10-K: Leonardo DRS Reports Strong 2025 Growth, Strategic Investments

Leonardo DRS, Inc. announced robust financial results for the fiscal year ended December 31, 2025, driven by increased demand in defense technologies and strategic investments in capacity and innovation.

Summary

• Revenue for 2025 increased by 12.8% to $3,648 million, up from $3,234 million in 2024.
• Net earnings for 2025 rose by 30.5% to $278 million, compared to $213 million in 2024.
• Basic earnings per share (EPS) was $1.05 in 2025, a 29.6% increase from $0.81 in 2024.
• Diluted EPS was $1.03 in 2025, an increase of 28.8% from $0.80 in 2024.
• Total backlog as of December 31, 2025, reached $8,448 million, a 2.2% increase from $8,268 million in 2024.
• Bookings for 2025 increased by 4.1% to $4,245 million, up from $4,077 million in 2024.
• Investments in company-funded independent research and development (IR&D) increased by over 40% to $129 million in 2025.
• Capital expenditures increased by over 60% to $139 million in 2025.
• The company opened a new 140,000 square foot naval power and propulsion manufacturing and testing facility in South Carolina, with an additional $45 million funded for a 40,000 square foot expansion.
• Approximately 80% of 2025 revenue was derived from U.S. government contracts, with 36% from the U.S. Navy and 36% from the U.S. Army.
• 88% of 2025 revenue came from firm-fixed price contracts.
• A quantum cascade laser license contributed to higher profitability in the Advanced Sensing and Computing (ASC) segment.
• The negotiated conclusion of a legacy ground surveillance program resulted in a program charge, negatively impacting gross margin.
• Supply chain disruptions, including shortages of germanium and other raw materials, led to increased costs and delays.

Sentiment

Score: 8

Explanation: StockSavvy.ai views this as a strongly positive report, reflecting robust financial growth across key metrics, strategic investments in future capabilities, and a solid backlog, despite some operational challenges and geopolitical risks inherent in the defense sector.

Positives

• Strong revenue growth of 12.8% to $3,648 million in 2025, indicating robust demand for defense technologies.
• Net earnings increased significantly by 30.5% to $278 million in 2025, demonstrating improved profitability.
• Gross profit grew by 18.1% to $869 million, with gross margin improving by 100 basis points to 23.8%.
• Operating earnings increased by 18.8% to $348 million, reflecting efficient operations.
• Total backlog expanded by 2.2% to $8,448 million, providing a solid foundation for future revenue.
• Bookings increased by 4.1% to $4,245 million, with strong book-to-bill ratios of 1.0 to 1 for ASC and 1.4 to 1 for IMS.
• Significant strategic investments in IR&D (up 40% to $129 million) and capital expenditures (up 60% to $139 million) are accelerating innovation and capacity.
• The opening of a new 140,000 sq ft naval power and propulsion manufacturing facility in South Carolina, with further expansion, enhances capabilities for key U.S. Navy programs.
• Lower net interest expense due to increased interest income and reduced borrowings on the revolving credit facility.
• Improved program performance on the Columbia Class program and favorable revenue mix, including a quantum cascade laser license, boosted profitability.
• Management concluded that internal control over financial reporting was effective as of December 31, 2025.

Negatives

• The negotiated conclusion of a legacy ground surveillance program resulted in a program charge, negatively impacting gross margin.
• Increased cost at completion estimates, totaling approximately 2% of revenue for 2025, negatively impacted earnings.
• Supply chain disruptions, including shortages of germanium and other raw materials, and quality problems with components, led to delays and increased costs.
• General and administrative (G&A) expenses increased by 20.0% to $497 million, partly due to enhanced IR&D and business expansion efforts.
• Integrated Mission Systems (IMS) operating earnings decreased by 1.7% and operating margin decreased by 150 basis points, primarily due to the legacy ground surveillance program.
• Advanced Sensing and Computing (ASC) bookings decreased by 5.7% due to certain multi-year bookings in the prior year not recurring.
• International sales decreased from 13% in 2024 to 8% in 2025, partly due to reduced exposure to the Ukraine conflict and the legacy ground surveillance program.
• Restructuring costs of $2 million were incurred in 2025, primarily for employee termination and severance.
• The company has unfunded obligations under its pension plans.
• There is a risk of significant write-offs of goodwill or intangible assets if business or market conditions change.
• Limitations exist on the ability to use net operating losses (NOLs) to offset future taxable income due to Section 382 of the Tax Code.
• The company could be liable for certain tax liabilities of US Holding and its subsidiaries under the tax allocation agreement.

Risks

• Heavy dependence on U.S. defense spending (80% of 2025 revenues), making the company vulnerable to disruptions or deteriorations in relationships with U.S. government agencies.
• Significant delays or reductions in appropriations for programs, changes in U.S. government priorities and spending levels (e.g., government shutdowns, sequestration, continuing resolutions) may negatively impact business.
• Fixed-price contracts (88% of 2025 revenue) expose the company to financial risk from potential cost overruns or higher than anticipated inflation.
• Requirement to maintain facility security clearances for classified contracts, subject to National Industrial Security Program Operating Manual (NISPOM) and Defense Counterintelligence and Security Agency (DCSA) audits; failure to comply could lead to contract termination or ineligibility.
• Foreign Ownership Control and Influence (FOCI) due to Leonardo S.p.A.'s indirect majority ownership (71% of voting power) necessitates mitigation through a proxy agreement with the U.S. Department of Defense (DoD); non-compliance could lead to contract termination or loss of clearances.
• U.S. government contracts are often only partially funded and subject to immediate termination for convenience or default, leading to potential loss of anticipated future revenue.
• Reliance on estimates in pricing and accounting for programs, where changes in assumptions or circumstances could adversely impact financial results.
• Inability to realize the full value of total estimated remaining contract value or bookings due to funding reductions or cancellations.
• Variable working capital requirements and cash flows, which could lead to negative cash flows in some quarters and impact liquidity.
• Inability to predict future capital needs or obtain additional financing on acceptable terms, potentially requiring US Holding's consent.
• Intense competition from larger and smaller defense contractors, leading to pricing pressure and potential for competitors to develop disruptive technologies.
• Organizational conflict of interest rules could limit the ability to successfully compete for new contracts or require exiting existing ones.
• Dependence on relationships and alliances with industry participants, involving risks from joint ventures and subcontractor performance.
• Contractual disputes with industry participants or the inability of key suppliers to timely deliver components (e.g., germanium shortages) could disrupt production and delivery.
• Susceptibility to security breaches (cyber-attacks, insider threats) and disruptions of IT networks, potentially leading to data loss, operational disruption, litigation, and reputational harm.
• Compliance with National Institute of Standards and Technology Special Publication 800-171 and Cybersecurity Material Model Certificate (CMMC) requirements poses ongoing challenges and potential costs.
• Limited investor insight into classified U.S. government programs due to security restrictions.
• Increased risk from terrorism and other threats to physical security and personnel as a defense contractor, particularly in regions with heightened geopolitical tension (e.g., Israel, Middle East).
• Need to respond to rapid technological changes, including successfully integrating AI technologies, to maintain competitive position.
• Failure to meet contractual obligations due to design issues, technological complexity, manufacturing expertise, or subcontractor performance could negatively affect reputation and future prospects.
• Inability to fully exploit or obtain intellectual property protections, or claims of infringement by third parties, could impact competitive position.
• Reputation and ability to do business may be impacted by improper conduct of employees, agents, affiliates, subcontractors, suppliers, business partners, or joint ventures.
• Adverse effects from climate change regulations (emissions limits, manufacturing changes, increased costs) could impact profitability.
• Unpredictable outcomes of litigation, arbitration, investigations, and other legal proceedings could have a material adverse impact.
• Additional risks from international business, including political and economic factors, foreign laws and regulations (e.g., ITAR, EAR, FCPA), exchange rate fluctuations, and offset obligations.
• Challenges in localizing business operations in new territories due to local government policies, cultural differences, and economic instability.
• Inability to obtain necessary export licenses or congressional prevention of proposed foreign sales could adversely affect international business.
• Failure to attract and retain technical and other key personnel, including those with security clearances, could reduce revenues and operational effectiveness.
• Difficulties with the unionized workforce, including prolonged work stoppages, could harm business operations.
• Inadequate insurance coverage, customer indemnifications, or other liability protections may not cover all significant risks or material losses.
• Unfunded obligations under pension plans and changes in actuarial estimates could adversely affect financial condition and results of operations.
• Impairment of goodwill or other long-term assets due to changes in future business or market conditions could result in substantial losses and write-downs.
• Limitations on the ability to use net operating losses (NOLs) to offset future taxable income due to Section 382 of the Tax Code.
• Potential liability for certain tax liabilities of US Holding and its subsidiaries under the tax allocation agreement.
• Acquisitions could result in operating difficulties, dilution, and other harmful consequences.
• Significant operations in locations susceptible to natural disasters, severe weather, or other significant disruptions.
• CFIUS review may modify, delay, or prevent future acquisition or investment activities due to foreign ownership.
• Conflicts of interest with indirect majority stockholder Leonardo S.p.A. and its affiliates, including their ability to pursue corporate opportunities that might otherwise be available to the company.
• Obligations to provide certain services to Leonardo S.p.A. may divert human and financial resources, and reliance on services from Leonardo S.p.A. may be difficult to replicate if needed.
• No assurance that the company will continue to pay or increase its dividend or repurchase shares of common stock.

Future Outlook

The company expects continued revenue growth, driven by its strong backlog and sustained demand for mission-critical technologies. It anticipates increased demand for defense products and services globally due to heightened tensions and evolving security requirements. Strategic investments in IR&D and capital expenditures are planned to accelerate capabilities and capacity. Approximately 33% of remaining performance obligations as of December 31, 2025, are expected to be recognized as revenue over the next twelve months, with long-term naval power and propulsion contracts extending up to 11 years. International sales are projected as an important growth opportunity, supported by increased defense spending in Europe and new foreign military sales agreements in the Middle East. The company also expects to contribute $6 million to its pension plans in 2026.

Management Comments

• Our operating results for the year ended December 31, 2025, are highlighted by our strong $8.4 billion of backlog and over $4.2 billion of new orders, demonstrating the strong customer demand for our mission critical technologies.
• Embedded in our backlog is a diversified, balanced portfolio supported by foundational programs strongly aligned in areas of, in our view, growing importance within the DoW budget priorities.
• We believe the performance on these and other programs within our portfolio will support continued revenue growth.
• Over the past 12 months, the Company has invested to accelerate both increased capacity and the pacing of innovation.
• We believe the current global security environment continues to underscore the need for strong deterrence and robust defense capabilities.
• We are actively evaluating both opportunities and risks associated with these conditions.
• We believe that excellence is not a destination, but by constantly challenging ourselves to be better, we will improve, and ultimately approach excellence.
• We believe it is more likely than not that we will generate sufficient taxable income in future periods to realize our deferred tax assets, subject to the valuation allowances recognized.

Industry Context

StockSavvy.ai notes that Leonardo DRS operates in a robust U.S. defense market, benefiting from sustained priority areas such as counter-unmanned aircraft systems (C-UAS), advanced infrared sensing, network computing, and electric power and propulsion for naval vessels. The company's focus on integrating AI and open architecture software aligns with the broader industry trend towards autonomous, software-enabled, interconnected, and multi-domain capabilities, driven by increasingly complex global threats. The increase in defense spending in Europe and foreign military sales agreements in the Middle East also provide tailwinds for international growth, positioning Leonardo DRS favorably within the global defense landscape.

Management Changes

Corporate Governance

Legal Proceedings

• The company is subject to certain legal proceedings and claims in the ordinary course of business, with potential for material adverse effects on results of operations and/or cash flows for a particular reporting period.
• Previously involved in a CERCLA (Superfund law) matter regarding the Orphan Mine site, where a subsidiary's alleged predecessor operated over 50 years ago.
• The Orphan Mine reserve was eliminated as a liability is no longer probable or estimable, based on EPA's determination of 'no further federal action' (NFFA) as of June 2023.
• It remains possible that the National Park Service (NPS) may seek to recover damages for remediation and/or loss of natural resources related to the Orphan Mine.
• The company believes it has legitimate defenses and that the U.S. government is a potentially responsible party for the Orphan Mine site.
• As a government contractor, the company is subject to audits, investigations, and claims with respect to its contract performance, pricing, costs, cost allocations, and procurement practices, with potential for civil/criminal penalties, sanctions, or contract termination.

Related Party Transactions

• Provided services to Leonardo S.p.A. and its affiliates (indirect majority stockholder) in support of its U.S. operations, including financial, tax, trade compliance, marketing, communications, and legal services.
• Related party sales to Leonardo S.p.A. and its affiliates were $29 million in 2025, $30 million in 2024, and $40 million in 2023.
• Related party purchases from Leonardo S.p.A. and its affiliates were $7 million in 2025, $7 million in 2024, and $4 million in 2023.
• Receivables with Leonardo S.p.A. and its affiliates were $5 million in 2025 and $19 million in 2024.
• Payables to Leonardo S.p.A. and its affiliates were $5 million in 2025 and $4 million in 2024.
• Contract assets with Leonardo S.p.A. and its affiliates were $16 million in 2025 and $12 million in 2024.
• The company has a Tax Allocation Agreement with US Holding (dated November 16, 2020) for computing and allocating tax liabilities.
• The company holds an approximately 25% equity interest in Hoverfly Technologies, Inc., a private company.
• Related party sales to Hoverfly Technologies, Inc. were $6 million for the year ended December 31, 2025.
• Contract assets with Hoverfly Technologies, Inc. were $6 million at December 31, 2025.
• An additional $15 million investment was made in Hoverfly Technologies, Inc. in 2025.

Stakeholder Impact

• Shareholders: Positive financial performance (revenue, earnings, EPS growth), increased dividend payments, and a share repurchase program indicate value return. However, FOCI and anti-takeover provisions may limit change of control opportunities.
• Employees: The company maintains a workforce of approximately 7,300 employees (7% unionized) and is committed to fostering growth, agility, problem-solving, innovation, and operational excellence, along with market-competitive compensation and benefits. Recent leadership changes include a new CEO, COO, and Chief Tax and Treasury Officer.
• Customers (U.S. Government & Allies): The company continues to provide advanced defense technology, supported by a strong backlog and investments in innovation, aiming to meet evolving national security needs. However, supply chain issues or government shutdowns could impact delivery schedules.
• Suppliers/Subcontractors: The company's dependence on suppliers carries risks of disruptions and quality issues, which could affect its ability to meet customer commitments.
• Creditors: The company's debt obligations and covenants require careful management. The repayment of the 2022 Term Loan A and the establishment of a new credit agreement demonstrate active debt management.
• Regulatory Authorities: The company's operations are subject to extensive U.S. government procurement regulations, FOCI mitigation requirements, cybersecurity standards, and environmental laws, necessitating continuous compliance efforts.

Next Steps

• Continue investments in IR&D and capital expenditures to accelerate capabilities and capacity, including the expansion of the naval power facility in South Carolina.
• Focus on supporting current operational requirements and facilitating the DoD's rapid transition toward more autonomous, software-enabled, interconnected, and multi-domain capabilities.
• Ongoing evaluation of opportunities and risks associated with global security conditions, including geopolitical tensions.
• Continue efforts to attract, train, and retain qualified technical and other key personnel.
• Renegotiate renewals to expiring collective bargaining agreements.
• Monitor the impact of the One Big Beautiful Bill Act (OBBBA) and anticipated guidance from the U.S. Department of the Treasury.
• Evaluate potential future acquisitions or strategic transactions to expand or complement the current portfolio.
• Pay a cash dividend of $0.09 per share on March 24, 2026, to stockholders of record as of March 10, 2026.
• Continue share repurchases under the approved program through March 4, 2027.
• File the 2026 definitive proxy statement with the SEC within 120 days after December 31, 2025.

Key Dates

Recommendation

Leonardo DRS demonstrated exceptional financial performance in 2025 with double-digit revenue and net earnings growth, coupled with a robust backlog and strategic investments in high-priority defense technologies. The company's strong positioning in critical defense areas, combined with proactive capital deployment through dividends and share repurchases, signals a compelling investment opportunity for long-term growth and shareholder value. While geopolitical and supply chain risks exist, the company's consistent execution and alignment with national defense priorities mitigate these concerns.

Keywords

Defense technology, SEC filing, 10-K, Leonardo DRS, Government contracts, U.S. Department of Defense, Advanced sensing, Network computing, Force protection, Electric power, Propulsion systems, Military, Aerospace, Cybersecurity, AI, C-UAS, Columbia Class submarine, Financial results, Earnings, Revenue, Backlog, Bookings, R&D, Capital expenditures, Corporate governance, Risk management, FOCI, Supply chain, Intellectual property