Leonardo DRS, Inc. Q4 FY2024 earnings call

Key Achievements in 2024 - Delivered record bookings, mid-teens organic revenue growth, healthy adjusted EBITDA margin expansion, and steady free cash flow generation. - Over $4 billion of contract awards secured throughout the year, with a 1.3 book-to-bill ratio for both Q4 and the year. - Increased investment in internal research and development and capital expenditures by approximately 25% year over year. ### Business Segments - Advanced Sensing: Expanded into market adjacencies, received over-the-horizon radar contracts, and expanded presence in missile domain. - Tactical Radar: Enjoyed exceptional demand for counter UAS, short-range air defense, etc. - Network Computing: Progressed next-generation architecture and began work on Army mortar fire control contract. - Electric Power and Propulsion: Secured over $45 million of submarine industrial base funding, with new facility in Charleston, SC on track. - Force Protection: Key enabler of directed energy counter UAS system, with international demand for counter UAS and short-range air defense solutions. ### Management Changes - Appointed Bill Guyan as Senior Vice President of Business leading international expansion, and promoted Denny Brumley to succeed him as Senior Vice President and General Manager of Land Electronics. ### Capital Deployment - Declared a cash dividend of $0.09 per share, payable March 27, 2025. - Authorized a $75 million share buyback program over the next two years to mitigate dilutive impact of employee stock plan.

In the fourth quarter, revenue was $981 million, up 6% year over year. For the full year 2024, revenue was $3.2 billion, a 14% organic growth. The Advanced Sensing and Computing (ASC) segment saw 9% revenue growth in the fourth quarter and 16% for the full year. The Integrated Mission Systems (IMS) segment had a slight 1% revenue decrease in Q4 but an 11% full-year growth. Adjusted EBITDA was $148 million in Q4 and $400 million for the full year, with year-over-year growth of 13% and 23% respectively. ASC segment adjusted EBITDA increased 9% in Q4 and 22% for the full year, while IMS segment adjusted EBITDA was up 24% in Q4 and 27% for the full year, with margin expansions of respective basis points.

Revenue - Expect revenue to range between $3.425 and $3.525 billion in 2025, implying 6% to 9% organic growth. ### Adjusted EBITDA - Anticipate adjusted EBITDA between $435 million and $455 million in 2025, with margin improvement of 30 to 50 basis points. ### Adjusted Diluted EPS - Initiate a range of $1.02 to $1.08 per share. ### Capital Expenditures - Anticipate CapEx to trend around 4% of revenue in 2025. ### Q1 Outlook - Expect revenue around $725 million in Q1 2025 with mid-10% adjusted EBITDA margins.

• Global threat environment remains elevated, applying upward pressure on defense investment. - Supply chain risks, including potential impact of raw material export restrictions (e.g., germanium). - Government budget changes and uncertainty in defense appropriations. - Volatility in currency exchange rates affecting financial results.

Q: Have you seen any impact as yet from the Doge effort? Or is everything at this stage still being focused on the Department of Defense and has yet to flow down?

A: No, Doge hasn't reached the Department of Defense; focus is on the new administration's strategic priorities and 2026 budget bill.

Q: There were a couple of one-off items in the fourth quarter. Could you elaborate on what those were and if you've got any further adjustments anticipated in your 2025 guidance?

A: The only real change was attributed to a currency shift affecting balance sheet items in the adjusted EBITDA reconciliation; no material further adjustments anticipated at this time.

Q: What other areas, whether you want to talk about a program or a product area with force protection, what other areas are kind of helpful in the margin progression when we think about it outside of Columbia?

A: Some of the smaller sensing and force protection programs moving from development to production, moving to lower risk and higher margin profile, contributing to margin improvement.

Q: What is the opportunity that you think about when you in that over-the-horizon radar area?

A: Moving up the food chain from components to prime contracts, and potential with the new administration's missile defense priorities.

Q: Is any of the Navy's latest renderings of what DDGX looks like being factored into the 2025 outlook? And how do things stand on KDDX?

A: DDGX's electric propulsion option is being considered, but 2025 is early; KDDX has ongoing engagement with Korean customer but no decision yet.

Q: Are there any other materials that we might have to worry about in terms of sourcing and access besides germanium?

A: Nothing else is jumping out as overly concerning currently, with supply chain predictability and availability remaining strong.

Q: How are you thinking about this 8% reallocation and what could it be reallocated to and how is that impacting how you're thinking about running your business?

A: Assessing where the 8% is coming from and going, with opportunities in missile defense, counter UAS, space, and Indo-Pak region; no single decision to fundamentally change direction.

Q: What implications does it have for you if we end up in a continuing resolution for fiscal 2025?

A: More of a 2026 issue, as about 75% of 2025 revenue is already in backlog.

Q: What impact do you think the Ukraine and Russia situation could have on foreign military sales?

A: Ukraine revenue is low and expected to taper off; Europeans likely to look more to US for urgent defense solutions like counter UAS systems.

Q: Could you talk about the opportunity of the investment by the Navy into Charleston and the market size of steam turbines and other advanced components outside?

A: Charleston facility investment supports Columbia program and submarine industrial base expansion, with long-term opportunity to contribute significantly to revenue output.

Q: Could you break down again the components of getting to that 14% in 2026, especially with the stepped-up R&D intensity?

A: Margin expansion on back of Columbia's execution, with revenue growth outpacing initial expectations, and IRAD investment to support agility and rapid prototyping, contributing to margin improvement.