Q4 2024 Leonardo DRS Inc Earnings Call
Thank you.
Ladies and gentlemen, good day and welcome to the Leonardo DRS fourth quarter fiscal year 2024 earnings conference call.
At this time, all participants are in a listen-only mode.
Speaker Change: Following the company's prepared remarks, there will be an opportunity to ask questions and instructions will be given at that time. 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.
Speaker Change: Morning and welcome everyone. Thanks for participating on today's quarterly earnings conference call. With me today are Bill Lynn, our Chairman and CEO, and Mike Dippold, our CFO. They will discuss their strategy, operational highlights, financial results, and forward outlook.
Speaker Change: Today's call is being webcast in the investor relations portion of the website, where you will also find the earnings release and supplemental presentation.
Speaker Change: Management may also make forward-looking statements during the call regarding future events.
anticipated future trends and anticipated future performance of the company.
Speaker Change: We caution you that such statements are not guaranteed to future performance and involve risks.
Speaker Change: and uncertainties that are difficult to predict. Actual results may differ materially from those projected in the forward-looking statement due to a variety of factors.
Speaker Change: For a full discussion of these risk factors, please refer to our latest Form 10-K and our other FCC filings. We undertake no obligation to update any of the forward-looking statements made on this call.
Speaker Change: 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.
Speaker Change: You can find a reconciliation of the non-GAAP measures discussed on this call in our earnings press release.
Bill Lynn: This time, I'd like to turn the call over to Bill. Bill?
Bill Lynn: Thanks, Steve, and thank you all for joining us today to discuss our fourth quarter and fiscal year 2024 results.
The DRS team continues to execute impeccably.
Bill Lynn: Before we get into the details of our performance, I want to express my genuine appreciation to our talented people for their steadfast focus and significant contributions that drove another strong year for our customers and our shareholders.
Bill Lynn: In 2024, we delivered record bookings, mid-teens organic revenue growth, healthy adjusted EBITDA margin expansion, and steady free cash flow generation. Our business saw broad-based customer demand, which was reflected in the over $4 billion of contract awards secured throughout the year.
Bill Lynn: The robust level of bookings translated to a 1.3 book-to-bill ratio for both the fourth quarter and the year.
Bill Lynn: Solid execution, strong international demand, and a more normalized supply chain enabled the acceleration to 14% revenue growth with double-digit growth evident in both segments for the year.
Bill Lynn: Furthermore, we delivered 23% adjusted EBITDA growth along with 90 basis points of margin expansion in the year.
Bill Lynn: More importantly, we achieve the increased profit margin while maintaining steady investments for future growth.
Bill Lynn: I'm pleased to report that in 2024 we increased our investment in internal research and development and capital expenditures by approximately 25% year over year.
Bill Lynn: We are committed to stepping up both R&D and CapEx investment in 2025 as we invest to unlock incremental avenues of future long-term growth.
Bill Lynn: Some of these investments include the expansion of our sensing modalities, directed energy capabilities, enabling the application of AI and quantum in sensing and processing. And of course, from a CAPEX standpoint, our new facility in Charleston, South Carolina.
Bill Lynn: Additionally, we generated $190 million of free cash flow in line with our targeted conversion of approximately 80% of adjusted net earnings.
Bill Lynn: Our crisp execution in 2024, coupled with a record $8.5 billion total backlog, provides visibility into driving continued growth and margin expansion into 2025, and in achieving our multi-year Investor Day targets.
Moving to some comments on the macro backdrop.
Bill Lynn: As we look across the globe, the threat environment remains elevated.
Bill Lynn: We expect the need to contest and deter global threats as continuing to apply steady upward pressure on U.S. and allied defense investment.
Bill Lynn: The imperative and focus remains on building next generation strategic capabilities as well as modernizing existing platforms.
We are operating in a more dynamic environment.
Bill Lynn: The new administration has brought an emphatic focus on speed, innovation, efficiency, and best-in-class technology. It is evident that DRS is well-positioned across all of these themes.
Bill Lynn: Since our inception, DRS has earned a reputation for its agility and cutting-edge innovation.
Bill Lynn: This has been consistently demonstrated through our capacity to rapidly deliver advanced capabilities with exceptional quality and reliability in an affordable manner for our customers.
Bill Lynn: Furthermore, DRS enjoys a differentiated market position as a growth-focused, critical defense technology company.
Our diverse portfolio is intentionally designed to be platform agnostic.
which buffers us from budget volatility.
Bill Lynn: Columbia class is our largest program at approximately 10% of revenue and is a top national priority and a key leg in the nation's nuclear deterrence modernization effort.
Bill Lynn: Beyond electric power and propulsion, the balance of the portfolio is aligned to enduring missions ranging from counter-UAS and short-range air defense to multi-domain and multi-modal advanced sensing.
Bill Lynn: to Next Generation Network Computing Solutions for Secure Mission Management, Communications, Combat Systems, and Fire Control.
Bill Lynn: The bottom line is that we have incredible technology depth and domain expertise.
Bill Lynn: As you know, our entire business model is predicated on delivering technology and integrated solutions that are critical to our customers executing their mission successfully and in an effective manner.
Bill Lynn: Our ability to consistently produce technologies that meet and exceed the most stringent operational requirements at scale makes us a trusted partner to U.S. and allied defense customers.
Bill Lynn: With this new administration, considering a greater shift toward fixed-price contracts,
Bill Lynn: I want to remind you that our mix already significantly skews Dick's price, and has for some time.
Bill Lynn: As a result, we have a rigorous understanding of how to deliver innovative capability in an affordable manner to customers, while managing risk and generating appropriate returns for shareholders.
Bill Lynn: We are also continuously identifying and driving improvements enterprise-wide to optimize performance. And in 2025, we are maintaining that steadfast focus on execution excellence.
Bill Lynn: Additionally, in the coming months, we look forward to gaining better clarity and a deeper understanding into the new administration's key priorities, as well as the finer details of their initiatives.
Bill Lynn: I want to emphasize that for over 55 years, we have been delivering on our commitments.
Bill Lynn: innovating for future growth and leveraging our market-leading capabilities to provide our customers a decisive edge.
Bill Lynn: Our steady stream of bookings and growing backlog across our differentiated portfolio of advanced sensing, network computing, force protection, and electric power and propulsion technologies
Bill Lynn: provide us confidence that DRS is well aligned to critical and enduring defense priorities.
Bill Lynn: In short, our fundamentals are solid. I expect 2025 to be another strong year of performance for DRS.
Our success remains evident throughout the entire portfolio.
Bill Lynn: Let me expand with some observations on our notable operational and technical accomplishments exiting 2024.
Bill Lynn: In our advanced sensing business, we continue to expand into attractive market adjacencies, which is a testament to our differentiation and further broadens our growth factors.
In the quarter, we received several over-the-horizon radar contracts.
clearly demonstrating our growing technical leadership in this arena.
Bill Lynn: Additionally, we were selected to provide infrared sensing on several missile programs, including those utilized for counter UAS as well as more strategic mission applications.
Bill Lynn: It's worth noting that these recent winds are an expansion of our presence in the missile domain.
Bill Lynn: DRS has diverse content on several missile programs such as THAAD, Patriot, and Aegis.
Bill Lynn: Moving into our tactical radar business, it continues to enjoy exceptional demand as it remains one of the most compelling commercial off-the-shelf solutions to enable on-the-move, counter-UAS, short-range air defense, and active vehicle protection.
Bill Lynn: Furthermore, our expanded capabilities in electronic warfare and software-defined radios were also met with healthy customer interest and demand.
Bill Lynn: From a network computing standpoint, we continue to progress next generation architecture that leverages open standards, modularity, advanced cooling, and the ability to utilize AI sensing and processing at the tactical edge.
Bill Lynn: Also pleased to announce that we were able to begin performing on a contract to help the Army modernize its mortar fire control.
Bill Lynn: Again, a very complementary and logical expansion of our network computing offering.
moving to our electric power and propulsion business.
Bill Lynn: I'm pleased to report that over the course of 2024, we were able to secure more than $45 million of submarine industrial-based funding commitments from the Navy and our prime customers, namely HII and General Dynamics.
Bill Lynn: This industrial-based funding will be utilized to equip and expand our capabilities in our new Charleston, South Carolina facility.
Bill Lynn: Specifically, the investments will strengthen our capacity and capabilities in the design, manufacture, integration, and test of steam turbine systems.
Bill Lynn: Additionally, we continue to make solid progress toward the targeted facility completion by 2026.
Bill Lynn: As a reminder, the rationale for building this facility was to more efficiently execute the Columbia-class program, but also create capacity for next-generation platforms.
Bill Lynn: These future platforms are a critical part of the long-term growth opportunity that we see in expanding our electric power and propulsion business.
While these platforms remain further out,
Recent data points continue to bolster our strategy.
Bill Lynn: Current design requirements for DDTX call for 40 megawatts of power generation, as well as a design approach that is focused on platform modularity to accommodate regular modernization, as well as the deployment of next generation combat systems.
These advanced combat systems are moving from concept to reality.
Bill Lynn: For example, the Navy recently tested a surface combatant-based directed energy weapon.
Bill Lynn: whether it be directed energy or other future combat communications and sensing systems.
We expect the shipboard power requirements to only increase.
Bill Lynn: which is most effectively addressed by electric power and propulsion architecture.
Bill Lynn: Shifting to force protection, we are the key enabler and integrator of the directed energy counter UAF system that is currently undergoing tests and demonstration by the Army.
Bill Lynn: The system continues to show strong performance, and we look forward to working closely with our customer to operationalize and field this capability in the medium term.
Bill Lynn: Moreover, we are seeing distinct international demand for our integrated solutions in counter UAFs and short-range air defense.
Bill Lynn: As a result, we are focused on progressing the ability to export these capabilities to close allies.
Bill Lynn: Speaking of international, we saw our percentage of revenue coming from international customers rise to 13% in 2024.
Bill Lynn: This demonstrates remarkable year-over-year growth and marks the fourth consecutive year of increased international business.
Bill Lynn: The elevated global threat environment continues to catalyze an urgent push for capability modernization.
which we view as lasting for years to come.
Bill Lynn: We continue to see clear international growth opportunities across the entire portfolio, but particularly for our multi-domain sensing and network computing technologies.
Speaker Change: On the leadership front, I'm pleased to announce that we have appointed Bill Guyon as our Senior Vice President of Business Development.
and he is also leading our international expansion efforts.
Speaker Change: Bill has made an incredible impact in a number of roles at DRS throughout the course of his over 20 years of service at the company.
including most recently leading our land electronics business.
Speaker Change: In his new role, I look forward to working with him closely to sharpen the competitive positioning of our business to drive growth in core, adjacent, and new markets, both domestically and internationally.
Speaker Change: With Bill in a new role, we have promoted Denny Crumley to succeed him as Senior Vice President and General Manager of our Land Electronics business.
Speaker Change: Denny has been at DRS for nearly 15 years and has both deep customer intimacy and domain expertise in the ground network computing market.
Speaker Change: These promotions reflect the incredible depth of talent resident at DRS and also exemplify our steadfast commitment to leadership and employee development.
Speaker Change: Furthermore, our strong culture and competitive employee proposition are enabling our success in driving record hiring and retention rates.
Now to a discussion on our capital deployment strategy.
Speaker Change: In our earnings press release, we announced a shift toward a more balanced capital allocation approach.
Speaker Change: Let me reiterate that our value creation strategy remains focused on driving growth, both organically and through M&A.
Speaker Change: That said, our steady cash generation and our strong balance sheet enable us to commence a capital return program comprised of a cash dividend and a modest share buyback, which will supplement our priority for value-additive M&A.
Speaker Change: With respect to the dividend, our Board of Directors has declared a cash dividend in the amount of $0.09 per share.
Speaker Change: The dividend is payable March 27, 2025 to shareholders of record at the close of business on March 13, 2025.
Speaker Change: We intend to begin payments of regular quarterly cash dividends subject to the discretion and final determination by the board.
Speaker Change: We are also announcing that the board has authorized the company's first share buyback program.
Speaker Change: It is an authorization totaling $75 million over the next two years.
Speaker Change: The program is expected to commence early next month and is designed to mitigate the dilutive impact of shares issued under the company's employee stock plan.
Speaker Change: Before I turn the call over to Mike, let me conclude my remarks by stating that our nation continues to operate in a complex global threat environment.
Speaker Change: Foundational to our country's ability to deter and contest these increasingly sophisticated threats is the technological competitive edge provided by companies like ours.
Mike Dippold: It is our strategy and our talented people that enable DRS to meet our customers' most challenging needs.
Mike Dippold: Our focus remains on driving innovation and capability to enable our customers' success, as well as drive value for our shareholders through steady growth, margin expansion, and cash flow generation.
Mike Dippold: Mike, over to you to review our recent financial performance and 2025 outlook.
Mike Dippold: Thanks, Bill. I also want to commend the entire DRS team for delivering another year of exceptional financial results. As a quick note, I have structured my comments to review both our fourth quarter and full year 2024 results by key metric, and then we'll discuss in detail our 2025 outlook.
Mike Dippold: First, revenue was $981 million and up 6% year-over-year for the quarter. Our programs related to tactical radars, naval network computing, advanced infrared sensing, and electric power and propulsion were key drivers to growth.
Mike Dippold: On a full-year basis, revenue is $3.2 billion, which represents a 14% organic growth over 2023.
Mike Dippold: Similar to the quarter, we saw consistent strength in our advanced infrared sensing, tactical radars, and electric power propulsion businesses, as well as healthy growth from our forest protection programs.
Broad-based strength was evident across both segments.
Mike Dippold: Our Advanced Sensing and Computing segment increased revenue year-over-year by 9% in the fourth quarter and by 16% for the full year.
Mike Dippold: For our Integrated Mission System segment, revenue is down slightly in Q4 by 1% due to program timing, but was up a healthy 11% for the full year thanks to solid growth throughout the segment.
Mike Dippold: Moving to Adjusted EBITDA. Adjusted EBITDA was $148 million for the fourth quarter and $400 million for the full year, representing year-over-year growth at 13% and 23% respectively.
Mike Dippold: Resulting margins were 15.1% for the fourth quarter and 12.4% for the full year. A year-over-year expansion of 100 basis points and 90 basis points respectively.
Mike Dippold: Increased program profitability on Columbia class, improved deck program execution, favorable mix and operational leverage from higher volume helped drive the margin expansion.
Moving to the segment, Trent.
Mike Dippold: ASC segment adjusted EBITDA increased 9% on higher volume as margin was flat year-over-year in Q4. For the full year, ASC segment adjusted EBITDA was up 22% and margin expanded 70 basis points on improved program execution, favorable program mix, and higher volume.
Mike Dippold: IMS segment adjusted EBITDA was up 24% in Q4 and 27% for the full year, which translated to a margin expansion of 290 basis points and 140 basis points respectively.
Mike Dippold: Margin was up in both periods thanks to increased profitability on our Columbia class program, but the pool year also enjoyed the benefit of higher volume.
Now to the bottom line metrics.
Mike Dippold: Diluted EPS and adjusted diluted EPS were up 18% and 23% year-over-year in the fourth quarter respectively. Solid operational performance combined with lower interest expense drove the favorable compares.
Mike Dippold: For the full year 2024, diluted EPS and adjusted diluted EPS were up 25% and 27% respectively.
Mike Dippold: The Foyer results similarly reflected strong execution and lower interest expense, but the more normalized tax rate was a slight headwind to the compare.
Moving to free cash flow.
Mike Dippold: Q4 free cash flow generation was robust and totaled $416 million in the quarter, driving the full year to $190 million. Our implied free cash flow conversion was consistent with expectations of 80% of adjusted net earnings.
Mike Dippold: Adding to Bill's discussion earlier, our balance sheet is now in a net cash position to start 2025, and this is spurring us to adapt our capital deployment strategy to a more balanced approach that maintains a focus on M&A, but also incorporates an element of consistent shareholder return.
Now to our 2025 guidance.
Mike Dippold: We are focused on building upon our spectacular execution track record by driving healthy organic growth and margin expansion.
Mike Dippold: I am pleased to report that the range of guidance that we are formalizing today sits slightly above the framework that we outlined on our Q3 call back in October. We are now expecting revenue to range between $3.425 billion and $3.525 billion, which implies a 6-9% organic growth.
Mike Dippold: Our growing backlog provides us with ample visibility to execute within the range offered.
Mike Dippold: As usual, the variability of performance will rely on the pace of material receipts and progress of labor inputs, as well as the timing and level of customer orders that comprise the smaller portion of book-to-bill driven revenue.
Mike Dippold: Assumed in our guidance is the passage of FY 25 appropriations in a stable supply chain.
Mike Dippold: Additionally, we continue to monitor and evaluate the executive orders that are being rapidly executed and implemented, but do not see any material business impacts at this time.
Mike Dippold: Moving to adjusted EBITDA, we are expecting between $435 million and $455 million for 2025.
Mike Dippold: Margin expansion continues to be driven by improved profitability on Columbia class to steady transition from development to production on smaller programs, favorable program mix, and growth operational leveraging.
Mike Dippold: Given our strong focus on growth, we have opted to increase our investment into our business development and company-funded R&D over the prior year and also over our prior expectations for 2025.
Mike Dippold: As a percentage of revenue, depreciation, and amortization expense should remain comparable to 2024.
Mike Dippold: Now to adjusted diluted EPS, we are initiating a range of $1.02 a share and $1.08 a share. Embedded in our guidance is a tax rate of 19%. We are assuming a fully diluted share count of $270 million.
Mike Dippold: Note that we will adjust our share count expectations after we better understand the pace of our stock buyback program execution.
Mike Dippold: Additionally, we are anticipating an 80% conversion of adjusted net earnings into free cash flow for the year.
Mike Dippold: While our Charleston, South Carolina facility investment is tracking to schedule, we saw CapEx come in lower than expected in 2024, largely due to timing of spend. We anticipate to catch up in 2025 and as a result CapEx should trend around 4% of revenue.
Mike Dippold: Lastly, I expect that our quarterly cadence for revenue and adjusted EBITDA should be largely comparable to the improved linear progression we saw in 2024. In Q1, we are expecting revenue around $725 million with mid-10% adjusted EBITDA margins.
Pre-cash outflows should also closely mirror Q1 2024.
Let me quickly wrap up before we move to questions.
Mike Dippold: Our team continues to build upon its execution track record as demonstrated by another year of exceptional financial results. DRS remains attractively positioned to continue to drive continued growth based upon our sizable backlog and our strong alignment to well-funded customer priorities.
Mike Dippold: Our strategy, culture, people, and platform agnostic portfolio are foundational in generating long-term value for our customers and shareholders.
Mike Dippold: As we look ahead, we are increasing investments to best capitalize on the abundant opportunities in front of us. With that, we are ready to take your questions.
Speaker Change: Ladies and gentlemen, if you have a question or comment at this time, please press star 1 1 on your telephone keypad.
Mike Dippold: If your question has been answered or you wish to remove yourself from the queue simply press star 1 1 again
Mike Dippold: Again, if you have a question or comment at this time, please press star 1 1 on your telephone keypad. Please stand by while we compile the Q&A roster.
Speaker Change: Our first question or comment comes from the line of Robert Stallard from Vertical Research. Mr. Stallard, your line is open.
Thanks so much. Good morning.
Good morning.
Speaker Change: A couple of questions from me. First of all for Bill, more of a big-picture question I suppose. Have you seen any impact as yet from the whole DOGE effort?
Speaker Change: or is everything at this stage still being focused on the Department of Defense and is yet to?
Speaker Change: flowed down. And then secondly, a technical question for Mike, there was a couple of one-off items in the fourth quarter. I wonder if you could elaborate on what those are.
Speaker Change: and if you've got any further adjustments anticipated in your 2025 guidance.
Thank you.
Speaker Change: Thanks, thanks Rob. With regard to Doge, no, I mean they
One, they haven't really reached the Department of Defense.
Speaker Change: They've really been focused on federal workforce and things like grants, which we're not in.
Speaker Change: part of either of those, so our focus as you really start the new administration is what are their strategic priorities and how is their 26 budget bill looking and so that that's really where we're focused.
Speaker Change: And Rob, the one-off adjustments, I'm assuming that you're referring to the the adjustments to the adjusted EBITDA, is that where the question is centered?
Rob: Yeah, that's right. In the back of the slide deck, there's a reconciliation.
what was the actual practical.
Rob: The only real change there is attributed to the currency shift that we had, so we put the FX impact.
Rob: Some of our balance sheet items that are adjusted in that line item, that's kind of the other non-operational events in that reconciliation. That's the only real change from what we've seen from a pacing item in prior quarters or the prior year.
Great, thanks for watching.
Speaker Change: Thank you. Our next question or comment comes from the line of Peter Armit from RW Baird. Mr. Armit, your line is open.
Yeah, thanks. Good morning, Bill, Mike, Steve. Nice results.
um
Speaker Change: When we think about, you know, your margin targets for 2026, and we know that Columbia has a favorable impact on that, what other areas, whether you want to talk about a program or a product area like force protection, what other areas are kind of helpful in the margin progression when we think about it outside of Columbia?
Yeah, it's some of the...
Smaller Sensing and Force Protection Programs.
Speaker Change: They're on a similar track to Columbia in that they're moving from a development phase into a production phase, so we're moving into a lower risk profile and generally a higher margin profile. And so, collectively, they're not as big as Columbia, but there's still, you know, a quarter or a third of that margin improvement.
Got it, that's helpful. And then just...
Speaker Change: on the, you know, the last couple quarters, you've mentioned, you know, the investments or the beyond the horizon radar, you know, kind of.
Speaker Change: investments that you're making, and you've also mentioned that you received a contract. What is the opportunity that you think about when you're in that area?
Speaker Change: Well I mean for us this is a move up the food chain and we're going from an area where we were really doing components to one where we've now gotten some prime contracts so that's an important step.
Speaker Change: And then this whole area is becoming more important. We're still assessing, or I think the administration is still assessing, what...
Speaker Change: this Iron Dome missile defense architecture is going to look like, but...
Speaker Change: over-the-horizon radar is certainly a candidate to be part of that. So there's, I think, some potential in with the new administration and the priorities they're bringing to missile defense for this growing area for us.
Okay, and then just lastly, quickly, on the...
Speaker Change: You know, you've got a high percentage of fixed price, so you seem to be set up well for this administration's focus. How do you see that evolving just with the rest of the industry, because a large percentage of the industry is half and half? How do you see the changes being implemented?
Well, I mean, I think...
Speaker Change: They're going to have to move to where we already are, which is, you know, we operated in a fixed price environment. I mean, I think you're referring to, we're about 85% fixed price now, which...
Speaker Change: It means you have to have a very good risk process. You have to be very careful in how you bid.
Speaker Change: you need to understand what the development risk means for production costs. That all has to go into the pricing and the bids. I think we've become quite good at that. I think the rest of the industry is now going to have to follow.
I appreciate the call. Thanks Bill.
Speaker Change: Thank you. Our next question or comment comes from the line of Andre Madrid from BTIG. Your line is open.
Yeah, so looking, I guess, at the IMS level.
Speaker Change: Obviously, continued strong demand there, and the Navy just released their latest renderings of what DGGX looks like. I mean, is any of this being factored into the 25 Outlook?
Speaker Change: and I guess just beyond that too, I know I feel like I've asked about this a lot, but how do things stand on KDDX and what can we expect there, if anything?
Speaker Change: Yeah, I started the last first under, I mean, KDDX is the same as before, we're actively engaged with the Korean customer, the shipyards, we've kept our bid updated, but we don't have a decision yet from the Korean customer. And we don't have a, you know, we think it's coming, but we do not have.
a timeline.
Speaker Change: With respect to DDGX, I think there is growing attention both in Congress and the Navy for the electric propulsion option.
Speaker Change: for that is meeting the growing requirements for electric power. It's no longer just driving the ship.
Speaker Change: with directed energy weapons. All of that's going to increase the power requirement, which
Speaker Change: drive you to electric. In terms of the timing, 2025 is a little early. The ship is really a 2030 ship. The decisions and the design and the development of
Speaker Change: The electric power system that we think will go into it will start I think in the next couple of years though
Speaker Change: Excellent. Thank you for the color, Bill. And if I could follow up and maybe pivot more to raw material supply. I know
Speaker Change: back in December trying to ban the export of germanium, and that's obviously a huge component or partial component into the sensing business.
Speaker Change: although I feel like a lot of attention has shifted more towards the supply of other materials ever since the Trump administration took hold so I'm trying to think is there are there any other materials that we might have to worry about in terms of sourcing and access?
Speaker Change: I would say in terms of our concern was that germanium You know continues to be our focus point as you alluded to we put the safety stock up there to protect against
Speaker Change: and absence of supply. We're not tapping into that yet because the supply is still is still available, but what we've seen is some volatility in the pricing.
Speaker Change: from an older material perspective right now and what has helped us from a growth perspective is
the stabilization and the predictability of the supply chain.
Speaker Change: Nothing that is jumping out as overly concerning. I think you're still in a position where...
Speaker Change: lead times and such are still elongated from what we saw in a pre-pandemic environment, but the predictability remains strong, the availability remains strong, so I think now there's not a lot outside of gymnasium that's keeping us up at night.
Speaker Change: Awesome, appreciate the color. Mike, Bill, I'll leave it there. Take care.
Thanks, Andre.
Speaker Change: Thank you. Our next question or comment comes from the line of Michael C. O'Morley from Truist Securities. Your line is open.
Speaker Change: Hey, morning guys. Good results. Thanks for taking the question. Hey, Bill, maybe not on Doge, and I know, you know, this news flow is pretty fast and furious, and we've got the 8% budget cuts, but I think the House Armed Services Committee was also asking the Pentagon.
Speaker Change: for a list of potential cuts by March 1st. And maybe it feels a little bit similar to the night court exercise back in 2019. You've got a lot more exposure to the Army. I don't know what 24 closed out at. But
Speaker Change: Do you see maybe, kind of, some of those Army revenues, ground systems, could that be a headwind for you guys, and just trying to figure out how that might be contemplated, you know, if it even is an impact in 25, or, you know, if Army does see more ground cuts, or
Speaker Change: whether it's warfighter systems, is that on your radar right now?
Speaker Change: Obviously, we're looking closely at what the new administration does. There's always going to be turbulence when you have a new administration. They reset the priorities, reset the whole team.
Speaker Change: and so on. We're right now, Michael, about 30 percent army give or take.
Speaker Change: Over the past 5 or 6 years, we have realigned. We used to be much, much heavier.
Speaker Change: Army and now actually Navy is larger, but I think the key is we're more balanced and the largest program we have is Columbia, the Navy program, that's 10%. Nothing else we have even approaches that. So as we go into this kind of budget
Speaker Change: environment, there's no single decision that is going to fundamentally change our direction. And then overall, you know, going back to your Army point,
Overall, we think we are, you know, we consciously targeted
Speaker Change: growth areas and all the services and particularly the Army. So thank
Speaker Change: Counter UAS, think artificial intelligence supported Computing, longer range sensing that you'll need in the Indo-Pakistan fight
Speaker Change: We think all of those are growth sectors. That's why we identified them. They were growth sectors in the first Trump administration. They were growth sectors in the Biden administration. And we think when the dust settles on the priorities of this new administration, there'll be growth sectors there, too. We're not in platforms where I think...
Speaker Change: We don't build platforms. I think that's the bigger vulnerability, and we're not in that area.
Speaker Change: Got it. That's helpful. And then just one on margins. I think you called out maybe, Mike, the IRAD investment in 2025. Can you just give us a sense of the magnitude there? I mean, you're still getting some pretty good margin expansion. I mean, you had a high watermark in the fourth quarter for
Speaker Change: For IMS, you know, just trying to get a sense, you know, kind of, yeah, what that R&D headwind investment is and, you know, if there's maybe anything preventing IMS from continuing to drive, you know, higher from here.
Speaker Change: Yeah, a couple things. I think you have it right first in that, you know, as we look at the margin expansion into 2025, IMF will be
is the key driver.
Speaker Change: of that on the back of Columbia, and that performance continues to go very well.
Speaker Change: The investment that we're looking at is we're certainly looking at increasing the investment. We're trying to increase
Speaker Change: I read about 20 dips as a percentage of revenue, so I think, you know, kind of a double-digit growth on our IRED number that exceeds the...
Speaker Change: the revenue growth by a pretty good margin. So we think it's going to be important to continue that investment, especially with the new administration's kind of emphasis on agility and, you know, kind of rapid prototyping and.
Speaker Change: and getting solutions in the hands of the warfighter quicker. And that's why I think we're going to pick up the investment a little bit to be able to be that active.
Okay, perfect. Thanks guys, I'll jump back in the queue.
Speaker Change: Thank you. Again, ladies and gentlemen, if you have a question or comment at this time, please press star 1-1 on your telephone keypad. Our next question or comment comes from the line of Ronald Epstein.
from Bank of America, Mr. Epstein, your line is open.
Ronald Epstein: Hey, good morning, guys. How are you? Given your experience, you know, running the company and then in the DoD, how are you thinking about this 8% reallocation?
Ronald Epstein: What could it be reallocated to and how is that impacting how you're thinking about running your business?
Well, I mean, I think they're...
Ronald Epstein: are assessing both sides of this, you know, it's a moving game so that
Ronald Epstein: So where the 8% is coming from is, you know, they're assembling right now. And I think where the 8% is going, they're similarly assembling right now.
Ronald Epstein: You know, the indications have been, I mean, the biggest one has been the executive order on Iron Dome. I think they want to put more money into missile defense. And it's missile defense broadly defined.
Iron Dome, you'd think the Israeli system, which is...
Ronald Epstein: the lower side of this. But I think they're thinking all the way up to space and then all the way back down to counter UAS.
Ronald Epstein: We're in much of that, so I think we see opportunities, I mentioned, over the horizon radar, you know, we counter UAS as one of our core mission areas, we're demonstrating our space capabilities in space.
Ronald Epstein: So I think that's an opportunity, and then I think the other big muscle movement, but I think it's hard yet to see all the programmatic implications, are the move to endopac reach.
You know, that's longer ranges.
It's a different set, more Air Force, more Navy.
Ronald Epstein: Although I would never, you need an army in every conceivable scenario, so I wouldn't understate that. But I think it's, you know, what are the programmatic implications of that? Beyond what, I mean, Biden, the Biden administration was focused on INDOPAC too, so it's kind of incrementally what are they doing more there? I think that, I think we're going to see in the coming weeks.
Ronald Epstein: Got it, got it, got it. And then, have you thought about, I mean, what implications does it have for you if we end up in a continuing resolution for fiscal 25, and maybe for a lot of the same reasons that we are in fiscal 26?
Ronald Epstein: I don't think we know where we are. I mean, you know, it's on 25. We, you know, there's always talk at this point in the process about a CR. We've never had one for defense. It's always, it's always possible. It would mean, you know, I think incremental cuts to programs.
Ronald Epstein: that's for us that would be probably more of a 26 issue than a 25 we have about 75% of our 25 revenues already in backlog so it's already contracted
Ronald Epstein: But 2026 is where you'd start to see a CR take hold.
Speaker Change: Got it, got it, got it, got it. And maybe just one last one for me. Given sort of the politics of what's going on right now with the Ukraine and Russia and what impact do you think that could have on foreign military sales, if any? You know, NATO is going to need more stuff but...
Speaker Change: One would assume NATO doesn't think they can count on us anymore. So, I mean, how do you think about the positives and negatives there?
Speaker Change: Well, it's hard to assess the last couple of days. I think longer term
Speaker Change: We've, you know, we saw it tick up in Ukraine, low single digits for us in terms of our revenue. We've been assuming.
Speaker Change: that that will go down in 25, and then we think it'll taper off. It'll go down in 25 and then probably down further in 26 as we move to a negotiation phase.
Speaker Change: In terms of, you know, the Europeans, I think, will be interested in buying American. I understand what you're saying about the, you know, kind of the...
transatlantic relationship.
Speaker Change: But, to the extent that this causes them to think they need things more urgently, they're going to look more to the U.S., because many of the things that we have...
Speaker Change: things like counter-UAS systems that we build were in production on them. They're still, to the extent that they have them, they're still developing. So if you wanted something urgently, you would have to look to this side of the Atlantic in many cases.
Got it, got it. Thank you very much.
Speaker Change: Thank you. Our next question or comment comes from the line of John Talenting from CJS Securities. Your line is open.
John Talenting: Most of them have already been answered, but I just wanted to touch on the investment by the Navy into Charleston. Could you talk about the opportunity there? I know it's far out, but what exactly are you expecting in terms of market size, are these steam turbines and other advanced components that are outside what you had previously envisioned, and are those at margins that are accretive, or does it come with the strings attached with the investments?
John Talenting: Let me start, John. I'll let Mike do a bit more of the number side here.
John Talenting: First of all, we think this is a major move by the Navy.
Mike Dippold: developed the Columbia, the Charleston facility to support the Columbia program, basically to insource, since we had a decade-long contract, we could execute that contract more efficiently. We had an option to expand and facilitize
that facility to support the submarine industrial base expansion.
Mike Dippold: is going to invest $45 million in that initiative. And initially, as you said, it would go to the steam turbine capacity. And that's a critical node in terms of expanding the number of submarines that we build per year.
Mike Dippold: That's a point. You have to be able to build steam turbines faster to build submarines faster.
Mike Dippold: bringing us on as a source along that and investing in that. We think that's a major move for the submarine industrial base. And of course, in the midterm, in a few years, that would be a major program for us.
Speaker Change: Yeah, let me just jump on what Bill said here. I think one of the key takeaways is we
Speaker Change: started this investment in South Carolina, we had a thesis that we can underwrite it based upon the efficiencies built into Columbia and that's moving along well. The other piece was that it was going to give us a seat at the table to expand the relationship with the Navy and really help from an industrial-based throughput perspective.
Speaker Change: the continued kind of trusted relationship that we have with the Navy on Columbia is showing them our commitment to this effort and I think that certainly helped us in terms of getting that seat at the table and expanding what we can offer in South Carolina. So when we think about this,
Speaker Change: It's going to be, you know, longer out, you know, probably beyond the next couple of years outside of some design, but this has the opportunity to be another tool in our toolbox from a scope of work perspective that contributes significantly to the revenue output as we look out, you know, five, six years.
Speaker Change: Okay, great. And then just to follow up to the margin question for heading into 26, I think at the midpoint of the guidance you're doing just under 13% even in margins this year. Could you just break down again the components of getting to that 14% in 26, especially with this stepped up R&D intensity?
Speaker Change: Yeah, and I'll zoom out a little bit just from our overall 2026 commitment since I was at the investor day, but
Speaker Change: Obviously, a lot of puts and takes since last March when we came out. On the revenue growth side, we're far exceeding the expectations of that mid-single-digit growth.
Speaker Change: And I'd like to remind that what we're saying now with this 6% to 9% growth range is on a much higher base. So from a revenue perspective...
Speaker Change: We are well outpacing our commitments that we laid out. On the profit side, it's been a little less linear, but the key element of that margin expansion has always been on the back of Columbia, and Columbia continues to execute very well.
Speaker Change: So although, you know, we're a little behind a straight linear progression to that 14%, we do remain committed to achieving those targets as we look out into 2026.
Okay, great. Thank you.
Speaker Change: I'm showing no additional questions in the queue at this time. I would like to turn the conference back over to management for any closing remarks.
Speaker Change: Thank you, Howard. Thank you all for your time this morning and your interest in DRS. Of course, if you have follow-up questions on the round, please don't hesitate to call or email me. We look forward to speaking to you all again soon. Have a great day.
Speaker Change: Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a wonderful day. Speakers stand by.
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Speaker Change: This is a story about a man who had a dream He had a dream that he was going to be a doctor He had a dream that he was going to be a doctor He had a dream that he was going to be a doctor This is a story about a man who had a dream
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