Leonardo DRS(DRS) - 2025 Q1 - Quarterly Report

PART I. Financial Information This section presents the unaudited financial statements and management's discussion and analysis for the quarter ended March 31, 2025, detailing the company's financial performance, position, and cash flows ITEM 1. Financial Statements (Unaudited) The unaudited consolidated financial statements for Q1 2025 reveal significant year-over-year growth in revenue and net earnings, a solid balance sheet, and improved operating cash flow Consolidated Statements of Earnings Q1 2025 consolidated earnings show revenues of $799 million, a 16.1% increase, and net earnings of $50 million, up 72.4% year-over-year Consolidated Earnings Summary (Q1 2025 vs Q1 2024) | Metric (in millions, except per share) | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Revenues | $799 | $688 | | Gross Profit | $181 | $153 | | Operating Earnings | $59 | $43 | | Net Earnings | $50 | $29 | | Basic EPS | $0.19 | $0.11 | | Diluted EPS | $0.19 | $0.11 | Consolidated Balance Sheets As of March 31, 2025, total assets were $4.096 billion, with a decrease in cash, while total liabilities decreased and shareholders' equity increased Balance Sheet Summary | Metric (in millions) | March 31, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Total Current Assets | $2,070 | $2,163 | | Cash and cash equivalents | $380 | $598 | | Total Assets | $4,096 | $4,184 | | Total Current Liabilities | $1,027 | $1,116 | | Total Liabilities | $1,525 | $1,627 | | Total Shareholders' Equity | $2,571 | $2,557 | Consolidated Statements of Cash Flows Q1 2025 cash flow shows net cash used in operating activities improved to $138 million, with investing and financing activities also using cash, resulting in a $218 million net decrease Cash Flow Summary (Q1 2025 vs Q1 2024) | Activity (in millions) | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Net cash used in operating activities | $(138) | $(265) | | Net cash used in investing activities | $(32) | $(10) | | Net cash used in financing activities | $(48) | $(32) | | Net decrease in cash | $(218) | $(307) | Notes to Consolidated Financial Statements Notes detail accounting policies, segment performance, 78% revenue reliance on DoD, $8.6 billion backlog, and recent share repurchase and dividend activities - The Department of Defense (DoD) is the largest customer, accounting for approximately 78% of total revenues for the three months ended March 31, 2025[32] - Total backlog as of March 31, 2025, was $8.612 billion Approximately 27% is expected to be recognized as revenue over the next nine months[45] - On February 20, 2025, the Board approved a share repurchase program of up to $75 million As of March 31, 2025, approximately $3 million had been repurchased[75] - A quarterly dividend of $0.09 per share was declared and paid during the first quarter of 2025[76] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes strong Q1 2025 performance to backlog growth and execution across ASC and IMS segments, with revenue up 16.1% and operating earnings up 37.2%, maintaining strong liquidity Business Overview and Considerations DRS operates two defense technology segments, ASC and IMS, with 78% of Q1 2025 revenue from DoD, influenced by global conflicts and the $850 billion FY 2025 U.S. defense budget - The company operates through two technology-driven segments: Advanced Sensing and Computing (ASC) and Integrated Mission Systems (IMS)[102][106] - The DoD accounted for 78% of revenue in Q1 2025, with the U.S. Navy (38%) and U.S. Army (32%) being the primary end-users[100] - The FY 2025 National Defense Authorization Act (NDAA) authorizes $850 billion in defense spending, largely flat over prior year levels but with increases in procurement and R&D[118] Results of Operations Q1 2025 revenue grew 16.1% to $799 million, with operating earnings up 37.2% and net earnings up 72.4%, driven by backlog growth and improved margins Q1 2025 vs Q1 2024 Performance | Metric (in millions) | Q1 2025 | Q1 2024 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenues | $799 | $688 | 16.1% | | Gross Profit | $181 | $153 | 18.3% | | Operating Earnings | $59 | $43 | 37.2% | | Net Earnings | $50 | $29 | 72.4% | | Bookings | $991 | $815 | 21.6% | | Backlog | $8,612 | $7,845 | 9.8% | - G&A expenses increased by 15.8% primarily due to higher internal R&D spending and bid and proposal efforts[135] - Net interest expense decreased by $4 million due to higher interest income from larger cash balances and reduced borrowings[139] Review of Operating Segments Both ASC and IMS segments contributed to Q1 2025 growth, with ASC revenue up 18.0% and IMS revenue up 11.5%, driven by strong bookings across programs Segment Performance (Q1 2025 vs Q1 2024) | Segment (in millions) | Metric | Q1 2025 | Q1 2024 | Change (%) | | :--- | :--- | :--- | :--- | :--- | | ASC | Revenues | $511 | $433 | 18.0% | | | Operating Earnings | $25 | $19 | 31.6% | | | Bookings | $669 | $587 | 14.0% | | IMS | Revenues | $291 | $261 | 11.5% | | | Operating Earnings | $34 | $25 | 36.0% | | | Bookings | $322 | $228 | 41.2% | Advanced Sensing and Computing (ASC) ASC revenue grew 18.0% to $511 million in Q1 2025, with operating earnings up 31.6% and margin improving to 4.9%, driven by tactical computing and C-UAS radars - Revenue growth was driven by advanced sensing and force protection programs, specifically tactical computing and C-UAS tactical radars[165] - Operating margin increased to 4.9% due to higher revenue and reduced restructuring, despite increased germanium costs and R&D spending[166][167] Integrated Mission Systems (IMS) IMS revenue increased 11.5% to $291 million in Q1 2025, with operating earnings up 36.0% and margin expanding to 11.7%, driven by naval power programs - Revenue growth was attributed to naval power programs (submarine and surface ship) and short-range air defense programs[169] - Operating margin increased to 11.7% from 9.6%, driven by operational leverage and continued program improvement on the Columbia Class submarine program[170] - Bookings increased significantly due to funding for the next tranche of the Columbia Class program and additional short-range air defense vehicle awards[171] Liquidity and Capital Resources Q1 2025 ended with $380 million cash, with net cash used in operating activities improving to $138 million due to working capital management, despite increased investing and financing outflows Cash Flow Summary (Q1 2025 vs Q1 2024) | Activity (in millions) | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Net cash used in operating activities | $(138) | $(265) | | Net cash used in investing activities | $(32) | $(10) | | Net cash used in financing activities | $(48) | $(32) | | Net decrease in cash | $(218) | $(307) | - The improvement in operating cash flow was driven by customer advances on electric propulsion and tactical radar programs, and lower cash outflow for accounts payable[174] ITEM 3. Quantitative and Qualitative Disclosures About Market Risk Primary market risks include interest rate risk on variable-rate debt, limited foreign currency exposure, and inflationary pressures on supply chain costs impacting profitability - The company is exposed to interest rate risk on its $200 million outstanding variable-rate 2022 Term Loan A A 0.5% change in rates would alter annual interest expense by about $1 million[179] - Foreign currency risk is limited, with primary exposure to the Canadian dollar on receivables of $26 million as of March 31, 2025[181] - The company has experienced inflationary pressures on supply chain costs for micro-electronics and metals, which have impacted profitability[182] ITEM 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2025, with no material changes to internal control over financial reporting during the quarter - Management, including the principal executive and financial officers, concluded that disclosure controls and procedures were effective as of the end of the quarter[183] - No changes occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[185] PART II. Other Information This section provides updates on legal proceedings, risk factors, equity security sales, and other general information for the reporting period ITEM 1. Legal Proceedings The company is subject to ordinary course legal proceedings and claims, with details provided in Note 12 of the Consolidated Financial Statements - Information regarding legal proceedings is detailed in Note 12: Commitments and Contingencies to the Consolidated Financial Statements[187] ITEM 1A. Risk Factors No material changes have occurred to the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2024 - No material changes have occurred to the risk factors discussed in the Annual Report on Form 10-K for the year ended December 31, 2024[188] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 88,050 shares for approximately $3 million under its $75 million share repurchase program during Q1 2025 Share Repurchase Activity (Q1 2025) | Period | Shares Purchased | Average Price Paid | Value (in millions) | Remaining Authorization (in millions) | | :--- | :--- | :--- | :--- | :--- | | March 2025 | 88,050 | $32.46 | ~$2.9 | $72 | - The Board approved a share repurchase program on February 20, 2025, authorizing the purchase of up to $75 million of common stock through March 4, 2027[189] ITEM 5. Other Information No directors or officers adopted, modified, or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during Q1 2025 - No directors or officers adopted, modified, or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the three months ended March 31, 2025[194]