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DATE

  • Wednesday, July 30, 2025, at 10 a.m. EDT

CALL PARTICIPANTS

  • Chairman and Chief Executive Officer — Bill Lynn
  • Chief Financial Officer — Mike Dippold

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RISKS

  • Management cited, "germanium availability and pricing remain a thorny issue," with export restrictions constraining supply and increasing costs, and noted that reliance on safety stock is required to sustain product deliveries for most of the year.
  • Adjusted EBITDA margin expansion guidance for FY2025 was reduced due to R&D investment running well above plan, as well as "increased raw material input costs related to germanium."
  • "Quarterly cash usage was higher than this time last year," attributed to increased working capital investment, although expected by management.
  • The company is "actively mitigating the germanium availability challenge" but expects "more meaningful relief in 2026," signaling continued near-term operational risk.

TAKEAWAYS

  • Bookings: $853 million of bookings, reflecting a book-to-bill ratio of 1.0 with notable strength in electric power and propulsion, naval network computing, advanced infrared sensing, and ground systems.
  • Total Backlog: $8.6 billion total backlog, up 9% year over year, with funded backlog experienced double-digit growth.
  • Revenue: $829 million in revenue, representing 10% year-over-year growth and balanced contributions from both business segments.
  • Adjusted EBITDA: Adjusted EBITDA was $96 million, a 17% increase in adjusted EBITDA, yielding a margin of 11.6%—70 basis points higher versus the prior year.
  • ASC Segment Performance: ASC adjusted EBITDA increased by 5%, though ASC adjusted EBITDA margin declined by 50 basis points due to higher internal R&D and unfavorable program mix arising from germanium cost pressures.
  • IMS Segment Performance: IMS adjusted EBITDA was up 41% and margin expanded by 290 basis points, predominantly driven by the Columbia Class program and broader electric power and propulsion activities.
  • Net Earnings: Net earnings (GAAP) were $54 million, with diluted EPS (GAAP) of $0.20, up 42% and 43%, respectively, compared to Q2 FY2024.
  • Adjusted Net Earnings: Adjusted net earnings were $62 million, with adjusted diluted EPS of $0.23, increasing 32% and 28%, respectively (non-GAAP).
  • FY2025 Guidance (Revised): Revenue raised to $3.525-$3.6 billion for FY2025 (9%-11% growth), adjusted EBITDA narrowed to $437-$453 million, and adjusted diluted EPS set between $1.06-$1.11, assuming a 19% tax rate, and 269 million fully diluted shares (guidance for FY2025).
  • Free Cash Flow: The company expects approximately 80% conversion from adjusted net earnings for the full year 2025.
  • Q3 Outlook: Revenue is forecasted to be near $925 million for Q3 FY2025, with adjusted EBITDA margin (non-GAAP) targeted in the mid-12% range, with and free cash flow generation comparable to 2024.
  • Macro Tailwinds: Management directly referenced $150 billion in new U.S. defense funding via the One Big Beautiful Bill Act, enacted earlier in 2025, with $113 billion front-loaded into FY2026, allocated to FY2026 defense funding, and a FY2026 U.S. defense budget request totaling $962 billion, up 12% year over year for FY2026 compared to FY2025, including reconciliation funding.
  • International Demand: NATO members are now targeting 5% of GDP for national security with 3.5% dedicated to defense, higher than the previous 2% benchmark, supporting further international growth for Leonardo DRS, Inc.
  • Golden Dome: Management said initial order activity is expected in 2026 due to the early-stage program architecture and procurement planning.
  • Internal R&D Investment: Increased IRAD reached the mid-threes percent of revenue at the half-year mark in 2025, up from 2.8% in 2024, focusing on counter-UAS, space, and missile seeker capabilities.

SUMMARY

Leonardo DRS (DRS -10.29%) management reported revenue and profitability growth across both business segments in Q2 2025, driven by ongoing program execution and strong U.S. and international demand. Operating performance prompted an upward revision to full-year 2025 revenue and adjusted earnings guidance, despite near-term cost headwinds from materials and elevated R&D investment. Macro environment developments, including major increases in U.S. defense spending and rapidly rising NATO commitments, underpin long-term demand visibility across core program areas without material changes to contract structure or company positioning.

  • The company expects to be largely insulated from direct impacts of expiring tariff reprieves, although management acknowledged potential second-order risks, including new critical minerals trade restrictions.
  • Bill Lynn noted upward pricing pressure in the M&A market due to heightened sector interest, and stated, We are seeing properties that would be interesting there. The prices are relatively high.
  • Management clarified that the Columbia Class program’s contract structure provides stability against budget changes and reported delays, as contracts for ship sets are secured into the mid-2030s.
  • Mike Dippold stated that R&D investment, directed at expanding ReadyNow solutions, has been intentionally increased to accelerate competitive positioning in counter-drone and space-focused markets, with internal R&D spend rising from about 2.8% in 2024 to the mid-3% range at the half-year point.

INDUSTRY GLOSSARY

  • Book-to-bill ratio: A measure comparing new bookings (orders received) to revenue billed during the period; a ratio above 1.0 indicates backlog growth.
  • ASC: Advanced Sensing and Computing segment, focused on infrared sensors, electronic warfare, and computing systems.
  • IMS: Integrated Mission Systems segment, comprising electric power, propulsion, force protection, and mission system solutions.
  • IRAD: Internal Research and Development; company-funded R&D for product and technology development outside customer contracts.
  • Golden Dome initiative: U.S. strategic layered air and missile defense funding priority named in recent federal defense legislation.
  • Columbia Class program: U.S. Navy nuclear ballistic missile submarine program central to company’s naval power content and growth outlook.
  • ReadyNow: Proprietary term management uses to reference rapidly deployable, mature, production-ready technologies.
  • Counter UAS: Solutions and technologies targeting the detection, tracking, and neutralization of unmanned aerial systems (drones).

Full Conference Call Transcript

Bill Lynn, our Chairman and CEO, and Mike Dippold, our CFO. They will discuss our strategy, operational highlights, financial results, and forward outlook. Today's call is being webcast on the Investor Relations portion of the website, where you'll also find the earnings release and supplemental presentation. Management may also make forward-looking statements during the call regarding future events, anticipated future trends, and the anticipated future performance of the company. We caution you that such statements are not guarantees of future performance and involve risks that are difficult to predict. Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors.

For a full discussion of these risk factors, please refer to our latest Form 10-Ks and our other SEC filings. We undertake no obligation to update any of the forward-looking statements made on this call. During this call, management will also discuss non-GAAP financial measures, which we believe provide useful information for investors. These non-GAAP measures should not be evaluated in isolation or as a substitute for GAAP performance measures. You can find a reconciliation of the non-GAAP measures discussed on this call in our earnings release. At this time, I'll turn the call over to Bill. Bill?

Bill Lynn: Thanks, Steve. Good morning, and welcome, everyone, to the Leonardo DRS, Inc. Q2 earnings call. Our second quarter results reflect sustained momentum and capturing customer demand, driving revenue growth, expanding both profitability and margin. In the quarter, we secured $853 million of bookings, which is a 1.0 book-to-bill ratio for the quarter. We saw particular strength for electric power and propulsion, naval network computing, advanced infrared sensing, and ground systems technologies, all of which contributed meaningfully to Q2 bookings. Our total backlog stood at $8.6 billion, rising 9% year over year. Also noteworthy was that our funded backlog maintained a healthy double-digit growth rate in the quarter.

We continue to expect a book-to-bill ratio greater than 1.0 for the full year, thanks to strong performance in the first half and consistent customer demand across the portfolio. Diving deeper into our quarterly financial performance, we delivered double-digit organic revenue growth squarely in line with the framework shared on the last call. Furthermore, the foundation built in the year to date is leading us to increase our full-year revenue growth expectations to 9% to 11%. Our profit metrics also showed strong performance. Adjusted EBITDA was up 17%, corresponding margin increased by 70 basis points, and adjusted diluted EPS was up 28%. In aggregate, our strong Q2 results position us well to meet our full-year outlook.

That said, the team and I remain focused on disciplined program execution, investing for future growth, and navigating a complex operational environment. We continue to operate in a dynamic macro backdrop, one that remains largely favorable to Leonardo DRS, Inc., though not without its complexities. Let me begin with the positives. Earlier this month, the One Big Beautiful Bill Act was enacted, a sweeping tax reconciliation package that includes $150 billion in defense funding, with $113 billion front-loaded into FY '26. This legislation represents significant opportunities and tailwinds for Leonardo DRS, Inc.

The funding emphasizes the following: shipbuilding and enhancing industrial base resiliency, layered strategic air and missile defense, including initial funding for the Golden Dome initiative, counter UAS and unmanned systems, electronic warfare, missiles and munitions, and more broadly, investment in innovation to enhance asymmetric capabilities. Our portfolio is well aligned with these national priorities, and we expect to benefit across the company as this funding is obligated over the coming years. Additionally, the administration's FY '26 defense budget request calls for $962 billion in total defense spending, including the reconciliation funding, which in total represents a 12% increase year over year. Beyond the US, global defense spending continues to rise amid ongoing geopolitical tension.

Notably, NATO members are now targeting 5% of GDP for national security, with 3.5% dedicated to defense, a sharp increase from the long-standing 2% benchmark. This trend is expected to support incremental international demand, particularly for our ReadyNow differentiated capabilities. The intensifying global threat landscape is especially acute for our operations and employees in Israel. We are grateful to report that all employees in the region are currently safe. We are closely monitoring the situation and are taking proactive steps to enhance employee safety and operational continuity. Shifting to supply chain, while our overall supply chain remains relatively healthy, germanium availability and pricing remain a thorny issue. Export restrictions have constrained the available global supply of this raw material.

Unfortunately, new mining and refining capacity has also been slower to ramp. We are currently relying on our safety stock, which provides sufficient runway for most of the year. However, in order to sustain timely product deliveries, material flow must improve in the second half. We are actively mitigating the germanium availability challenge through a multipronged approach. We expect these mitigation efforts to offer more meaningful relief in 2026. Onto tariffs. The temporary reprieve granted by the administration is set to expire later this week. As previously discussed, we expect to be largely insulated from direct impacts, particularly for inputs where cost increases can be clearly tied to tariffs.

However, second-order risks persist, including the potential for retaliatory trade restrictions on items such as critical minerals. Despite the complexities of the macro environment, Leonardo DRS, Inc. continues to innovate and deliver cutting-edge technologies to meet the evolving needs of our customers. This quarter, we delivered advanced infrared sensing content for the next-generation short-range interceptor or stinger replacement, as well as other future missile systems. These sensors provide a distinct operational advantage, offering higher resolution, improved countermeasure resilience, lower cost, and enhanced overall performance. We are also seeing growing opportunities to integrate our mobile power generation solutions into new missile systems.

Overall, I am pleased with our ability to broaden the applicability of our infrared sensing expertise into this logical adjacency. Amid rising strategic and tactical threats, Golden Dome is a critical part of this effort. Our portfolio, including our over-the-horizon radar, tactical radar technologies, as well as counter UAS capabilities, is highly relevant and well-positioned to support this demand. Additionally, some of our increased internal research and development investment is being directed toward further demonstrating and maturing our space sensing capabilities. We believe we have a highly differentiated offering that can provide customers added capability in space-based missile tracking and intercept. We are committed to securing competitive successes in this domain.

The persistent threat environment is driving escalation of customer interest and an expansion of existing contracts across each of the capability areas I noted earlier. Our tactical radar offering has maintained strong international demand, as allied nations look to reinforce their short-range air defense posture. At the same time, we are seeing rapid expansion in counter UAS opportunities across the company, but also a comprehensive technology suite including infrared sensors, laser and RF systems, along with platform integration expertise to deliver best-of-breed solutions. Customer focus on counter UAS is here to stay, and its importance is only growing, as evidenced by the recent launch of a joint interagency task force to tackle this ongoing threat.

Beyond sensing and force protection, our network computing business plays a critical role in enabling next-generation shipboard computing, supporting both US and allied naval modernization initiatives. Our proprietary ice piercer cooling technology is starting to gain traction, especially as customers seek to increase computing density and system performance in constrained platforms. Lastly, to round up my operational updates, I want to briefly touch on our electric power and propulsion business. This part of Leonardo DRS, Inc. continues to perform exceptionally well, serving as a consistent financial tailwind propelling both top-line growth and margin expansion.

We are well-positioned to capitalize on medium and long-term opportunities tied to next-generation platforms and to expand platform content in support of the priority to improve shipbuilding throughput. Our Q2 financial results reflect the strength of our portfolio and growing demand for differentiated capabilities in a rapidly evolving threat environment. We have solid momentum in bookings and a remarkable backlog that provides ample runway visibility into enhanced revenue growth. That said, we remain rigorously focused on continuing to deliver for our customers. Our success to date is a testament to the hard work of our team, and we are committed to building on this foundation in the second half of the year.

Let me now turn the call over to Mike, who will review the second quarter and our revised 2025 guidance in greater detail.

Mike Dippold: Thanks, Bill. I am pleased with our year-to-date performance. We had a solid quarter, but we are keeping focus on consistent execution to deliver against our full-year financial objectives. Let me begin by reviewing Q2 performance. Revenue for the quarter was $829 million, 10% higher year over year. The strong continued organic growth is fueling our ability to raise our guidance for the full year, which I will discuss shortly. Both segments had relatively balanced contributions to our increased quarterly revenue. The IMS segment and the company in total benefited from greater revenues from electric power and propulsion programs. Advanced infrared sensing and ground network computing programs bolstered growth at ASC as well as at Leonardo DRS, Inc. at large.

Moving now to adjusted EBITDA. Adjusted EBITDA in the quarter was $96 million, up 17% from last year. Adjusted EBITDA margin in Q2 was 11.6%, representing a 70 basis points of margin expansion compared to last year, and improved profitability at our electric power and propulsion business, most notably on our Columbia Class program. Shifting to the segment view, ASC adjusted EBITDA increased by 5%, but margin contracted by 50 basis points due to greater internal research and development investment along with less favorable program mix and less efficient program execution caused by rising raw material costs, namely germanium.

IMS adjusted EBITDA was up 41%, and margin expanded by 290 basis points, thanks to improved profitability on our Columbia Class program and across the rest of the electric power and propulsion business. Onto the bottom line metrics, second-quarter net earnings were $54 million, and diluted EPS was $0.20 a share, up 42% and 43%, respectively. Our adjusted net earnings of $62 million and adjusted diluted EPS of $0.23 a share were up 32% and 28%, respectively. Solid core operating performance coupled with reduced interest expense led to favorable year-over-year comparisons. Moving to free cash flow.

Although our quarterly cash usage was higher than this time last year, it was in line with our expectations as we anticipated increased working capital levels to fuel growth. Despite higher capital expenditure investments in 2025, halfway through the year, we are revising our full-year 2025 guidance across our key metrics. We are increasing the range of revenue to $3.525 to $3.6 billion, implying a 9% to 11% year-over-year growth. We have solid backlog visibility for the balance of the year, with a modest portion of our revenue coming from book-to-bill programs. Approximately 90% of our full-year revenue has been realized or is in backlog.

Given the healthy visibility, the timing of material receipts will be the most important factor in determining the level of our revenue output. We are also narrowing the range of adjusted EBITDA. The revised range is expected to be between $437 and $453 million. At this time, we expect IMS to offer more growth and margin improvement opportunity relative to ASC. The guidance adjustments to revenue and adjusted EBITDA result in a reduced implied margin expansion for the year. This is due to two factors. One, our increasing R&D investment well above plan, and two, we are seeing increased raw material input costs related to germanium.

Our revised adjusted diluted EPS range incorporates the tailwinds from increased core profitability, lower net interest expense, and a reduced diluted share count. We now expect adjusted diluted EPS between $1.06 and $1.11 a share. Assumed in these figures is a tax rate of 19%, which is unchanged from our prior guide, and a $269 million fully diluted share count, lower than our prior guide as we factor in the impact of stock repurchases. With respect to free cash flow conversion, we still anticipate approximately 80% conversion of our adjusted net earnings for the full year.

The recently enacted tax legislation is expected to have limited benefit to our 2025 free cash flow, but it will be a modest tailwind in 2026 and beyond. That said, we are still working to quantify the specific impact. Now let me offer up our framework for the third quarter. We expect revenue in the neighborhood of approximately $925 million, adjusted EBITDA margin in the mid-12% range, and free cash flow generation comparable to 2024. Please note the timing of material receipts will weigh heavily on how the second half is allocated on a quarterly basis. Let me offer some closing thoughts before we take questions. I want to extend my gratitude to the broader Leonardo DRS, Inc. team.

Our financial success is a direct result of their incredible efforts and unwavering commitment. As we navigate an increasingly complex global environment, we remain consistently focused on delivering exceptional technology to our customers, executing with excellence, and driving sustainable long-term growth. With that, we are ready to take your questions.

Operator: Thank you. Due to time restraints, we ask that you please limit yourself to one question and one follow-up question. Our first question will come from the line of Peter Arment with Baird. Your line is open.

Peter Arment: Yes. Hey, good morning, Bill, Mike, Steve. Nice results. Thanks for the color on kind of Golden Dome and how you're positioned. Maybe if I could just ask, when do you expect, you know, I know the architecture hasn't been fully laid out with General Goodline just getting the assignment. But how do you expect it to kind of roll out in terms of impact, you know, your backlog? When should we start to see kind of some of the programs that you might be well-positioned on?

Bill Lynn: Thanks, Peter. I mean, as you said, they're just organizing themselves on the architecture. There are industry meetings starting, and the department has an internal effort to lay out an architecture. So I think that means you won't see much in the way of bookings or orders this year in calendar '25. But I think given that they're trying to really focus on doing things in this presidential term, you'll start to see orders roll out in the '26 time frame.

Peter Arment: Okay. Appreciate that. And just as my follow-up, just could you talk maybe a little bit about the M&A environment? I know you've had interest there in the past, and just, you know, are you seeing more deals just given, you know, where funding is and any update there? Thanks.

Bill Lynn: Yeah. I mean, we're, as you know, we're in the market. We're looking. We're doing diligence. We're seeing a continual flow of things in those four core markets where we're focused. We have been active. I'd say the only change we're seeing is given the interest in the sector, I think prices are pushing up. So I think that's been a factor here. We're having to assess our financial criteria, which are relatively strict, although we're open to things the closer they are strategically to our main areas of focus, the more we're willing to extend on financial criteria. And that's what's going on right now is that strategic focus. We are seeing properties that would be interesting there.

The prices are relatively high.

Peter Arment: Got it. I'll jump back in the queue. Thanks, Bill.

Operator: And one moment for our next question. And that will come from the line of Robert Stallard with Vertical. Your line is open.

Robert Stallard: Thanks so much. Good morning.

Bill Lynn: Morning. Good morning.

Robert Stallard: Couple for you. First of all, I was wondering if we could dig into this whole germanium thing. And what's going on there. You know, how much of a headwind has it been so this year? What are you expecting in the second half? And what is this metal used for in terms of your products? And then secondly, maybe following up on Peter's question, was wondering if you could elaborate on this flexibility on looking at M&A. Does this mean you might be open to using equity, for example? Are you looking at a different return metric in terms of when the deal might pay off? That would be helpful. Thank you.

Bill Lynn: Yeah, Peter, let me—I'm sorry, Rob, let me start on germanium and then let Mike expand on it. On germanium, you know, what's happened is given the tension with China, the source of most of the germanium in the world is the supply has reduced to a trickle. We anticipated this in the sense that we built up a safety stock. And we're now having to utilize that safety stock. That has been effective for us, but it has caused prices to increase. And it's also caused us to seek other sources of germanium outside China. So we're looking at other countries and sources of germanium. We're looking at other customers.

There is an ability to recycle out of existing products. And then there are opportunities on some products we could use something other than germanium, although that requires at least a couple of months' work in terms of redesign, qualifying. It's not overly taxing, but there is a time lag. We're pursuing all of those with a target of 2026 to bring some or all of those online. Let me let Mike address your question on the fiscal impacts.

Mike Dippold: Yes. So Rob, first, you had a question in terms of what product are they used for? This is going through our infrared product line. So in our advanced sensing, computing business, but more focused on our infrared sensing capabilities, that's where you see this metal being used. For the impact, we spoke a little bit about last quarter in terms of the price shock that we saw because of the supply-demand elements that were in play. And we made the comment that absent the germanium impact, the margins of ASC would have been in line in Q1 with expectations. Looked into Q2 here, and the prices remained fairly stable.

What we're seeing is as that availability becomes a concern later in the year, we've had some absorption issues and some overhead rates that have impacted a little bit more than we had anticipated in Q1. So that's what we're looking at from an impact perspective. All of that's now incorporated into the revised guide that we put forward.

Bill Lynn: Rob, I'd come back on your M&A question, the financial. We have three financial metrics: EPS, ROIC, and then our overall margin and growth. On EPS, we expect it to be accretive in the first year. There's a little flex there, but probably not. With that, we will look at ROIC, we're looking at a multiyear return. I think there we would have flex. I think things that would take maybe a little bit longer to bring a positive contribution to ROIC, we're willing to kind of go along beyond our notional three-year window looking four years, five years. I think that would be well within something we'd find acceptable. And the other is more general.

We have, I think, a very strong, you know, right now, double-digit growth story. We have a margin enhancement story. I don't think we are now changing our approach there. We don't want to undercut that story with a significant acquisition. And that really hasn't changed. So the change is I think we'll be more flexible on ROIC.

Robert Stallard: Okay. That's great. Thank you very much.

Operator: And one moment for our next question. And that will come from the line of Michael Ciarmoli with Truist Securities. Your line is open.

Michael Ciarmoli: Hey, good morning, guys. Thanks for taking the question. Bill, maybe just a little bit more clarification on what Keith was asking about Golden Dome. I mean, you know, thinking about timing of order flow, does that kind of stand for already deployed existing systems, or is this kind of—are you talking architecture for some of the newer kind of systems and capabilities that might be deployed?

Bill Lynn: Right. It's a little hard to be specific because they don't even have a program yet. But I think, you know, directionally, I think the first orders would have to be on existing systems, just given the timing. And you're going to have to develop—it will take longer time to develop first the requirements and then the RFP and then the competition for kind of future-oriented. So I think what's behind your question is right. The early orders are likely to come from something that has some maturity, something that's already something that can be produced.

Michael Ciarmoli: Got it. Okay. And then just if I may, just because you used to be in the building, you know, this is obviously a unique and dynamic budget environment. We're getting a big bump up in front-end load here with reconciliation, but we don't have a FYDP yet. How are you guys thinking about, you know, just budget and trajectory longer term and maybe, you know, kind of, like I said, just drawing on your experience from being in the building?

Bill Lynn: Yeah. It's actually not unusual at this point not to have a FYDP. Usually, a new administration just puts out a first-year budget and is in the middle, as they are, of their kind of their strategic plan. Obviously, what they have done so far, they really inherited from Biden. It takes some months to develop that strategic plan, which they're doing. So I wouldn't expect to see a FYDP until the next budget, which is February. But that's not unusual. In terms of what to expect, I mean, there's lots of puts and takes in the reconciliation bill.

I think, you know, if you look at just general historical trends and tendencies, when you move from a Democratic to a Republican administration, normally, what you see is a modest at least bump up in the overall defense spending. Generally, politically, a Republican administration sees itself as stronger on defense, wants to show that in the budget. And then second, they have more initiative. You know, multiple questioners have mentioned Golden Dome. But there's force protection, there's shipbuilding, there are programmatic reasons to increase the budget. So I think at the end of the day, when the smoke clears, you'll see a Trump budget that, over time, is moderately higher than its Biden predecessor.

Michael Ciarmoli: Got it. Okay. Good color, Bill. I'll jump back in the queue here.

Operator: And one moment for our next question. And that will come from the line of Seth Seifman with JPMorgan. Your line is open.

Seth Seifman: Thanks very much, and good morning. Wanted to ask, you know, you talked about performance, good performance in electric power and propulsion, and about the opportunities there that may be to capitalize on what's coming into the resources coming into the industrial base. I wonder if you could be more specific around kind of where you see opportunities, you know, do those opportunities come out of the new facility in Charleston primarily? And you know, what the timeline for capitalizing on some of those opportunities might be?

Bill Lynn: Sure, Seth. And I'll start and then let Mike add some more color. I mean, first of all, the core program, of course, in our naval powers is Columbia, which is secured through the middle of the next decade and is on a steady increase. And we are using that South Carolina facility to execute that program with greater and greater efficiency, which should be a tailwind on margins. Beyond that, which is really what I think you're asking, is we see that facility and our overall capabilities generally as well-positioned to help the Navy surge content into the industrial base with the goal of particularly increasing the throughput of submarines where we have important content beyond just Columbia.

In particular, I would say the first of those opportunities is in the area of steam turbine generators. The Navy has now given us $50 million of that industrial base money to build a test capacity in South Carolina for that. What should follow on is another contract to design a new steam turbine generator with production to follow. The problem that's addressing is that there's only one producer of steam turbine generators, which makes it something of a choke point in submarine production. And the Navy is interested in the second source to address that choke point. So I think we're a principal part of the avenue to address that challenge.

And beyond that, I think there's a more general view, and we're talking to the Navy in the future about can we use our capacity to take on more work and allow the yards to dedicate their resources to producing submarines faster. That's still a sort of an early-stage discussion, but I think there's real potential for additional content to move to suppliers such as Leonardo DRS, Inc. with, again, the goal of increasing that submarine throughput.

Mike Dippold: Yeah. The only thing I'll add, Seth, is from a timing perspective, we do expect the Columbia portion of the building to begin to come on in 2026, in late 2026, and actually begin to pull the work in. That Columbia piece of the investment not only covers Columbia but also if we have some successes in new platforms that'll help from a capacity perspective and ability to execute. What Bill was mentioning in terms of the steam turbine efforts, that funding is now flowing, and we're starting those exercises.

That will come on from a timing perspective a little later, you know, outside of 2026 as we create that test capability and start to move forward on the steam initiative. From there, you can start to see that extra tool that we're putting in a toolbox from a steam turbine generator perspective start to be an impact of revenue outside of that 2027 time frame as we begin to execute development work with the anticipation of hopefully having production thereafter.

Seth Seifman: Great. Thank you. And maybe just as a quick follow-up, do you expect—how do you look at the bookings environment for the second half? Do you expect to exit the year with the backlog higher than it was at June 30?

Bill Lynn: Yes. We do. But let me let Mike address it.

Mike Dippold: Yeah. I would—I think the bookings for the quarter of the kind of one-to-one ratio, I wouldn't put too much stock into that. We're continuing to see strong demand across all elements of the business. For the six-month period, we're still sitting above the one-to-one ratio, and we expect that to continue throughout the second half of the year. So still a lot of confidence. The macro tailwinds in the threat environment are still there. The budget alignment is there. And we feel good about our ability to continue to see strong bookings throughout the remainder of the year.

Seth Seifman: Great. Thank you very much.

Operator: One moment for our next question. And that will come from the line of Andre Madrid with BTIG. Your line is open.

Andre Madrid: Good morning, everyone. Thanks for taking my question. Thanks, Andre. You previously disclosed international sales would outpace the broader sales growth for this year. With the new NATO commitments, again, that's not instantaneous. It's over a decade. But could we see upside to, you know, what you initially thought international would be through the out years?

Bill Lynn: Yeah. I think a couple of things are happening in the international space right now. First off, you know, what will drive a little bit of the international is what happens with Ukraine. So I think first and foremost, that's going to be an indicator of where our international sales go. So far, that demand has continued. From a NATO perspective, we are seeing consistent demand signals across some of the, you know, East European members of NATO and are focused on being able to execute there. The question in the long term will be, what does that mean from a European industrial base investment buying American?

We continue to see the elements moving towards the ReadyNow capabilities are still important. So we see that as a tailwind to, you know, kind of the US domestic opportunities to sell abroad. I expect to see that trend continue. Again, we still view the international market as a growth engine because of NATO, but also just because of the other macro trends and the hot global conflicts that are emerging.

Andre Madrid: Got it. Got it. Maybe a follow-up to that. I mean, so long as they, you know, fit into the criteria that you've outlined already, would you be especially interested in acquiring anything over in Europe? I guess, following on to that, given that, you know, valuations have been a little high right now, a little rich, what's your attitude towards forging partnerships with defense tech names? I mean, this just seems to be becoming more prevalent in the current threat and demand environment, so curious to hear your thoughts there.

Bill Lynn: On the—we have a global focus on our M&A. Obviously, we demonstrated that when we acquired RADA and the triangular merger that brought us public, RADA being an Israeli company. And we have looked in Europe and Asia as well. So we have an international focus. We're not limited just to the US. In terms of partnerships, that too is on the table. We have had discussions with different companies about arrangements we might make that will increase our mutual competitiveness. And so that would be on the table as well.

Andre Madrid: Got it. Got it. I'll jump back in the queue.

Operator: One moment for our next question. And that will come from the line of Christine Lewag with Morgan Stanley. Your line is open.

Christine Lewag: Hey, good morning, everyone. Bill, you've kind of talked a lot about the germanium risks here. I was wondering, are there other rare earth metals that you're watching? And it sounds like 2026, you'll see some improvement. But if you have, you know, I guess, what we're seeing in the industry is everybody else is also trying to figure out their supply. If things don't necessarily pan out as you expect for 2026, how could this shortage of germanium or higher cost affect operating performance?

Bill Lynn: Thanks, Christine. We do look at other—the biggest other material we think about is permanent magnets because that's a part of the electric drive system in Columbia and any other programs. We are pretty well protected right now in that we have the supply for all of our existing programs. So as we look at it, it's more protecting against future programs, and we're looking at what steps we would need to do to do that. But in terms of germanium on 2026, as I said, we have multiple paths in terms of recycling, other sources, other materials.

We think that through the course of 2025, those are going to come online and allow us to start to begin back up the ramp again in terms of germanium and protect the 2026 program.

Christine Lewag: I see. Thank you. That's really helpful. And following up on the opportunity in European NATO, even though NATO in Europe wants to spend more money on defense, there's also a concerted effort to focus more on indigenous capabilities. So, I mean, you guys are, you know, largely an American company. But your ownership is also with a European parent. So do you have any indication in terms of how these governments view you? Do they view you as an American company, or do they view you as hybrid because of your European parent ownership? How does that work? And does that change the opportunity for Europe for you regarding their higher spend?

Bill Lynn: I think we're in a proxy. We're most definitely a US company. I think that's how we're viewed both in the US and in Europe. I think though the angle towards which you're headed is right, is where we have opportunity, which is maybe unique given our ownership structure. We have the opportunity to team with and collaborate with Leonardo because of our closeness, and that allows us then to go into Europe as a home team and to use the good offices and the teaming arrangements with Leonardo. And we're seeing opportunities in the UK and elsewhere where we can execute on that partnership.

It's that partnership rather than just being seen as a—it's not how we're seen as our country of origin. It's how we partner with our 70% shareholder.

Christine Lewag: Great. Thank you.

Operator: One moment for our next question. And that will come from the line of Moeller with Canaccord Genuity. Your line is open.

Moeller: Hi. Good morning. Just my first question here. If we look at the House Appropriation Committee's draft of the defense bill, there's a 57% plus-up to about $5.27 billion for the Columbia Class program. I was wondering if you could just comment on that and the reported 12 to 16-month delay in boat construction for Columbia Class and how that affects the one versus two production rate for Columbia and Virginia Class and how we should think about that.

Bill Lynn: Yeah. On Columbia, the Navy, working with the yards, has intentionally put us in a relatively segregated position so that we have, as I said, the contracts on Columbia for the ship sets all the way through shipset 12, which takes you into the mid-2030s. The purpose of that was to insulate this critical component from the ups and downs of the program itself. The reason to do that is you don't want to lose—this is a complex program. You don't want to lose the learning. You don't want to lose the workforce by having gaps and, you know, having down cycles and then being forced to retrain.

That will cause schedule and budget issues in the Navy, and nor are we looking for that. So, you know, we're not really affected by that budget increase that you talked about. We have, you know, our budget set by contract all the way through the 2030s. And the intent of setting that contract out was not to change the motor schedule, the drive schedule, based on relatively modest changes in the ship delivery schedule, the submarine delivery schedule.

Moeller: Okay. And if we think about the force protection counter UAS side of the equation, if we do see the Ukraine war continue, I think you talked about this a little bit already, but presumably, that's incrementally positive for sales into US NATO allies, etc.

Bill Lynn: I think more generally, the threat that Putin posed through by attacking Ukraine is what's, you know, driving Europe to higher defense budgets, and they're seeing that concrete threat that Putin is prepared to cross borders in a way that we haven't seen in 80 or 90 years. That is then driving, you know, programmatic implications, prominent among them is force protection. The advent of drones, the importance of having not just kind of perimeter protection around your formations, but really organic protection inside those formations. So programs like RM Lids, that counter UAS system, become critical.

And what we're seeing is a growing international demand for that kind of system, partly driven by Ukraine, but more generally driven by the trends in warfare that we're seeing in Ukraine, you're seeing in Israel, and how do you bring on systems that counter that. And with some urgency given what Putin's doing in Ukraine and the future implications of that.

Moeller: Great. Thanks for all the details there.

Operator: One moment for our next question. And that will come from the line of Jon Tanwanteng with CJS Securities. Your line is open.

Jon Tanwanteng: Hi. Good morning, and thank you for taking my questions. Was wondering if you could break down the new guidance range and just the components of it. Especially the revenue line. What's driving that? Is it stronger demand or contract modifications? Maybe just more confidence in the ability to work down the backlog, you know, with improved supplier execution? Is there something else that's going on? Just a little help there would be helpful. Thank you.

Mike Dippold: Yeah. I'll—I'll from the guidance on the revenue side, here, the uplift is certainly driven just by the continued demand that we're seeing. We got out of the gate really hot from a bookings perspective in Q1. And that confidence coupled with the consistency of the supply base and the material receipts 13% year over year. So, you know, the bookings demand, where we are with the backlog year over year, what we've executed to date through the six months, and the stability of the supply base gave us the confidence to increase the revenue guide, Jon.

Jon Tanwanteng: Okay. Great. And how should we think about the R&D intensity going forward over the next three to five years and how that affects operating leverage, especially if you chase these new programs in the new DOD budgets and increase NATO spending.

Mike Dippold: I'm sorry, Jon. I didn't catch the end of that. I lost you. Can you repeat that question again?

Jon Tanwanteng: Yeah. How should we think about R&D intensity and the operating leverage that you have, especially with, you know, the new DOD budgets and with the higher NATO commitments?

Mike Dippold: Yes. So from an R&D budget perspective, I'm assuming you're talking about the internal R&D spend. Correct. Yeah. But ultimately, what we wanted to do and what we've made a priority of is there's certainly an emphasis within the administration to get products to the warfighter quicker. And therefore, they're trying to accelerate procurements, and we wanted to ensure that we have ReadyNow solutions and ReadyNow capabilities and are investing increased IRAD in order to make that a reality. So we've taken up our IRAD, you know, from about 2.8% in 2024 to an area where we're sitting at the mid-threes here at the half-year point. So that's a sizable headwind from a margin perspective.

But we do believe we're investing in areas that are getting a lot of enthusiasm surrounding. And when you talk about the counter-drone capabilities, when you talk about space, missile seekers, as Bill mentioned in the prepared remarks, these are the areas we're investing in. The markets are growing. And we thought it would be prudent to continue to invest heavily in there to facilitate our continued growth.

Jon Tanwanteng: Okay, great. If I could sneak one more in there, just when do you think you can get margins on products containing germanium or alternatives back to the normalized range, whether that's through pricing or through supply, or going to some of these alternative technologies to do so.

Mike Dippold: Yeah. I think the first challenge we have is to execute against the backlog. Right now, we're in a position where we're a predominantly fixed-price shop. So the pricing fluctuations are being realized in our results, and that's what's realized in our guide. Prospectively, we are looking at contract modifications that allow some flexibility. In terms of the recovery when you have the volatility in germanium like we've seen, which is largely due to some of the trade wars and other elements that are going on that are, you know, kind of outside of our control. We've seen mixed results from a customer receptive perspective on that.

And we're continuing to push hard on that to make sure that we're derisked from the price volatility.

Jon Tanwanteng: Okay. Any sense of timing of when that normalizes overall?

Mike Dippold: It's going to be a program-by-program negotiation, to be fair. So it'll be on a contract-by-contract basis.

Jon Tanwanteng: Okay. Great. Thank you.

Operator: Thank you. And as a reminder, if you would like to ask a question, please press 11. Our next question will come from the line of Ronald Epstein with Bank of America. Your line is open.

Ronald Epstein: Hey, good morning. So germanium has been a bit of an issue for you guys. It really doesn't seem like it's been for anybody else. I'm curious why that may be the case. And then two, are there any other rare earths that we should start worrying about for you or others given what's going on broadly with trade, particularly with China?

Bill Lynn: Ron, I think obviously, we're a sensor house since an important piece of our product base. So germanium, I think, stands out for us. I don't know what's going on with others. But I'm sure they're not getting germanium. The other one, and I mentioned it on an earlier question, I'd say the principal other one we focus on is in the electric power area is permanent magnets. And there, I think currently, we're in a strong position with holding what we need to execute our current programs. But we are trying to anticipate future disruptions and trying to think about how do we—how do we—of course, we're winning future electric drive programs.

So we need to think about how we protect future sources of supply. It's a high-class problem, but we're anticipating winning other programs, and we're taking steps now to protect against that future potential.

Ronald Epstein: And then if you could peel back, Daniel, a little bit on, you know, with the big investments that are being made into the naval industrial base, shipbuilding industrial base. What other opportunities are out there for you all? I mean, I would imagine there's got to be a whole bunch of them if you could maybe mention a few.

Bill Lynn: Are you talking shipbuilding, or are you looking beyond shipbuilding?

Ronald Epstein: Shipbuilding.

Bill Lynn: Shipbuilding, I think as we said, we have the current Columbia program. The biggest near-term opportunity is the steam turbine generator that I talked about. Coming after that, I think, is just the general enhancement industrial base programs and the realignment of the workload between yards and suppliers. And then the one I didn't mention, but I—well, two I didn't mention, future ship classes as the propulsion system because of the operational advantages in terms of cost, in terms of quietness, and in terms of the mechanical systems just cannot meet the needs. And even as you increase sensor demand, which is inevitable, mechanical systems won't meet the need. So we think the next-generation destroyer DDGX is a good candidate.

The next-generation submarine, the SSNX, probably an even better candidate. And then, of course, internationally, international navies are looking at electric drive as well. So we think, you know, over the next five to ten years, there's going to be a shift into electric drive, and we think we stand to benefit from that.

Ronald Epstein: Got it. Got it. And then if I can ask you just one more. Sort of more macro question. You know, again, given your experience, you know, kind of on the hill and in the building, how would you expect fiscal '27 to play out? Right? I mean, in terms of the budget process this year was sort of bizarre. Right? Do we get another reconciliation? I mean, how is it all going to go? I mean, it seems kind of likely that there's going to be another continuing resolution. I mean, I don't know. I mean, if you were to look in your crystal ball, take a swipe at it, how would you guess fiscal '27 plays out?

Bill Lynn: I think, as I said, at the end of the day, it's hard. As you said, this has been a very unusual year, particularly with the very large increase in the reconciliation bill. And there's still—they allocated a lot of that to '26, but not all of it. So there's still some reconciliation money out there that needs to be allocated. They have to make a decision on what is the '27 base bill. As I said in the answer to an earlier question, so I mean, I think what you want to see is, you know, maybe a sustained and predictable increase in the defense budget that will let us meet the growing threats from China and Russia.

That's, I think, the policy goal. I do think it's going to be the policy goal of this administration. So I think, you know, they're going to have to find a way through reconciliation, maybe a second reconciliation bill. I don't know. And the core base budget bills to execute on that sustained predictable growth. That should be their goal, and I think it is their goal.

Ronald Epstein: Got it. Alright. Thank you very much.

Operator: Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Steve Vather for any closing remarks.

Steve Vather: Thanks for your time this morning and for your interest in Leonardo DRS, Inc. As usual, if you have any follow-up questions, please call or email. We look forward to speaking with all of you again soon. Enjoy the rest of your day.

Operator: This concludes today's program. Thank you for participating. You may now disconnect.