Leonardo DRS(DRS) - 2024 Q1 - Quarterly Report

PART I. Financial Information ITEM 1. Financial Statements (Unaudited) This section presents Leonardo DRS, Inc.'s unaudited consolidated financial statements, including earnings, comprehensive income, balance sheets, cash flows, and shareholders' equity, with notes on accounting policies, revenue, debt, and segment information for Q1 2024 Consolidated Statements of Earnings Consolidated Statements of Earnings (Dollars in millions, except per share amounts) | Metric (Dollars in millions, except per share amounts) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change ($) | Change (%) | | :---------------------------------------------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Total revenues | $688 | $569 | $119 | 20.9% | | Gross profit | $153 | $131 | $22 | 16.8% | | Operating earnings | $43 | $25 | $18 | 72.0% | | Net earnings | $29 | $12 | $17 | 141.7% | | Basic earnings per share | $0.11 | $0.05 | $0.06 | 120.0% | | Diluted earnings per share | $0.11 | $0.05 | $0.06 | 120.0% | Consolidated Statements of Comprehensive Income Consolidated Statements of Comprehensive Income (Dollars in millions) | Metric (Dollars in millions) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--------------------------- | :-------------------------------- | :-------------------------------- | | Net earnings | $29 | $12 | | Total comprehensive income | $29 | $12 | Consolidated Balance Sheets Consolidated Balance Sheets (Dollars in millions) | Metric (Dollars in millions) | March 31, 2024 | December 31, 2023 | | :--------------------------- | :------------- | :---------------- | | Cash and cash equivalents | $160 | $467 | | Accounts receivable, net | $194 | $151 | | Contract assets | $1,006 | $908 | | Total current assets | $1,772 | $1,918 | | Total assets | $3,781 | $3,921 | | Short-term borrowings and current portion of long-term debt | $30 | $57 | | Accounts payable | $220 | $398 | | Contract liabilities | $361 | $335 | | Total current liabilities | $902 | $1,078 | | Total liabilities | $1,426 | $1,596 | | Total shareholders' equity | $2,355 | $2,325 | Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows (Dollars in millions) | Metric (Dollars in millions) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--------------------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(265) | $(334) | | Net cash used in investing activities | $(10) | $(14) | | Net cash (used in) provided by financing activities | $(32) | $216 | | Net decrease in cash and cash equivalents | $(307) | $(132) | | Cash and cash equivalents at end of period | $160 | $174 | Consolidated Statements of Shareholders' Equity Consolidated Statements of Shareholders' Equity (Dollars in millions) | Metric (Dollars in millions) | Balance as of December 31, 2023 | Total Comprehensive Income | Share-based Compensation Activity | Balance as of March 31, 2024 | | :--------------------------- | :------------------------------ | :------------------------- | :-------------------------------- | :--------------------------- | | Common stock | $3 | — | — | $3 | | Additional paid-in capital | $5,175 | — | $1 | $5,176 | | Accumulated deficit | $(2,806) | $29 | — | $(2,777) | | Total shareholders' equity | $2,325 | $29 | $1 | $2,355 | Notes to Consolidated Financial Statements - Leonardo DRS, Inc. is a supplier of defense electronics products, systems, and military support services, with its largest shareholder being Leonardo S.p.A. The U.S. Department of Defense (DoD) is the largest customer, accounting for approximately 81% of total revenues for the three months ended March 31, 2024[32][33][34] - The company operates in two reportable segments: Advanced Sensing and Computing (ASC) and Integrated Mission Systems (IMS). ASC focuses on sensing and network computing technology for situational awareness, while IMS designs and integrates power conversion, control, distribution, ship propulsion, and force protection systems[34][35][38] Contract Assets and Liabilities (Dollars in millions) | Metric | March 31, 2024 | December 31, 2023 | | :---------------- | :------------- | :---------------- | | Contract assets | $1,006 | $908 | | Contract liabilities | $361 | $335 | | Net contract assets | $645 | $573 | - Revenue recognized from contract liability balances at the beginning of the period increased significantly, from $84 million in Q1 2023 to $140 million in Q1 2024[54] Total Backlog (Dollars in millions) | Component | March 31, 2024 | | :---------- | :------------- | | Funded | $3,509 | | Unfunded | $4,336 | | Total backlog | $7,845 | - Approximately 25% of the March 31, 2024 backlog is expected to be recognized as revenue over the next nine months[55] Revenue Disaggregation by Segment (Dollars in millions) | Segment | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :------ | :-------------------------------- | :-------------------------------- | | ASC | $433 | $391 | | IMS | $261 | $189 | | Total | $688 | $569 | Debt Composition (Dollars in millions) | Debt Type | March 31, 2024 | December 31, 2023 | | :-------------------------------------------- | :------------- | :---------------- | | Term Loan A | $211 | $214 | | Finance lease and other | $167 | $158 | | Short-term borrowings | $9 | $35 | | Total debt principal | $387 | $407 | | Less unamortized debt issuance costs and discounts | $(1) | $(1) | | Total debt, net | $386 | $406 | | Less short-term borrowings and current portion of long-term debt | $(30) | $(57) | | Total long-term debt | $356 | $349 | - The 2022 Revolving Credit Facility had a limit of $275 million with no outstanding balance as of March 31, 2024, and December 31, 2023. The weighted average interest rate on the facility was 6.83% as of March 31, 2024[78] Adjusted EBITDA by Segment (Dollars in millions) | Segment | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :---------------------- | :-------------------------------- | :-------------------------------- | | ASC | $41 | $37 | | IMS | $29 | $12 | | Corporate & Eliminations | $0 | $0 | | Total adjusted EBITDA | $70 | $49 | ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Leonardo DRS's Q1 2024 financial condition and results, covering business overview, operational performance, key metrics, and liquidity Business Overview and Considerations - Leonardo DRS is a provider of advanced defense technology, specializing in sensing, network computing, force protection, and electric power and propulsion for U.S. national security customers and allies[102] - The U.S. Department of Defense (DoD) is the largest customer, accounting for approximately 81% of total revenues for the three months ended March 31, 2024, with the U.S. Navy and U.S. Army representing 40% and 26% of total revenues, respectively[103][119] - The company's operations are structured into two technology-driven segments: Advanced Sensing and Computing (ASC) and Integrated Mission Systems (IMS)[104] - The FY2024 National Defense Authorization Act (NDAA) authorized $842 billion in defense spending, and the U.S. President's FY2025 budget request included $850 billion for national defense programs. A national security supplemental package in April 2024 provided $95 billion in foreign aid, including over $3 billion for the submarine industrial base[120] - Global conflicts, particularly the Russia-Ukraine war, have led to increased orders for equipment and replacements from the U.S. and allies. The Israel-Middle East conflict has not materially impacted operations to date, though potential disruptions exist[117][118] Results from Operations Consolidated Operating Results (Dollars in millions, except per share amounts) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change ($) | Change (%) | | :-------------------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Total revenues | $688 | $569 | $119 | 20.9% | | Total cost of revenues | $(535) | $(438) | $(97) | 22.1% | | Gross profit | $153 | $131 | $22 | 16.8% | | Gross margin | 22.2% | 23.0% | (80)bps | | | General and administrative expenses | $(101) | $(100) | $(1) | 1.0% | | Amortization of intangibles | $(5) | $(6) | $1 | (16.7)% | | Other operating expenses, net | $(4) | — | $(4) | 100.0% | | Operating earnings | $43 | $25 | $18 | 72.0% | | Interest expense | $(5) | $(8) | $3 | (37.5)% | | Earnings before taxes | $37 | $16 | $21 | 131.3% | | Income tax provision | $8 | $4 | $4 | 100.0% | | Net earnings | $29 | $12 | $17 | 141.7% | | Basic EPS | $0.11 | $0.05 | $0.06 | 120.0% | | Diluted EPS | $0.11 | $0.05 | $0.06 | 120.0% | | Backlog | $7,845 | $4,272 | $3,573 | 83.6% | | Bookings | $815 | $749 | $66 | 8.8% | - Revenue increased by $119 million (20.9%) primarily due to continued performance on electric power and propulsion programs with the U.S. Navy[135] - Operating earnings increased by $18 million (72.0%) to $43 million, driven by gross profit impacts. Net earnings increased by $17 million (141.7%) to $29 million[141][146] - Total backlog increased by $3,573 million (83.6%) to $7,845 million, primarily due to a multi-boat contract for the Columbia Class submarine program. Bookings increased by $66 million (8.8%) to $815 million[147][148] Key Non-GAAP Operating Measures Key Non-GAAP Operating Measures (Dollars in millions, except per share amounts) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Adjusted EBITDA | $70 | $49 | | Adjusted EBITDA margin | 10.2% | 8.6% | | Adjusted diluted EPS | $0.14 | $0.07 | | Free cash flow | $(275) | $(346) | - Adjusted EBITDA increased by $21 million (42.9%) to $70 million, driven by increased revenue volume and gross profit contribution, leading to better absorption of G&A expenditures[157] - Adjusted EBITDA margin improved to 10.2% from 8.6%, reflecting operational leverage from the 20.9% revenue increase[158] - Adjusted diluted EPS increased by $0.07 to $0.14, a product of increased adjusted net earnings partially offset by an increase in diluted weighted average shares outstanding (266 million in Q1 2024 vs. 262 million in Q1 2023)[160] - Free cash flow usage decreased by $71 million to $275 million, primarily due to lower cash used to fund working capital[163] Factors Impacting Our Performance - Performance is highly correlated to U.S. government spending levels and priorities, with potential impacts from budget constraints, delays in appropriations, and government shutdowns[164][165] - The majority of revenue is derived from fixed-price contracts, with revenue recognized over time using the percentage of completion cost-to-cost method. Changes in contract estimates, particularly for fixed-price development programs, can impact revenue and operating earnings[167][168][172][173] - International revenue increased to 14% of total revenue (from 9% in Q1 2023), partly due to increased defense spending in Eastern Europe and military aid to Ukraine, driving demand for battle management, tactical radars, and C-UAS products[176] - The company is exposed to inflationary pressures on supply chain costs (micro-electronics, commodities), which have impacted profitability and may continue to do so[202] Review of Operating Segments Segment Performance (Dollars in millions) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change ($) | Change (%) | | :-------------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Revenues: | | | | | | ASC | $433 | $391 | $42 | 10.7% | | IMS | $261 | $189 | $72 | 38.1% | | Adjusted EBITDA: | | | | | | ASC | $41 | $37 | $4 | 10.8% | | IMS | $29 | $12 | $17 | 141.7% | | Adjusted EBITDA Margin: | | | | | | ASC | 9.5% | 9.5% | — bps | | | IMS | 11.1% | 6.3% | 480 bps | | | Bookings: | | | | | | ASC | $587 | $404 | $183 | 45.3% | | IMS | $228 | $345 | $(117) | (33.9)% | - ASC revenue growth (10.7%) was driven by advanced sensing (ground vehicle, tactical radar, dismounted soldier sensing) and naval computing solutions. ASC bookings increased by 45.3% due to international demand for dismounted soldier solutions and continued demand for airborne and electronic warfare sensing programs[182][185] - IMS revenue increased by 38.1% due to momentum in naval power and propulsion submarine programs, particularly the Columbia Class efforts. IMS adjusted EBITDA increased by 141.7% with margin improvement of 480 bps, attributed to operational leverage and program improvements on the Columbia Class[188][189] - IMS bookings decreased by 33.9% primarily due to the timing of Columbia Class funding[190] Liquidity and Capital Resources - Cash and cash equivalents decreased to $160 million as of March 31, 2024, from $467 million as of December 31, 2023[191] Cash Flow Summary (Dollars in millions) | Activity | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(265) | $(334) | | Net cash used in investing activities | $(10) | $(14) | | Net cash (used in) provided by financing activities | $(32) | $216 | | Net decrease in cash and cash equivalents | $(307) | $(132) | | Free cash flow | $(275) | $(346) | - Cash usage from operating activities decreased by $69 million, primarily due to lower cash used to fund working capital, driven by a reduction in accounts payable and investments in contract assets[194] - Net cash used in financing activities was $32 million, a significant change from $216 million provided in the prior year, mainly due to no outstanding revolver balance in Q1 2024 compared to $215 million in Q1 2023, and a net decrease in short-term borrowings[196] Critical Accounting Policies and Estimates - There have been no material changes to the critical accounting policies and estimates from those discussed in the Annual Report on Form 10-K for the year ended December 31, 2023[198] ITEM 3. Quantitative and Qualitative Disclosures About Market Risk This section details Leonardo DRS's exposure to equity, interest rate, foreign currency, and inflation risks, assessing their financial impact - The company has limited equity risk, with investments primarily in overnight money market accounts[199] - Exposure to interest rate risk exists on variable-rate borrowings, specifically the 2022 Term Loan A ($211 million outstanding) and the 2022 Revolving Credit Facility (no outstanding amounts). A 0.5% change in the weighted average interest rate would impact annual interest expense by approximately $1 million[200] - Foreign currency risk is limited, primarily with the Canadian dollar, and a 10% fluctuation in exchange rates would not materially impact financial statements[201] - The company has experienced inflationary pressures on supply chain costs (micro-electronics, commodities), which have negatively impacted profitability and may continue to do so[202] ITEM 4. Controls and Procedures This section confirms Leonardo DRS's disclosure controls effectiveness and reports no material internal control changes in Q1 2024 - Management, including the principal executive and financial officers, concluded that disclosure controls and procedures were effective as of March 31, 2024[203] - There were no material changes in internal control over financial reporting during the quarter ended March 31, 2024[205] PART II. Other Information ITEM 1. Legal Proceedings This section refers to legal proceedings and claims detailed in the Notes to Consolidated Financial Statements - Information relating to legal proceedings is provided in Note 13: Commitments and Contingencies to the Consolidated Financial Statements[208] ITEM 1A. Risk Factors This section confirms no material changes to risk factors previously disclosed in the company's Annual Report on Form 10-K - As of the date of this Quarterly Report, there have been no material changes to the risk factors discussed in Part I, Item 1A of the Annual Report on Form 10-K for the year ended December 31, 2023[209] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports no unregistered sales of equity securities or use of proceeds during the reporting period - None[210] ITEM 3. Defaults Upon Senior Securities This section indicates no defaults upon senior securities occurred during the reporting period - None[211] ITEM 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the company - Not applicable[212] ITEM 5. Other Information This section provides additional information, specifically concerning Rule 10b5-1 trading arrangements - No director or officer adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement" during the three months ended March 31, 2024[213] ITEM 6. Exhibits Exhibit List This section lists the exhibits filed with the Form 10-Q, including certifications and XBRL documents - The report includes certifications by the principal executive officer and principal financial officer pursuant to Rule 13A-14(a) or 15D-14(a) and 18 U.S.C. Section 1350[215] - XBRL (eXtensible Business Reporting Language) documents are filed, including the Instance Document, Taxonomy Extension Schema, Calculation Linkbase, Definition Linkbase, and Presentation Linkbase Documents, along with the Cover Page Interactive Data File[215]