Leonardo DRS Q3 2026 Earnings Call Transcript
Leonardo DRS (NASDAQ:DRS) reported third-quarter financial results on Thursday. The transcript from the company’s third-quarter earnings call has been provided below.
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Summary
Leonardo DRS reported strong financial results for Q3 2026, with bookings exceeding $1.6 billion and 11% year-over-year organic revenue growth. Profitability grew faster, with a 59% increase in adjusted diluted EPS and a 180 basis points margin expansion.
The company raised its full-year outlook, now expecting $3.95 to $3.985 billion in revenue and adjusted EBITDA of $545 to $555 million. The funded backlog reached a record $5.6 billion, providing strong visibility into future revenue.
Key strategic achievements include a $500 million contract for tactical radars, a win for the Republic of Korea Navy’s KDDX Destroyer Program, and continued progress in space sensing and counter-UAS systems. The pending acquisition of Raft is expected to enhance AI and data fusion capabilities.
Full Transcript
OPERATOR
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 Januszewski, Director, Investor Relations.
Ma’am, please go ahead.
Camilla Januszewski (Director, Investor Relations)
Good morning and welcome. Thank you for joining today’s quarterly earnings conference call. With me today are John Baillooney, our president and CEO, and Mike DePold, our CFO. They will discuss our strategy, our 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.
Mike Dippold (Chief Financial Officer)
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 is 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 is well balanced with IMS up 12% and ASC up 14%. At IMS, electric power, propulsion, 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 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 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 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 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 to $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 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 carry through to the bottom line. We now expect adjusted diluted EPS of $1.50 to $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.
John Baylouny (Chief Executive Officer)
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 U.S. and allied service members, strengthen warfighter readiness, and enable mission success around the globe. With that, we’re happy to take your questions.
OPERATOR
Thank you. At this time, we will begin the question-and-answer session. To ask a question, please press star-1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star-1-1. Again, in fairness to all, we ask that you please limit yourselves to one question, 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.
Justin Lang (Analyst at Morgan Stanley)
Yeah, 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 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.
John Baylouny (Chief Executive Officer)
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 United States. 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. And the reason for that is distances. We think that warfighters 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 a 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 United States next, whether it’s a battleship or destroyer or cruiser, ends up with the same architecture. And just to compare it against Columbia, it’s exactly what we did for Columbia: we 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.
Justin Lang (Analyst at Morgan Stanley)
Great, thanks. That’s great color. And then maybe just one quick one for Mike. It’s another really strong margin quarter for IMS, and I 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 at IMS was driven by Columbia specifically, that’d be great.
Mike Dippold (Chief Financial Officer)
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. So 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. And in this quarter we saw particular strength in the counter-UAS side, also delivering to those high returns. So as we pull back and look at the IMS margin profile, we’ve always talked about, you know, kind of a long-term vision of mid-teens margin profile for Leonardo DRS, and the way that IMS is executing now, I would expect to kind of see the 16% margin level 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.
Justin Lang (Analyst at Morgan Stanley)
Great, thanks so much.
OPERATOR
Thank you. And one moment for our next question. Our next question comes from the line of Rasheek Kumbuchkar with Guggenheim Securities. Your line is open. Please go ahead.
Rasheek Kumbuchkar (Analyst at Guggenheim Securities)
John, Mike, good morning. I wanted to, staying on margins, I wanted to look at ASC. So certainly appreciate that the margins expanded 80 bps year over year, but thinking sequentially, I’m seeing that they’re flat. Curious if you can provide some color regarding the drivers there and how we should think about that moving forward.
Mike Dippold (Chief Financial Officer)
Yeah, I would say that on the ASC side we’re 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’s the driver. If you zoom out a little bit from a year-to-date perspective, I think that’s where the benefit is more well seen.
Rather than looking at a quarter-to-quarter basis, we continue to execute the margin in an 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 Baylouny (Chief Executive Officer)
Let me just add a little bit to that, Rashid. I think that it’s important to kind of understand what’s going on in the counter-UAS market, which 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 flying objects, being able to track those drones, and giving you the ability to go and counter them.
And this is one of the reasons why our margins are rising on the ASC side: because those radars are part of the picture and we’re solving problems in counter-UAS across the entire market.
Rasheek Kumbuchkar (Analyst at Guggenheim Securities)
I appreciate the color, that’s helpful. And one 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? You know, thinking about the wins? Thank you.
John Baylouny (Chief Executive Officer)
Yeah, it’s 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 challenge coming. We now have a very strong balance sheet. We’re 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 don’t end up with a shortfall of material going forward.
Rasheek Kumbuchkar (Analyst at Guggenheim Securities)
Great, thank you.
OPERATOR
Thank you. And one moment for our next question. Our next question will come from the line of Dan Engelbrecht with Baird. Your line is open. Please go ahead.
Dan Engelbrecht (Analyst at Baird)
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 ’27 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 probably definitely don’t have that capability 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 three contracts and talk about how they potentially ramp in ’27 or later this decade? Thank you.
Mike Dippold (Chief Financial Officer)
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 IRAD. 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 in 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 ’27. But that said, kind of given the performance to date, the wins you referenced, the increased backlog, the success we’re seeing from the investments, we remain optimistic about kind of growing above what we laid out as the current framework.
Additionally, if you put Raft into that, we’re looking at ’27 driving towards a low double-digit growth profile. But we will give more color to that coming out in early 2027.
John Baylouny (Chief Executive Officer)
Yeah, let me just add that we’re 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’ve made in capacity, give us confidence for that framework Mike just mentioned and confidence in sustained growth not just in ’27 but beyond ’27. I want to just go back to the comment about the one-way vectors and so forth. I think you’re going to start seeing a blending of capability between missiles, high-end missiles, and all the way down to one-way drones. You’re 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. But tomorrow you’re not going to be able to name them all.
They’re going to proliferate. You’re going to have all different capabilities from very high-end to very low-end. The common element here is that they’re all going to have to see, they’re all going to have to seek, and Leonardo DRS is providing that capability with high-end U.S.-manufactured infrared capability. We’ve invested in the facilitation, the expansion of our Dallas-based foundry to be able to address those needs. And you’re right, a lot of the 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.
Dan Engelbrecht (Analyst at Baird)
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. If you just look at, you know, in epictheory, what happened with some of these exquisite radars which have exquisite capabilities, but they do take, you know, anything from three to eight years to replace and they’ve been sort of, you know, destroyed. So are you guys seeing sort of a noticeable uptick with the customers in the Middle East, the GCC, and on sort of these tactical radars that you guys supply?
They don’t necessarily have a SAT 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 radar but also some of the over-the-horizon radar capabilities that you guys have? Thank you.
John Baylouny (Chief Executive Officer)
Yeah, great. You’re spot on. This is exactly the issue that our customers are seeing. Those big, expensive, exquisite radars are just kind of like the geosynchronous satellites of yesteryear. You’re going to start seeing the proliferation of smaller, tactical, lower-cost radars. We’re seeing that demand coming from the Middle East and Eastern Europe. We have thousands of radars in Eastern Europe right now doing that very thing: aggregating the radar picture together so that you don’t 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? And that’s something that we expect the market to move in our direction to be able to solve that problem. But you’re right, you’re spot on. That’s the problem du jour. It’s a problem that we think there’s a market shift from exquisite capability centralized to distributed tactical capabilities.
Dan Engelbrecht (Analyst at Baird)
Thanks John.
OPERATOR
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.
Andrew (Analyst at Bank of America)
Hi John, this is Andrew on for Ron. Thanks for taking our questions. I just wanted to—good morning. I just wanted to follow up on the earlier questions on KDDX. I’m just looking to get a better idea of what Doosan and Herbility’s contribution is on that. And then just in terms of future opportunities, is the Korean Navy’s recently announced unmanned teaming battle group initiative something you guys are interested in pursuing a role on? Thank you.
John Baylouny (Chief Executive Officer)
Yeah. So Doosan is our partner here for in-country content as well as integration. And this is, you know, bringing this world-class capability into Korea is a nice—they’re a nice partner for us here. As far as the unmanned, manned-unmanned teaming, I’m not aware of Korea moving in that direction. I would expect them to, but I’m just not aware of that move right now.
Andrew (Analyst at Bank of America)
Yeah, it was announced I think last week that they are looking to deploy drone aircraft carriers. But Yeah, it sounded like
John Baylouny (Chief Executive Officer)
Yeah. Andrew, thanks for that. Look, at the end of the day, this is where the market has to move. You’re 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’re going to put those platforms up in the front to be able to sense the battle space, understand the battle space, and then potentially even react. And this is where Leonardo DRS has been investing, this is where we’re going, is to be able to provide those sensing capabilities, the computing capabilities, the AI to the edge of the battle space.
It’s 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.
Andrew (Analyst at Bank of America)
Gotcha. 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’m just thinking, you know, it sounds like it would be positive for you guys in the sense that, you know, they’re looking to build more submarines more quickly, which would, you know, bring volume tailwinds to Leonardo DRS. Is that the right way to think about it?
John Baylouny (Chief Executive Officer)
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 of the Navy coming to us to expand their industrial base to provide second source capabilities, 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. So I think that Anduril’s investment, the department’s investment in Anduril, is a good thing for the industry. It’s a good thing for the submarine industrial base, good thing for the nation.
Andrew (Analyst at Bank of America)
Gotcha. Thank you.
OPERATOR
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.
Jamie Simonson (Analyst at JPMorgan)
Hi, good morning everyone. This is Jamie Simonson on for Seth today. 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. You know, 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 to what we’re seeing? And I guess I know it’s 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.
John Baylouny (Chief Executive Officer)
Hey, Jim. Good morning, Jamie.
Mike Dippold (Chief Financial Officer)
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. And 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. And 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.
John Baylouny (Chief Executive Officer)
I’ll just add to that and just take you back to the fiscal 2027 budget request. And just 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 a 100% or 400% increase year over year in drone and counter-drone. You’re seeing a 100% increase in space, 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 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. Yeah, we don’t consider that risk to be material to us. And 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 continue. We don’t see a material risk here.
OPERATOR
Thank you. And one moment for our next question. Our next question will come from the line of Austin Mohler with Canaccord Genuity. Your line is open. Please go ahead.
Austin Mohler (Analyst at Canaccord Genuity)
Hi, good morning, John, Mike and Camilla. So my first question. Are you seeing opportunities to deploy similar counter-UAS radars in either NATO Europe or the Middle East? I know Leonardo S.p.A. had been interested in licensed 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 Baylouny (Chief Executive Officer)
Yeah, we’re certainly seeing demand from across the globe. We’re selling radars into many of those nations today for the reasons that we discussed. I think there’s going to be a demand across the board in all avenues of all parts of the world, the globe, for counter-drone, drone air defense. And you’re going to see architectures like the ones that we’ve been building in Eastern Europe and the Middle East proliferate into other areas of the globe.
We’re not saying we don’t have competition. We certainly have competition, but the demand signal is very high. We’ve been winning a significant amount of that market share, and we think we’re going to continue to do so. The only other thing I’d add to that, Austin, is we did also announce that we opened a UK division that’s geared towards manufacturing the tactical radars to kind of give us access to that UK and European counter-UAS environment. We do think that that’s a blueprint for what’s to come in order to get that capability in different countries, to have that sovereign expertise there via a license. So we’ve started to march down that path and have seen early successes there.
Austin Mohler (Analyst at Canaccord Genuity)
Okay. And 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? And then just on the $14.4 billion for drone dominance that includes that, that’s within the reconciliation bill. How should we think about how much of that goes to JIATF 401 if it gets passed?
John Baylouny (Chief Executive Officer)
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’re able to satisfy pretty quickly. I think that that will continue to be a mechanism that our customer uses to buy radars. That’s point number one. Point number two is I think you’re 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 won’t comment on, but the point is that there has to be money appropriated for counter-drone. Whether it’s in the base budget or a reconciliation act, it’s almost irrelevant to us because the demand signal is there.
It’s bipartisan. It has to be bought.
OPERATOR
Awesome. I’ll pass 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.
Andre Madrid (Analyst at BTIG)
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’re 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, 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’m trying to focus.
John Baylouny (Chief Executive Officer)
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’s a market that’s growing. It’s growing fast. It’s growing larger than the overall defense top line. So it’s an area of focus for us. As you indicated, we did win the SDA Tranche 3 missile warning/missile tracking payload contract. That’s going well. We’re executing very nicely there. We have also talked about it via the OTA that you mentioned, and that’s going well as well.
We’re executing promptly. That’s a sensing program to counter space-based threats, and that’s going well. We have other activities going on in space as well, because it’s a focus of our company now. We have also launched a payload for 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 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’re going to put another payload up here in the next couple of months to be able to prove that out as well. So there’s a number of different activities going on in space. We’re investing in that area, and as I said, the market is growing very quickly.
Andre Madrid (Analyst at BTIG)
That’s very helpful color. Thank you. John, maybe pivoting to something that I feel like doesn’t 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, what’s the opportunity for you and the team to really win some significant work here?
John Baylouny (Chief Executive Officer)
So our legacy there on the nuclear side is instrumentation and controls, safety controls, and so we get orders for those continuing as the reactors get upgraded or turned back on. And so we’re 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’s an area that could potentially grow in the future.
Andre Madrid (Analyst at BTIG)
Got it, got it. Thanks.
OPERATOR
So much for the color there. I’ll leave it there. Thank you. And one moment for our next question. Our next question will come from the line of Noah Popenick with Goldman Sachs. Your line is open. Please go ahead.
Noah Popenick (Analyst at Goldman Sachs)
Hey, good morning everyone.
John Baylouny (Chief Executive Officer)
Morning, Noah.
Noah Popenick (Analyst at Goldman Sachs)
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 and 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.
Mike Dippold (Chief Financial Officer)
No, I’ll take that, Noah. 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 kind of 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 kind of faster than the framework we’ve laid out. And that’s the way we came out to 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 out.
Noah Popenick (Analyst at Goldman Sachs)
Okay, that’s fair. And Mike, when you talked about 2027 double digits including RAFT, what is RAFT in 2027 from a growth contribution perspective?
Mike Dippold (Chief Financial Officer)
So we haven’t 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 epsilon 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, 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 kind of get to that overall number in and around where we think RAFT will contribute to DRS, but think it’s going to be a couple points, two, three points additive to the top-line growth.
Noah Popenick (Analyst at Goldman Sachs)
Okay, helpful. 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?
Mike Dippold (Chief Financial Officer)
Yeah, I would say we still expect to see 2027 increasing margin, but it will not be at the clip that we’re 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.
Noah Popenick (Analyst at Goldman Sachs)
Okay, thank you.
OPERATOR
Thank you. And one moment for our next question. Our last question will come from the line of John Tanwanting with CGIS. Your line is open. Please go ahead.
John Tanwanting (Analyst)
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 or three years, especially with this new 500 million contract, the international opportunity you’re seeing and expanding expansion you’re doing on the capacity side.
Mike Dippold (Chief Financial Officer)
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, 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 UK.
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.
John Baylouny (Chief Executive Officer)
And, John, I’ll just come over the top on that one and just talk about the budget request. Again, back onto the ’27 Department’s budget request. And 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. So you would expect, and we do expect, that the radar part of our portfolio, which addresses that need, is going to be one of the larger parts of our growth profile.
So it’ll outpace the framework that Mike talked about for ’27.
OPERATOR
Thank you. At this time, I will now turn the floor back to John Baylouny for closing remarks.
John Baylouny (Chief Executive Officer)
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 Leonardo DRS, and we look forward to updating you again next quarter.
OPERATOR
Thank you. This concludes today’s conference. You may now disconnect. Thank you for participating, and everyone have a great day.
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