Business Overview and History
Leonardo DRS Inc (DRS) is a leading provider of advanced defense technology to U.S. national security customers and allies around the world. With over 55 years of experience, the company has established itself as a trusted partner in delivering mission-critical solutions across land, air, sea, space, and cyber domains.
Leonardo DRS was founded in 1969 as a subsidiary of Consolidated Controls Corporation, a prominent defense contractor. In the early years, the company focused on developing innovative power conversion, control, and distribution systems for the U.S. Navy. Over time, DRS expanded its capabilities, diversifying into areas such as sensor technology, network computing, and force protection systems.
Throughout its history, DRS has demonstrated a strong commitment to innovation and research and development, continuously enhancing its existing products and services while developing new technologies. This dedication has enabled the company to maintain its position at the forefront of the industry and meet the evolving needs of its customers.
As a government contractor, DRS has navigated the complexities of the procurement process and complied with numerous regulations. The company has also adapted to changes in defense spending priorities and shifting market dynamics, showcasing its agility and technical expertise.
DRS's growth strategy has included both organic expansion and strategic acquisitions. The company's ability to successfully integrate new capabilities is exemplified by its acquisition of RADA Electronic Industries Ltd. in 2022, which expanded its portfolio of advanced sensing and force protection solutions.
Today, DRS operates through two main business segments: Advanced Sensing and Computing (ASC) and Integrated Mission Systems (IMS). The ASC segment focuses on the design, development, and manufacture of sensing and network computing technologies, while the IMS segment specializes in power conversion, control and distribution systems, ship propulsion systems, and force protection solutions.
Financial Performance and Ratios
Over the past three fiscal years, DRS has demonstrated strong financial performance. In the fiscal year ended December 31, 2024, the company reported total revenue of $3.23 billion, a 14.4% increase from the previous year. Net income for the same period was $213 million, with a net profit margin of 6.6%.
DRS's balance sheet remains healthy, with a current ratio of 1.94 and a debt-to-equity ratio of 0.18 as of December 31, 2024. The company's strong cash flow generation is evident, with operating cash flow of $271 million and free cash flow of $186 million in the same fiscal year.
In the most recent quarter (Q4 2024), DRS reported revenue of $981 million, representing a year-over-year growth of 6%. Net income for the quarter stood at $89 million. The company saw broad-based strength across both of its segments, with ASC revenue growing 9% in Q4 and 16% for the full year, driven by increased demand for tactical radars, advanced infrared sensing, and naval network computing. IMS revenue was down slightly in Q4 due to program timing but grew 11% for the full year on strength in electric power and propulsion and force protection programs.
Geographically, DRS derived approximately 87% of its revenue from the United States, with the remaining 13% coming from international customers. International revenue has grown for four consecutive years, now representing 13% of total revenue in 2024 compared to 10% in 2023.
Liquidity
DRS maintains a strong liquidity position, which is crucial for its operational flexibility and ability to invest in growth opportunities. The company's cash and cash equivalents stood at $598 million as of December 31, 2024. Additionally, DRS has access to a $275 million revolving credit facility, of which there were no outstanding borrowings as of December 31, 2024, providing further financial flexibility if needed.
The company's current ratio of 1.94 and quick ratio of 1.62 further underscore its strong liquidity position. These ratios indicate that DRS has ample resources to meet its short-term obligations and maintain operational stability.
Key Operational Highlights
One of DRS's standout programs is the Columbia-class ballistic missile submarine, for which the company provides critical power conversion, control, and propulsion systems. This program, which accounts for approximately 10% of DRS's revenue, is a top priority for the U.S. Navy and a vital component of the nation's nuclear deterrence strategy.
In the Advanced Sensing and Computing segment, DRS has seen strong demand for its tactical radar solutions, which are used for counter-unmanned aerial systems (C-UAS) and short-range air defense applications. The company has also made significant investments in electronic warfare and software-defined radio capabilities, positioning it well to address evolving customer needs.
The ASC segment designs, develops, and manufactures sensing and network computing technology that enables real-time situational awareness and enhanced operational decision-making for its customers. The segment's leading sensing capabilities span a wide range of applications, including advanced detection, precision targeting, surveillance sensing, long-range electro-optic/infrared (EOIR), signals intelligence (SIGINT), electronic warfare (EW), ground vehicle sensing, next-generation active electronically scanned array tactical radars, dismounted soldier sensing, and space sensing.
In 2024, the ASC segment generated revenues of $2.12 billion, a 15.7% increase from the prior year. This growth was primarily driven by increased demand for the segment's dismounted sensing and tactical radar programs, both domestically and internationally. The segment's operating earnings increased by 34.6% to $183 million in 2024, with the operating margin expanding from 7.4% to 8.6%.
Within the Integrated Mission Systems segment, DRS has secured several new contracts for its force protection systems, including solutions for C-UAS and active protection systems for army vehicles. The company's expertise in integrating complex systems, such as sensors, electronic warfare equipment, and kinetic countermeasures, has been a key driver of its growth in this area.
The IMS segment designs, develops, manufactures, and integrates power conversion, control, and distribution systems, ship propulsion systems, motors and variable frequency drives, force protection systems, and transportation and logistics systems for the U.S. military and allied defense customers. DRS is a leading provider of next-generation electrical propulsion systems for the U.S. Navy, supplying power conversion, control, distribution, and propulsion systems for the Navy's top priority shipbuilding programs, including the Columbia Class ballistic missile submarine.
For the year ended December 31, 2024, the IMS segment reported revenues of $1.14 billion, an 11.5% increase compared to the prior year. This growth was primarily driven by increased output within the segment's electric power and propulsion programs supporting the U.S. Navy's Columbia Class submarine initiative, as well as higher revenue from fire system support programs, including the Patriot Missile program. The segment's operating earnings increased by 27.2% to $117 million, with the operating margin expanding from 9.0% to 10.3%.
Guidance and Outlook
For the fiscal year 2025, DRS has provided guidance for revenue in the range of $3.425 billion to $3.525 billion, representing organic growth of 6% to 9%. The company expects to achieve adjusted EBITDA between $435 million and $455 million, with a corresponding margin expansion of 30 to 50 basis points. Adjusted diluted EPS is projected to be between $1.02 and $1.08 per share.
DRS anticipates converting approximately 80% of its adjusted net earnings into free cash flow in 2025. Capital expenditures are expected to be around 4% of revenue. For the first quarter of 2025, the company projects revenue of approximately $725 million with mid-10% adjusted EBITDA margins.
DRS's robust backlog, which stood at $8.51 billion as of December 31, 2024, provides strong visibility into the company's future performance. The company's diverse portfolio of technologies, aligned with the U.S. Department of Defense's strategic priorities, positions it well to capitalize on the growing demand for advanced defense solutions.
Risks and Challenges
As a government contractor, DRS is subject to the risks associated with U.S. defense spending levels and budget dynamics. Significant delays or reductions in appropriations for the company's programs could adversely impact its financial results. Additionally, the company's reliance on a limited number of large customers, primarily the U.S. government, makes it vulnerable to changes in customer priorities and procurement strategies.
The company also faces competition from larger defense conglomerates, as well as smaller, agile competitors that may be able to adapt more quickly to changing market conditions. Maintaining technological superiority and cost-effective manufacturing processes will be crucial for DRS to stay ahead of the competition.
Conclusion
Leonardo DRS Inc (DRS) has established itself as a reliable and innovative provider of mission-critical defense technologies. The company's diverse portfolio, strong backlog, and strategic alignment with the U.S. Department of Defense's priorities position it well for continued growth. While the company faces risks inherent to the defense industry, its experienced management team, robust financial performance, and commitment to technological excellence suggest that DRS is poised to navigate the challenges and capitalize on the opportunities in the years ahead.
The company's strong performance in 2024, delivering record bookings, 14% organic revenue growth, and 23% adjusted EBITDA growth, along with its positive outlook for 2025, underscores its solid market position and growth potential. With a focus on advanced sensing, computing, and integrated mission systems, DRS is well-positioned to meet the evolving needs of its customers in an increasingly complex global security environment.