Leonardo DRS [DRS] on Thursday reported strong operating results in its third quarter although net income tumbled due to two earlier divestitures.
Net income of $47 million, 18 cents earnings per share (EPS), dove 87 percent from $279 million ($1.33 EPS) a year ago. Excluding the impact from the sale of a business and a stake in a joint venture, adjusted earnings of $53 million (20 cents EPS) were 112 percent higher than the $25 million (12 cents EPS) a year ago, four cents a share ahead of analysts’ estimates.
Sales increased 11 percent to $703 million from $634 million a year ago with 10 percent of the gain organic.
The company’s two operating segments both posted top and bottom-line gains driven by work on naval propulsion and power business on the Columbia-class ballistic missile nuclear submarine and other programs, naval and ground network computing, and tactical communications programs.
After third quarter closed, Leonardo DRS said it received a contract worth more than $3 billion to provide the electric power and propulsion system on the remaining seven
Columbia-class vessels. The contract will help grow annual sales and operating margin going forward, Bill Lynn, the company’s chairman and CEO, said during an earnings call.
Lynn said the contract gives the Navy and shipyard “stability in terms of delivery and pricing” and Leonardo DRS gets 10 years of clarity that also flows to its suppliers, allowing the company to “get better pricing” and reduce risks as suppliers benefit as well.
An earlier contract allowed Leonardo DRS to scale up and test the electric propulsion system, which is new for the Navy, and now the company is building the production units, he said.
“It was a very thorough development program, five years, with an enormous amount of testing,” Lynn said. “And we’re feeling very good about the predictability of the production capacity. And we think that where this leads, is we’re going to be able to transfer this technology to new classes of ships, both foreign and domestic. And that’s really an enormous opportunity over the next several years.”
Supply chain challenges have stabilized although the areas of concern have shifted, Lynn said. There is more stability in the supply of microelectronics but castings remain a challenge and new concerns have arisen for specialty alloys and raw materials, he said. The company is working to minimize operational impacts, including buying and stockpiling supplies to meet sales and customer commitments through 2024, he added.
“Bottom line, the supply chain complexities that we have faced over the past few years and continue to face will keep our bookings to revenue conversion cycle elongated and our working capital above historical norms,” Lynn said.
Leonardo DRS tallied $1.1 billion in orders in the quarter, helping to lift backlog to a record $4.7 billion, up 52 percent from $3.1 billion a year ago. Free cash flow was $21 million.
Given year to date results, Leonardo adjusted its financial outlook for the year. Sales are forecast to be slightly higher but still between $2.7 billion and $2.8 billion. The outlook for adjusted earnings was narrowed to between $319 million and $325 million from the prior range of $318 million to $328 million. EPS guidance was raised to between 70 and 72 cents versus the prior range of 66 to 69 cents.