Q2 2025 Leonardo DRS Inc Earnings Call

Operator: Ladies and gentlemen, good day and welcome to the Leonardo DRS second quarter fiscal year 2025 earnings conference call. At this time, all participants are in a listen-only mode. 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 Stephen Vather, Senior Vice President of Investor Relations and Corporate Finance. Please go ahead.

Ladies and gentlemen, good day and welcome to the Leonardo DRS second quarter, fiscal year 2025 earnings conference call.

At this time, all participants are in a listen-only mode. 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 bather. Senior vice president of investor relations and corporate finance. Please go ahead.

Stephen Vather: Good morning and thanks for participating on today's quarterly earnings conference call. Joining me today are Bill Lynn, our Chairman and 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 will 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 guaranteed the 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.

Good morning and thanks for participating on today's sport.

Weekly earnings conference call joining me. Today are Bill Lynn, our chairman, and CEO and Mike the boulder CFO. We 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 in supplemental presentations.

Stephen Vather: You 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 will turn the call over to Bill. Bill?

Management may also make forward-looking statements during the call regarding future events anticipated, future Trends in the anticipated future performance of the company. The 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 10K and our other SEC filings, we undertake no obligation to update any of the 4 looking statements made on this call.

Bill Lynn: Thanks, Steve. Good morning and welcome, everyone, to the Leonardo DRS Q2 earnings call. Our second quarter results reflect sustained momentum in capturing customer demand, driving revenue growth, and expanding both profitability and margin. In the quarter, we secured $853 million in bookings, which is a 1.0 book-to-bill ratio for the quarter. We saw particular strength for electric power and propulsion, naval network computing, advanced infrared sensing, and ground systems technologies, all of which contributed meaningfully to Q2 bookings. Our total backlog stood at $8.6 billion, rising 9% year over year. Also noteworthy was that our funded backlog maintained a healthy double-digit growth rate in the quarter. We continue to expect a book-to-bill ratio greater than 1.0 for the full year, thanks to strong performance in the first half and consistent customer demand across the portfolio.

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 Gap 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 Q2 earnings call.

Our second quarter results, reflects the stained momentum and capturing customer demand driving Revenue, growth and expanding both, profitability and margin.

Which is a 1.0 book-to-bill ratio for the quarter.

We saw particular strength for our electric power and propulsion. Naval network computing, Advanced infrared sensing and ground systems technologies. All of which contributed meaningfully to Q2 bookings.

Our total backlog stood at 8.6 billion dollars Rising 9% year-over-year.

With that, our funded backlog maintained a healthy double-digit growth rate in the quarter.

Bill Lynn: Diving deeper into our quarterly financial performance, we delivered double-digit organic revenue growth, squarely in line with the framework shared on the last call. Furthermore, the foundation built in the year to date is leading us to increase our full-year revenue growth expectations to 9% to 11%. Our profit metrics also showed strong performance. Adjusted EBITDA was up 17%, corresponding margin increased by 70 basis points, and adjusted diluted EPS was up 28%. In aggregate, our strong Q2 results position us well to meet our full-year outlook. That said, the team and I remain focused on disciplined program execution, investing for future growth, and navigating a complex operational environment. We continue to operate in a dynamic macro backdrop, one that remains largely favorable to Leonardo DRS, though not without its complexities. Let me begin with the positives.

We continue to expect a book to build ratio greater than 1.0 for the full year. Thanks to strong performance in the first half and consistent customer demand across the portfolio.

Diving deeper into our quarterly financial performance. We delivered double digit organic Revenue growth squarely in line with the framework shared on the last call.

Furthermore, the foundation built in the year to date is leading us to increase our full year. Revenue growth expectations to 9% to 11%.

Our profit metrics also showed strong performance, adjusted ibida was up. 17% corresponding margin, increase by 70 basis points and adjusted diluted EPS was up. 28%

An aggregate, our strong Q2 results position us well to meet our full year outlook.

That said, the team and I remain focused on the discipline program, execution, investing for future growth, and navigating a complex operational environment.

Bill Lynn: Earlier this month, the One Big Beautiful Bill Act was enacted, a sweeping tax reconciliation package that includes $150 billion in defense funding, with $113 billion front-loaded into FY26. This legislation represents significant opportunities and tailwinds for Leonardo DRS. The funding emphasizes the following: shipbuilding and enhancing industrial-based resiliency, layered strategic air and missile defense, including initial funding for the Golden Dome Initiative, counter-UAS and unmanned systems, electronic warfare, missiles and munitions, and more broadly, greater investment in innovation to enhance asymmetric capabilities. Our portfolio is well aligned with these national priorities, and we expect a benefit across the company as this funding is obligated over the coming years. Additionally, the administration's FY26 defense budget request calls for $962 billion in total defense spending, including the reconciliation funding, which in total represents a 12% increase year over year.

We continue to operate in a dynamic macro backdrop, one that remains largely favorable to DRS, though not without its complexities. Let me begin with the positives. Earlier this month, the big, beautiful bill act was enacted, a sweeping tax reconciliation package that includes $150 billion in defense funding, with $113 billion front-loaded into FY26. This legislation represents significant opportunities and a tailwind for DRS.

the funding emphasizes the following.

Ship building and enhancing industrial base resiliency.

Layered Strategic Air and missile defense, including initial funding for the golden dome initiative.

Counter UAS and unmanned systems. Electronic warfare.

Missiles and munitions, and more broadly, greater investment in innovation to enhance asymmetric capabilities.

Our portfolio is well aligned with these National priorities and we expect to benefit the company as this funding is obligated over the coming years.

Bill Lynn: Beyond the U.S., global defense spending continues to rise amid ongoing geopolitical tensions. Notably, NATO members are now targeting 5% of GDP for national security, with 3.5% dedicated to defense, a sharp increase from the longstanding 2% benchmark. This trend is expected to support incremental international demand, particularly for our ready-now differentiated capabilities. The intensifying global threat landscape is especially acute for our operations and employees in Israel. We are grateful to report that all employees in the region are currently safe. We are closely monitoring the situation and are taking proactive steps to enhance employee safety and operational continuity. Shifting to supply chain, while our overall supply chain remains relatively healthy, germanium availability and pricing remain a thorny issue. Export restrictions have constrained the available global supply of this raw material. Unfortunately, new mining and refining capacity has also been slower to ramp.

Additionally the administration's FY 2692 billion dollars in total defense spending including the reconciliation funding which in total represents a 12%, increase year-over-year.

In the US Global defense spending continues to rise amid ongoing geopolitical tensions.

Notably, NATO members are now targeting 5% of GDP for national security, with 3.5% dedicated to defense—a sharp increase from the long-standing 2% benchmark.

This trend is expected to support incremental, International demand, particularly for our ready. Now, differentiated capabilities

The intensifying global threat landscape is especially acute for our operations and employees in Israel.

We are grateful for a report that all employees in the region are currently safe.

We are closely monitoring the situation and are taking proactive steps to enhance employee safety and operational continuity.

Shifting to supply chain, while our overall supply chain remains relatively healthy, geranium availability and pricing remain a thorny issue.

Bill Lynn: We are currently relying on our safety stock, which provides sufficient runway through most of the year. However, in order to sustain timely product deliveries, material flow must improve in the second half. We are actively mitigating the germanium availability challenge through a multipronged approach. We expect these mitigation efforts to offer more meaningful relief in 2026. Onto tariffs. The temporary reprieve granted by the administration is set to expire later this week. As previously discussed, we expect to be largely insulated from direct impacts, particularly for inputs where cost increases can be clearly tied to tariffs. However, second-order risks persist, including the potential for retaliatory trade restrictions on items such as critical minerals. Despite the complexities of the macro environment, Leonardo DRS continues to innovate and deliver cutting-edge technologies to meet the evolving needs of our customers.

Export restrictions have constrained the available Global Supply of this raw material. Unfortunately, new mining and refining capacity is also been slower to ramp

We are currently relying on our safety stock, which provides sufficient Runway, through most of the year. However, in order to sustain timely product, deliveries material flow must improve in the second half.

We are actively mitigating the geranium availability challenge through a multi-pronged approach. We expect these mitigation efforts to offer more meaningful relief in 2026.

On to tariffs.

The temporary reprieve granted by the administration is set to expire later this week.

Previously discussed, we expect to be largely insulated from direct impacts, particularly for inputs or cost increases can be clearly tied to tariffs.

however, our second order risks persist, including the potential for retaliatory trade restrictions on items, such as critical minerals,

Bill Lynn: This quarter, we delivered advanced infrared sensing content for the next-generation short-range interceptor or Stinger replacement, as well as other future missile systems. These sensors provide a distinct operational advantage, offering higher resolution, improved countermeasure resilience, lower cost, and enhanced overall performance. We are also seeing growing opportunities to integrate our mobile power generation solutions into new missile systems. Overall, I am pleased with our ability to broaden the applicability of our infrared sensing expertise into this logical adjacency. Amid rising strategic and tactical threats, there is heightened focus on building resilient, multi-layered air defense architectures. Golden Dome is a critical part of this effort. Our portfolio, including our over-the-horizon radar and tactical radar technologies, as well as counter-UAS capabilities, is highly relevant and well positioned to support this demand.

DRS continues to innovate and deliver Cutting Edge Technologies to meet the evolving needs of our customers.

This quarter, we delivered advanced infrared sensing content for the Next Generation Short-Range Interceptor, which will replace the Stinger as well as other future missile systems.

These sensors provide a distinct operational Advantage, offering higher resolution improved countermeasure resilience, lower cost and enhanced overall performance.

We're also seeing growing opportunities to integrate our mobile power generation solutions into new missile systems.

overall, I am pleased with our ability to broaden the applicability of our infrared sensing expertise into this logical adjacency

amid Rising strategic and tactical threats.

There is heightened focus on building resilient multi-layered air defense architectures. The Golden Dome is a critical part of this effort.

Bill Lynn: Additionally, some of our increased internal research and development investment is being directed toward further demonstrating and maturing our space sensing capabilities. We believe we have a highly differentiated offering that can provide customers added capability in space-based missile tracking and intercept. We are committed to securing competitive successes in this domain. The persistent threat environment is driving escalation in customer interest and an expansion of existing contracts across each of the capability areas I noted earlier. Our tactical radar offering has maintained strong international demand as allied nations look to reinforce their short-range air defense posture. At the same time, we are seeing rapid expansion in counter-UAS opportunities across the company. Leonardo DRS not only offers industry-leading tactical radars for these missions, but also a comprehensive technology suite, including infrared sensors, laser, and RF systems, along with platform integration expertise to deliver best-of-breed solutions.

Our portfolio, including our Over the Horizon radar and tactical radar Technologies as well as counter uas capabilities as highly relevant and well positioned to support this demand.

Additionally, some of our increase, internal research and development investment is being directed toward further, demonstrated and maturing our space, sensing capabilities.

We believe we have a highly differentiated offering that can provide, customers added capability and space-based missile, tracking and intercept.

We are committed to securing competitive successes in this domain.

The persistent threat. Environment is driving escalation of customer interest and an expansion of existing contracts.

Across each of the capability areas, I noted earlier.

Our tactical radar offering is maintained strong. International demand as Allied Nations look to reinforce their short-range air defense. Posture the same time we're seeing rapid expansion in counter uas opportunities across the country.

BRS not only offers industry-leading tactical Radars for these missions but also a comprehensive technology Suite including infrared sensors laser and RF systems along with platform, integration expertise to deliver best of breed Solutions.

Bill Lynn: Customer focus on counter-UAS is here to stay, and its importance is only growing, as evidenced by the recent launch of a joint interagency task force to tackle this ongoing threat. Beyond sensing and force protection, our network computing business plays a critical role in enabling next-generation shipboard computing, supporting both U.S. and allied naval modernization initiatives. Our proprietary ice-piercer cooling technology is starting to gain traction, especially as customers seek to increase computing density and system performance in constrained platforms. Lastly, to round out my operational updates, I want to briefly touch on our electric power and propulsion business. This part of DRS continues to perform exceptionally well, serving as a consistent financial tailwind, propelling both top-line growth and margin expansion.

Customer focus on counter. Uas is here to stay and it's important is only growing as evidenced by the recent launch of a joint inter agency task force to tackle this ongoing threat.

Beyond sensing and force protection our network computing, business plays a critical role in enabling Next Generation chipboard Computing, supporting both us and Allied Naval modernization initiatives.

Our proprietary ice, piercer cooling technology is starting to gain traction, especially as customers seek to increase Computing, density and system performance and constrain platforms.

Lastly, to round out my operational updates, I want to briefly touch on our electric power and propulsion business.

Bill Lynn: We are well positioned to capitalize on medium and long-term opportunities tied to next-generation platforms and to expand platform content in support of the priority to improve shipbuilding throughput. Our Q2 financial results reflect the strength of our portfolio and growing demand for our differentiated capabilities in a rapidly evolving threat environment. We have solid momentum in bookings and a remarkable backlog that provides ample runway visibility into enhanced revenue growth. That said, we remain rigorously focused on execution to continue delivering for our customers. Our success to date is a testament to the hard work of our team, and we are committed to building on this foundation in the second half of the year. Let me now turn the call over to Mike, who will review the second quarter and our revised 2025 guidance in greater detail.

This part of DRS continues to perform exceptionally well serving as a consistent Financial Tailwind propelling. Both Topline growth and margin expansion

We are well, positioned to capitalize on medium and long-term opportunities tied, to Next Generation platforms. And to expand platform content in support of the priority to improve ship building through wood.

Our Q2 Financial results. Reflect the strength of our portfolio and growing demand for our differentiated capabilities in a rapidly evolving threat environment.

We have solid momentum and bookings and a remarkable backlog. That provides ample Runway, visibility into enhanced Revenue growth.

That said, we remain rigorously focused on execution to continue delivering for our customers.

Our success to date is a testament to the hard work of our team and we are committed to building on this foundation in the second half of the year.

Mike Dippold: Thanks, Bill. I am pleased with our year-to-date performance. We had a solid quarter, but we are keeping focus on consistent execution to deliver against our full-year financial objectives. Let me begin by reviewing Q2 performance. Revenue for the quarter was $829 million, 10% higher year over year. The strong continued organic growth is fueling our ability to raise our guidance for the full year, which I will discuss shortly. Both segments had relatively balanced contributions to our increased quarterly revenue. The IMF segment and the company in total benefited from greater revenues from electric power and propulsion programs. Advanced infrared sensing and ground network computing programs bolstered growth at ASC as well as at DRS at large. Moving now to adjusted EBITDA, adjusted EBITDA in the quarter was $96 million, up 17% from last year.

I mean, after the call over to Mike, who will review the second quarter and our revised 2025 guidance in Greater detail.

Thanks, Bill. I am pleased with our year-to-date performance. We had a solid quarter, but we are keeping focus on consistent execution to deliver against our full-year financial objectives.

Let me Begin by reviewing, Q2 performance.

Revenue for the quarter was 829 million, 10%, higher year-over-year, the strong continued organic growth. It's fueling our ability to raise our guidance, for the full year, which I will discuss shortly.

Both segments had relatively balanced contribution to our increase quarterly Revenue.

The IMF segment and the company in total benefited from greater revenues from Electric power and propulsion programs.

Advanced infrared, sensing and ground network computing programs. Both through growth at ASC as well as at DRS at Large.

Mike Dippold: Adjusted EBITDA margin in Q2 was 11.6%, representing a 70 basis points of margin expansion compared to last year. The increased margin was from higher volume and improved profitability at our electric power and propulsion business, most notably on our Columbia class program. Shifting to the segment view, ASC adjusted EBITDA increased by 5%, but margin contracted by 50 basis points due to greater internal research and development investment, along with less favorable program mix and less efficient program execution caused by rising raw material costs, namely germanium. IMF adjusted EBITDA was up 41%, and margin expanded by 290 basis points, thanks to improved profitability on our Columbia class program and across the rest of the electric power and propulsion business. On to the bottom line metrics. Second quarter net earnings were $54 million, and diluted EPS was $0.20 a share, up 42% and 43% respectively.

Adjusted. Eva margin and Q2 was 11.6%, representing a 70 basis points of margin expansion compared to last year.

The increased margin was from higher volume and improved profitability at our electric power propulsion business. Most notably on our Columbia class program

Shifting to the segment View.

ASC adjusted IBA increased by 5%, but margin contracted by 50 basis points due to greater internal research and development investment. Along with less favorable program mix and less efficient program execution caused by rising raw material costs, namely geranium.

IMS, adjusted ibida was up 41% and margin expanded by 290 basis points. Thanks to improved profitability on our Columbia class program and across the rest of the electric power and propulsion business.

On to the bottom line metrics.

Mike Dippold: Our adjusted net earnings of $62 million and adjusted diluted EPS of $0.23 a share were up 32% and 28% respectively. Solid core operating performance, coupled with reduced interest expense, led to favorable year-over-year comparisons. Moving to free cash flow, although our quarterly cash usage was higher than this time last year, it was in line with our expectations as we anticipated increased working capital levels to fuel growth in the second half of the year. Despite higher capital expenditure investment in 2025, our first half free cash outflow showed a clear year-over-year improvement that reflects enhanced profitability and a more efficient working capital position. Halfway through the year, we are revising our full-year 2025 guidance across our key metrics. We are increasing the range of revenue to $3.525 to $3.6 billion and flying a 9% to 11% year-over-year growth.

Second quarter, net earnings for 54 million and diluted EPS was 20 cents. A share up 42% and 43% respectively.

Our adjusted net earnings of 62 million and adjusted diluted EPS of 23 cents a share. We're up 32% and 28% respectively

Solid core operating performance coupled with reduced interest expense led to favorable year-over-year comparisons.

Moving to free cash flow.

Although our quarterly cash usage was higher than this time last year, it was in line with our expectations. As we anticipated increased working capital levels to fuel growth in the second half of the year.

Despite how higher capital expenditure investments in 2025, our first half free cash, outflow shows, a clear year-over-year Improvement, that reflects enhanced profitability and a more efficient working capital position.

Halfway through the year. We are revising our full year 2025 guidance across our key metrics

Mike Dippold: We have solid backlog visibility for the balance of the year, with a modest portion of our revenues coming from book-to-bill programs. Approximately 90% of our full-year revenue has been realized or is in backlog. Given the healthy visibility, the timing of material receipts will be the most important factor in determining the level of our revenue output. We are also narrowing the range of adjusted EBITDA. The revised range is expected to be between $437 and $453 million. At this time, we expect IMF to offer more growth and margin improvement opportunity relative to ASC. The guidance adjustments to revenue and adjusted EBITDA result in a reduced implied margin expansion for the year. This is due to two factors. One, we are increasing R&D investment well above plan, and two, we are seeing increased raw material input costs, namely related to germanium.

We are increasing the range of Revenue to 3.525 to 3.6 billion and flying in 9% to 11% year-over-year growth.

We have solid backlog visibility for the balance of the year with a modest portion of our Revenue coming from book to Bill programs.

Approximately 90% of our full year, Revenue has been realized or is in backlog.

Given the healthy visibility. The timing of material receipts will be the most important factor in determining the level of our Revenue output.

We are also narrowing the range of adjusted ibitta.

The revised range and expected to be between 437 and 453 million.

At this time, we expect IMS to offer more growth and margin Improvement opportunity relative to ASC.

The guidance adjustments do revenue and adjusted. Evita result in a reduced, implied margin expansion for the Year. This is due to 2 factors 1. We are increasing R&D investment while above plan and 2. We are seeing increased raw material input costs. Namely related to geranium.

Mike Dippold: Our revised adjusted diluted EPS range incorporates the tailwinds from increased core profitability, lower net interest expense, and a reduced diluted share count. We now expect adjusted diluted EPS between $1.06 and $1.11 a share. Assumed in these figures is a tax rate of 19%, which is unchanged from our prior guide, and a $269 million fully diluted share count, lower than our prior guide as we factor in the impact of stocker purchases. With respect to free cash flow conversion, we still anticipate approximately 80% conversion of our adjusted net earnings for the full year. The recently enacted tax legislation is expected to offer limited benefit to our 2025 free cash flow, but it will be a modest tailwind in 2026 and beyond. That said, we are still working to quantify the specific impact. Now let me offer up our framework for the third quarter.

Our revised adjusted diluted EPS range, incorporates the Tailwind from increased core profitability, lower, net, interest expense, and a reduced diluted Share account.

We now expect adjusted diluted EPS between a dollar 6 and a dollar 11 cents a share.

Assumed in these figures is the tax rate of 19% which is unchanged from our prior guide and a 269 million fully diluted share count lower than our prior guide as we factor in the impact of stock or purchases.

With respect to free cash flow conversion. We still anticipate approximately 80% conversion of our adjusted net earnings for the full year.

The recently enacted tax legislation is expected to offer limited benefit to our 2025, free cash flow. But it will be a modest Tailwind in 2026. And beyond that said, we are still working to quantify the specific impact.

Mike Dippold: We expect revenue in the neighborhood of approximately $925 million, adjusted EBITDA margin in the mid-12% range, and free cash flow generation comparable to Q3 of 2024. Please note the timing of material receipts will weigh heavily on how the second half is allocated on a quarterly basis. Let me offer some closing thoughts before we take questions. I want to extend my gratitude to the broader DRS team. Our financial success is a direct result of their incredible efforts and unwavering commitment. As we navigate an increasingly complex global environment, we remain consistently focused on delivering exceptional technology to our customers, executing with excellence, and driving sustainable long-term growth. With that, we are ready to take your questions.

Now, let me offer up our framework for the third quarter.

We expect Revenue in the neighborhood of approximately 925 million adjusted epita margin in the mid 12% range and free cash flow generation comparable to Q3 of 2024.

Please note that timing of material seats, receipts will weigh heavily on how the second half is allocated on a quarterly basis.

Let me offer some closing thoughts. Before we take questions, I want to extend my gratitude to the broader DRS team. Our financial success is a direct result of their incredible efforts and unwavering commitment.

As we navigate and increasingly complex global environment, we remain consistently focused on delivering exceptional technology to our customers executing with excellence and driving sustainable. Long-term growth

With that, we are ready to take your questions.

Operator: Thank you. To ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, press star 11 again. Due to time restraints, we ask that you please limit yourself to one question and one follow-up question. Please stand by while we compile the Q&A roster. Our first question will come from the line of Peter Arment with Baird. Your line is open.

Thank you to ask a question. Please press star, 1, 1 1 on your telephone, and wait for your name to be announced.

So withdraw, your question, press star, 1 1 1 again, due to time restraints, we ask that you please limit yourself to 1 question and 1. Follow-up question, please. Stand by while we compile the Q&A roster,

And our first question will come from the line of Peter Armen with beard. Your line is open.

Peter Arment: Yeah. Hey, good morning, Bill, Mike, Steve. Nice results. Hey, Bill, thanks for the color on kind of Golden Dome and how you're positioned. Maybe if I could just ask, when do you expect? I know the architecture hasn't been fully laid out with General Goodlon. I'm just getting the assignment. But how do you expect it to kind of roll out in terms of impacting your backlog? When should we start to see kind of some of the programs that you might be well positioned on?

Yeah. Hey, good morning Bill like Steve. Uh, nice results. Um, Bill thanks. Thanks for the caller on on, kind of golden dome and how, how, how your position maybe if I could just ask when you expect, uh, you know, I know the architecture hasn't been fully laid out, uh, with General Google. I'm just, just getting the the assignment but, uh, how do you, how do you expect it to kind of roll out in terms of impacting, your, you know, your backlog? Once we start to see kind of some of the programs that you might be well, positioned on?

Bill Lynn: Yeah, thanks, Peter. As you said, they're just organizing themselves on the architecture. There are industry meetings starting, and the department has an internal effort to lay out an architecture. So I think that means you won't see much in the way of bookings or orders this year in calendar 2025. But I think given that they're trying to really focus on doing things in this presidential term, you'll start to see orders roll out in the 2026 timeframe.

Yeah, thanks Peter. I mean I I as you said, they're just uh organizing themselves on the on the architecture. There are industry meetings uh, starting in the department, as an internal effort to uh, lay out an architecture. So I think that means you won't see much in the way of booking or orders this year and in calendar, 2, 5 t h.

Peter Arment: Okay, appreciate that. Just as my follow-up, could you talk maybe a little bit about the M&A environment? I know you've had interest there in the past. Are you seeing more deals just given where funding is and any update there? Thanks.

Okay, and just says my follow-up. Um, just could you talk, maybe a little bit about, um, you know, the m&a environment. I know you've had interests there in the past and just, you know, uh, are you seeing more deals? Just given, uh, you know where funding is and and any any update there thanks?

Bill Lynn: Yeah, I mean, we're, as you know, we're in the market. We're looking, we're doing diligence. We're seeing a continual flow of things in those four core markets where we're focused. We have been active. I'd say the only change we're seeing is given the interest in the sector, I think prices are pushing up. So I think that's been a factor here. We're having to assess our financial criteria, which are relatively strict, although we're open to things. The closer they are strategically to our main areas of focus, the more we're willing to extend on financial criteria. That's what's going on right now is that strategic focus. We are seeing properties that would be interesting there. The prices are relatively high.

Yeah, I mean we're we're as, as you know, we're in the market, we're looking, we're doing diligence, uh, we're seeing a continual flow of of things in our those 4 core markets, where, uh, we're focused. Uh we have been active, I'd say the only change we're seeing is given the interest in the sector. I think prices are are pushing up. Uh, so I think that's uh, that's been a a factor here. Uh, we're we're having to assess our financial, uh, criteria which are relatively strict, although, we're, we're open to, uh, things. What the, the closer they are strategically to our main, uh, areas of focus. The more we're willing to, uh, uh, extend on on financial criteria. And that's, that's the, uh, what what's going on right now is that that strategic Focus we are seeing, uh, properties. That would be interesting there. Uh,

The prices are relatively High.

Peter Arment: Got it. I will jump back in the queue. Thanks, Bill.

Got it. I'll jump back in a few. Thanks Bill.

Operator: One moment for our next question. That will come from the line of Robert Stallard with Vertical Research. Your line is open.

And 1 moment for our next question.

and that will come from the line of Robert Stallard, with vertical research, your line is open

Peter Arment: Thanks so much. Good morning.

Thanks so much. Good morning.

Robert Stallard: Morning.

Peter Arment: Good morning. A couple for you. First of all, I was wondering if we could dig into this whole germanium thing and what's going on there. You know, how much of a headwind has it been so far this year? What are you expecting in the second half? What is this metal used for in terms of your products? Then secondly, maybe following up on Peter's question, I was wondering if you could elaborate on this flexibility on looking at M&A. Does this mean you might be open to using equity, for example? Are you looking at a different return metric in terms of when the deal might pay off? That would be helpful. Thank you.

Morning. Um,

A couple for you. First of all, I was wondering if we could dig into this whole geranium thing. Um, and what's going on there? Um, you know, how much of a headwind has it been so far this year? What are you expecting in the second half? Uh, and what is what is this um metal used for uh in terms of your products? And then secondly um maybe following up on on Peter's question as if we could you could elaborate on this flexibility uh on looking at m&a. Does this mean you might be open to using equity? For example, are you looking at a different return metric in terms of when a deal might pay off? That would be helpful. Thank you.

Bill Lynn: Peter, let me, Peter, sorry, Rob, let me start on germanium, and then let Mike expand on. On germanium, what has happened is, given the tension with China, the source of most of the germanium in the world, the supply has reduced to a trickle. We anticipated this in the sense that we built up a safety stock, and we are now having to utilize that safety stock. That has been effective for us, but it has caused prices to increase. It has also caused us to seek other sources of germanium outside China. So we are looking at other countries as sources of germanium. We are looking at other customers. There is an ability to recycle out of existing products.

Yeah, uh, Peter let me uh, sorry Rob. Let me start on on geranium and then let Mike expand on. I I'm geranium. You know, what's happened is given the tension with China. Uh, the source of most of the germanium and the world is the supply has has reduced to a triple. Uh, we anticipated this to, uh, in the sense that we built up a safety stock. And we're now having to utilize uh, that Safety stock uh, that has, you know, that has been effective for us, but it has caused uh, uh, prices.

Bill Lynn: Then there are opportunities on some products we could use something other than germanium, although that requires at least a couple of months' work in terms of redesign, requalifying. It is not overly taxing, but there is a timeline. We are pursuing all of those with a target of 2026 to bring some or all of those online. Let me let Mike address your question on the fiscal impacts.

Mike Dippold: Yeah, so Rob, first, you had a question in terms of what products are these used for. This is going through our infrared product line. So in our advanced sensing and computing business, but more focused on our infrared sensing capabilities, that is where you see this metal being used. For the impact, we spoke a little bit about last quarter in terms of the price shock that we saw because of the supply and demand elements that were in play. We made the comment that absent the germanium impact, that the margins of ASC would have been in line in Q1 with expectations. We looked into Q2 here, and the prices remained fairly stable.

Or that this is going through our infrared product line. So in our Advanced sensing and Computing business, but more uh, focused on our infrared, sensing capabilities, that's where you see this metal being used, uh, for the impact. Uh, we we spoke a little bit about last quarter in terms of the, the price shock that we saw because of the uh, Supply demand elements that were were in play. Uh, and we made the comment that, you know, absent the the

Mike Dippold: What we are seeing is as that availability becomes a concern later in the year, we have had some absorption issues and some overhead rates that have impacted a little bit more than we had anticipated in Q1. So that is what we are looking at from an impact perspective. All of that is now incorporated into the revised guide that we put forth.

Geranium impact that the, the margins of ASC would have been in line. Uh, in, in q1, with expectations, we looked into Q2 here and the prices remained fairly stable, but what we're seeing is as that availability becomes a concern later in the year, we've had some absorption issues and some some overhead rates that have impacted, uh, a little bit more than, than we, uh, had anticipated in q1. So that's that's what we're looking at, from, from a impact, uh perspective. All of that is down incorporated into uh, into the revised guide that we put forth.

Bill Lynn: Rob, I'd like to come back on your M&A question, the financial. We have three financial metrics: EPS, ROIC, and then our overall margin in growth. On EPS, we expect it to be accretive in the first year. There's a little flex there, but probably not. We will look. ROIC, we're looking at a multi-year return. I think there we would have flex. I think things that would take maybe a little bit longer to bring a positive contribution to ROIC, we're willing to kind of go beyond our notional three-year window, looking four years, five years. I think that would be well within something we'd find acceptable. The other is more general. We have, I think, a very strong, right now double-digit growth story. We have a margin enhancement story. I don't think we are now changing our approach there.

Yeah. Robin come back on your, your m&a. Question, on the the financial, we have 3, Financial metrics, uh, EPs roic, and then our overall margin and growth, uh, on EPS, we expect it to be a creative in the first year. I, I there there's a little Flex there, but probably not all we we without, we will look, our OIC were looking at at a multi-year, uh, return. I think there we would have Flex. I think things that, uh, would take maybe a little bit longer to, uh, bring a positive.

Uh, contribution to roic, we're willing to kind of go belong, beyond our notional 3-year, uh, window, looking for years, 5 years. I think that would be, uh, well within, uh,

Bill Lynn: We don't want to undercut that story with a significant acquisition, and that really hasn't changed. The change is I think we'll be more flexible on ROIC.

Peter Arment: Okay, that's great. Thank you very much.

Something we'd find acceptable and the other is more General. We have a, I think a very strong, you know, right now? Double digit, growth story. Uh, we have a margin enhancement story. I don't think we are now changing, uh, our approach there. We don't want to undercut that story with the, with the significant acquisition and that really hasn't changed. So, the change is, is I think will be more flexible on roic.

Okay, that's great. Thank you very much.

Operator: One moment for our next question. That will come from the line of Michael Ciarmoli with Truist Securities. Your line is open.

And 1 moment for our next question.

Michael Ciarmoli: Hey, good morning, guys. Thanks for taking the question. Bill, maybe just a little bit more clarification on what Pete was asking about Golden Dome. I mean, you know, thinking about timing of water flow, does that kind of stand for already deployed existing systems, or is this kind of, are you talking architecture for some of the newer kind of systems and capabilities that might be deployed?

That will come from the line of Michael to your Molly with Truist Securities. Your line is open.

Hey, uh, good.

A question.

Was asking about the Golden Dome. I mean, you know, thinking about the timing of order flow, does that kind of stand for already deployed existing systems, or is this kind of, are you talking architecture for some of the newer kinds of systems and capabilities that might be deployed?

Bill Lynn: Right. It is a little hard to be specific because they do not even have a program yet. I think, directionally, the first orders would have to be on existing systems, just given the timing. You are going to have to develop, it will take longer time to develop first the requirements, then the RFP, and then the competition for future-oriented. I think what is behind your question is right. The early orders are likely to come from something that has some maturity, that is already something that can be produced.

Right? It's a little hard to be specific because they they don't even have a, a a program yet. But I think you know, directionally I think the the first order is would have to be on existing systems, just, uh, given the timing and I is you're going to have to develop. It will take longer time to

Develop first, the the requirements, and then the RFP and then the, uh, uh, the competition for the future oriented. So I think you're you're

What's behind your question is, right? The early orders are likely to come from, some something that has some maturity, some, that's already, uh, something that can be produced.

Michael Ciarmoli: Got it. Okay. Just if I may, just because you used to be in the building, you know, this is obviously a unique and dynamic budget environment. We are getting a big bump up in front-end load here with reconciliation, but we do not have a fight-up yet. How are you guys thinking about, you know, just budget and trajectory longer term and maybe, kind of, like I said, just drawing on your experience from being in the building?

Okay. And then just if I may just because you

To be in the building.

Obviously.

Dynamic budget environment. We're getting the big bump up in front end load here with reconciliation. But we, we don't have a fight it yet. How how are you guys thinking about, you know, just budget and trajectory longer term and maybe, you know, kind of, like I said, just drawing on your experience from being in the building,

Bill Lynn: Yeah, it is actually not unusual at this point not to have a fight-up. Usually, a new administration just puts out a first-year budget and is in the middle, as they are, of their strategic plan. Obviously, what they have done so far, they really inherited from Biden. It takes some months to develop that strategic plan, which they are doing. I would not expect to see a fight-up until the next budget, which is February. That is not unusual. In terms of what to expect, there are lots of puts and takes in the reconciliation bill. I think, if you look at just general historical trends and tendencies, when you move from a Democratic to a Republican administration, normally what you see is a modest, at least, bump up in the overall defense spending.

Yeah, it it's actually not unusual at this point, not to have a fight up. Uh, you usually a new Administration just puts out a first year budget and is in the middle, as they are of their kind of their strategic plan. Obviously, what they, what they have done so far they really inherited from from Biden. It takes some months to develop that strategic plan, which they're doing. So I wouldn't expect to see a fight up until the next budget, which is February. Uh, but that's, that's not unusual in terms of what to expect. Uh, I mean there's lots of puts and takes in the reconciliation bill.

Bill Lynn: Generally, politically, a Republican administration sees itself as stronger on defense, wants to show that in the budget. Second, they have more initiatives. Multiple questioners have mentioned Golden Dome, but there is force protection, there is shipbuilding. There are programmatic reasons to increase the budget. I think at the end of the day, when the smoke clears, you will see a Trump budget that over time is moderately higher than its Biden predecessor.

Overall, defense spending is generally viewed as a priority by Republican administrations, which see themselves as stronger on defense and want to reflect that in the budget.

Michael Ciarmoli: Got it. Okay. Good call, Bill. I will jump back in the queue here.

And then second, they have more initiatives. You know, multiple questions have mentioned the Golden Dome, but there's force protection. There's shipbuilding; there are programmatic reasons to increase the budget. So I think at the end of the day, when the smoke clears, you'll see a Trump budget that, over time, is moderately higher than its Biden predecessor.

Got it. Okay, could call it Bill. I'll jump back in the queue here.

Operator: One moment for our next question. That will come from the line of Stephen Vather with J.P. Morgan. Your line is open.

1 moment for our next question.

And that will come from the line of Steph Siman with JP Morgan. Your line is open.

Peter Arment: Thanks very much, and good morning. I wanted to ask, you know, you talked about performance, good performance in electric power and propulsion, and about the opportunities there that may be capitalized on what is coming into the resources coming into the industrial base. I wonder if you could be more specific around where you see opportunities. Do those opportunities come out of the new facility in Charleston primarily? And what the timeline for capitalizing on some of those opportunities might be?

Uh, thanks very much and, uh, good morning. Um, wanted to ask the, uh, you know, you talked about performance, good performance in, um, electric power and propulsion and about the opportunities there, uh, that may be to capitalize on, um, what's coming into the, the resources coming into the, the industrial base. Um, yeah. I wonder if if you could be more specific around, kind of where you see opportunities, you know, do those opportunities come out

Of the new facility in Charleston primarily. And, um, you know what, the timeline for, um, capitalizing on some of those opportunities might be.

Bill Lynn: Sure, Seth. I will start and then let Mike add some more color. First of all, the core program, of course, in our naval powers is Columbia, which is secured through the middle of the next decade and is on a steady increase. We are using that South Carolina facility to execute that program with greater and greater efficiency, which should be a tailwind on margin. Beyond that, which is really what I think you are asking, we see that facility and our overall capabilities generally as well positioned to help the Navy surge content into the industrial base with the goal of particularly increasing the throughput of submarines where we have important content beyond just Columbia. In particular, I would say the first of those opportunities is in the area of steam turbine generators.

Bill Lynn: The Navy has now given us $50 million of that industrial base money to build a test capacity in South Carolina for that. What should follow on is another contract to design a new steam turbine generator with production to follow. The problem that is addressing is that there is only one producer of steam turbine generators, which makes it something of a choke point in submarine production. The Navy is interested in a second source to address that choke point. I think we are a principal part of the avenue to address that challenge.

St. Seth and I I'll start and then let Mike get some more, uh, call it. I mean, first of all, the the core program of course in our Naval Powers is Columbia, which is secured through the middle of the next decade and is on a steady increase, and we are using that South Carolina facility, uh, to execute that program with greater and greater efficiency, which should, uh, be a, a, a, a, a, a, a Tailwind on margins beyond that, which is really what. I, I think you're, you're asking, is we see that, uh, facility and our overall capabilities, generally, as well, positioned to help the Navy surge, uh, uh, uh, content into the industrial base with the goal of particularly increasing the throughput of submarines, where we have important content Beyond just Columbia, uh, in particular, I would say, the first of those opportunities is in the area of steam turbine generators.

Uh, the Navy has has now given us a 50 million of that industrial base money, uh, to build a a test capacity in South Carolina for that. Uh, what should follow on is another contract, uh, to design a new, uh, a steam turbine generator with production to follow. Uh, the problem that's addressing is

Bill Lynn: Beyond that, I think there is a more general view, and we are talking to the Navy in the future about can we use our capacity as a supplier to take on more work and allow the yards to dedicate their resources to producing submarines faster. That is still a sort of an early-stage discussion, but I think there is real potential for additional content to move to suppliers such as DRS with, again, the goal of increasing that submarine throughput.

Mike Dippold: The only thing I will add, Seth, is from a timing perspective, we do expect the Columbia portion of the building to begin to come on in 2026, in late 2026, and actually begin to pull the work in. That Columbia piece of the investment will not only cover Columbia, but also if we have some successes in new platforms, it will help from a capacity perspective and ability to execute. What Bill Lynn was mentioning in terms of the steam turbine efforts, that funding is now flowing, and we are starting those exercises. That will come on from a timing perspective a little later, outside of 2026 as we create that test capabilities and start to move forward on the steam initiatives.

That there's only 1 producer of steam turbine generators which, which makes it something of a choke point and submarine production and the Navy is interested in the Second Source to address that choke point. So I think we're we're a principal part of the avenue to address uh uh that challenge and beyond that. Uh uh I think there's a more General View and we're talking to the Navy in the future about. Can we use our capacity as a supplier to take on more work? Uh and allow the yards to uh dedicate their resources to producing submarines faster? Uh, that's still a sort of an early stage discussion, but I think there's real potential for additional content to move to suppliers such as DRS with again, the goal of increasing that submarine, throughput

Mike Dippold: From there, you can start to see that extra tool that we are putting in the toolbox from a steam turbine generator perspective start to be an impact of revenue, outside of that 2027 timeframe as we begin to execute development work with the anticipation of hopefully having production thereafter.

Yeah, the only thing I'll add uh, says is from a timing perspective. We do expect the the Columbia portion of the building to begin to come on in in in 2026 and late 2026. Uh and actually begin to pull the work in um that Columbia piece of the of the investment will not only cover Columbia but also if we have some successes in in new platforms, that will help from a capacity perspective and an ability to execute. What bill was mentioning in terms of the steam turbine efforts uh that funding is now flowing. And we're starting those exercise that will come on from a timing perspective, a little later, uh you know, outside of 2026 as we create that test capabilities, uh, and start to move forward on on the steam initiative.

Uh, from there, you can start to see that extra tool that we're putting in. The toolbox from a steam turbine generator perspective starts to be an impact on revenue, you know, outside of that 2027 timeframe, as we begin to execute development work with the anticipation of hopefully having production thereafter.

Peter Arment: Great. Great. Thank you. And maybe just as a quick follow-up, do you expect, you know, how do you look at the bookings environment for the second half? Do you expect to exit the year with the backlog higher than it was at June 30?

Great, great, thank you. And maybe just as a quick follow-up, do you expect, um, you know, how do you look at the bookings environment for the second half? Do you expect to exit the year with the backlog higher than it was at June 30?

Bill Lynn: Yes, we do, but let me let Mike Dippold address it.

Mike Dippold: Yeah, I think the bookings for the quarter, the kind of one-to-one ratio, I wouldn't put too much stock into that. We're continuing to see strong demand across all elements of the business. For the six-month period, we're still sitting above the one-to-one ratio, and we expect that to continue throughout the second half of the year. Still a lot of confidence. The macro tailwinds and the threat environment are still there. The budget alignment is there, and we feel good about our ability to continue to see strong bookings throughout the remainder of the year.

1 to 1 ratio. Uh, I wouldn't put too much stock into that. We're continuing to see strong demand across all elements of the business for the 6-month period. Uh, you know, we're still sitting above the 1 to 1 ratio and we expect that to continue throughout the second half of the year. So still a lot of confidence. Um, the macro Tailwinds and the threat environment is still there. The budget alignment is there and and we feel good about our ability to to continue to see strong bookings throughout the remainder of the year.

Peter Arment: Great. Thank you very much.

Great, thank you very much.

Operator: One moment for our next question. That will come from the line of Andre Madrid with BTIG. Your line is open.

1 moment for our next question.

And that will come from the line of Andre Madrid with BTIG. Your line is open.

Peter Arment: Good morning, everyone. Thanks for taking my question.

Good morning everyone. Thanks for taking my question.

Bill Lynn: Thanks, Andre.

Peter Arment: You previously disclosed international sales would outpace the broader sales growth for this year. With the new NATO commitments, again, that is not instantaneous. It is over a decade, but could we see upside to, you know, what you initially thought international would be through the out years?

You previously disclosed International sales would outpace the broader sales growth for this year, um, with the new NATO commitments. Um, again that's not instantaneous it's over a decade but could we see upside to, you know, what you initially thought International would be through the out years?

Mike Dippold: Yeah, I think a couple of things are happening in the international space right now. First off, what will drive a little bit of the international is what happens with Ukraine. So I think first and foremost, that is going to be an indicator of where our international sales go. So far, that demand has continued. From a NATO perspective, we are seeing consistent demand signals across some of the Eastern European members of NATO and are focused on being able to execute there. The question in the long term will be, what does that mean from a European industrial base investment versus buying American? We continue to see the elements moving towards the ready-now capabilities are still important. So we see that as a tailwind to kind of the U.S. domestic opportunities to sell abroad.

Yeah. I I think a couple of things are happening in the International Space right now. First off, um, you know what, what we'll draw in a little bit of the international is what happens with Ukraine. Um, so I think, first and foremost that's going to to, to be an indicator of where our International sales go. Um, so far that demand has continued from a NATO perspective. Um, we are seeing consistent demand signals um, across

Mike Dippold: I expect to see that trend continuing, and we still view the international market as a growth engine because of NATO, but also just because of the other macro trends and the hot global conflicts that are emerging.

Some of the Eastern European, uh, members of NATO and, and our our focused on on being able to execute their the question in the long term will be. What does that mean from a, you know, European industrial base investment versus buying American. We continue to see um, the the elements moving towards the ready now, capabilities are still important. Uh, so we see that in the Tailwind, uh, to, you know, kind of the US domestic opportunities, to, to sell a broad. I, I expect to see that Trend continuing and we still view the international market as a growth engine, um, because of NATO, but also, just because of the other macro Trends and, and the hot, uh, Global conflicts that are that are emerging.

Peter Arment: Got it. Got it. Maybe a follow-up to that. So long as they, you know, fit into the criteria that you've outlined already, would you be especially interested in acquiring anything over in Europe? And I guess following on to that, given that, you know, valuations have been a little high right now, a little rich, what's your attitude towards forging partnerships with defense tech names? This seems to be becoming more prevalent in the current threat and demand environment. So curious to hear your thoughts there.

Got it, got it. Maybe a follow-up to that. Um, I mean, so long as they, you know, fit into the criteria that you've outlined already. Would you be especially interested in, acquiring anything over in Europe and I guess, uh, following on to that given that, you know, valuations have been a little high right now, a little Rich. Um, what's your attitude towards forging Partnerships with the defense Tech names? I mean this is seems to be a become more prevalent in the current threat and demand environment. So curious to hear your thoughts there.

Bill Lynn: We have a global focus on our M&A. Obviously, we demonstrated that when we acquired RADA and the triangular merger that brought us public, RADA, an Israeli company. We have looked in Europe and Asia as well. So we have an international focus. We are not limited just to the U.S. In terms of partnerships, that too is on the table. We have had discussions with different companies about arrangements we might make that will increase our mutual competitiveness. So that would be on the table as well.

On the we we have a a global focus on our m&a. Obviously, we demonstrated that when we, uh, uh, acquired Rod, Rhoda and the Triangular merger that brought us public, rotting Israeli, uh, company and we, we have looked in in Europe and Asia as well. So we're, uh, we have an international, uh, Focus. Uh, we're not limited, uh, just to the US, uh, in terms of of Partnerships, uh, back to was on the table. We, uh, we have had discussions with, uh, different companies about Arrangements. We might make that will increase our mutual competitiveness. Uh, and so that's that would be on the table as well.

Peter Arment: Got it. Got it. I will jump back in the queue. Thanks.

Got it, got it. I'll jump back in the queue.

Thanks.

Operator: One moment for our next question. That will come from the line of Christine Leewag with Morgan Stanley. Your line is open.

1 moment for our next question.

Christine Leewag: Hey, good morning, everyone. Bill, you've kind of talked a lot about the germanium risks here. I was wondering, are there other rare earth metals that you're watching? It sounds like 2026, you'll see some improvement. If you have, I guess what we're seeing in the industry is everybody else is also trying to figure out their supply. If things don't necessarily pan out as you expect for 2026, how could this shortage of germanium or higher costs affect operating performance?

And that will come from the line of Christine. Lee wag with Morgan Stanley, your line is open.

Hey, uh, good morning everyone. Um Bill, you've kind of talked a lot about the geranium. Uh, risks here I was wondering, are there other rare earth metals that you're watching and it sounds like 2026, you'll see some improvement but if if you have a you know I guess what we're seeing in the industries, everybody else is also trying to figure out their supply. If things don't necessarily

Uh, pan out, as you expect for 2026, how could this uh, shortage of geranium or higher cost affect uh, operating performance?

Bill Lynn: Thanks, Christine. We do look at other, I would say the biggest other material we think about is permanent magnets because that is a part of the electric drive system in Columbia and any other. We are pretty well protected right now in that we have the supply for all of our existing programs. As we look at it, it is more protecting against future programs, and we are looking at what steps we would need to do to do that. In terms of germanium on 2026, as I said, we have multiple paths in terms of recycling, other sources, other materials. We think that through the course of 2025, those are going to come online and allow us to start, begin back up the ramp again in terms of germanium and protect the 2026 program.

Thanks, thanks, Christine. Um, we do look at, at, at other, uh, the, I would say, the biggest other material we think about is permanent magnets.

On 26. Uh, as I said, we have multiple paths in terms of recycling, other sources, other materials. Uh, we we think that uh well through the course of uh 25. Those are going to uh come online and allow us to start. Uh begin. Uh back up the ramp again in terms of uh, geranium and and protect the 26 uh program.

Christine Leewag: I see. Thank you. That is really helpful. Following up on the opportunity in European NATO, even though NATO in Europe wants to spend more money on defense, there is also a concerted effort to focus more on indigenous capabilities. You guys are largely an American company, but your ownership is also with a European parent. Do you have any indication in terms of how these governments view you? Do they view you as an American company, or do they view you as a hybrid because of your European parent ownership? How does that work, and does that change the opportunity for Europe for you regarding their higher spend?

I see, thank you. That's really helpful and following up on uh, the opportunity in European NATO, uh, even though nato in Europe wants to spend more money on defense. Uh, there's also a concerted effort to focus more on indigenous capabilities. So I mean you guys are you know, largely an American company, but your ownership is um also with a European parent. So do you have any indication in terms of how these governments view you do you, they view you as an American company or do they view you as a hybrid because of your European parent ownership? How does that work? And uh, does that change the opportunity for Europe for you regarding, uh, their their higher spend?

Bill Lynn: I think we're in a proxy. We're most definitely a U.S. company, and I think that's how we're viewed both in the U.S. and in Europe. I think, though, the angle towards which you're headed is right, is where we have opportunity, which is maybe unique given our ownership structure, is we have the opportunity to team with and collaborate with Leonardo because of our closeness. That allows us then to go into Europe as a home team and to use the good offices and the teaming arrangements with Leonardo. We're seeing opportunities in the U.K. and elsewhere where we can execute on that partnership. It's that partnership rather than just being seen as a, it's not how we're seen as our country origin. It's how we partner with our 70% shareholder.

I I think we're we're in a proxy. We're most definitely a US company and I think that's how we're viewed both in the US and in Europe. I think though the angle towards which your headed is right is where we have opportunity which is maybe unique given our ownership structure, is we have the opportunity to team with and collaborate with uh, with Leonardo uh, because of our closeness and that allows us then to go into Europe as as as a home team, uh, and, and to use the, uh, good offices in the teaming Arrangements, uh, with Leonardo and we're seeing opportunities, uh, in the UK and elsewhere where we can, uh, execute on that partnership. That it's, it's, that partnership rather than just being seen as a

It's not how we're seen as our our country origin. It's how we partner with uh, our share, our 70% shareholder.

Christine Leewag: Great. Thank you.

Great. Thank you.

Operator: One moment for our next question. That will come from the line of Austin Moeller with Canaccord Genuity. Your line is open.

1 moment for our next question.

and that will come from the line of Austin Mohler with canaccord genuity, your line is open,

Peter Arment: Hi, good morning. My first question here, if we look at the House Appropriation Committee's draft of the defense bill, there is a 57% plus up to about $5.27 billion for the Columbia class program. I was wondering if you could just comment on that and the reported 12 to 16 months delay in boat construction for Columbia class and how that affects the one versus two production rate for Columbia and Virginia class and how we should think about that.

Hi. Good morning. Um, just my first question here, if we look at the house appropriation committees draft of the of the defense Bill. Uh, there's a 57% plus off to about 5. 2 7.

Uh, the reported 12 to 16 month delay in boat construction for Columbia class and, and how that affects the the 1 versus 2 production rate for Colombian Virginia class and and how we should think about that.

Bill Lynn: Yeah, on Columbia, the Navy, working with the yards, has intentionally put us in a relatively segregated position so that we have, as I said, the contracts on Columbia for the ship sets all the way through ship set 12, which takes you into the mid-2030s. The purpose of that was to insulate this critical component from the ups and downs of the program itself. The reason to do that is you don't want to lose, this is a complex program, you don't want to lose the learning, you don't want to lose the expertise of the workforce by having gaps and having down cycles and then forced to retrain. That will cause schedule and budget issues. The Navy, nor are we looking for that. We're not really affected by that budget increase that you talked about. We have our budget set by contract all the way through the 2030s.

Yeah. On Columbia, the the Navy working with the yards has intentionally uh put us in a relatively segregated position. So that that that we have, as I said, uh, the contracts on Columbia for the the ship sets all the way through ship set 12, which takes you into the mid 2030s, the purpose of that was to insulate. Uh, this critical component from the ups and downs uh, of the of the program itself, the reason to do that is you don't want to lose. This is a complex program, you don't want to lose the learning, you don't want to lose the expertise of the workforce by having gaps and and, you know, having down cycles and then forced to retrain uh, that that will cause schedule, and and budget, uh, issues in the Navy and nor are we looking for that? So the, you know, the we're not really affected, uh, by

Bill Lynn: The intent of setting that contract out was not to change the motor schedule, the drive schedule, based on the relatively modest changes in the ship delivery schedule, the submarine delivery schedule.

That, that budget increase that you talked about. We have, you know, our budget Set, uh, by contract all the way through the, uh, the, uh, the 20, uh, 30s. And the, the intent of setting that contract out was not to change the, the motor schedule. The drive schedule, uh, based on the uh, uh uh relatively modest changes in the ship delivery uh schedule, the submarine delivery schedule.

Peter Arment: Okay. If we think about the force protection, counter-UAS side of the equation, if we do see the Ukraine war continue, I think you had talked about this a little bit already, but presumably that's incrementally positive for sales into U.S.-NATO allies, etc.

Okay. And if we think about the, the force protection, counter us counter uas side of the equation. Um, if we do see the Ukraine war continued, um, I think you talked about this a little bit already but I presumably that's incrementally positive for uh sales and to us NATO allies Etc.

Bill Lynn: I think more generally, the threat that Putin posed through by attacking Ukraine is what's driving Europe to higher defense budgets. They're seeing that concrete threat that Putin is prepared to cross borders in a way that we haven't seen in 80 or 90 years. That is then driving programmatic implications. Prominent among them is force protection. The advent of drones, the importance of having not just perimeter protection around your formations, but really organic protection inside those formations. So programs like our EMLIDS, that counter-UAS system become critical. What we're seeing is a growing international demand for that kind of system, partly driven by Ukraine, but more generally driven by the trends in warfare that you're seeing in Ukraine, you're seeing in Israel. How do you bring on systems that counter that, and with some urgency, given what Putin's doing in Ukraine and the future implications of that.

The threat that Putin posed through by attacking Ukraine is what you know, driving Europe to higher defense budgets and they're seeing that that concrete threat, that Putin is prepared to cross borders in a way that we haven't seen in 80 or 90 years. That is then driving. You know, programmatic implications prominent among them is force protection. The the Advent of drones uh the importance of having not just kind of perimeter protection around your formations but really organic protection inside those formations. So programs, like our emids uh that counter uas system, become critical. And what we're seeing is a growing International demand for that kind of system, partly driven by Ukraine, but more generally driven by the, the the trends in Warfare that you're seeing in Ukraine, you're seeing in in Israel. And how do you, uh, bring on?

On systems, uh, that that that counter that and with some urgency given what uh Putin's doing in Ukraine and the future implications of that.

Peter Arment: Great. Thanks for all the details there.

Great. Thanks for all the details there.

Operator: One moment for our next question. That will come from the line of Jon Tanwanteng with CJS Securities. Your line is open.

1 moment for our next question.

Peter Arment: Hi, good morning, and thank you for taking my question. I was wondering if you could break down the new guidance range and the components of it, especially the revenue line. What is driving that? Is it stronger demand or contract modifications? Maybe just more confidence in the ability to work down the backlog with improved supplier execution? Is it something else that is going on? Just a little help there would be helpful. Thank you.

And that will come from the line of John 101 tang with CJs Securities. Your line is open.

Hi, good morning, and thank you for taking my questions. Um, I was wondering if you could break down the uh new guidance uh range and and just the components of it, especially the revenue line. What what's driving that um, is a stronger demand or contract modifications, uh, maybe just more confidence in the ability to, to work on the backlog. Um, you know, with improved supplier execution, is it something else that's going on just a little help? There would be helpful. Thank you.

Mike Dippold: Yeah, from the guidance on the revenue side here, the uplift is certainly driven just by the continued demand that we are seeing. We got out of the gate really hot from a bookings perspective in Q1. That confidence coupled with the consistency of the supply base and the material receipts, germanium, you know, with the asterisk there, continues to perform well. That gave us the confidence to increase the guide for the full year at the half from a revenue perspective. We are up 13% year over year. The bookings demand, where we are with the backlog year over year, what we have executed to date through the six months, and the stability of the supply base gave us the confidence to increase the revenue guide, Jon.

Peter Arment: Okay, great. How should we think about the R&D intensity going forward, you know, over the next three to five years and how that affects operating leverage, especially as you chase these new programs in the new DOD budgets and increasing NATO spending?

I I'll I'll from the guidance on the revenue side here. The the uplift is is certain driven just by the continued demand that we're seeing, we got out of the gate really hot from a booking space perspective in q1. Um, and that confidence coupled with the the consistency of the supply base and the material receipts geranium, you know, with with the asterisk there, uh, continues to perform well, and that gave us the confidence to, to increase the, the guide for the full year, uh, at the half from a revenue perspective. You know, we're we're up 13% year-over-year. Uh, so, you know, the bookings demand where we are with the backlog year-over-year. What we've executed to date through the 6 months, um, and the, the stability of the supply base gave us the confidence to increase the the revenue guy John.

Okay great and how should we think about the R&D intensity going forward? You know over the next 3 to 5 years and and how that affects the operating leverage. Especially if you chase these new programs in, in the in the new DOD, budgets and increasing their spending,

Mike Dippold: I'm sorry, I didn't catch the end of that. I lost you. Can you repeat that question again?

Peter Arment: Yeah, how should we think about R&D intensity and the operating leverage that you have, especially with the new DOD budgets and with the higher NATO commitments?

I'm sorry, I didn't catch the end of that, I lost you, can you repeat that question again?

Yeah. How should we think about R&D intensity and the operating leverage that you have, especially with, you know, the new DOD budgets and with the higher NATO commitments?

Mike Dippold: From an R&D budget perspective, I am assuming you are talking about our internal R&D spend?

Peter Arment: Correct. Yeah.

yeah, so from from an R&D budget perspective, I'm assuming you're talking about our internal, uh,

Mike Dippold: Ultimately, what we wanted to do and what we've made a priority of is there's certainly an emphasis within the administration to get products to the warfighter quicker. Therefore, they're trying to accelerate procurements. We wanted to ensure that we had ready-now solutions and ready-now capabilities. Our investing increased IRED in order to make that a reality. We've taken up our IRED, you know, from about 2.8% in 2024 to an area where we're sitting at the mid-3s here at the half-year point. That's a sizable headwind from a margin perspective, but we do believe we're investing in areas that are getting a lot of enthusiasm surrounded. When you talk about the counter-drone capabilities, when you talk about space, missile seekers, as Bill Lynn mentioned in the prepared remarks, these are the areas we're investing in.

Spend correct. Yeah, um,

But but ultimately, what we wanted to do, and what we've made a priority of is, is there certainly an emphasis, uh, within the administration to get products, to the war fighter quicker. Um, and and therefore, they're trying to accelerate procurements. And we wanted to ensure that we have ready now, Solutions, and ready now capabilities, uh, and our investing increased, I read in order to make that that a reality. Um, so we've taken up our Ira, um, you know, from from about 2.8% in 2024, uh, to an area where we're sitting at the mid-30s uh, here at the half year Point. Uh, so that that's a, that's a, a sizable headwind, um, from a margin perspective, but we do believe, we're investing in areas that are getting a lot of um, enthusiasm around it. And when you talk about the the counter drone capabilities, when you talk about space, um, missile C,

Mike Dippold: The markets are growing, and we thought it would be prudent to continue to invest heavily in there to facilitate our continued growth.

As Bill mentioned in the prepared remarks, these are the areas we're investing in. The markets are growing, and we thought it would be prudent to continue to invest heavily in there to facilitate our continued growth.

Peter Arment: Okay, great. If I could sneak one more in there, just when do you think you can get margins on products containing germanium or alternatives back to the normalized range, whether that's through pricing or improved supply or going to some of these alternative, I guess, technologies to do so?

Okay, great. If I could speak 1 more in there. Just when do you think you can um get margins on products, containing geranium or Alternatives, back to the normalized range, whether that's through pricing or boost Supply. Uh or going to some of these um Alternatives. Um I guess technology to do. So.

Mike Dippold: Yeah, I think the first challenge we have is to execute against the backlog. Right now, we're in a position where we're a predominantly fixed-price shop, so the pricing fluctuations are being realized in our results, and that's what's realized in our guide. Perspectively, we are looking at contract modifications that allow some flexibility in terms of the recovery when you have the volatility in germanium, like we've seen, which is largely due to some of the trade wars and other elements that are going on that are kind of outside of our control. We've seen mixed results from a customer receptive perspective on that, and we're continuing to push hard on that to make sure that we're de-risked from the price volatility.

Respectively. We are looking at Contract modifications that allow, uh, you know, some flexibility in terms of the recovery. When you have the the volatility in geranium. Um like we've seen which is largely due to some of the the trade Wars and other elements that are going on. Um, that are, you know, kind of out outside of our control. We've seen mixed results from a customer receptive perspective on that. And and we're, we're continuing to push hard on that to make sure that we're de-risked from the the price volatility.

Peter Arment: Okay. Any sense of timing of when that normalizes overall?

Okay. Any sense of timing of when that normalizes overall?

Mike Dippold: It's going to be a program-by-program negotiation, to be fair. So, it'll be on a contract-by-contract basis.

It's it's going to be a a program by program um negotiation to be fair. So it'll be on a on a contract by contract basis.

Peter Arment: Okay, great. Thank you.

Okay, great. Thank you.

Operator: Thank you. As a reminder, if you would like to ask a question, please press star 11. Our next question will come from the line of Ronald Epstein with Bank of America. Your line is open.

Thank you. And as a reminder, if you would like to ask a question. Please press star 1, 1 1. Our next question will come from the line of Ronald Epstein with Bank of America. Your line is open,

Peter Arment: Hey, Sam. Good morning. Germanium has been a bit of an issue for you guys. It really does not seem like it has been for anybody else. I am curious why that might be the case. Are there any other rare earths that we should start worrying about for you or others, given what is going on broadly with trade, particularly with China?

Hey yeah, good morning. Um,

So, Geranium has been a bit of an issue for you guys. It really doesn't seem like it's been for anybody else. I'm curious why that might be the case. And then, are there any other...

Rare Earth that um we should start worrying about for you or others given what's going on, broadly uh with trade particularly with China.

Bill Lynn: Ron, I think obviously we're a sensor house and it's an important piece of our product base. So germanium, I think, stands out for us. I don't know what's going on with others, but I'm sure they're not getting germanium. The other one, and I mentioned it on an earlier question, I'd say the principal other one we focus on is in the electric power area, is permanent magnets. There, I think currently we're in a strong position with holding what we need to execute our current programs, but we are trying to anticipate future disruptions and trying to think about how we, we're hopeful, of course, of winning future electric drive programs. So we need to think about how we protect future sources of supply. It's a high-class problem, but we're anticipating winning other programs, and we're taking steps now to protect against that future potential.

Ron, I think.

Obviously we're a a, a sensor house since, uh, important piece of our, uh, uh, product base. So geranium. I think stands out, uh, for us. I, I don't know what going on with others.

Peter Arment: If you could peel back down a little bit on, with the big investments that are being made into the naval industrial base, shipbuilding industrial base, what other opportunities are out there for you all? I would imagine there has got to be a whole bunch of them, if you could maybe mention a few.

Um, but I, I'm I'm sure they're not getting geranium. Um, the uh, the other 1 and I, I mentioned it on an earlier question. I say the principal other 1, we focus on is in the electric power area is permanent magnets. Uh, and there, I think, currently, we're in a strong position with the holding what we need for to execute our current programs. But we are trying to anticipate, you know, future disruptions and uh, trying to think about how do we, how do we uh, we're hopeful of course of winning future electric Drive programs. So we need to think about how we protect future sources of Supply. It's uh it's a high class problem, but we're we're uh, anticipating winning other programs and we're trying to taking steps now to protect against that that future potential.

And then if, if you could peel back the onion a little bit on, you know, with the big Investments that are being made into the naval industrial base.

um,

Ship building, industrial base.

What other opportunities are out there for you all? I mean, I would imagine there's got to be a whole bunch of them. If you could maybe mention a few.

Bill Lynn: Are you talking shipbuilding, or are you looking beyond shipbuilding?

Peter Arment: Shipbuilding.

Are you talking shipbuilding? Are you looking beyond Bishop building shipbuilding?

Bill Lynn: In shipbuilding, as we said, we have the current Columbia program. The biggest near-term opportunity is the steam turbine generator that I talked about. Coming after that is just the general enhancement of Virginia class and other industrial base programs and the realignment of the workload between yards and suppliers. The one I didn't mention, well, two I didn't mention, beyond that, a little bit longer term out is future ship classes. We think we'll look to electric drive as the propulsion system because of the operational advantages in terms of cost, in terms of quietness, and in terms of the power density. When you start to look at directed energy weapons, mechanical systems just cannot meet the needs. Even as you increase sensor demand, which is inevitable, mechanical systems won't meet the needs. We think the next generation destroyer, DDGX, is a good candidate.

Chip. Well, in chip building. I, I think, as we said the, the we have the current Columbia program, the biggest near-term opportunity is the steam turbine generator, uh, that I talked about, uh, coming after that. I think is just the, the general enhancement of Virginia class and other sub, uh, industrial base programs and the, uh, the the realignment of the workload between yards and and suppliers and then, the 1. I I didn't mention, but I I, uh, well, 2, I didn't mention beyond that, a little bit longer term out is future ship classes. Uh, we think we'll, we'll look to Electric drive as the, uh, the propulsion system because of the operational advantages in terms of cost in terms of uh, quietness. And in terms of the power density, when you start to look at it directed energy weapons uh mechanical systems just cannot meet uh the need

Bill Lynn: The next generation submarine, the SSNX, probably an even better candidate. Internationally, international navies are looking at electric drive as well. We think, over the next five to ten years, there's going to be a shift into electric drive, and we think we stand to benefit from that.

Even as you increase sensor demand, which is inevitable, mechanical systems won't meet the need. So, we think that the Next Generation Destroyer DDGX is a good candidate. The Next Generation Submarine, the SSNX, uh,

Peter Arment: Got it. Got it. If I can ask you just one more sort of more macro question, given your experience on the hill and in the building, how would you expect fiscal 2027 to play out? I mean, in terms of the budget process this year was sort of bizarre, right? Do we get another reconciliation? How is it all going to go? It seems kind of likely that there is going to be another continuing resolution. I mean, I do not know. If you were to look in your crystal ball and take a swag at it, how would you guess fiscal 2027 plays out?

Probably an even, uh, better candidate. And then of course, and then internationally, uh, International navies. Uh, are are looking at electric drive as well. So we think, you know, over the next 5 to 10 years, there's going to be a shift, uh, into electric drive and, and we think we, uh, stand uh, to benefit from that.

Got it, got it. And then, if I can ask you just one more sort of more macro question. You know, again, given your experience, you know, kind of on the Hill and in the building.

Reconciliation. I mean, how is it all going to go? I mean, it seems kind of likely that there's going to be another continuing resolution. I mean, I don't know. I mean, if you were to look in your crystal ball.

And take a swipe at it. How would you get a fiscal set for the 27 plays out?

Bill Lynn: I think, as I said, at the end of the day, it's hard, as you said, this has been a very unusual year, particularly with the very large increase in the reconciliation bill. They allocated a lot of that to 2026, but not all of it. So there's still some reconciliation money out there that needs to be allocated. They have to make a decision on what is the 2027 base bill. As I said, in answer to an earlier question, I have a hard time believing a Republican president wants to be lower than his Democratic predecessor. So I think that's going to drive some increase. I mean, I think what you want to see is, you know, maybe is what you'd like to see is a sustained and predictable increase in the defense budget that will let us meet the growing threats from China and Russia.

I think, as I said at the end of the day, it's hard.

Bill Lynn: That's, I think, the policy goal. I do think it's going to be, it's the policy goal of this administration. So I think they're going to have to find a way through reconciliation, maybe a second reconciliation bill, I don't know, and the core budget bills to execute on that sustained, predictable growth. That should be their goal, and I think it is their goal.

You said, this has been a very unusual year, particularly with the very large increase in the reconciliation Bill and that, and there's still they allocated a lot of that to 26, but not all of it. Uh, so there's still some reconciliation money out there that needs to be allocated. They have to make a decision on. What is the 27 base bill? As I said the answer to an earlier question. I have a hard time believing a a a Republican president wants to be lower than his Democratic predecessor. So I think that's that's going to drive uh, some some increase. So I I mean, I think what you want to see is, you know maybe is what you'd like to see is a sustained and predictable increases uh in the defense budget that will let us meet the growing threats from China and and Russia. That's I think the the policy goal

I do think it's going to be, it's the policy goal of this Administration.

Peter Arment: Got it. All right. Thank you very much.

Uh, so I I think you're they're going to have to find a way through reconciliation, uh, maybe a second reconciliation bill, I don't know. And the core base budget bills to execute on that uh, uh, sustained predictable growth, that's that's, that should be their goal and I think it is their goal.

Operator: Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Steve Vather for any closing remarks.

Got it. All right. Thank you very much.

Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Steve Basser for any closing remarks.

Peter Arment: Thanks for your time this morning and for your interest in DRS. As usual, if you have any follow-up questions, please call or email. We look forward to speaking with all of you again soon. Enjoy the rest of your day.

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

Operator: This concludes today's program. Thank you for participating. You may now disconnect.

This concludes today's program. Thank you for participating. You may now disconnect.