Leonardo DRS, Inc. (DRS) Q3 2026 Earnings Call Transcript

Operator: Ladies and gentlemen, good day, and welcome to the Leonardo DRS Third Quarter Fiscal Year 26 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the company's prepared remarks, there will be an opportunity to ask questions and instructions will be provided at that time. As a reminder, this conference is being recorded. I would now like to turn the conference over to Stephen Vather, Director, Investor Relations. Ma'am, please go ahead.

Stephen Vather: 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 Michael 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 ks 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.

John A. Baylouny: Thank you, Stephen. 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 a 180 basis points of margin expansion and 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 helps 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 is counter drone defense proven in real world combat in Ukraine, naval power systems extending our partnership with the allied navies in the Pacific, or force protection system 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. But 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 is 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 customers 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 ROS the business is performing exceptionally well. That performance comes as global security challenges grow more complex. And the inexpensive drones proliferate at scale. Creating an asymmetric threat to critical infrastructure and exquisite systems at home and overseas. Ongoing conflicts have made 1 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 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 mass surveillance system or EMSS. And fielded a system within a week of the customer's request. Rapidly extending protection for critical US assets in the Indo Pacific, and demonstrating our ability to put proven capability to customers' hands with speed and agility. Also this month, the US 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 installed base gives us a clear view of evolving mission requirements and positions us to stay ahead 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 nonkinetic 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 and expensive threats have been launched in volume. While inventories of costly interceptors remain finite. Our focus is on changing that equation. Directed energy is 1 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 EHEL 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 1 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 10 orbit thermal core with a leading low cost drone manufacturer beginning with an order of more than 50 thousand 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 1 of the 6 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 of shaping future fleet requirements. China's deep magazine of short and medium range missiles is pushing US 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 24 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. Reviewed our experience on the state of the art Columbia program as the foundation of the broader electric power opportunity. Our performance established us as the provider of critical electric drive components, creating a hard-to-replicate position on 1 of the Navy's most important programs. For a surface ship, this architecture translates into a system that provides more efficient and flexible power output than is currently available under a traditional mechanical even hybrid electric architecture making it ideal for the increased power demands. As shipboard power requirements continue to rise, we anticipate a growing demand from the Navy. and allies as we build our Charleston facility to support that growth. That conviction delivered another significant win. This quarter, we were selected to provide the permanent magnet electric propulsion system for the Republic of Korea's Navy's KDDX destroyer program. KDDX establishes an important foothold for DRS in the Indo-Pacific surface fleet market, expanding our opportunity set with allied navies and provides a valuable proof point for potential US Navy adoption of this electric power and propulsion architecture across the domestic surface fleet including new US Navy ship classes and unmanned surface vessels. Complementing the KDDX win, we received additional funding this quarter to advance our steam turbine generator capability including an award to begin developing a DRS design system. Also for our naval business, at Beyond Power and Propulsion this quarter, we received a roughly $40 million award to produce joint technical terminal transceiver or JTTx, units for the Navy's EA 18 g Growler electronic attack. aircraft. JTTx provides secure beyond line of sight communications. Enhances threat warning, and improves situational awareness at the edge. We also received $96 million in awards to continue supplying power supplies launch control equipment, and transformer systems for the Navy's Mark 41 vertical launch system. Mark 41 is the common launcher for weapons including Tomahawk and standard missiles and it is installed on more than 180 US and allied ships. The system's ability to integrate additional missile types over time also expands its relevance. As the U.S. and allied navies invest in deeper magazines to support prolonged operations in increasingly contested waters. More broadly, information superiority is becoming increasingly important across the missions we discussed today. Making sense of the battlefield at the edge continues to be an important focus of our strategy. The faster our customers can move from detection to decision, the greater their operational advantage. Our multiyear investments in open architecture high performance computing led to the launch of THOR. A rugged embedded computing system that brings AI processing, sensor fusion, communications, and command and control capability to the tactical edge. We are proud to see that innovation was recognized at the 2026 AUSA annual meeting and exposition in Washington DC where THOR was named best new product. A key differentiator is its ability to operate in all mission relevant environments, while maintaining full processing capability in extreme temperatures where commercial and competing hardware can throttle or shut down. That need for faster data driven decisions underpins the strategic rationale for our pending acquisition of RAFT which we still expect to close in the fourth quarter. RAFT's AI focused mission software capabilities will complement DRS' trusted fielded hardware and expand our ability to deliver integrated command and control solutions. The 5-year, roughly $100 million NGC 2 IDIQ awarded to RAFT in early Q3 validates the army's confidence in this integrated hardware software approach. Taken together, these investments and wins we have discussed today from counter drone, to infrared sensing and electric propulsion to next generation communications and innovations like THOR reinforce a strategy that is working. 1 that turns foresight into trusted, fielded capability, the capacity to scale, the data to decision advantage. that is why our technology is at the center of how the United States and its allies are responding to today's security challenges. and we will continue to translate that mission relevance into strong durable growth. I will now turn it over to Mike to walk through the financials.

Michael Dippold: Thanks, John, and good morning, everyone. Headline this quarter is strong execution across the business. As John noted, that execution allowed us to translate solid revenue growth into even faster profit growth. On our last call, we expected third quarter revenue of more than $1 billion adjusted EBITDA margin in the mid-13% range and modestly positive free cash flow. We finished ahead of that framework on every metric. Revenue exceeded $1 billion adjusted EBITDA margin was 14%, driving a year over year EBITDA growth rate of 27%. Free cash flow came in at $61 million well above the modestly positive contribution we anticipated. Importantly, we delivered these results while continuing to invest ahead of need in both capabilities and the capacity required to support future growth. Let me walk through our results and turn to our updated 2026 outlook and provide some context for the fourth quarter. Starting with revenue, we delivered $1.1 billion in the quarter, up 11% year over year. Growth was driven by programs related to tactical radars, electric power propulsion, and space sensing. At the segment level, growth was well balanced with IMS up 12% and ASC up 14%. At IMS, electric power propulsion and counter UAS were the primary drivers. At ASC, tactical radars and space payloads led the growth. Through Q3, both segments contributed in similar measure to our year to date growth. That balance underscored the breadth of our portfolio, and its alignment with the mission priorities John outlined. Turning to profitability. Our quarterly profit performance was exceptional. And we expected our performance to carry through for the full year. In the third quarter, adjusted EBITDA was $149 million, up 27% year over year, and meaningfully outpacing revenue growth. Adjusted EBITDA margin was 14%, up 180 basis points from the prior year. Profit growth and margin expansion reflected rigorous program execution, favorable mix, and operational leverage on the greater volume. By segment, profit growth was strong across both segments. With IMS the standout. IMS adjusted EBITDA rose 34%, and margin expanded 280 basis points. That performance is particularly notable given a more than 40% increase in R&D spend. Strong naval power execution and operational leverage from the higher volume more than offset that investment. At ASC, adjusted EBITDA increased 22% and margin expanded 80 basis points. This segment also benefited from strong operational delivery, favorable mix and volume leveraging. On a year to date basis, both segments delivered strong adjusted EBITDA growth and margin expansion, with IMS pacing the gain. Moving further down the P and L. Net earnings were $115 million, up 60% diluted EPS was $0.43 per share, up 65% year over year. Adjusted net earnings were $124 million, up 59% adjusted diluted EPS was $0.46 per share, also up 59% year over year. Higher operating profit was the primary driver of that growth, with an additional benefit from a lower tax rate. Shifting to free cash flow. Generated $61 million in the third quarter, was well above the modestly positive contribution we anticipated and meaningfully higher than the second quarter. From a year to date perspective, it also represents an improvement in free cash flow linearity compared with last year. Taken together, our cash generation and balance sheet strength give us ample flexibility to fund attractive organic investments and pursue selective M&A to drive long term shareholder value. A pending all cash acquisition of RAFT is a clear example. It expands our multi domain AI data fusion and mission software capability strengthens our growth profile meets our disciplined financial criteria. With that, let me turn to our updated 2026 outlook Our performance through the first 9 months has exceeded internal expectations and strengthened our confidence for the full year. As a result, we are raising and narrowing our outlook across all key metrics. We now expect full year revenue in the range of $3.95 billion to $3.985 billion implying an 8% to 9% organic growth year over year. Our record funded backlog of 5.6 billion provides strong visibility into that range. For the remainder of the year, revenue will be shaped primarily by the timing of materials receipts and achievement of program milestones. We now expect adjusted EBITDA of $545 million to $555 million up from our previous range of $525 million to $540 million updated outlook reflects our third quarter outperformance, and points to a stronger margin expansion for the full year. Consistent with what we shared last quarter, we expect both segments to make meaningful contributions to full year revenue and adjusted EBITDA growth. As a reminder, year over year comps are affected by 2 non-routine items from 2025. The Quantum laser license that benefited ASC 2025 results creates a tough comparison this year. Conversely, the conclusion of a legacy foreign ground surveillance program that weighed on IMS' 2025 results creates a more favorable comparison in 2026. The stronger profitability outlook combined with a lower tax rate, also carries through to the bottom line. We now expect adjusted diluted EPS of $1.50 to $1.53 per share. We have updated our full year tax rate assumption to 13%, while our diluted share count assumption is unchanged at 269 million As a reminder, our guidance excludes any contribution from the pending acquisition of RAFT. Given the expected fourth quarter close, we do not anticipate a meaningful contribution in 2026. And we continue to expect the acquisition to be accretive to adjusted diluted EPS in the first full year of ownership. For free cash flow, we are still targeting a 75% conversion of adjusted net earnings. At the same time, capital expenditures will remain elevated in the fourth quarter with full year CapEx expected to approximate 4% of revenue. Finally, a few comments on the fourth quarter. Our updated outlook implies a solid finish to the year. With meaningful sequential growth in both revenue and adjusted EBITDA dollars. On taxes, our full year assumption implies an effective tax rate of approximately 19% in Q4, which is more representative of a normalized go forward rate. On cash, we expect Q4 to remain our strongest free cash flow quarter even with the improved linearity we have seen year to date. As usual, we will provide our formal 2027 outlook with our full year results in February. With that, let me turn the call back over to John for some closing remarks.

John A. Baylouny: Thanks, Mike. Before we take questions, I want to come back to our strategy. Taken together, our performance and the wins we have discussed today, show that the strategy is working. Provide differentiated capability to help our customers maintain overmatch, that approach is translating to strong bookings, record funded backlog, and an improved outlook. Thanks to exceptional execution across our teams, delivering affordable, mission proven capability focused on performing as required the first time every time. That focus is helping protect the U.S., allied service members. Strengthen more fighter readiness, and enable mission success around the globe. With that, we are happy to take your questions. Thank you.

Operator: At this time, we will begin the question and answer session. In fairness to all, we ask that you please limit yourselves to 1 question, 1 moment as we compile our Q and A roster. Our first question is going to come from the line of Kristine Liwag with Morgan Stanley. Your line is open. Please go ahead.

Analyst: Yes. Hi, thanks. Good morning. John, actually, I wanted to start with the KDDX win. Congratulations on that. I was hoping you could talk a little bit more about the opportunity there. How your content compares to the work you are doing on Columbia today and if there are other near term international surface ship opportunities that we should be monitoring as well. Thanks.

John A. Baylouny: Thanks, Austin. I appreciate the question. Absolutely. This is a really a groundbreaking program for us. First and foremost, it gives us the ability, to show that our technology is applicable to nations outside of the United States. Expanding it to Korea is a is a big deal. Secondly, going back to the comments that I made, we expect that future ships. Ship classes are going to go full electric. And the reason for that is, is distances. We think that warfighters increasingly going to require fighting. Ships will have to fight from a further distance. That requires more powerful radars, more power for electronic warfare. Warfare, more power for direct energy. You really cannot do that without having the ability to shift power from different parts of the ship. Rather than just making power for the propulsion system and having a dead end there, you have. And a separate power supply for the sensors and weapons. You really need to be able to pull power from all of those places to increase power for those sensors and defectors. So we think this is an opportunity for us to show that, architecture, that structure is applicable to, surface vessels. We hope that the United States' next. Whether it is a battleship or destroyer or cruiser, ends up with the same architecture. And just to compare it against Columbia, it is exactly what we did for Columbia is build this is just a structure that allows us to move power from 1 place to another inside that ship. So it is the same architecture, the same capability. We do think there is expanding capability in the U.S. for next-generation ship classes and other ship classes around the world.

Analyst: Great. Thanks. that is great color. And then maybe just 1 quick 1 for Mike. it is another really strong margin quarter for IMS. And appreciate you had some risk retirement benefits last quarter. But should we think about margin levels in this kind of mid to high teens realm as the new run rate for the segment? And if you could give us a little more color on maybe how much of the margin strength that IMS was driven by Columbia specifically, that would be great. Thanks.

Michael Dippold: Yeah. Thanks, Austin. First, I would say the IMS execution continues to be stellar across the segment. This includes really both our land and naval programs. So we do talk a lot about Columbia but the margin increase and the margin strength that we have been seeing has also been supported by our other naval programs across the fleet. And then this quarter, we saw a particular strength in the counter UAS side also. Delivering to those high returns. So if we pull back and look at the IMS margin profile, we have always talked about, you know, kind of a long term vision of mid teens margin profile for DRS. And the way that IMS is executing now I would expect you would kind of see these 16% margin level hold That should be the baseline going forward. Given the performance levels that we have seen. And the market position that they have in those kind of key areas.

Analyst: Great. Thanks so much.

Operator: Thank you. And 1 moment for our next question. Our next question comes from the line of Robert Stallard with Guggenheim Securities. Your line is open. Please go ahead.

Analyst: John, Mike, Camilla, good morning. Morning. I wanted to kind of stay on margins. I wanted to look at ASC. So certainly appreciate that the margins expanded 80 bps year over year, but kind of thinking sequentially, You know, I am seeing that they are flat Curious if you can provide some color regarding the drivers there and how we think about that moving forward.

Michael Dippold: Yeah. I would say that on the ASC side, we are continuing to predict and project margin expansion throughout the year. I would say a lot of the margin depends on mix. From the ASC perspective, so that plays into a large portion of the margin expansion. And I think last quarter, we saw a significant uptick in some of our more favorable mixed programs in particular, some of the tactical radar, elements. So I think that is the driver. If you zoom out a little bit from a year to date perspective, I think that is where the benefit is more well seen rather than looking at a quarter to quarter basis. We continue to execute the margin in a in a in a expanding profile as compared to last year. And I expect that Q4 for the ASC segment will actually continue to see maybe a bit more of an accelerated step up from a margin expansion perspective.

John A. Baylouny: Yeah. Let me just add a little bit to that. Rishi. I think that it is important to kind of understand what is going on in the counter UAS market, is driving some of those margins on the ASC side. You know, first and foremost, you have to sense the drones before you can counter them. And our sensors are being selected more and more time and time again as the sensor of choice, being able to detect the drone, being able to distinguish between drones and birds and other things, other flying objects, being able to track those drones, and giving the. You the ability to go and counter them. And this is 1 of the reasons why our margins are rising in the on the ASC side is because that. Those radars are part of the picture, and we are solving problems in counter UAS. Across the entire market. I appreciate the color. that is helpful. And 1 more for me regarding kind of zooming out and thinking about the supply chain. You know, you highlighted a lot of the contract wins. But in terms of product sourcing, component sourcing, and material sourcing, are you seeing any issues or pressures at this point? Thinking about the wins? Thank you. Yeah. it is a great question. So first and foremost, we learned our lesson with germanium. Germanium gave us the ability to now look at, holistically, the supply chain. We have processes and procedures. We have tools including AI working on predicting where those supply chain challenges are going to be ahead of the challenge coming. We now have a very strong balance sheet We are using that balance sheet to buy product and material in advance of need, even in advance of contract. To bring that in house. So that we do not end up with a shortfall of material going forward. Great. Thank you.

Operator: Thank you. And 1 moment for our next question. Our next question will come from the line of Peter Arment with Baird. Your line is open. Please go ahead.

Analyst: I wanted to touch on the timing of new contract wins and how that maybe could affect 2027. I know you guys are not guiding towards 2027 today, but if you just look at that 50 thousand-unit drone camera when there is probably some follow on awards. If you just look at some of the drone dominance guys, they are fairly small companies, and they are probably they definitely do not have the capabilities that you have. And then you look at the radar IDIQ and then also the Korean destroyer. Just at a high level, could you guys talk about those 3 contracts and talk about how they potentially ramp in 2027 or later this decade? Thank you.

Michael Dippold: Yeah. I will start with the contracts. I would say first off, on these successes that we have had, this is a manifestation of the investments we have been making And we have been making these investments in the increased IRAD You have also been seeing the investments in an uptick in CapEx to increase our capacity. So we are we are pleased to see these kind of materializing and the successes that they have. If I am thinking about how that kind of reflects itself into 2027, you know, we will provide an update to that framework on our earnings call in early February and even give some more kind of multiyear guidance at the Investor Day as we are looking to do that in early 27. But that said, given the performance to date, the wins you referenced, the increased backlog, the success we are seeing from the investments, we remain optimistic about growing above what we laid out as the current framework. Additionally, if you put RAFT into that we are looking at 2027 driving towards a low double digit growth profile, but we will give more color to that coming out in early, 27.

John A. Baylouny: Yeah. Let me just add that, we are very well positioned for sustained growth in our investments, in the cutting edge technology, some of which you mentioned, and alignment to the customer's priorities. Really give us. In addition to the investments that we have made in capacity, give us confidence for this. That framework, Mike, just mentioned and confident in sustained growth, not just in 2027, but beyond 2027. Let me. I wanna just go back to the comment about the 1 way effectors and so forth, I think you are gonna start seeing a blending of capability between missiles, high end missiles, and all the way down to 1 way drones, you are gonna start seeing those blend. Today, you might be able to donate missiles with 1, 2, or 3 hands. 10, 15 different missiles that you could probably name off the top of your head. Tomorrow, you are not gonna be able to name them all. They are gonna they are gonna proliferate You are gonna have all different capabilities from very high end to very low end and the thing. The common element here is that they are all going to have to see. They are all gonna have to seek, and DRS is providing that capability with high end US manufactured infrared capability. We have invested in the facilitation and the expansion of our Dallas based foundry to be able to address those needs and you are right. A lot of these suppliers do not have the depth and the financial wherewithal to be able to give larger orders, but we do see that order base is going to come, and we are there with the solutions to be able to make those new solutions, those new capabilities of effectors affordable, and on par with the threats. Great. Thanks, John. Just. If I may, a quick follow-up You guys have previously talked about you know, the proliferation of tactical radars as part of a layered defense system. You just look at, you know, an epic theory, what happened with some of these exquisite radars, which have exquisite capabilities, but they do take you know, anything from 3 to 8 years to replace, and they have been destroyed. So are you guys seeing a noticeable uptick with the customers in The Middle East, the GCC on these tactical radars that you guys supply. They do not necessarily have you know, a SAD sensor capability, but if you employ multiple of them, across The Middle East, how should we just think about that business in terms of short range with RADA, but also some of the over the horizon radar capabilities that you guys have? Thank you. Yeah. Great. Great. You are spot on. This is exactly the issue that we that we are. Our customers are seeing those big expensive exquisite radars are just kind of like the geosynchronous satellites of yesteryear. You are going to start seeing the proliferation of smaller tactical lower cost radars We are seeing that demand coming from The Middle East and Eastern Europe. We have thousands of radars in the in the Eastern Europe right now doing that very thing is aggregating the radar picture together so that you do not have a centralized sensing capability. I think The U.S. is challenged with the same with the same problem. How do you balance out the need to have an exclusive capability but have the ability to defend it or distribute it. And that is something that we expect the market to move in our direction to be able to solve that problem. But you are right. You are you are spot on. that is the problem, for sure. it is a problem that we think there is a market shift to. From exquisite capability to centralize to a distributed tactical capabilities. Thanks, John. Appreciate it.

Operator: Our next question will come from the line of Ronald Epstein with Bank of America. Your line is open. Please go ahead.

Andrew: Hi, John. This is Andrew on for Ronald. Thanks for taking our questions. Good morning. I just wanted to follow-up on the earlier questions on KDDX. I am just looking to get a better idea of what Doosan's and our abilities contribution is on that. And then just in terms of future opportunities, is the Korean Navy's recently announced manned unmanned teaming battle group initiative something you guys are interested in pursuing a role on? Thank you.

John A. Baylouny: Yes. So Doosan is our partner here, and for in country content as well as integration. And this is, you know, bringing this world class capability into Korea is a nice. They are a nice partner for us here. As far as the unmanned teaming, I am not aware of Korea moving in that direction. I would expect them to, but I am just not aware of that move right now. Yeah. It was announced, I think, last week that they are looking to deploy a drone aircraft carriers, But Okay.

Andrew: Yeah.

John A. Baylouny: It sounded like something Yeah, Andre, thanks for that. Look, at the end of the day, this is this is where the market has to move. If you are gonna end up seeing a need for more and more mass on the battlefield. That mass has to be increasingly autonomous, has to be increasingly unmanned or uncrewed. You are going to put those platforms up in the front to be able to sense the battle space, understand the battle space, and then and potentially even react. And this is where DRS has been investing. This is where we are going. Is to be able to provide the sensing capabilities, the computing capabilities, the AI to the edge of the battlespace. it is not surprising that Korea is moving in that direction. I think everybody is gonna end up having to go there to be able to put that mass on the battlefield. Gotcha.

Andrew: And if I could just sneak in a quick follow-up. How are you guys thinking about Anduril's entry into shipbuilding components? I mean, I am just thinking, you know, it sounds like it would be positive for you guys in the sense that, you know, they are looking to build more submarines more quickly, which would, you know, bring volume tailwinds to DRS. Is that the right way to think about it?

John A. Baylouny: Yeah. I think I think you got it right. Anything that helps the submarine industrial base produce submarines faster is good for the nation. it is good for the navy. it is good for us. At the end of the day, you know, our capability is about the propulsion, the power propulsion part of the submarine. We are not challenged by a capacity; we have invested there. We are increasing production. that is not an area that I expect to see a lot of competition. In fact, we see the customer, the navy, come into us to expand their industrial base to provide second source capabilities and specifically in the area of steam turbine generators where the Navy really deserves to have a second source, and they are coming to us to solve that problem. So I think that Anduril's investment, the department's investment in Anduril, is a good thing for the industry. it is a good thing for the submarine industrial base. A good thing for the nation. Gotcha. Thank you.

Operator: Thank you. And 1 moment for our next question. Our next question will come from the line of Seth Seifman with JPMorgan. Your line is open. Please go ahead.

Jamie: Hi. Good morning, everyone. This is Jamie on for Seth today. Hi, Jamie. Morning. Hey. Morning. Thanks for taking my question here, and congratulations on a great quarter. I wanted to ask maybe a little bit more on ASC. I think you mentioned that a lot of the margin expansion was sort of due to the mix here, which makes sense. I guess when you look at your very strong backlog and order intake, Do you think the mix there is sort of similar what we are seeing? And I guess, I know it is too early to give 27 guidance, but just looking to how the mix might evolve into next year from a margin perspective might be helpful.

Michael Dippold: Yes. I think that there is going to be a positive mix tailwind as we look out for Q4 and into the into the future, including 27. I think John laid out the blueprint as to why. The distributed radar needs and the counter drone and short range air defense threat that are emerging globally, are certainly driving the need for that detection that enables INTERCEPT. And the radars that we provide are the right bands They are the right kind of distance from a range perspective. They are included in a lot of the counter UAS solutions that are being, offered and issued globally. So I expect that mixed tailwind to be at our back. From a profitability perspective. And I would expect you see that a majority of our future margin expansion is going to come on the back of ASC. As IMS is already performing at a very high level.

John A. Baylouny: I will just add to that. And just to take you back to the fiscal 27 budget request, And just. When you look at the budget request, you see the prioritization in there. I will not comment about what we think gets appropriated, but the most important thing about that budget is where the priorities are You are seeing, you know, more than a 100% or 4% increase year over year in drone and counter drone. You are seeing a 100% increase in space. seeing a 50% increase in shipbuilding. These are areas that we have been investing in. These are areas that are profitable for us. These are areas that we can expect to continue to grow regardless of what happens with the appropriations bill. Those are gonna be the priorities that come through the other side. Those are the areas that we have been, we have been focused on. We are gonna be able to provide solutions to our customers there. Excellent.

Jamie: Okay. Thank you. Yeah. that is that is great color. Thanks for the detail. I am happy you actually brought up the budget there because that was my follow-up. So I know that you said in your prepared remarks that the CR is not really having a meaningful impact on your business, which, you know, I can certainly appreciate. Is there any risk thinking about the scenario, possibly an elongated CR situation, Is there any risk looking to 2027 or are you kind of confident based on what you just said Yeah.

John A. Baylouny: We do not consider that risk to be material to us. And for the reasons we just discussed, fact is that whatever happens in the 2027 timeline, whether there is a. An extended CR or worse. I think that the priorities are gonna still be the same with the department. Those priorities are not going away. They are bipartisan issues that need to be funded I think that we are well positioned both from a prioritization standpoint and from a backlog standpoint. We continue, that we do not see a material risk here. Excellent. it is great to hear. Thanks for the time.

Operator: Thank you. And 1 moment for our next question. Our next question will come from the line of Austin Moeller with Canaccord Genuity. Your line is open. Please go ahead.

Austin Moeller: Hi. Good morning, John, Mike, and Camilla. So my first question are you seeing opportunities to deploy similar counter UAS radars in either NATO or The Middle East? I know, Leonardo SPA had been interested in licensing technology for Europe. Another contractor recently got an almost $500 million contract from Kuwait. To build a nationwide counter UAS shield. So just wondering your thoughts there.

John A. Baylouny: Yeah. We. We are certainly seeing demand from across the globe. We are selling radars into many of those nations today. For the reasons that we discussed. I think there is gonna be a demand across the board in all avenues of. Of all parts of the world the globe for counter drone, drone, air defense, And you are gonna see architectures like the ones that we have been building. In the in the Eastern Europe and The Middle East proliferate into other areas of the globe. We are not saying we do not have competition. We certainly have competition. But the but the demand signal is very high. We have been winning a significant amount of that market share, and we think we are gonna continue to do so.

Michael Dippold: The only other thing I would add to that, Austin, is we did also announce that we opened a UK division that is geared towards manufacturing the tactical radars to kind of give us access to that you know, UK and European counter UAS environment. We do think that is a blueprint for what is to come in order to get that capability, in different countries to have that sovereign expertise there via license. So we have started to down that path and have seen early successes there.

Austin Moeller: Okay. And I just wanna follow-up on Joint Interagency Task Force 401 domestic shield contract. When should we start to see some of those revenues from the $500 million task order flow through the p and l? And then just on the 14.4 billion for Drone Dominance that includes that is within the reconciliation bill, how should we think about how much of that goes to JIATF 401 if it gets passed?

John A. Baylouny: Let me let me address the fur. First part of the question. Some of that revenue is already flowing through the P and L. The award, the framework came with delivery orders. Which we are able to satisfy pretty quickly. I think that will continue to be mechanism that our customer uses to buy radars. that is that is point number 1. Point number 2 is I think you are gonna continue to see an ability for the department to focus. it is its buying power through that task force. So I would expect a significant portion of that $14 billion budget request to come through JIATF. Now how much gets appropriated, I will not comment on, but the point is that there has to be money appropriated for a counter drone, whether it is in the base budget or reconciliation. Act, it is almost irrelevant to us because demand signal's there. it is bipartisan. It has to be bought. Awesome. I will pass it back there. Thank you.

Operator: Thank you. 1 moment for our next question. Our next question will come from the line of Andre Madrid with U. S. Bancorp BTIG. Your line is open. Please go ahead. Andre, your line might be muted.

Andre Madrid: Yep. Thank you for that. Appreciate it. Sorry. Good morning, team, and, appreciate the question. Want to start first with maybe some talk on the space portfolio. Seems like the sensing work you are doing there is already trending well. I mean, could you maybe just more pointedly tell us how Tranche 3 work is progressing? I know you guys also won a, you know, a recent OTA as well layering that on top. I mean, how should we be thinking about the size of space now and maybe what the clip that it could be growing at and just how big it could become through the out years? Is really where I am trying to focus.

John A. Baylouny: Thanks, Andre. First and foremost, just going back to the budget request, the space request for 2027 is a 100% increase from 2026. So it is a market that is growing. it is growing fast. it is growing bit larger than the overall defense top line. So it is an area of focus for us. As you indicated, we did win, the SDA Tranche 3 missile warning, missile tracking payload contract. that is going well. We are executing very nicely there. We have also talked about it via OTA that you mentioned. And that is going well as well. We are executing properly. that is a sensing program to counter space based threats, and that is going well. We have other activities going on in space. As well because it is a focus of our company now. We have also launched a payload for which I believe we have talked about. Last year, we launched a payload to do a software defined radio with a software defined crypto That is the beginnings of a of a capability for the for the space based communications to be able to get that data to the ground quickly and get. Without going through a decision process so we can encrypt or decrypt and re encrypt data going from space based sensors directly to the interceptors. We are going to put another payload up here in the next couple of months to be able to prove that out as well. So there is a number of different activities going on in space. We are investing in that area. As I said, the market is growing very quickly. Okay. that is very helpful color. Thank you, John.

Andre Madrid: Maybe pivoting to something that I feel like does not really get a lot of airtime, but is pretty important in the current climate. Your commercial nuclear position, I know you have heritage. Through instrumentation and controls that goes back decades. I mean, with the pipeline that exists currently for both large scale and small scale projects, I mean, what is the opportunity for you and the team to really win some significant work here. So our legacy there on the nuclear side is instrumentation and controls.

John A. Baylouny: Safety controls. And so we get orders for those continuing as the as the reactors get upgraded or turned back on And so we are also looking at the small modular reactor market to see where there might be an opportunity to control those reactors or put instrumentation on those reactors. And that is an area that could potentially grow in the future. Got it. Got it. Thanks so much for the color there. I will leave it there.

Operator: Thank you. And 1 moment for our next question. Our next question will come from the line of Noah Poponak with Goldman Sachs. Your line is open. Please go ahead.

Noah Poponak: Hey, good morning, everyone. Good morning, Noah. John, you have you have laid out a pretty a pretty a pretty a pretty clear case for increased demand in sensing. That would. That could accrue to you. it is hard to quantify. You know, I know you guys have provided some numbers around what you are doing with uncooled infrared from a from a lower cost, higher volume perspective. And know, you discussed the verticals this can feed into. I guess, is there a way to quantify the shifts you are seeing? And how much how much of this drives existing business to keep growing around 10%? How much of it drives us step function in the growth rate of existing business? How much of it is brand new business entirely? Do not know if there is any it is kind of a too broad of a question maybe, but if there is any way to frame it.

John A. Baylouny: Noah. I will take that. Noah. I think that obviously, you are hitting on you know, our diversity, which is both an asset and a curse there. Right? Because it is you know, not any individual line item in the budget. But overall, the way I would characterize it is that we have got a solid kinda mid to high single digit growth rate embedded in our core portfolio, and that is kind of what we talked about with the tactical radar base and some of our core programs that we have.

Michael Dippold: We have also been investing in kind of frothier growth areas like the missiles, like space that if we hit on them, it will give us some option tickets to grow you know, kind of faster than the framework we have laid out. And that is the way we came out, at the market in 2024, when we did our multiyear guide. And that is what we are doing now. We kind of give a guide that is firm but then provide the optionality through our investments to maybe outperform. Okay.

Noah Poponak: that is fair. And, Mike, when you talked about 2027, double digits including RAFT. What is raft in 2027 from a growth contribution perspective?

Michael Dippold: So we have not been explicit in that, but we did give some color surrounding RAFT. We talked about it, 1 being immediately accretive to the financial profile. Being EPS, to revenue growth and to margin. But the key piece here that I think can kind of point you in the right direction as we talked about the acquisition being inside the DRS trading multiple you know, if you take the tax benefit out of that purchase price. That gives you some color on the EBITDA contribution And then if you back into that being margin accretive, you can get to that overall number in and around where we think RAFT will contribute to DRS. But I think it is gonna be, you know, a couple points, 2, 3 points, additive to the top line growth. Okay. Helpful.

Noah Poponak: And Mike, you had started this year with a framework for 2027 margin expansion, looking similar to 2026. How should we be thinking about that now with the 2026 outperformance?

Michael Dippold: Yeah. I would say we still expect to see 2027 increasing margin. But it will not be at the clip that we are seeing in 2026. The performance in 2026 has kind of surpassed our expectations here, and therefore, 2027 will be a little bit more muted in the margin expansion. Okay. Thank you.

Operator: Thank you. And 1 moment for our next question. Our last question will come from the line of John Tanwanteng with CJS. Your line is open. Please go ahead.

Jonathan Tanwanteng: Hi. Good morning. Thanks for squeezing me in, and congrats on the strong results and outlook. Wondering if you could be a little bit more specific on the radar business today. What percentage is it of revenues? And how do you where do you expect that number to go over the next 2 or 3 years, especially with this new $500 million contract, the international opportunity you are seeing and expansion you are doing on the capacity side?

Michael Dippold: Yeah. We have not disclosed what the actual revenue contribution from the radars is. it is highly embedded in 2 pieces of the business, both force protection piece and the advanced sensing. it is kind of where you are seeing a lot of the radar demand come through. it is becoming a sizable piece of the portfolio. And maybe more importantly, is the investments we are making in the capacity is creating it to be a nice tailwind to growth. So we are we are looking to continue to increase that capacity to continue to increase the geographic penetration like we did in The UK I think we have some other opportunities around the globe to run that same playbook. So this is gonna be a nice tailwind to growth. On the radar side. And as we mentioned, it also comes with a with a favorable mix profile from a profit perspective.

John A. Baylouny: And, John, I will just come in over the top on that 1 and just talk about the budget request again back on to the 400% increase year over year, It is by far the largest increase in capability in the department's request. So you would expect, and we do expect, that the radar part of our portfolio, which addresses that, that need is gonna outpace. it is going to be 1 of the larger parts of our growth profile. So it will outpace the framework that Mike talked about for 27. Thank you.

Operator: At this time, I will now turn the floor back to John Baylouny for closing remarks.

John A. Baylouny: Well, thanks, everyone, for joining us today for the great discussion. As we close out the year, our focus remains innovation, growth and execution. That means delivering on our record funded backlog advancing mission ready technologies, expanding domestic manufacturing capabilities, and working to close the integration of the RAFT acquisition. Together, those efforts strengthen the end to end capabilities we provide to customers reinforce our supply chain resilience and position us for strong durable growth. If you have any follow on questions, Mike and Camilla will be available after the call. We appreciate your time and continued interest in DRS, and we look forward to updating you again next quarter. Thank you.

Operator: This concludes today's conference. You may now disconnect. Thank you for participating and everyone have a great day.