Leonardo DRS, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; filed March 28, 2022. The filing reports annual results, not a standalone fourth-quarter filing. DRS supplies defense electronics and systems across advanced sensors, network computing and communications, and integrated mission systems. It was wholly owned by Leonardo US Holding, a subsidiary of Leonardo S.p.A.
Financial results and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $2,879 million | $2,778 million |
| Gross profit / gross margin | $547 million / 19.0% | $494 million / 17.8% |
| Operating earnings | $236 million | $181 million |
| Net earnings / diluted EPS | $154 million / $1.06 | $85 million / $0.59 |
| Adjusted EBITDA / margin | $310 million / 10.8% | $268 million / 9.6% |
| Cash from operating activities | $178 million | $125 million |
| Free cash flow | $118 million | $74 million |
| Cash and cash equivalents at year-end | $240 million | $61 million |
| Total debt principal / net debt | $393 million / $153 million | $427 million / $251 million |
| Leverage ratio | 0.5x | 0.9x |
| Bookings / backlog | $2,595 million / $2,861 million | $3,055 million / $3,291 million |
Revenue comprised $2,505 million of products and $374 million of services. The reported gross margin was 19.0%; operating margin was approximately 8.2%, and net margin approximately 5.3%. Interest expense was $35 million, down from $64 million, and the effective tax rate was 23.0%, versus 24.1%.
Current assets were $1,389 million and current liabilities $989 million at year-end, implying a current ratio of approximately 1.4. Contract assets were $743 million, up from $672 million; accounts receivable was $156 million, up from $102 million; inventory was $205 million, down from $247 million. Operating cash flow included a $71 million use of cash from contract assets and a $54 million use from receivables.
The selected quarterly table reports Q4 2021 revenue of $820 million and net earnings of $58 million. The table’s prior-year column labeling is unclear, so a comparable Q4 year-over-year figure is not stated here.
Changes versus the prior comparable year
- Revenue rose 3.6%; gross profit increased 10.7%, and operating earnings increased 30.4%. Net earnings grew 81.2%, reflecting stronger operating earnings and lower interest expense.
- Adjusted EBITDA increased 15.7%, with margin expanding 1.2 percentage points to 10.8%. Management attributed improvement mainly to program execution and margin recovery in Integrated Mission Systems, including Columbia-class submarine work.
- Cash from operations increased $53 million and free cash flow increased $44 million. Year-end cash rose to $240 million.
- Bookings fell 15.1% and backlog fell 13.1%. Management said lower bookings largely reflected multi-year awards received in 2020 and backlog reduction reflected program execution.
- Segment revenue was $970 million for Advanced Sensor Technologies (+3.2%), $972 million for Network Computing & Communications (-5.3%), and $959 million for Integrated Mission Systems (+15.1%). NC&C’s decline reflected lower naval hardware demand and reduced bandwidth awards; IMS growth included Army short-range air-defense mission equipment and Navy carrier and submarine programs.
Outlook, commentary, risks, and unusual items
- Outlook: No numerical FY2022 revenue or earnings guidance is provided in the supplied filing text. Management expressed confidence in continued growth, citing defense priorities, its program positions, and expected transitions from development to production. It cited the FY2022 DoD appropriations level of $751 billion and said priorities could be influenced by Russia’s invasion of Ukraine.
- Backlog quality: Of $2,861 million total backlog, $2,510 million was funded and $351 million unfunded. DRS expected to recognize about 62.5% of year-end backlog as revenue over the next 12 months; funding, timing, scope changes, and cancellation remain risks.
- Customer concentration and contracts: U.S. government revenues represented 86% of total revenue. The U.S. Army and Navy represented 38% and 31%, respectively. Approximately 87% of revenue came from fixed-price contracts, exposing DRS to cost overruns and inflation.
- COVID-19 and supply chain: DRS reported approximately $7 million of 2021 pandemic-related expenditures in its discussion (the risk section separately cites $6 million). It described continuing microelectronics shortages, supplier disruption, labor-cost and inflation pressures, and uncertainty around federal contractor vaccine requirements.
- Transactions: DRS acquired substantially all AES assets for $11 million, with up to $5 million additional contingent consideration. On March 21, 2022, after year-end, it agreed to sell Global Enterprise Solutions for $450 million cash, subject to customary approvals and closing conditions.
- Contingencies and governance: A long-running potential CERCLA matter concerns radioactive material at a national park site; remediation costs and ultimate liability are uncertain. The company also disclosed routine government audits, contract claims and litigation risks. Foreign ownership requires a DoD proxy agreement to mitigate foreign ownership, control, or influence; material noncompliance could jeopardize classified work and security clearances.
- Other: DRS recorded $5 million of restructuring costs and $7 million of pandemic-related costs discussed in MD&A. Its auditor issued an unqualified opinion and identified estimating costs to complete certain IMS long-term contracts as a critical audit matter. Management reported effective disclosure controls; the filing did not include management’s internal-control assessment or auditor attestation due to the SEC transition period for newly public companies.
Most important facts for investors to verify
- Whether backlog converts to funded orders and revenue, particularly as backlog and bookings declined in 2021.
- Whether fixed-price program execution, inflation, and supply constraints affect margins, contract estimates, and cash conversion.
- The collectability and timing of contract assets and receivables, which grew and used cash during 2021.
- Closing conditions, proceeds, and operational effects of the $450 million GES sale, including how proceeds will be used.
- Debt terms and reliance on related-party financing, including repayment of the 7.5% term loan due in 2023 and the Daylight term loan due in 2024.
- Potential costs or developments in the environmental matter, government audits, and compliance with the DoD proxy agreement.