Leonardo DRS, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. DRS supplies defense electronics, systems and support services through Advanced Sensing and Computing (ASC) and Integrated Mission Systems (IMS). The U.S. Department of Defense accounted for approximately 78% of Q2 revenue and 82% of first-half revenue.
Financial performance and liquidity
- Q2 revenue: $627 million, down 4.7% from $658 million. Products generated $549 million and services $78 million. Gross profit was $127 million; gross margin rose to 20.3% from 19.3%.
- Q2 earnings: Operating earnings were $42 million, down from $51 million; net earnings were $25 million, down from $32 million. Diluted EPS was $0.17 versus $0.22. Adjusted EBITDA was $67 million versus $69 million, with margin of 10.8% versus 10.5%; adjusted EPS was $0.23 in both periods.
- First-half revenue and earnings: Revenue was $1.239 billion, down 7.5%; gross profit was $261 million versus $263 million. Operating earnings were $98 million versus $102 million, while net earnings were $61 million in both periods and diluted EPS was $0.42. Adjusted EBITDA was $140 million in both periods; margin increased to 11.3% from 10.4%, and adjusted EPS was $0.49 versus $0.48.
- Segment trends, first half: ASC revenue declined 13.5% to $840 million and adjusted EBITDA fell 22.6% to $89 million. IMS revenue rose 8.0% to $405 million and adjusted EBITDA increased to $51 million from $25 million.
- Cash flow: First-half operating cash flow was negative $242 million versus negative $185 million. Capital expenditures were $22 million; free cash flow, a non-GAAP measure, was negative $264 million versus negative $214 million. Management attributed working-capital use largely to increased contract assets and inventory and lower accounts payable, including advance procurement amid longer supply lead times.
- Balance sheet and debt: Cash was $69 million at June 30, down from $240 million at year-end 2021. Total debt was $490 million versus $393 million, including $110 million drawn on a $450 million related-party revolving facility; $140 million of debt was classified as current. The company also reported $65 million in uncommitted financial-institution facilities, reduced by $31 million of outstanding letters of credit.
- Working capital and orders: Contract assets were $874 million versus $743 million at year-end; inventories were $249 million versus $205 million. Backlog was $3.051 billion, down 9.9% year over year but up 7% since year-end. Bookings were $1.430 billion versus $1.435 billion. Management expected approximately 39% of June backlog to convert to revenue over the following six months.
Material changes and management commentary
- Management linked the revenue decline chiefly to ASC, citing electronic-component availability, customer installation staffing and delayed awards. IMS growth reflected force-protection deliveries and progress on submarine and surface-ship programs.
- Improved contract performance, APEX cost savings and development programs transitioning into production supported higher gross and adjusted EBITDA margins. IMS margin gains were particularly strong; ASC’s first-half adjusted EBITDA and margin declined with lower volume.
- Cost-to-complete estimate changes reduced revenue by $10 million in Q2 and $11 million in the first half of 2022, primarily reflecting fixed-price program design changes and inflationary impacts on naval programs. Management said inflation had not yet caused broad-based material cost increases across the business, but warned that greater-than-expected labor or supply inflation could pressure fixed-price contract profitability.
- Bookings were broadly level year over year. Management said it anticipated full-year new awards to exceed prior-year results, including in ASC; this is a company expectation, not formal financial guidance. No specific full-year revenue or earnings guidance is provided in the supplied filing text.
Outlook, transactions and risks
- Divestitures: DRS sold its Global Enterprise Solutions (GES) business on August 1, 2022 for proceeds of $427 million, following a $450 million stated cash purchase price. It sold its 51% interest in Advanced Acoustic Concepts (AAC) on July 8 for $56 million. The company said accounting for both transactions, including gains, was still being finalized. On August 5, it paid a $396 million dividend to its sole shareholder, funded from the divestiture proceeds net of costs and estimated taxes.
- RADA merger: DRS agreed to merge with RADA Electronic Industries in an all-stock transaction, expected to close in Q4 2022 subject to conditions and approvals. The proposed ownership allocation was 80.5% to DRS’s parent and 19.5% to RADA holders, on the agreement’s stated fully diluted basis. A registration statement had been filed but was not yet effective.
- Principal risks: Significant U.S. government customer and Army/Navy concentration; appropriations and procurement timing; supply-chain delays and component shortages; inflation and fixed-price contract cost overruns; contract estimate uncertainty; and effects of COVID-19 and the Russia-Ukraine conflict. DRS also cited merger execution, approval, integration and transaction-cost risks.
- Contingencies: The company described a potential CERCLA environmental matter involving a site in a national park; the investigation and potential remediation exposure remained uncertain, and DRS had recorded its best estimate based on current information. It stated that other legal matters and contract claims were not expected to materially affect the company overall, while acknowledging a particular-period impact remained possible.
Important facts for investors to verify
- Whether supply constraints, customer installation capacity and delayed awards improve, and how they affect ASC revenue and backlog conversion.
- Whether working-capital investment normalizes and cash flow supports liquidity needs, especially after the $396 million shareholder dividend.
- How fixed-price contract estimates respond to inflation and whether estimate-at-completion adjustments remain elevated.
- Completion, accounting gains and final proceeds for the GES and AAC sales, as well as the RADA merger’s approvals, terms and closing timetable.
- The funding composition of backlog, the timing of U.S. government awards, and progress toward management’s stated expectation for full-year bookings.