Q4 2025 Leonardo DRS Inc Earnings Call

February 24, 2026

Operator: President, Corporate Development and Investor Relations. Please go ahead.

Speaker #1: President, Corporate Development and Investor Relations. Please go ahead.

Speaker #2: Good morning and welcome, everyone. 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.

[Company Representative] (Leonardo DRS): Good morning, and welcome, everyone. Thank you for joining today's quarterly earnings conference call. With me today are John Baylouny, our President and CEO, and Michael 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 also find the earnings release and supplemental presentation. Management may also make forward-looking statements during the call regarding future events, anticipated 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. For a full discussion of these risk factors, please refer to our latest Form 10-K and our other SEC filings.

Steve Vather: Good morning, and welcome, everyone. Thank you for joining today's quarterly earnings conference call. With me today are John Baylouny, our President and CEO, and Michael 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 also find the earnings release and supplemental presentation.

Speaker #2: 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 also find the earnings release and supplemental presentation.

Speaker #2: Management may also make forward-looking statements during the call regarding future events, anticipated 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.

Steve Vather: Management may also make forward-looking statements during the call regarding future events, anticipated 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. For a full discussion of these risk factors, please refer to our latest Form 10-K and our other SEC filings.

Speaker #2: Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors. For a full discussion of these risk factors, please refer to our latest Form 10-K and our other SEC filings.

Speaker #2: 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.

[Company Representative] (Leonardo DRS): 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?

Steve Vather: 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?

Speaker #2: These non-gap measures should not be evaluated in isolation or as a substitute for gap performance measures. You can find a reconciliation of the non-gap measures discussed on this call in our earnings release.

Speaker #2: With that, I will turn the call over to John. John?

Speaker #3: Thanks, Steve. And thank you all for joining us today to discuss our fourth quarter and full year 2025 results. I want to begin by thanking Bill Lynn for his leadership and commitment to DRS.

John Baylouny: Thanks, Steve. Thank you all for joining us today to discuss our Q4 and full year 2025 results. I want to begin by thanking Bill Lynn for his leadership and commitment to DRS over the past 14 years as Chairman and CEO. The company is stronger because of his impact. We're grateful for his contributions. I am honored to step into the role of Chief Executive Officer and could not be more excited to lead the next chapter for DRS. I joined the company nearly 40 years ago as a staff engineer, and over the course of my career, I've had the privilege of serving in operational leadership roles across each of our incredible businesses.

Speaker #3: Over the past 14 years, as Chairman and CEO, the company has strongened because of his impact and we're grateful for his contributions. I am honored to step into the role of Chief Executive Officer and could not be more excited to lead the next chapter for DRS.

Speaker #3: I joined the company nearly 40 years ago as a staff engineer and over the course of my career, I've had the privilege of serving in operational leadership roles across each of our incredible businesses.

Speaker #3: That frontline perspective, combined with my experience over the past decade as Chief Technology Officer and, most recently, Chief Operating Officer, has given me a deep appreciation for our leading market positions, our balanced and diverse portfolio, our truly differentiated technologies, and above all, our exceptionally talented people.

John Baylouny: That frontline perspective, combined with my experience over the past decade as chief technology officer and most recently, chief operating officer, has given me a deep appreciation for our leading market positions, our balanced and diverse portfolio, our truly differentiated technologies, and above all, our exceptionally talented people. As I look ahead, my priority as CEO are clear. Build on our foundation of success. We have a remarkable business with distinctive differentiation that is well-positioned for long-term growth. Accelerate our operating cadence. Our goal is to put innovation, capabilities into the hands of our customers even faster, without compromising the quality, reliability, and affordability that they expect. This is precisely what the Department of War is asking of industry. While we've already been operating at speed and investing in innovation for years, we are encouraged by this call to action and are accelerating even further.

Speaker #3: As I look ahead, my priority as CEO is clear: build on our foundation of success. We have a remarkable business with distinct differentiation that is well positioned for long-term growth.

Speaker #3: Accelerate our operating cadence. Our goal is to put innovation capabilities into the hands of our customers. Even faster without compromising the quality, reliability, and affordability that they expect.

Speaker #3: This is precisely what the Department of War is asking of industry. While we've already been operating at speed and investing in an innovation for years, we are encouraged by this call to action and are accelerating even further.

Speaker #3: And three, continue to empower invest in and reward our people. There is no question that our talented employees are the bedrock of our success.

John Baylouny: Three, continue to empower, invest in, and reward our people. There is no question that our talented employees are the bedrock of our success. My formula is straightforward: maintain a sharp focus on meeting and exceeding customer needs. That will propel growth for the years to come. Turning to the macro environment, the operating backdrop remains dynamic. Global threats persist, and the nature of warfare continues to evolve rapidly. Our customers require next-generation capabilities to maintain a decisive advantage over the adversaries, and they need them delivered at speed, at scale, and with uncompromising quality. Against that backdrop, our nation and our allies are investing in these capabilities, as demonstrated by significant recent and projected increases in defense spending.

Speaker #3: My formula is straightforward. Maintain a sharp focus on meeting and exceeding customer needs, and that will propel growth for the years to come. Turning to the macro environment, the operating backdrop remains dynamic.

Speaker #3: Global threats and the nature of warfare continue to evolve rapidly. Our customers require next-generation capabilities to maintain a decisive advantage over adversaries. They need them delivered at speed, at scale, and with uncompromising quality.

Speaker #3: Against that backdrop, our nation and our allies are investing in these capabilities as demonstrated by significant recent and projected increases in defense spending. We are encouraged by the enactment of the fiscal 26 defense appropriations early signals for a fiscal 27 and supplemental funding including in last summer's tax reconciliation package.

John Baylouny: We are encouraged by the enactment of the fiscal 2026 defense appropriations, early signals for a fiscal 2027, and supplemental funding, including in last summer's tax reconciliation package. In aggregate, these indicators support our confidence in sustained demand. Our relentless customer focus, disciplined investment, and advanced capabilities and consistent execution has positioned us well for growth. The results of that strategy are demonstrated by the fourth consecutive year of a book-to-bill ratio of 1.2 or better. Equally important, customer demand is well-balanced throughout our portfolio, validating the strength of our technology-led, platform-agnostic approach. That consistent customer demand, combined with our strong financial position, has enabled significant multiyear increases in both research and development and capital investment. Let me frame the magnitude of investment growth. In 2025, we increased internal R&D investment by 40%, and capital expenditures rose more than 60%.

Speaker #3: In aggregate, these indicators support our confidence in sustained demand. Our relentless customer focus disciplined investment and advanced capabilities and consistent execution as positioned us well for growth.

Speaker #3: The results of that strategy are demonstrated by the fourth consecutive year of a book-to-bill ratio of 1.2 or better. Equally important, customer demand is well balanced throughout our portfolio.

Speaker #3: Validating the strength of our technology-led, platform-agnostic approach. That consistent customer demand combined with our strong financial position has enabled significant multi-year increases in both research and development and capital investment.

Speaker #3: Let me frame the magnitude of investment growth. In 2025, we increased internal R&D investment by 40%, and capital expenditures rose more than 60%. Our R&D investment is focused on expanding our footprint in high-growth markets, including airborne, missiles, space, and unmanned markets.

John Baylouny: Our R&D investment is focused on expanding our footprint in high-growth markets, including airborne, missiles, space, and unmanned markets, while continuing to build share in our core ground-enabled domains. Additionally, the emphasis of our R&D initiatives is on advancing platform AI and enabling platform autonomy, stronger security and modularity, and extending our platform-agnostic capabilities to new missions and platforms. With respect to CapEx, our 2025 investments were focused on progressing our new naval power facility in Charleston, South Carolina, along with targeted growth initiatives across the portfolio. In 2026, we expect CapEx to increase even further and trend toward approximately 5% of revenue. We are ramping operations in Charleston, as well as expanding production capacity and modernizing facilities to deliver enhanced capability across the business. Key areas seeing upsized investment include our tactical radars, air defense products, and advanced infrared sensing.

Speaker #3: While continuing to build share in our core ground, enabled domains. Additionally, the emphasis of our R&D initiatives is on advancing platform AI and enabling platform autonomy, stronger security, and modularity, and extending our platform-agnostic capabilities to new missions and platforms.

Speaker #3: With respect to CapEx, our 2025 investments were focused on progressing our new naval power facility in Charleston, South Carolina. Along with targeted growth initiatives across the portfolio.

Speaker #3: In 2026, we expect CapEx to increase even further and trend toward approximately 5% of revenue. We are ramping operations in Charleston as well as expanding production capacity on modernizing facilities to deliver enhanced capability across the business.

Speaker #3: Key areas seeing upsized investment include our tactical radars, air defense products, and advanced infrared sensing. Additionally, some of the increased CapEx supports dedicated germanium processing capacity, which suppliers an important part of ensuring stable supply going forward.

John Baylouny: Additionally, some of the increased CapEx supports dedicated germanium processing capacity with suppliers, an important part of ensuring stable supply going forward. In summary, we intend to maintain our approach of innovating, executing at speed, and investing ahead of demand to support customers and drive long-term growth. Let me briefly highlight our full year 2025 financial performance. We delivered another year of record bookings, that was accompanied by robust organic revenue growth of 13%, marking back-to-back years of double-digit growth. Year-end backlog stood at 8.7 billion, providing clear visibility into 2026 growth. Full year Adjusted EBITDA growth tracked closely with revenue. While margins were flat, performance was shaped by several factors. First, we intentionally increased our internal R&D investment substantially. Second, we managed supply chain complexity related to shortages of critical raw materials, most notably germanium.

Speaker #3: In summary, we intend to maintain our approach of innovating executing at speed, investing ahead of demand to support customers and drive long-term growth. Let me briefly highlight our performance.

Speaker #3: We delivered another year of record bookings, and that was accompanied by robust organic revenue growth of 13%, marking back-to-back years of double-digit growth. Year-end backlog stood at $8.7 billion, providing clear visibility into 2026 growth.

Speaker #3: Full-year adjusted EBITDA growth tracked closely with revenue, while margins were flat, performance was shaped by several factors. First, we intentionally increased our internal R&D investment substantially.

Speaker #3: Second, we managed supply chain complexity related to shortages in critical raw materials, most notably germanium. As we enter 2026, these constraints are contained, with remediation measures firmly in place and being executed throughout this year with confidence.

John Baylouny: As we enter 2026, these constraints are contained with remediation measures firmly in place and being executed throughout this year with confidence. Through a combination of recycling initiatives, strategic allocations from customers, and securing more reliable North American and European sources, we have adequate coverage for our demand in the short, medium, and long term. We've also entered into firm long-term supply agreements, and as I noted earlier, co-investing to secure dedicated refining capacity. While price volatility may persist in the near term, we will reprice contracts renewals on a rolling basis to reflect market conditions and incorporate contractual protections against future potential shocks. Third, as we close out the year, we have two unusual items with largely offsetting revenue and profit impacts.

Speaker #3: Through a combination of recycling initiatives, strategic allocations from customers, and securing more reliable North American and European sources, we have adequate coverage for our demand in the short, medium, and long term.

Speaker #3: We've also entered into firm long-term supply agreements. And as I noted earlier, co-investing to secure dedicated refining capacity. While price volatility may persist in the near term, we will reprice contracts for renewals on a rolling basis to reflect market conditions, and incorporate contractual protections against future potential shocks.

Speaker #3: Third, as we close out the year, we have two unusual items. With largely offsetting revenue and profit impacts. We entered into a 10-year, $100 million license agreement with a leading quantum technology company enabling them to leverage certain laser intellectual property for quantum computing applications.

John Baylouny: We entered into a 10-year, $100 million license agreement with a leading quantum technology company, enabling them to leverage certain laser intellectual property for quantum computing applications. This license agreement monetizes an exciting and attractive commercial opportunity, while allowing us to remain focused on capturing abundant growth in our core defense markets. We also executed a memorandum of understanding to jointly conclude a legacy foreign ground surveillance program initiated more than a decade ago. Technology evolution and obsolescence issues caused the program to be no longer viable for either party. As a result, we recognized an unanticipated loss on the program. While disappointing, the circumstances surrounding this program were unusual and isolated within a portfolio. To be clear, we don't see any other program with similar characteristics that would be expected to drive comparable impacts.

Speaker #3: This license agreement monetizes an exciting and attractive commercial opportunity while allowing us to remain focused on capturing abundant growth in our core defense markets.

Speaker #3: We also executed a memorandum of understanding to jointly conclude a legacy foreign ground surveillance program initiated more than a decade ago. Technology evolution and obsolescence issues caused the program to be no longer viable for either party.

Speaker #3: As a result, we recognize the non-anticipated loss on the program. While disappointing, the circumstances surrounding this program were unusual and isolated within a portfolio.

Speaker #3: To be clear, we don't see any other program with similar characteristics that would be expected to drive comparable impacts. To conclusion, of this legacy effort along with the IP license agreement clears growth and execution.

John Baylouny: The conclusion of this legacy effort, along with the IP license agreement, clears the slate and allows us to focus on growth and execution across our core competencies. Finally, despite materially higher CapEx investment, we delivered 19% growth in full-year Free Cash Flow in 2025, driven by higher profitability and improved working capital efficiency. On balance, 2025 was a strong year, and we're focused on building on that momentum in 2026 and beyond. Turning to Q4 highlights. First, let me commend the team on a tremendous win in the space market. Space has been a multi-year growth initiative for DRS, and I'm pleased that our persistence was validated with a landmark position on the SDA Tracking Layer Tranche 3 program. We're teamed with one of the prime awardees, and we'll deliver a differentiated infrared sensing approach.

Speaker #3: Across our core competencies. Finally, despite materially higher CapEx investment, we delivered 19% growth in full-year free cash flow in 2025, driven by higher profitability and improved working capital efficiency.

Speaker #3: On balance, 2025 was a strong year and we're focused on building on that momentum in 2026 and beyond. Turning to fourth quarter highlights. First, let me commend the team on a tremendous win in the space market.

Speaker #3: Space has been a multi-year growth initiative for DRS, and I'm pleased that our persistence was validated with a landmark position on the SDA Tracking Layer Tranche 3 program.

Speaker #3: We're teamed with one of the prime awardees and will deliver a differentiated infrared sensing approach. This is an exciting opportunity not only to showcase our innovation, but more importantly, to advance critical national defense capabilities against missile threats.

John Baylouny: This is an exciting opportunity not only to showcase our innovation, but more importantly, to advance critical national defense capabilities against missile threats. Now that we've opened the door to this win, our focus shifts to execution excellence to deliver on our commitments. Strong performance will position us for additional SDA opportunities and for other customers, including the potential to leverage our expertise in space-based sensing for the Golden Dome initiative. Also in space, we successfully demonstrated secure data transport using a next-generation crypto multi-channel software-defined radio. This innovative capability enables high-performance, secure satellite communications across multiple frequencies and networks simultaneously, and we look forward to delivering it to customers in the near term. In infrared sensing, we continue to grow in ground-based applications and are seeing green shoots in adjacencies, particularly space and airborne, across both manned and unmanned platforms.

Speaker #3: Now that we've opened the door to this win, our focus shifts to executing excellence to deliver on our commitments. Strong performance will position us for additional SDA opportunities and for other customers, including the potential to leverage our expertise in space-based sensing, for the golden dome initiative.

Speaker #3: Also in space, we successfully demonstrated secure data transport using a next-generation crypto multi-channel software-defined radio. This innovative capability enables high-performance secure satellite communications across multiple frequencies and networks simultaneously, and we look forward to delivering it to customers in the near term.

Speaker #3: In infrared sensing, we continue to grow in ground-based applications. We are seeing green shoots in adjacencies, particularly space and airborne. Across both manned and unmanned platforms, our high-performance cooled infrared sensors are being leveraged on advanced airborne platforms.

John Baylouny: Our high-performance cooled infrared sensors are being leveraged on advanced airborne platforms. Our uncooled capabilities are being adopted on unmanned platforms as customers prioritize an assured electronic supply chain. Our advanced infrared gimbals are being used to designate and direct munitions to neutralize drone threats. We are engaged on multiple primes on several strategic missile programs to provide next-generation sensing capability and expand production capacity. We're also making capital investments to support this demand growth. We remain a market leader in Counter-UAS and are closely partnered with customers to field effective solutions. We're committed to a platform and effector-agnostic approach, which is why we have demonstrated capabilities across multiple vehicle platforms, including the JLTV and unmanned ground vehicles. We're enhancing both kinetic and non-kinetic effectors in our offerings, including cost-effective munitions and non-kinetic tools such as electronic warfare and directed energy.

Speaker #3: Our uncooled capabilities are being adopted on unmanned platforms as customers prioritize an assured electronic supply chain. Our advanced infrared gimbals are being used to designate and direct munitions to neutralize drone threats.

Speaker #3: We are engaged on multiple primes on several strategic missile programs. To provide next-generation sensing capability and expand production capacity. We're also making capital investments to support this demand growth.

Speaker #3: We remain a market leader in counter-UAS and are closely partnered with customers to field effective solutions. We're committed to a platform and effector agnostic approach which is why we have demonstrated capabilities across multiple vehicle platforms, including the JLTV and unmanned ground vehicles.

Speaker #3: We're enhancing both kinetic and non-kinetic vectors in our offerings, including cost-effective munitions, and non-kinetic tools such as electronic warfare and direct energy. Turning to tactical radars, we continue to see immense global demand driven by an imperative to field counter-UAS and air defense capabilities.

John Baylouny: Turning to tactical radars, we continue to see immense global demand, driven by an imperative to field Counter-UAS and air defense capabilities. Our radars are not only highly effective in tracking UAS threats, but also in supporting missile defense and active protection missions. We're also seeing increased demand and growing relevance in maritime-based Counter-UAS applications, alongside the continued momentum on ground-based platforms. More broadly, we're seeing increasing potential beyond tactical radars in the unmanned surface vessel market. Opportunities to pull through an integrated sensing and computing offering across leading platform providers are becoming a growth vector. We're well positioned on the Navy as the Navy crystallizes its USV strategy and begins deploying funding in this area. Staying with naval, our Columbia-class program continues to execute exceptionally well.

Speaker #3: Our radars are not only highly effective in tracking UAS threats, but also in supporting missile defense and active protection missions. We're also seeing increased demand and growing relevance in maritime-based counter-UAS applications, alongside the continued momentum on ground-based platforms.

Speaker #3: More broadly, we're seeing increasing potential beyond tactical radars in the unmanned surface vessel market. Opportunities to pull through an integrated sensing and computing offering across leading platform providers are becoming a growth factor.

Speaker #3: While we're well positioned on the Navy as the Navy crystallizes its USV strategy and begins deploying funding in this area. Staying with naval, our Columbia-class program continues to execute exceptionally well.

Speaker #3: We're delivering on time and with quality and our results reflect the financial benefits of that solid execution. As the Navy adjusts surface combat and modernization strategy, we remain engaged at the center of propulsion architecture discussions across platforms.

John Baylouny: We're delivering on time and with quality, and our results reflect the financial benefits of that solid execution. As the Navy adjusts surface combatant and modernization strategy, we remain engaged at the center of propulsion architecture discussions across platforms. Our electric power and propulsion solutions are modular and remain highly relevant to the power demands of next-generation platforms. Finally, I wanna congratulate Sally Wallace on her new role as Chief Operating Officer. Sally is a strong leader, a trusted partner, and a more than 20-year DRS veteran with deep understanding of customers and a strong track record of delivering mission-critical technology. We've made a few other changes to the team. As a result, we have an exceptional team, and many of those changes reflect expanded responsibilities for longstanding leaders who have delivered strong results.

Speaker #3: Our electric power and propulsion solutions are modular and remain highly relevant to the power demands of next-generation platforms. Finally, I want to congratulate Sally Wallace on her new role as Chief Operating Officer.

Speaker #3: Sally is a strong leader, a trusted partner, and a more than 20-year DRS veteran with deep understanding of customers and a strong track record of delivering mission-critical technology.

Speaker #3: We've made a few other changes to the team as a result. We have an exceptional team and many of those changes reflect expanded responsibilities for long-standing leaders who have delivered strong results.

Speaker #3: I'm confident in each of them and will be successful in expanding roles. Mike, over to you to walk through the details of our financial performance in 2026 outlook.

John Baylouny: I'm confident each of them will be successful in expanding roles. Mike, over to you to walk through the details of our financial performance and the 2026 outlook.

Speaker #2: Thanks, John. I appreciate the team's steadfast focus in delivering another year of solid financial results, particularly in light of several unique factors we faced in 2025.

Michael Dippold: Thanks, John. I appreciate the team's steadfast focus in delivering another year of solid financial results, particularly in light of several unique factors we faced in 2025. I'll walk through Q4 and full year 2025 results by key metric, and then discuss our 2026 outlook. Overall, our full year 2025 results exceeded our expectations. We executed at the high end of, or above, the guidance range provided on our last call. These results were delivered amid a prolonged government shutdown for most of the Q4. Revenue in the Q4 was $1.1 billion, up 8% year-over-year. Robust demand for tactical radars, electric power and propulsion, and advanced infrared sensing drove core growth.

Speaker #2: I'll walk through fourth quarter and full-year 2025 results by key metric, and then discuss our 2026 outlook. Overall, our full-year 2025 results exceeded our expectations.

Speaker #2: We executed at the high end of or above the guidance range provided on our last call. These results were delivered amid a prolonged government shutdown for most of the fourth quarter.

Speaker #2: Revenue in the fourth quarter was $1.1 billion, up 8% year over year. Robust demand for tactical radars, electric power and propulsion, and advanced infrared sensing drove core growth.

Speaker #2: The quarter included a net benefit from the quantum laser IP license agreement, partially offset by the conclusion of the legacy foreign ground surveillance program John discussed.

Michael Dippold: The quarter included a net benefit from the quantum laser IP license agreement, partially offset by the conclusion of the legacy foreign ground surveillance program John discussed. For simplicity, I've referred to the net effect of these items as the net non-routine impact. While the net impact is not significant at the consolidated level, it is more visible in the segment results for both the quarter and for the full year. Full year revenue was $3.6 billion, representing 13% organic growth versus 2024. This marks back-to-back years of teens revenue growth. Growth was broad-based across Advanced Sensing, network computing, force protection, and electric power and propulsion. That was reflected in the segment trends. Our Advanced Sensing and Computing segment delivered revenue growth 9% in Q4, and 11% for the full year.

Speaker #2: For simplicity, I've referred to the net effect of these items as the net non-routine impact. While the net impact is not significant at the consolidated level, it is more visible in the segment results for both the quarter and for the full year.

Speaker #2: Full-year revenue was $3.6 billion, representing 13% organic growth for 2024. This marks back-to-back years of teams' revenue growth. Growth was broad-based across advanced sensing, network computing, force protection, and electric power and propulsion, and that was reflected in the segment trends.

Speaker #2: Our advanced sensing and computing segment delivered revenue growth 9% in Q4 and 11% for the full year. Our integrated mission systems segment delivered year-over-year growth of 5% in Q4 and a healthy 15% for the full year on the back of robust performance in electric power and propulsion and counter-UAS programs.

Michael Dippold: Our Integrated Mission Systems segment delivered year-over-year growth of 5% in Q4, and a healthy 15% for the full year, on the back of robust performance in electric power and propulsion and Counter-UAS programs. Moving to Adjusted EBITDA. Adjusted EBITDA was $158 million in Q4, and $453 million for the full year, representing year-over-year growth of 7% and 13% respectively. Margins were 14.9% in Q4 and 12.4% for the full year. Full year margin was flat, as higher volume and improved profitability on the Columbia class program were offset by higher R&D investment and less efficient program execution, driven by material cost growth. Increased R&D created a 70 basis point year-over-year headwind to margin.

Speaker #2: Moving to adjusted EBITDA. Adjusted EBITDA was $158 million in the fourth quarter and $453 million for the full year, representing year-over-year growth of 7% and 13%, respectively.

Speaker #2: Margins were 14.9% in Q4 and 12.4% for the full year. Full-year margin was flat as higher volume and improved profitability on the Columbia-class program were offset by higher R&D investment and less efficient program execution driven by material cost growth.

Speaker #2: Increased R&D created a 70-basis-point year-over-year headwind to margin. At the segment level, ASC adjusted EBITDA and margin were bolstered by the laser license agreement in both Q4 and the full year.

Michael Dippold: At the segment level, ASC Adjusted EBITDA and margin were bolstered by the laser license agreement in both Q4 and the full year. Excluding this item, ASC Adjusted EBITDA and margin would have declined, primarily due to higher company-funded R&D and raw material cost headwinds, primarily related to germanium. IMS Adjusted EBITDA was negatively impacted by the legacy program conclusion in both Q4 and the full year. Excluding this item, IMS Adjusted EBITDA and margin would have increased meaningfully, driven by operating leverage from growth and improved profitability on Columbia class. Now to the bottom line metrics. Diluted EPS and Adjusted Diluted EPS increased 15% and 11% year-over-year in Q4, respectively. For the full year, Diluted EPS and Adjusted Diluted EPS increased by 29% and 24%, respectively.

Speaker #2: Excluding this item, ASC adjusted EBITDA and margin would have declined, primarily due to higher company-funded R&D and raw material cost headwinds, primarily related to germanium.

Speaker #2: IMF adjusted EBITDA was negatively impacted by the legacy program conclusion in both Q4 and the full year. Excluding this item, IMF adjusted EBITDA and margin would have increased meaningfully, driven by operating leverage from growth and improved profitability on Columbia-class.

Speaker #2: Now to the bottom line metrics. Diluted EPS and adjusted diluted EPS increased 15% and 11% year-over-year in the fourth quarter, respectively. For the full year, diluted EPS and adjusted diluted EPS increased by 29% and 24%, respectively.

Speaker #2: In both periods, strong operating profitability, lower interest and other expense, as well as a lower effective tax rate, supported EPS performance. Moving to free cash flow, fourth-quarter free cash flow generation was robust and totaled $376 million, bringing our full-year free cash flow to $227 million.

Michael Dippold: In both periods, strong operating profitability, lower interest, and other expense, as well as a lower effective tax rate, supported EPS performance. Moving to Free Cash Flow. Q4 Free Cash Flow generation was robust and totaled $376 million, bringing our full year Free Cash Flow to $227 million. Our strong cash generation in 2025 leaves the balance sheet with net cash at year-end. Subsequent to year-end, we entered into a new $500 million revolving credit facility, providing lower interest costs and added borrowing flexibility. Turning to 2026 guidance, robust customer demand and bookings over the past few years provide visibility into continued growth. We are initiating a revenue range of $3.85 to $3.95 billion, implying a 6% to 8% organic growth. Our backlog provides a clear path to executing within this range.

Speaker #2: Our strong cash generation in 2025 leaves the balance sheet with net cash at year-end. Subsequent to year-end, we entered into a new $500 million revolving credit facility, providing lower interest costs and added borrowing flexibility.

Speaker #2: Turning to 2026 guidance, robust customer demand and bookings over the past few years provide visibility into continued growth. We are initiating a revenue range of $3.85 to $3.95 billion, implying a 6 to 8 percent organic growth.

Speaker #2: Our backlog provides a clear path to executing within this range. Key factors influencing revenue include the pace of material receipts, labor execution, and to a lesser extent, the timing of customer orders for book-to-bill revenue.

Michael Dippold: Key factors influencing revenue include the pace of material receipts, labor execution, and, to a lesser extent, the timing of customer orders for book-to-bill revenue. For Adjusted EBITDA, we expect $505 million to $525 million in 2026. The implied year-over-year margin improvement is 70 to 90 basis points, driven by improved profitability on Columbia class, favorable program mix, and operating leverage from growth. We plan to continue robust company-funded R&D investment at a comparable percentage of revenue to 2025, but we do not expect it to pressure margins to the same extent as last year. Amortization is expected to be flat in dollars, and depreciation should increase modestly, given recent CapEx. Together, they should approximate 3% of revenue. For Adjusted Diluted EPS, we are initiating a range of $1.20 to $1.26 per share.

Speaker #2: For adjusted EBITDA, we expect $505 million to $525 million in 2026. The implied year-over-year margin improvement is 70 to 90 basis points, driven by improved profitability on Columbia-class, favorable program mix, and operating leverage from growth.

Speaker #2: We plan to continue robust company-funded R&D investment at a comparable but we do not expect it to pressure margins to the same extent as last year.

Speaker #2: Amortization is expected to be flat in dollars and depreciation should increase modestly given recent capex. Together, they should approximate 3% of revenue. For adjusted diluted EPS, we are initiating a range of $1.20 to $1.26 per share.

Speaker #2: Our guidance assumes an 18.5% tax rate and a fully diluted share count of 269 million. We also expect free cash flow conversion of 80% of adjusted net earnings.

Michael Dippold: Our guidance assumes an 18.5% tax rate and a fully diluted share count of 269 million. We also expect free cash flow conversion of 80% of adjusted net earnings. As John mentioned, we are increasing projected CapEx meaningfully in 2026 as we complete the Charleston facility and make additional investments across the business to enhance capacity and capability. As a result, we expect CapEx to be just under 5% of revenue. Improved working capital efficiency is expected to partially offset the higher CapEx. Finally, we expect Q1 revenue to range in the low $800s, with an Adjusted EBITDA margin in the low 11% range. Revenue and Adjusted EBITDA linearity is expected to be comparable to recent years. The second half of the year should contribute slightly more than half of revenue and more than half of Adjusted EBITDA.

Speaker #2: As John mentioned, we are increasing projected capex meaningfully in 2026 as we complete the Charleston facility and make additional investments across the business to enhance capacity, end capability.

Speaker #2: As a result, we expect capex to be just under 5% of revenue. Improved working capital efficiency is expected to partially offset the higher capex.

Speaker #2: Finally, we expect Q1 revenue to range in the low $800 million range, with an adjusted EBITDA margin in the low 11% range. Revenue and adjusted EBITDA linearity is expected to be comparable to recent years.

Speaker #2: The second half of the year should contribute slightly more than half of revenue and more than half of adjusted EBITDA. We anticipate a similar quarterly trend in our free cash flow, with modest linearity improvements as we continue to drive working capital efficiencies.

Michael Dippold: We anticipate a similar quarterly trend in our Free Cash Flow, with modest linearity improvements as we continue to drive working capital efficiencies. Let me turn the call back over to John for closing remarks.

Speaker #2: Let me turn the call back over to John for closing remarks.

Speaker #1: Thanks, Mike. I'm incredibly proud of the team's relentless focus and their immense contributions in support of our critical national security priorities. The results we delivered in 2025 and over the past few years reflect the strength of our portfolio and the soundness of our strategy.

John Baylouny: Thanks, Mike. I'm incredibly proud of the team's relentless focus and their immense contributions in support of our critical national security priorities. The results we delivered in 2025 and over the past few years reflect the strength of our portfolio and the soundness of our strategy. DRS is in an excellent position, and we're building on this strong foundation to drive another year of significant growth, while also nurturing long-term opportunities that will define the next chapter of the business. We are investing, innovating, and executing at a time when our customers need these capabilities more than ever. We look ahead, we remain focused on delivering these cutting-edge capabilities to customers with speed, quality, and scale, positioning us for continued growth. With that, we're ready to take your questions.

Speaker #1: DRS is an excellent position, and we're building on this strong foundation to drive another year of significant growth while also nurturing long-term opportunities that will define the next chapter of the business.

Speaker #1: We are investing, innovating, and executing at a time when our customers need these capabilities more than ever. As we look ahead, we remain focused on delivering these cutting-edge capabilities to customers with speed, quality, and scale, positioning us for continued growth.

Speaker #1: With that, we're ready to take your questions.

Speaker #3: Thank you. Ladies and gentlemen, to ask the question, please first start one-one on your telephone. Then wait for your name to be announced. To withdraw your question, please first start one-one again.

Operator: Thank you. Ladies and gentlemen, to ask a question, please press star one one on your telephone, then wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Robert Stallard with Vertical Research. Your line is open.

Speaker #3: Please stand by while we compile the Q&A roster. Our first question comes from the line of Robert Stollert with vertical research. Yolanda's open.

Speaker #4: Thanks so much. Good morning.

Robert Stallard: Thanks so much. Good morning.

Speaker #1: Good morning.

John Baylouny: Good morning.

Robert Stallard: John, maybe just to kick things off, you mentioned at the start of your comments the potential benefits from the reconciliation bill that was passed last year. We're starting to get some details on that, and I was wondering if you've seen anything there that suggests some upside for DRS.

Speaker #4: John, maybe just to kick things off, you mentioned at the start of your comments the potential benefits from the reconciliation bill that was passed last year.

Speaker #4: We're starting to get some details on that. And I was wondering if you've seen anything there that suggests some upside for DRS.

Speaker #1: Well, thanks, Rob. Yes, we are starting to see some of the money flowing now. And we believe that we have alignment in some of the priority areas where some incremental funding could flow.

John Baylouny: Well, thanks, Rob. Yes, we are starting to see some of the money flowing now. We believe that we have alignment in some of the priority areas where some incremental funding could flow. Again, it's early days, though. I think we haven't seen the money get all the way to our customers yet, but there is certainly some alignment with where we're investing and where that money's going.

Speaker #1: Again, it's early days, though. I think we haven't seen the money get all the way to our customers yet. But there's certainly some alignment with where we're investing and where that money's going.

Speaker #4: Okay. And then as a follow-up, you highlighted that you've seen four years of at or above 1.2 times book-to-bill. As a rank, does this suggest there's going to be a step-up in your revenue growth in the years ahead?

Robert Stallard: Okay. As a follow-up, you highlighted that you've seen four years of at or above 1.2x book to bill. I was wondering, does this suggest there's going to be a step-up in your revenue growth in the years ahead? Does this order intake just extend similar kind of growth further into the future?

Speaker #4: Or does this order intake just extend similar kind of growth further into the future?

Speaker #1: Well, Rob, we're certainly optimistic on growth. But I want to acknowledge that we do have a diverse portfolio we are due to the fact that we're stepping up to a higher level in capabilities and solutions.

John Baylouny: Well, Rob, we're certainly optimistic on growth. I want to acknowledge that we do have a diverse portfolio. We are due to the fact that we're stepping up to a higher level in capabilities and solutions, we do have an elongated conversion cycle. It's certainly our goal to continue growing like we did in 2025, and we're optimistic, but you have to acknowledge there's other elements.

Speaker #1: We do have an elongated conversion cycle. It certainly, our goal to continue growing like we did in 2025. And we're optimistic but you have to acknowledge there's other elements.

Speaker #4: That's great. Thanks so much, John.

Robert Stallard: That's great. Thanks so much, John.

Speaker #3: Thank you. Our next question comes from the line of Michael Chamoli with Truist. Yolanda's open.

Operator: Thank you. Our next question comes from the line of Michael Ciarmoli with Truist. Your line is open.

Speaker #5: Hey, morning, guys. Nice results. Thanks for taking the questions. Just to follow up on that last line, on growth, I don't know, John or Mike, did you size the ground revenue program?

Michael Dippold: Hey, morning, guys. Nice results. Thanks for taking the questions. Just to follow up on that last line on growth. I don't know, John or Mike, did you size the ground revenue program that's rolling off? Just trying to get a sense of, you know, you've got a big portfolio. Is anything specifically winding down or creating a headwind? I mean, it just seems like

Michael Ciarmoli: Hey, morning, guys. Nice results. Thanks for taking the questions. Just to follow up on that last line on growth. I don't know, John or Mike, did you size the ground revenue program that's rolling off? Just trying to get a sense of, you know, you've got a big portfolio. Is anything specifically winding down or creating a headwind? I mean, it just seems like

Speaker #5: That's rolling off. Just trying to get a sense if you've got a big portfolio. Is anything specifically winding down or creating a headwind? I mean, it just seems like the funding environment, the budget environment's getting better.

Michael Ciarmoli: ... the funding environment, the budget environment is getting better. You know, I know you're lapping two years of low teens growth, but why should we think growth is really going to decelerate here?

Speaker #5: I know you're lapped in two years of low teens growth. But why should we think growth is really going to decelerate here?

Speaker #1: Yeah. Yeah, Mike, I'll take that. I think that ultimately, when you look at the portfolio, as diverse as ours, it's always going to be elements that are growing at a different rate.

Michael Dippold: Yeah, yeah, Mike, I'll take that. I think that ultimately, when you, when you look at the portfolio as diverse as ours, there's always going to be elements that are growing at a different rate. Although we're aligned in a lot of the swim lanes that I think are going to get good allocated funding in terms of shipbuilding, our recent win in space, there are pockets, you know, mainly in the network computing area, that are growing at a little lesser rate, and that's what we're John was kind of commenting on there.

Speaker #1: So although we're aligned in a lot of the swim lanes that I think are going to get good allocated funding in terms of shipbuilding, our recent win in space, there are pockets, mainly in the network computing area, that are growing at a little lesser rate.

Speaker #1: And that's what John was kind of commenting on there.

Speaker #5: Okay. Okay. And then just one more on kind of cap structure, capital deployment. You're probably going to end the year here with a net cash position of in excess of $400 million.

Michael Ciarmoli: Okay. Okay. Just one more on kind of cap structure, capital deployment. You know, you're probably going to end the year here with a net cash position of in excess of $400 million. You just mentioned the new $500 million revolver. You know, how should we think about, you know, putting that balance sheet to work? You know, is that the most optimal structure right now?

Speaker #5: You just mentioned the new $500 million revolver. How should we think about putting that balance sheet to work, and is that the most optimal structure right now?

Speaker #1: Well, thanks, Mike. Yeah, certainly, our top priority has always been and will continue to be organic investments first. And you're seeing us invest in CapEx.

John Baylouny: Well, thanks, Mike. Yeah, certainly, our top priority has always been and will continue to be organic investments first. You're seeing us invest in CapEx, you're seeing us invest in IRAD. We expect it to drive growth in the out years. But organic first and then inorganic. We're going to be kind of picky about what we look at in the M&A space. First organic, then inorganic.

Speaker #1: You're seeing us invest in IRAD. We expect it to drive growth in the out years but organic first and then inorganic. And we're going to be kind of picky about what we look at in the M&A space.

Speaker #1: So but first, organic, then inorganic.

Speaker #5: Okay. Fair enough. Thanks, guys. I'll jump back in the queue.

Michael Ciarmoli: Okay, fair enough. Thanks, guys. I'll jump back in the queue.

Speaker #3: Thank you. Our next question comes from the line of Seth Seifman with JPMorgan. Yolanda's open.

Operator: Thank you. Our next question comes from the line of Seth Seifman with JP Morgan. Your line is open.

Seth Seifman: Hey, thanks very much. Good morning, and nice results. Wanted to start off asking about the profitability in IMS in the Q4. If we add back the international program termination, there's a, you know, very healthy margin. Was there a catch up on Columbia? Or should we think about what the Q4 margin implies for going forward in IMS?

Speaker #6: Hey, thanks very much. Good morning. And nice results. I wanted to start off by asking about the profitability in IMS and the fourth quarter. If we add back the international program termination, it was a very healthy margin.

Speaker #6: Was there a catch-up on Columbia? Should we think about the what should we think about what the fourth quarter margin implies for going forward in IMS?

Speaker #1: Yeah, thanks. Seth, appreciate the question. We certainly saw a strong demand across the segment of IMS coming from our naval power business, both on Columbia but also on the surface ships.

Michael Dippold: Thanks, Seth. Appreciate the question. We certainly saw a strong demand across the segment of IMS coming from our naval power business, both on Columbia, but also on the surface ships. Also, had an inflow of revenue on the counter UAS and e- efforts that we have there. A lot of the margin was coming from the volume leverage that we saw. We had a big growth in the quarter, which materialized in margin. As you're aware, we period expense G&A, we period expense the IRAD, that operating leverage falls to the bottom. That was a big element of it. The performance at Columbia certainly continues to be a tailwind. Not a major catch-up, but certainly a tailwind for the quarter.

Speaker #1: Also, had an inflow of revenue on the counter-UAS and efforts that we have there. So a lot of the margin was coming from the volume leverage that we saw.

Speaker #1: So we had a big growth in the quarter, which materialized in margin as you're aware. We period expense G&A. We period expense the IRA.

Speaker #1: So that operating leverage falls to the bottom. So that was a big element of it. The performance at Columbia certainly continues to be a tailwind.

Speaker #1: Not a major catch-up, but certainly a tailwind for the quarter.

Speaker #6: Okay. Okay. Excellent. And then maybe following up when we think about Charleston and the new capacity, coming online there, it seems now that we might have some new ships a little bit faster than previously expected when you guys announced that in terms of a new frigate and we'll see what happens.

Seth Seifman: Okay, okay. Excellent. Maybe following up when we think about Charleston and the new capacity coming online there. It seems now that we might have some new ships a little bit faster than previously expected when you guys announced that in terms of a frigate and we'll see what happens, but maybe even a battleship. You know, what are discussions like at this point about your ability to use that capacity on these new ship classes?

Speaker #6: But maybe even a battleship. What are discussions like at this point about your ability to use that capacity on these new ship classes?

Speaker #1: Yeah. So, thanks for the question. Look, I think that we're seeing that space evolve, right? And we've said—in the last call, we talked about the need for future combatants to have to fight from greater distances.

John Baylouny: Yeah, thanks for the question. Look, I think that we're seeing that space evolve, right? We've said in the last call, we talked about the need for future combatants have to fight from greater distances. They need more power to meet that distance need and more powerful radars, more powerful electronic warfare or directed energy, et cetera. To do that, they're going to need electric propulsion, a system that allows them to move energy from one part of the ship to another and make use of all of the energy on the ship.

Speaker #1: They need more power to meet that distance need. And more power for radars, more power for electronic warfare or direct in energy, etc. And to do that, they're going to need electric propulsion system that allows them to move energy from one part of the ship to another and make use of all of the energy on the ship.

John Baylouny: What we're looking at going forward here is, and we're embedded in some of these discussions with the Navy, is about building a capability for modularity. Whether they build a battleship or a destroyer or a cruiser or a frigate, or even, frankly, a medium-sized USV, they should be using the same architecture, that electric architecture, propulsion architecture, that will allow for common... What I've been calling a common chassis. Like you see in the automotive world, where all the different size cars are built off the same kind of structure. If that's the case and we head down that path, regardless of what the Navy ends up building, we'll be able to utilize that capacity down in Charleston for different size components.

Speaker #1: What we're looking at going forward here is and we're embedded in some of these discussions with the Navy is about building a capability for modularity.

Speaker #1: So whether they build a battleship or a destroyer or a cruiser or a frigate, or even frankly, a medium-sized USV, they should be using the same architecture that electric architecture, propulsion architecture that will allow for what I've been calling a common chassis like you see in the automotive world where all the different size cars are built off the same kind of structure.

Speaker #1: And so if that's the case and we head down that path, regardless of what the Navy ends up building, we'll be able to utilize that capacity down in Charleston for different-sized components.

Speaker #1: We've been investing in different-sized motors, different-sized drives, different-sized components for those ships that would be applicable to any size ship, whether it's a battleship all the way down to a medium-sized USV.

John Baylouny: We've been investing in different size motors, different size drives, different size components for those ships that would be applicable to any size ship, whether it's a battleship, all the way down to a medium-sized USV. That's where we're headed. That's where we think that the Navy is going to head down that path. Again, that capacity that we built out down in Charleston will be the enabler for that capability.

Speaker #1: So that's where we're headed. That's where we think that the Navy is going to head down that path. And again, that capacity that we built out down in Charleston will be the enabler for that capability.

Speaker #6: That's super helpful. Thanks very much.

Seth Seifman: That's super helpful. Thanks very much.

Operator: Our next question comes from the line of Austin Moeller with Canaccord. Your line is open.

Speaker #3: Our next question comes from the line of Austin Moller with Canaccourt. Yolanda's open.

Michael Ciarmoli: Hi, John and Mike. Good morning. Just my first question here: Can you comment on the Palm Street tracking layer infrared payload award, what the contract value might look like, and how this might grow as part of the Golden Dome now that over $13 billion was appropriated in the Space Force budget for 2026?

Austin Moeller: Hi, John and Mike. Good morning. Just my first question here: Can you comment on the Palm Street tracking layer infrared payload award, what the contract value might look like, and how this might grow as part of the Golden Dome now that over $13 billion was appropriated in the Space Force budget for 2026?

Speaker #7: Hi, John and Mike. Good morning. So just my first question here, can you comment on the Tronstery tracking layer infrared payload award, what the contract value might look like, and how this might grow as part of the Golden Dome now that over $13 billion was appropriated in the Space Force budget for 26?

John Baylouny: Austin, thanks for the question. We're not gonna comment on the size of the award due to the fact that that's competitive. We're really excited about this award. It's taken us some time, incredible amount of innovation to find a different way to do this mission. Now that we've won that award, we're squarely focused on executing the program and bringing that execution excellence to that team so that we can deliver on time. As we move forward to, you know, what other opportunities there might be in space, we look to help solve the bigger question of connecting potentially for Golden Dome, connecting the threat to the... or the interceptor to the threat.

Speaker #1: We're not going to Austin, thanks for the question. We're not going to comment on the size of the award due to the fact that that's competitive.

Speaker #1: But we're really excited about this award. It's taken us some time. Incredible amount of innovation to find a different way to do this mission.

Speaker #1: Now that we've won that award and we're squarely focused on executing the program and bringing that execution excellence to that team, so that we can deliver on time.

Speaker #1: As we move forward to what other opportunities there might be in space, we look to help solve the bigger question of connecting—potentially for Golden Dome—connecting the threat to the interceptor, to the threat.

John Baylouny: Which is one of the reasons why we want to put the software-defined radio with the software-defined crypto into space. We put some compute up there as well. It would allow us to now connect and decrypt the data, compute, and then re-encrypt the data so that we can send it down to the interceptor, so that the decisions, the yes, no decision happens on the ground, but the connectivity happens up at the edge in space. We're looking to solve the bigger problem that Golden Dome has, which is time. The intercept time has to happen, we believe, up in space, that connectivity. Otherwise, you're not gonna make the timeline.

Speaker #1: Which is one of the reasons why we want to put the software-defined radio with the software-defined crypto into space. That would allow us, and we put some compute up there as well.

Speaker #1: So it would allow us to now connect and decrypt the data, compute, and then re-encrypt the data so that we can send it down to the interceptor so that the decisions the yes/no decision happens on the ground, but the connectivity happens up at the edge in space.

Speaker #1: And so we're looking to solve the bigger problem that the Golden Dome has, which is time. The intercept time has to happen, we believe, up in space that connectivity.

Speaker #1: Otherwise, you're not going to make the timeline. So what happens with the SDA tracking layer portfolio and how does it dovetail into Golden Dome is still a question mark.

John Baylouny: What happens with the SDA Tracking Layer portfolio and how does it dovetail into Golden Dome is still a question mark. The preliminary architecture is still being discussed and not completely public. We believe that all of the sensors that are up in space, all of the sensors on the ground, to include over-the-horizon radar, will be part of the solution for Golden Dome.

Speaker #1: The preliminary architecture is still being discussed. And not completely public. But we believe that all of the sensors that are up in space, all of the sensors on the ground to include over the horizon radar, will be part of the solution for Golden Dome.

Speaker #7: Okay. And based on the fiscal year 26, 27 billion dollar shipbuilding budget and what you're hearing from the Navy, do you expect a higher mix of small or medium USVs in the force structure and would one design versus the other impact your ability to build an electric drive system or provide compute content or impact profitability on such a system?

[Analyst] (Canaccord Genuity): Okay. Based on the Fiscal Year 2026, $27 billion shipbuilding budget and what you're hearing from the Navy, do you expect a higher mix of, like, small or medium USVs in the force structure? Would one design versus the other impact your ability to build an electric drive system or provide compute content on, or impact profitability on such a system?

Austin Moeller: Okay. Based on the Fiscal Year 2026, $27 billion shipbuilding budget and what you're hearing from the Navy, do you expect a higher mix of, like, small or medium USVs in the force structure? Would one design versus the other impact your ability to build an electric drive system or provide compute content on, or impact profitability on such a system?

Speaker #1: It's a great question. I think you're going to see—and this is an opinion—you're going to see different ship classes being built. The battleship, whether they end up building a battleship or not, we'd love to see it.

John Baylouny: It's a great question. I think you're gonna see, this is an opinion. You're gonna see different ship classes being built. The battleship, whether they end up building a battleship or not, we'd love to see it, or it becomes a destroyer or a cruiser. You're gonna see a lot more, as you kind of led here to smaller surface combatants, whether they're MUSVs or small USVs, or medium or small USVs, you're gonna see a lot more quantity of those. We've been investing in capabilities for those small and medium USVs by putting mission equipment packages on them, putting them to sea last year. We think there are missions out there for whether it's Counter-UAS or ISR or other missions for those small combatants.

Speaker #1: Or it becomes a destroyer or a cruiser. But you're going to see a lot more as you kind of led here to smaller surface combatants, whether they're MUSVs or small USVs, medium or small USVs.

Speaker #1: You're going to see a lot more quantity of those. We've been investing in capabilities for those small and medium USVs by putting mission equipment packages on them, putting them to sea last year.

Speaker #1: We think there are missions out there for whether it's counter-UAS or ISR or other missions for those small combatants. As far as the propulsion systems for those, again, we've been investing in small, medium, large, and extra-large different components.

John Baylouny: As far as the propulsion systems for those, again, we've been investing in small, medium, large, and extra large different components. We have some of our propulsion components on some of the USVs that are being tested now. Of course, you know, Columbia-sized motors would be applicable for some of the larger combatants. We think we can address any number of different size ships, and we do expect that the Navy will buy a whole portfolio of different capabilities.

Speaker #1: We have some of our propulsion components on some of the USVs that are being tested now. And of course, Columbia-sized motors would be applicable for some of the larger combatants.

Speaker #1: So we think we can address any number of different size ships and we do expect that the Navy will buy a whole portfolio of different capabilities.

Speaker #7: That's super interesting. Thanks for the caller.

[Analyst] (Canaccord Genuity): That's super interesting. Thanks for the caller.

Austin Moeller: That's super interesting. Thanks for the caller.

Speaker #3: Thank you. Ladies and gentlemen, as a reminder to ask the question, please first start one-one on your cell phone. Please stand by for our next question.

Operator: Thank you. Ladies and gentlemen, as a reminder to ask a question, please press star one one on your telephone. Please stand by for our next question. Our next question comes from the line of Jon Tanwanteng with CJS Securities. Your line is open.

Speaker #3: Our next question comes from the line of John Tanwanting with CJS Securities. Yolanda's open.

Speaker #8: Hi, good morning. Thank you for taking my questions and congrats on a nice year. I was wondering if you could address the quantum laser license that you signed.

Jon Tanwanteng: Hi, good morning. Thank you for taking my questions, and congrats on a nice year. I was wondering if you could address the quantum laser license that you signed. Can you go into a little bit more detail what that technology allows the customer to do, number one? Number two, are there more opportunities beyond that as quantum, you know, becomes the next tech over the horizon?

Speaker #8: Can you go into a little bit more detail what that technology allows the customer to do, number one. And number two, are there more opportunities beyond that as quantum becomes the next tech over the horizon?

Speaker #1: Yeah, John. Let me take that. Thanks for the question. Depending on the architecture of the quantum computing structure, some of them utilize lasers to excite the ions, and in this particular case, that's exactly what they're doing.

John Baylouny: Yeah, John, let me take that. Thanks for the question. Depending on the architecture of the quantum computing structure, some of them are, some of them utilize lasers to excite the ions. In this particular case, that's exactly what they're doing. They're using the quantum cascade laser technology that we make for military use to excite the ions for quantum use. To the question about, you know, are there other applications like this? We certainly look for non-core areas of the market that, to license our technology. We're not in the commercial space. We focus our attention on the military defense space.

Speaker #1: They're using the quantum cascade laser technology that we make for military use, to excite the ions for quantum use. The question about are there other applications like this?

Speaker #1: We certainly look for non-core areas of the market to license our technology. We're not in the commercial space. We focus our attention on the military defense space.

Speaker #1: And so when we see an application like this, and this is the second time we've seen it, we'll look for others. Going forward, we like to license the technology out and allow the other companies to take advantage of the technology in the markets that we're not in.

John Baylouny: When we see an application like this, and this is the second time we've seen it, and we'll look for others going forward, we like to license the technology out and allow the other companies to take advantage of the technology in the markets that we're not, we're not in. We'll continue to do that in the future. I can't say we have another one in the bag ready to go, but we'll continually look for them.

Speaker #1: And so we'll continue to do that in the future. I can't say we have another one in the bag ready to go, but we'll continue to look for them.

Speaker #8: Okay. Great. Question about the CapEx. You mentioned that you're increasing it for the year. What is the specific what are the specific programs that they increase is tied to?

Jon Tanwanteng: Okay, great. Question about the CapEx. You mentioned that you're increasing it for the year. What are the specific programs that the increase is tied to? Is it production of components? Is it other stuff that's going on?

Speaker #8: Is it production of components? Is it other stuff that's going on?

Speaker #1: Yeah, John, I'll take that one for you. So, thanks for the question. From a CapEx perspective, as John alluded to earlier, organic investment is what we're focused on.

Michael Dippold: Yeah, John, I'll take that one for you. Thanks for the question. From a CapEx perspective, as John alluded to earlier, organic investment is where we're focused. Right now, from a CapEx perspective, that's about capacity. We've spoken about the naval elements that we're doing down in South Carolina, but also throughout the whole naval portfolio, we're looking to expand capacity and make sure that we're contributing to the more efficient shipbuilding aspirations of the Department. There's an element of CapEx going there. I would also say, from a counter UAS and maybe more finite, the tactical radars, the demand continues to be robust.

Speaker #1: And right now, from a CapEx perspective, that's about capacity. So we've spoken about the naval elements that we're doing down in South Carolina, but also throughout the whole naval portfolio, we're looking to expand capacity and make sure that we're contributing to the more efficient shipbuilding aspirations of the department.

Speaker #1: So there's an element of CapEx going there. I would also say, from a counter-UAS and maybe more finite, the tactical radars, the demand continues to be robust.

Speaker #1: I think we're continuing to see the performance of these radars, and that's requiring us to also increase capacity for that output. So those are the two primary areas that we're seeing.

Michael Dippold: I think we're continuing to see the performance of these radars, and that's requiring us to also increase capacity for that output. Those are the two primary areas that we're seeing. The other things we're trying to do is also continue to have demo assets ready to meet the need of this kind of speed to market. We want to have mission equipment packages to go on USVs that are ready to go. That's also an element of the CapEx, but mainly capacity, but also some demo assets for demonstration and speed to market.

Speaker #1: But the other things we're trying to do is also continue to have demo assets ready, to meet the need of this kind of speed to market.

Speaker #1: So we want to have mission equipment packages to go on USVs that are ready to go. And that's also an element of the CapEx.

Speaker #1: But mainly capacity, but also some demo assets for demonstration and speed to market.

John Baylouny: Let me just add a little bit more to that, in another area, in the missile area. Where as you look at, you come to realize that in the battlefields of the future, they're gonna be dominated by autonomous platforms and weapons, like loitering munitions and such. Sensing is a key part of every one of those platforms. Of course, we make exquisite, you know, infrared sensors and radars and other sensors as well. The demand signal for those low-cost, highly attritable platforms is there. We're investing some in capacity to expand those capabilities.

Speaker #8: Let me just add a little bit more to that. In another area, in the missile area, where as you look at—you come to realize that, in the battlefields of the future, it's going to be dominated—they're going to be dominated by autonomous platforms and weapons, like loitering munitions and such.

Speaker #8: And sensing is a key part of every one of those platforms. And, of course, we make exquisite infrared sensors and radars, and other sensors as well.

Speaker #8: The demand signal for those low-cost, highly attributable platforms is there. So we're investing some in capacity to expand those capabilities. And on the missile front, all the way from the very low-end capabilities all the way to the very high-end capabilities are things that we're investing in, including capacity for those capabilities.

John Baylouny: On the missile front, you know, all the way from the very low-end capabilities, all the way to the very high-end capabilities, are things that we're investing in, and including capacity for those capabilities.

Speaker #8: Understood. Thank you. If I could sneak one more in there, how do you expect OpEx and R&D to grow, maybe as a percent of revenue this year?

Jon Tanwanteng: Understood. Thank you. If I could sneak one more in there. How do you expect OpEx and R&D to grow, maybe as a % of revenue this year? Or do they stay roughly the same?

Speaker #8: Or do they stay roughly the same?

Speaker #1: Certainly, from an IRAD perspective, we expect to see that as a similar percentage of revenue. I think the margin impact that you saw as we ticked it up to that mid-3 percent of sales range, was a one-time thing.

Michael Dippold: Certainly, from an IRAD perspective, we expect to see that as a similar percentage of revenue. I think the margin impact that you saw as we ticked it up to, you know, that mid-3% of sales range was a one-time thing, and that we're gonna be stabilized there. That will contribute to our ability to expand margins. From a CapEx perspective, I would say that we're looking to pick that up, and it'll be somewhere in the neighborhood of 5% of sales.

Speaker #1: I think we're going to be stabilized there. That will contribute to our ability to expand margins. And then from a CapEx perspective, I would say that we're looking to tick that up.

Speaker #1: And it'll be somewhere in the neighborhood of 5% of sales.

Speaker #8: Got it. I think I said OpEx, not CapEx.

Jon Tanwanteng: Got it. I think I said OpEx, not CapEx.

Speaker #1: Oh, I'm sorry. Yeah. I would expect from an OpEx perspective that you see a little bit more moderate of an increase. I think in 2025, we had a big jump that we saw, and I would not expect that to continue at that pace.

Michael Dippold: Oh, I'm sorry. Yeah, I would expect from an OpEx perspective that you'd see a little bit more moderate of an increase. I think in 2025, we had a big jump that we saw, and I would not expect that to continue at that pace.

Speaker #8: Great. Thank you.

Jon Tanwanteng: Great. Thank you.

Speaker #3: Thank you. Our next question comes from the line of Andre Madrid with BTIG. Yolanda's open.

Operator: Thank you. Our next question comes from the line of Andre Madrid with BTIG. Your line is open.

Speaker #8: Hey, good morning, guys. Thanks for taking my question.

Andre Madrid: Hey, good morning, guys. Thanks for taking my question.

Andres Madrid: Hey, good morning, guys. Thanks for taking my question.

Speaker #1: Good morning. Looking at your prior 2026 target, I know you guys had outlined 14% EBITDA margin. That's obviously not going to be the case with what's implied right now.

John Baylouny: Good morning.

Michael Dippold: Good.

Andre Madrid: You know, looking at your prior 2026 target, I know you guys had outlined 14% EBITDA margin. That's obviously not gonna be the case with what's implied right now. When do you think that that could feasibly be achieved down the road? Then I guess, too, as we just look at, you know, 2026 kind of being the endpoint of your targets from the last Investor Day, I mean, what insight can you just provide at large about how the remainder of the decade might look like?

Andres Madrid: You know, looking at your prior 2026 target, I know you guys had outlined 14% EBITDA margin. That's obviously not gonna be the case with what's implied right now. When do you think that that could feasibly be achieved down the road? Then I guess, too, as we just look at, you know, 2026 kind of being the endpoint of your targets from the last Investor Day, I mean, what insight can you just provide at large about how the remainder of the decade might look like?

Speaker #1: But when do you think that that could feasibly be achieved? Down the road? And then I guess, too, as we just look at 2026 kind of being the endpoint of your targets from the last investor day, I mean, what insight can you just provide at large about how the remainder of the decade might look like?

Speaker #8: Yeah, so our intent is to provide multi-year targets probably in the first quarter of 2027, Andre. So we're not going to get out in front of that now.

Michael Dippold: Our intent is to provide multiyear targets, probably in Q1 2027, Andre. We're not gonna get out in front of that now, I'll give you some directional points. The first is, we think the business is structured to be in the mid-teens margins, right? There's a continued path to grow the margins. I think our guide's showing that in the increase that we're expecting in 2026, I don't expect that to be any different as we look out into 2027. We should be able to get into the mid-teens comfortably there. That's what I'd kind of give you that confidence there as we look out into the future.

Speaker #8: But I'll give you some directional points. The first is we think the business is structured to be in the mid-teens margins, right? So there's a continued path to grow the margins.

Speaker #8: I think our guide showing that in the increase that we're expecting in '26. And I don't expect that to be any different as we look out into '27.

Speaker #8: So we should be able to get into the mid-teens comfortably there. And that's what I'd kind of give you that confidence there as we look out into the future.

Speaker #1: Gotcha, gotcha. And then I guess as we look at book-to-bill, I mean, demand has just been so strong. I mean, we've looked at 16 consecutive quarters either at or above one time.

Andre Madrid: Gotcha. Gotcha. Then I guess as we look at, you know, book-to-bill, I mean, demand has just been so strong. I mean, we've looked at 16 consecutive quarters, either at or above 1x. I mean, are you worried about this softening at any point, or is there any particular area in which we might see a softening?

Andres Madrid: Gotcha. Gotcha. Then I guess as we look at, you know, book-to-bill, I mean, demand has just been so strong. I mean, we've looked at 16 consecutive quarters, either at or above 1x. I mean, are you worried about this softening at any point, or is there any particular area in which we might see a softening?

Speaker #1: I mean, are you worried about this softening at any point, or is there any particular area in which we might see a softening?

John Baylouny: Well, Mike explained that we are looking at some of the areas that aren't gonna grow as fast as other areas. We focus all of our attention on the portfolio to see where we can invest to increase the speed of growth. You know, so I wouldn't point out any one particular area of the business that we say is the demand is gonna fall off. I just think it's a matter of how fast they grow.

Speaker #8: Well, Mike, we are looking at some of the areas that aren't going to grow as fast as other areas. But we focus all of our attention on the portfolio to see where we can invest to increase the speed of growth.

Speaker #8: And so I wouldn't point out any one particular area of the business that we say is the demand is going to fall off. I just think that's a matter of how fast they grow.

Speaker #8: Got it. Got it. All right. I appreciate it. Thanks, John, Mike, and Steve. Thanks.

Andre Madrid: Got it. All right, I appreciate it. Thanks, John, Mike, and Steve.

Andres Madrid: Got it. All right, I appreciate it. Thanks, John, Mike, and Steve.

Michael Dippold: Thanks, Andre.

Speaker #3: Thank you. Our next question comes from the line of Ron Epstein with Bank of America. Yolanda's open.

Operator: Thank you. Our next question comes from the line of Ronald Epstein with Bank of America. Your line is open.

Speaker #8: Yeah. Hey, good morning, guys.

Jon Tanwanteng: Hey. Hey, good morning, guys.

Ronald Epstein: Hey. Hey, good morning, guys.

Speaker #1: Hey, Rob.

John Baylouny: Hey, Ron.

Speaker #8: So we've covered a lot of ground already, but maybe one area we really haven't talked much about is what are you seeing for the company in terms of opportunities in Europe, right? European defense spending should, I don't know, grow up, go to, I don't know, what, $850 billion by the end of the decade, maybe, if everybody spends what they say they're going to do?

Jon Tanwanteng: You've covered a lot of ground already, but maybe one area we really haven't talked much is...

Ronald Epstein: What are you seeing for the company in terms of opportunities in Europe, right? European defense spending should, I don't know, grow to, I don't know, what, $850 billion by the end of the decade, maybe, if everybody spends what they say they're gonna do. That's a pretty big market. How has sort of the transatlantic tension impacted your business, be it that your primary shareholder is a European company?

Speaker #8: That's a pretty big market. And then also, how has sort of the transatlantic tension impacted your business, be it that you're primary shareholder is a European company?

Speaker #1: Yeah. Thanks, Rob. Let me take that. I think, first of all, you're right. There is certainly the macro environment today the US is looking for speed.

John Baylouny: Yeah, thanks, Rob. Let me take that. I think, first of all, you're right. There is certainly the macro environment today, you know, the US is looking for speed, Europe is looking to be self-reliant, and there's urgency on both sides. That's a conducive environment for partnership, frankly. You mentioned, you know, our parent. They're a key partner for us in driving that international growth capability. Given their footprint in Europe and around the globe, we're looking to further leverage that position and accelerate and expand our growth, especially now that they have this Iveco Defence and through their JV with Rheinmetall.

Speaker #1: Europe is looking to be self-reliant. And there's urgency on both sides. And that's conducive environment for partnership, frankly. And you mentioned our parent, there are key partners for us in driving that international growth capability.

Speaker #1: Given their footprint in Europe, and around the globe, we're looking to further leverage that position and accelerate and expand our growth, especially now that they have this Iveco Defense and through their JV with Rheinmetall.

John Baylouny: Given the fact that they've got a strong portfolio, we're looking to utilize that, those technologies capabilities in the US, and of course, we'd have to Americanize the capability to apply to the US market. Vice versa, right. Moving in the other direction, the self-reliance in Europe, often starts with licensing technology from the US. We've got technology that we could do. This is the right time for us to be having the discussion, and your question is timely to be having a discussion about increased collaboration with Leonardo to address both the European markets and the urgency on the US side.

Speaker #1: Given the fact that they've got a strong portfolio, we're looking to utilize those technologies, capabilities in the US, and of course, we'd have the Americanized the capability to apply to the US.

Speaker #1: Market. And vice versa, right? Moving in the other direction, the self-reliance in Europe often starts with licensing technology from the US, and we've got technology that we could do.

Speaker #1: So this is the right time for us to be having the discussion in your question is timely. To be having a discussion about increased collaboration with Leonardo to address both the European markets and the urgency on the US side.

Speaker #8: Got it. Got it. Got it. And then maybe just a detail. This is the laser IP licensing assigned of just more expanded I mean, I guess this is sort of already asked, but more expanded work outside defense?

Ronald Epstein: Got it. Got it, got it. Then maybe just a detail. Is the laser IP licensing a sign of just more expanded, I mean, I guess this is sort of what I asked, but more expanded work outside defense?

Speaker #1: Yeah. Look, I think that we want to stay focused. We want to stay focused on defense. We want to make sure that we play to our strengths and our capabilities.

John Baylouny: Yeah, look, I think that we wanna stay focused. We wanna stay focused on defense. We wanna make sure that we play to our strengths and our capabilities. When we see a market like this, that's outside of our core capability and focus, we tend to wanna get it licensed out. We'll, we'll help, but we wanna get it out of our portfolio and move it into another domain. This will keep us focused on the growth markets for defense, which is where we're which is our strength.

Speaker #1: And so, when we see a market like this—it's outside of our core capability and focus—we tend to want to get it licensed out.

Speaker #1: We'll help, but we want to get it out of our portfolio and move it into a another domain. This will keep us focused. On the growth markets for defense, which is where we're which is our strength.

Speaker #8: Yeah. And Ron, I'll just add one thing here. The laser IP that we were talking about has a lot of utility in non-defense outlets.

Michael Dippold: Yeah, Rob, I'll just add one thing here. The laser IP that we're talking about has a lot of utility in non-defense outlets. We've looked at this in the past and have had some successes. We're gonna continue to do so. Really, where John's going is that utility of that IP just has broad-based applicability, and we're not gonna be able to chase every one of those opportunities. We're keeping focused on the defense space and get a look for these license opportunities as they emerge.

Speaker #8: So we've looked at this in the past and have had some successes. We're going to continue to do so. But really, where John's going is that utility of that IP just has broad-based applicability.

Speaker #8: And we're not going to be able to chase every one of those opportunities. So we're keeping focused on the defense space and get a look for these licensed opportunities as they emerge.

Speaker #8: Got it. All right. Thank you.

Ronald Epstein: Got it. All right. Thank you.

Speaker #3: Thank you. Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to John for closing remarks.

Operator: Thank you. Ladies and gentlemen, I'm showing no further questions in the queue. I will now like to turn the call back over to John for closing remarks.

Speaker #1: Thank you. I want to thank everyone for joining today's call. We're proud of our strong, continued organic growth, our expanding presence in the space market, and our disciplined investment alignment with customer needs.

John Baylouny: Thank you. I wanna thank everyone for joining today's call. We're proud of our strong, continued organic growth, our expanding presence in the space market, and our disciplined investment alignment with customer needs. We're excited about the opportunities ahead. Focus remains on driving profitable growth and delivering differentiated capabilities for our customers. If you have any further questions, Steve and the team will be available after today's call. We look forward to speaking to you again. Thanks again. Have a great day.

Speaker #1: We're excited about the opportunities ahead, focus remains on driving profitable growth and delivering differentiated capabilities for our customers. If you have any further questions, Steve and the team will be available after today's call.

Speaker #1: We look forward to speaking to you again. Thanks again, and have a great day.

Operator: Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.

Q4 2025 Leonardo DRS Inc Earnings Call

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