Leonardo DRS, Inc. Common Stock 2026 Q3 Earnings Call

Ma'am, please go ahead. Good morning and welcome.

Thank you for joining today's quarterly earnings conference call. With me today are John Baylouny, our President and CEO, and Mike Dippold, our CFO. They will discuss our strategy, operational highlights, financial results, and outlook. Today's call is being webcast on the investor relations section of the website, where you can find the earnings release and supplemental presentation. Management may also make forward-looking statements during the call regarding future events, future trends, and the anticipated future performance of the company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors.

These statements include those relating to the pending acquisition of Raft, including the expected timing of completion of the transaction, the satisfaction of closing conditions, the receipt of regulatory approvals, the anticipated benefits of the transaction, and plans for the integration of the acquired business. For a full discussion of these risk factors, please refer to our latest Form 10-K and our other SEC filings. We undertake no obligation, other than as may be required by law, to update any of the forward-looking statements made on this call. During this call, management will also discuss non-GAAP financial measures, which we believe provide useful information for investors. These non-GAAP measures should not be evaluated in isolation or as a substitute for GAAP performance measures. You can find a reconciliation of the non-GAAP measures discussed on this call in our earnings release. With that, I will turn the call over to John.

Thank you, Camilla. Good morning, everyone, and welcome to our third quarter 2026 earnings call. I am pleased to share that we delivered another strong quarter. Bookings exceeded $1.6 billion, representing a book-to-bill ratio of 1.5x. Organic revenue grew 11% year-over-year. Profitability grew even faster, driving 180 basis points of margin expansion at a 59% increase in Adjusted Diluted EPS. This performance, combined with improved visibility into the fourth quarter, gives us confidence to raise and tighten our full-year revenue and profitability outlook. I want to thank our entire DRS team for their hard work and dedication. Their high standards and focus on customer success help strengthen the security of our nation and our allies with a dedication and focus on ensuring that our products perform as required the first time, every time.

That commitment has never mattered more, from the continued defense of Ukraine to rising tensions across the Indo-Pacific to persistent instability in the Middle East. The global security landscape continues to grow increasingly complex. Our capabilities are central to how the U.S. and its allies are responding and adapting to this evolving landscape. Whether it's counter-drone defense proven in real-world combat in Ukraine, naval power systems extending our partnership with allied navies in the Pacific, or force protection systems safeguarding soldiers and sailors in the front lines, our technology is being selected because it works, and our third quarter results reflect this. We expect these security challenges to persist, creating increasing demand for our solutions and supporting a strong bookings environment. Last quarter, we shared that we expected the second half to drive a greater contribution across key metrics, and our third quarter results reflect a solid start.

Third quarter bookings span radar and advanced sensing, electric power propulsion, and force protection. Both bookings and book-to-bill were our strongest since becoming a public company 4 years ago and lifted our record-funded backlog to $5.6 billion. That backlog provides meaningful visibility and underscores the durability of demand for our differentiated capabilities. Mike will share further specifics behind the quarter and our improved outlook in just a moment. First, I want to provide some additional perspectives on the budget environment. Our customers began the fourth quarter under a continuing resolution, currently set to run through December 11. We do not expect the current CR to have a meaningful impact on our business. Regardless of how the continuing resolution resolves or the outcome of next month's midterm elections, we remain confident that the broader threat environment warrants continued growing and bipartisan defense investment. The administration's base budget is a record.

The request highlights priority investment areas for our customers, and it's well-aligned to our portfolio, allowing us to foresee sustained and growing demand for the solutions we provide. Against this backdrop, our strategy is to deliver differentiated capability to help our customer maintain overmatch and invest ahead of need in both capability and capacity. This enables us to scale when the mission requires it. Let me share a few examples of our strategy in action. Starting with tactical radars, nearly 4 years after acquiring RADA, the business is performing exceptionally well. That performance comes as global security challenges grow more complex, and inexpensive drones proliferate at scale, creating an asymmetric threat to critical infrastructure and exquisite systems at home and overseas. Ongoing conflicts have made one thing clear: high-value sensors and defensive systems need an affordable, scalable layer of protection of their own. Responding to these threats begins with sensing.

As an early mover in tactical radars, DRS has both the capacity and capability to respond quickly. We are rapidly providing a distributed network of tactical radars in active conflict zones, delivering resilient sensing coverage across large areas, including around allied forces, critical infrastructure, and high-value systems. That speed and flexibility are built into our company and are embodied in our radar portfolio, which spans multiple bands and allows us to match the right mix of range, resolution, and detection performance to each mission. Our software-defined and AI-enabled architecture also lets us adapt fielded radars as threats evolve without redesigning the hardware. Taken together, our sensors provide range, resilience, affordability, and depth of detection. Our differentiation is recognized this quarter with a $500 million contract supporting the Department of War's counter-drone office, called JIATF 401.

We believe our radar's strong record against drone threats across multiple conflicts helped secure this award. While the contract ceiling is not included in backlog, it is a meaningful demand signal and reinforces our position as a radar provider of choice across the counter-drone ecosystem. During the quarter, we also received a large order for the Extended Mast Surveillance System, or EMSS, and fielded a system within a week of customer's request, rapidly extending protection for critical U.S. assets in the Indo-Pacific and demonstrating our ability to put proven capability to customers' hands with speed and agility. Also this month, the U.S. Army highlighted our radars on a combat-proven robotic combat vehicle. These opportunities reinforce our confidence in sustained demand growth, and we are expanding radar capacity to meet that demand.

This includes the establishment of DRS UK, which we announced this month to better serve customers across Europe with local capability, content, and production. Shifting to counter-UAS more broadly, our radars are integrated into many counter-UAS systems in service today. That install base gives us a clear view of evolving mission requirements and positions us to stay ahead of as those requirements change. For example, we just exhibited a vehicle-agnostic, pallet-based counter-UAS and short-range air defense system that integrates modular sensors and effectors. Our solution is built around a Self-Loading Equipment Dock or SLED, an open reconfigurable platform that can mount on a range of vehicles and combine our radar with mission-tailored sensors and effectors. This effector-agnostic architecture supports kinetic and non-kinetic defeat options for missiles and guns to directed energy and electronic warfare.

That open approach gives customers flexibility as threats, platforms, and available effectors evolve, rather than locking them down to a single solution. Shifting to effectors, operations in Ukraine and more recently in the Middle East, have underscored a growing cost asymmetry. Inexpensive threats have been launched in volume while inventories of costly interceptors remain finite. Our focus is on changing that equation. Directed energy is one way to address it. Recently, a leading high-energy laser provider selected DRS to enable its mobile counter-drone laser system under the Army's Enduring High Energy Laser, or HEL, program, the Army's first production contract for a high-energy laser weapon. That selection builds on years of DRS-directed energy integration work, including government live fire evaluations and training in 2024 and 2025. Another way to address the cost per intercept challenge is by lowering the cost of kinetic interceptors. Interceptor drones are one low-cost kinetic option.

To support them, we adapted our detector approach around uncooled infrared technology designed to deliver performance at a fraction of the cost of traditional systems. As we discussed last quarter, that capability helped us secure a contract for our Tenum Orbit thermal core with a leading low-cost drone manufacturer, beginning with an order of more than 50,000 units. Interest from additional manufacturers is accelerating, and we believe demand for thermal cores could grow significantly as low-cost drones proliferate. Our Dallas assembly and test line provides the domestic capacity to serve that opportunity. That same combination of performance and affordability earned us a role this quarter on DUTCH, the Army's next-generation thermal imaging initiative. Together with growing demand, this validation supports our view that DRS has a natural path to expand its role as a sensor provider across next-generation effectors.

That opportunity advanced this quarter when the Army named us one of the six finalists in its xTech|Apex Intercept low-cost Seeker category, supporting interceptors designed to operate alongside Patriot. Turning to the Navy, the Indo-Pacific is a primary theater shaping future fleet requirements. China's deep magazine of short and medium-range missiles is pushing U.S. and allied forces to operate at greater distances. Ships must detect and defeat threats further out and carry more effectors, driving the need for significantly more onboard power. At our 2024 Investor Day, we laid out a case for integrated electric propulsion on surface combatants, an architecture that places all power generation on a common grid, allowing ships to shift power between propulsion and combat systems as mission needs change, rather than limiting it to the drive shaft. We viewed our experience on state-of-the-art Columbia program as the foundation of the broader electric power opportunity.