What Leonardo DRS (DRS) Said on Its Q3 Earnings Call

Key Points

• Leonardo DRS delivered strong Q3 results: Revenue rose 11% to $1.1 billion, adjusted EBITDA increased 27% to $149 million, and bookings exceeded $1.6 billion, lifting funded backlog to a record $5.6 billion.
• The company raised its fiscal 2026 outlook to $3.95 billion–$3.985 billion in revenue and $545 million–$555 million in adjusted EBITDA, while projecting adjusted EPS of $1.50–$1.53.
• Growth is being driven by counter-drone systems, tactical radars, naval power and battlefield sensing. Management expects the pending Raft AI acquisition to close in Q4 and potentially add 2–3 percentage points to 2027 revenue growth.

Leonardo DRS NASDAQ: DRS reported third-quarter fiscal 2026 results marked by double-digit organic revenue growth, margin expansion and record bookings, prompting the defense technology company to raise and narrow its full-year outlook.

Bookings exceeded $1.6 billion during the quarter, producing a book-to-bill ratio of 1.5x and lifting funded backlog to a record $5.6 billion. Revenue rose 11% year over year to $1.1 billion, while adjusted EBITDA increased 27% to $149 million. Adjusted EBITDA margin expanded 180 basis points to 14%.

“Both bookings and book-to-bill were our strongest since becoming a public company four years ago,” President and CEO John Baylouny said. He attributed demand to defense needs spanning counter-drone systems, naval power, force protection and battlefield sensing.

Profit Growth Outpaces Revenue

Net earnings rose 60% from the prior-year period to $115 million, and diluted earnings per share increased 65% to $0.43. Adjusted net earnings were $124 million, up 59%, while adjusted diluted EPS rose 59% to $0.46.

Chief Financial Officer Mike Dippold said profitability benefited from program execution, favorable mix and operating leverage from higher volumes. The company also generated $61 million in free cash flow, exceeding its expectation for a modestly positive quarterly contribution.

• Integrated Mission Systems revenue increased 12%, driven primarily by electric power propulsion and counter-UAS programs.
• Advanced Sensing and Computing revenue increased 14%, led by tactical radars and space payloads.
• IMS adjusted EBITDA increased 34%, with margin expanding 280 basis points, despite more than a 40% increase in independent research and development spending.
• ASC adjusted EBITDA increased 22%, while margin expanded 80 basis points.

Dippold said the company expects IMS margins at about 16% to hold as a baseline going forward, citing execution across naval and land programs. He also said ASC could see additional margin expansion in the fourth quarter, supported by program mix and tactical radar demand.

Full-Year Outlook Raised

Leonardo DRS increased its fiscal 2026 revenue forecast to $3.95 billion to $3.985 billion, representing expected organic growth of 8% to 9% from the prior year. The company previously expected revenue between $3.85 billion and $3.95 billion.

The company raised its adjusted EBITDA outlook to $545 million to $555 million, from a prior range of $525 million to $540 million. It now expects adjusted diluted EPS of $1.50 to $1.53, supported by the stronger profitability forecast and an updated full-year tax-rate assumption of 13%.

The outlook excludes contributions from the pending acquisition of Raft, an AI-focused mission software company. Management continues to expect the all-cash transaction to close in the fourth quarter and said it should be accretive to adjusted diluted EPS in the first full year of ownership. Dippold said Raft could add roughly 2 to 3 percentage points to top-line growth in 2027.

For free cash flow, the company continues to target conversion equal to 75% of adjusted net earnings. Capital expenditures are expected to remain elevated in the fourth quarter and total about 4% of full-year revenue.

Radar, Counter-Drone and Naval Program Wins

Management emphasized the growing role of tactical radars and counter-drone systems in its portfolio. During the quarter, Leonardo DRS received a $500 million contract ceiling supporting the Department of War’s Joint Interagency Task Force 401 counter-drone office. The ceiling was not included in backlog, but Baylouny said the award included delivery orders that have already begun contributing revenue.

The company also received a large order for its Extended Mast Surveillance System and said it fielded a system within one week of a customer request for protection of U.S. assets in the Indo-Pacific. Leonardo DRS is expanding radar capacity, including through the creation of DRS UK to serve European customers with local production capabilities.

Baylouny said the company sees a market shift toward distributed, lower-cost tactical radars that can complement or protect more expensive centralized sensing systems. Management expects radar demand to be a significant growth driver and said its radar business should outpace the company’s overall 2027 growth framework.

In naval power, the company was selected to provide a permanent-magnet electric propulsion system for the Republic of Korea Navy’s KDDX destroyer program. Baylouny described the award as an important entry into the Indo-Pacific surface-fleet market and a potential proof point for wider adoption of integrated electric propulsion architectures.

Leonardo DRS also received roughly $40 million to produce Joint Tactical Terminal Transceiver units for the Navy’s EA-18G Growler aircraft, along with $96 million in awards for power supplies, launch-control equipment and transformer systems supporting the Navy’s Mk 41 vertical launch system.

Investment in Sensors, Space and AI

The company cited further opportunities in uncooled infrared sensors for low-cost interceptor drones. It previously secured an order of more than 50,000 Tenum Orbit thermal cores from a low-cost drone manufacturer, and Baylouny said interest from additional manufacturers is increasing.

In space, management said Leonardo DRS is executing work under the Space Development Agency’s Tranche 3 missile-warning and missile-tracking payload program, as well as a separate sensing-related OTA. Baylouny noted that the company expects to launch another payload in the coming months to demonstrate encrypted communications between space-based sensors and interceptors.

Management said the current continuing resolution, scheduled to run through Dec. 11, was not expected to have a meaningful impact on the business. Baylouny said the company sees no material risk from a potentially extended continuing resolution, citing the alignment of its programs with defense priorities and its funded backlog.

About Leonardo DRS (NASDAQ:DRS)

Leonardo DRS, Inc is a defense technology company that develops and supplies advanced products and systems for the U.S. military and government customers, as well as allied nations. The company operates as a subsidiary of Leonardo S.p.A. and focuses on technologies used in land, sea, air and space-related defense applications.

Its offerings include sensing and surveillance systems, electro-optical and infrared technologies, radar and electronic warfare products, network computing and communications systems, counter-uncrewed aircraft systems, force protection equipment, and naval power and propulsion systems.

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