RADA Electronic Industries Ltd. (DRS) on Q2 2024 Results - Earnings Call Transcript
Operator: Thank you for standing by. Welcome to Leonardo DRS Second Quarter 2024 Earnings Call. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the call over to Steve Vather. Sir, you may begin. 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 the reconciliation of the non-GAAP measures discussed on this call in our earnings release. At this time, I will turn the call over to Bill. Bill? Bill Lynn: Thanks, Steve, and thank you all for joining us. DRS continues to perform well as evidenced by the impressive quarterly results we are releasing this morning. We are experiencing steady customer demand across our diverse portfolio of differentiated technologies. As a result, we posted another consecutive quarter of 1.2 book-to-bill. In Q2, there was particular strength to our capabilities in advanced infrared sensing, electric power and propulsion, network computing and ground systems integration. Additionally, our total backlog ascended to new company records and now stands over $7.9 billion, which is up 82% year-over-year and also up sequentially. The robust demand we continue to experience, coupled with the easing of supply chain constraints, unlocked another quarter of 20% year-over-year organic revenue growth. We also grew our adjusted EBITDA by 32% and delivered margin expansion of 100 basis points in the quarter. Adjusted net earnings and adjusted diluted EPS increased by 21% and 20% compared to last year, thanks to solid operational execution. I want to take a moment to thank the broader DRS team for driving such marvelous results. The team's steadfast focus and our exceptional performance in the first half is prompting us to adjust our outlook for the full year. Mike will walk through the detail of our increased guidance a little bit later on the call. To give you some thoughts on the macro environment, Congress has made preliminary progress on FY '25 appropriations. However, consistent with prior years, we expect to enter the fiscal year under a continuing resolution. Looking beyond the near term, we believe that the elevated global threat environment will remain as the single most important factor driving defense investment by the U.S. and its allies. Technology advancements are changing the nature of warfare and our national security strategy remains consistently focused on deterring and, if necessary, contesting near peer adversaries. Both of these factors reinforce the imperative to modernize. DRS is well positioned to continue supporting our customers as they enhance their capabilities to address new mission complexities. Shifting to supply chain. I made a brief mention that improvements on this front are partially responsible for unlocking incremental revenue growth. We have seen a steady and gradual recovery across most but not all of our supply chain and year-to-date 2024. Additionally, our steadfast and proactive management of the supply chain, coupled with a broader improvement, are resulting in better predictability and delivery time lines, increased component material availability as well as improved consistency and quality. Overall, these positive developments are accelerating the pacing of revenue for the year. That said, the revenue step-up from the supply chain recovery is expected to be contained to this year, with future growth to be more in line with our previous projections in the mid-single-digit growth range. We believe that we are close to a new steady state with respect to lead times and input pricing, which, of course, are both significantly higher than pre-2020. While inflation has been a lessening factor for us in 2024, there are still some stubborn pockets within our business where we are still absorbing higher input pricing. Shifting to our operations, let me highlight a couple of items this quarter. As I mentioned earlier, we are continuing to see strong demand across our broad and differentiated portfolio. In our sensing business, our technologies continue to be well recognized as the go-to standard. This is evident in our outstanding quarterly bookings as well as the clear long-term opportunity set bolstered by our customers' modernization push for next-generation technologies. We are also advancing our leading market positions by partnering with commercial players to jointly develop cutting-edge capabilities that meet emerging customer requirements. As an example, we are actively working to integrate edge AI processing into sensors. At the same time, our agility and commitment to excellence makes us a partner of choice across the defense ecosystem. We were recently recognized with the Partner 2 Win award from our customer, BAE Systems, for best-in-class performance and delivering exceptional capability, quality and on-time delivery. This award, among many others received over the years embodies our culture and commitment to ensuring our customers at the very best technology to execute their missions. Our innovation continues to be matched with healthy customer interest, which validates the close alignment of our R&D strategy to future mission needs. You may recall that earlier this year, we unveiled a new family of lasers that cover a wider spectrum of light. These lasers were specifically designed for quantum information science applications. I am pleased to report that we have already secured several orders and continue to gather demand for our state-of-the-art capability in this domain. Additionally, we are seeing considerable domestic and international customer appetite for our multi-domain force protection solutions. Counter-UAS, and force protection capabilities remain critical to survivability and operating effectively in today's battlefield. Our tactical radars, advanced sensing and active protection technologies as well as our systems integration expertise continued to be key enablers. I want to briefly mention that in this quarter, we also secured a $417 million contract to provide critical electronic combat control and sonar systems across U.S. and allied Navy submarines. We are pleased that we will be continuing to support the Navy on this important network computing contract for many years to come. This win also provides us with increased visibility into the year as it clears our largest recompete for 2024. Moving to a quick update on our facility expansion efforts in Charleston, South Carolina. We continue to make steady progress as demonstrated by the ramp-up of CapEx in the quarter. As planned, CapEx will continue to pick up in the second half. Lastly, I want to commend our team in Danbury, Connecticut for their superb commitment to industrial security. This year, DRS was one of 14 recipients of the Cogswell Award, out of more than 12,500 eligible cleared facilities. This honor now marks our 22nd award which demonstrates our continued and unwavering company-wide commitment to security. Overall, there is a lot to be proud of, and I am pleased with our outstanding year-to-date results. That said, I am most proud of the team's continued focus on delivering the very best technology to our war fighters. Our talented people, sound strategy and leading market positions are generating spectacular outcomes for both customers and shareholders. We remain focused on driving sustainable growth, execution consistency and prudent investment, all of which are critical components to our long-term value creation formula. Let me now turn the call over to Mike, who will walk you through our second quarter results and revised 2024 guidance in greater detail. Mike Dippold: Thanks, Bill. I'm pleased with our strong continued momentum. I also want to extend my thanks to the team for executing another great quarter. As Bill mentioned earlier, impressive customer demand and a continued supply chain recovery is driving revenue growth well above our prior expectations. Revenue growth in the quarter was 20% and entirely organic. A sizable portion of the growth stemmed from increases in our advanced infrared sensing, electric power and propulsion as well as our tactical radar programs. Moving to the segment view. ASC segment revenue was up 22% due to growth in programs related to advanced infrared sensing and tactical radars. Our IMS segment revenue was up 18% year-over-year, with solid performance evident across the segment. Now to adjusted EBITDA. Adjusted EBITDA in the quarter was $82 million, representing 32% growth from last year. Increased volume was the primary catalyst for the 100 basis points of margin expansion in the quarter. At the segment level, quarterly adjusted EBITDA and margin performance continues to be fairly lumpy. The trending is clearer when extrapolated to an annual view. That said, for the core ASC segment, adjusted EBITDA increased by 53% and with margin up 230 basis points due to favorable program mix, higher volume and improved program execution. IMS segment adjusted EBITDA was up 4%, a margin contracted by 130 basis points due to unfavorable program mix and less efficient execution related to a ground surveillance integration program. It is important to note that our Columbia-class program continues to trend positively with improved year-over-year profitability. Since it's evident, first half compare where segment adjusted EBITDA is up 47% with 140 basis points of margin expansion over last year. Moving to the bottom-line metrics. Second quarter net earnings were $38 million and diluted EPS was $0.14 a share, up 9% and 8%, respectively. Our adjusted net earnings of $47 million and adjusted diluted EPS of $0.18 a share were up 21% and 20%, respectively. Strong operational execution outweighed the headwind from increased taxes and a higher relative tax rate in the year-over-year compare. Moving to free cash flow. Cash collections were slightly better than last year with a small free cash generation in the quarter, a great outcome driven by higher net profitability and better working capital efficiency, which more than offset the increased year-over-year CapEx investment. Let me shift to a discussion on our updated guidance. Based on the remarkable first half performance, we are increasing our guidance across all key metrics. We are now expecting a higher revenue range between $3.075 billion and $3.175 billion, which represents a 9% to 12% year-over-year growth, all of which is still organic. We have solid visibility for the year as we recently secured recompetes and continued to execute from our sizable backlog position. However, our revenue output will largely depend on the timing of material receipts, progress of labor input as well as the level and pacing of customer orders. For adjusted EBITDA, the range has also increased and is now between $375 million and $395 million. We are still expecting healthy margin improvement year-over-year primarily from the Columbia-class transition to production as well as some operational leveraging from higher volume. The implied margin improvement is a little lower than our prior guide due to less favorable program composition from the increased revenue output, some discrete, less efficient program execution as well as the lingering impact of inflation in pockets of the business. Overall, we expect both our ASC and IMS segments to contribute to our revenue growth and annual margin improvement. The adjusted diluted EPS range was increased to between $0.82 and $0.88 a share. Embedded in this range are lower expected tax rate of 20.5% but our fully diluted share count remains consistent with our prior guide at 268 million shares. Lastly, we are still targeting 80% free cash flow conversion of adjusted net earnings for the year. When we think about the likely cadence of the second half, consistent with prior years, it is our expectation that the fourth quarter will contribute strongly to the financial performance of the year. Obviously, a significant portion of the guidance increase is coming from the outperformance in the second quarter, the balance of the increase will manifest primarily in the fourth quarter. As a result, we are anticipating a small step-up in Q3 from Q2, translating to revenue around $775 million, with adjusted EBITDA margin in the low to mid-11% range. Our revised 2024 guidance does not change our three-year financial targets. We remain committed to driving mid-single-digit revenue growth annually, albeit from a higher revenue base while driving towards approximately 14% adjusted EBITDA margin by 2026. Let me wrap up with a few quick closing thoughts. We are pleased with our performance to-date and applaud 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: [Operator Instructions] Our first question comes from the line of Robert Stallard with Vertical Research. Your line is open. Robert Stallard: And I've got a couple for you. First of all, wondering if you could elaborate on these, what I think you call them efficiency issues in the IMS division in the quarter, and whether you're expecting them to continue going forward. Bill Lynn: Mike, why don't you go ahead? Mike Dippold: Sure. Yes. So, Rob, this is a program, it's a land integration program that we have within the IMS segment. It's a program that's a handful of years old, and we had anticipated kind of closing that out this year. We've had some delays that we've had in the program testing and completion of the programs which is extended it out a bit. And that's really what the headwind is. We believe that this is -- at the 10-yard line, we can see the light at the end of the tunnel here. It's just taking us a little longer and we'll -- more cost to complete than we had previously anticipated. So, I believe it's contained to '24. I don't think it will impact anything in the long term, but it is a headwind we're dealing with for the current year. Robert Stallard: Okay. Then as a follow-up, it sounds like the overall supply chain situation is getting better, but I was wondering if you could sort of contrast where it's got better than most perhaps and where there is still some work to do. Bill Lynn: Yes. As I said in the opening comments, Rob, we are seeing a better environment, both in terms of the supply chain and the market, itself, lead times have come down. Availabilities are up. We are not, though, back to or anywhere close really particularly in things like electronic components to the pre-2020, pre-COVID time-frame. The other factor in this is we are much more heavily managing the supply chain than we did in the past. Obviously, like everyone else, we've moved away from just-in-time delivery and are looking at resilience in the supply chain. And I think part of the improvement we saw this year was that proactive management. Robert Stallard: Okay. And then just a final one for me, one for Bill probably. Looking on the sort of funding outlook for the DoD and obviously, the political uncertainty we have later on this year, I was wondering what sort of risk DRS might have if the Ukrainian supplemental were to be zeroed? And what sort of offset perhaps there could be from European demand? Bill Lynn: Yes. I mean, I think Rob, overall, I think the change in administration, either to Harris or Trump led, is going to have a modest impact on the defense budget because the threat they're dealing with is the same. The pacing threat is still China and the Pacific. The immediate threat is still Putin in Ukraine. I do think you highlight the biggest difference between a Democratic and Republican White House would be how they've talked about Ukraine. I wouldn't -- I'd be a little surprised if you saw an abrupt ending of Ukraine spending. Most of it's backfill for U.S. equipment at this point rather than direct transfers Ukraine. So, I think you probably see less of that under a Republican White House than you would under a Democrat act. But I think it would be a gradual change. Operator: Our next question comes from the line of Seth Seifman with JPMorgan. Your line is open. Alex Ladd: Bill, Mike and Steve, this is actually Alex Ladd on for Seth today. First, kind of wanted to dig more into the change in the outlook that we saw for adjusted EBITDA margins. I think if you take the midpoint of the sales and adjusted EBITDA guidance, it implies a step down to 12.3% margins for the year. And I certainly get that there's a stronger sales outlook, but it seems like the release in kind of your prepared remarks earlier imply that there's a bit of less drop-through and a less favorable mix and some program execution headwinds are kind of driving this. So, I was wondering if you could kind of provide more color on this. I'd assume, given the margin improvement that you're expecting from Columbia in the second half, it's not related to that, but maybe if you could kind of highlight more specifically what type of programs we should be driving that? Bill Lynn: Yes. Let me open and then turn to Mike for some more detail. You're right. We're now projecting about an 80-basis point improvement year-over-year from '23 to '24. That's still a substantial improvement. It is strongly driven by the Columbia program, and that -- the contract transition is each year, we get a better contract mix with better profit margins, and that continues to happen. The headwinds that we identified are the program -- the surveillance program that we're closing out this year more slowly than we had expected. In addition, the revenue increase, the mix of the revenue increase is towards the lower end of our margin portfolio. So, there's a mix issue. And then, we are still seeing some pockets of inflation. It's still about 1/3 of our contracts are priced under over inflation assumptions. And so, we're still carrying some of that. We expect that -- this to be the last year of that. Mike, why don't you add... Mike Dippold: I think you covered it pretty well. I'll just answer the latter part of your question, which was on the kind of H2 outlook. So, we do expect to see a little tick up in the profitability in the second half to drive us to the guide range that we just put out, and that's going to be driven by the Columbia and as Bill mentioned, as we start to execute on the later shift sets, they will come with a higher margin and you're going to see even an in-year shift as we execute that program in the second half of the year. Alex Ladd: Great. That's helpful. And then maybe as a follow-up. Obviously, sales growth was pretty strong in the first half at about 20%. I appreciate the sales guide being up more towards the double digits. And I think you also pointed to Q3 being up a little bit year-over-year. So that kind of implies a pretty decent decline in the fourth quarter. Just thinking about the Company having a book-to-bill above one, the growth you guys are seeing in the backlog and the general strength we're seeing in the demand environment, it seems like there could be some opportunity for upside. So curious, if you can kind of level set us on this and how we should think about that progression maybe in Q4 a little bit more, too. Bill Lynn: Yes. I think the one factor you missed there, Alex, is the improved linearity that we're experiencing this year. This has been a drive we've had. So, when you're looking at year-over-year comps, the easier ones are in the front end of the year and the tougher ones are in the back end because of the math of the increased linearity of '24 versus '23. It is still driving to that 9% to 12% year-over-year increase, which we do think is a strong year. Operator: Our next question comes from the line of Andre Madrid with BTIG. Your line is open. Andre Madrid: I wanted to start off talking a bit more about the South Carolina facility. I mean have you guys already started thinking -- I mean when you look more broadly just at the naval supply chain, skilled labor has been really hard to come by. You see this across some of your SMID-cap peers as well. I mean, have you guys started to consider what recruiting will look like for this eventual facility once it's actually rolled out? Bill Lynn: Yes. We have. And in fact, the placement in South Carolina was intentional in that we think we have a strong pool of potential employees there. And importantly, it's out of the catchment area of the two big yards, the two nuclear yards, Newport News and Electric Boat. In terms of broadening the submarine industrial base, that is one of the things we wanted to do. The Navy is supportive of this is to broaden the geography of that submarine industrial base. So, we think we have a strong pool of employees, and we are starting -- we've obviously broken ground, and we're about, I think, about 1/4 of the way through the build cycle for Charleston. And as we ramp up, we'll -- and we get closer, we'll start even stronger recruiting efforts to bring in a talented workforce. Andre Madrid: Understood. Understood. And if I could follow that up still on the naval front. I mean when you look at Columbia-class, the ramp there is pretty well underway. I mean what other opportunities for power and propulsion do you think are available moving forward? I know DDG(X) was supposed to see supplier down selection earlier this year, but I think that got pushed out. Is there any other color there? Bill Lynn: Yes. I mean I think the -- Andre, the other think over kind of the mid to long term, I think of three buckets of opportunities for DRS in the propulsion area. One is DDG(X) you mentioned, but even more broadly, other classes of ships, DDG(X) and SSN(X) are the two most prominent. We do think there's a very strong case to put the electric power technology on those new classes of ships, both because operationally, it's quieter, which is important in a war fighting sense, it is cheaper in terms of the operating cost because of the lower fuel costs. And probably most importantly, the power demands of ships going forward are going to increase by several multiples, and it will be very difficult. And that's driven by not just the propulsion system, but by the sensor suites, which are taking increasing amounts of power. And ultimately, when you're looking at 30- to 50-year lives for these ships, you're looking at directed energy being part of the equation and the power requirements for directed energy is substantial. All that drives you towards electric power as the choice here on power propulsion. So, we think that there's a strong case in the mid- to long term for those. The second basket is international opportunities. We've talked about the Korean one. No, we don't have a decision on that yet. But we do think that that's just the leading edge of international opportunities. International navies, just like the U.S. Navy, is looking strongly towards electric power. And then, the third basket of opportunities is for us to get increased content on existing programs as we look at expanding submarine industrial base and realigning the work between the yards who will be dedicated to producing more submarines faster and the supplier base, which will be looking to do more of the content on each submarine to allow that increase throughput. So, we think there's strong potential in this market area coming from those three baskets. Andre Madrid: That's very helpful color. If I could just squeeze in one more. What would some of that increased content look like? I mean are you able to break that down? Or is that a little too granular? Bill Lynn: It's probably a little too granular at this point because we're under negotiation that we've talked about the way we've set the Charleston facility up is that it's the initial phase is the business case is justified just based on the contracts we now have for Columbia that go all the way through the 2030s, that visibility gave us the business case to invest in greater efficiency and capacity to execute that work in a better way. But there's a second phase that we could bring work in a number of types into that facility with investment from the Navy in this case, to expand that submarine industrial base. But I can't really give you much specifics in terms of the exact content of that expansion. That's what we're discussing now with both the shipyards and the Navy. Operator: Next question comes from the line of Mariana Perez Mora with Bank of America. Your line is open. Mariana Perez Mora: So, you mentioned in the prepared remarks, a lot of developments to actually implement AI, quantum and cybersecurity to the edge. Could you please describe how are your investments there? How much of those are call it like customer R&D versus your own R&D? And which specific arenas you're seeing the opportunities for this? It's like the traditional Navy and Army, or you actually have a way to get into unmanned air or space? Bill Lynn: Yes. There's a lot there, Mariana. On the AI front, the focus of the investment is how do you bring better processing to the edge and then basically improve the capability of our sensors and by sensors, here, I mean, both our ground-based vehicle sensors as well as our space-based sensors. We use AI processing and you push it to the edge and that we think will improve performance. And the investment there is a mix of us, it's teaming with some commercial companies. As you know, a lot of the AI expertise lies on the commercial side of the industrial base, and we found some partners there. With quantum, our entry point into quantum is really through lasers. You need a photonics engine to be able to do quantum computing and sensing. And we have some of the best laser capability in the world at Daylight Solutions. And so, we've been doing some IRAD to develop that capability. And now, we're getting some co-investment from customers, and we're getting some initial orders and contracts that are starting to help finance. We're still in the early stage -- well, we're in the early stages of quantum but we're also in the early stages of our participation in quantum, but we think that photonics engine has enormous potential. Mariana Perez Mora: And the other one is about Columbia. In their earnings call, General Dynamics mentioned that they are seeing some progress in the shipyards. I'm curious if you're seeing something of that progress to spill over your work? Or -- and then what are the key milestones that we should be looking at as outsiders to see the progress towards production? Mike Dippold: Yes. I think the important thing for us to realize with DRS is that we did get the entirety of the contract led to us last year for all 12 ships as to maintain the continuous production. So, we're a little disconnected from any comments that GD makes there because we are executing on the existing stand-alone contract. We continue to progress well there. And I think maybe because of my financial seat, I think the indicator is going to be the continued margin expansion as you see that we're continuing to hit those milestones and execute effectively. Operator: Our next question comes from the line of Sam Struhsaker with Truist Securities. Your line is open. Samuel Struhsaker: I'm on for Mike Ciarmoli, this morning. I was wondering if you guys could maybe give a little bit more detail on the upper revision for revenue. Could you potentially break that kind of maybe if the drivers -- where the drivers are between the two segments, IMS and ACS. And then in addition to that, looking at the mild margin pressure for the year, how should we think about kind of the trajectory of margins in the second half? Bill Lynn: Mike, why don't you take that? Mike Dippold: Yes. So, let me start with the first half on the revenue side and on the top line side. We are seeing a pretty holistic demand push across both segments. So, we're feeling good about our backlog position and therefore, our ability to deliver revenue growth out of all segments. And I think you're going to see a similar trend as we end up -- that both segments will contribute fairly equally to the revenue growth for DRS for the year. On the margin side, I would also say that both segments are executing in a similar fashion in which they will both contribute to our margin expansion year-over-year. And that's kind of the expectation we walked into the year with, and it's still kind of what we're holding even with the higher revenue output. Samuel Struhsaker: Okay. That's great. And then -- so I guess it's just about one program really that you guys are seeing kind of some pressure on. Is there anywhere else that you're seeing any issues? Or is that really just kind of isolated to that one program? Mike Dippold: Yes. We're 85% firm fixed price. So, there's always some opportunities, there may be some risk. I think what we've done well as a management team is to make sure that we're identifying risk early, understanding the mitigation of those risks and maybe equally as important identifying opportunities. So, as we look forward, yes, we have some fixed price development efforts, but we also have an incredible balance between our risks and our opportunities. And that's really what underpins our confidence that we're going to be able to execute effectively and then deliver on our EBITDA margin commitments all the way through 2026. Samuel Struhsaker: Okay. Great. And then just one final follow-up, if I could. On the CapEx for the South Carolina facility, should we expect a pretty steady increase or ramp on that? Or is there kind of a peak and then ramp back down with that trajectory that we could think about? Mike Dippold: For the remainder of the year, I would expect to see kind of the CapEx commitments looking pretty similar to Q2 with a slight ramp up as we get into the latter Q3 and into Q4. So, I think you'd see a gradual step-up, and that's the expectation that we have in terms of the cadence of the execution of the South Carolina facility for the remainder of the year. Operator: Our next question comes from the line of Jon Tanwanteng with CJS Securities. Your line is open. Jon Tanwanteng: Great quarter and outlook. I was wondering if you could talk a little bit more about the long-term expectations for defense spending. Maybe a split between domestic and international and kind of ex the Ukraine supplementals, it seems like there's been a push to grow defense spending at the DoD at a higher percentage than it's been in the past, broadly, you're seeing that among Allied Nations as well. How does that factor into your long-term growth expectations, if it's any different from what you've presented at the Investors Day before? Bill Lynn: Thanks, Jon. I don't think it's different than what we presented at the Investor Day. But there, we did talk about that at this point, the international environment, broadly speaking, is growing faster than the U.S. defense budget. And we are seeing that in our revenue mix. We've doubled to about 10%, our international revenue over the last three or four years, and we're still on that trajectory of increase. We do think we'll see an increase this year in our international and projecting forward. So, we think that, that environment that you talked about where Europe is increasing and going for that, too, and now U.K. is talking about 2.5% of GDP. And similarly, in Asia, you're seeing strong increases in Australia and Japan. And that gives us, I think, opportunity to further increase the international content of our revenue base. Jon Tanwanteng: Okay. Great. Any updates on capital allocation and specifically M&A. We've seen some really attractive assets go for reasonable time multiples, and I'm wondering if that -- if you're getting a look at those deals or if you're seeing more opportunities? Bill Lynn: We have been seeing more opportunities. We've been quite active and diligent over the past six months. We don't have anything to announce, but we're we continue to see opportunities in the four core markets that our strategic framework and where we would want to do any kind of M&A. We continue to have the strict financial criteria, and we evaluate them against this. But as I said, we are seeing opportunities. We're prudent, but we do think we will be able to execute on an M&A strategy over the near to midterm. Jon Tanwanteng: Okay. And if I could squeeze one more in. Any update on just what your parent, Leonardo, is doing. They've been active in M&A markets as well. Bill Lynn: We can -- on our M&A, we have a shareholder agreement where we consult closely with them, and we're aligned in that -- there are 70% shareholders. So, any increase in value drops directly into their share price. So, we're aligned on what we're looking for, and we participate with them. Operator: Our next question comes from the line of Jan-Frans Engelbrecht with Baird. Your line is open. Jan-Frans Engelbrecht: I just had a question on force protection, clearly seeing significant demand tailwinds, especially -- I would imagine in the Middle East. I was wondering if you could just highlight the 2024 growth outlook for that specific end market? And if there's any milestones or programs that we should look out for late in 2024 heading into 2025 in force protection specifically? Bill Lynn: Yes. No, I think you've got the underlying market dynamics, right? The conflict in Ukraine and Israel have highlighted the importance of organic force protection that we return to a world where there are air threats and that -- those air threats have been exacerbated by the advent of drone technology, which extends even to the lower end of military capabilities. They're still able to put drone threats in the year. That all is made our decision to invest in the Army short-range air defense, the Counter-UAS, the active protection. We're seeing growth in all of those. I think we mentioned it on an earlier call, but the Army has doubled the force structure that they've -- this year that they dedicated to short-range air defense. They got -- went from four to nine battalions, that's even as they shrunk the force structure. So, they have fewer assets, but they're voting a higher proportion to the mission of short-range air defense. And we are also starting to see international demand. We were able, I think, to enable -- help that demand by developing a single vehicle solution for the Counter-UAS, which makes it more operationally efficient and lowers the price point, make it more competitive in the international markets. So, I mean, overall, I think in this area, the trends are very positive. Jan-Frans Engelbrecht: That's really helpful. And just a quick follow-up, I guess, also sort of high level, but we've seen this growing trend or call, I guess, from the industry for the need for interoperability between the U.S. NATO Allied Nations in terms of weapon platforms. Is there any opportunity that you guys are targeting? I know it's early days, but maybe I would think top of mind would be sensors or anything like that, anything that you can comment maybe on the longer term there? Bill Lynn: Yes. I mean frankly, that's always been there. I mean, NATO Alliance is -- we just celebrated 75th anniversary. So, the -- and then we have close alliances in Asia as well. So, that's always been there. I think your right, it's been reemphasized with some of the conflicts we face and with the threat of China. Where will we see -- yes, sensing is one area where we see people. I would say even more, you see it on computing and communications. And we do the battlefield compute for the U.S. military, and we do see international opportunities for that. We already sell it to the U.K. it is part of some of the foreign military sales of vehicles to Eastern Europe. So, there's a dynamic there that basically, if you're -- particularly if you're buying U.S.-sourced vehicles, there's certainly an incentive to put the same network computing. One because it's integral to the vehicle, but two, that does give you that interoperability that you suggested. Operator: Our next question comes from the line of Kristine Liwag with Morgan Stanley. Your line is open. Unidentified Analyst: This is Justin on for Kristine. I think a lot have been covered already, but maybe just a quick one on ASC. I think last quarter, you mentioned mix was shifting from development to production over the course of the year. I guess, how much of that shift manifested here in 2Q results? And still fair expectations for further tilt towards production type work in the back half for the segment? Mike Dippold: Yes, I think you're spot on with your assessment. We are starting to see some of those development programs move into production, and the production efficiencies is improving on those programs, which has certainly helped in both the revenue growth as well as the margin. So, I would expect to see that trend continue into the second half of the year. Operator: Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Steve for closing remarks. Steve Vather: Thank you all for your time this morning and your interest in the Company. Of course, if you have follow-up questions, please don't hesitate to call or e-mail me. We look forward to speaking with all of you again soon. Enjoy the rest of your day. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.DRS Ratings Summary
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Bank of America Downgrades Leonardo DRS to Neutral, Shares Drop 5%
Leonardo DRS (NASDAQ:DRS) shares fell more than 5% intra-day today after Bank of America downgraded the company to Neutral, citing that the stock's current valuation already reflects much of its potential upside.
While DRS has delivered strong performance, including an 82% year-over-year growth in backlog and securing its largest recompete contract, BofA believes there are better near-term opportunities in the market, particularly in companies with a stronger focus on capitalizing on increased global defense spending and Navy-centric initiatives.
BofA acknowledged that DRS’ new South Carolina facility, which will support the Columbia-class submarine program, is expected to enhance profitability and efficiency, but the benefits are unlikely to be realized until operations begin in 2026.
Until significant progress is made in the Columbia-class program or growth materializes from other defense contracts, BofA sees limited room for further stock appreciation at the current valuation.
The analysts highlighted the AUKUS submarine partnership between Australia, the US, and the UK as a long-term growth opportunity for DRS, but BofA believes the current stock price already factors in much of this potential.
Leonardo DRS, Inc. Showcases Strong Q1 2024 Financial Performance
Leonardo DRS, Inc. Kicks Off 2024 with Strong Financial Performance
Leonardo DRS, Inc. (NASDAQ:DRS) kicked off the first quarter of 2024 on a high note, as detailed in their recent earnings conference call. The company, under the leadership of Chairman & CEO Bill Lynn and CFO Mike Dippold, reported a remarkable 21% year-over-year revenue growth, which was entirely organic. This growth is a testament to the company's strong market positioning and its ability to meet the evolving needs of its customers. The financial metrics shared, including a 1.2 book-to-bill ratio and bookings worth $815 million, underscore the company's robust performance and the high demand for its offerings. Furthermore, the record backlog of $7.8 billion, an 84% increase from the previous year, along with a 43% increase in adjusted EBITDA, highlights the company's solid foundation for sustained growth.
On the strategic front, Leonardo DRS's commitment to innovation and technology differentiation is evident in its significant investments in research and development (R&D) and capital expenditures (CapEx). These investments are crucial for maintaining the company's competitive edge in the defense technology sector. The company's diverse and platform-agnostic portfolio, which aligns well with customer priorities, has played a pivotal role in achieving these impressive results. This strategic focus not only enhances Leonardo DRS's market positioning but also contributes to its strong financial performance.
Operationally, Leonardo DRS reported strong demand across its portfolio, especially in areas such as advanced infrared sensing, tactical radars, and air defense systems, with notable interest from international customers. The domestic market also showed robust demand, particularly for naval network computing and electric power and propulsion technologies. These operational highlights reflect the company's ability to cater to a wide range of defense technology needs, further solidifying its market position and growth prospects.
Despite the company's strong performance and optimistic future outlook, DRS's stock price experienced a decrease of approximately 4.65%, trading at $20.52. This decline might seem counterintuitive given the company's strong Q1 achievements and strategic advancements. However, stock prices can be influenced by a variety of factors beyond a company's immediate performance, including market sentiment and broader economic conditions. The trading session saw fluctuations between $19.88 and $21.225, indicating some volatility in the stock's price. Over the past year, DRS's stock has seen highs and lows, ranging from $24 to $14.12, with a current market capitalization of around $5.39 billion. This volatility in stock price, despite the company's solid performance, highlights the complex nature of stock markets and the importance of long-term investment perspectives.
In conclusion, Leonardo DRS, Inc. has demonstrated a strong start to 2024, with significant financial achievements and strategic advancements that position it well for continued growth in the defense technology sector. The company's focus on innovation, technology differentiation, and aligning with customer priorities are key drivers of its success. Despite the recent dip in stock price, the company's solid fundamentals and optimistic future outlook suggest a promising path ahead.
