Leonardo DRS(DRS) - 2021 Q3 - Quarterly Report

PART I. Financial Information This section provides the company's unaudited financial statements and management's discussion and analysis Financial Statements (Unaudited) Unaudited financial statements for September 30, 2021, reveal significant net earnings growth and improved operating cash flow Consolidated Statements of Earnings Presents consolidated earnings for the three and nine months ended September 30, detailing revenues, gross profit, and net earnings Consolidated Statements of Earnings (Three Months Ended Sep 30) | Indicator (in millions) | 2021 | 2020 | | :--- | :--- | :--- | | Total revenues | $720 | $719 | | Gross profit | $131 | $122 | | Operating earnings | $53 | $37 | | Net earnings | $35 | $15 | | Basic and diluted EPS | $0.24 | $0.10 | Consolidated Statements of Earnings (Nine Months Ended Sep 30) | Indicator (in millions) | 2021 | 2020 | | :--- | :--- | :--- | | Total revenues | $2,059 | $1,952 | | Gross profit | $394 | $337 | | Operating earnings | $155 | $102 | | Net earnings | $96 | $38 | | Basic and diluted EPS | $0.66 | $0.26 | - For the nine months ended September 30, 2021, net earnings increased by 153% to $96 million from $38 million in the prior year, and EPS grew to $0.66 from $0.26[18] Consolidated Balance Sheets Outlines the company's financial position, detailing assets, liabilities, and equity, as of September 30, 2021, and December 31, 2020 Consolidated Balance Sheet Highlights | Indicator (in millions) | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $78 | $61 | | Total current assets | $1,225 | $1,263 | | Goodwill | $1,071 | $1,057 | | Total assets | $2,886 | $2,956 | | Liabilities & Equity | | | | Total current liabilities | $832 | $975 | | Long-term debt | $372 | $374 | | Total liabilities | $1,356 | $1,529 | | Total shareholder's equity | $1,530 | $1,427 | Consolidated Statements of Cash Flows Details the sources and uses of cash from operating, investing, and financing activities for the nine months ended September 30 Consolidated Statements of Cash Flows (Nine Months Ended Sep 30) | Indicator (in millions) | 2021 | 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | $(111) | $(230) | | Net cash provided by investing activities | $58 | $62 | | Net cash provided by financing activities | $70 | $181 | | Net change in cash and cash equivalents | $17 | $12 | - Net cash used in operating activities significantly improved, decreasing to $(111) million for the nine months ended Sep 30, 2021, from $(230) million in the prior-year period[29] Notes to Consolidated Financial Statements Details the company's segments, major customer, revenue recognition, recent acquisition, and total backlog - The company operates through three reportable segments: Advanced Sensor Technologies (AST), Network Computing & Communications (NC&C), and Integrated Mission Systems (IMS)[39][40][41] - The U.S. Department of Defense (DoD) is the largest customer, accounting for approximately 84% and 85% of total revenues for the third quarter and nine months of 2021, respectively[39] - On July 28, 2021, the company acquired substantially all assets of Ascendant Engineering Solutions (AES) for a purchase price of $11 million with an additional $5 million of contingent consideration, adding $14 million to goodwill in the AST segment[91][135] - Total backlog, representing the value of remaining performance obligations, was $3.152 billion as of September 30, 2021, with approximately 28% expected to be recognized as revenue over the next three months[115][119] Management's Discussion and Analysis (MD&A) Management discusses the company's strong financial performance for the nine months ended September 30, 2021, highlighting growth in revenue, net earnings, and Adjusted EBITDA, and improved cash flow - For the nine months ended Sep 30, 2021, revenue grew 5.5% to $2,059 million, operating earnings grew 52% to $155 million, and net earnings grew 152% to $96 million compared to the prior year period[258] - Adjusted EBITDA for the nine months ended Sep 30, 2021 increased by 35% to $210 million, and Adjusted EBITDA margin expanded by 270 basis points to 10.2%[258] - The company is taking steps to comply with the federal executive order requiring U.S. based federal contractors' employees to be vaccinated by January 4, 2022[205] Key Financial and Operating Data (Nine Months Ended Sep 30) | Indicator (in millions) | 2021 | 2020 | | :--- | :--- | :--- | | Total revenues | $2,059 | $1,952 | | Bookings | $1,919 | $2,542 | | Backlog | $3,152 | $3,454 | | Adjusted EBITDA | $210 | $156 | | Adjusted EPS | $0.73 | $0.34 | | Free Cash Flow | $(153) | $(267) | Results from Operations Analyzes the company's operational performance for the nine months ended September 30, 2021, detailing revenue, gross profit, and the impact of reduced interest expense on net earnings - Revenue for the nine months ended Sep 30, 2021 increased by $107 million (5.5%), driven by growth in the AST segment ($75 million) and IMS segment ($31 million)[260] - Gross profit for the nine-month period increased by $57 million (17%) due to higher revenue and improved program performance, including cost savings from the APEX operational excellence program[261][262] - Interest expense for the nine-month period decreased by 45% to $27 million, primarily due to the forgiveness of $300 million of principal on a term loan in December 2020[268] - Backlog decreased by 8.8% to $3.15 billion, and bookings decreased by 24.5% to $1.92 billion for the nine-month period, reflecting the burn-down of significant multi-year awards received in 2020[278][279] Review of Operating Segments Examines the performance of AST, NC&C, and IMS segments for the nine months ended September 30, 2021, highlighting revenue and Adjusted EBITDA trends, and key profitability drivers Segment Performance (Nine Months Ended Sep 30, 2021 vs 2020) | Segment | Revenue (M) | Revenue % Chg | Adj. EBITDA (M) | Adj. EBITDA % Chg | | :--- | :--- | :--- | :--- | :--- | | AST | $743 | 11.3% | $99 | 23.4% | | NC&C | $747 | (0.3%) | $72 | 20.0% | | IMS | $584 | 5.6% | $39 | 168.3% | - AST revenue growth was driven by the transition to production for next-generation soldier sensing programs and increased deliveries of ground vehicle sensing systems[286] - NC&C's Adjusted EBITDA margin improved from 8.0% to 9.6% due to better program performance across its naval computing portfolio[285][292] - IMS profitability surged due to improved performance on key design programs like submarine electric propulsion and increased revenue from force protection programs[296] Liquidity and Capital Resources Assesses the company's liquidity and capital resources, highlighting improved cash, reduced operating cash outflow, and enhanced free cash flow for the nine months ended September 30, 2021 Cash Flow Summary (Nine Months Ended Sep 30) | Indicator (in millions) | 2021 | 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | $(111) | $(230) | | Net cash provided by investing activities | $58 | $62 | | Net cash provided by financing activities | $70 | $181 | | Free cash flow | $(153) | $(267) | - The improvement in operating cash flow was primarily due to higher net income and a decrease in cash used to fund working capital[302] - Net cash from financing activities decreased by $111 million, mainly due to lower net borrowings under the revolving credit facility as profitability and working capital management improved[304] Quantitative and Qualitative Disclosures about Market Risk Details the company's limited market risk exposure, primarily focusing on interest rate risk from variable-rate debt and minimal foreign currency risk from Canadian dollar receivables - Interest rate risk is limited to variable-rate borrowings under revolving credit facilities, with an outstanding balance of $75 million as of September 30, 2021[307] - Foreign currency exposure is primarily with the Canadian dollar, limited to receivables of $33 million as of September 30, 2021, with a 10% exchange rate fluctuation not having a material impact[308] Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of September 30, 2021, with no material changes to internal control over financial reporting - Management concluded that as of September 30, 2021, the company's disclosure controls and procedures were effective[312] - No changes in internal control over financial reporting occurred during the third quarter of 2021 that materially affected, or are reasonably likely to materially affect, internal controls[314] PART II. Other Information This section covers legal proceedings, updated risk factors, equity security sales, and exhibits Legal Proceedings Information regarding legal proceedings is detailed in Note 13 to the unaudited Consolidated Financial Statements - For details on legal proceedings, refer to Note 13 of the financial statements[317] Risk Factors Highlights updated risk factors, primarily focusing on the potential adverse impacts of the federal executive order mandating COVID-19 vaccination for federal contractor employees - A key risk factor update relates to the COVID-19 pandemic and the federal vaccine mandate for contractor employees[319] - The executive order requiring U.S. based federal contractors' employees to be vaccinated by January 4, 2022, could materially and adversely affect the company's financial condition, results of operations, and cash flows, including through employee attrition[320] Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds during the period - None[322] Exhibits Lists exhibits filed with the Form 10-Q, including certifications by principal executive and financial officers, and XBRL data files - The report includes required certifications from the CEO and CFO, as well as XBRL interactive data files[326]