Aerospace and defense company Leonardo DRS (NASDAQ: DRS) reported Q4 CY2025 results topping the market’s revenue expectations, with sales up 8.1% year on year to $1.06 billion. The company’s full-year revenue guidance of $3.9 billion at the midpoint came in 2% above analysts’ estimates. Its non-GAAP profit of $0.42 per share was 13.2% above analysts’ consensus estimates.
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Leonardo DRS (DRS) Q4 CY2025 Highlights:
- Revenue: $1.06 billion vs analyst estimates of $990.8 million (8.1% year-on-year growth, 7% beat)
- Adjusted EPS: $0.42 vs analyst estimates of $0.37 (13.2% beat)
- Adjusted EBITDA: $158 million vs analyst estimates of $147.1 million (14.9% margin, 7.4% beat)
- Adjusted EPS guidance for the upcoming financial year 2026 is $1.23 at the midpoint, missing analyst estimates by 2.1%
- EBITDA guidance for the upcoming financial year 2026 is $515 million at the midpoint, above analyst estimates of $507.8 million
- Operating Margin: 11.9%, in line with the same quarter last year
- Free Cash Flow Margin: 35.5%, down from 42.2% in the same quarter last year
- Backlog: $8.73 billion at quarter end, up 2.6% year on year
- Market Capitalization: $10.15 billion
Company Overview
Developing submarine detection systems for the U.S. Navy, Leonardo DRS (NASDAQ: DRS) is a provider of defense systems, electronics, and military support services.
Revenue Growth
A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, Leonardo DRS’s 5.6% annualized revenue growth over the last five years was tepid. This wasn’t a great result compared to the rest of the industrials sector, but there are still things to like about Leonardo DRS.
Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Leonardo DRS’s annualized revenue growth of 13.6% over the last two years is above its five-year trend, suggesting its demand recently accelerated. 
Leonardo DRS also reports its backlog, or the value of its outstanding orders that have not yet been executed or delivered. Leonardo DRS’s backlog reached $8.73 billion in the latest quarter and averaged 7.8% year-on-year growth over the last two years. Because this number is lower than its revenue growth, we can see the company fulfilled orders at a faster rate than it added new orders to the backlog. This implies Leonardo DRS was operating efficiently but raises questions about the health of its sales pipeline. 
This quarter, Leonardo DRS reported year-on-year revenue growth of 8.1%, and its $1.06 billion of revenue exceeded Wall Street’s estimates by 7%.
Looking ahead, sell-side analysts expect revenue to grow 5.3% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and indicates its products and services will see some demand headwinds. At least the company is tracking well in other measures of financial health.
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Operating Margin
Leonardo DRS has managed its cost base well over the last five years. It demonstrated solid profitability for an industrials business, producing an average operating margin of 10.9%.
Looking at the trend in its profitability, Leonardo DRS’s operating margin rose by 1.3 percentage points over the last five years, as its sales growth gave it operating leverage.
In Q4, Leonardo DRS generated an operating margin profit margin of 11.9%, in line with the same quarter last year. This indicates the company’s overall cost structure has been relatively stable.
Cash Is King
Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.
Leonardo DRS has shown mediocre cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 5.2%, subpar for an industrials business.
Leonardo DRS’s free cash flow clocked in at $376 million in Q4, equivalent to a 35.5% margin. The company’s cash profitability regressed as it was 6.7 percentage points lower than in the same quarter last year, but it’s still above its five-year average. We wouldn’t read too much into this quarter’s decline because investment needs can be seasonal, causing short-term swings. Long-term trends trump temporary fluctuations.
Key Takeaways from Leonardo DRS’s Q4 Results
We were impressed by how significantly Leonardo DRS blew past analysts’ revenue expectations this quarter. We were also glad its EBITDA outperformed Wall Street’s estimates. Zooming out, we think this was a solid print. The stock traded up 3% to $39.30 immediately after reporting.
Leonardo DRS put up rock-solid earnings, but one quarter doesn’t necessarily make the stock a buy. Let’s see if this is a good investment. The latest quarter does matter, but not nearly as much as longer-term fundamentals and valuation, when deciding if the stock is a buy. We cover that in our actionable full research report which you can read here (it’s free).
