Leonardo DRS, Inc.

Moving to the budget and market environment, we are closely monitoring the progress of FY24 appropriations, and at this time, we are cautiously optimistic on its timely passage. The need to deter and counter growing and more sophisticated threats across increasingly connected and contested domains is prompting our customers to accelerate investment and to modernize capabilities. Furthermore, the dynamic global threat environment is palpable, and it is also spurring increased defense spending by our allies. Our portfolio is closely aligned to these well-funded priorities, and this is evidence in our growing backlog and multiple years of robust bookings for our advanced technologies in sensing, network computing, force protection, and electric power and propulsion. The confidence we have in our ability to drive long-term growth is backstopped by strong, continued customer demand in our healthy opportunity pipeline. Shifting now to operational highlights, I'm pleased with the broad strength evident across our business. Throughout the year, we've continued to expand our well-fortified market positions, secured new business wins, and sharpened our differentiation through R&D investments. Our long-term strategy to drive a growing, resilient, and diverse business is reflected in our evolving mix. First, growth in our electric power and propulsion and naval network computing businesses drove the Navy to become our largest end customer, which is a first for us in several decades. The Navy now represents nearly 40% of revenue today and an even greater percentage of our total backlog given the recent Columbia-class contracts secured in the last 18 months. The importance of the Navy and the long-term growth opportunity we see with this customer is driving capital investment in the form of a new facility in South Carolina. This new investment is approximately $120 million over the next three years with the goal of initial occupancy by 2026. There is a clear long-term, fast-growing, addressable opportunity set for DRS, given our customers' need for next-generation capabilities to overmatch potential near-peer adversaries. Alternative technologies to electric power and propulsion are inadequate in their ability to scale to the power requirements needed for the future. We fundamentally believe that it is a question of when, not if, This technology is adopted for next-generation destroyers as well as other platforms. Secondly, strong global demand from allies for our ground network computing and advanced sensing technologies resulted in a meaningful increase in international revenues. Our international customer exposure grew 10% of revenue for the year. While customer demand was most evident for technologies residing in our ASC segment, we believe there are clear international growth opportunities across our business. In addition to a shift in customer mix, we are continuing to see new and growing addressable missions emerge for our technologies. Our uncooled infrared sensors, tactical radars, high frequency and software, defined radios stand out in particular. Some of these increasing missions include applications in signals intelligence, secure communications, missiles, and also both ground and airborne force protection. I'm pleased to report that we also continued to make progress in the space market through wins on next-generation civilian weather satellites in 2023. That said, in the missile defense arena, we saw a solid customer interest in our technology, but that interest has been slower to translate into contract awards. We are maintaining a long-term focus on growing our share in the space defense market. Earlier, I mentioned that one of the drivers for increased G&A costs in 2023 was an uptick in internal R&D investment. As you know, this was a conscious decision to invest in expanding our differentiation and propelling future growth. Our internal R&D as a percentage of revenue approached 3% in 2023, which is consistent with peers operating comparable business models. On prior calls, I have detailed some of our investment initiatives, including integrated sensing, cyber hardened and assured PNT capabilities for network computing, increased mobility for counter UAF solutions, among other technology advancements. Today, I wanted to highlight that throughout the year, we debuted three brand new radars for new applications in force protection and longer-range air defense. Overall, our tactical radar portfolio has been incredibly well received as we continue to generate strong customer demand across active protection, air defense, and force protection markets. Secondly, we recently unveiled a new family of lasers that cover a wider spectrum of light. These new lasers are critical to helping solve the foundational problems in advancing defense and commercial quantum computing and sensing challenges. Shifting to program execution, we made significant progress in 2023 to advance our development programs into sustainable production efforts across the portfolio. The team has done a remarkable job in improving execution. We will maintain, though, a consistent focus on this front to maximize outcomes for our customers and our shareholders alike. Before I turn the call over to Mike, let me wrap up my remarks by underscoring that our strategy is creating value for our customers, employees, and shareholders. I'm proud of what we have achieved. Our focus remains on continuing to execute our strategy to accelerate growth, drive margin expansion, and generate consistent cash flow.

mike over to you to review our financial performance and 2024 outlook thanks bill and thank you to the entire team for their remarkable efforts throughout the year to deliver the excellent financial results for 2023. revenue was 926 million for the fourth quarter accelerating total growth to 13 and 11 on an organic basis for the year revenue was 2.8 billion representing a 5% total growth and 7% organic growth from 2022. We saw broad-based demand drive growth in both Q4 and 2023 full year. Our advanced sensing and computing segment revenue growth for the year was driven by strength in naval network computing and multi-mission advanced sensing programs, particularly leveraging our tactical radars, lasers, tactical communications, and electronic warfare technology. Our integrated emission system segment revenues benefited from strong contribution from electric power and propulsion programs to drive growth for the year. Now to adjusted EBITDA. Adjusted EBITDA was $131 million for the fourth quarter and $324 million for the full year, representing year-over-year growth of 9% and 2% respectively. Resulting margins were 14.1% for the fourth quarter and 11.5% for the full year, a decline of 60 and 30 basis points respectively. Higher volume at the top line resulted in adjusted EBITDA growth, but we faced headwinds to adjusted EBITDA margin, primarily from higher G&A due to greater investments in internal R&D and an uptick in public company costs. Moving to the segment trends, ASC segment adjusted EBITDA increased and margin expanded for the year, mostly on better volume and better mix. IMS segment adjusted EBITDA and margin were down due to unfavorable mix and higher G&A spend for the year. These headwinds mask the strong execution on our Columbia class program, which is progressing favorably towards higher margins in 2024 and beyond. Now to the bottom line metrics. Solid operational execution translated to net earnings growth of 14% to $74 million for the fourth quarter, but declined for the full year. As a reminder, the compare for the full year net earnings is skewed given the sizable net gain on the divestitures recorded in 2022. Adjusted net earnings were $83 million for the fourth quarter, and $194 million for the full year, demonstrating a growth of 2% and 8% versus the prior year. The compares for both diluted EPS and adjusted diluted EPS in the quarter and full year continue to be impacted by the diluted share count growth from the all stock combination with RADA. Exiting the year, our fully diluted share count should have more stability, making the comparisons moving forward hopefully cleaner. Moving to free cash flow. Consistent with historical trends, free cash flow exhibited year-end strength and was $494 million in Q4, reflecting robust collection and benefit from favorable timing that accelerated cash into the quarter. As a result, full-year free cash flow was significantly ahead of our expectations at $159 million. We continue to strengthen our balance sheet and have expanded capacity for value-enhancing capital deployment. As discussed, our capital deployment strategy is focused on both organic and inorganic growth. While we continue to evaluate bolt-on M&A opportunities that fit our strategy and show potential of being value-added to our business, we remain disciplined and to date have not found compelling opportunities to transact on. Organic investments in the near term are presenting greater long-term value to our business. As Bill briefly mentioned earlier, we are embarking on building a new coastal facility in South Carolina to support our fast-growing electric power propulsion business. This investment will increase our capital expenditures over the next few years, but even with that uptick in capex, we expect to maintain solid free cash flow conversion. We have rigorously evaluated the merits of this capital project and have determined there is an overwhelming reason to proceed and have a clear path to delivering returns in excess of our return on invested capital targets over the long term. This organic investment has not changed our active interest in pursuing M&A targets aligned to our strategic and financial criteria. Now to our 2024 guidance. We expect to capitalize on the momentum built throughout 2023 into strong organic growth and margin expansion this year. We are initiating a revenue range between $2.925 billion and $3.025 billion, representing a 4% to 7% growth, all of which is organic. Assumed in our guidance is a reasonable and timely passage of the FY 2024 appropriations. We expect the quarterly cadence to be less pronounced compared to 2023, but we are still anticipating the same general trend where revenues will build throughout the year with comparable statements on average to what we saw in years prior to 2023. Lastly, for revenue, I would condition you to expect Q1 revenue just shy of $650 million. Moving to adjusted EBITDA, we are expecting between $365 and $390 million for 2024. The implied year-over-year margin improvement is in the range of 100 to 140 basis points. The transition of our development programs to production, namely Columbia class but others as well, are the primary drivers for this significant margin expansion. Additionally, we expect stability in our G&A costs as a percentage of revenue and an easing of the inflation impacts on our portfolio. Finally, as you may recall, we period expense our G&A, thus greater revenue volume typically drops to adjusted EBITDA. Given my comments on our quarterly revenue trajectory, you should calibrate your models accordingly. Now to adjusted diluted EPS. We are initiating a range between $0.74 and $0.82 a share. Embedded in this guidance is the tax rate of 22.5%. We are assuming a fully diluted share count of $268 million. And I would also note that we expect depreciation to trend towards 2.4% of revenue. Lastly, with respect to free cash flow conversion, We are adjusting the conversion from our previously communicated target of 90% to approximately 80% for the year. This adjustment is entirely due to the first-year costs associated with the new coastal facility project. Our ability to generate strong cash flow remains unchanged. Separately, while there is some optimism on the modification of Section 174 provisions, we believe it premature to incorporate this into our outlook. Let me wrap up with a couple of thoughts before we move to questions. Our 2023 results and business momentum are evident and speak for themselves. While the macro environment remains dynamic, there is consistency in our customer demand, our backlog is growing, and we have demonstrated a clear ability to execute. As a team, we are focused on leveraging our strong market position to drive long-term value for our customers, for our shareholders, and employees. We look forward to seeing many of you in a few weeks at our upcoming Investor Day in New York on March 14. With that, we are ready to take your questions.

Thank you. At this time, we will begin the question and answer session. To ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by. We compile the Q&A roster. Our first question comes from the line of Robert Stallard with Vertical Research. Please proceed with your question.