레오나르도 DRS(DRS) 2026 회계연도 3분기 실적 발표회: 수주잔고 56억 달러, 가이던스 상향

핵심 요약

• 레오나르도 DRS는 전술 레이더, 전력 및 추진 시스템, 우주 감지에 힘입어 2026 회계연도 3분기 매출 11억 달러를 달성했으며, 이는 전년 동기 대비 11% 증가한 수치다.
• 수주액은 16억 달러를 초과해 1.5배의 수주출하비율(book-to-bill ratio)을 기록했다. 수주잔고는 역대 최고치인 56억 달러에 달했다.
• 조정 EBITDA는 1억 4,900만 달러로 27% 증가했으며, 조정 EBITDA 마진은 180bp 확대된 14%를 기록했다.
• 조정 희소주당순이익(EPS)은 0.46달러로 59% 증가했다. 잉여현금흐름은 총 6,100만 달러를 기록해 완만한 흑자를 예상했던 경영진의 기존 전망치를 상회했다.
• 경영진은 2026 회계연도 가이던스를 상향 및 축소 조정하여 매출 39억 5,000만~39억 8,500만 달러, 조정 EBITDA 5억 4,500만~5억 5,500만 달러, 조정 희소주당순이익 1.50~1.53달러로 제시했다.
• 드론 대응(Counter-UAS) 레이더 수요, 해군 전기 추진, 적외선 감지 및 우주 탑재체가 핵심 성장 동력으로 유지되고 있다. 경영진은 또한 진행 중인 라프트(Raft) 인수 절차가 4분기에 완료될 것으로 예상하고 있다.

주요 재무 데이터

두 사업 부문 모두 성장에 기여했다. 통합 미션 시스템(IMS) 매출은 12% 증가했으며, 첨단 감지 및 컴퓨팅(ASC) 매출은 14% 성장했다. IMS 조정 EBITDA는 연구개발(R&D) 지출이 40% 이상 증가했음에도 불구하고 34% 상승하며 마진이 280bp 확대되었다. ASC 조정 EBITDA는 22% 증가했으며 마진은 80bp 확대되었다.

사업 및 영업 실적

전술 레이더 및 드론 대응(counter-UAS) 수요가 실적의 주요 기여 요인으로 유지되었다. DRS는 JIATF-401을 지원하는 5억 달러 규모의 계약을 수주했으나, 계약 상한액은 수주잔고에 포함되지 않았다. 경영진은 계약 수주와 함께 납품 주문이 발행되었으며, 관련 매출 중 일부는 이미 손익계산서에 반영되고 있다고 밝혔다.

또한 회사는 확장형 다목적 감시 시스템(Extended Multi-Mission Surveillance System)의 대형 주문을 수주했으며, 고객 요청 후 일주일 이내에 시스템을 현장 배치했다. DRS는 레이더 생산 능력을 확대하고 있으며, 유럽 고객을 위한 현지 역량, 콘텐츠 및 생산을 제공하기 위해 DRS U.K.를 설립했다.

적외선 감지 부문에서 DRS는 5만 개를 초과하는 초기 주문에 따라 저가형 드론 제조업체에 탠덤 궤도 열 코어를 공급하고 있다. 경영진은 다른 제조업체들의 관심도 가속화되고 있다고 말했다. 회사는 또한 미 육군의 xTech|Apex Intercept 저가형 탐색기(seeker) 부문 최종 6개 후보 중 하나로 선정되었다.

해군 전력 및 추진 부문에서도 또 다른 전략적 성과를 거두었다. DRS는 두산에너빌리티와 협력하여 현지화 및 통합 작업을 진행하며 대한민국 해군의 KDDX 구축함 사업에 영구자석 전기 추진 시스템을 공급하는 업체로 선정되었다. 경영진은 KDDX를 컬럼비아급 잠수함 사업에 적용된 전기 아키텍처를 수상함에 적용하는 입증 사례로 보고 있다.

추가적인 해군 관련 수주로는 미 해군의 EA-18G 그라울러(Growler) 항공기용 JTT-X 장비 약 4,000만 달러, 마크 41(Mark 41) 수직발사시스템 지원 부품 9,600만 달러 등이 포함되었다. DRS는 또한 증기 터빈 발전기 역량을 고도화하기 위한 자금도 지원받았다.

우주 감지 분야도 분기 성장에 기여했다. 경영진은 SDA 트랜치 3(Tranche 3) 미사일 경보 및 미사일 추적 탑재체 계약과 별도의 감지 OTA 사업 집행이 순조롭게 진행되고 있다고 밝혔다. 회사는 또한 소프트웨어 정의 무선(SDR) 및 암호화 기술을 활용한 우주 기반 통신 역량을 개발 중이다.

DRS는 라프트(Raft) 인수 거래가 4분기에 완료될 것으로 계속 예상하고 있다. 라프트의 AI, 데이터 융합 및 미션 소프트웨어 역량은 DRS의 하드웨어를 보완하고 통합 지휘통제 제품군을 지원하기 위한 것이다.

경영진 가이던스

해당 가이던스에는 진행 중인 라프트 인수에 따른 기여분은 제외되어 있다. 경영진은 2026년에 라프트의 유의미한 기여가 있을 것으로 기대하지는 않지만, 인수 후 첫 연간 실적 전체 기준으로는 조정 희소주당순이익(EPS)을 증가시킬 것으로 계속 전망하고 있다.

2027 회계연도에 대해 경영진은 공식 가이던스 대신 예비 전망을 제시했다. 라프트를 포함하여 회사는 10%대 초반의 성장률을 목표로 하고 있으며, 라프트가 매출 성장률에 약 2~3%포인트를 더할 가능성이 있다. 공식 2027년 가이던스는 2월 연간 실적 발표와 함께 공개될 예정이다. 경영진은 또한 2027년에 추가적인 마진 확대를 예상하지만, 2026년보다는 완만한 속도가 될 것으로 보고 있다.

리스크 및 점검 사항

2026년 남은 기간 동안의 매출은 주로 자재 수령 시기와 사업 마일스톤 달성 여부에 달려 있을 것이다. 사업 믹스 또한 ASC 마진에 중요한 요인으로 남아 있다.

현재의 임시지출안(continuing resolution)은 12월 11일까지 유효하다. 경영진은 이것이 사업에 유의미한 영향을 미치지 않을 것으로 예상하고 있으며, 초당적 국방 우선순위와의 포트폴리오 부합 및 수주잔고를 이유로 임시지출안이 연장되더라도 중대한 리스크가 되지 않을 것이라고 밝혔다.

공급망 수급 안정성은 여전히 운영상의 핵심 관심사다. 저마늄(germanium) 관련 이전 문제 이후, DRS는 AI를 포함한 예측 도구를 도입했으며, 재무상태표를 활용해 필요한 제품 및 자재를 선제적으로 구매하고 있다.

5억 달러 규모의 JIATF-401 계약 상한액은 수주잔고에 포함되지 않으며, 향후 매출은 납품 주문에 달려 있다. 보다 광범위한 드론 대응 예산안에 따른 자금 지원의 시기와 규모 역시 의회 예산 승인 여부에 따라 달라질 수 있다.

애널리스트 Q&A 주요 내용

• IMS 마진: 마이클 디폴드(Michael Dippold) 최고재무책임자(CFO)는 해군 사업 및 드론 대응 활동 전반의 견조함을 반영하여, 사업부의 실행력이 향후 기준선으로서 약 16%의 마진을 뒷받침한다고 밝혔다.
• ASC 수익성: 경영진은 유리한 레이더 및 드론 대응 믹스가 마진 확대를 뒷받침할 것으로 기대하고 있으며, 4분기에는 더 큰 폭의 개선 가능성이 있다고 보았다. IMS가 이미 높은 수준에서 운영되고 있기 때문에 향후 마진 확대의 대부분은 ASC가 견인할 것으로 예상된다.
• 레이더 성장: DRS는 레이더 매출을 구체적 수치로 밝히지 않았으나, 경영진은 이것이 포트폴리오에서 점차 상당한 비중을 차지하고 있다고 설명했다. 회사는 생산 능력 확충과 지역적 확장에 힘입어 레이더 성장이 전체적인 2027년 프레임워크 상의 성장률을 상회할 것으로 전망하고 있다.
• KDDX 기회: 경영진은 한국 구축함 사업 수주가 DRS의 전기 추진 기술이 미국 잠수함을 넘어 동맹국의 수상함대 및 향후 미국 함정급으로 확장될 수 있음을 입증한다고 밝혔다.
• 장기 성장성: 경영진은 핵심 포트폴리오가 한 자릿수 중후반대의 성장 프로필을 가지고 있다고 규정했으며, 우주, 미사일 감지 및 기타 투자가 추가적인 상승 잠재력을 제공할 것으로 보았다.
• 분산형 감지: 회사는 고객들이 특히 동유럽과 중동에서 중앙집중식 고비용 레이더 시스템에서 소형 전술 레이더 네트워크로 전환하고 있는 것으로 파악하고 있다.

실적 발표 컨퍼런스 콜 전문

전체 실적 발표 컨퍼런스 콜 녹취록

경영진 발표

Operator

Ladies and gentlemen, good day, and welcome to the Leonardo DRS Third Quarter Fiscal Year 2026 Earnings Conference Call. As a reminder, this conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Camilla Yanusewski, Director, Investor Relations. Ma'am, please go ahead.

Camilla Yanushevsky

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.

John Baylouny

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 and a 59% increase in adjusted diluted EPS. This performance, combined with improved visibility into the fourth quarter, gives us confidence to raise and tighten our full year revenue and profitability outlook. I want to thank our entire DRS team for their hard work and dedication. Their high standards and focus on customer success 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 persistence 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 sellers in the front lines. Our technology is being selected because it works, and our third quarter results reflect this. We expect these security challenges to persist, creating increasing demand for our solutions and supporting a strong bookings environment.

Last quarter, we shared that we expected the second half to drive a greater contribution across key metrics, and our third quarter results reflect a solid start. Third quarter bookings span radar and advanced sensing, electric power propulsion and force protection. Both bookings and book-to-bill were our strongest since becoming a public company 4 years ago and lifted our record funded backlog to $5.6 billion. That backlog provides meaningful visibility and underscores the durability of demand for our differentiated capabilities. Mike will share further specifics behind the quarter and our improved outlook in just a moment.

But first, I want to provide some additional perspectives on the budget environment. Our customers began the fourth quarter under a continuing resolution currently set to run through December 11. We do not expect the current CR to have a meaningful impact on our business. Regardless of how the continuing resolution resolves or the outcome of next month's midterm elections, we remain confident that the broader threat environment warrants continued growing and bipartisan defense investment. The administration's base budget is a record. The request highlights priority investment areas for our customers, and 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 customers maintain overmatch and invest ahead of need in both capability and capacity. This enables us to scale when the mission requires it.

Let me share a few examples of our strategy in action. Starting with tactical radars, nearly 4 years after acquiring 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 and active conflict zones, delivering resilient sensing coverage across large areas, including around allied forces, critical infrastructure and high-value systems. That speed and flexibility are built into our company and are embodied in our radar portfolio, which spans multiple bands and allows us to match the right mix of range, resolution and detection performance to each mission.

Our software-defined and AI-enabled architecture also lets us adapt fielded radars as threats evolve without redesigning the hardware. Taken together, our sensors provide range, resilience, affordability and depth of detection. Our differentiation is recognized this quarter with a $500 million contract supporting the Department of War's counter drone office called JIATF-401. We believe our radar's strong record against drone threats across multiple conflicts helped secure this award. While the contract ceiling is not included in backlog, it is a meaningful demand signal and reinforces our position as a radar provider of choice across the counter drone ecosystem.

During the quarter, we also received a large order for the extended mass Surveillance System or EMSS, and fielded a system within a week of customers' 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 U.S. 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 U.K., which we announced this month to better serve customers across Europe, with local capability, content and production.

Shifting to counter UAS more broadly. Our radars are integrated into many counter UAS systems in service today. That installed base gives us a clear view of evolving mission requirements and positions us to stay ahead 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 from missiles and guns to directed energy and electronic warfare. That open approach gives customers flexibility as threats, platforms and available effectors evolve rather than locking them down to a single solution.

Shifting to effectors. Operations in Ukraine and more recently in the Middle East have underscored a growing cost asymmetry and expensive threats have been launched in volume, while inventories of costly interceptors remain finite. Our focus is on changing that equation. Directed energy is 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 EHL 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 tandem 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 1 of the 6 finalists in its xTech|Apex Intercept Low-cost seeker category, supporting interceptors designed to operate alongside Patriot.

Turning to the Navy. The IndoPacific 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 ship power between propulsion and combat systems as mission needs change rather than limiting it to the driveshaft. 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 that 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 India-Pacific surface fleet market, expanding our opportunity set with allied Navies and provides a valuable proof point for potential U.S. Navy adoption of this electric power and propulsion architecture across the domestic surface fleet, including new U.S. 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 the 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 situation awareness at the edge. We also received $96 million in awards to continue supplying power supplies, launch control equipment and transformer systems for the Navy's Mark 41 vertical launch system. Mark 41 is the common launcher for weapons including Tomahawk and standard missiles and is 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 discuss today. Making sense of the battlefield at the edge continues to be an important focus of our strategy. The faster our customers can move from detection to decision, the greater their operational advantage. Our multiyear investments in open architecture, high-performance computing led to the launch of THOR in March, a rugged embedded computing system that brings AI processing, sensor fusion, communications and command and control capability to the tactical edge. We're 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 5-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'll continue to translate that mission relevance into strong durable growth.

I'll now turn it over to Mike to walk through the financials.

Michael Dippold

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 a 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 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 9 months has exceeded internal expectations and strengthened our confidence for the full year. As a result, we are raising and narrowing our outlook across all key metrics. We now expect full year revenue in the range of $3.95 billion to $3.985 billion, implying an 8% to 9% organic growth year-over-year. Our record funded backlog of $5.6 billion provides strong visibility into that range. For the remainder of the year, revenue will be shaped primarily by the timing of material receipts and achievement of program milestones. We now expect adjusted EBITDA of $545 million to $555 million, up from our previous range of $525 million to $540 million. 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 2 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 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 Graft.

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

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 into 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 more fighter readiness and enable mission success around the globe.

With that, we're happy to take your questions.

Operator

[Operator Instructions] Our first question is going to come from the line of Justin Lang with Morgan Stanley.

질의응답

Justin Lang

John, actually, I wanted to start with the KDDX win. Congratulations on that. I was hoping you could talk a little bit more about the opportunity there and how your content compares to the work you're doing on Colombia today, and if there are other near-term international surface ship opportunities that we should be monitoring as well.

John Baylouny

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 war fighters are increasingly going to require fighting ships on the fight from a further distance. That requires more power for radars, more power for electronic warfare, more power for direct energy. You really can't do that without having the ability to ship power from different parts of the ship rather than just making power for the propulsion system and having it dead end there, you have -- and a separate power supply for the sensors and weapons, you really need to be able to pull power from all of those places to increase power for those sensors and 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 Colombia, it's exactly what we did for Colombia 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.

Justin Lang

Great. That's great color. And then maybe just one quick one for Mike. It was 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 a new run rate for the segment? And if you give us a little more color on maybe how much of the margin strength of IMS was driven by Colombia specifically, that would be great.

Michael Dippold

Yes. 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 Colombia, 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 a 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 kind of a long-term vision of mid-teens margin profile for DRS, and the way that IMS is executing now, I would expect to kind of see the 16% margin levels hold and 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.

Operator

Our next question comes from the line of Hrishi Kumbhojkar with Guggenheim Securities.

Hrishi Kumbhojkar

I wanted to kind of staying on margins. I wanted to kind of look at ASC. So certainly appreciate that the margins expanded 80 bps year-over-year. But kind of 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?

Michael Dippold

Yes. 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 mix 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

Let me just add a little bit to that, Hrishi. 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. First and foremost, you have to sense the drones before you can counter them. And our sensors are being selected more and more time and time again as the sensor of choice, being able to detect the drone, being able to distinguish between drones and birds and other things -- other flying objects, being able to track those drones and giving you the ability to go and counter that. And this is one of the reasons why our margins are rising on the ASC side is because that those radars are part of the picture, and we're solving problems in counter UAS across the entire market.

Hrishi Kumbhojkar

I appreciate the color. That's helpful. And one more for me regarding kind of zooming out and thinking about the supply chain. You highlighted a lot of the contract wins. But in terms of product sourcing, component sourcing, in material sourcing. Are you seeing any issues or pressures at this point, thinking about the wins?

John Baylouny

Yes, it's a great question. So first and foremost, we learned our lesson with germanium. Germanium gave us the ability to now look at holistically the supply chain. We have processes and procedures. We have tools, including AI working on predicting where those supply chain challenges are going to be ahead of 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, given the event of contract to bring that in-house so that we don't end up with a shortfall of material going forward.

Operator

Our next question will come from the line of Jan Engelbrecht with Baird.

Jan-Frans Engelbrecht

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 -- they definitely don't have the capabilities that you have. And then you look at the radar IDIQ and then also the Korean destroyer. Just at a high level, could you guys talk about those three contracts and talk about how they potentially ramp in '27 or later this decade?

Michael Dippold

Yes. 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 then you can give some more kind of multiyear 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 in the current framework. Additionally, if you put RAF 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

Yes. Let me just add that we're very well positioned for sustained growth. Our investments in the cutting-edge technology, some of which you mentioned and alignment to the customers' 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 confident in sustained growth, not just in '27, but beyond '27. Let me -- I want to just go back to the comment about the one-way ors 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 1 or 2 or 3 hands, 10, 15 different missiles that you can probably name off the top of your head. Tomorrow, you're not going to be able to name them all. They're going to proliferate. They're going to have all different capabilities from very high end to very low end. And the thing -- the common element here is that they're all going to have to see. They're all going to have to seek and DRS is providing that capability with high-end U.S. manufactured infrared capability. We've invested in the facilization, the expansion of our vales-based foundry to be able to address those needs. And you're 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 of factors affordable and on par with the threats.

Jan-Frans Engelbrecht

Great. Just if I may, a quick follow-up. You guys have previously talked about the proliferation of tactical radars as part of a layer the same 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 3 to 8 years to replace, and they've been sort of destroyed. So are you guys seeing sort of a noticeable uptick with the customers in the Middle East to GCC and on sort of these tactical radars that you guys supply. They 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 radar, but also some of the over-the-horizon radar capabilities that you guys have?

John Baylouny

Yes. Great, you're spot on. This is exactly the issue that we're -- 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 the Eastern Europe right now, doing that very thing is 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 exclusive 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 to sure. It's a problem that we think there's a market shift to -- from exquisite capability to centralized to a distributed tactical capabilities.

Operator

Our next question will come from the line of Ronald Epstein with Bank of America.

Unknown Analyst

This is Andrew on for Ron. I just wanted to follow up on the earlier questions on KDDX. I'm 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 to roll on?

John Baylouny

Yes. So Doosan is our partner here for in-country content as well as integration. And this is bringing this world-class capability into Korea is a nice -- they're a nice partner for us here. As far as the 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.

Unknown Analyst

Yes. It was announced, I think, last week that they are looking to deploy drone aircraft carriers.

John Baylouny

Yes. 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 DRS has been investing. This is where we're going, is to being able to provide that -- 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.

Unknown Analyst

Got you. 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 -- it sounds like it would be positive for you guys in the sense that they're looking to build more submarines more quickly, which would bring volume tailwinds to DRS. Is that the right way to think about it?

John Baylouny

Yes. 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. 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, a good thing for the nation.

Operator

Our next question will come from the line of Seth Seifman with JPMorgan.

Seth Seifman

This is Jamie Simonson on for Seth today. Congratulations on a great quarter. I wanted to ask maybe a little bit more on ASC. I think you mentioned that a lot of the margin expansion was sort of due to the mix here, which makes sense. I guess when you look at your very strong backlog and order intake, do you think the mix there is sort of similar 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.

Michael Dippold

Yes. I think that there is going to be a positive mix tailwind as we look out for Q4 and into the future, including '27. I think John laid out the blueprint as to why the distributed radar needs and the counter drone and short-range air defense 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 band, 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

I'll just add to that and just to take you back to the fiscal '27 budget request. And just when you look at the budget request, you see the prioritization in there. I 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 drones, you're seeing 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.

Unknown Analyst

Excellent. Okay. Yes, that's great color. I'm happy you actually brought up the budget there because that was my sort of follow-up. So I know that you said in your prepared remarks that the CR is not really having a meaningful impact on your business, which 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?

John Baylouny

Yes. We don't consider that risk to be material to us and for the reasons we just discussed. The fact is that the -- whatever happens in the '27 time line, whether there's an extended CR or worse, I think that the 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

Our next question will come from the line of Austin Moeller with Canaccord Genuity.

Austin Moeller

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 SpA had been interested in licensing technology for Europe. Another contractor recently got an almost $500 million contract from Kuwait to build a nationwide counter UAS shield. So just wondering your thoughts there.

John Baylouny

Yes. 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, air defense. And you're going to see architectures like the ones that we've been building in the 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.

Michael Dippold

The only other thing I'd add to that, Austin, is we did also announce that we opened a U.K. division that's 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's a blueprint for what's to come in order to get that capability in different countries to have that sovereign expertise there via license. So we've started to march down that path and have seen early successes there.

Austin Moeller

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

Let me address the first part of the question is 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 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 GIT. 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

Our next question will come from the line of Andre Madrid with U.S. Bancorp, BTIG.

Andre Madrid

I want to start first with maybe some talk on the space portfolio. It seems like the sensing work you're doing there is already trending well. I mean could you maybe just more pointedly tell us how Tranche 3 work is progressing? I know you guys also won a recent OTA as well, layering that on top. I mean, 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'm trying to where I'm trying to focus.

John Baylouny

Thanks, Andre. First and foremost, just going back to the budget request, the space request for '27 is 100% increase from '26. 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 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

No, that's very helpful color. Maybe pivoting to something that I feel like doesn't really get a lot of airtime, but it's pretty important in the current climate. Your commercial nuclear position. I know you have heritage through instrumentation and controls that goes back decades. I mean, with the pipeline that exists currently for both large-scale and small-scale projects, I mean, what's the opportunity for you and the team to really win some significant work here?

John Baylouny

So our legacy there on the nuclear side is instrumentation and controls, safety controls. And so we get orders for those continuing as the 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.

Operator

Our next question will come from the line of Noah Poponak with Goldman Sachs.

Noah Poponak

John, you've laid out a pretty clear case for increased demand in sensing that would -- that could accrue to you. It's hard to quantify. You guys have provided some numbers around what you're doing with unquoted 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 a too broad of a question maybe, but if there's any way to frame it?

Michael Dippold

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 missile like space that if we hit on them, it will 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 of the market in 2024 when we did our multiyear 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...

Noah Poponak

That's fair. And Mike, when you talk about 2027 double digits, including Raft, what is Raft in '27 from a growth contribution perspective?

Michael Dippold

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 EPS to revenue growth and to margin. But the key piece here that I think can kind of 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. 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 RAP will contribute to DRS. But I think it's going to be a couple of points, 2, 3 points additive to the top line growth.

Noah Poponak

Okay. Helpful. And Mike, you had started this year with a framework for '27 margin expansion, looking similar to '26. How should we be thinking about that now with the '26 outperformance?

Michael Dippold

Yes. I would say we still expect to see '27 increasing margin, but it will not be at the clip that we're seeing in '26. The performance in '26 has kind of surpassed our expectations here, and therefore, '27 will be a little bit more muted in the margin expansion.

Operator

Our last question will come from the line of John Tanwanteng with CJS.

Jonathan Tanwanteng

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 how do you -- where do you expect that number to go over the next 2 to 3 years, especially with this new $500 million contract, the international opportunity you're seeing and the expansion you're doing on the capacity side?

Michael Dippold

Yes. We've haven't disclosed what the actual revenue contribution from the radar is. It's highly embedded in 2 pieces of the business, both the force protection piece and the advanced sensing is 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.

John Baylouny

And John, I'll just comment over the top on that one and just talk about the budget request, again, back on to 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 -- it's going to be one of the larger parts of our growth profile. So it will 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

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.

Operator

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