Leonardo DRS Stock

Ladies and gentlemen, good day, and welcome to the Leonardo DRS Second Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this event is being recorded.

I would now like to turn the conference over to Steve Vather, Senior Vice President, Corporate Development and Investor Relations. Please go ahead.

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. They will discuss our strategy, operational highlights, financial results and outlook. Today's call is being webcast on the Investor Relations section of the website, where you can find the earnings release and supplemental presentation.

Management may also make forward-looking statements during the call regarding future events, future trends and the anticipated future performance of the company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors. These statements, including those relating to the pending acquisition of Raft LLC, including the expected timing of completion of the transaction, the satisfaction of closing conditions, the receipt of regulatory approvals and the anticipated benefits of the transaction and plans for the integration of the acquired business. For a full discussion of the risk factors, please refer to our latest Form 10-K and our other SEC filings. We undertake no obligation other than as may be required by law to update any of the forward-looking statements made on this call.

During the 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?

Thank you, Steve, and good morning, everyone. We appreciate you joining us for a review of our second quarter 2026 results.

Q2 was another strong quarter that builds directly on the foundation that we've laid over the past several years. Organic revenue growth accelerated to 10% year-over-year. Bookings exceeded $1 billion, driving book-to-bill to 1.2x for the quarter. Demand was apparent throughout the portfolio, and our Q2 book-to-bill extended our streak of 18 quarters with book-to-bill at or above 1.0. Furthermore, we exited the quarter with a record funded backlog, and given our conservative bookings and backlog methodology, this provides meaningful visibility into future growth.

The highlight of the quarter was the 33% year-over-year growth in adjusted EBITDA and 240 basis points of margin expansion. Execution, favorable program mix and the retirement of program risk were the linchpins of our success. Mike will expand on the [ drivers ] later.

These strong results once again demonstrate the benefits of DRS's diverse portfolio and platform-agnostic approach. The top and bottom line outperformance further validates our strategy and is a direct result of the sound execution across the portfolio.

Additionally, I'm pleased to highlight that we announced an agreement to acquire Raft, expanding our multi-domain AI, data fusion and mission software capabilities. This $450 million all-cash acquisition reflects a disciplined deployment of capital in line with our strategy and supportive of continued long-term growth.

Overall, the solid first half trajectory reinforces our confidence in raising our full year profit outlook. I want to thank the entire DRS team for their relentless effort and unwavering focus on execution to convert demand into these outstanding results.

Let me offer some framing comments with respect to the macro and operating backdrop. The global threat environment remains elevated, and demand fundamentals remain supportive across our diverse portfolio. Customers are prioritizing modernization and the procurement of production-ready capabilities. And those demand signals are clearly evident in our book-to-bill.

On the U.S. budget, Congress is working through the fiscal '27 funding and we expect the continuing resolution to govern the calendar fourth quarter. I won't speculate on the timing or final level of fiscal '27 defense appropriations, and we recognize the path may not be linear. What we are confident in is that the threat environment warrants continued growing defense investment. Beyond the near-term funding mechanics and the record base budget request and the reconciliation dollars flowing to priority programs reinforce a durable demand signal for exactly the capabilities that we provide.

Top line and timing alone does not determine the opportunity set for DRS. What matters more are the underlying priorities and thematics where we remain closely aligned. Customer priorities are increasingly shaped by operational lessons from recent and ongoing conflicts in the Middle East and Eastern Europe. These structural trends are the ones I discussed last quarter. And to refresh, they are, first, the necessity of layered and effective air defense and counter-UAS. Second, the shift towards proliferated, resilient sensing across domains. Third, the depth and [indiscernible] symmetry of effectors to counter growing threats. We saw each of these trends further manifest in our business this quarter.

With that, let me discuss how these trends as well as other customer priorities are materializing in our results. As you know, the DRS portfolio is diverse, platform-agnostic and benefits from a number of different defense thematics.

Starting with air defense and counter-UAS. The proliferation of unmanned threats keeps accelerating the adoption of counter-UAS technologies and the customer pull is evident in our results. Our tactical radars are an essential enabling technology embedded in counter-UAS systems fielded around the globe, and order flow continues to run ahead of supply. So we are aggressively adding capacity. We also continue to see robust global appetite as international allies quickly work to fill air defense gaps highlighted by recent conflicts. We think we are in the early innings of tactical radar proliferation, not only for counter-UAS missions, but more broadly. Staying ahead of the sensing only matters if we can turn it into decisions. Our advantage is combining sensing, computing and networking to act that data across a connected force, not just deliver a stand-alone component.

That is exactly the capability we're expanding on with our acquisition of Raft. A recent example of this is what we saw firsthand in Operation Jailbreak, and I want to spend a moment on it because I was there on the ground. Operation Jailbreak was the Army's first industry hackathon, a live effort to get their systems to talk to one another. It brought roughly 20 companies together to break down the barriers between systems that are not originally designed to connect. It is the first step in what the Army calls its right to integrate and the foundation for the next-generation command and control system. I'm pleased to report that our team had a meaningful role in that exercise and that our technology has demonstrated interoperability seamlessly and quickly, in a matter of a few hours.

Modularity open standards, platform-agnostic approach and scalability are designed into the entirety of our technology portfolio and it's just one of the latest proof of that point.

Next-generation command and control is among the Army's top modernization priorities. Customers are managing growing volumes and data from distributed sensors and systems with fragmented architectures that slow decision-making. As such, there's a need for a resilient network and a unified data layer that turns that data into decisions.

This is also what's driving our customers towards integrated hardware and software capabilities. That's why we announced an agreement to acquire Raft earlier this week. Raft is a provider of open architecture mission software for multi-domain data fusion and AI, supporting real-time situation awareness and faster decision-making for national security customers. Importantly, Raft was selected by the Army's next-generation C2 software architecture, the very priority I just described. Additionally, the company expands our customer footprint within the Air Force, Space Force, special operations and the intelligence community.

We have long said that we apply the same open or modular philosophy to software as we do hardware, giving customers the flexibility to deploy the best-of-breed solutions without being locked into a single provider. Raft advances that approach and checks the boxes that matter to us most. Outstanding people, a mission-first culture and a proven open architecture technology. Raft software, AI and data fusion are complementary to our core strengths in sensing, computing and mission systems. Combining those franchises expected to open growth avenues not available to either company on a stand-alone basis. It also accelerates our R&D emphasis on platform AI, autonomy and extending our platform-agnostic capabilities to new missions.

Put simply, Raft helps us own the edge, putting sensing, computing and integration where the decision gets made, reducing the cognitive burden on operators and improving decision speed.

Coming back to counter-UAS, we continue to see adversaries target high-value assets to degrade sensing and defensive capability. This only reinforces the need for proliferated and resilient sensing architectures. It also puts a premium on open software and data layer that sits on level up from those sensors, and that is what Raft provides. It unifies fragmented data into a single common operating picture, so the Force keeps a coherent view even when individual nodes are degraded or lost. Our counter-UAS work extends into systems and platform integration. As unmanned threats evolve, we expect the technologies and systems used to neutralize them to also evolve rapidly. Customers increasingly see counter-UAS solutions that are platform and vehicle agnostic.

For example, the Army is iterating on its approach for the next tranche of ground-based air defense capabilities. To that end, we are maturing our palletized counter-UAS offerings by incorporating different effectors and technologies that will broaden the flexibility of capability development. Given our enabling technologies are modular and integrated across vehicles, we are not tied to any single platform or procurement line. And we sell -- we stay aligned as mission needs evolve across configurations.

Last quarter I mentioned that we received a $533 million production IDIQ contract for the Distributed Aperture Infrared Countermeasure System, or DAIRCM, for aircraft survivability. Demand for aircraft protection remains elevated across infrared countermeasure programs and order flow is accelerating given how critical these systems are to airborne platform survivability. Recent conflicts have put these systems to the test, and they delivered, pushing the urgency to field more of these systems quickly. I am proud of our work to help ensure the safety of airmen.

Beyond protecting our soldiers and platforms, we're also growing on the munition side, equally important as sensing and countermeasure systems or effectors. While our footprint today in this area is modest, our involvement is expanding meaningfully. This is similar to how you saw DRS the predominantly weather satellite position in space and leverage that pedigree to drive adjacent growth into missile tracking and warning via the SDA Tranche 3 contract. That same sensing pedigree positions us for homeland defense where investments in infrared space-based interception are directly poised to support missile defense mission.

Our exposure to missiles and effectors spans tactical to strategic, balanced between existing platforms, seeing urgent multifold increases in demand and next-generation systems that will see growth for years to come. Today we're providing essential components to platforms such as THAAD and Patriot, and is a qualified supplier on those platforms. We're leaning in to add capacity and depth. As the prime scale these programs under multiyear munitions frameworks, we're leaning in right alongside them and investing in ramping capacity to support higher level production of our content.

As I've mentioned before, we're also being designed in as the advanced sensing provider for future missile platforms. What is also exciting is that our infrared capabilities are starting to see notable traction in low-cost drone platforms. Our investments in size, weight, power and cost to optimize uncooled long-wave infrared detection are paying off. As the Department of War prioritizes affordable drones fielding at higher volume, the sensing payload is increasingly what differentiates one platform from the next, and our sensing our infrared pedigree plays directly into that need.

In the quarter, we secured a contract with a leading low-cost drone manufacture for high-volume production of a camera course with an initial order of 50,000 units. We're seeing appetite and interest from additional drone OEMs given our quality, capability and ability to deliver at significant scale.

Turning from sensing and effectors to the maritime domain and naval power. Expanding shipbuilding capacity to grow the nation's naval fleet of operational surface and subsurface platforms remains an important priority. I'm pleased to report that we saw steadfast demand materialize in the quarter, not only for our propulsion content but also for our naval network computing capabilities. While many know DRS for its innovative full electric propulsion work on Columbia class, we offer and enable propulsion capabilities that include traditional and hybrid electric approaches. In the quarter, we booked orders for content across power capabilities for a diversity of subsurface and surface platforms, including Columbia class, Virginia class, DDG-51 to LPD.

Additionally, existing naval platforms still require regular network computing modernization to enhance and scale processing at the edge. We're supporting these initiatives through a delivery of advanced platform-based processing solutions, critical to onboard sensing, combat weapons, communications and other mission systems. While executing on this demand is driving near and midterm growth, we continue to progress efforts to expand our involvement in steam turbines as well as grow our sensing footprint and content more broadly on unmanned surface vessels.

Stepping back from the individual mission areas. Our results reinforce our strategy. Delivering differentiated capability to help our customers maintain overmatch is core to DRS. We are capturing growth through consistent delivery and disciplined investment. We have proactively and methodically stepped up organic investment over the past few years and are doing so year-to-date.

Investment in internal research and development was up 16% year-over-year in the first half and approaching 4% of revenue. Our increased investment is going towards innovation and initiatives such as infrared sensing technologies for space-based interception, further involving our platform-agnostic and modular counter-UAS solutions, enhancing our tactical radars and expanding naval propulsion capabilities.

Similarly, we are stepping up capital investment to further expand capacity across the board, scaling tactical radar production, revitalizing our foundry to drive next-generation infrared sensors and detectors, and of course, deepening our naval propulsion and shipbuilding presence in Charleston. These investments position us well to address the mission-critical needs of our customers, capture market share and drive growth.

Raft is the same strategy at work through M&A., adding to an already strong organic growth profile.

To bring it together, we delivered a robust second quarter with growth accelerating, margin expanding and steady execution across the portfolio. That combination is what compounds over time and gives us confidence in the year ahead. These results rest on the trust that our customers place in us, trust to earn the same way every quarter by delivering mission-critical capabilities at speed, with quality and at scale.

With that, I'll turn it over to Mike to walk through the financials.

Thanks, John, and good morning, everyone. As John noted, the second quarter was a strong one for DRS with standout performance evident across our financial metrics. At a high level, our strong execution drove us to exceed the framework we have set last quarter.

Revenue came in ahead of our expectations, and even more notably, we posted significant outperformance across our profit metrics. Importantly, we delivered these results while continuing to invest organically in R&D and capacity to fuel future growth. Let me walk through our Q2 performance in greater detail, and then I'll turn to our revised 2026 outlook and offer a few thoughts on Q3.

We generated $913 million of revenue in the quarter, up 10% year-over-year. Our growth rate accelerated from Q1, and the solid first half reinforces our confidence in achieving the full year revenue outlook. Growth in the quarter was [indiscernible] programs related to tactical radars, electric power propulsion, infrared sensing and force protection. The IMS segment led the way with 15% growth, while ASC contributed a healthy 8% increase. At IMS, the gains were broad-based with contributions spread across the segment. At ASC programs related to tactical radars and infrared sensing bolstered the top line growth. When evaluating the half year results, you could see that both segments are contributing evenly to growth, underscoring the momentum we see across the business.

As I noted at the outset, our quarterly profit metrics were outstanding. Overall we expect that outperformance to carry through to our full year 2026 outlook. In Q2, adjusted EBITDA was $128 million, up 33% year-over-year and meaningfully outpacing the top line. Adjusted EBITDA margin was 14%, up 240 basis points from the prior year. The increased adjusted EBITDA and margin expansion reflected disciplined program execution across the portfolio, favorable program mix and operating leverage on higher volume. It's also worth noting that part of this operational execution drove program risk retirement, which acted as a tailwind to profitability given the cumulative catch-up nature of fixed-price contract accounting.

Breaking it down by segment, as with revenue, IMS paced our year-over-year adjusted EBITDA growth in the quarter. IMS adjusted EBITDA grew 55% over the prior year Q2, translating to 460 basis points of margin expansion. Higher volume, together with broad-based execution and program risk retirement, propelled net margin. In ASC adjusted EBITDA increased 19% and margin expanded 110 basis points as sound program execution, favorable mix and operational leverage from higher volume more than offset increased investment in research and development versus Q2 2025. Again, on a first half basis, the 2 segments' growth and margin gains were far more balanced than the quarterly figures alone suggest.

Turning to earnings for the quarter, our operational strength flowed straight to the bottom line. Net earnings were $86 million, up 59%, and diluted EPS was $0.32 a share, up 60% year-over-year. Adjusted net earnings were $94 million, up 52%, and adjusted diluted EPS was $0.35 a share, up 52% year-over-year. These gains were driven primarily by stronger operating performance and aided by a lower net interest expense and lower tax rate.

Turning to free cash flow. We are seeing improved quarterly linearity relative to last year. Free cash flow was positive in the quarter, supported by higher profitability and greater working capital efficiency. Furthermore, we delivered this while maintaining our planned level of capital investment to support future growth.

More broadly, our strong balance sheet and cash flow generation led us to deploy capital across both organic and inorganic growth. The pending all-cash acquisition of Raft embodies that go-forward strategy, reflects disciplined capital deployment and is being funded from a position of financial strength.

Given the momentum in our business and solid first half performance, we are raising our 2026 outlook across profit metrics. We still expect a healthy full year revenue performance and are maintaining the range of $3.9 billion to $3.975 billion, which implies a 7% to 9% organic growth year-over-year. This guidance reflects the balanced view of second half revenue shaped by the timing and level of material receipts and achievement of programmatic milestones. If you look back at 2024 and 2025, you will see that we generated approximately 45% of full year revenue in the first half. Our revenue outlook assumes a similar first half [indiscernible] cadence in 2026. Our record funded backlog gives us tremendous visibility and confidence in delivering on that outlook.

We now expect adjusted EBITDA of $525 million to $540 million, up from $515 million to $530 million previously. This increased adjusted EBITDA outlook implies a path to greater margin expansion for the year. Disciplined operational execution, favorable program mix and leverage from higher volume are all contributing to that improved profitability and margin.

Consistent with what we shared last quarter, we still expect revenue and adjusted EBITDA growth to be visible at both segments, though margin expansion will come primarily from IMS. That stronger profitability carries through to our improved bottom line outlook. We now expect adjusted diluted EPS of $1.34 to $1.39 a share. And we have updated our full year tax rate assumption to 16.5%. Our diluted share count assumption is unchanged at 269 million shares.

Please note that our guidance excludes any contribution from the pending acquisition of Raft. We do not anticipate a meaningful contribution in 2026 given the expected fourth quarter close. However, we expect the acquisition to be accretive to adjusted diluted EPS in the first full year of ownership.

Lastly, the implied EBITDA multiple being paid, net of the tax assets required, is in line with our own and reflects a disciplined deployment of capital. We are maintaining a 75% conversion of adjusted net earnings into free cash flow for the full year. You should assume that the increased adjusted diluted EPS implies a modest uplift to free cash flow as well. That said, we still expect high capital expenditures in the second half with full year CapEx running likely in this 4% range of revenue. Broadly, we expect the second half to drive a greater contribution across key metrics. And as we've consistently said, we are working to drive better linearity to profit and cash.

Finally, a quick view on the third quarter. We expect revenue to be above $1 billion and adjusted EBITDA margin should be in the mid-13% range. The sequential step-down in margins simply reflect a nonrecurring program risk retirement gain that lifted Q2, not any change in underlying execution. Additionally, we expect free cash flow to be modestly positive and above our Q2 level.

Let me turn the call back over to John for closing remarks.

Thanks, Mike. Before we take your questions, I want to close on what this quarter reaffirms about our strategy. We continue to execute with strength quarter after quarter. In Q2, we delivered double-digit revenue growth, profitability that significantly outpaced the top line and bookings that once again exceeded revenue. We're deploying capital with discipline organically and through M&A., investing ahead of the shifts that we see coming.

This quarter, we agreed to acquire Raft, extending our platform-agnostic approach into multi-domain software and AI as customers increasingly demand integrated hardware and software. Our portfolio is differentiated, and throughout our business, we are well aligned to the enduring customer demand signals as evidenced in our multiyear book-to-bill trends.

Thanks to our talented people, strong execution, strategic investments and differentiated portfolio, DRS is well positioned to deliver durable profitable growth. We will keep delivering with the speed, quality and scale that our customers demand.

With that, we are happy to take your questions.

[Operator Instructions] Our first question comes from the line of Peter Arment of Baird.

Mike, Steve, nice results. Mike, this question, maybe first for you. On IMS format, obviously excellent. You mentioned volume execution and then the program risk retirement. Could you either size that for us or give us some more color on what that specifically was? And if you could kind of give us an update on where things stand on Columbia in terms of chipset volume, where you are?

Sure, Peter. So margins were strong, really on improved execution across the entire segment. It is led by the naval propulsion business, but the execution gains are really more broad-based than just Columbia. The favorable programmatic risk retirement that did occur in the naval business is on a surface ship. We also saw some real good execution across our counter-UAS portfolio, really highlighting this kind of portfolio-wide execution improvements.

If I take out the risk retirement, I would think of the IMS margin kind of closer to the 15% range for the quarter. So that's the magnitude there, Peter. And from a Columbia perspective, things continue to go very well. We're seeing the benefits of the long-term contract and the procurement of the materials that [ we've unloaded ]. The team is executing well. Charleston is on pace. So things are really hitting on all cylinders within the segment.

Let me just add to that real quickly, Peter. I just wanted to highlight the fact that, as you know, we're very optimistic about the budget environment for the Navy. We're looking at a 50% increase. Obviously, the Navy needs a second source for critical components like the steam turbine generator, and we're investing in that capability to bring that to the Navy. They deserve it, so we're investing in that as well. I just wanted to add that point.

Appreciate that. And just as my follow-up, just could you -- John, could you give us maybe an update on kind of how things are progressing in your counter unmanned area? I know you guys have made some investments there over the [indiscernible] radar, it seems like a great opportunity with Golden Dome. Maybe if you could just touch upon both of those.

Sure, Peter. Certainly, in the short-range air defense and counter-UAS area, there's a lot of change. We're seeing from Ukraine lessons learned and changes in capability almost on a weekly basis. So we expect that market to continue to evolve. And we've got to evolve with it. So we're investing ahead of need on a lot of capabilities, we're bringing new technologies to the play. We've kind of moved our counter-UAS program onto a sled so it could be platform agnostic like the rest of our business, and we're moving forward on that.

On the over-the-horizon radar for -- that could apply to Golden Dome, we're seeing some great positive movement there as well. I won't get into the specifics, but we're definitely moving forward and we're looking at that as a nice growth vector for us.

Great results.

Our next question comes from the line of Robert Stallard of Vertical Research.

John, you mentioned that you're seeing strong demand coming out of Europe for a range of your different products. I was wondering if there's an opportunity for you to, in some way, [ pull forces ] with your parent to get some of these deals over the line and potentially grow your market share into the European region.

Yes, absolutely, Robert. We're actually doing a lot of that right now. It's a push for us to do more and more together with Leonardo. As you know, the macro environment is ripe for this. The U.S. is on a wartime footing and demand is high and urgency is high.

Same thing is happening in Europe. In Europe, they want to have some internal capabilities, sovereign capabilities, and there are gaps. So we're looking at pulling and pushing technology in both directions together with our parent.

Okay. Great. And then a follow-up for Mike. On the Raft acquisition, I was wondering if you could give us some idea of what sort of revenues this business could generate on an annual business and how its margin maybe compares to the overall EBITDA margin of DRS?

Yes. So we're not going to comment on the sizing of the revenue yet. We'll kind of come out with that with our 2027 guidance given the late fourth quarter close. But what we will say, to kind of give you some direction is, as was in the prepared remarks, that the EBITDA multiple paid is going to be kind of inside of DRS's current trading multiple. And when you think about the financial profile of the business, it's going to be accretive to DRS from a growth profile and from a margin perspective.

So as you know, we've been very disciplined in our approach towards M&A. We've been looking for the right target both strategically and financially. And that's the shot we took here. We feel real confident about this deal.

One of the things, Rob, I'll just add on to that, to say that we really think about this strategically, think about the gaps that we're filling here. If you think about DRS as a business, we've been really focused on sensing and computing and communications and force protection, and [ all ] sensors that we created and have in the marketplace really need to have that intelligence. And as Raft likes to say, sensors need a brain. And in the future, autonomous platforms are going to increasingly need to sense the battle space, make sense out of the battle space and do something about it and act.

So we've been working really on the front end of that, providing the sensors and the computing infrastructure. Raft fills that slot of the thinking part of what's actually happening on the battlefield. They've been focused on the edge. We've been focused on the edge with our hardware. They're focused on it with [indiscernible]. So this is a really nice synergistic play for us.

Our next question comes from the line of Andre Madrid of BTIG.

This is actually Ned Morgan on for Andre this morning. I just wanted to build on that. Could you provide some specific examples of programs where combining your guys' hardware with Raft's software capabilities creates new opportunities and when we could expect those opportunities to begin contributing?

Yes, Ned. Let me start by saying the U.S. Army has selected Raft for their data layer. And so what that means is that our sensors and other sensors would be converted -- that data would be converted in a way that the AI algorithms can read it across enterprise, and from the -- starting at the edge and moving to the enterprise. So this is an area where, obviously, we're already playing from a computing standpoint, from a sensing standpoint, and now they've -- now Raft has been selected for the data layer. This is a big step forward. I think it's an area where we immediately have synergies.

I also want to point out the customer profile here. Because when we talked about filling gaps with M&A, we talked about filling technical gaps, customer gap and geographic gaps. Well, this acquisition really fills 2 of those. It fills the technology gap and the intelligence piece that I just spoke to, but also expanding our customer base. They've got a large presence in the Air Force. We've got our large presence with Special Operations in the Space Force as well as the intelligence community. So it opens up a lot of doors for us. And of course, we're going to be opening doors for them. So there's going to be a lot of synergies between 2 businesses.

Great. And then just a follow-up, another one. You guys have highlighted space as a big opportunity and growth driver. I know you guys won work on the Tranche 3 tracking layer. But any opportunities you're pursuing right now? And where are you seeing the strongest demand there?

Yes. Ned, I would tell you that there's a lot of opportunity going on in space right now. We're looking at different sensing, different communication opportunities across the board. Of course, Raft is going to play into some of that as well. I'm not going to be at liberty to talk about any particular opportunity that we're focused on, but there's a lot of opportunity there.

Space, as you're probably aware in the President's budget request, '27 budget request, is growing 10%. So there's a lot of opportunities, it's a big market.

Our next question comes from the line of Jon Tanwanteng of CJS.

Congrats on a nice quarter and outlook. I was wondering if you could drill a little bit more into the drones and munitions business, John, that you mentioned in the prepared remarks. How big is that business today, number one? And number two, how should we think of growth going forward, and especially focused on the capacity side just because I know you've had issues with germanium in the past and I'm wondering what happens when you start putting on these higher volume programs like drones and munitions, and if that strains your ability to grow there?

All right, Jon. I appreciate the question. Obviously, the munition business is growing very, very quickly. You're seeing some of the primes print some very incredible growth numbers because of that. We've got exposure across the board, from that sensing Patriot components all the way down to low-cost drones. And there's a few elements in between. So we see this core capability that we have in infrared sensing as applicable to a lot of different -- of these effectors and missiles.

You're also going to see that missiles and effectors, one-way drones, if you will, are going to start fusing together. You're going to start seeing all of these different types of capabilities between 2 capabilities.

But we're on a number of different platforms, a number of different missile platforms, through the primes. We see this as a growth path, but obviously, a small part of our business today.

Can you frame the relative size and the growth that you're seeing there?

Well, I'm not going to put a relative size. It is a small part of our business today, but it is going to be growing, it's going to outpace the growth of the company. So I'll just leave it there.

Okay. Great. And then second, I think you mentioned you're increasing your R&D and CapEx for the year. Were there any specific numbers attached to that? And then kind of what programs are they associated with?

Yes. There was a couple of numbers to that, Jon, we mentioned, that R&D is going to approach 4% of sales during the course of the year here. And from a CapEx perspective, we're looking in the mid-4% range. So we continue to invest heavily in the growth given the demand signals that we're seeing. I'll let John elaborate on the R&D projects, but it's not going to be a surprise that we're looking in areas like space and counter drone and continuing to affect our tactical radars, as well as the investments we're making in the power and propulsion domain. But John, do you want to add?

Yes. Let me just add one point to that. And I'm going to just point out space-based interceptions is an area that we're investing in. It's aligned to our core competency, our core capabilities in infrared sensing. It is a national need to have a low-cost interceptors. So we're focused on our investment there to try to bring that cost down. That's just an example, Jon, that we're working on.

Our next question comes the line of Seth Seifman of JPMorgan.

Good results. I wanted to ask about the booking environment from here, the fact that there's still a bunch of money that hasn't been on contract yet from last year's reconciliation bill. Do you expect significant order activity and backlog growth coming up here in the third quarter? And if so, does that create some potential revenue upside for the year? Or is the top line really about the supply side of the business right now given how much demand is out there?

Yes. I think from a bookings perspective, we continue to be confident in the trajectory just holistically because of the environment and where we are aligned. Hopefully, that will result in some awards here in the second half as they start to let some of the [indiscernible] money out, as you alluded to.

From a revenue perspective, however, I wouldn't assume that the bookings cadence is going to impact the revenue for '26 significantly. I would think of it more, as we talk about our record backlog, that we are moving up the value chain and the value stack from the solutions that we're providing. So we're really in the midst of that transition from components to solutions, which is going to elongate that conversion of backlog into revenue.

What I would say is that, that record backlog that we talked about, record funded backlog, is the indication that we have a platform for sustained success. So that's the way I would look at that, not so much a '26 item, but continued confidence into '27 and beyond.

And I'll just add, Seth, that we are seeing the money from the reconciliation bill flowing in core areas of our growth. That money is actually flowing now.

All right. Excellent. Okay. And maybe to follow up, can you talk a little bit more maybe about naval computing? I know you highlighted it as a growth driver. And just as we think about that environment, the potential for further growth there and kind of how that stacks up within the company? And maybe just a little bit more about how that how that market works? Is that mainly associated with mods and upgrades on existing ships and submarines? Is it tied more to new builds? How should we think about it?

Yes, Seth. It's both. The traditional approach here is weapon system by weapon system compute capabilities for new ships and back fits. And we get incremental awards for those capabilities.

What the future looks like is quite a bit different. What we believe is going to happen onboard ship is you're going to see central computing more like a cloud computing architecture. And so you're going to process sensors and weapon systems centrally virtually on the ship. And so we're preparing for that. We're investing in areas that allow the Navy to go off and move in that direction so that they can have cloud computing and AI on the edge on the ship. And so that's what we think the future holds.

Our next question comes from the line of Ron Epstein of Bank of America.

It's been a lot of questions so far on Raft, maybe just one more. Does that signal that you guys want to move more into AI-enabled mission software, given software tends to have a different margin structure, so on and so forth? Or is this just more of a strategic enabler for your hardware? How are you thinking about that?

Yes, Ron. Let me take that. Acquisition reform has, I think, been very successful in one thing. It's moving the customer away from buying components and subsystems to solutions. We've been investing in capability that provides solutions to our customers for a while. This was one of the missing pieces that we needed to fill to get to that level.

So our customer is now saying, hey, can you solve the problem for me with a solution that includes a lot of our components, our core capabilities, whether it's sensing computing, communications and propulsion and force protection. But this gives us the ability to address those kinds of needs. So we're kind of heading off at the paths where the customers are moving. And yes, so that's a big structural change in both the way that the customers are buying and what we're selling and how we're selling.

Got it. Got it. And then [indiscernible] the ship, but I think it's an important one. How is your supply chain doing given the increase in demand, you had some issues a little while back on critical minerals, I mean, how are we doing there? Just kind of broadly. Are there any pitch point? And how is it going?

Well, we strengthened our supply chain pretty significantly since we had some trouble with the germanium, as you alluded to. We've got a regular cadence of detection, mitigation that's deeper and faster than it's ever been. And we're maintaining -- we manage a couple of areas of risk at all times, and we're willing to accept a little bit less efficient working capital to secure the critical materials so we don't run out of them.

So the germanium picture is a positive story. We've got a great flow of germanium. We're not going to run out, even with the areas that we're [indiscernible] in missiles and other places. In terms of magnet material, I think we're in good shape. We talked about memory devices, and we're in good shape there.

I think across the board, the availability of materials in the right place. The cost is always sometimes a little bit variable, and we'll deal with that. But the process that we've put in place now is very robust and has been successful in mitigating these risks.

Our next question comes from the line of Noah Poponak at Goldman Sachs.

Is DRS taking market share? Or is there more kind of opportunity in the forward here to take market share, I guess, in a world where your customers are potentially looking to grow faster than they had for a bit? And then also, I guess, specifically in a world where your customers are maybe signing contracts that put schedule risk on them more than it has in the past? That would make me think they would maybe want more sourcing of given components or more reliable sourcing, which DRS is. So has that been happening recently? Is that an opportunity going forward? Should we think of that as a growth kicker? Or should we just be thinking your end markets and your positions in them drive your growth?

Well, no, I would say both of those avenues are areas of growth for us. But I wouldn't lean on market share as the predominant elements of our growth. I would say that the market itself is growing considerably.

I do think that the point that you made about schedule risk and really the idea of second sources is helping us. It is an element of our growth. But I would say that the market itself is growing fast, and that's the predominant part of our growth.

Yes. And let me just add on to that real quick. I think the other thing that you touched on is a reliable provider. So these opportunities that are emerging, I think, are in part because of our execution and what we've been able to demonstrate. That's why the Navy is lining up to see us as a second source in the steam turbine generators. And that's why we were successful in getting the camera course for the [ affordable ] drones that John talked about in the prepared remarks. It's because of the ability to ramp, the ability to scale and to do that effectively and predictably.

Okay. Appreciate that. And then I also wanted to just try to get a little bit more of a sense for, I guess, how big a piece of the strategy M&A could become for DRS over the medium term now with Raft -- or I guess the business was not super acquisitive prior to that for a little bit of a window of time. Is there a lot to do? Is there little to do? And obviously, your balance sheet has a lot of capacity. And maybe it's a little bit too early for this, but we've had this kind of violent derating of the broader defense tech landscape. Your stock price and multiple on a relative basis have been more spared from that, so the -- so your kind of relative buying power would be arguably greater from that. Maybe that's too soon or too short term.

But I don't know, how would you frame how acquisitive we should expect the business to be over the next 2 or 3 years?

Well, no, I would repeat what we've said in the past. I think our primary focus is on organic investment, [ IRAD ] CapEx. We are going to be looking for and continue to look for key capabilities outside inorganically that would fill gaps. But we're going to continue to be picky about it and make sure that we are really filling gaps and that we get the value out of that.

Raft is an outstanding example of kind of disciplined approach to M&A, finding the right product capability that fills our gaps from a technology standpoint and from a customer standpoint. I think you can count on us continuing that approach.

Our next comes from the line of Kristine Liwag of Morgan Stanley.

This is Justin on for Kristine this morning. Mike, you mentioned the Charleston facility earlier. I was hoping maybe you could provide a little more of an update on the facility build-out. And you've talked about taking on incremental marine industrial base work on top of the Columbia class sub work at the facility. So just curious if you could update us on that front and any potential margin implications for IMS.

Yes. So phase one of the Charleston facility is getting towards completion. We're starting to put the equipment in and take position and occupy the facility. The phase one was always geared towards driving the in-sourcing of Columbia. That's the margin opportunity. We had kind of put that out as a second half of 2027. We'll start to see some of the uplift from that in-sourcing; that's still on track and going well. The phase two, which was when we announced the investment, was always kind of the upside opportunity, which was further expansion of the facility to take on new scopes of work, things like the steam turbine generator. That funding continues to flow. We're moving in the right direction there, both from a capacity build-out and also getting the design for the second source opportunity under our belt. So things are moving at or maybe even a little better than the pace we had initially laid out, and we're still very optimistic on the outlook for that facility.

Great. And the Navy just yesterday announced, I think it was $77 billion worth of submarine contracts, including about $30 billion for Columbia. Curious for any color, I mean, does that change the profile for DRS on the program at all, or are you contracted separately?

Yes. We're contracted separately. So we were able to negotiate the long-term contract for the [ multi-buy ] a while back. So we've been in that luxurious position of having the full contract already. And I think the rest of the shipyards here are catching up to where we are.

I would just add that the Virginia part of that will flow down to us because we don't have a multiyear for Virginia. But we'll see the flow down from the Virginia part of that order to us over time.

Okay. Great. If I could sneak maybe one more in. The Navy is moving out on the new battleship class. I guess the expectation is [ BBGN ]. Just curious how you're thinking about addressability there and you flagged [ DDGX ] in the past as a good opportunity. I'm just wondering if you think the customer can sustain both programs in tandem.

Yes, Justin. I think that we view BBGN as an opportunity in the following way. We believe that the Navy should be focused on a modular architecture that allows them to design a ship that's applicable to whatever size should they want to build, whether it's a battleship or a cruiser, destroyer or a frigate. And we believe that that architecture needs to be electric.

Those ideas are getting some traction. And so we believe that the battleship is an opportunity not just for the industry and us, but also for the Navy, to make sure that they can shorten the amount of time it takes to design a new ship.

Our next question comes from the line of Alexandra Mandery of Truist Securities.

Nice results. Following up on the earlier bookings question, do you see any headwinds for the remainder of the year, including maybe a potential continuing resolution that might impact the booking cadence?

I think we're pretty confident. We don't lay out our bookings guidance, but we've kind of said we're going to continue to print the bookings better than 1:1. I think we're on a good start to the year in what we've shown for the first half. Obviously, a CR can impact on the fringes, but I don't see it having a material impact to our bookings trajectory.

Yes. We're likely to see a CR here, as we said in the opening remarks. The effect on us is really minimal. It's really kind of normal for us to see that. Even if it's an extended CR, we don't see a lot of impact. If there is an extended CR, we do expect the Hill to provide some flexibility in the CR that would give the department the ability to move forward with new starts and things like that. I don't see that as a risk to DRS.

And then I guess, given these long-term contracts for missiles, including THAAD, as you mentioned, what are your margin expectations on missiles? And what is the potential there as these long-term contracts ramp?

Yes. I would say we're still approaching the missiles and the [ seekers ] here as a new market for us. But what it's borne off of is our indigenous capabilities in the infrared spectrum. So we are expecting that these products, because they're mature, in the center, to carry a margin consistent with what we see in our legacy profile.

Our next question comes from the line of Austin Moeller of Canaccord Genuity.

John and Mike, nice quarter. So recently, you had a great program win on the tracking layer Tranche 3 program. And more recently, there have been some contract awards that have gone out for the AMD T3 program. Would it be good intuition to think that there could be some contracts coming associated with the sensor payload for that?

Yes. I would -- I don't want to guess as to what the SDA is going to do. We believe that that second award that you just described is an acceleration or an increase on Tranche 2 award. But we're moving forward on Tranche 3. We're making great progress. We believe that that capability is useful in the end architecture. And I think that we're going to be successful there.

Okay. And on the ground component of Gold Dome, we're starting to see some contracts come out for that as well. What's the latest that you've heard from Space Force or General Guetlein about potentially deploying [ Stout Strykers ] or multi-hemispheric radars at various bases around the country or overseas? They're already talking about such a capability in Grand Forks, for example.

Yes. This is definitely an area that we're focusing a lot of attention on, and General Guetlein is moving ahead with this program, as you indicated. We're definitely chasing this on multiple different factors. We spoke about OTHR, over-the-horizon radar, is an opportunity for us. The MHR and our radar infrastructure, like we've seen in Ukraine, is an area that we've been discussing with that office.

Just to reiterate what we've done in Ukraine, is with thousands of radars all network together to supplement or even replace the big radars. You saw that in Bahrain, we launched the big [ TPY-2 radar ], which is a very expensive radar. The approach that we have in other places of the world is a distributed, proliferated sensing architecture. We think that's a structural change in the marketplace. And I think that the department sees it that way as well.

I am showing no further questions at this time. I'll turn the floor back to John Baylouny for closing remarks.

Thanks, everyone, for joining us today and for the great discussion. Our second quarter results reflect a strong market position, solid execution and overall momentum we have in our business. Robust bookings, accelerating organic growth and expanding margins and profitability. [indiscernible] out a strong first half, and that performance, coupled with a funded backlog, that will keep us pushing to new records, provide us with solid visibility into the year ahead and the confidence to raise our full year profit outlook. We continue to invest in innovation and capacity to execute on the demand ahead.

If you have any follow-up questions, Steve and the team will be available after the call. We appreciate your time and continued interest in DRS. We look forward to updating you again in the next quarter.

Thank you. This concludes today's conference. You may disconnect now. Thank you for your participation.

Ladies and gentlemen, good day, and welcome to the Leonardo DRS First Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this event is being recorded.

I would now like to turn the call over to Steve Vather, Senior Vice President, Corporate Development and Investor Relations. Please go ahead.

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. 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, future trends and the anticipated future performance of the company. We caution you that such statements are not guarantees of future performance that 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. 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?

Thank you, Steve, and welcome, everyone. We appreciate you joining us to discuss our first quarter 2026 results. This morning, we're pleased to report strong quarterly results and an excellent start to 2026. The team's steadfast execution is translating into tangible financial outperformance as results clearly demonstrate.

Revenue for the first quarter was up 6% year-over-year. Adjusted EBITDA grew 28% year-over-year, allowing us to deliver adjusted diluted EPS of $0.26 a share. Importantly, we're delivering these results while maintaining healthy levels of organic investment in R&D and capital expenditures. This disciplined approach reflects our commitment to meeting both current and future customer needs as we continue to build on our foundation of growth.

Let me share a few performance highlights from the quarter. Robust customer demand drove our 17th consecutive book-to-bill of at least 1x revenue, bolstering our funded backlog to new company records and enhancing visibility and growth for the full year. That momentum, coupled with favorable material receipt timing, accelerated revenue growth and enabled outperformance against our expectations in Q1. We Increasing volume, favorable program mix and solid operational execution unlocked higher profitability and margin expansion. Overall, the strength delivered in the first quarter gives us confidence to raise our expected growth and profitability for the full year. Our differentiated technology portfolio and exceptional people are foundational to these results.

I want to thank the entire team for their dedication and unwavered commitment to our customers, partners and shareholders. The global threat environment remains elevated with limited signs of near-term easing. Against that dynamic backdrop, our focus remains on delivering differentiated technologies that drive overmatch and mission success for our customers. Our customers are operating with a clarity of a full year appropriations for fiscal year '26. Additionally, there are indications that supplemental defense funding enacted through last summer's reconciliation package will be deployed this fiscal year, accelerating the procurement of critical capabilities. The overall funding and budget environment continues to be favorable.

Last month, the administration released its fiscal year '27 budget request, proposing $1.5 trillion in total defense spending. As usual, Congress will consider and negotiate the final funding allocations. Importantly, we remain strongly aligned with our customers' spending priorities, including shipbuilding and industrial-based resiliency, layered air and missile defense, counter UAS, unmanned systems, space and missile replenishment. Furthermore, the recent tensions in the Middle East, along with ongoing conflict in Ukraine, continue to reinforce several key lesson shaping requirements and budgets.

First, Missiles and one-way drones are now so widespread that attacks that were once anomalous are expected at scale and are proliferating. This reality is fundamentally reshaping requirements and the nature of warfare layered air defense and counter U.S. are no longer optional. They are now required. Second, adversaries are increasingly targeting large radars and other high-value assets to the great infrastructure, sensing and defensive capabilities to quickly create exploitable vulnerabilities. This is accelerating the shift towards distributed resilient and modular sensing and battle management architectures that can be rapidly proliferated, replaced and scaled.

We are already seeing this trend in space with the shift from geosynchronous to low earth orbit satellites and is also beginning to manifest in the ground enable arenas where unmanned vessels can be utilized a sensor and effector equipped perimeters deployed around manned platforms. Third, volume scalability and effector cost symmetry are essential to counter-growing threats. Magazine depth and munition stockpiles are a key factor in operational endurance. We're supporting production ramps across several weapon systems, advancing secret capabilities for improved sensing on next-generation missile platforms and introducing lower-cost seekers to enable more symmetric countermeasures.

Each of these trends represent a fundamental shift and placed directly to DRS's strengths. DRS is a market leader in tactical radars, and our technology continues to deliver significant operational and mission impact. Additionally, our activators continue to see immense global demand, and we are aggressively increasing throughput and production capacity to satisfy that appetite. Recent hostilities have again demonstrated that force protection cannot be confined to fix sites. It must also be embedded in maneuver units and proliferated at scale.

Our force protection solutions span multiple domains. In the quarter, we received a $533 million production contract IDIQ with the Distributed Aperture Infrared Countermeasure System or [indiscernible] for aircraft survivability. The Aircom combines both missile warning and infrared countermeasures into 1 system and leverages multiple sensors to provide a 360-degree threat picture. -- each with a laser director to defeat increasingly capable missiles that threaten aircraft. -- as recent operations have demonstrated both rotary and fixed wing platforms without this capability, our vulnerable and contested airspace.

Across our portfolio, our capabilities are modular and platform-agnostic, optimized for size, weight, power and cost to meet customers' specific needs. Let me illustrate that with a few examples. We can deploy power and propulsion technologies on a platform as compact as a medium unmanned surface vessel and scale all the way to the Columbia class summary. That modularity approach is 1 we strongly advocate for as the Navy considers future service combatant platforms. Simon, our infrared sensing capabilities span deployment from attributable Class 1 drones to the most sophisticated ground combat vehicles. And because our technologies are domain agnostic, that same sensing capability can deploy across ground, air, sea and space.

We also stand to benefit as customers accelerate modernization and expand production rates, a tailwind evident throughout our portfolio. We're investing in both research and development and capital against that broader demand. Overall, we view these trends as part of an enduring structural shift, and they align directly with our core strengths.

The business continues to perform well, and we remain focused on 3 key strategic priorities: innovation, growth and execution. The diversity and differentiation of our portfolio creates multiple growth avenues. Our increased investment in innovation is evident through the accelerated pace procurement ready prototypes that meet the needs of our customers. Those capabilities include next-generation multi-domain counter UAS solutions, key technologies underpinning next-generation command and control architectures and cutting-edge space sensing capabilities, among others. In the quarter, we demonstrated counter UAS mission execution from both unmanned ground and unmanned naval platforms. further validating a platform-agnostic approach, where our enabling technologies can be integrated into virtually any platform.

We also [indiscernible] a tactical, high-performance embedded computing product there is an open architecture, rugged chassis designed to deliver high-density processing as a tactic glitch with native support for AI-enabled operations in multi-sensor data fusion. We remain deeply committed to a truly open architecture approach, giving our customers the flexibility to deploy investment breed hardware and software solutions, not blocked to a single provider.

Our approach is open, flexible, modular and affordable, enabling customers to scale sustainably. Our capabilities extend beyond hardware integration and software. We apply the same open and modular philosophy to software as we do hardware. Our platform level operating system, Sage Core accelerates data fusion across expect sensor and effective solutions, converting that data into actionable intelligence for improved investor decision-making.

Sage Core is a key component of the integrated counter UAS solution being tested with our customers today. Our innovation and growth initiatives are backstopped by customer trust earned through consistent execution. As we add new efforts to the portfolio, including the SDA tracking layer Tranche 3 program, we're applying the same operational rigor that guides execution across the company. Our customers operate in some of the most demanding and consequential environments in the world. and earning their trust requires more than great technology that requires consistent, reliable delivery and partnership. We take that mandate seriously, and our ultimate measure of success is enduring -- ensuring that our customers know what they need, when they need it. We believe that solid execution enables growth and that philosophy and that philosophy is embedded in everything that we do.

With that, I'll turn it over to Mike to walk through the financials.

Thanks, John. John covered the strategic backdrop and why our portfolio remains well positioned. Let me walk through first quarter results by key metric and then discuss our revised 2026 outlook. Overall, our first quarter results were well above the framework we provided on our last call as both revenue and profitability came in stronger than expected. Revenue in the first quarter was $846 million, up 6% year-over-year. Quarterly revenue exceeded expectations on favorable receipt timing and the year-over-year growth came from programs related to tactical radars, infrared sensing and electric power and propulsion.

The strong contribution from tactical radars and infrared sensing was evident in the increased ASC segment revenue. In IMS, Q1 revenue growth was more modest as electric pound propulsion strength was offset by a tough compare and force protection program. mostly attributed to timing.

Moving to profitability. Adjusted EBITDA was $105 million in the first quarter represent a year-over-year growth of 28%. Adjusted EBITDA margin was 12.4%, reflecting 210 basis points of year-over-year margin expansion. The increased adjusted EBITDA and margin came from strong program execution across the business favorable mix and operational leverage from higher volumes.

Shifting to the segment view. In Q1, ASC adjusted EBITDA was up 48% with margin expanding by 290 basis points reflecting improved execution, better mix and operational leverage. For IMS, adjusted EBITDA growth of 8% outpaced the top line with margin expanding 90 basis points driven by strong program execution, including on the Columbia class.

Turning to the bottom line metrics. First quarter net earnings were $62 million and diluted EPS was $0.23 a share, up 24% and 21%, respectively. Our adjusted net earnings of $69 million and adjusted diluted EPS of $0.26 a share were up 28% and 30%, respectively. The favorable year-over-year compares were driven primarily by strong operating profitability and lower net interest expense.

Moving to free cash flow. Free cash flow in the quarter reflected typical seasonality with a modest outflow. However, relative performance improved meaningfully versus last year, higher profitability, better working capital management and solid program execution drove the improvement. We are only 1 quarter into the year. Our strong start to the year gives us confidence to increase our full year outlook across metrics. We are increasing our range for revenue to $3.9 billion to $3.975 billion, implying strong year-over-year organic revenue growth of 7% to 9%.

Our funded backlog continues to provide a healthy visibility into growth. That said, the timing and level of material receipts pace of program execution and the capture of book-to-bill revenue remain at the primary drivers behind the variability in the range. Additionally, we are increasing the range of adjusted EBITDA to between $515 million and $530 million. which also assumes an improved margin expectations over our prior guide.

As you know, we do not provide granular guidance on our segments, but to help with your modeling, let me provide some directional color. We continue to expect strong revenue growth from both our segments. Adjusted EBITDA dollar growth is expected across both segments, but the margin improvement over the as reported 2025 will come from IMS. Stronger operational execution, combined with reduced assumptions for net interest expense is flowing through to our bottom line metrics. We are now projecting adjusted diluted EPS to be in the $1.26 to $1.30 per share range. Our underlying assumptions for tax rate and diluted share count for the year remain unchanged at 18.5% and $269 million, respectively.

We are now targeting free cash flow generation at approximately 75% of adjusted net earnings for the year. Despite the lighter capital expenditures in the quarter, we still expect increased capital investment for the balance of the year. The slight revision to our free cash flow conversion for the year is largely driven by increased assumption for working capital investment to fund future growth.

Finally, let me give you some color on our current expectations for the second quarter. We expect revenue to trend around $900 million, and adjusted EBITDA margin should be comparable to Q1 in the mid-12% range. Additionally, we expect to be modestly free cash flow positive in the quarter alleviating some of the cash generation load from the second half.

Let me turn the call back over to John for closing remarks.

Thanks, Mike. I want to recognize our team for the dedication and mission focus they bring every day in support of our customers and the nation's most important security priorities. Our team understands the stakes. Our nation is at war and our service members are counting on the technology and products that we deliver. That's why we're operating at a wartime footing across the company.

Our first quarter performance, along with the progress we've made over the last several years highlights the quality of our portfolio and validates the strategy we've been executing. We're starting this year from a position of strength, and we intend to build out on that momentum, driving meaningful growth in the near term while continuing to develop the longer horizon opportunities that will shape the next phase of DRS. We're investing in innovation and capacity at the moment when the demand for these capabilities is both urgent and enduring.

Looking forward, our priority is clear: provide differentiated next-generation solutions with speed, quality and the ability to scale so we can deliver the consistent performance our customers and shareholders have come to expect.

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

[Operator Instructions] And your first question comes from the line of Peter Arment from Baird.

Mike, Steve, nice results. John, maybe just to kick things off at a high level. We've gotten a lot of materials out from the budget and the request. Obviously, you mentioned the reconciliation bill and opportunities there. But when you look across kind of some of those details on the fiscal '27 request, anything that jumps out of you whether the opportunities that you're seeing for DRS and space or force protection or maybe you just want to comment on broadly the portfolio?

Yes. Thanks, Peter. I appreciate the question. First, the budget request represents a very high priority for defense in the United States, the $1.5 trillion. The budget is very clearly rich with opportunity and with urgency as you probably know. Obviously, Congress will we'll need to weigh in on the overall budget and the budget level. But what I want to highlight, though, is that the most important element of that budget is really what's inside it. And the prioritization the elements that are in there really aligned very nicely with DRS's capabilities. For instance, shipbuilding, air missile defense, counter UAS, unmanned space and missiles are all very prevalent in the budget.

So we see a huge alignment between where we are and where that budget is. And each of those elements is growing. It's growing very quickly. Again, we have to see what Congress does with the overall funding levels, but we're encouraged by the prioritization that's inside that budget.

Got it. And then just quickly, Mike, as a follow-up, CapEx to start the year started a little light. Any change or just how should we think about kind of cadence of CapEx for this year?

Yes. I would say the light CapEx in Q1, Peter, was attributed to timing. You're going to see that pick up over the subsequent quarters. And as we laid out in our last call, kind of that 5% of sales threshold is where we anticipate being at the end of the year. So no real change, just kind of ramping up as we go across the year.

Your next question comes from the line of Seth Seifman from JPMorgan.

This is Alex on for Seth today. I wanted to ask kind of on the IMS margin specifically, I mean, it got off to a good start here in Q1 at 14.6%. It comes off of Q4, where if you kind of adjust out that onetime kind of ends up in the high teens range. Curious kind of if you guys could elaborate a little bit more on the recent momentum you've been seeing with IMS profitability. Has there been any sort of unlock with respect to maybe the Columbia class program specifically? And I know you guys talked about margin expansion kind of expected to drive the overall company's margin expansion for the rest of the year. So curious if you guys could kind of elaborate a little bit more on that.

Yes, sure. I'll take that, Alex. Thanks for the question. The IMS margins were notably strong, really execution based across the segment, but the largest contributor being Columbia class. So we're continuing to see strong execution on that program. The team is performing very well. And that continues to be the catalyst for the margin expansion within the segment. But more broadly than that, we did see program level efficiency throughout the segment. We managed costs well and I think that's what's driving EBITDA growth. I think you should think about this segment being kind of in this range as we progress throughout the course of the year. I think this is a good kind of revised baseline for the segment.

That's very helpful. And then maybe kind of for this next question, focus a little bit more on ASC. I certainly appreciate you guys are kind of at a record backlog level and the overall company's book-to-bill has been onetime or greater for the past 17 quarters. So if we kind of look at the book-to-bill specific for ASC over the past couple of quarters. It looks like it's dipped below 1 time? Kind of curious if you guys can maybe provide a quick update on what you're seeing in the order environment there.

Yes. I wouldn't be too overly concerned with the kind of the quarterly trend here that you see -- saw last quarter and now this quarter from an ASC perspective. if you kind of zoom out a little bit on the time period, the segment over the last 12 months is right around 1:1. But I think more importantly, as John kind of went through on the call, we continue to see solid demand signals from the customer our tactical radars are continuing to see global demand and how they're important in the air defense domain. John mentioned a $500 million day AircomIDIQ contract that we haven't started to see order flow come through on.

If you couple that with some of the next-gen sensing programs where we have just recently been awarded some IDIQ contract and also what's happening in space, I think the book-to-bill trend is one that's going to reverse pretty quickly in a favorable manner.

Your next question comes from Andre Madrid from BTIG.

Mike and Steve, I wanted to talk a bit more about capital deployment, maybe more specifically about what you guys are seeing on the M&A front. I know you talked last quarter about M&A being mainly focused on closing specific technology gaps. With -- can you maybe talk about the current M&A pipeline with that context.

Hello, Andre. This is the operator. Can you have your question repeated for them, please?

Yes. Sure. I was just pointing out like I think M&A focus last quarter was said to be mainly on closing technology gaps. With that in context, I mean, can you maybe talk about what the pipeline currently looks like?

Yes, Andre, thanks for the question. We have a little bit of a gap in your question, but I think we got it. look, our primary focus for capital deployment is really, as we've talked about before, organic. We're spending more on R&D, more on CapEx, focusing a lot on building capability inside the business. That said, we are still looking for technology gap fulfillment and kind of tuck-ins and the M&A pipeline. That pipeline does span the gamut of capabilities hardware to software, where we see areas of growing demand and growing a market pull, if you will, as well as aligning with gaps.

And when I talk about gaps, I'm talking about areas where for want of a piece of technology, we could provide a solution to the customer. And so those are the kinds of things that we're looking for. Typically, we do a lot of partnerships for filling those kind of gaps, but we look for them in the M&A market as well. Hopefully, that answers your question.

Yes. Yes. No, that's definitely helpful. And I guess on that point, you mentioned the organic investments you're making, higher, higher ad spend. I guess when you look at IRAD, like what is most of your attention going towards, if you can maybe provide like a top 3 areas in which you're looking to invest specifically through the balance of '26?

I would tell you that those -- our focus -- our investment is definitely focused in areas of highest demand. And when I say highest demand, I'm talking about growth, right? So if you go back to that -- the budget request, you kind of see that shipbuilding, you're seeing missiles and we provide secrets for missiles counter UAS, where you're seeing kind of in the $14 billion, $15 billion in the request for counter UAS, those capabilities are really well aligned. Our investments are really well aligned to those growing demand space, et cetera. That's where we're putting our money.

And your next question comes from Austin Moeller from Canaccord Genuity.

So just my first question here. The adjusted EBITDA margin improvement within ASC. Is that partially being driven by improvement in germanium availability and supply? Is it being driven by any inflation cost escalators of renegotiation of contracts? Or is it just more favorable mix of tactical radars and [indiscernible] and volume moving through the factory?

Yes, Austin, thanks for the question. I would say that the margin expansion, first and foremost, is driven by the favorable mix coming out of the tactical radar piece that we had and demand we saw there. Also, we're starting to see the operational leverage materialize as the IRAD wasn't a headwind to margins. So that's certainly up the margin expansion. But the last point of the margin expansion is where you directed the question. We certainly have had a better result on the margin side because of the raw material costing, especially germanium. So that helped the segment outperformed the prior year.

Okay. And I think you guys said in your prepared remarks, you alluded to underwater platforms or counter UAS for underwater platforms. Could you elaborate on that a little bit more? Is that radar? Is that Sonar? Is that like the tactical MHR? How should we think about that?

Austin, we were referring to unmanned surface vessels. And what we've done is we've taken our counter UAS mission equipment package, really kind of taking it off a tank and putting it on -- we did an unmanned service vessels and we put it on unmanned ground vehicles. So we believe that the future of warfare is increasingly going to be robotic. So they're going to have unmanned platforms out in front, protecting manned platforms. And so what we've done is we've put these on the ground vehicle side. On the surface side, we put it at sea and we demonstrated this capability. Again, there's a lot of money that the Navy will spend on unmanned surface vessels. The money is in the reconciliation bill from '26.

The question is, what are they going to do with the unmanned service vessels. We believe that there is a market here for counter UAS. That's why we went and did this demonstration as part of our IR to put that to see. So I think a really incredible capability, our team really did a great job here. If you look at some of the LinkedIn post, you can see the pictures of that platform.

Your next question comes from John from CJS Securities.

Really nice quarter and outlook there. I was wondering if you could give us an update on the status of your radar operations in Israel. If you're seeing any disruptions there just from the conflict and if there's any resolution to that as you move forward?

Well, first and foremost, our -- the backlog and the revenue there is rising pretty quickly. The demand for those capabilities is nearly insatiable. We're investing in infrastructure to be able to increase production at a very high rate. The team is doing a great job of doing that. We -- of course, some of our employees have to do some reserve duty and things like that, that hasn't really impacted us in any material way. And I think the team is doing a great job of increasing production. So -- but the demand is there for sure.

Got it. That's good to hear. And then I was also wondering if you could talk about maybe your expectations for the fall and what happens if Congress changes hands. Would you expect to see friction or vulnerability in any specific parts of the budget or overall? And where would you expect to see continued strength?

Yes, it's a great question. Look, I'm not going to kind of predict what happens to the overall to Congress to the budget. But -- but I would just go back to the point of what's in the budget. I think that the prioritization of capability we provide is clear in that budget request. No matter what happens on the hill, no matter what happens with the funding level. First of all, there will be an increase in budget, whether it goes to $1.5 trillion or not is another question. But there'll be an increase. But the more important point is that the focus of attention and the prioritization in that budget is aligned to DRS and aligned to our capabilities.

And your next question comes from Alexandra Mandar from Truist Securities.

Nice results. Given the strong defense demand environment across domains, how are you prioritizing resources internally given opportunities across naval ground space and in the air and where do you expect the most growth in 2026 and into 2027?

It's a great question. We're really prioritizing our internal capital based on growth rates, on market growth rates. And so the areas that we're focusing attention, which I mentioned already, shipbuilding and aero missile defense, counter UAS unmanned space and missiles are all prioritized in our internal efforts. I think we're going to see growth in all of those areas of our plan -- of our portfolio. I wouldn't want to guess as to which one is going to win, but we certainly run a competition here. So we'll see which one wins.

Great. And can you provide additional color on what drove improved execution and operations in the quarter?

Yes, I'll take that. I'll say one of the major elements was what you alluded to earlier on the call, which is we've got a little bit more line of sight from what we've done from a raw material and supply perspective. So the material favorability that we've seen both from a timing perspective, driving the revenue as well as from an execution perspective helped on the margin side there. The other elements were really more attributed to the actual volume of revenue and the operational leverage driving that additional revenue and gross margin contribution down to the bottom line as the IRAD spend and the G&A spend were much less of a headwind in Q1 of '26 than they were in the prior year.

[Operator Instructions] And your next question comes from Ron Epstein from Bank of America.

This is Alex Preston on for Ron today. If you could start maybe on shipbuilding, right, output continues to expand. At the same time, outsourcing is expanding as well, and the supply base seems to be making, call it, slow and steady progress? Can you just update maybe on any options or discussions to expand content or second sourcing perhaps in addition to what's already in progress at Charleston?

Yes, sure. Let me take that. First of all, we are working with our customer on second sourcing, the steam turbine generators for the summary industrial base. we're seeing that, look, at the end of the day, the Navy deserves to have at least 2 sources for these capabilities. Right now, they have 1 we're starting to see some of the money move out of the reconciliation bill out of OB to the customer set. -- some of that money has made its way to us already. So this is one area of focus for us is to continue growing content to be a steam turbine generator second source.

Another area that I'll point you to is the Navy is focused on a battleship. And one of the things that we believe is that whatever the Navy ends up trying to design in the next-generation surface combatant, they need to have an electric propulsion system. The electric propulsion system is really necessary to be able to move power around within the ship. We know that those ships are going to have to fight from a longer distance because the any ship missiles are -- have a greater range today.

And so having an electric propulsion system allows those ships to provide power to radars for longer-range radars for directed energy weapons for electronic warfare for a longer range. And so we believe that's the architecture of the future. Going one step further than that, we believe that the Navy should be focused on a modular architecture, an architecture that would provide the capability from all the way from a battleship down to a cruiser to a destroyer or a frigate or a core even a U.S. medium-sized USV. And so when the Navy would design an architecture once and then move forward. So we're investing in these components power components that would provide that flexibility for the Navy to basically build whatever they want to build designed and tested an architecture.

And so we're focused there on providing that capability for the Navy. We think that the Navy is moving in that direction. We're helping them with some ideas here on how to do that. And so we'll -- I think that's another big vector for us, and that's where we're investing some money.

Got it. And then I know the budget has been brought up a couple of times, but maybe to ask question from a slightly different angle. I'm curious if you can talk maybe more specifically about your assumptions between the basin reconciliation budgets into '27, right? Some of the largest items and reconciliations seem maybe more relevant to DRS. I'm curious if reconciliation is sort of considered upside for you or in your plans? And maybe broadly, how that's influencing your planning into '27 and beyond?

It's a great question, Alex. I think that as you look at the bill, a lot of the reconciliation elements are things that are needed right now. And I think that the administration did that purposely could -- so -- but I would say that if you looked at the base budget, they have the same kind of prioritization that aligns well with the Ares' capabilities. certainly, our capabilities are applicable to the reconciliation portion of the bill, but very well aligned to the base bill as well.

I would tell you that our plan does not include -- it's not dependent on a $1.5 trillion budget. We're I wouldn't say we're expecting, but this isn't -- we're not dependent on a $1.5 trillion budget. So whatever comes out of the hill on the other side is going to have the same prioritization that, that base bill has, which aligns directly with the DRS capabilities.

There are no further questions at this time. And now I would like to turn the call back over to John Baylouny, Chief Executive Officer, for the closing remarks. Please go ahead.

Well, I want to thank everyone for joining today's call. This quarter underscores the momentum in our business, strong profitability, sustained organic growth and a disciplined approach to investing. We're off to a strong start in 2026, our execution and visibility support, raising our full year outlook. As I discussed earlier, we continue to see a rapid rate of change in the nature of warfare, and we believe the theme of capability proliferation is enduring and is driving a shift towards distributed resilient modular architectures that can be quickly replaced and scaled.

The DRS is a strategic advantage because we provide enabling technologies and we pair that with deep integration expertise and growing software capabilities. As our funded backlog reaches new company records, we continue to invest in innovation and capacity to execute on the clear multiyear demand in front of us.

If you have any further follow-up questions, Steve and the team will be available after the call. and we appreciate your time and continued interest in DRS. We look forward to updating you again next quarter. Thank you.

Ladies and gentlemen, thank you all for joining, and that concludes today's conference call. All participants may now disconnect.

Ladies and gentlemen, good day, and welcome to the Leonardo DRS Fourth Quarter and Full Year 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this event is being recorded.

I would now like to turn the conference over to Steve Vather, Senior Vice President, Corporate Development and Investor Relations. Please go ahead.

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. 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. 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?

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 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 and operational leadership roles across each of our incredible businesses. 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, a truly differentiated technologies and above our -- 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 as an 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; 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. 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. Global threats persist and the nature of warfare continues to evolve rapidly. Our customers require next-generation capabilities to maintain the decisive advantage over 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.

We are encouraged by the enactment of the fiscal '26 Defense Appropriations early signals for fiscal '27 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%. 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. 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, 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. 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 investments substantially. Second, we managed supply chain complexity related to shortages of 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. Through a combination of recycling initiatives, strategic allocations from customers, 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 2 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. 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 of 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 a non-anticipated loss on the program. While disappointing, the circumstances surrounding this program were unusual and isolated within our portfolio.

To be clear, we don't see any other program with similar characteristics that would be expected to drive comparable impacts. The conclusion of this legacy effort along with the IP license agreement clears a 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 fourth quarter highlights. First, let me commend the team on a tremendous win in the space market. Space has been a multiyear 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 [ parties ] 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.

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 Dom initiative.

Also in space, we successfully demonstrated secure data transport using a next-generation crypto multichannel 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 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. 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 emissions to neutralize strong 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 are committed to a platform and effective 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 nonkinetic factors in our offerings, including cost-effective ammunitions and nonkinetic tools, such as electronic warfare and directed energy.

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 in growing relevance and 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 in integrated sensing and computing offering across leading platform providers are becoming a growth vector while we're well positioned on the Navy -- as the Navy crystalizes its USV strategy and begins deploying funding in this area.

Staying with Naval, our Columbia class program continues to execute exceptionally well. We're delivering on time and with quality and our results reflect the financial benefits of that solid execution. As an AV adjust surface combat and modernization strategy. We remained 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 want to 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 with 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 long-standing leaders who have delivered strong results. 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 and 2026 outlook.

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 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. 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.

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. 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 will refer to the net effect of these items as the net nonroutine 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 demand sensing, network computing, force protection and electric power and propulsion, and 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. 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 the fourth quarter 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.

At the segment level, ASC adjusted EBITDA and margin were bolstered by the license -- 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 the fourth quarter, respectively. For the full year, diluted EPS and adjusted diluted EPS increased by 29% and 24%, respectively. 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. Our strong cash generation in 2025 leads 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 billion to $3.95 billion, implying a 6% to 8% organic growth. 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.

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 in 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. 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. 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.

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.

As we look ahead, we remain focused on delivering these cutting-edge capabilities to the customers with speed, quality and scale, positioning us for continued growth.

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

[Operator Instructions] Our first question comes from the line of Robert Stallard with Vertical Research.

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?

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. 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 the money is going.

Okay. And then as a follow-up, you highlighted that you've seen 4 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? Or does this order intake just extend similar kind of growth further into the future?

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, 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.

Our next question comes from the line of Michael Ciarmoli with Truist.

Nice results. Just a 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'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 is getting better. I know you're lapping 2 years of low teens growth, but why should we think growth is really going to decelerate here?

Yes, 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. 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 winded space. There are pockets 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.

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, 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?

Well, thanks, Mike. Yes, certainly, our top priority has always been and will continue to be organic investments first. And 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. And we're going to be kind of picky about what we look at in the M&A space. So -- but first organic, then inorganic.

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

Nice results. I wanted to start off asking about the profitability in IMS in the fourth quarter. If we add back the international program termination, it was a very healthy margin. Was there a catch-up on Colombia? Or should we think about the -- what should we think about what the fourth quarter margin implies for going forward in IMS.

Yes. Thanks. Appreciate the question. We certainly saw a strong demand across the segment of IMS coming from our naval power business, bolt-on Colombia, but also on the surface ships 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. So we had a big growth in the quarter which materialized the margin. As you're aware, we've peer to expense G&A, we peer to expense the IRAD. So that operating leverage fall to the bottom. So that was a big element of it. The performance at Colombia certainly continues to be a tailwind, not a major catch-up but certainly a tailwind for the quarter.

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, but maybe even a battleship. What are discussions like at this point about your ability to use that capacity on these new ship process?

Yes. 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 have to have greater -- to fight from greater distances. They need more power to meet that distance need and more powerful radars, more powerful electronic warfare or direct in energy, et cetera. 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.

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. So whether they build a battleship or a destroyer 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 on what I've been calling out is common chassis like you see in the automotive world where all the different size cars are built off the same kind of structure.

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 size components. 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. 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 at Charleston will be the enabler for that capability.

Our next question comes from the line of Austin Moeller with Canaccord.

So just my first question here. Can you comment on the tranche 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.

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. 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. 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.

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

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. And so we're looking to solve the bigger problem the Golden Dome has, which is time. The intercept time has to happen, we believe, up in space that connectivity, otherwise, you're not going to make the time line.

So what happens with the SDA tracking layer, portfolio? And how does dovetail into Golden Dome is still a question mark. 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.

Okay. And based on the fiscal year '26, $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 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?

It's a great question. I think you're going to see -- and it's an opinion. You're going to see a 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 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 USV or medium or small USVs, 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 see last year. 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, we -- 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. And of course, Columbia Size motors would be applicable for some of the larger compaction. 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.

Our next question comes from the line of Jon Tanwanteng with CJS Securities.

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? And number two, are there more opportunities beyond that as quantum becomes the next tech over the horizon?

Yes, 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. And 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 are there other applications like this, we certainly look for noncore areas of the market to license our technology.

We're not in the commercial space. We focus our attention on the military and defense space. And so 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 in. 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 continually look for them.

Okay. Great. A question about the CapEx. You mentioned that you're increasing for the year. What is the specific -- what are the specific programs that the increase is tied to? Is it production of components? Is it other stuff that's going on?

Yes, Jon, I'll take that one for you. So thanks for the question. From a CapEx perspective, as John alluded to earlier, organic investment is where we're focused. And right now, from a CapEx perspective, that's about capacity. So we spoke 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. 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. 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 2 primary areas that we're seeing. 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.

So 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.

Let me just add a little bit more to that in another area in the missile area, where as you look at, they come to realize that in the battlefields of the future, it's going to be -- they're going to be dominated by autonomous platforms and weapons like load emissions and such. 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. 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 and including capacity for those capabilities.

Understood. If I could sneak one more in there. How do we expect OpEx and R&D to grow maybe as a percent of revenue this year? Or do they stay roughly the same?

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% of sales range was a onetime thing. 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 pick that up and it will be somewhere in the neighborhood of 5% of sales.

Got it. I think I said OpEx, not CapEx.

I'm sorry. Yes, 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.

Our next question comes from the line of Andre Madrid with BTIG.

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. 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.

Yes. So our intent is to provide multiyear targets probably in the first quarter of 2027, Andre. So we're not going to get out in front of that now, 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 is a continued path to grow the margins 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. 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.

Got you. Got you. 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 onetime. I mean are you worried about this softening at any point? Or is there any particular area in which we might see a softening.

Well, Mike explained that we are looking at some of the areas that are not 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. 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 it's a matter of how fast they grow.

Our next question comes from the line of Ron Epstein with Bank of America.

So you've covered a lot of ground already, but maybe one area we really haven't talked much is what are you seeing for the company in terms of opportunities in Europe. European defense spending should, I don't know, go to, I don't know, what, $850 billion by the end of the decade, maybe if everybody spends what say they're going to do. But it's a pretty big market. And then also, how has sort of the transatlantic tension impacted your business, be it that your primary shareholder is a European company.

Yes. Thanks, Rob. Let me take that. I think, first of all, you're right. There's certainly the macro environment today, the U.S. is looking for speed. Europe is looking to be self-reliant. And there's urgency on both sides. And that's a conducive environment. for partnership, frankly. You mentioned 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 defense and through their JV with Rheinmetall.

Given the fact that they've got a strong portfolio, we're looking to utilize those technologies capabilities in the U.S. And of course, we'd have to mechanize the capability to apply to the U.S. market, but -- and vice versa, right, moving in the other direction, the self reliance in Europe off the source would licensing technology from the U.S. we've got technology that we could do. So 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 U.S. side.

Got it. Got it. Got it. And then maybe just a detail -- is the laser IP licensing a sign of just more expanded? I mean I guess this is sort of order you asked, but more expanded work outside defense.

Yes. 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. 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. We want -- will help, but we want to get it out of our portfolio and moving into another domain. This will keep us focused on the growth markets for defense, which is where we're -- which is our strength.

Yes. And Rob, I'll just add one thing here. The laser IP that we're talking about has a lot of utility in nondefense outlets. So we've looked at this in the past, we have had some successes. We're going to continue to do so. But really, where John is going is that utility of that IP, just as broad-based applicability. 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 license opportunities as they emerge.

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.

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. 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, and have a great day.

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

Ladies and gentlemen, good day, and welcome to the Leonardo DRS Third Quarter Fiscal Year 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this event is being recorded.

I would now like to turn the conference over to Steve Vather, Senior Vice President of Investor Relations and Corporate Finance. Please go ahead.

Good morning, and thanks for participating on today's quarterly earnings conference call. Joining me today are Bill Lynn, our Chairman and CEO; John Baylouny, our COO and incoming CEO; and Mike Dippold, our CFO. They will discuss our strategy, operational highlights, financial results and forward outlook.

Today's call is being webcast on the Investor Relations portion of the website, where you'll also find the earnings release and supplemental presentation. Management may 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. We undertake no obligation 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.

At this time, I'll turn the call over to Bill. Bill?

Thanks, Steve. Good morning, and welcome, everyone, to the DRS Q3 earnings call. We continue to perform well. Our third quarter results demonstrate DRS's close alignment with customer priorities, which was clearly reflected in our strong bookings, revenue and profit growth as well as solid cash flow generation. As I told you last call, we expected second half booking strength and that materialized in spades in the third quarter. We secured $1.3 billion of bookings in the quarter, resulting in a 1.4 book-to-bill ratio. Our year-to-date book-to-bill ratio sits at 1.2, and we continue to see a solid path to remain above 1 for the full year.

This quarter, demand was most evident for our Counter-UAS, advanced infrared sensing, naval network computing and electric power and propulsion technologies. Our exceptional bookings propelled us to another record total backlog, which now sits at $8.9 billion, up 8% year-over-year and also up sequentially. Funded backlog also saw a remarkable year-over-year growth of 20% in the quarter. Diving deeper into our quarterly financial performance, across metrics, we sustained double-digit growth in the year-to-date including in Q3. This provides greater visibility to close out the year on a strong footing. Furthermore, the foundation built in the year-to-date leads us to increase our full year revenue growth expectations to 10% to 11%.

Our profit metrics also showed strong performance. Adjusted EBITDA was up 17%, although margins slightly lagged behind prior year levels as we continue to ramp our investment in internal research and development. Adjusted diluted EPS increased by 21%. Lastly, free cash flow significantly surpassed prior year levels, reflecting improved collection linearity and working capital efficiency. In aggregate, our strong Q3 results place us in a solid position to meet our full year outlook. However, we continue to operate in a dynamic market environment and are focused on smoothly navigating its complexities. The team and I remain focused on execution discipline and maintaining investment to sustain strong organic growth.

While DRS continues to perform well, the operating environment offers both opportunities and challenges. Global threats persist, leading to continued growth in U.S. and allied defense investments to expand and enhance capabilities to deter and conduct these adversaries. We are thankful that earlier this month, the remaining Israeli hostages were returned and that initial steps towards pieces are being made in the Middle East. We are hopeful that the ceasefire sustains and brings lasting stability, not only for our employees in the region but for all situated there.

Domestically, the federal government remains shut down, marking the longest full shutdown on record. Unlike the last lengthy government shutdown in late 2018, all agencies, including the Department of Defense are impacted. Thankfully, to date, we have not seen a meaningful impact on our ability to execute our programs or deliver for our customers. However, as the shutdown extends, we are keeping a watchful eye on any impacts. We are hopeful that Congress and the administration negotiate and enact funding to provide clarity and visibility to our national security customers.

Zooming out and taking a look at the bigger picture, DRS remains well positioned in areas of customer priority with strong alignment to enduring themes of Counter-UAS, improving shipbuilding throughput via industrial-based expansion, enhancing missile production and sensing and electronics modernization. There are clear funding tailwinds in the $150 billion for defense embedded in the tax reconciliation passed earlier this year. We are eager to see the enacted funding start to flow to our customers.

Shifting to the supply chain. We are executing the strategy laid out last quarter to strengthen our germanium supply chain. We have begun recycling initiatives and are seeing early success in extracting adequate levels of germanium. We are also actively working on strategic agreements with several partners to ensure consistent supply in 2026.

Overall, I am pleased with the progress made to date. There's still work to be done before resolving this constraint fully, but I am confident that the initiatives that we have put in place will successfully resolve this challenge in 2026.

Let me wrap up my remarks with a few closing thoughts. Our year-to-date results reflect the resilience of our business and the strength of our differentiated technology portfolio. Customer demand is clear for our capabilities, and we remain focused on executing with excellence to support them in their most critical missions. The team has performed remarkably. Their commitment is unwavering and their incredible contributions are foundational to our financial success.

Earlier today, I announced that I will be retiring as Chairman and CEO on January 1. And our COO, John Baylouny, has been named the company's new CEO. I've had the distinct privilege of leading DRS as CEO since 2012. The DRS we have today is better and stronger than the one I joined 14 years ago. I could not be prouder of what the team and I have accomplished together. We have strategically transformed DRS through a steadfast focus on reshaping the portfolio into enduring areas of demand, driving consistent innovation and executing to provide exceptional capability into the hands of our war fighters. All of these strategic actions have resulted in a consistently growing business with expanding profitability and strong cash generation.

I am pleased with where the company is positioned today and the incredible potential ahead of it. This inflection point offers an opportunity for me to hand the reins over to someone who has been my right hand for a near decade. While I'm delighted with what we have achieved, I have high expectations for what this company will achieve under John's leadership as our next CEO.

Many of you already know John. He's an outstanding leader and is absolutely the right person to take this on. He has a wealth of knowledge, deep technological expertise and vast experience at DRS spanning over 35 years with significant operational impacts. Equally important, he possesses a profound understanding of our customers and their needs, coupled with an unwavering commitment to driving innovation and delivering solutions that ensure their mission success.

Separately, the Board is unanimously elected Fran Townsend, our current Lead Independent Director to become Chair. She has been a steady hand on our Board dating back to our acquisition by Leonardo.

As part of this transition process, John, Mike, Steve and I will have several opportunities to meet with many of you over the coming months. John and I will be sharply focused on ensuring a seamless transition through the end of the year. Congratulations, John.

Now let me turn the call over to him so he can review our operational highlights.

Thank you, Bill. First, on behalf of all of our employees, I want to thank you for your extraordinary leadership and the incredible impact you've had on the company. I am honored to be the next CEO of DRS, and I appreciate the trust you and the Board having me to lead this exceptional organization.

I'm very excited about where DRS is today, more importantly, where we can take this company moving forward. The opportunities to create value for both our customers and shareholders are abundant as ever. Let me now turn to discuss key business highlights from the quarter.

As Bill mentioned earlier, we continue to see vigorous appetite for our Counter-UAS solutions. Due to the evolving threats, we are constantly iterating our offerings to stay ahead of the threat. Earlier this month, at the AUSA Annual Meeting, we showcased our leading expertise in Counter-UAS. We demonstrated our ability to develop and integrate a palletized mission equipment package that is vehicle and platform agnostic and applicable to both manned and unmanned systems. Furthermore, we successfully combined both short-range air defense and Counter-UAS missions into a significantly smaller and lighter platform that JLTV.

In a growing field of Counter-UAS solutions, DRS stands out due to its reputation for bringing best-of-breed technologies well ahead of others and with proven field tested results and mission effectiveness. To that end, I would like to commend the team for taking first place at a recent Army Counter-UAS competition, showcasing our cutting-edge electronic warfare capabilities to disrupt drone threats. Additionally, in Q3, we demonstrated cross-modality success in solving some of the hardest problems facing our armed forces, integrating our sensors to enable threat neutralization through a platform-to-platform Connecticut kill handoff.

Our leadership position in Counter-UAS has translated into demand across our portfolio, including our integrated systems and sensing solutions and tactical radar, electronic warfare and infrared. I want to highlight that in the quarter, we were awarded over $250 million contracts for our premier ground-based Counter-UAS and short-range air defense programs.

Moving to sensing. We continue to see strong demand building in the missile domain. We are actively engaged in initiatives to expand sensing capacity and bring generational upgrades to sensing content on new platforms. Additionally, unmanned systems present a growing area of opportunity for our multimodal sensing business as we integrate our technologies into both unmanned aerial and surface vessel platforms.

Lastly, in our core infrared business, we continue to capture an outsized share of the market to supply our customers with infrared capabilities for dismounted and ground combat vehicle applications.

Next, I want to highlight our new software offering, SAGEcore. SAGEcore is an integrated operating system that brings AI, advanced sensor and edge computing together in a single deployable solution for use on tactical platforms across multi-domain environments. SAGEcore is one piece of the innovation we are bringing to the next-generation computing and sensor fusion.

In the quarter, we also released SHORAD, a 4+1 multifunction network computing product with the ability to host electronic warfare, onboard crypto and tactical WiFi capabilities. SHORAD complements the AI processor we developed earlier this year and supports the Army's next-generation C2 initiative with a 0 trust, cost-effective solution for tactical and ruggedized computing at the edge. Additionally, we continue to see steady demand for our next-generation naval network computing solutions in support of the Navy's network sensor and integrated fire control initiative cooperative engagement capability or CEC.

Last, but certainly not least, I want to commend our electric power and propulsion business for the considered and remarkable performance. The impact of their strong execution is evident not only at the segment level, but also at the company level. We continue to see this part of our business driving significant growth and margin expansion. We are well positioned to capture incremental scope and remain active -- in active conversations with our customers industrial-based expansion, particularly steam turbine generators. The growth opportunity of proliferating our power and propulsion technology into future platforms remains an exciting growth factor.

Let me now turn the call over to Mike, who will review our third quarter at our revised 2025 guidance in greater detail.

Thanks, John, and congratulations. I look forward to working closely with you in your new role to create value for our customers and shareholders. Bill, it's been a heck of a ride, and I'd like to thank you for your outstanding leadership.

Overall, I'm pleased with our solid year-to-date performance, particularly amidst a complex and dynamic operating environment. Our third quarter reflects the results of our sustained focus on driving innovation, processing customer demand into revenue growth and maintaining disciplined execution.

Let me start by discussing our Q3 performance. Quarterly revenue grew by 18% over the prior year, totaling $960 million. The team did an impressive job converting strong customer demand. We also benefited from favorable timing of material seats resulting in revenue above the framework laid out on the Q2 call.

From a segment perspective, IMS was our growth engine. IMS quarterly revenue was up 34%, driven by strong contributions from Counter-UAS and electric power and propulsion programs. ASC demonstrated a healthy upper single-digit increase 9%, thanks to growth from naval network computing, advanced infrared sensing and tactical radar programs.

Shifting to adjusted EBITDA. Q3 adjusted EBITDA was $117 million, up 17% from last year. Quarterly adjusted EBITDA margin was 12.2%, reflecting a 10 basis point margin contraction from the prior year. Higher volume and improved electric power and propulsion program profitability were offset by increased research and development investments, less favorable program mix and less efficient program execution, leading to the slight margin decrease in the quarter.

Shifting to the segment view. ASC adjusted EBITDA was flat on a dollar basis, but saw a 100 basis point contraction due to greater internal research and development investment, along with less favorable program mix. IMS adjusted EBITDA was up 47%, with margin expanding by 120 basis points, thanks to higher volume and improved profitability on our Columbia Class program.

On to the bottom line metrics, third quarter net earnings were $72 million and diluted EPS was $0.26 a share, up 26% and 24%, respectively. Our adjusted net earnings of $78 million and adjusted diluted EPS of $0.29 a share were up 22% and 21%, respectively. The favorable year-over-year compares were driven primarily by operationally led profit growth, coupled with slightly lower interest expense.

Now on to free cash flow. Free cash flow was $77 million for the quarter, up significantly over the prior year despite increased capital expenditure investment driven by increased net profitability and better working capital efficiency.

With one quarter remaining, we are revising our full year 2025 guidance to incorporate our strong year-to-date performance, along with factors we expect to influence the business as we close out the year. We now expect revenue in the range of $3.55 billion to $3.6 billion, implying 10% to 11% year-over-year growth. Our backlog position provides clarity into the execution range. The single most important factor driving the output is the variability in the timing and level of material receipts received by year-end.

I would resist the urge to fixate on the implied fourth quarter trends. Over the past few years, we have steadily worked to improve quarterly linearity and our year-to-date performance this year is certainly reflective of that initiative. We expect Q4 to reflect comparable patterns as last year, where there is a step down in growth from the first 9 months of the year.

Lastly, the nature of our business makes it challenging to run rate quarterly performance into any useful trend. Bottom line, the step down in implied growth to close the year should not be used as a read-through for next year just at Q4 2024 was not indicative of the growth we are currently on track to deliver for 2025.

Next, we are maintaining the range of adjusted EBITDA. As a reminder, the range is between $437 million and $453 million. As evidenced by our year-to-date results, we continue to expect IMS to be the source of the vast majority of profit and margin expansion for the year. Adjusted EBITDA margin at the company level continues to be constrained by increased R&D investment less favorable program mix and less efficient program execution, including the impact of germanium.

The increased adjusted diluted EPS range incorporates a slightly lower effective tax rate. We now expect adjusted diluted EPS between $1.07 and $1.12 a share. Our revised tax rate assumption for the year is 18%, and our other nonoperational assumptions remain static from our prior guidance. Lastly, with respect to free cash flow conversion, we are still targeting approximately 80% conversion of adjusted net earnings for the full year.

Shifting to 2026, we are in the middle of our normal course budgeting process. It's premature to provide specific guidance for next year, but as a team, we are focused on driving continued organic growth and expanding adjusted EBITDA margin. Consistent with past practice, we plan to provide formal guidance in conjunction with our fourth quarter and fiscal year 2025 call in late February.

In conclusion, I want to thank the team for their incredible contributions in bringing innovation to solve complex national security challenges, delivering exceptional technologies to our customer and delivering solid financial results for our investors. We will continue to remain focused on rigorously executing our strategy to create value through durable long-term growth.

With that, we are ready to take your questions.

[Operator Instructions] The first question today will be coming from the line of Peter Arment of Baird.

Congrats, Bill and John. And Bill, thanks for all the support over the years. I really appreciate it. Question on just our ad spending. Obviously, you're seeing a lot of opportunities up pretty significantly, 35%, I think, in 2025. How do we expect that trending just because of kind of some of the margin performance we've seen at ASC just because some of that is impacting that. How does that trend as we go forward?

I would expect to see this internal research and development investment kind of stay at this percentage of revenues. I think we're in a more dynamic operating environment where the procurement processes has changed from the department. And I think that we're going to continue the investment levels to provide that agility in order to maintain this growth, Peter.

Okay. So that was roughly like mid-3% or so roughly or right around there...

Yes, around there. Yes.

Okay. Helpful. And then just, I guess, any update on just kind of foreign military sales activity. Obviously, there's a lot of demand signals from Europe, you guys are well positioned. What do you see in there, Bill? And any opportunities for DRS?

Yes. Thanks, Peter. We do think we're going to see a ramp-up in foreign military sales opportunity. We're just at the -- I think at the start for the force protection, the kind of UAS. I think that has a real opportunity. We continue to see demand for our sensors, the EOIR sensors and for our network computing. And I think given the threat environment, we expect those to continue. And then we are working to develop markets for our naval power and propulsion system, particularly in Asia.

Just last one for me. Just on, Mike, on the germanium pricing, as things stabilized there, you've gotten more suppliers or supply lined up for next year?

Yes, I'll take that out to start and then maybe hand it over to Bill. But first on the pricing side, as we talked about in our last call, I think we've got 2025 kind of lined out and there were no real surprises or anything from our last call on the germanium front. We are making some progress in terms of solidifying supply into '26. And I'll hand it over to you, Bill there.

Yes. As Mike said, we're trying to build a structure that supports our revenue flow for optics going forward. And so that involves in the near term recycling, existing germanium from older optics. Over the midterm, we've moved to diversify our supply base with the agreements with different suppliers and processors. And basically, we need to move it away from reliance on China. We're seeing success in both those near-term and midterm initiatives, and we think that will put us in a strong position in 2026.

And our next question will be coming from the line of Robert Stallard of Vertical Research.

Best of luck, Bill, and congratulations, John. First sort to kick things off. Very good quarter for bookings. And I was wondering if there's any unusually large orders that were placed this quarter. And in relation to that, how do you expect these bookings to flow through to revenues?

Yes. I would say there was an increase in demand that we saw on the Counter-UAS and short-range air defense programs. So those came in heavy for the quarter, which accelerated some of the bookings results, primarily in the IMS segment. So that was a little bit of a pop there. And then we did see some acceleration just across the board as just the typical flow you see at the government fiscal year-end as September wrapped out. So a little bit plused up. That's, as I look out for the year, I expect to be comfortably ahead of that 1:1 target that we've put out there. We've got a good foundation for that. So we expect the demand to continue and feel good about our bookings number for the year.

In terms of the revenue turn, obviously, for us, it's about our funded backlog and how that pulls over into revenue. Bill mentioned in the prepared remarks here that the funded backlog was up 20% year-over-year. And if you look at it sequentially, it's up 7%. So we're feeling good about the foundation we have for 2026, Rob.

Okay. And then as a follow-up for Bill. You highlighted the extended U.S. government shutdown. If this carries on, what sort of potential risk do you see for DRS from this situation?

Yes, Rob, it depends for how long, of course. We're anticipating at least going well into November. And as I said in the prepared remarks, the impact of that length is moderate. As it starts to go longer than that, it's the people who pay us and give us the awards aren't there. And so you'll start to see delays in awards and delay in pay, but they would really have to keep going for a longer period where we're already basically longer than we've ever seen, but it would have to be a historic length before we see an impact.

Okay. And then just one final one for Mike. You said there was some I think operating efficiency issues on programs in the quarter, you highlighted germanium. Is there anything else we should be aware of?

It's primarily germanium. Obviously, with our development programs. We always have a little lower margin when we have that mix. But in terms of the context of the comment, it centers around germanium.

And our next question will be coming from the line of Michael Ciarmoli of Truist Securities.

Bill -- John, congrats and Bill, thanks for everything over the years. Maybe just back to Peter's question on the margins. I mean, you guys had '26 targets out there. You've obviously got this elevated R&D. How do we think about the payback and measuring the return on this R&D? Do we -- should we expect, do we see new programs maybe an acceleration of revenue growth off of what you've done this year? Just trying to get a sense of really measuring the payback on the R&D investments.

Yes. I think the payback on the R&D investments are going to put us in position to attack a lot of those adjacent markets and growth opportunities that we've had. So I think as you think about the kind of new way of procurement and coming to the table with solutions that are already at a higher kind of technical maturity, that's what we're really doing here, and I think it is giving us some good opportunities in the Counter-UAS domain. I think it's giving us some opportunities here as we look to kind of unmanned surface vessels. So all of these are giving us some additional opportunities to continue the growth that we've seen. And that's really what we're expecting from the IRAD investment at these levels, Mike.

Okay. Okay. Is that -- you just mentioned Counter-UAS and we've heard it a couple of times. Is there any way to sort of quantify or size your exposure at this point to Counter-UAS programs and maybe size the pipeline of opportunities? You mentioned AUSA. There's certainly a lot of competing companies from new entrants to large-scale primes, guys like yourselves, everybody is throwing around, new offerings. I mean, can you give us any sense of where your revenues are today or what you think your growth rate is or sort of adoption penetration there?

Yes. And I think this is one of DRS's nice differentiators is when we talk about Counter-UAS that is largely all of our force protection type of revenue that we have there. So we talk about and disclose force protection being about 20% of our revenues, that's largely dominated by the short-range air defense and Counter-UAS program. So we have real penetration, which we believe gives us an advantage as we look to the future here. So that's -- think about that kind of in that 18% to 20% range of revenue is all tied to those efforts.

Let me add to that quickly and just say that we're the current provider, the approved provider for Counter-UAS for the U.S. Army. Our solutions are battlefield tested. We know that our solutions work and we're always adapting our solutions to the evolving threat. We did see a lot of Counter-UAS solutions on the AUSA floor. But we distinguish ourselves by having a battle-proven capability. And we're very close to our customer. We understand what they need. We understand what they're thinking. We do expect Counter-UAS to kind of expand and proliferate to all echelons of the forces and really all domains. And so we see a real opportunity in the future here is driving innovation and pushing this out new technology.

Okay. Would you say you're kind of equally exposed to both Kinetic and kind of non-kinetic solutions for Counter-UAS?

Yes. I would say this, Michael. I think that you're going to see both capabilities on the battlefield. It's going to depend on where you are in the Echelon. If you're up in the front -- next to the front, you're going to see some capabilities back in the -- in back of the higher Echelon, you're going to see other capabilities. DE is going to end up probably at both Echelons, but those capabilities are going to be different. So you're going to start seeing the Counter-UAS market kind of proliferate across all Echelons, all different capabilities, and we provide all of that.

Okay. Okay. Last quick one for me, Mike. Just should we expect the same margin profile in 2016 with kind of IMS being the lead engine and some more of that IRAD dampening down the ASC margins?

Yes. I wouldn't expect the trends to continue. We're not going to go deep into '26 here. But in terms of just the allocation of profit, the investment is going to stay heavy at and we still feel pretty good about the tailwind that is Colombia as we look into the future.

And our next question will be coming from the line of Kristine Liwag of Morgan Stanley.

Bill, congratulations on your retirement. It's been a pleasure to see how you've transformed DRS over the years; and John, congrats on your new role. I guess following up on the supply chain. You guys have called out germanium a few times. So I just wanted to dive a little bit deeper into this. Can you talk a little bit more about your sourcing strategy for this? Like how much inventory do you have? It sounds like you got a little bit better access, but it would be really helpful to understand regarding some sort of time line or some sort of quantity.

Yes. Thanks, Kristine. I don't think I can give you precise numbers, but let me give you kind of the approach. We had before anticipating these kind of issues, bought a buffer stock, which is we are using to transition '25 and support our '25 flow through. At the same time, we're now actively involved in recycling from over optics and pulling -- extracting the germanium and constructing new optics from that. And that's -- now that we've seen success in that process. And that will bridge us into '26 and get us part way through '26. And then at the same time, we're involved in developing partnerships with companies in both the mining and the processing area outside of China so that we have a long-term supply, and that's what gives us confidence that we're going to have a robust '26, and we're going to be able to support our germanium needs with these both mid-term and short-term initiatives.

Great. And maybe pivoting to a different topic. I mean, in the quarter, you guys made a $15 million investment on Hoverfly. I wanted to -- I think you're now at 25% of your equity stake here. I wanted to better understand what's your strategy regarding these unmanned capabilities? Where does this fit into your broader portfolio and strategic vision?

Yes. I would say the investment with Hoverfly is really kind of key to some of the strategy that we have in terms of making sure we're bringing the best-in-breed technologies to different solutions W.e think this tethered capability is going to allow for, obviously, for elevated sensing for targeting, potentially for Counter-UAS. So there's some good applications here for this capability, and that's what fostered the investment.

Great. If I could do a follow-up question. IMS growth was up 34% year-over-year, 32% up sequentially. Can you provide any color on how much of this was driven by the Columbia Class? And were there any other transitions in shipsets that drove this step up?

I didn't catch what the first part of that question, Kristine, I'm sorry.

Sorry, on IMS growth, IMS was up 34% year-over-year, up 32% sequentially. Just trying to understand how much of the step-up was driven by Columbia Class? Or if there were other transitions and shipsets that drove this increase?

Yes. So good question. The increase in the revenue, actually, Colombia has been pretty stable from its revenue output in a quarterly cadence throughout the course of the year. The increase in revenue is really coming from a lot of the short-range air defense and Counter-UAS programs for the quarter. So that's where the big pop was this quarter.

[Operator Instructions] The next question will be coming from the line of Anthony Valentini of Goldman Sachs.

Bill, congrats on a great run. I'm just trying to get a sense for the longer-term growth prospects here. Are there opportunities to take what you guys are doing in propulsion on Colombia to other types of ships and programs? And the primes are talking about significant growth in missiles, which I think are highly dependent on the sensors. You guys have expertise there. So I'm wondering how large the missile businesses say for DRS? And where that can go over time? Any color really on the large growth factors would be great.

Thanks, Anthony. This is John. Let me start with the ship and the propulsion systems. And absolutely, we are looking and bidding other ship classes and we have some real progress in that regard, shaping. We believe that we have an advantage in providing energy flexibility on board a ship. It's not obvious, but the more energy, more power a ship has, the further away can fight. Longer range or radars, longer range, electronic warfare, a longer-range directed energy. And our solutions allow for that capability to be able to direct that energy to different places on the ship. So yes, for sure, we believe that there's opportunity long-term growth for us there.

Turning to missiles. DRS has always been a supplier of the best infrared sensoring in the industry, and I know the sensors as well, we're really at the top of the food chain. When it comes to missiles, those missiles have to be smarter. They have to have a longer range. They have to have greater capability. So we're seeing an increased pull for those higher-performing sensors into that space. And so we're playing in all different levels from the very low cost, high-volume missiles and factors all the way to the very high-end missiles and

And the next question will be coming from the line of Seth Seifman of JPMorgan.

Congratulations to Bill and to John as well. Wanted to ask, John, you mentioned at the outset, the SAGEcore. I wonder if you could talk a little bit about how that fits into Army's and GT2 plans? And the extent to which that can be a growth driver. It seems there's a good amount of funding headed in that direction?

Thanks, Seth. Let me step back and talk about the fact that when we see platforms -- all platforms are going to end up having to think for themselves. We've got to sense for themselves and think for themselves. At the end of the day, those platforms that are at the edge of the battle space, whether it's Lance or Air are going to have disruptive communications in battle. So those -- the computing resources for those platforms to think about what's happening on the battle space has to be out on the platform. It has to be at the edge. And so this is where we're putting our energy. This is where we're putting a lot of our money is to build out that capability.

The connectivity from the platform up to the enterprise, we'll be there at certain times and some of the enterprise capabilities will play there. But those platforms have to think. So this is part of NGC2, next-generation C2 program with the Army is being able to build out a capability on the platform, not just to communicate, but also to think. And so we're adding the AI capability.

And now with the SAGEcore, it's really the DRS's operating system, which we're going to place on to those computing resources at the edge that allow those platforms to think for themselves. Defuse the sensing information to have AI to understand what's going on in the edge and to be able to make sense and act on the information. So that's where SAGEcore fits into the program. Not just for the Army's platforms, but we're also using on the C for US -- we're also putting in other air platforms and in space as well.

Excellent. Excellent. And as a follow-up, if we could just talk about IMS and on the Columbia kind of what ships that you're up to or maybe a different way of saying it is, how far up the curve are we in terms of when? You've got kind of to a place where pricing has kind of stabilized.

Yes. And we've talked about Colombia in the past that we're always kind of working on 3 different shipsets simultaneously in terms of our revenue base. What happened in 2025 is we will start to pretty much retire the second shipset, which was bid at a lower price point. So subsequent to 2025, we'll be at a cadence where all of the new ship and revenue base associated with the different ship classes will be negotiated after the design was materially complete after the inflation impacts to labor and materials. So we should see more consistent margin output from Colombia starting in 2026 with 1 more year of margin expansion. And then the little asters I'd put on that is that is before we see the margin benefit from the South Carolina facility and think about that impact starting in 2027.

Our next question will be coming from the line of Andre Madrid of BTIG.

Congrats to Bill and John. I wanted to talk again about Hoverfly. Great to see the up investment there. Is this something that fits into your previously outlined M&A criteria?

Yes. I would say that when we're talking about M&A, we're looking at different aspects of that, whether they're joint ventures, partnerships, minority investments. And certainly, with this capability having the ability to assist us in elevated sensing to bring our centers through from a network perspective, I think that this kind of checks the boxes that we were looking at from an M&A perspective. And it's certainly strategic to where DRS is headed.

Got it. Got it. That's helpful. And then I wanted to follow up on the UAS work that you guys are doing. Could you maybe talk a bit more about the margin profile of that work and if it's generally accretive or dilutive to IMS?

Yes. We don't get into the marginality of this particular programs but it's the same customer set. It's in line with the rest of our portfolio. There's no anomalies here from a reg or from a tailwind perspective.

And our next question will be coming from the line of Ronald Epstein of Bank of America.

This is Alex Preston on for Ron today. First of all, I just wanted to echo the congratulations, both Bill and John. I wanted to circle back on the government shutdown. Obviously, 3Q bookings are really strong. You guys mentioned there's not a kind of material impact at this point. But I'm wondering if you're seeing any slowness in the contracting environment? And if so, where? I think, for instance, we might have expected Golden Dome awards to be maybe a little more firmed up by now given the reconciliation funding is to be spent. There's contract vehicles in place. Curious if you have any commentary on that.

Yes. As I said, it would take a while before this would catch up to influencing things like that. It would to think of things like testing to prove systems out -- but those schedules are generally pretty far out. And so we haven't really seen much more than modest impact yet. And it would have to go much closer to the end of the year before we'd see that.

Okay. And then just as a quick follow-up. We've noted a bunch of us have noted the strength in Counter-UAS as bookings and revenue this quarter. Just curious if you could characterize more on where the demand is coming from? I know you mentioned there's particular strength of the U.S. Army. There's foreign military sales involvement. Just curious if you could provide any color on the split there.

Yes. I think that's where the demand is coming from, for sure. We are seeing demand coming from really all over we're seeing demand coming from the Army for sure, and that's evident in the bookings. We're seeing demand coming from Navy Marines as well in the U.S. Air Force is also played with this problem. We're seeing the progress there and demand building and some bookings there as well. And of course, direct commercial and international FMS sales as well. There's demand coming from all avenues, as you might imagine, due to the changing nature of Warfare.

And our next question will be coming from the line of John Tan of CJS.

Congratulations, Bill, on your retirement and John and Fan on their appointments. My first question is if you could drill just a little bit a bit more into the germanium supply, that will be helpful. You mentioned bridging into the future with the recycling and then alternative supply. But do you expect to be constrained in the coming quarters as your stockpile falls off and then maybe catch up later in the year? Or how do you expect that to shape up to do the programs that you have in line fill 100% of supply right out the gate or does it take time to get there?

We think we have a plan, Jon, that does bridge from '25, where I think we've taken account of the supply restrictions and price increases. And we have a planned into '26 with the different initiatives that I mentioned. So we're feeling comfortable as to where we are.

Okay. Great. That's helpful. And then second, is the price on these alternative supply significantly higher than what you're seeing in the market? And does that further impact the ASC margin as we go forward? How should we think about the profitability there as you ramp these sources?

Yes. I would say that, as you know, we're largely a fixed price shop. So the higher pricing is certainly going to be inherent in those programs as we look into 2026.

Okay. Got it. One last one, if I could. Just any changes to thoughts on capital allocation? You obviously took the Hoverfly investment. You did some share repurchases, but any thoughts on capital allocation and use of cash going forward?

Yes. I mean -- we've said that we want to have a balanced capital allocation strategy. So we've instituted a dividend this year. We have a moderate buyback but our priority continues to be seeking out M&A opportunities that meet both our strategic and financial criteria. In that we've exercised patients. We've looked at a lot of things. We are doing the Hoverfly this quarter, as we mentioned. We're looking at larger investments as well. but you should expect going forward to see more M&A but a balanced strategy as well.

And our next question will be coming from the line of Austin Moeller of Canaccord.

Thanks again, Bill and John, for your leadership. Just my first question here. You've talked about recycling germanium from older optics. It sounds like you're going to get additional legs on your supply beyond Q1 '26, which is I think what you discussed last time for your visibility. Have you looked into alternative like glass-based solutions like Black Diamond glass potentially to replace the germanium just given it has less temperature sensitivity and better supply?

We -- you're correct. We are looking at alternative materials. It's particularly relevant for smaller optics where you can replace germanium with other -- and that is part of the portfolio of solutions we're pursuing. And that one is in the early stages, but we are seeing success there as well.

Okay. And just a follow-up. If we -- I know we're in a shutdown here, but if we think about the opportunity for Golden Dome and when do we start to get RFPs and contracts for that. Do you have any sense of the timing next year? And there's also like your partner, AeroVironment has been testing Counter-UAS solutions at Grand Forks in North Dakota.

Let me take the Golden Dome part of that. For sure, we're seeing a lot of activity on Golden Dome. While -- the architecture is not yet public. We certainly see movements. You're probably aware of the Shield RFI -- RFP that, I think, 1,500 companies bid, including DRS. We do expect that to move forward very quickly. I think that we see opportunity here, not just in the space sensing but also in the underlayer and also in the over the horizon radar area. So we believe that that's going to move forward and general booties moving forward very quickly.

On the Counter-UAS front, we see a lot of activity in Counter-UAS, including Andres activity, and I think that just to go back to the points about the fact that we are the ones that are solving this problem for the Army. We have battle-proven technology. We've proven our capability and we're following a threat, making sure that we're ahead of the threat and very close to the customer.

I would now like to turn the call over to management for closing remarks. Please go ahead.

Thank you, Lisa, and thank you all for your time this morning and your interest in DRS. As usual, if you have any follow-up questions, please call or e-mail me. We look forward to speaking with all of you again soon. Enjoy the rest of your day.

This does conclude today's program. Thank you all for participating. You may now disconnect.