Leonardo DRS, Inc. Q2 FY2025 earnings call

• Bookings: Secured $853 million in Q2 with a 1.0 book-to-bill ratio, driven by electric power and propulsion, naval network computing, advanced infrared sensing, and ground systems technologies.
• Backlog: Total backlog stood at $8.6 billion, rising 9% year over year, with funded backlog maintaining double-digit growth.
• Financial Performance: Delivered double-digit organic revenue growth, increased full-year revenue growth expectations to 9%-11%, adjusted EBITDA up 17%, adjusted diluted EPS up 28%.
• Legislation Impact: The One Big Beautiful Bill Act, with $150 billion in defense funding, provides opportunities in shipbuilding, air/missile defense, counter UAS, etc.
• Supply Chain: Germanium availability and pricing remain a challenge; relying on safety stock, with mitigation efforts expected to offer relief in 2026.
• Innovation: Delivered advanced infrared sensing for next-gen missile systems, growing opportunities in mobile power generation integration, and space sensing capabilities development.
• Market Demand: Strong international demand for tactical radar, rapid expansion in counter UAS, critical role of network computing in naval modernization, and electric power/propulsion business performing exceptionally well.

In the second quarter, revenue was $829 million. The IMS (Industrial & Marine Systems) and ASC (Advanced Sensing & Combat Systems) segments had balanced contributions to quarterly revenue. ASC adjusted EBITDA increased by 5%, but margin contracted by 50 basis points due to greater internal R&D investment, less favorable program mix, and rising raw material costs (notably germanium). IMS adjusted EBITDA was up 41% with a 290 basis points margin expansion, driven by improved profitability on the Columbia Class program and the rest of the electric power and propulsion business. Revenue contribution from each segment was balanced, with both contributing meaningfully to the overall financial performance.

• Revenue: Increased the range to $3.525 to $3.6 billion, implying 9%-11% year-over-year growth.
• Adjusted EBITDA: Revised range between $437 and $453 million, with IMS expected to offer more growth and margin improvement relative to ASC.
• Adjusted Diluted EPS: Range of $1.06 to $1.11 per share.
• Q3 Outlook: Expect revenue around $925 million, adjusted EBITDA margin in the mid-12% range, and free cash flow generation comparable to 2024.

• Germanium Availability: Export restrictions and slow ramp of new mining/refining capacity pose challenges to timely product deliveries.
• Tariffs: Expiration of temporary reprieve with potential second-order risks like retaliatory trade restrictions on critical minerals.
• Geopolitical Complexities: Dynamic macro backdrop with ongoing complexities affecting operational environment.

Q: Peter Arment asks about the timing of Golden Dome program impact on bookings and orders.

A: Bill Lynn responds that no programs are yet defined, but early orders are likely for existing systems with maturity, with orders expected to roll out in 2026.

Q: Robert Stallard inquires about germanium's impact on products and M&A flexibility.

A: Bill Lynn explains germanium is used in infrared products, with safety stock utilized and efforts to find other sources; on M&A, flexible on ROIC with focus on accretive EPS and strong growth story.

Q: Michael Ciarmoli asks about Golden Dome's relation to existing systems and budget trajectory.

A: Bill Lynn states early orders likely for existing systems, and a new administration budget typically sees modest defense spending bump up over time.

Q: Seth Seifman asks about electric power and propulsion opportunities and bookings outlook.

A: Bill Lynn and Mike Dippold discuss steam turbine generator opportunities and ongoing naval work, with expectations of strong bookings throughout the second half.

Q: Andre Madrid asks about European NATO opportunities and M&A partnerships.

A: Bill Lynn mentions international focus in M&A, including Europe, and partnerships as an option.

Q: Christine Lewag asks about other rare earth metals and European NATO view of Leonardo DRS.

A: Bill Lynn mentions permanent magnets as another key metal, and Leonardo DRS is viewed as a US company with partnership opportunities via European parent.

Q: Moeller asks about Columbia Class program and force protection counter UAS.

A: Bill Lynn discusses Columbia Class contract insulation and force protection relevance due to Ukraine war driving defense budgets.

Q: Jon Tanwanteng asks about revenue guidance components and R&D intensity.

A: Mike Dippold explains revenue guide driven by bookings demand and supply base stability, with increased R&D investment in areas like counter-drone and space capabilities.

Q: Ronald Epstein asks about germanium uniqueness and other rare earths.

A: Bill Lynn notes germanium's importance for sensors, and permanent magnets as another key metal, with focus on protecting future supply.