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Leonardo DRS, Inc. (DRS)·Q2 2025 Earnings Summary

Executive Summary

  • Q2 2025 delivered solid top-line and profit growth: revenue $829M (+10% YoY), adjusted EBITDA $96M (+17% YoY), adjusted diluted EPS $0.23 (+28% YoY); backlog $8.6B (+9% YoY). Bookings were $853M with a 1.0x book-to-bill .
  • Results were modestly above Street: revenue beat by ~$1.5M and adjusted EPS beat by ~$0.02; adjusted EBITDA also ahead vs consensus. The company raised FY25 guidance (revenue to $3.525–$3.600B; adjusted EPS to $1.06–$1.11) and narrowed EBITDA ($437–$453M) .
  • Strength continued in electric power & propulsion (Columbia Class) driving margin expansion at IMS; ASC grew revenue but saw margin headwinds from elevated germanium costs and higher IRAD .
  • Near-term catalysts: Q3 framework implies ~$925M revenue and mid-12% adjusted EBITDA margin; medium-term tailwinds from defense reconciliation funding (Golden Dome, shipbuilding), submarine industrial-base initiatives (steam turbine generator second source) .

What Went Well and What Went Wrong

What Went Well

  • Electric power & propulsion momentum: “This part of DRS continues to perform exceptionally well, serving as a consistent financial tailwind propelling both top line growth and margin expansion” .
  • Guidance raised across key metrics: FY25 revenue, adjusted EPS increased; EBITDA range tightened, tax rate maintained, diluted WASO reduced .
  • Strategic positioning for Golden Dome, Counter-UAS, naval computing, and space sensing: “Our portfolio… is highly relevant and well positioned to support this demand” . IcePiercer cooling gaining traction in shipboard computing .

What Went Wrong

  • ASC margin pressures from germanium and higher IRAD: ASC adjusted EBITDA margin down 50 bps YoY in Q2; management cited “rising raw material costs, namely germanium” and elevated internal R&D .
  • Free cash flow usage sequentially improved but remained negative in Q2 (-$56M) due to working capital investment to fund growth and capex for the South Carolina facility .
  • Book-to-bill normalized to 1.0x in Q2 from 1.2x in Q1, reflecting timing; management still expects >1.0x for FY25 .

Financial Results

Consolidated performance (oldest → newest)

MetricQ4 2024Q1 2025Q2 2025
Revenue ($USD Millions)$981 $799 $829
GAAP Diluted EPS ($)$0.33 $0.19 $0.20
Adjusted Diluted EPS ($)$0.38 $0.20 $0.23
Adjusted EBITDA ($USD Millions)$148 $82 $96
Adjusted EBITDA Margin (%)15.1% 10.3% 11.6%
Operating Earnings ($USD Millions)$120 $59 $70
Diluted WASO (Millions)268.955 268.775 269.025

Segment breakdown (ASC and IMS)

ASC MetricQ4 2024Q1 2025Q2 2025
Revenues ($USD Millions)$660 $511 $542
Adjusted EBITDA ($USD Millions)$102 $42 $58
Adjusted EBITDA Margin (%)15.5% 8.2% 10.7%
IMS MetricQ4 2024Q1 2025Q2 2025
Revenues ($USD Millions)$326 $291 $290
Adjusted EBITDA ($USD Millions)$46 $40 $38
Adjusted EBITDA Margin (%)14.1% 13.7% 13.1%

KPIs and balance sheet

KPIQ4 2024Q1 2025Q2 2025
Bookings ($USD Millions)$1,270 $991 $853
Book-to-Bill (x)1.3x 1.2x 1.0x
Backlog ($USD Millions)$8,509 $8,612 $8,607
Free Cash Flow ($USD Millions)$416 ($170) ($56)
Cash & Equivalents ($USD Millions)$598 $380 $278
Credit Facility Borrowings ($USD Millions)$203 $200 $197
Dividend per Share ($)$0.09 (declared) $0.09 (paid/declared) $0.09 (paid/declared)

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Revenue ($USD Billions)FY 2025$3.425–$3.525 $3.525–$3.600 Raised
Adjusted EBITDA ($USD Millions)FY 2025$435–$455 $437–$453 Narrowed
Adjusted Diluted EPS ($)FY 2025$1.02–$1.08 $1.06–$1.11 Raised
Tax Rate (%)FY 202519.0% 19% Maintained
Diluted WASO (Millions)FY 2025270.0 269 Lowered
Q3 2025 FrameworkQ3 2025N/ARev ≈$925M; Adj EBITDA margin mid‑12%New quarterly color

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4’24 and Q1’25)Current Period (Q2’25)Trend
Electric power & propulsion (Columbia)Margin tailwind in Q4; broad IMS contribution in Q1 Continued margin expansion; core driver of IMS growth Strengthening
Germanium supply/pricingQ1 noted raw material price impact on ASC IR programs Availability/pricing headwind; mitigation via alternative sourcing, recycling; relief expected in 2026 Persistent headwind; mitigation underway
IR sensing adjacency to missilesQ4/Q1: strong sensing demand Delivered advanced IR content for NGSR interceptor; expanded opportunities Expanding
Counter‑UAS focusOngoing demand; bookings across force protection Rapid expansion across company; interagency task force; maritime MEP demo (Aug 12) Accelerating
Naval network computing/IcePiercerQ4/Q1 bookings; computing content IcePiercer traction for higher density shipboard computing Positive adoption
Submarine industrial baseN/A$50M funding for steam turbine generator test capacity; potential second source New opportunity
Tariffs/macroMonitoring indirect impacts Largely insulated; watch for retaliatory restrictions on critical minerals Manageable risk
IRAD intensityQ4/Q1 IRAD elevated in ASC IRAD up from ~2.8% to mid‑3s of sales; margin headwind near term Elevated with strategic focus
International/NATOBacklog/bookings support; global demand NATO targeting higher spend; international demand growth; Ukraine-driven tailwinds Improving medium-term outlook

Management Commentary

  • CEO: “Our portfolio is well aligned with national priorities… Golden Dome, Counter UAS, unmanned systems, shipbuilding… We expect to benefit as this funding is obligated over the coming years” .
  • CEO: “Electric power and propulsion… continues to perform exceptionally well, serving as a consistent financial tailwind propelling both top line growth and margin expansion” .
  • CFO: “Approximately 90% of our full year revenue has been realized or is in backlog… timing of material receipts will be the most important factor determining revenue output” .
  • CFO: “We are increasing R&D investment well above plan and… seeing increased raw material input costs, namely related to germanium” (reducing implied margin expansion) .

Q&A Highlights

  • Golden Dome timing: Industry architecture in 2025; initial orders likely in 2026 and on existing, mature systems .
  • Germanium impact: Concentrated in IR sensing within ASC; price shock and absorption issues; multiple mitigation paths (alternative sources, recycling, material substitution) targeting relief by 2026 .
  • M&A posture: Flexible on ROIC timeline (4–5 years acceptable); focus on strategic fit; prices elevated; partnerships on table; potential international targets .
  • Submarine industrial base: $50M to build steam turbine generator test capacity in SC; potential second source to relieve bottleneck; broader supplier realignment to increase throughput .
  • International demand: NATO higher spend; Ukraine a key driver; ready‑now U.S. capabilities favored; collaboration with Leonardo S.p.A. enables “home team” access in Europe .

Estimates Context

  • Q2 2025 vs S&P Global consensus:
    • Revenue: $829.0M actual vs $827.5M estimate* → modest beat .
    • Adjusted EPS: $0.23 actual vs $0.214 estimate* → beat .
    • Adjusted EBITDA: $96.0M actual vs $93.5M estimate* → beat .
    • FY25 consensus: Revenue $3.584B*, EPS $1.095*, EBITDA $442.0M*; guidance raised vs prior .
  • Target price consensus: $47.3*; consensus recommendation text unavailable*.
    Values retrieved from S&P Global.
MetricQ2 2025 ConsensusQ2 2025 Actual# of Estimates
Revenue ($USD Millions)827.5*829.0 7*
Adjusted Diluted EPS ($)0.214*0.23 8*
Adjusted EBITDA ($USD Millions)93.5*96.0 —

Key Takeaways for Investors

  • Strong execution with consistent organic growth and margin expansion; results modestly beat consensus and FY25 guidance was raised, supporting estimate revisions upward .
  • IMS (electric power & propulsion) is the margin engine near term; ASC growth is intact but margins are constrained by germanium and higher IRAD—expect mixed segment margin trajectory until mitigations take hold in 2026 .
  • Backlog visibility (~90% of FY revenue realized/in backlog) and reconciliation-driven defense funding (Golden Dome, shipbuilding) underpin medium-term growth; watch for order flow starting 2026 .
  • Q3 setup: management points to ~$925M revenue and mid‑12% margin; quarterly allocation will hinge on material receipts—trading setups should monitor supply chain updates and booked-to-bill cadence .
  • Submarine industrial-base initiative (steam turbine generator second source) and IcePiercer traction create incremental content and margin tailwinds beyond Columbia; medium-term optionality in DDG/SSNX electrification .
  • Free cash flow usage improved YoY in H1 but remains negative due to growth investments; expect conversion (~80%) for FY as working capital normalizes and backlog converts .
  • Tactical catalyst: continued Counter‑UAS momentum, including maritime demonstrations, could drive incremental awards and narrative strength around force protection .

Additional Notes

  • Non-GAAP: Adjusted EBITDA/Adjusted EPS exclude amortization, deal-related, restructuring, and one-time non-operational items; reconciliations provided in the release .
  • Capital returns: $0.09 dividend paid/declared in Q2; ongoing buybacks ($11M repurchased) .
  • Other relevant press (Q2 period): $41M award for combat management system hardware supporting AEGIS/SSDS across U.S. and allied navies (Australia, South Korea, Japan) .