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Leonardo DRS, Inc. (DRS)·Q3 2025 Earnings Summary

Executive Summary

  • Q3 2025 delivered strong top-line and booking momentum: revenue $960M (+18% YoY), bookings $1.307B (1.4x book-to-bill), record backlog $8.909B (+8% YoY) . EPS rose to $0.26 (GAAP) and $0.29 (adj.), with adjusted EBITDA $117M (12.2% margin) .
  • Results beat S&P Global consensus on revenue and EPS; EBITDA was in line to slightly above. Management raised FY25 revenue to $3.55–$3.60B and adjusted EPS to $1.07–$1.12; tax rate cut to 18% (from 19%) . Q4 growth step-down is not a read-through for 2026, per CFO .
  • What drove the quarter: robust Counter-UAS demand (>$250M awards), IMS strength (Columbia program profitability), naval network computing and advanced infrared sensing; sequentially higher funded backlog (+7%) supports 2026 visibility .
  • Key watch items: ASC margin pressure from germanium availability/pricing, less favorable mix, and elevated IRAD (mid-3% of revenue), plus potential U.S. government shutdown impacts on awards/pay if extended .
  • Corporate actions: $0.09 dividend declared for Dec 2, $10M buybacks in Q3; CEO succession announced (Bill Lynn retiring; John Baylouny appointed CEO effective Jan 1; Board Chair to Fran Townsend) .

What Went Well and What Went Wrong

What Went Well

  • Exceptional demand and bookings: $1.3B Q3 bookings and a 1.4x book-to-bill; backlog at a record $8.9B (+8% YoY). “Broad-based customer demand was evident in our exceptional bookings and organic revenue growth” — Bill Lynn .
  • IMS segment outperformed: revenue +34% YoY to $383M; adjusted EBITDA +47% YoY with margin +120 bps, driven by Counter‑UAS and improved Columbia Class profitability .
  • Cash flow inflected positively: operating cash flow $107M and free cash flow $77M in Q3, both better YoY on improved working capital and profitability .
  • Counter‑UAS traction: “awarded over $250 million… for premier ground-based Counter‑UAS and short-range air defense programs,” with battle‑proven solutions and current U.S. Army provider status .

What Went Wrong

  • ASC margin pressure: adjusted EBITDA flat with margin down 100 bps YoY to 11.0% on higher IRAD and less favorable mix; germanium supply/pricing constrained efficiency .
  • Slight company margin compression: adjusted EBITDA margin down 10 bps YoY to 12.2% as higher volume/Columbia profitability was offset by elevated IRAD, mix, and execution inefficiencies (including germanium) .
  • Macro/program risk: management highlighted the extended U.S. government shutdown risk to awards/pay if it continues historically long; Q4 implied growth step-down is cautioned not to be used as 2026 read‑through .

Financial Results

Consolidated Performance vs Prior Periods

MetricQ1 2025Q2 2025Q3 2025
Revenues ($M)$799 $829 $960
Operating Earnings ($M)$59 $70 $93
Net Earnings ($M)$50 $54 $72
Diluted EPS ($)$0.19 $0.20 $0.26
Adjusted EBITDA ($M)$82 $96 $117
Adjusted EBITDA Margin (%)10.3% 11.6% 12.2%
Adjusted Diluted EPS ($)$0.20 $0.23 $0.29

Segment Breakdown

Segment MetricQ1 2025Q2 2025Q3 2025
ASC Revenues ($M)$511 $542 $580
ASC Adj. EBITDA ($M)$42 $58 $64
ASC Adj. EBITDA Margin (%)8.2% 10.7% 11.0%
ASC Bookings ($M)$669 $559 $757
ASC Book‑to‑Bill (x)1.3x 1.0x 1.3x
IMS Revenues ($M)$291 $290 $383
IMS Adj. EBITDA ($M)$40 $38 $53
IMS Adj. EBITDA Margin (%)13.7% 13.1% 13.8%
IMS Bookings ($M)$322 $294 $550
IMS Book‑to‑Bill (x)1.1x 1.0x 1.4x

KPIs

KPIQ1 2025Q2 2025Q3 2025
Bookings ($M)$991 $853 $1,307
Book‑to‑Bill (x)1.2x 1.0x 1.4x
Backlog ($M)$8,612 $8,607 $8,909
Operating Cash Flow ($M)($138) ($28) $107
Free Cash Flow ($M)($170) ($56) $77
Dividend per Share ($)$0.09 (Jun 5) $0.09 (Sep 3) $0.09 (Dec 2)
Share Repurchases88,050 sh / $3M 265,120 sh / $11M 247,558 sh / $10M
Cash & Credit Facility ($M)Cash $380; Credit $200 Cash $278; Credit $197 Cash $309; Credit $194

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Revenue ($M)FY 2025$3,525–$3,600 $3,550–$3,600 Raised (low end)
Adjusted EBITDA ($M)FY 2025$437–$453 $437–$453 Maintained
Adjusted Diluted EPS ($)FY 2025$1.06–$1.11 $1.07–$1.12 Raised (range)
Tax Rate (%)FY 202519% 18% Lowered
Diluted WASO (M)FY 2025269 269 Maintained
DividendQ4 2025$0.09 declared (Sep) $0.09 declared, payable Dec 2 Maintained payout cadence
Free Cash Flow ConversionFY 2025~80% of adjusted net earnings (framework) ~80% of adjusted net earnings (framework) Reiterated

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1 2025)Previous Mentions (Q2 2025)Current Period (Q3 2025)Trend
Counter‑UAS demandStrong orders; maturing directed energy; design wins; international interest Rapid expansion; joint interagency focus; tactical radars + comprehensive tech suite >$250M awards; palletized MEP; U.S. Army approved provider; battle‑proven Strengthening
AI/edge computing (Sage Core/Thor)Announced AI processor; open OS initiative Next‑gen shipboard computing; IcePiercer cooling traction Sage Core OS; Thor 4.1 multifunction computing; NG C2 alignment Building
Supply chain: germaniumDiscrete supplier issue; volatile pricing; backlog re‑set Price shock; safety stock; mitigation paths; EBITDA headwind Recycling/alt suppliers; 2026 resolution targeted; ASC margin drag Improving by 2026; near‑term constraint
Tariffs/macroExpected insulation; monitoring derivative impacts Temporary reprieve; risks incl. critical minerals No major new tariff impact noted; monitoring Watchful
Electric power & propulsion (Columbia)Favorable adjustments; margin expansion tailwind Margin expansion; industrial base expansion (steam turbine generators) Stable revenue cadence; more consistent margins in 2026; SC facility tailwind from 2027 Sustained tailwind
Government budget/shutdownFY26 request expected; elevated threat supports spend Reconciliation bill; FY26 budget up; Golden Dome initial funding Shutdown risk if prolonged; 2026 visibility solid Mixed near term; supportive medium term
IRAD (internal R&D)~40% YoY increase; proactive prototypes Elevated; margin headwind esp. ASC Mid‑3% of revenue; sustained at current level Elevated investment

Management Commentary

  • “Broad-based customer demand was evident in our exceptional bookings and organic revenue growth in the third quarter… We are making steady progress on strengthening Germanium supply and remain focused on disciplined program execution throughout the business.” — Bill Lynn, CEO .
  • “IMS… margin expanding by a higher 120 basis points thanks to higher volume and improved profitability on our Columbia Class program… Adjusted EBITDA margin at the company level continues to be constrained by increased R&D investment, less favorable program mix and less efficient program execution, including the impact of germanium.” — Mike Dippold, CFO .
  • “Sage Core is an integrated operating system that brings AI, advanced sensor, and edge computing together… applicable to both manned and unmanned systems… We were awarded over $250 million in contracts for our premier ground-based Counter‑UAS and short-range air defense programs.” — John Baylouny, COO/incoming CEO .
  • CEO transition: Bill Lynn to retire Jan 1; John Baylouny named CEO; Fran Townsend elected Chair; leadership focused on seamless transition .

Q&A Highlights

  • IRAD intensity and margin impact: IRAD to remain around mid‑3% of revenue to accelerate “ready‑now” solutions; expect ASC margins to stay dampened, IMS continues to lead margin expansion .
  • Germanium supply/pricing: safety stock supporting 2025; recycling older optics; diversifying to non‑China sources; exploring alternative materials for smaller optics; aiming for robust supply by 2026 .
  • Bookings/funded backlog: Q3 bookings “plussed up” at fiscal year‑end; funded backlog up 20% YoY and 7% sequentially, supporting 2026 revenue visibility .
  • Q4 setup and guidance bridge: expect growth step‑down vs 9M cadence; resist run‑rate extrapolation; revenue variability driven by material receipts; EBITDA range maintained; EPS raised on lower tax rate .
  • Columbia margins and industrial base: margins become more consistent in 2026 post pricing cadence; steam turbine generator second source opportunity with Navy funding; SC facility benefits from 2027 .

Estimates Context

  • Q3 actuals vs S&P Global consensus: Revenue $960M vs $925M estimate; EPS $0.29 adj. vs $0.279 estimate; EBITDA $117M vs $116M estimate — all modest beats. Q2 and Q1 were in-line to above on EPS and revenue; note SPGI “EBITDA” may differ from company “Adjusted EBITDA” definitions . Values retrieved from S&P Global.
MetricQ1 2025Q2 2025Q3 2025
Revenue Consensus Mean ($)736,717,230*827,455,810*924,790,660*
Revenue Actual ($)799,000,000 829,000,000 960,000,000
Primary EPS Consensus Mean ($)0.16509*0.21420*0.27947*
Adjusted Diluted EPS Actual ($)0.20 0.23 0.29
EBITDA Consensus Mean ($)78,090,020*93,518,350*116,010,830*
EBITDA Actual ($)82,000,000 96,000,000 117,000,000

*Values retrieved from S&P Global.

Key Takeaways for Investors

  • Beat-and-raise quarter: DRS beat consensus revenue/EPS and raised FY25 revenue and adjusted EPS ranges; tax rate lowered to 18%, providing EPS tailwind . Near-term catalyst is the raised outlook and strong bookings.
  • Counter‑UAS leadership: >$250M awards and U.S. Army provider status underpin growth; maritime C‑UAS MEP successfully demonstrated on USVs in Q3, expanding domain applicability .
  • IMS-led margin expansion continues: Columbia profitability and power & propulsion programs drive IMS margin; expect more consistent Columbia margins starting 2026, with SC facility benefits from 2027 .
  • ASC margins pressured near-term: elevated IRAD, mix, and germanium constraints weigh on ASC; management expects germanium mitigation (recycling/alt sources) to resolve by 2026 .
  • Funded backlog supports 2026: funded backlog up 20% YoY and +7% sequentially; revenue visibility is strong, though quarterly output hinges on material receipts timing .
  • Capital allocation steady: dividend maintained at $0.09 and buybacks ongoing; strategic $15M investment increased Hoverfly stake to ~25%, aligning with unmanned and C‑UAS adjacency .
  • Trading setup: Expect focus on Counter‑UAS pipeline wins, Golden Dome roadmap, and shutdown duration; heed CFO’s caution not to extrapolate Q4 step‑down as a 2026 read-through .

Additional Press Releases Relevant to Q3 2025

  • Hoverfly Technologies Series B: DRS invested $15M; manufacturing agreement expands domestic production of Sentry/Spectre; supports U.S. unmanned defense and supply chain resilience .
  • Maritime C‑UAS MEP: First open‑water USV demonstration validated detection, identification, tracking and sensor fusion; extends DRS’s land-based C‑UAS expertise to maritime domain .