Leonardo DRS (DRS) Q3 2025: Bookings Surge 1.4x, Backlog Hits $8.9B as Counter-UAS Demand Accelerates
Leonardo DRS delivered a standout Q3, driven by a 1.4 book-to-bill ratio and a record $8.9 billion backlog, underscoring sustained momentum in counter-UAS, naval computing, and electric propulsion. The company’s robust order pipeline and portfolio realignment position it to capitalize on enduring defense priorities, even as margin pressure from R&D and supply chain constraints persist. The CEO transition and continued investment in innovation signal a focus on long-term growth, with visibility into 2026 supported by funded backlog and ongoing demand tailwinds.
Summary
- Counter-UAS Solutions Propel Growth: Battle-proven force protection and sensing technologies are driving record bookings and backlog.
- Margin Pressure from R&D and Supply Chain: Elevated internal R&D and germanium sourcing challenges weigh on near-term profitability.
- Leadership Transition Amid Strong Visibility: New CEO inherits a resilient portfolio with multi-year demand and funded backlog support.
Performance Analysis
Leonardo DRS delivered double-digit top-line growth in Q3, with revenue up 18% year-over-year to $960 million, propelled by surging demand in integrated mission systems (IMS) and advanced sensing capabilities. IMS revenue jumped 34%, fueled by counter-UAS, short-range air defense, and electric power propulsion programs, while ASC posted a solid 9% increase on strength in naval network computing and infrared sensing. These segments reflect the company’s strategic focus on high-priority defense domains.
Profitability trends were mixed: Adjusted EBITDA rose 17% to $117 million, but margins compressed slightly to 12.2%, reflecting higher internal research and development (IRAD) investment and less favorable program mix, particularly in ASC. Free cash flow improved significantly, supported by better working capital management and collection linearity, offsetting higher capital expenditures. Backlog reached a record $8.9 billion, up 8% year-over-year, with funded backlog surging 20%, providing strong visibility into future revenue conversion.
- IMS Segment Drives Outperformance: IMS accounted for the majority of growth and margin expansion, supported by counter-UAS and Columbia-class programs.
- ASC Margins Impacted by R&D: Increased IRAD spend and program mix diluted ASC margins, a trend expected to persist as innovation investment remains elevated.
- Backlog and Bookings Signal Enduring Demand: Book-to-bill of 1.4 in Q3 and 1.2 year-to-date reinforce confidence in sustained revenue growth into 2026.
Overall, DRS’s results reflect a business aligned with customer priorities, but margin expansion will depend on balancing R&D, supply chain costs, and execution efficiency as the company navigates a dynamic operating environment.
Executive Commentary
"Our third quarter results demonstrate DRS's close alignment with customer priorities, which was clearly reflected in our strong bookings, revenue, and profit growth, as well as solid cash flow generation. We secured $1.3 billion of bookings in the quarter, resulting in a 1.4 book-to-bill ratio. Our exceptional bookings propelled us to another record total backlog, which now sits at $8.9 billion, up 8% year-over-year and also up sequentially."
Bill Lynn, Chairman and Chief Executive Officer
"Quarterly revenue grew by 18% over the prior year, totaling $960 million. The team did an impressive job converting strong customer demand. From a segment perspective, IMS was our growth engine. IMS quarterly revenue was up 34%, driven by strong contributions from counter UAS and electric power propulsion programs."
Mike DePold, Chief Financial Officer
Strategic Positioning
1. Counter-UAS and Force Protection Leadership
DRS’s counter-unmanned aerial systems (UAS) and short-range air defense offerings are the cornerstone of its current growth, with $250 million in new awards this quarter alone. The company’s battlefield-proven solutions, field-tested with the U.S. Army and other services, have established DRS as a premier provider in an increasingly competitive and rapidly evolving market. Management expects this segment, which now represents 18% to 20% of total revenue, to proliferate across all echelons and domains, supporting future innovation and expansion into adjacent markets.
2. Sensing, Computing, and Edge Innovation
Investment in integrated sensing and network computing remains a strategic priority, with new products like SageCore, an AI-enabled tactical operating system, and Thor, a multifunction network computing platform, positioning DRS at the center of next-generation command and control (C2) modernization. These offerings address the U.S. Army’s Next Generation C2 initiative and multi-domain operations, supporting platform autonomy and edge analytics—capabilities increasingly in demand as warfare becomes more distributed and data-driven.
3. Electric Power and Propulsion Expansion
DRS’s electric power and propulsion business continues to deliver margin expansion and growth, notably through the Columbia-class submarine program. The company is actively pursuing new ship classes and industrial base expansion, leveraging differentiated technology that enhances energy flexibility and operational range for naval platforms. Management views this segment as a multi-year growth driver, with opportunities to proliferate technology across future platforms and geographies, including potential international markets.
4. Supply Chain Resilience and Germanium Sourcing
Ongoing supply chain constraints, especially in germanium (critical for infrared optics), have prompted DRS to implement recycling initiatives and diversify sourcing away from China. Management reports early success in extracting germanium from legacy optics and is negotiating new supplier agreements to secure 2026 supply. While these efforts mitigate risk, higher input prices are expected to be absorbed within fixed-price contracts, impacting ASC margins into next year.
5. Portfolio Realignment and M&A Strategy
DRS continues to reshape its portfolio toward enduring demand areas, evidenced by the recent $15 million investment in Hoverfly (tethered drone technology) and a balanced approach to capital allocation. The company is prioritizing strategic M&A, moderate share repurchases, and a new dividend, with a bias toward acquisitions that deepen core technology or open new adjacencies in sensing, autonomy, and networked systems.
Key Considerations
DRS’s Q3 performance and guidance reflect a defense technology company navigating both robust demand and operational headwinds. The strategic context is defined by:
Key Considerations:
- Demand Concentration in Counter-UAS and Sensing: Force protection and sensing solutions are the primary growth engines, with significant customer pull from U.S. and allied militaries facing evolving drone and missile threats.
- Persistent Margin Pressure from R&D and Input Costs: Elevated IRAD spend (mid-3% of revenue) and germanium inflation are weighing on ASC margins, a dynamic likely to persist as DRS prioritizes innovation and supply chain resilience.
- Visibility from Record Backlog and Funded Orders: $8.9 billion total backlog and 20% funded backlog growth provide multi-year revenue visibility, supporting management’s confidence in sustained organic growth.
- CEO Transition with Continuity of Strategy: Incoming CEO John Bailuni brings deep operational and customer expertise, signaling continuity in technology focus and execution discipline.
- Balanced Capital Deployment: Management remains disciplined on M&A, with a clear preference for strategic fit and financial returns, while maintaining moderate buybacks and a dividend.
Risks
Risks include extended U.S. government shutdowns, which could delay contract awards and payments if they persist beyond current durations, as well as ongoing supply chain volatility, particularly around critical materials like germanium. Fixed-price contracts expose DRS to input cost inflation, and continued margin compression in ASC could limit near-term earnings leverage. Competitive intensity in counter-UAS and sensing markets remains high, with both established primes and new entrants vying for share.
Forward Outlook
For Q4 2025, DRS guided to:
- Revenue in the range of $3.55 to $3.6 billion for the full year, implying 10% to 11% growth
- Adjusted EBITDA between $437 million and $453 million
- Adjusted diluted EPS between $1.07 and $1.12
Management highlighted several factors that will shape performance:
- Material receipt timing and program execution will drive quarterly linearity
- IMS will remain the primary margin expansion engine, while ASC absorbs ongoing R&D and input cost headwinds
Takeaways
Leonardo DRS enters the final quarter with strong demand signals and a record backlog, positioning the company for continued growth into 2026 despite margin volatility. The leadership transition comes at a moment of strength, with the new CEO inheriting a robust portfolio and clear customer alignment.
- Backlog and Bookings Anchor Growth: Multi-year demand visibility and funded orders support sustained organic expansion, even as quarterly growth rates moderate due to timing effects.
- Innovation Investment Is a Double-Edged Sword: IRAD spending is fueling new product launches and future market access, but is temporarily dilutive to margins, especially in ASC.
- Watch for Supply Chain and Cost Dynamics: Progress on germanium sourcing and margin stabilization in ASC will be critical for restoring earnings leverage in 2026 and beyond.
Conclusion
Leonardo DRS’s Q3 underscores its alignment with enduring defense priorities, with counter-UAS, sensing, and naval power at the forefront of customer demand. While margin headwinds persist, record backlog and innovation investment position the company for long-term growth, with the new CEO set to steer execution through 2026.
Industry Read-Through
DRS’s results highlight broad-based demand for counter-UAS, sensing, and networked defense solutions, reflecting a sector-wide pivot toward autonomous, resilient, and data-driven capabilities. Rising R&D spend and supply chain complexity are industry-wide themes, with fixed-price contracts exposing many defense tech firms to input cost volatility. Investors should monitor how primes and mid-tier suppliers balance innovation investment with profitability, and how rapidly evolving threat environments accelerate procurement and adoption of next-generation capabilities across the sector.