Leonardo DRS, Inc. (DRS) Earnings

Management highlights

### Core Financial & Strategic Position - Q2 delivered accelerating 10% year-over-year organic revenue growth, with bookings exceeding $1 billion, driving a 1.2x book-to-bill ratio that extends the company's streak of 18 consecutive quarters with book-to-bill at or above 1.0x - Exited the quarter with a record-funded backlog, providing strong visibility into future growth; adjusted EBITDA grew 33% year-over-year with 240 bps of margin expansion, driven by strong execution, favorable program mix, and program risk retirement - The company's diverse, platform-agnostic business model is aligned with key structural defense demand trends: layered air defense/counter UAS, proliferated resilient sensing across domains, and advanced effectors for countering growing threats ### Acquisition Update - Announced an all-cash $450 million agreement to acquire Raft, a provider of open-architecture multi-domain data fusion and AI mission software for national security customers - Raft expands the company's capabilities in command and control, has been selected for the U.S. Army's next-generation C2 software architecture, and extends the customer footprint to the Air Force, Space Force, Special Operations, and Intelligence Community - The acquisition is complementary to Leonardo DRS's core strengths in sensing, computing, and mission systems, opening new growth avenues and accelerating R&D for platform AI, autonomy, and edge capabilities; it is expected to close in Q4 FY2026 and be accretive to adjusted diluted EPS in the first full year of ownership ### Key Business Segment Updates - **Air Defense & Counter UAS**: Customer demand continues to accelerate, with tactical radar order flow outpacing supply, leading the company to aggressively add production capacity; the company is maturing modular, platform-agnostic palletized counter UAS offerings to align with evolving Army requirements. Demand for DAIRCM aircraft survivability systems is accelerating after proven performance in recent conflicts - **Missiles & Effectors**: The company is expanding its footprint, providing critical components for existing programs including THAAD and Patriot, and adding capacity to meet growing multi-year production demand; secured a 50,000-unit high-volume initial order for infrared sensing payloads from a leading low-cost drone manufacturer, with additional interest from other drone OEMs - **Maritime & Naval**: Steady demand across both new construction and modernization programs, including Columbia-class, Virginia-class, DDG 51, and LPD platforms; the company is progressing on expansion of steam turbine capabilities and sensing for unmanned surface vessels, with the Charleston facility build out moving ahead of schedule ### Investment Highlights - Internal research and development investment increased 16% year-over-year in the first half, approaching 4% of revenue, focused on key growth areas including infrared sensing for space-based interception, counter UAS solutions, tactical radar enhancements, and naval propulsion expansion - Capital investment is ramping up to expand production capacity for tactical radars, revitalize the infrared sensor foundry, and deepen naval propulsion capabilities at the new Charleston facility; full-year CapEx is expected to be in the mid-4% range of revenue

Guidance

- Full-year 2026 revenue guidance is maintained at $3.9 billion to $3.975 billion, which implies 7% to 9% year-over-year organic growth - Full-year adjusted EBITDA guidance is raised to $525 million to $540 million, up from the prior range of $515 million to $530 million, reflecting expected greater margin expansion driven by disciplined execution, favorable mix, and operating leverage - Full-year adjusted diluted EPS guidance is raised to $1.34 to $1.39 per share, with an updated full-year tax rate assumption of 16.5% and an unchanged diluted share count assumption of 269 million shares - All 2026 guidance excludes any contribution from the pending Raft acquisition, as no meaningful 2026 contribution is expected following a Q4 close - Full-year free cash flow conversion of adjusted net earnings is maintained at 75%, with a modest uplift to free cash flow implied by the higher adjusted EPS outlook - For Q3 FY2026, management expects revenue to exceed $1 billion, with adjusted EBITDA margins in the mid-13% range (the sequential margin decline reflects the non-recurring program risk retirement gain that boosted Q2 margins, not weaker underlying execution); Q3 free cash flow is expected to be modestly positive and higher than Q2's level

Segment performance

Leonardo DRS reports two business segments: Integrated Mission Systems (IMS) and Advanced Sensor Components (ASC). In Q2 FY2026, total company revenue was $913 million, a 10% year-over-year increase. IMS led growth with 15% year-over-year revenue growth, while ASC delivered 8% year-over-year revenue growth. On a half-year basis, both segments contribute evenly to overall company growth. For profitability, total adjusted EBITDA for the quarter was $128 million, up 33% year-over-year, with an adjusted EBITDA margin of 14% (up 240 bps year-over-year). IMS adjusted EBITDA rose 55% year-over-year, with 460 bps of margin expansion, driven by higher volume, broad-based execution, and program risk retirement. ASC adjusted EBITDA increased 19% year-over-year, with 110 bps of margin expansion, as strong execution, favorable mix, and operating leverage offset higher R&D investment compared to Q2 FY2025. First half profitability performance is far more balanced between the two segments than quarterly figures indicate.

Risks & headwinds

- Passage of the U.S. FY27 defense appropriations bill is not expected to be linear, and a continuing resolution is anticipated to govern the calendar fourth quarter; however, management does not expect a material impact to Leonardo DRS's bookings or operational performance, even in the case of an extended continuing resolution - Supply chain risks for critical materials (including germanium, magnet materials, and memory devices) have been mitigated through strengthened detection and mitigation processes, and proactive working capital investments to secure long-term access to critical inputs - Conversion of backlog to revenue is elongated as the company shifts from component sales to integrated solutions, meaning near-term bookings growth will primarily benefit 2027 and beyond rather than 2026 revenue - Execution of capacity expansion projects, including the Charleston naval facility, carries inherent execution risk, though current progress is at or ahead of initial projections

Analyst Q&A

• Q: An analyst asked for more color on drivers of IMS's strong Q2 margin, the size of the program risk retirement contribution, and an update on the Columbia-class submarine program. /

  A: Strong IMS margins were broad-based across the segment, led but not limited to the naval propulsion business. Program risk retirement occurred on a surface ship program; excluding this one-time benefit, IMS margin would have been approximately 15% for the quarter. Columbia-class program execution remains on track, with all work including the Charleston facility progressing as planned, and the company is investing to become a second source for critical steam turbine generators to meet growing Navy demand.

• Q: An analyst asked if the Raft acquisition signals a broader strategic shift into AI-enabled software, or if it is just a supporting enabler for the company's existing hardware business. /

  A: The acquisition aligns with a broader industry shift where customers are moving from buying individual components to purchasing full integrated solutions. Raft fills a critical missing technical gap, giving Leonardo DRS the capability to deliver end-to-end solutions that combine its existing hardware strengths in sensing, computing, and propulsion with Raft's AI and data fusion software. It supports the company's existing strategy rather than representing a new strategic shift.

• Q: An analyst asked about the current state of the company's supply chain, following past issues with germanium availability. /

  A: The company has significantly strengthened its supply chain risk management processes, with deeper and faster detection and mitigation protocols than in the past. The company proactively holds additional working capital to secure critical materials to avoid shortages. The germanium supply picture is currently very stable, with no expected shortages even as production ramps for missile and drone programs; other key inputs including magnet materials and memory devices are also secured, with only minor variable cost risks that the company can manage.

• Q: An analyst asked if the expected continuing resolution for FY27 creates any material headwinds for 2026 bookings. /

  A: Management expects a continuing resolution, but notes this is a normal process and does not expect any material impact to Leonardo DRS's bookings trajectory. Even an extended CR is not expected to have a meaningful negative impact, as Congress typically includes flexibility for new program starts in extended continuing resolutions, and DRS's existing backlog provides ample near-term visibility.