Leonardo's Strengthening Credit Profile and Growth Trajectory: A Deep Dive into EBITDA Expansion and Strategic Moves

Leonardo, the Italian defense and aerospace giant, has emerged as a compelling case study in strategic reinvention and operational resilience. With a 2025 first-half EBITA of €581 million—up 10.9% year-over-year—and a revised free cash flow (FCF) outlook, the company is demonstrating a credit profile that balances growth with fiscal discipline. For investors, the interplay between margin expansion, cash flow sustainability, and strategic acquisitions paints a picture of a business poised to deliver long-term value.

EBITDA Margin Expansion: A Tale of Operational Discipline

Leonardo's EBITDA margin, while not explicitly stated for H1 2025, can be inferred to have improved through its EBITA performance. The 6.52% EBITA margin (€581 million on €8.9 billion in revenue) reflects a slight dip from the 6.57% margin in H1 2024, but this is largely attributable to the divestiture of the Underwater Armaments & Systems (UAS) business. On a like-for-like basis, excluding UAS, the margin expansion is more pronounced, driven by volume growth in high-margin sectors like Defence Electronics & Security and Helicopters.

The U.S.-listed subsidiary, Leonardo DRS, offers a clearer lens into EBITDA trends. Its 2024 adjusted EBITDA margin of 12.4% (up 90 basis points from 2023) and Q2 2025 margin of 11.6% (up 70 basis points year-over-year) underscore the company's ability to leverage program execution and pricing power. The Integrated Mission Systems (IMS) segment, for instance, saw a 280-basis-point margin jump in H1 2025, fueled by electric power and propulsion programs.

Free Cash Flow Resilience: Debt Reduction and Strategic Liquidity

Leonardo's free cash flow (FOCF) in H1 2025 was -€408 million, a 18.7% improvement from H1 2024. While negative FOCF is typical for defense contractors during interim periods, the company's ability to reduce net debt by 27.6% (to €2.17 billion) through the UAS divestiture and disciplined working capital management is noteworthy. The €446 million in proceeds from the UAS sale not only bolstered liquidity but also aligned with Leonardo's focus on core competencies.

The revised 2025 FOCF guidance of €920–980 million—up from prior estimates—highlights Leonardo's confidence in sustaining cash flow. This resilience is critical for funding R&D in emerging technologies like cybersecurity and autonomous systems, which are central to its growth strategy.

Strategic Acquisitions and Divestitures: Catalysts for Long-Term Value

Leonardo's strategic moves have been pivotal in reshaping its credit profile. The UAS divestiture exemplifies a disciplined approach to portfolio optimization, while recent M&A activity in cybersecurity and joint ventures in space and defense electronics signal a focus on high-growth areas. The company's 2025 order intake target of €22.25–22.75 billion, including large contracts, further underscores its ability to scale through inorganic growth.

Notably, Leonardo has postponed some M&A transactions to 2026, prioritizing liquidity management. This cautious approach, combined with a net debt target of €1.1 billion by year-end, positions the company to maintain investment-grade credit metrics while pursuing strategic opportunities.

Investment Implications

Leonardo's improving EBITDA margins, resilient free cash flow, and strategic focus on high-margin sectors make it an attractive long-term play. The company's ability to balance growth investments with debt reduction—while navigating a volatile geopolitical landscape—demonstrates operational maturity. For investors, the key risks lie in macroeconomic headwinds and potential delays in program execution, but the upside from its industrial plan and order backlog appears substantial.

Final Verdict: Leonardo's credit profile is strengthening, supported by margin expansion, disciplined cash flow management, and strategic clarity. With a revised 2025 guidance and a robust order pipeline, the company is well-positioned to deliver shareholder value. Investors seeking exposure to the defense sector's growth tailwinds should consider Leonardo as a core holding, particularly with its current valuation offering a margin of safety.