Following a $3 billion award last fall to provide the integrated electric propulsion systems for the Navy’s Columbia-class ballistic missile submarines, Leonardo DRS [DRS] on Tuesday said it will invest $120 million to build a new manufacturing, integration, and test facility to support the nuclear submarine program and potentially other submarine and ship work in the future.
Work on the “state-of-the-art” 140,000 square-foot purpose-built facility in Charleston, S.C., will be fully funded by DRS and will take three years to complete with initial occupancy slated for 2026, the company said.
For the first time in several decades, the Navy represents the largest customer for Leonardo DRS, making up nearly 40 percent of sales, driven by the fast-growing electric power and propulsion business, and network computing, Bill Lynn, the company’s chairman and CEO, said during the fourth quarter earnings call on Tuesday.
“There is a clear long-term, fast-growing addressable opportunity set for DRS,” Lynn said. “Given our customers’ need for next-generation capabilities to overmatch potential near-peer adversaries, alternative technologies to electric power 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.”
Later in the call, Lynn described any integrated electric propulsion work on platforms beyond the Columbia-class submarines as “upside to the additional investment.”
Acquisitions remain part of Leonardo DRS’s game plan but, for now, internal investments are more attractive for long-term value, Mike Dippold, the company’s chief financial officer, said on the investor call.
The company’s investment in the new facility could also lay the ground work for future government investment to further expand capacity and throughput, particularly in the submarine industrial base, the Leonard DRS executives said.
“We’re in active discussions with the Navy and the [ship]yards as to how you’d align work between the yards and the suppliers to drive that increased throughput, and the facility is a key part of that conversation,” Lynn said.
The South Carolina facility will integrate sub-assembly work done elsewhere and provide direct access to local waterways and the Atlantic Ocean to transport the larger assemblies to shipyard customers. Currently, Leonard DRS makes solid-state drives in Wisconsin, electric motors in Massachusetts, control systems in Connecticut, and cooling equipment in Missouri.
Leonardo DRS is forecasting higher operating margin on its Columbia work this year and, in the future, and the South Carolina facility is expected to support that expansion, the officials said.
General Dynamics [GD] is the prime contractor for the 12-boat Columbia submarine program. HII [HII] is the principal subcontractor, responsible for the bow and stern sections.
Lynn said that Leonardo DRS is finishing work on the first propulsion shipset, is working on the second shipset, and beginning production of the third.
Leonardo DRS said it partnered with South Carolina and local governments, regional economic organizations, and the private sector to bring the facility to Charleston.
Net income in the fourth quarter rose 14 percent to $74 million, 28 cents earnings per share (EPS), from $65 million (28 cents EPS) a year ago. Per share earnings remained level due to higher share count stemming from the company’s acquisition in November 2022 of RADA, which was an all-stock deal.
Excluding income taxes, interest expenses, acquisition costs, restructuring costs and other one-time non-operational events, adjusted earnings of 31 cents EPS in the quarter topped consensus expectations by a penny.
Sales in the quarter increased 13 percent to $926 million from $820 million a year ago, driven by work on tactical radars and communications, lasers, electronic warfare, Naval network computing, and electric power and propulsion programs. Organic growth was 11 percent.
Overall, in 2023 sales increased 5 percent to $2.8 billion, up 7 percent organically after accounting for prior divestitures. International business made up 10 percent of sales, double the percentage five years ago.
Net income fell to $168 million (64 cents EPS) from $405 million ($1.88 EPS) in 2022, which benefitted from divestiture proceeds. Adjusted earnings for the year were 73 cents EPS.
In 2024, Leonardo DRS is forecasting organic growth of 4 to 7 percent with sales pegged to be between $2.9 billion and $3 billion. Adjusted per share earnings are expected to be between 74 cents and 82 cents despite continued share count dilution from the RADA deal.
Leonardo DRS bagged $3.5 billion in orders in 2023 and backlog was a record $7.8 billion, up 82 percent from 2022. Free cash flow in 2023 was $154 million.