Business Overview

Leonardo DRS, Inc. (NASDAQ:DRS) is an innovative and agile provider of advanced defense technology to U.S. national security customers and allies around the world. The company specializes in the design, development, and manufacture of advanced sensing, network computing, force protection, and electric power and propulsion solutions, among other leading mission-critical technologies.

DRS operates through two reportable segments: Advanced Sensing and Computing (ASC) and Integrated Mission Systems (IMS). The ASC segment focuses on developing and manufacturing sensing and network computing technology that enables real-time situational awareness and enhanced operational decision-making for customers. This includes advanced detection, precision targeting, surveillance, electronic warfare, and tactical computing capabilities. The IMS segment designs, develops, manufactures, and integrates power conversion, control and distribution systems, ship propulsion systems, force protection systems, and transportation and logistics systems for the U.S. military and allied defense customers.

DRS's diverse and platform-agnostic portfolio is well-aligned with key customer priorities, particularly in areas of advanced sensing, network computing, force protection, and electric power and propulsion. The company's innovative technologies and solutions directly support the U.S. Department of Defense's (DoD) modernization efforts and mission requirements across land, air, sea, space, and cyber domains.

Financials

DRS delivered an exceptional financial performance in the first quarter of 2024, with revenue increasing 21% year-over-year to $688 million. This growth was entirely organic and driven by strong demand across the company's diverse portfolio, particularly in its naval power programs, ground systems integration, advanced sensing, and naval network computing offerings.

The company's profitability also improved significantly, with adjusted EBITDA increasing 43% to $70 million and adjusted EBITDA margin expanding 160 basis points to 10.2%. This margin expansion was driven by the increased revenue volume and better absorption of the company's general and administrative expenses. Net earnings for the quarter were $29 million, up 142% year-over-year, while adjusted diluted earnings per share (EPS) doubled to $0.14.

DRS's robust financial performance was underpinned by its strong backlog, which reached a new company record of $7.8 billion as of March 31, 2024, up 84% from the prior-year period. This backlog visibility, combined with the company's diverse growth opportunities, provides confidence in DRS's ability to deliver mid-single-digit organic growth over the next few years.

Segment Performance

The ASC segment reported a 10.7% year-over-year increase in revenue to $433 million, driven by growth in advanced sensing and network computing programs. Adjusted EBITDA for the ASC segment increased 10.8% to $41 million, with the margin remaining flat at 9.5% as the higher volume was offset by a mix shift.

The IMS segment delivered an impressive 38.1% revenue increase to $261 million, primarily due to continued momentum in the company's naval power and propulsion programs, particularly the Columbia-Class submarine effort. Adjusted EBITDA for the IMS segment surged 141.7% to $29 million, with the margin expanding 480 basis points to 11.1% as a result of the increased volume and improved program performance.

Liquidity

DRS ended the first quarter of 2024 with a cash balance of $160 million. The company's free cash flow usage decreased by $71 million year-over-year to $275 million, driven by more efficient working capital management and reduced capital expenditures. While the company expects elevated capital expenditures in 2024 and the next few years due to its new facility investment in South Carolina, it is targeting 80% free cash flow conversion of adjusted net earnings for the full year.

DRS remains committed to a disciplined capital allocation strategy, focusing on organic growth investments, strategic acquisitions, and returning capital to shareholders. The company maintains a robust M&A pipeline and continues to evaluate opportunities that align with its core market, are EPS accretive, and support its strategic growth and margin expansion objectives.

Outlook

For the full year 2024, DRS is reiterating its previous guidance. The company expects revenue to be between $2.925 billion and $3.025 billion, representing 4% to 7% organic growth. Adjusted EBITDA is expected to be in the range of $365 million to $390 million, with adjusted diluted EPS between $0.74 and $0.82 per share.

DRS's guidance reflects the company's confidence in its ability to execute on its strategic priorities and capitalize on the robust demand environment. The company's diverse portfolio, strong backlog, and focus on innovation and operational excellence position it well to deliver sustainable growth and value creation for its shareholders.

Risks and Challenges

As a government contractor, DRS is subject to various risks, including changes in U.S. government spending priorities, budget uncertainty, and the potential for program delays or cancellations. The company is also exposed to supply chain challenges, inflationary pressures, and the need to maintain a robust industrial security program to support its work on sensitive and classified programs.

However, DRS's platform-agnostic approach, focus on mission-critical technologies, and strong customer relationships have enabled it to navigate these challenges effectively. The company's diversified portfolio and ability to pivot between upgrades and new platforms provide it with the agility to adapt to changing market conditions.

Conclusion

Leonardo DRS, Inc. is a leading provider of advanced defense technology solutions that are critical to the U.S. military and its allies. The company's impressive financial performance, robust backlog, and strategic growth initiatives position it well to capitalize on the favorable defense spending environment and deliver sustainable value for its shareholders. With its innovative technologies, operational excellence, and disciplined capital allocation, DRS is poised to continue its trajectory as a diversified defense technology leader.