Ladies and gentlemen, good day and welcome to the Leonardo DRS third quarter fiscal year 2026 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 Camilla Yanushevsky, Director, Investor Relations. 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 four 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 four 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 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 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.
Our performance established us as the provider of critical electric drive components, creating a hard-to-replicate position on one 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 or 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 and beyond power and propulsion this quarter, we received a roughly $40 million award to produce Joint Tactical Terminal Transceiver, or JTT-X, units for the Navy's EA-18G Growler electronic attack aircraft. JTT-X 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 Mk 41 vertical launch system. Mk 41 is the common launcher for weapons including Tomahawk and Standard Missiles, and it's installed on more than 180 U.S. 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 multi-year investments in open architecture, high performance computing, led to the launch of THOR in March, 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 that innovation was recognized at the 2026 AUSA Annual Meeting and Exposition in Washington, D.C., 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 five-year, roughly $100 million NGC2 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 discussed today, from counter-drone to infrared sensing and electric propulsion to next generation communications and innovations like THOR, reinforce a strategy that's working. One that turns foresight into trusted fielded capability, the capacity to scale, and the data to decision advantage. That's why our technology is at the center of how the United States and its allies are responding to today's security challenges, and why 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.
Thanks, John, and good morning, everyone. The 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, then 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 underscores 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 expect that outperformance 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 IR&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 gains. Moving further down the P&L, net earnings were $115 million, up 60%, and diluted EPS was $0.43 a share, up 65% year-over-year.
Adjusted net earnings were $124 million, up 59%, and Adjusted Diluted EPS was $0.46 a 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, we generated $61 million in the third quarter. That 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. The 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, and meets our disciplined financial criteria.
With that, let me turn to our updated 2026 outlook. Our performance through the first nine 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-$3.985 billion, implying an 8%-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-$555 million, up from our previous range of $525 million-$540 million. The 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 two non-routine items from 2025. The quantum laser license that benefited ASC's 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-$1.53 a 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've 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.
Thanks, Mike. Before we take questions, I want to come back to our strategy. Taken together, our performance and the wins we discussed today show that the strategy is working. We 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, we're delivering affordable, mission-proven capability focused on performing as required the first time, every time. That focus is helping protect the U.S. and allied service members, strengthen war fighter readiness, and enable mission success around the globe. With that, we're happy to take your questions.
Thank you. At this time, we will begin the question- and -answer session. To ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. In fairness to all, we ask that you please limit yourselves to one question and one follow-up. One moment as we compile our Q&A roster. Our first question is going to come from the line of Justin Lang with Morgan Stanley. Your line is open. Please go ahead.
Yeah. Hi. Thanks. Good morning. John, 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 and how your content compares to the work you're doing on Columbia today, and if there are other near-term international surface ship opportunities that we should be monitoring as well. Thanks.
Thanks, Justin. I appreciate the question. Absolutely. This is 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 U.S. Expanding into Korea is a big deal. Secondly, going back to the comments that I made, we expect that future ship classes are going to go full electric. The reason for that is distances. We think that war fighters are increasingly going to require fighting. Ships will have to fight from a further distance. That requires more power for radars, more power for electronic warfare, more power for directed energy. You really can't 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 it dead end there 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 effectors. So we think this is an opportunity for us to show that that architecture, that structure, is applicable to surface vessels. We hope that the U.S. next, whether it's a battleship or a destroyer or a cruiser, ends up with the same architecture. Just to compare it against Columbia, it's exactly what we did for Columbia, is built a structure that allows us to move power from one place to another inside that ship. So it's the same architecture, the same capability. We do think there's expanding capability in the U.S. for next-generation ship classes and other ship classes around the world.
Great. Thanks. That's great color. Maybe just one quick one for Mike. It was 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? If you give us a little more color on maybe how much of the margin strength of IMS was driven by Columbia specifically, that'd be great. Thanks.
Yeah. Thanks, Justin. First, I'd say the IMS execution continues to be stellar across the segment. This includes really both our land and naval programs. We do talk a lot about Columbia, but the margin increase and the margin strength that we've been seeing has also been supported by our other naval programs across the fleet. In this quarter, we saw a particular strength in the counter-UAS side also delivering to those high returns. As we pull back and look at the IMS margin profile, we've always talked about kind of a long-term vision of mid-teens margin profile for DRS. The way that IMS is executing now, I would expect you to kind of see these 16% margin levels hold. That should be the baseline going forward, given the performance levels that we've seen and the market position that they have in those kind of key areas.
Great. Thanks so much.
Thank you. One moment for our next question. Our next question comes from the line of Hrishi Kumbhojkar with Guggenheim Securities. Your line is open. Please go ahead.
John, Mike, Camilla, good morning.
Good morning.
I wanted to kind of staying on margins. I wanted to kind of look at ASC. Certainly appreciate that the margins expanded 80 bps year-over-year, but kind of thinking sequentially, I am seeing that they are flat. Curious if you can provide some color regarding the drivers there and how we should think about that moving forward.
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. 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. 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 expanding profile as compared to last year. 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.
Yeah. Let me just add a little bit to that, Hrishi. I think that it is important to kind of understand what is going on in the counter-UAS market, which is driving some of those margins on the ASC side. First and foremost, you have to sense the drones before you can counter them. 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 you the ability to go and counter them. This is one of the reasons why our margins are rising on the ASC side is because 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. One more from me regarding kind of zooming out and thinking about the supply chain. You highlighted a lot of the contract wins. 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. 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.
Thank you. And one moment for our next question. Our next question will come from the line of Jan Engelbrecht with Baird. Your line is open. Please go ahead.
Hi, John and Mike. Thanks for taking our questions. I wanted to touch on the timing of new contract wins and how that maybe could affect 2027. I know you guys aren't guiding towards 2027 today, but if you just look at that 50,000-unit drone camera win, there's probably some follow-on awards. If you just look at some of the drone dominance guys, they're fairly small companies, and they definitely don't have the capabilities that you have. And then you look at the IDIQ and then also the Korean Destroyer. Just at a high level, could you guys talk about those three contracts, and talk about how they potentially ramp in 2027 or later this decade? Thank you.
Yeah, I'll start with the contracts. I'd say, first off, on these successes that we've had. This is a manifestation of the investments we've been making. And we've been making these investments in the increased IR&D. You've also been seeing the investments in an uptick in CapEx to increase our capacity. So we're pleased to see these kind of materializing and the successes that they have. If I'm thinking about how that kind of reflects itself into 2027, we'll provide an update to that framework in our earnings call in early February. And even give some more kind of multi-year guidance at the investor day, as we're looking to do that in early 2027.
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 2027.
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 and in addition to the investments that we have made in capacity, give us confidence for that framework Mike just mentioned. And confident in sustained growth, not just in 2027, but beyond 2027. I want to just go back to the comment about the one-way effectors and so forth. I think you are going to start seeing a blending of capability between missiles, high-end missiles, and all the way down to one-way drones. You are going to start seeing those blend. Today, you might be able to name missiles with one or two or three hands, 10, 15 different missiles that you could probably name off the top of your head.
Tomorrow, you are not going to be able to name them all. They are going to proliferate. You are going to have all different capabilities from very high-end to very low-end. And the common element here is that they are all going to have to see. They are all going to have to seek. And DRS is providing that capability with high-end, U.S.-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 don't have the depth and the financial wherewithal to be able to give larger orders. But we do see that 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, 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 the proliferation of tactical radars as part of a layered defense system. If you just look at, in Epic Fury, what happened with some of these exquisite radars, which have exquisite capabilities, but they do take anything from three to eight ye ars that you guys supply that don't necessarily have 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. You are spot on. This is exactly the issue that our customers are seeing. Those big, expensive, exquisite radars are just like the geosynchronous satellites of yesteryear. You are going to start seeing a 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 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 problem.
How do you balance out the need to have an exquisite capability, but have the ability to defend it or distribute it? 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 spot on. That is the problem du jour. It is a problem that we think there is a market shift, from exquisite capability that is centralized to a distributed, tactic capabilities.
Great. Thanks, John. Appreciate it.
Thank you. One moment for our next question. Our next question will come from the line of Ronald Epstein with Bank of America. Your line is open. Please go ahead.
Hi, John. This is Andrew on for Ronald. Thanks for taking our questions. I just wanted to-
Morning, Andrew.
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 Enerbility's 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.
Yeah. Doosan is our partner here, and for in-country content as well as integration. Bringing this world-class capability into Korea, they are a nice partner for us here. As far as the manned, 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.
It was announced, I think, last week that they are looking to deploy drone aircraft carriers.
Okay.
It sounded like something.
Andrew, thanks for that. Look, at the end of the day, this is where the market has to move. You are going to 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 potentially even react. This is where DRS has been investing. This is where we are going, is to being able to provide those sensing capabilities, the computing capabilities, the AI to the edge of the battle space. It is not surprising that Korea is moving in that direction. I think everybody is going to end up having to go there to be able to put that mass on the battlefield.
Got you. If I could just sneak in a quick follow-up. How are you guys thinking about Anduril's entry into shipbuilding components? I am just thinking, it sounds like it would be positive for you guys in the sense that they are looking to build more submarines more quickly, which would bring volume tailwinds to DRS. Is that the right way to think about it?
Yeah. I think you got it right. Anything that helps the submarine industrial base produce submarines faster is good for the nation, it's good for the Navy, it's good for us. At the end of the day, our capability is about the propulsion, the power propulsion part of the submarine. We're not challenged by capacity. We've invested there. We're increasing production. That's not an area that I expect to see a lot of competition.
In fact, we see the customer, the Navy, coming to 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're coming to us to solve that problem. I think that the department's investment in Anduril is a good thing for the industry. It's a good thing for the submarine industrial base, a good thing for the nation.
Gotcha. Thank you.
Thank you. And one 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.
Hi. Good morning, everyone. This is Jamie Simonson on for Seth today.
Hey, Jim.
Morning, Jamie.
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 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 similar to what we're seeing? I know it's too early to give 2027 guidance, but just looking to how the mix might evolve into next year from a margin perspective might be helpful.
Yeah. I think that there is going to be a positive mix tailwind as we look out for Q4, and into the future, including 2027. I think John laid out the blueprint as to why. The distributed radar needs, and the counter-drone and short-range air defense threats that are emerging globally are certainly driving the need for that detection that enables intercept. The radars that we provide are the right bands. They're the right kind of distance from a range perspective, and they are included in a lot of the counter-UAS solutions that are being offered and issued globally. So I expect that mix tailwind to be at our back, from a profitability perspective. I would expect you see that the 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.
I'll just add to that, and just to take you back to the FY 2027 budget request. When you look at the budget request, you see the prioritization in there. I won't comment about what we think gets appropriated, but the most important thing about that budget is where the priorities are. You're seeing more than 100% or 400% increase year-over-year in drone and counter-drone. You're seeing 100% increase in space. You're seeing a 50% increase in shipbuilding. These are areas that we've 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 going to be the priorities that come through the other side. Those are the areas that we've been focused on. We're going to be able to provide solutions to our customers there.
Excellent. Okay. Thank you. Yeah, that's great color. Thanks for the detail. I'm happy you actually brought up the budget there because that was my sort of follow-up. I know that you said, in your prepared remarks that the CR is not really having a meaningful impact on your business, which I can certainly appreciate. Is there any risk, thinking about the scenario of 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, we don't consider that risk to be material to us. For the reasons we just discussed. The fact is that, whatever happens in the 2027 timeline, whether there's an extended CR, or worse, I think that the priorities are going to still be the same with the department. Those priorities are not going away. They're bipartisan issues that need to be funded. I think that we're well-positioned both from a prioritization standpoint and from a backlog standpoint. We don't see a material risk here.
Excellent. It's great to hear. Thanks for the time.
Thank you, and one 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.
Hi. Good morning, John, Mike, and Camilla. My first question, are you seeing opportunities to deploy similar counter-UAS radars in either NATO Europe or the Middle East? I know Leonardo DRS 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. Just wondering your thoughts there.
Yeah, we are certainly seeing demand from across the globe. We are selling radars into many of those nations today, for the reasons that we have discussed. I think there is going to be a demand across the board in all avenues of all parts of the world, the globe, for counter drone, air defense. You are going to see architectures like the ones that we have been building 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 demand signal is very high. We have been winning a significant amount of that market share, and we think we are going to continue to do so.
The only other thing I would add to that, Austin, is, we did also announce that we opened a DRS UK division that is geared towards manufacturing the tactical radars to kind of give us access to that U.K. and European counter-UAS environment. We do think that 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 march down that path and have seen early successes there.
Okay. I just want to follow up on Joint Interagency Task Force 401, the Domestic Shield contract. When should we start to see some of those revenues from the $500 million task order flow through the P&L? 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?
Let me address the first part of the question, some of that revenue is already flowing through the P&L. The award, the framework came with delivery orders, which we are able to satisfy pretty quickly. I think that will continue to be a mechanism that our customer uses to buy radars. That is point number one. Point number two is, I think you are going to continue to see an ability for the department to focus 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 counter-drone, whether it is in the base budget or a Reconciliation Act. It is almost irrelevant to us, because the demand signal is there, it is bipartisan, it has to be bought.
Awesome. I will pass it back there. Thank you.
Thank you. One moment for our next question. Our next question will come from the line of Andre Madrid with BTIG. Your line is open. Please go ahead. Andre, your line might be muted.
Yep. Thank you for that. Appreciate it. Good morning, team, and appreciate the question. I want to start first with maybe some talk on the space portfolio. It seems like the sensing work you are doing there is already trending well. Could you maybe just more pointedly tell us how Tranche 3 work is progressing? I know you guys also won a recent OTA as well, layering that on top. Just how should we be thinking about the size of space now and maybe 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.
Thanks, Andre. First and foremost, just going back to the budget request, the space request for 2027 is 100% increase from 2026. So it is a market that is growing. It is growing fast. It is growing 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 the OTA that you mentioned. And that is going well as well. We are executing promptly. 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, which I believe we 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 capability for the space-based communications to be able to get that data to the ground quickly 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. And as I said, the market is growing very quickly.
No, that is very helpful color. Thank you, John. Maybe pivoting to something that I feel like does not really get a lot of air time, 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. With the pipeline that exists currently for both large scale and small scale projects, what is the opportunity for you and the team to really win some significant work here?
Our legacy there on the nuclear side is instrumentation and controls, safety controls. We get orders for those continuing as the reactors get upgraded or turned back on. 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. That is an area that could potentially grow in the future.
Got it. Thanks so much for the color there. I will leave it there.
Thank you. One 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.
Hey, good morning, everyone.
Morning, Noah.
John, you've laid out a pretty clear case for increased demand in sensing that could accrue to you. It's hard to quantify. You guys have provided some numbers around what you're doing with uncooled infrared from a lower-cost, higher-volume perspective, and you've discussed the verticals this can feed into. I guess, is there a way to quantify the shifts you're seeing? How much of this drives existing business to keep growing around 10%? How much of it drives a step function in the growth rate of existing business? How much of it is brand-new business entirely? I don't know if there's any. It's kind of too broad of a question, maybe, but if there's any way to frame it.
No, I'll take that. I think that, obviously, you're hitting on our diversity, which is both an asset and a curse there, right? Because it is not any individual line item in the budget. But overall, the way I would characterize it is that we've got a solid mid to high single-digit growth rate embedded in our core portfolio, and that's kind of what we talked about with the tactical radar pieces and some of our core programs that we have.
We've also been investing in kind of frothier growth areas like the missiles, like space, that if we hit on them, it'll give us some option tickets to grow faster than the framework we've laid out. That's the way we came out of the market in 2024 when we did our multi-year guide, and that's what we're doing now. Kind of give a guide that is firm, but then provide the optionality through our investments to maybe outperform.
Okay. That is fair. Mike, when you talked about 2027 double digits, including Raft, what is Raft in 2027 from a growth contribution perspective?
We have not been explicit in that, but we did give some color surrounding Raft. We talked about it, one, being immediately accretive to the financial profile, being EPS to revenue growth into margin. The key piece here that I think can point you in the right direction is we talked about the acquisition being inside the DRS trading multiple. If you take the tax benefit out of that purchase price, that gives you some color on the EBITDA contribution. Then if you back into that being margin accretive, you can kind of get to that overall number in and around where we think Raft will contribute to DRS. I think it is going to be a couple points, 2, 3 points additive to the top line growth.
Okay, helpful. 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?
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 had kind of surpassed our expectations here, and therefore 2027 will be a little bit more muted in the margin expansion.
Okay. Thank you.
Thank you. And one moment for our next question. Our last question will come from the line of Jon Tanwanteng with CJS. Your line is open. Please go ahead.
Hi, good morning. Thanks for squeezing me in, and congrats on the strong results and outlook. I was wondering if you could be a little bit more specific on the radar business today. What percentage is it of revenues, and where do you expect that number to go over the next two to three years, especially with this new $500 million contract, the international opportunity you're seeing, and the expansion you're doing on the capacity side?
Yeah. We haven't disclosed what the actual revenue contribution from the radars is. It's highly embedded in two pieces of the business, both the force protection piece and the advanced sensing. It's kind of where you're seeing a lot of the radar demand come through. It's becoming a sizable piece of the portfolio. And maybe more importantly is the investments we're making in the capacity is creating it to be a nice tailwind to growth. So we're looking to continue to increase that capacity, to continue to increase the geographic penetration like we did in the U.K. I think we have some other opportunities around the globe to run that same playbook. So this is going to be a nice tailwind to growth on the radar side. And as we mentioned, it also comes with a favorable mix profile from a profit perspective.
Jon, I'll just come in over the top on that one, and just talk about the budget request again, back onto the 2027 department's budget request. If you look at the drone counter-drone increase, over 400% increase year-over-year, it is by far the largest increase in capability in the department's request. You would expect, and we do expect, that the radar part of our portfolio, which addresses that need, it's going to be one of the larger parts of our growth profile. It'll outpace the framework that Mike talked about for 2027.
Thank you. At this time, I will now turn the floor back to John Baylouny for closing remarks.
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 capability, 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. This concludes today's conference. You may now disconnect. Thank you for participating, and everyone, have a great day.