Leonardo DRS, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Financial amounts are in millions of dollars except per-share data. DRS supplies defense electronics, systems and support services, primarily to the U.S. military. The DoD accounted for approximately 85% of revenue. The company reports Advanced Sensing and Computing (ASC) and Integrated Mission Systems (IMS).
Financial performance and position
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $612 | $681 |
| Gross profit / margin | $134 / 21.9% | $136 / 20.0% |
| Operating earnings | $56 | $51 |
| Net earnings / diluted EPS | $36 / $0.25 | $29 / $0.20 |
| Adjusted EBITDA / margin | $73 / 11.9% | $71 / 10.4% |
| Adjusted EPS | $0.26 | $0.25 |
| Operating cash flow | $(255) | $(249) |
| Free cash flow | $(268) | $(262) |
| Bookings | $747 | $715 |
| Backlog | $2,995 | $2,945 in MD&A comparison |
Product revenue was $541 and service revenue $71, versus $570 and $111, respectively, a year earlier. Gross margin improved despite lower revenue. The effective income tax provision was $12, unchanged year over year; the filing attributes the comparison partly to discrete tax items in the prior-year quarter.
At March 31, cash was $113, down from $240 at December 31, 2021. Current assets were $1,517 and current liabilities $923; these include assets and liabilities held for sale of $177 and $42. Total debt was $540, up from $393 at year-end, including $150 drawn on the related-party revolving facility. Long-term debt was $354. Shareholder equity was $1,635.
Changes and operating drivers
- Revenue declined $69, or 10%, mainly from lower ASC sales. ASC revenue fell $87 to $396, with lower ruggedized computing and sensing deliveries affected by award timing, component delays and COVID-related installation constraints. IMS revenue rose $17 to $218.
- Operating earnings increased $5 and net earnings increased $7. Management cited improved contract performance, lower deal-related costs and reduced COVID-related expense. Adjusted EBITDA rose $2; improved IMS submarine-program performance was partly offset by lower ASC volume and inflationary pressure on certain naval radar programs.
- IMS adjusted EBITDA increased to $41 from $18, while ASC adjusted EBITDA fell to $32 from $54. Company adjusted EBITDA margin expanded to 11.9% from 10.4%.
- Bookings increased 4.5% to $747, driven by IMS awards and submarine-program funding. Backlog was $2,995; management expects approximately 53% to convert to revenue over the next nine months.
Outlook, transactions and risks
- The filing provides no specific full-year revenue or earnings guidance. Management said existing cash, credit facilities and expected operating cash generation should be sufficient for near- and long-term liquidity needs, while cautioning that cash generation may vary.
- On March 21, DRS agreed to sell Global Enterprise Solutions (GES) for $450 in cash, subject to customary approvals and closing conditions. GES assets and liabilities were classified as held for sale at quarter-end. The company also approved a plan to divest its AAC interest; a definitive agreement was signed April 19, after quarter-end, subject to regulatory approval.
- Management identified supply-chain delays and shortages, COVID-related workforce and delivery effects, inflation, fixed-price contract execution and U.S. government funding or award timing as relevant business risks. The Russia-Ukraine conflict added potential supply-chain, energy-cost, cybersecurity and economic uncertainty; management noted possible defense-demand effects but did not quantify them.
- Government contracts are subject to audits, funding changes and possible termination. The filing discusses contract claims and a CERCLA environmental matter; management believes amounts beyond recorded accruals should not materially affect financial condition or liquidity, though outcomes could affect results or cash flows in a particular period.
- Interest-rate exposure includes the $150 variable-rate revolver balance. Management reported limited foreign-currency exposure and isolated inflation impacts on programs. The filing states there were no material changes to the risk factors in the 2021 Form 10-K.
Investor verification points
- Reconcile the backlog comparison: the key-metrics table reports prior-year backlog of $3,326, while MD&A tables and discussion use $2,945.
- Check the ASC bookings figures: the segment table reports $388 for Q1 2022, while MD&A narrative says ASC contributed $164; the table’s $388 plus IMS’s $359 equals reported total bookings of $747.
- Monitor working-capital cash use, particularly contract assets ($823, up from $743 at year-end), inventories ($231, up from $205) and the reduction in accounts payable cited by management.
- Track the GES and AAC divestitures, their approvals and proceeds, and the effect of disposing of those businesses on future revenue, earnings and backlog.
- Assess whether supply-chain constraints, inflation and contract execution affect ASC recovery and margins, and whether IMS’s submarine and force-protection growth continues.