Yahoo Finance Leonardo DRS, Inc. (NASDAQ:DRS) Q1 2024 Earnings Call Transcript
Leonardo DRS, Inc. (NASDAQ:DRS) Q1 2024 Earnings Call Transcript May 1, 2024
Leonardo DRS, Inc. beats earnings expectations. Reported EPS is $0.14, expectations were $0.11. Leonardo DRS, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, good day, and welcome to Leonardo DRS First Quarter Fiscal Year 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. Following the company's prepared remarks, there will be an opportunity to ask questions and instructions will be given at that time. As a reminder, this event is being recorded. I would now like to turn the conference over to Steve Vather, Senior Vice President of Investor Relations and Corporate Finance. Please go ahead.
Steve Vather: Good morning, and welcome, everyone. Thanks for participating on today's quarterly earnings conference call. With me today are Bill Lynn, our Chairman and CEO; and Mike Dippold, our CFO. They will discuss our strategy, operational highlights, financial results and forward outlook. Today's call is being webcast on the Investor Relations portion of the website where you will also find the earnings release and supplemental presentation. Management may also make forward-looking statements during the call regarding future events, anticipated future trends and the anticipated future performance of the company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict.
Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors. For a full discussion of these risk factors, please refer to our latest Form 10-K and our other SEC filings. We undertake no obligation to update any of the forward-looking statements made on this call. During this call, management will also discuss non-GAAP financial measures, which we believe provide useful information for investors. These non-GAAP measures should not be evaluated in isolation or as a substitute for GAAP performance measures. You can find a reconciliation of the non-GAAP measures discussed on this call in our earnings release. At this time, I'll turn the call over to Bill. Bill?
Bill Lynn: Thanks, Steve, and thank you all for joining us this morning. It was great connecting with many of you at our recent Investor Day in New York. Just as a quick recap, we laid out a compelling investment case for DRS. And as many of you know, we are a unique story amidst a very scarce universe of SMID cap defense technology companies. Our diverse and platform agnostic portfolio is well aligned to customer priorities and areas of healthy demand. This is apparent in the steady pace of bookings, including the $815 million secured this quarter. As a result, our backlog visibility continues to build, and this combined with our multi-pronged growth strategy is demonstrating a clear path to mid-single digit organic growth over the next few years.
Our Q1 results, 2024 guidance, and multi-year targets all reflect the solid confidence we have in our portfolio and competitive positioning. I want to reiterate that foundational to DRS's strong market positioning are our people, innovation and the technology differentiation we have built over five decades. We continue to sharpen our investments in R&D and CapEx to increase our distinct edge and that of our customers. We remain focused on executing on our strategy to drive outcomes for our customers and our shareholders. This focus is evident in our exceptional quarterly results. These results were all well ahead of our expectations for the quarter. Our strong Q1 financial performance is a direct outcome of an initiative to drive incrementally better quarterly linearity.
I'm pleased with the solid start to the year as it places us on a nice path to deliver on our 2024 commitments. Let me review a couple of specifics. Our revenue growth was entirely organic and accelerated to 21% year-over-year. We continue to convert strong customer demand into bookings and drove a 1.2 book-to-bill ratio in Q1. Customer demand continues to be evident and well distributed throughout our diverse portfolio. This quarter, we saw a robust bookings from international customers, seeking our solutions in advanced infrared sensing, tactical radars, and air defense systems. Furthermore, with respect to domestic customers, we saw clear demand for our naval network computing and our electric power and propulsion technologies. We delivered another consecutive quarter of healthy bookings, which pushed our backlog to a new company record of $7.8 billion, up 84% year-over-year, and also up sequentially.
In addition to our robust backlog and contract awards, we are continuing to position ourselves to capture adjacent market opportunities to further solidify and accelerate our future growth. Last, but not least, we delivered impressive profit growth in Q1. Adjusted EBITDA was up 43% and margin expanded by 160 basis points. We also saw both adjusted net earnings and adjusted diluted EPS increased by 100% over last year. There's no question that our extraordinary people are responsible for these spectacular results. Their steadfast focus on our customers and their critical missions are demonstrated in our Q1 financials. Moving to an update on the operating environment. We are pleased to see the passage of FY ‘24 defense appropriations, which gives our customers the necessary funding clarity to execute their missions.
Additionally, the President's FY ‘25 budget request called for $850 billion for defense. This represents a 1% growth over enacted FY ‘24 and is in line with previously agreed upon levels. We are pleased to see bipartisan action on supporting our allies in Ukraine, Israel and Taiwan, via the recent passage of the $95 billion defense supplemental. Again, while we have limited direct sales into either ongoing conflict, the passage of a defense supplemental should serve as a tailwind to our customers and their modernization efforts, which presents a long-term opportunity for DRS. As a reminder, our three-year targets offered at our Investor Day already incorporate the budget environment I just discussed. Overall, our portfolio continues to be well funded.
We are closely aligned to areas of customer priority and our capabilities in advanced sensing, network computing, force protection, and electric power and propulsion, continue to be critical in supporting their important missions. Over the past year, I have consistently highlighted the broad-based strength coming from across our portfolio. The sources of our growth and opportunity continue to be well-diversified. Our customers are focused on maintaining capability advantage over adversaries, and we are pleased to partner with them to enhance their competitive edge. Let me spotlight a couple of notable items this quarter. In the sensing arena, we are experiencing strong demand for our capabilities in advanced infrared across mission applications and we are finding some early success in implementing our technology into missiles.
Additionally, we are seeing expansion opportunities, both from domestic and international customers, for our best of breed electronic warfare solutions, particularly as the importance of multi-mission EW capabilities grows. Next, our radar business continues to evolve into new domains and mission applications. I am pleased to announce that we recently won an expanded role as a design agent on a shipboard X-band radar. Furthermore, our tactical radar business is experiencing steady demand for a variety of missions spanning air defense, counter-UAS, and active protection. We are proud that our tactical radars were a critical component in the missile defense capabilities deployed in Israel against recent Iranian hostile actions. The global conflicts continue to reinforce the growing and evolving threats facing our platforms and our people.
Force protection is not an option, it is an imperative. As a result, and in addition to what I just mentioned on tactical radars, we are seeing heightened global demand for our infrared countermeasures to protect rotary and fixed-wing aircraft from surface to air missiles as well as other emerging threats. The expansion of our force protection business is also evident in the Army's desired growth from four to nine short-range air defense battalions. In the face of evolving threats, agility is invaluable and the ability to scale and modify capabilities rapidly and efficiently is critical. We recognize this need and in our network computing business, we recently unveiled a new mounted form factor mission system to address the Army's initiative focused on open standards.
Our new network compute offering is fully compliant with these standards and will enable our customers to continuously fuel future capabilities. We're excited that to have a compelling solution that supports the Army's modernization vision. Lastly, I wanted to briefly touch on our electric power and propulsion business. Recently, the Secretary of the Navy ordered a 45 day shipbuilding review. The findings from this analysis indicated multi-year delays for several shipbuilding programs. While we are not the source of these delays, I want to highlight that we are focused on supporting our customers by maintaining schedule and quality for our content, as well as positioning to take on more scope as appropriate to help address these challenges over the long term.
As previously discussed, our future facility in South Carolina affords us the ability to execute the Columbia-Class program more efficiently, but also sets up to support shipbuilding capacity expansion. Additionally, we would expect that some portion of the robust funding and investment for the submarine industrial base in the recent defense supplemental could be made available to us as we look to support the Navy in this key initiative. While the delays on current production programs have pressured the timing of future platforms such as DDGx and SSNx, it is worth reminding that both of those platforms represent long-term opportunity for DRS, but do not impact our near or medium term growth prospects. We believe that our electric power and propulsion technology provides multifaceted strategic advantages to customers, particularly given growing power platform requirements and the need to operate discreetly around the globe.
In that context, I am pleased to report that we continue to expand our naval propulsion content and were recently awarded follow-on work to provide our hybrid electric solution for U.S. Coast guard offshore patrol cutters. We are continuing to see opportunities with navy’s and our coast guards around the world as they modernize their fleets with next-generation platforms. Overall, I am quite pleased with DRS's market position and its growth prospects that lie ahead for the business. Our team continues to execute well and that is clearly represented in the quarterly results. That said, we remain focused on driving value creation over the long term for our customers, shareholders, and employees. Now I'd like to turn the call over to Mike, so that he can walk you through our financials in more detail.
Mike Dippold: Thanks, Bill. I'm excited to discuss our financial results in greater detail. Before I get to that, let me express my heartfelt thanks to the team for helping execute another remarkable quarter. As Bill mentioned, we are working to make progress towards better linearity in our financial performance, and that is certainly evident in our Q1 results. In the quarter, we experienced year-over-year growth of 21%, again, all organic. A significant portion of the growth was driven by our naval power programs, namely Columbia-Class, but momentum for our ground systems integration, advanced sensing, and naval network computing efforts were also strong contributors to the performance in the quarter. Moving to the segment view.
ASC segment revenues were up 11% due to growth in programs related to advanced infrared sensing, naval and ground network computing, as well as tactical radars. Our IMS segment revenues were up an impressive 38% year-over-year with strong performance apparent across the segment, but growth of our Columbia-Class program was certainly a key driver. Now to adjusted EBITDA. Adjusted EBITDA in the quarter was $70 million, representing significant growth of 43% from last year. As previously discussed, our period expensing of G&A means incremental volume typically drops to the bottom line. And in Q1 this definitely rang true. The increased volume also translated to adjusted EBITDA margin expansion of 160 basis points taking margin to 10.2% in Q1. On a segment basis, ASC segment adjusted EBITDA increased by 11%, but margin was flat due to less favorable program mix offsetting the higher volume.
IMS segment adjusted EBITDA was up 142% and margin was 480 basis points higher than last year due to continued momentum on naval power programs led by the Columbia-Class. Moving to the bottom line metrics. First quarter net earnings were $29 million and diluted EPS was $0.11 a share of 142% and 120% respectively. Our adjusted net earnings of $38 million and adjusted diluted EPS of $0.14 a share were both up 100%. The overwhelming driver of the increases came from strong operational execution, however lower interest expense and a lower effective tax rate were also slight tailwinds. Moving to free cash flow. Cash collection followed historical Q1 trends with an outflow in the quarter. That said, we saw favorable year-over-year trending with a significantly smaller free cash flow use of $275 million compared to Q1 2023.
The narrowed cash usage was driven by more efficient working capital, improved net profitability, and reduced capital expenditures. Note that favorable timing of cash receipts from customers aided our working capital position in the quarter, but this will revert some in Q2. As discussed last quarter, we are embarking on a $120 million new facility investment in South Carolina. This will result in elevated CapEx compared to historical norms in 2024 and for the next few years. That said, despite a lighter CapEx outlay in Q1, I would expect the remaining quarters to tick up considerably from here. Additionally, similar to prior years, we expect that free cash generation will build throughout the year with the bulk of collections coming in the fourth quarter.
Now to a few comments on our 2024 outlook. We are reiterating the strong view issued on our last call. Let me quickly review our expectations across metrics. Revenue will be between $2.925 billion and $3.025 billion, which represents a 4% to 7% growth, all of which is organic. The primary factors driving variability in the range are the timing of material receipts, progress of labor inputs, as well as the level and pacing of customer orders. For adjusted EBITDA, the range is between $365 million and $390 million. We continue to expect healthy margin improvement year-over-year as we transition our development programs to production, which includes the Columbia-Class among others. Adjusted diluted EPS remains between $0.74 and $0.82 per share, embedded in this range, our tax rate of 22.5% and $268 million fully diluted shares.
Depreciation should be 2.4% of revenue and CapEx should approach 4% of sales. Lastly, we are targeting 80% free cash flow conversion of adjusted net earnings for the year. We are pleased with the Q1 momentum, but want to reiterate that a significant portion of the outperformance was attributable to favorable timing. Right now, Q2 is shaping up to look a lot like our Q1 actuals with revenue in the high 600s and adjusted EBITDA profitability in a low 10% range. Additionally, we are expecting a modest free cash outflow as some of the favorable cash receipt timing reverses from this quarter. Let me wrap up with a few quick closing thoughts. We are pleased with our year-to-date performance and commend the broader team in achieving these results.
That said, we are maintaining a steadfast focus on driving execution to meet our commitments to our customers and shareholders. With that, we are ready to take your questions.
Operator: Thank you. At this time, we will begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Peter Arment with Baird. Please proceed with your question.
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