Leonardo DRS, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. The filing also reports unaudited quarterly results, including Q4 2022. Unless otherwise stated, amounts are in U.S. dollars and millions.
Business context and reporting period
Leonardo DRS supplies defense technologies, including advanced sensing and computing, force protection, and naval power and propulsion systems. Its two reportable segments are Advanced Sensing and Computing (ASC) and Integrated Mission Systems (IMS). The U.S. government represented 84% of FY2022 revenue; the U.S. Army and Navy represented 37% and 32%, respectively.
The company became publicly traded in November 2022 following its all-stock merger with RADA Electronic Industries. It sold its Global Enterprise Solutions (GES) business in August and its interest in Advanced Acoustic Concepts (AAC) in July.
Financial performance and liquidity
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $2,693 | $2,879 |
| Gross profit / gross margin | $575 / 21.4% | $547 / 19.0% |
| Operating earnings | $561 | $236 |
| Net earnings | $405 | $154 |
| Diluted EPS | $1.88 | $0.73 |
| Adjusted EBITDA / margin (non-GAAP) | $318 / 11.8% | $310 / 10.8% |
| Adjusted diluted EPS (non-GAAP) | $0.83 | $0.83 |
| Operating cash flow | $33 | $178 |
| Company-defined free cash flow (non-GAAP) | $74 | $122 |
| Backlog | $4,269 | $2,861 |
| Bookings | $3,156 | $2,595 |
Revenue fell 6.5%, mainly reflecting the GES divestiture, ASC supply-chain shortages, and lower tactical-computing orders. IMS revenue rose 2.5%, while ASC revenue declined 10.7%. Gross margin improved on stronger program execution, particularly on the Navy’s Columbia-class submarine work. FY2022 operating earnings and net earnings included a $354 million gain on the GES and AAC disposals; adjusted EBITDA and adjusted EPS exclude disposal gains and other specified items.
Operating cash flow declined amid $79 million of tax payments related to the disposals, transaction costs, and higher contract assets and inventory. Company-defined free cash flow also reflects specified adjustments, so it is not equivalent to operating cash flow less capital expenditures. Cash was $306 million at year-end, versus $240 million a year earlier. Total debt principal was $396 million; the company reported $394 million of total debt, net. Its $275 million revolving facility was undrawn at year-end. It reported no significant off-balance-sheet arrangements.
Q4 2022 revenue was $820 million and net earnings were $65 million. Adjusted EBITDA was $120 million and company-defined free cash flow was $336 million. Quarterly results are unaudited and may not indicate future performance.
Material changes and notable transactions
- RADA merger: completed November 28, 2022, for preliminary consideration of $511 million in shares and replacement awards. Approximately 49.7 million shares were issued; RADA shareholders held about 19% of the combined company at closing. RADA contributed no significant revenue or operating earnings in 2022 after acquisition.
- GES sale: generated $427 million in net cash proceeds and a reported $309 million pretax gain net of transaction costs.
- AAC investment sale: generated $56 million in proceeds and a $31 million pretax gain.
- The company paid a $396 million dividend to its then-sole shareholder from the divestiture proceeds, net of selling costs and estimated taxes.
- Backlog rose 49.2%, driven in large part by $1,083 million of unfunded Columbia-class submarine backlog. The company expects to recognize approximately 41% of year-end backlog as revenue over the next 12 months; unfunded backlog remains subject to appropriation and other contingencies.
Outlook, risks, contingencies, and unusual items
No quantified company-specific FY2023 financial guidance is provided in the supplied filing text. Management said backlog and program performance support expected revenue growth and further earnings growth and margin expansion as programs move from development into production. It described defense-budget priorities and demand for advanced capabilities as favorable, and reported receiving orders connected with support for Ukraine and replacement of equipment provided to Ukraine.
Key risks include dependence on U.S. defense spending and appropriations; fixed-price contract exposure to cost overruns and inflation; supply-chain constraints; variable working-capital needs; and the risk that funded or unfunded backlog does not convert to revenue. The company also operates under an interim DoD proxy agreement to mitigate foreign ownership, control, or influence and was seeking a new agreement. Failure to maintain suitable mitigation or comply with the agreement could jeopardize security clearances and classified contracts. Other disclosed risks include government audits and procurement compliance, cybersecurity, competition, staffing, litigation and environmental liabilities, and conflicts or restrictions associated with majority owner Leonardo S.p.A.
A long-running environmental matter concerns alleged radioactive contamination at a national park site; the National Park Service had not released its evaluation or opened the anticipated public comment period, and the ultimate exposure was unclear. The company stated that ordinary-course legal matters were not expected to materially affect financial condition or liquidity beyond recorded accruals, while acknowledging that a particular period’s results or cash flows could be affected. Management assessed disclosure controls and internal control over financial reporting as effective at year-end; the RADA acquisition was excluded from the internal-control assessment. The auditor issued an unqualified opinion on the financial statements but did not audit or opine on internal-control effectiveness.
Important facts for investors to verify
- How much of the $4.269 billion backlog is funded, and whether the large unfunded Columbia-class award receives appropriations and converts to revenue on schedule.
- Whether supply constraints, inventory and contract-asset growth, and customer payment timing improve enough to support operating cash flow and free cash flow.
- How much FY2022 earnings depended on the $354 million disposal gain, and whether underlying margins and adjusted earnings remain sustainable.
- Progress on securing a new DoD proxy agreement and maintaining security clearances for classified work.
- Final RADA purchase-price allocation and integration performance, including the valuation of acquired intangible assets and goodwill.
- Developments in the unresolved environmental matter and any material changes in government-contract claims, audits, or contingencies.