.