Leonardo DRS [DRS] on Wednesday reported strong earnings in its second quarter due to benefit from a legal reversal and a tax benefit from research and development credits while sales were flat from a year ago.
Net income rose 40 percent to $35 million, 13 cents earnings per share (EPS), from $25 million (12 cents EPS) a year ago, beating consensus estimates by a nickel per share. Sales of $628 million were up $1 million from a year ago.
The bottom-line benefited from a $10 million gain on a reversal of a legal liability charge taken years ago related to an environmental matter and an $8 million provision related to R&D tax credits.
At the operating level, an increase in income at the Integrated Mission Systems (IMS) segment was more than offset by a steep decline at the Advanced Sensing and Computing (ASC) segment. IMS benefited from higher sales on naval power and propulsion programs, particularly for work on the Navy’s Columbia-class ballistic missile nuclear submarine.
The ASC segment had lower sales due to a divestiture and supply chain challenges and operating income fell on increased R&D investments and incremental public company costs. Leonard DRS went public in November 22.
Orders in the quarter were a healthy $698 million for a book-to-bill ratio of 1.1 times sales, and backlog of $4.4 billion, a record, was up 42 percent from $3.1 billion a year ago. Free cash was a $10 million outflow.
Leonardo DRS increased its sales outlook for 2023 by $25 million on the low end of the prior guidance range to between $2.725 billion and $2.8 billion. The company narrowed its adjusted operating income guidance to between $318 million and $328 million from the prior outlook of between $315 million and $330 million and adjusted per share results are now forecast between 66 and 69 cents EPS versus the previous guidance of between 64 and 69 cents.
The guidance assumes that the federal government will be operating under a continuing resolution through the end of the year, Bill Lynn, chairman and CEO of Leonardo DRS, said on the company’s earnings call.
Lynn disclosed on the call two recent “strategic wins to help develop space payloads for civilian” low Earth orbit. He said the wins, which the company has released and are still in contract negotiations, “are important strategic market footholds.” Leonardo DRS also submitted several proposals that would further expand its civilian and defense space business, he said.
“We are encouraged by our continuing traction in this market as we expand our presence and build on our reputation as a go to provider for differentiated sensing capabilities optimized for size, weight and power,” he said.
Supply chain, inflation and labor challenges remain but to varying degrees, Lynn said. The supply chain continues to be the “biggest challenge” and the company does not expect a “material improvement” the rest of this year and “potential improvement in 2024 will likely be gradual and incremental,” he said. There is “greater stability” and lead times have not increased but also have not contracted, he said.
Specifically, there is more stability in microelectronics, which were more challenging in 2022, but issues persist in electro-mechanical components, castings, and “contract manufacturing generally,” Lynn said.
Inflation has moderated and prices are stabilizing for material and the company is “cautiously optimistic that inflation will become less of a headwind next year,” he said.
Employee retention rates are improving, which Lynn said “is helping the pacing of our net hiring.” He added that there “are still some pockets where hiring remains challenging.”