Leonardo DRS Q3 2025 Earnings Call: Contradictions in Germanium Supply Stability, Golden Dome Backlog Timing, and Government Shutdown Impact Revealed

Date of Call: October 29, 2025

Financials Results

• Revenue: $960M, up 18% YOY
• EPS: $0.29 adjusted diluted EPS, up 21% YOY; GAAP diluted EPS $0.26, up 24% YOY

Guidance:

• Revenue for FY2025 expected to be $3.55B–$3.60B, implying 10%–11% YOY growth.
• Adjusted EBITDA range $437M–$453M; adjusted diluted EPS $1.07–$1.12; revised tax rate ~18%.
• Target ~80% free cash flow conversion of adjusted net earnings for the full year.
• 2026 guidance not provided; focus on organic growth and margin expansion.

Business Commentary:

* Strong Bookings and Revenue Growth: - Leonardo DRS reported $1.3 billion in bookings for Q3, resulting in a 1.4x book-to-bill ratio, and a year-to-date book-to-bill ratio of 1.2x. - This growth was driven by strong demand for counter UAS, advanced infrared sensing, naval network computing, and electric power and propulsion technologies.

• Record Total Backlog and Funded Backlog:
• The company's total backlog now sits at $8.9 billion, up 8% year-over-year and 20% in funded backlog year-over-year.

• The increase in backlog is attributed to the substantial bookings and strong customer demand for the company's abilities to align with their priorities.

• Financial Performance and Margin Trends:

• Revenue for Q3 grew by 18%, with quarterly revenue totaling $960 million. Adjusted EBITDA increased by 17%, although adjusted EBITDA margin slightly lagged behind prior year levels.

• The financial performance was supported by increased revenue from the defense sector and strategic investments in internal research and development.

• Supply Chain Challenges and Initiatives:

• DRS is actively addressing challenges in the germanium supply chain, including recycling initiatives and strategic agreements with partners to ensure consistent supply in 2026.
• These initiatives are aimed at mitigating the impact of supply constraints, which have been caused by disruptions in the global market and increased demand.

Sentiment Analysis:

Overall Tone: Positive

• “We secured $1.3 billion of bookings in the quarter, resulting in a 1.4x book-to-bill ratio… backlog now sits at $8.9 billion, up 8% year‑over‑year.” “Adjusted EBITDA was up 17%… adjusted diluted EPS increased by 21%.” Management raised full‑year revenue growth expectations to 10%–11%.

Q&A:

• Question from Peter Arment (Robert W. Baird & Co. Incorporated, Research Division): A question on just IRAD spending. You're seeing a lot of opportunities up pretty significantly, 35% in 2025. How do we expect that trending going forward?
  Response: Expect IRAD spending to remain around mid‑3% of revenue to maintain agility and growth.

• Question from Peter Arment (Robert W. Baird & Co. Incorporated, Research Division): Any updates on foreign military sales activity? What are you seeing there, any opportunities for DRS?
  Response: Expect a ramp in FMS demand, especially for force protection (counter UAS), sensors and naval power/progression into Asia.

• Question from Peter Arment (Robert W. Baird & Co. Incorporated, Research Division): On germanium pricing, has things stabilized? Have you gotten more suppliers or supply lined up for next year?
  Response: 2025 is largely secured; recycling and supplier diversification initiatives are underway to solidify supply and pricing into 2026.

• Question from Robert Stallard (Vertical Research Partners, LLC): Any unusually large orders this quarter and how do you expect these bookings to flow through to revenues?
  Response: Bookings bump driven by counter UAS/short‑range air defense and fiscal year‑end timing; funded backlog +20% YOY supports comfortable revenue conversion.

• Question from Robert Stallard (Vertical Research Partners, LLC): If the U.S. government shutdown carries on, what sort of potential risk do you see for DRS?
  Response: So far modest impact; a materially longer (historic) shutdown could delay awards and payments and start to affect execution.

• Question from Robert Stallard (Vertical Research Partners, LLC): You mentioned operating efficiency issues and germanium; is there anything else we should be aware of?
  Response: The operating inefficiencies called out are primarily centered on germanium; development program mix also lowers near‑term margins.

• Question from Michael Ciarmoli (Truist Securities, Inc., Research Division): How should we think about payback and measuring the return on the elevated R&D? Should we expect acceleration of revenue growth from this investment?
  Response: IRAD is intended to deliver higher‑maturity solutions that accelerate wins in adjacent markets (notably counter UAS and unmanned surface vessels).

• Question from Michael Ciarmoli (Truist Securities, Inc., Research Division): Can you quantify exposure to counter UAS programs or size the pipeline of opportunities?
  Response: Force protection (largely short‑range air defense and counter UAS) represents roughly 18%–20% of revenue, indicating significant penetration.

• Question from Michael Ciarmoli (Truist Securities, Inc., Research Division): Are you equally exposed to kinetic and non‑kinetic solutions for counter UAS?
  Response: DRS provides both kinetic and non‑kinetic capabilities across echelons and expects both to proliferate on the battlefield.

• Question from Michael Ciarmoli (Truist Securities, Inc., Research Division): Should we expect the same margin profile in 2026 with IMS leading and IRAD dampening ASC margins?
  Response: ASC investment will remain elevated; IMS is expected to be the primary source of profit and margin expansion near term.

• Question from Kristine Liwag (Morgan Stanley, Research Division): Can you talk more about your sourcing strategy for germanium, inventory and timeline/quantity visibility?
  Response: We built buffer stock for 2025, are recycling germanium from older optics and forming non‑China supplier/processing partnerships to bridge into and support 2026.

• Question from Kristine Liwag (Morgan Stanley, Research Division): You invested $15M in Hoverfly (now ~25% stake). What's the strategy regarding these unmanned capabilities and fit with the portfolio?
  Response: Hoverfly is a strategic minority investment to access tethered elevated sensing for sensing, targeting and potential C‑UAS applications.

• Question from Kristine Liwag (Morgan Stanley, Research Division): IMS growth was up 34% YOY and 32% sequentially—how much was driven by Columbia Class or other shipset transitions?
  Response: Columbia revenue cadence was stable; the quarter's step‑up was driven primarily by short‑range air defense and counter UAS programs.

• Question from Anthony Valentini (Goldman Sachs Group, Inc., Research Division): Opportunities to take propulsion from Columbia to other ships and how large is the missile/sensor opportunity?
  Response: Propulsion technology is being pursued for other ship classes to provide onboard energy flexibility; IR sensors address a broad missile market from high‑volume to high‑end opportunities.

• Question from Seth Seifman (JPMorgan Chase & Co, Research Division): How does SAGEcore fit into the Army's NGC2 plans and can it be a growth driver?
  Response: SAGEcore is an edge operating system for on‑platform AI and sensor fusion that aligns with NGC2 and is being applied across land, sea, air, USVs and space—a strategic growth driver.

• Question from Seth Seifman (JPMorgan Chase & Co, Research Division): On Columbia, what shipset cadence are you at and when will pricing/margins stabilize?
  Response: The lower‑priced shipset is retiring after 2025; margins should be more consistent and expand starting in 2026, with additional facility benefits from South Carolina expected in 2027.

• Question from Andre Madrid (BTIG, LLC, Research Division): Does the Hoverfly investment fit your previously outlined M&A criteria?
  Response: Yes—minority investments/partnerships like Hoverfly meet strategic M&A criteria and support elevated sensing capabilities.

• Question from Andre Madrid (BTIG, LLC, Research Division): Is the margin profile of C‑UAS work accretive or dilutive to IMS?
  Response: DRS does not break out margins by program publicly; management says C‑UAS margins align with the broader portfolio—no material anomaly.

• Question from Alexander Christian Preston (BofA Securities, Research Division): Any signs of slowness in contracting due to the shutdown (e.g., Golden Dome timing)?
  Response: To date only modest impacts; delays to testing/awards would surface only if the shutdown persists much longer toward year‑end.

• Question from Alexander Christian Preston (BofA Securities, Research Division): Where is C‑UAS demand coming from—split between Army, FMS, etc.?
  Response: Demand is broad‑based: strong from Army, plus Navy, Marines, Air Force, international FMS and commercial channels.

• Question from Jonathan Tanwanteng (CJS Securities, Inc.): On germanium, will you be constrained as stockpile falls and how will program fills/timing shape up?
  Response: Management has a plan (buffer stock, recycling and supplier diversification) and is comfortable it will bridge 2025 into 2026 without major constraints.

• Question from Jonathan Tanwanteng (CJS Securities, Inc.): Are alternative supplies significantly higher priced and will that impact ASC margins?
  Response: Because many contracts are fixed‑price, higher input costs will be absorbed and are expected to put pressure on ASC margins into 2026.

• Question from Jonathan Tanwanteng (CJS Securities, Inc.): Any changes to capital allocation plans given Hoverfly investment, buybacks, dividend?
  Response: Capital allocation remains balanced—introduced a dividend, moderate buybacks and a priority on strategic M&A while exercising patience.

• Question from Austin Moeller (Canaccord Genuity Corp., Research Division): Have you evaluated glass‑based alternatives (e.g., BlackDiamond) to replace germanium for certain optics?
  Response: Yes—alternative materials are being explored, particularly for smaller optics, and early‑stage results are promising.

• Question from Austin Moeller (Canaccord Genuity Corp., Research Division): Timing for Golden Dome RFPs/contracts next year?
  Response: Management sees accelerating activity (e.g., SHIELD RFP interest) and expects movement and opportunities across sensing, underlayer and over‑the‑horizon radar areas soon.

Contradiction Point 1

Germanium Supply and Pricing Stability

It involves the stability and availability of germanium, a critical material in many of DRS's products, affecting production costs and financial forecasting.

Has there been progress in resolving DRS's germanium pricing and supply issues? - Peter Arment (Robert W. Baird & Co. Incorporated)

2025Q3: Pricing for 2025 is stable, and efforts are underway to solidify supply for 2026, including recycling existing germanium and diversifying the supply base to reduce reliance on China. - Michael Dippold(CFO)

Can you elaborate on germanium supply issues and their financial impact? - Robert Stallard (Vertical Research Partners, LLC)

2025Q2: Germanium is critical for infrared products. Supply has been constrained due to tensions with China. Efforts include recycling, alternative sources, and product redesigns. - William Lynn(CEO)

Contradiction Point 2

Golden Dome Impact on Backlog

It pertains to the expected timing and impact of the Golden Dome program on DRS's backlog, which could influence revenue projections and market expectations.

Are there contract delays from the government shutdown and what’s the current contracting environment? - Alexander Christian Preston (BofA Securities, Research Division)

2025Q3: Orders for Golden Dome are expected to roll out in the '26 timeframe. - William Lynn(CEO)

When will Golden Dome impact your backlog, and what’s the M&A environment update? - Peter Arment (Baird)

2025Q2: Orders for Golden Dome are expected to roll out in the '26 timeframe, as the architecture is being organized. - William Lynn(CEO)

Contradiction Point 3

Impact of Government Shutdown on Contracts and Payments

It involves the potential impact of a government shutdown on the company's operations and financial performance, which are crucial factors for investors.

What risks does a prolonged government shutdown pose for DRS? - Robert Stallard (Vertical Research Partners, LLC)

2025Q3: While any significant impact is still uncertain, a prolonged shutdown could lead to delays in awards and payments beyond a certain length, but the current situation is not yet at that critical point. - William Lynn(CEO)

What risks or opportunities arise from the Secretary of Defense's push for Army transformation? - Unidentified Analyst (Morgan Stanley)

2025Q1: The current impact is minimal. A prolonged shutdown could lead to delays in awards and payments beyond a certain length, but the current situation is not yet at that critical point. - Bill Lynn(CEO)

Contradiction Point 4

Counter UAS Market Opportunities

It touches upon the company's assessment and expectations regarding the counter UAS market, which is a significant growth area for Leonardo DRS.

What opportunities exist for DRS in foreign military sales, particularly in Europe, and are there recent developments? - Peter Arment (Robert W. Baird & Co. Incorporated)

2025Q3: Approximately 18-20% of DRS's revenue is from counter UAS programs, which are primarily part of its force protection segment, providing a solid market position. - Michael Dippold(CFO)

Will Army budget cuts affect your revenues, and what are IMS margins expected to be in 2025? - Michael Ciarmoli (Truist Securities, Inc., Research Division)

2024Q4: Counter UAS and AI-enhanced computing are growing, and they're in the sweet spot of our target market. - William Lynn(CEO)

Contradiction Point 5

Margins and IRAD Investment

It involves changes in financial forecasts, specifically regarding the impact of IRAD investments on margins, which are critical indicators for investors.

Can you update us on IRAD spending and whether it will increase in the future? - Peter Arment (Robert W. Baird & Co. Incorporated)

2025Q3: IRAD investment is expected to stay at around 3% of revenues, providing agility to maintain growth in a dynamic market. This includes increased investments to align with procurement process changes by the Department of Defense. - Michael Dippold(CFO)

What are this year's margin expectations and the implications of planned investments in the Charleston facility? - Alex Ladd (JPMorgan)

2025Q1: The margin expansion is primarily due to operational leverage as revenue increases. Volume impacts G&A expenses. We are well-positioned with our Charleston investment, especially with the Navy's investment to expand our role in submarine throughput. - Mike Dippold(CFO)