Leonardo DRS (NASDAQ:DRS) executives highlighted strong organic growth, record bookings, and rising investment in capacity and research during the company’s fourth-quarter and full-year 2025 earnings call. The discussion also included management updates, a new license agreement tied to quantum computing, and the conclusion of a legacy international program that resulted in an unexpected loss.
Leadership transition and strategic priorities
President and CEO John Baylouny opened the call by thanking outgoing chairman and CEO Bill Lynn for 14 years of leadership. Baylouny said his priorities as CEO include building on the company’s foundation, accelerating operating cadence to deliver capabilities faster, and continuing to invest in and reward employees.
The company also announced Sally Wallace has been named Chief Operating Officer, alongside other leadership changes described as expanded responsibilities for longstanding leaders.
Investment ramp: R&D, capex, and supply chain actions
Management emphasized stepped-up internal investment. Baylouny said internal R&D spending rose 40% in 2025, while capital expenditures increased more than 60%. R&D focus areas include airborne, missiles, space, unmanned markets, and core ground-enabled domains, with emphasis on platform AI and autonomy, security and modularity, and platform-agnostic capabilities.
On capital spending, Baylouny said 2025 investments supported progress on a new naval power facility in Charleston, South Carolina, and targeted growth initiatives across the portfolio. For 2026, the company expects capex to rise further and “trend toward approximately 5% of revenue,” driven by ramping operations in Charleston, expanding production capacity, and modernizing facilities.
He also addressed supply chain constraints tied to germanium, a critical raw material used in some sensing products. Baylouny said constraints are now “contained,” with remediation measures including recycling initiatives, customer allocations, securing more reliable North American and European sources, and entering firm long-term supply agreements. He added that the company is co-investing to secure dedicated refining capacity and intends to reprice contract renewals over time to reflect market conditions and add protections against future shocks.
2025 financial performance: growth, margins, and cash flow
Chief Financial Officer Michael Dippold said full-year 2025 results exceeded expectations and were delivered “amid a prolonged government shutdown for most of the fourth quarter.”
- Q4 revenue: $1.1 billion, up 8% year-over-year.
- Full-year revenue: $3.6 billion, representing 13% organic growth versus 2024, marking a second consecutive year of double-digit growth.
- Q4 adjusted EBITDA: $158 million, up 7% year-over-year, with a 14.9% margin.
- Full-year adjusted EBITDA: $453 million, up 13% year-over-year, with a 12.4% margin.
- Full-year free cash flow: $227 million, up 19% year-over-year; Q4 free cash flow was $376 million.
Dippold said full-year margins were flat as higher volume and improved profitability on the Columbia-class submarine program were offset by higher internal R&D and less efficient execution tied to material cost growth. He quantified the impact of increased R&D as a 70-basis-point headwind to margin year-over-year.
By segment, Advanced Sensing and Computing grew revenue 9% in Q4 and 11% for the full year, while Integrated Mission Systems grew 5% in Q4 and 15% for the full year. Dippold said segment results reflected the net impact of two “non-routine” items: a quantum laser intellectual property license agreement and the conclusion of a legacy foreign ground surveillance program. He said the laser license boosted Advanced Sensing and Computing results, while the legacy program conclusion weighed on Integrated Mission Systems results.
On earnings, management said diluted EPS and adjusted diluted EPS rose 15% and 11% year-over-year in Q4, and 29% and 24% for the full year, supported by operating performance, lower interest and other expense, and a lower effective tax rate. Dippold added that the company ended the year in a net cash position and subsequently entered into a new $500 million revolving credit facility, citing lower interest costs and increased flexibility.
Program and market highlights: space, sensing, radars, and naval power
Baylouny highlighted what he called a “landmark” position in space on the Space Development Agency’s Tracking Layer Tranche 3 program, where the company is teamed with one of the prime awardees and will provide an infrared sensing approach. He said the win validates a multiyear push into space and could position the company for additional opportunities, including potential relevance to the “Golden Dome” initiative. Management also described a demonstration of secure data transport using a next-generation crypto multi-channel software-defined radio for satellite communications.
Across the portfolio, Baylouny cited momentum in infrared sensing (including airborne and unmanned applications), continued demand for counter-UAS solutions with both kinetic and non-kinetic effectors, and “immense global demand” for tactical radars supporting counter-UAS and air defense missions. He also pointed to strong execution on the Columbia-class program and engagement with the Navy on propulsion architectures for future platforms, emphasizing modular electric power and propulsion solutions.
In Q&A, management declined to discuss the size of the SDA Tranche 3 award, calling it competitive. Baylouny said the company is focused on execution and described how software-defined radio and crypto capabilities could support time-sensitive connectivity needs in future architectures.
2026 outlook: growth and margin expansion targets
Dippold initiated 2026 guidance calling for continued organic growth and margin improvement:
- Revenue: $3.85 billion to $3.95 billion (6% to 8% organic growth).
- Adjusted EBITDA: $505 million to $525 million, implying 70 to 90 basis points of margin improvement.
- Adjusted diluted EPS: $1.20 to $1.26, based on an 18.5% tax rate and 269 million diluted shares.
He said drivers of margin expansion include improved profitability on Columbia-class, favorable program mix, and operating leverage, while R&D is expected to remain at a comparable percentage of revenue but without the same margin pressure seen in 2025. The company expects capex just under 5% of revenue and free cash flow conversion of 80% of adjusted net earnings.
For the first quarter of 2026, Dippold said revenue is expected in the “low $800 million” range with an adjusted EBITDA margin in the low 11% range, and that the second half of the year should contribute slightly more than half of revenue and more than half of adjusted EBITDA.
On capital deployment, management said organic investment remains the top priority, followed by selective inorganic opportunities. Baylouny also discussed increased collaboration potential in Europe, citing the broader urgency around defense spending and the company’s relationship with its parent as a partner for international growth and potential technology licensing.
About Leonardo DRS (NASDAQ:DRS)
Leonardo DRS is a U.S.-based defense technology company and wholly owned subsidiary of Italy’s Leonardo S.p.A. The firm specializes in developing and integrating mission-critical systems for military and government customers, with a primary focus on command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR). Its core offerings encompass advanced sensors, targeting systems, radars and electronic warfare solutions designed to enhance situational awareness and operational effectiveness across land, sea and air domains.
The company’s portfolio includes naval combat management systems, unmanned vehicle sensors, power generation and distribution equipment, and training and simulation solutions.
