Leonardo DRS Earnings Call Highlights Growth and Spend

Leonardo Drs, Inc. ((DRS)) has held its Q4 earnings call. Read on for the main highlights of the call.

Leonardo DRS’ latest earnings call struck an upbeat tone, with management emphasizing strong organic growth, record orders and rising earnings even as heavy R&D and capital spending weigh on near term margins. Executives framed 2025 as a year of investment and execution, positioning the defense contractor for sustained demand in radar, infrared and naval power markets.

Strong Revenue Growth

Leonardo DRS reported 2025 revenue of $3.6 billion, delivering a robust 13% organic increase versus 2024 as defense demand stayed elevated across key programs. Fourth quarter sales reached $1.1 billion, up 8% year over year, underscoring both healthy end market trends and solid execution despite supply chain and cost headwinds.

Record Bookings and Backlog Visibility

Bookings remained a standout, marking a fourth straight year with book to bill at 1.2 times or better and pushing year end backlog to $8.7 billion. Management highlighted the backlog as providing clear multi year revenue visibility and confidence in sustaining growth, particularly across sensors, computing and naval power systems.

Robust Profitability and EPS Expansion

Profitability advanced alongside revenue, with full year adjusted EBITDA rising 13% to $453 million and adjusted diluted EPS increasing 24%. In the fourth quarter, adjusted EBITDA grew 7% to $158 million and adjusted EPS climbed 11%, indicating operating leverage even as higher R&D and cost inflation pressured margins.

Exceptional Free Cash Flow and Balance Sheet Strength

Cash generation was exceptionally strong, with fourth quarter free cash flow of $376 million driving full year free cash flow to $227 million, a 19% increase. Leonardo DRS closed the year in a net cash position and subsequently secured a new $500 million revolving credit facility, giving it ample flexibility to fund growth and manage volatility.

Significant Strategic Investments

Management is leaning into the cycle with aggressive investment, boosting internal R&D by 40% in 2025 and lifting capital expenditures by more than 60%. For 2026, CapEx is expected to trend toward about 5% of revenue to expand capacity in Charleston naval power, tactical radar and infrared production and key demonstration assets.

Major Program Wins and Technology Demonstrations

The company notched important strategic wins, including a landmark role on the SDA Tranche 3 tracking layer for space based infrared sensing. It also successfully demonstrated a secure multichannel software defined radio for satellite communications, moves that deepen its presence in the fast growing space and resilient communications markets.

Segment Strengths and Broad-Based Demand

Growth was broad based across segments, with Advanced Sensing & Computing delivering 9% fourth quarter and 11% full year growth, while Integrated Mission Systems posted 5% and 15% respectively. Demand was driven by tactical radars, electric power and propulsion, counter drone systems and advanced infrared sensing, underscoring diversified exposure.

Improving Program Profitability

The flagship Columbia Class naval power program continues to execute well and is now contributing meaningfully to profitability within Integrated Mission Systems. Management pointed to improving margins and tailwinds from this program as volume ramps, helping offset pressures from higher materials costs and elevated development spending.

Commercial Monetization of Non-Core IP

Leonardo DRS also moved to monetize non core technology, signing a 10 year, $100 million laser intellectual property license with a quantum technology firm. The deal unlocks value from a commercial opportunity while allowing the company to maintain its strategic focus and capital allocation on defense end markets.

Margin Pressures from R&D and Investment

Despite higher volume, full year adjusted EBITDA margin held flat at 12.4% as gains from scale and Columbia Class execution were offset by a roughly 70 basis point headwind from sharply higher R&D. ASC segment margins benefited from the one time laser license, masking some underlying pressure from cost inflation and investment ramp.

CapEx Intensity and Execution Sensitivity

CapEx intensity jumped more than 60% in 2025 and is set to approach about 5% of revenue in 2026, raising near term cash deployment even as working capital efficiency is expected to improve. Management also flagged elongated conversion cycles and revenue sensitivity to material receipts and labor, with first quarter guidance implying a lower, low 11% EBITDA margin.

Supply Chain and Legacy Program Headwinds

Supply chain challenges around critical materials, most notably germanium, drove higher input costs and less efficient execution, and management warned that price volatility may persist, requiring contract repricing and supplier investments. Results were also hit by a non anticipated loss on a legacy foreign ground surveillance program that has reached obsolescence, pressuring IMS margins.

Forward-Looking Guidance and Outlook

For 2026, Leonardo DRS guided revenue of $3.85 billion to $3.95 billion, implying 6% to 8% organic growth, with adjusted EBITDA of $505 million to $525 million and 70 to 90 basis points of margin expansion. The company expects adjusted EPS of $1.20 to $1.26, free cash flow conversion near 80%, heavier back half weighted earnings and sustained R&D and CapEx intensity to support long term growth.

Leonardo DRS’ earnings call painted a picture of a defense supplier balancing strong demand and rising earnings with deliberate investment in next generation capabilities. While supply chain friction, legacy program clean up and higher spending weigh on near term margins, management’s guidance and record backlog suggest a constructive multi year growth story for investors tracking the name.