Leonardo DRS, Inc.

Ladies and gentlemen, good day and welcome to the Leonardo DRS first 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 like to now turn the conference over to Steve Vather, Senior Vice President of Investor Relations and Corporate Finance. Please go ahead.

Good morning, and thanks for participating on today's quarterly earnings conference call. Joining me today are Bill Lynn, our chairman and CEO, and Mike DePolder, CFO. They'll 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 anticipated future performance of the company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors. For a full discussion of these risk factors, please refer to our latest Form 10-K and our other SEC filings. We undertake no obligation to update any of the forward-looking statements made on this call. During this call, management will also discuss non-GAAP financial measures, which we believe provide useful information for investors. These non-GAAP measures should not be evaluated in isolation or as a substitute for GAAP performance measures. You can find a reconciliation in 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 Q1 earnings call. Our first quarter results reflect a solid start to the year. and meaningfully surpassed our expectations. Strong, steadfast customer demand continued to materialize across our broad and differentiated portfolio. We secured a healthy level of bookings that totaled nearly a billion dollars in the quarter, which translated to a 1.2 book-to-bill ratio. Demand remains well diversified throughout the business. In Q1, we saw particular order strength for advanced infrared sensing, electric power and propulsion, tactical radars, laser systems, and force protection technologies. It's also worth noting that this marks the 13th consecutive quarter with a book to bill above one, a trend that has resulted in our backlog pushing to new company records. As a result, that backlog increased to $8.6 billion, which is up on both a year-over-year basis and a sequential basis. Furthermore, In Q1, we saw remarkable organic growth of 16%, profit expansion, and improved cash flow. Material receipts pulled into the quarter to drive revenue growth well above our forecast. Overall, we anticipate this will translate into better quarterly linearity for the year on revenue and profit. As you know, we have been focused on driving more balanced quarterly distribution and achieving our full-year financial results. In addition to solid operational performance, we commenced execution of our capital return initiatives with the payment of our first dividend and initial stock repurchases against the authorization announced last quarter. All in all, our strong results in Q1 laid a nice foundation for the year, but we are maintaining a vigilant posture amidst a more dynamic operating environment that has emerged over the past few months. Let me share some more color on our perspectives with respect to the macro conditions. We are in a unique situation as our customers are now operating under a full year continuing resolution for FY25. What is different from prior CRs is the DoD's ability to initiate new program starts. Congress also provided greater funding execution flexibility and a higher reprogramming authority threshold. As of now, we have not seen any significant changes to customer procurement behavior, and the leading indicators reinforce the durability of demand. Additionally, we are still targeting a total company booked a bill above one in 2025. Looking ahead, we are expecting that the FY26 President's Budget Request will likely be released over the next month or so. As I've mentioned on prior calls, Historically, the most relevant and predictive variable for future U.S. defense spending growth is the global threat environment. Unfortunately, it remains elevated and largely unchanged, which will maintain pressure on the need for higher investment for the foreseeable future. We also anticipate that the FY26 request will provide incremental clarity and the funding allocations for the administration's key priorities. DRS continues to be well positioned and closely aligned to important national defense initiatives focused on enhancing the lethality, effectiveness, and affordability of critical capabilities. Our customers are expanding their investments in layered air defense and counter UAS, improving shipbuilding throughput, and more broadly modernizing technology embedded on combat platforms to deter and contest near peers. We are leveraging our core strengths to actively address each of these secular themes. Next, while the implementation for most of the tariffs announced last month have been temporarily postponed, I still want to discuss the potential implications. Overall, as a pure play defense technology company, we expect relative insulation from direct impacts related to tariffs. As a reminder, our customer base is largely U.S. defense in nature. Our geographic footprint is principally in the US, with the exception of operations in Canada and Israel. And lastly, our direct supply chain is predominantly comprised of US-based companies. That said, we are keeping a watchful eye on any derivative impacts on the business and are instructing our suppliers to identify any tariff-related costs so that we can pursue remedies from our customers should the need emerge. Secondly, China's increasing restriction on export of rare earth minerals to the US also has limited impact on DRS. For us, the key rare earth reliance is on germanium, as it is an important element in our infrared sensing products. Since the initial restrictions went into effect in mid 2023, we have taken mitigating actions to ensure our raw material suppliers had diverse sources. However, in the quarter, we discovered that a sole source optic supplier on an international program was unable to execute on our existing purchase orders. That placed us in an unfavorable position of absorbing increased cost as we rectified the issue with alternative germanium sources. Outside of this discrete supplier issue, there have not been significant challenges with respect to supply to date, but pricing has certainly become more volatile. This supplier challenge that emerged in Q1, combined with the incremental cost escalation of germanium, have been incorporated into our forward estimates and pressured quarterly ASC profitability. We have a steadfast priority on continuously enhancing program execution resilience across the business and are broadening the scope of our focus amidst the more dynamic backdrop. Shifting to operations, we are making steady progress in several key areas. First, improving and expanding shipbuilding is a key national priority. Our customers' behavior reflects an incredible urgency. We are working to expedite the completion of our Charleston, South Carolina facility, as well as rapidly deploy the submarine industrial base investment announced last quarter to reinvigorate our steam turbine capability. Additionally, we are in ongoing conversations with customers on how to expand our role in supporting better overall throughput. Separately but related, we are seeing new incremental domestic opportunities emerge for our electric power and propulsion technologies. We won't disclose the specific program names for competitive reasons, but nonetheless, this is an exciting development should these opportunities come to fruition. In the quarter, we also successfully demonstrated our electric propulsion capability on a medium unmanned surface vessel, proving the versatility of our technology as the Navy potentially considers a higher mix of unmanned naval platforms moving forward. Now to counter UAS. We are maturing the previously discussed directed energy capability through rigorous customer testing. The multiple rounds of results support the feasibility of near-term operational deployment to augment existing air defense systems. Additionally, we are actively working with partners to explore the integration of our counter-UAS technologies into other domains and platforms, including the maritime arena, to generate incremental growth. Next in the quarter, in partnership with best-in-class commercial technology partners, we announced the release of our AI processors. This AI processor is designed to quickly deliver real-time threat detection, situational awareness, and advanced mission processing into combat vehicles. This processor integrates with AI algorithms and is engineered to process massive amounts of battlefield data to deliver actionable intelligence and also enable AI-aided target recognition. We are also investing to advance our own software offering that will serve as an open operating system architecture to enable the management and fusion of multiple sensing modalities. Similarly, we predict that AI and other intensive applications will only drive growth of shipboard processing requirements. As a result, we are seeing customer appetite build for our advanced cooling techniques that enable greater computing density. Last but certainly not least, Our infrared sensing remains in high demand across domains from dismounted to ground combat vehicles to missiles. On the latter, we are being designed into a number of next-generation missile systems to provide our differentiated infrared capability. The diversity and breadth of our technology portfolio is a distinguishing characteristic of DRS and is facilitating multiple avenues for future growth. As I mentioned at the outset, I'm pleased with the nice start to the year. Our Q1 financial performance provides us confidence in executing on our 2025 outlook. Clearly, the operating environment is significantly more dynamic compared to last year, and this has required us to leverage our agility to navigate through new complexities. That said, DRS remains well-positioned to enduring defense priorities. We are maintaining a sharp focus on delivering critical innovation at speed, efficiently, and in an affordable manner. With that, let me turn the call over to Mike, who will walk you through our financials in further detail.

Thanks, Bill. I would echo that we are off to a solid start to the year across our key financial metrics. Overall, the quarter was well ahead of our expectations. In Q1, revenue growth was 16% and ended up being meaningfully above the framework we laid out on the last call. This was mostly due to the favorable timing of material receipts. Late in the quarter, we saw some supplier deliveries pull left by just a few days, which materialized as a sizable tailwind to Q1. Let me reiterate, this will mostly help drive improved quarterly linearity in 2025. Taking a closer look at the quarter, the most notable drivers of growth were programs related to ground and naval network computing, as well as offerings in tactical radars and electric power and propulsion. From a segment perspective, The programmatic increases to network computing and tactical radars spurred quarterly ASC revenue growth of 18%. IMS revenue was also up nicely at 11%, with growth evident across the segment. Strong contribution from both electric power propulsion as well as force protection programs were visible in the quarterly IMS revenue output. Now to adjusted EBITDA. Adjusted EBITDA in the quarter was 82 million, representing 17% growth from the last year. Adjusted EBITDA margin in Q1 was 10.3%, which represents 10 basis points of year-over-year margin expansion. The slight margin expansion was primarily as a result of favorable net contract adjustments and higher volume. Shifting to the segment view, ASC adjusted EBITDA increased by 2%, but margin declined by 130 basis points, primarily due to negative contract adjustments in the segment. As Bill mentioned earlier, discrete cost growth from the sole source supplier on the infrared sensing program as well as the broader impact of greater germanium costs on our remaining backlog hampered profitability in the quarter ims adjusted ebitda was up 38 and margin expanded by 260 basis points which was well beyond what we anticipated embedded in our baseline plan for the segment was the continued progression of columbia class and some operational benefit from increased volume which both occurred in the quarter however Incremental to our expectations was the recognition of favorable contract adjustments as a result of risk retirement milestones reached on Columbia Class. On to the bottom line metrics. First quarter net earnings were 50 million and diluted EPS was 19 cents a share, up 72% and 73% respectively. Our adjusted net earnings of 54 million and adjusted diluted EPS of 20 cents a share were up 42% and 43% respectively. Strong organic operational performance combined with a reduced effective tax rate and a lower interest burden drove the favorable year-over-year compare. While the Q1 tax rate was lower due to excess tax benefits on equity compensation, we still anticipate a normalized full-year tax rate of 19%. Moving to free cash flow, our cash usage in the quarter was significantly lower than this time last year, thanks to increased net profitability and enhanced working capital efficiency. partly aided by favorable timing and quarterly cash collections from customers. Our capital expenditures in the quarter were approximately 4% of revenue in line with our expectations discussed on the last call. Overall, the year over year free cash flow improvement in Q1 supports better line of sight into achieving our full year outlook. With only one quarter behind us, we are maintaining our 2025 guidance across our metrics. We delivered a solid Q1, but the more dynamic operating backdrop offers both puts and takes that we are still evaluating. As a quick refresher, we expect the following for the full year. Revenue in the range of 3.425 to 3.525 billion, implying a 6% to 9% year-over-year growth. Material receipts will continue to be the biggest factor influencing revenue output. We are operating with significant backlog visibility, but a small portion of book-to-bill revenue still remains. Our adjusted EBITDA range is expected to be between $435 and $455 million. At this time, we expect IMS to offer more growth and margin improvement opportunity relative to ASC. Adjusted diluted EPS remains in the $2 to $0.08 per share range. The underlying assumptions on tax rate and fully diluted share count remain consistent at 19% and 270 million shares respectively. Also, We are still targeting 80% free cash flow conversion of adjusted net earnings for the year. Lastly, let me frame up what we are seeing for the second quarter. At this time, we are expecting revenue to trend around 825 million with adjusted EBITDA margin likely in the mid 11% range. I'll wrap up with some quick thoughts. We have an exceptional team. Our strategy is sound and we are well positioned for long-term success. We are focused on capturing and converting significant demand into strong, continued organic growth. Additionally, we are keeping a steadfast focus on program execution to deliver value for customers and our commitments to shareholders. With that, we are ready to take your questions.

Thank you. At this time, we will begin the question and answer session. As a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. One moment for questions. Our first question comes from Michael Ciaramoli with Truist Securities. You may proceed.

Hey, good morning, guys. Thanks for taking the call or questions. Nice results. Hey, Mike or Bill, I guess you talked about material receipts and pulling some work left. Can you maybe talk specifically to what programs? Was that more on the shipbuilding, the propulsion side, and then any color you can give on international growth in the quarter? Was that a contributor?

I'll take that one, Mike, and appreciate the question. So the material acceleration and the impact of the revenue was really more holistic across the board. We've seen some good supplier deliveries. Our on-time deliveries have been improving. We saw some acceleration. Again, not a lot. It pulled forward, you know, a week or so, and that really impacted the revenue for the quarter. So a good result there. Good confidence in the supply chain right now. So that's what drove the overperformance on that side. The increase from the year-over-year revenue has really been actually on the domestic side. The international as you'll see when the Q is released, is actually a little dip for the quarter, just from some of the timing from certain deliveries to actually to support Ukraine. So the international, a little headwind for the quarter. I don't anticipate that prospectively, but for Q1, it was a domestic growth story. Okay, got it.

And then just piecing this together quickly here on the fly, I think you just said 825 million revenue to Q. I mean, the low end of the guidance, I mean, that would imply second half, maybe flat, almost down, I think, year over year. I mean, is that just, is there anything, you talked about supply chain, we've got the good kind of demand backdrop, bookings above one, you know, anything we should read into just kind of leaving the door open for maybe the unknowns on tariff trade, if at all anything materializes there?

I think you should think about it a little differently. I would say that we're continuing to push and improve linearity across the business. And I think you're seeing that materialize. So even if you kind of throw the Q1 results in, the Q2 framework, our H2 guide would then say we're going to be somewhere between flat to up 6% on the top line and still showing a margin expansion in the 50 to 80 basis point range. If you look back into 24, it's relatively consistent with what we started to see in Q4 of 24, right? You saw the acceleration of revenue growth pull in as we improved our linearity. And then on the back end, you started to see the quarters not have the same robust growth. I think you're going to see that trend materialize here in 2025 as well.

Okay, perfect. Last one for me. Any concern going forward on that ASC margin? Should we expect a snapback, or is that program now going to be running at a lower margin, given the measures you had to take with that challenge supplier?

Yeah, no, good question. And, yes, so what we did here is we took the adjustment in Q1 to kind of reset the backlog for the remainder of the program. So the lion's share of the impact is going to be in Q1, and then you'll have, obviously, a lower growth market prospectively, but that will be mitigated, and you'll see a pop-back. Okay, perfect. I'll jump back in the queue. Thanks, guys.

Thank you. Our next question comes from Seth Seifman with J.P. Morgan. You may proceed.

Yeah. Hey, guys. Thanks for the question. This is Alex on for Seth. You know, maybe I wanted to kind of ask at a higher level in terms of, you know, the margin expectations for this year. Obviously, Q1, you know, came in a little bit lower at 10.3% versus, you know, like the full year guide implies a 12.8% margin. You know, I understand last year we kind of saw a similar dynamic where the margin started lower before kind of increasing as the year went on. I'm curious if you guys could help us walk through the puts and takes here. I imagine Columbia is a pretty big driver of the expected margin expansion, so maybe if you could put a finer point on it and help us understand that bridge a little bit better.

Yeah, Alex, the bridge is going to be a little more simple than that. What you're going to see, because we period expense our G&A, the volume matters in terms of the drop through on the EBITDA margin percentage. So as our revenue increases quarter over quarter, you'll start to see the margin have that impact of that additional operational leverage. So that's what's really going to drive it in terms of if you're looking at the sequential quarter projections.

Got it. Okay. That's helpful. And then, you know, maybe as a second question, kind of a bigger picture question, you know, I know you guys talked about expediting, you know, the investments in the Charleston facility and, you know, another thing we kind of saw related to shipbuilding earlier this week is, you know, this, these plans for this reconciliation bill. And, you know, I think there's expected to be $34 billion of funding for shipbuilding, you know, kind of just thinking about, you know, is there any opportunity at least with the Charleston facility to maybe, you get DRS more involved on kind of the current classes of ships, given all this kind of funding going into them, going into shipbuilding right now. I'm just kind of curious about maybe how DRS could be involved in that as well.

Yeah, I'll take that, Alex. We do see opportunity there. I mean, you should look at this as a stepped step. We've got the Columbia-class program, which is the original justification for Charleston, and that continues to increase both in terms of volume and margin. We also now have an investment from the Navy to expand our content, in particular to become a second source. the steam turbine generators and we're just in the process now of developing the design for that and that will phase in over the next several years and And then beyond that, we're in discussion with the Navy about further investments they might make and further support we might give to the expanded throughput, particularly of Virginia-class submarines, which is a lot of the focus of that reconciliation bill that you mentioned, as well as the administration's priorities. We think we're in negotiation to have a participation in that through a Navy investment. And much of that would come through Charleston.

Got it. That's super helpful.

Thank you, guys.

Thank you. Our next question comes from John Tenwinting with CJS Securities. You may proceed.

Hi. Good morning. Thank you for taking my questions. I'm in a really nice quarter.

I was wondering if you could just talk a little bit about the guidance. You obviously did much better in Q1. Some of that was pull-ins, obviously, but the full year was unchanged. I was wondering just does that give you more cushion for the year, or is that really an offset, you know, from higher inputs and tariffs and things like that?

No, John, I think of it as our continued thrust on that improved linearity. So I think that's what we're doing. We're pulling some things left here. still have that, as I mentioned earlier, still have the, you know, kind of zero to 6% growth on the second half and still have the, you know, the lion's share of the margin expansion on the back end. So it's, I would say it's less conservatism and more our continued thrust to have more linear operations quarter over quarter.

Got it. Understood. As we hear rumors of, you know, potentially up to or approaching a $1 trillion defense budget, How do you expect your share of that to evolve? I know you've previously said that you expect to grow ahead of the defense budget. I'm wondering if that still holds true in the current environment and given what priorities are at the DOD today.

Yeah, I mean, John, obviously we don't have a budget yet, but I think the trends are good. As you say, they're talking about a trillion dollars. I assume that means 050, even though it's beyond defense. But that would still mean a meaningful increase in the defense budget year over year and over the original Biden program. That's reinforced by the talk about up to $150 billion front-loaded ad in the reconciliation bill. So I think the general trends are up. Uh, and then we think, uh, the priorities of the new administration, uh, you know, as they've been demonstrated in that reconciliation bill, those are congressional. And then in the Hegseth memo and other, uh, comments that are coming from the new administration, uh, I think they overlap strongly with our core markets in, in ship building and in force protection, uh, the nuclear triad represented, uh, by Columbia. So we, we feel like we are well positioned, uh, for this growth and to take our share of it.

Okay, great. Last one. I just wanted to focus on a comment you mentioned about being integrated into next-generation missile systems. Is that a market that you traditionally had a lot of exposure to, and can you just size the opportunity that's ahead of you?

For us, that's a little bit more of an adjacent market. We have a core capability in sensors. We're world-class in terms of sensors. But moving that capability into missiles is something that we're We're in the midst of doing, and we see it as sort of a new opportunity, a green field for us. And as the sensing capabilities of missiles, the accuracy of missiles continues to increase, we think that we can provide the technology to do that.

Okay. So just to be clear, this is more of a green field opportunity for you, and you do have design wins in this arena?

Yes, exactly right.

Okay, great.

Thank you.

Thank you. Our next question comes from Ron Epstein with Bank of America. You may proceed.

Good morning, everyone. This is Mariana for Ron today.

How are you doing? Good morning, Mariana.

So my question is going to be the first one on Europe. As these European countries build up their own defenses and they try to do their own domestic systems, How exposed are you and how big is the opportunity for you as a subsystem provider?

I think there's a substantial near-term opportunity, Mariana. I think in certain systems like counter drones, force protection, some of our advanced sensing programs, we're pretty far ahead, particularly when you're talking about production. So I think that as they want to increase their capabilities and their capacities in those areas, they're going to turn to companies like ours. Over time, I think that may evolve into a competition as they use some of their new resources to develop organic capabilities. But I think that's down the road.

Thank you. And then a follow-up on the Navy opportunity. As you become a clear competitor or like a clear alternative to actually increase the throughput with more outsourcing, with dual source alternatives, even with like opportunities for like higher volumes with like commercial opportunities on some cases, like how fast you could see those opportunities play out? What is your sense of like the Navy actually, or that money actually spreading down the supply chain? And then how much ahead or how much involvement you should have as this administration asks for some skin in the game or commercial terms? Are you thinking about internal R&D to actually support and go forward and try to capture these opportunities?

It's a complex question, Marianne. On the last part there, we're already 85% fixed price. We're, I think, already much closer to the commercial model that they're talking about. We know how to operate in that environment. We have been increasing our IRAD, our organic investment, and we've been pushing it more towards things like developing prototypes of different capabilities. So I think we are already positioned in, we already do what they're talking about doing. We're less of a cost plus shop and less of a response, just a pure response to requirements. We've with things like the directed energy capability for counter UAS. We try and be proactive and get ahead of customer needs and demonstrate them. On the first part of your question in terms of the competition in the naval area, If you're implying that that's going to be a threat to the shipyards and the Navy, I don't think that's right. I think this is an enabler for the shipyards. Their overwhelming desire, and it's what their customer wants, is to increase that throughput. To do that, they're going to have to diversify the work process. and push more into the suppliers like ourselves so that they can produce more submarines faster rather than more content on each submarine. And so things like us doing integration and testing more of it before we ship to the yards, I think are the kinds of things initiatives that the Navy is looking for, and I think the Yard very much supports. So I think this is a collaborative enterprise. It's not something where we're trying to take share from the Yards.

Great, and just a quick follow-up on that one. In the investor day, you guys shared that you have exposure and you work with the Korean Navy. Through these alternative initiatives, I don't know, shipyards or help for the Navy to have not only more throughput, but improve the maintenance of current ships and stuff. Do you have any exposure through those alternative channels?

We're engaged right now in supporting a new ship class for the Korean Navy, and we're competing to put our... electric power on the next frigate class. We don't have a response to our proposal on that. So yes, we're engaged with the international customers, particularly in Korea. And I don't know how this debate's going to go in chip building, but I think we do have that kind of knowledge and exposure of the international customer.

Thank you so much.

Thank you. Our next question comes from Andre Madrid with BTIG. You may proceed.

Hey, good morning, everyone. Morning. Morning. I want to ask, you know, I understand that you guys are kind of staying on with the dividend and the buybacks as you had kind of signaled last quarter, but I want to revisit the M&A environment, see what you guys are seeing there, and get your sense of that still on the table from a cap deployment perspective.

Yeah, no, Andre, we did initiate the dividend and the buyback, and we'll continue through on that. But the priority still for the balance sheet strength that we have is M&A. Despite the kind of little bit of disruption in the market, we are still seeing a robust pipeline. We're seeing opportunities that are strategically attractive, and we're in the process of doing diligence on those without anything at this point to announce. But we're actively engaged in the process side and the diligence side, and it remains the top priority we have for capital allocation.

Got it. Got it. And then I guess pivoting back now to, you know, tag on another question here, but I can't help but ask. Given the adjustment you took this quarter to reset for the germanium impact on the sole source contract, is there a point in time where this problem might creep up again? How much leeway does this provide us, I think? It seems like we're set for through the balance of the year, but is there the possibility that this might resurface beyond? I know you have several years worth of supply of germanium in inventory, but still.

Yeah, so the way I think I would look at this is what we did in Q1 was adjust for the new pricing mechanisms and getting the advanced germanium to this supplier and took that for our backlog. I think the important thing to note is, prospectively, what we've been doing is including economic price adjustment clauses in our future contracts in order to, you know, kind of mitigate the risk here of price volatility. So the customer's been willing to have those conversations. We're putting those clauses in place. So I think it becomes about backlog, and I think we largely have it contained here because we have pricing commitments now on those backlogs. We have schedule commitments and supply commitments for that. So I think we largely have it if you couple in the fact that we're going to be including these clauses prospectively to give us some re-opener relief in case there continues to be volatility in pricing.

That's good to hear. That's good to hear. How frequently are those repriced or, I guess, renegotiated?

So what we're looking at right now is to start to include that in all of the programs that are beyond our funded backlog. So we're having conversations in real time to modify existing options, modify existing IBIQ placements that are coming prospectively. So we're really taking an aggressive stance here to make sure we get that re-opener ability in as quickly as possible.

Got it, got it. Mike, Bill, appreciate it as always. Thanks.

Thanks.

Thank you. Our next question comes from Carl Oshlager with Vertical Research Partners. You may proceed. Thanks, guys.

Maybe this one's for Mike. um you know you had this this charge of the raw materials i guess um and you think you've worked through it but has that sort of excluding that charge is there a new kind of lower baseline expectation of margin there versus what you kind of thought going into the year i think from if you're looking at our overall margin expansion for the year we've always thought it was going to be skewed towards the ims segment because of the strength of columbia

And I think that that remains. I think you're going to see the overwhelming majority of the margin expansion coming out of the IMS segment. The ASC segment, obviously this will be a headwind to the overall margin for the year. And if you think about where we were in our last call, we were talking about incremental investment on the IRAD front. The overwhelming increase in the IRAD is also coming from ASC. So when you think about the kind of segment over segment outlook for 2025, I think that the IMS segment is going to be the driver in terms of the margin expansion while ASC kind of hangs more in line with where they were last year.

Okay. And then just kind of follow up on cash. I guess, you know, for revenues and you did a good job of kind of improving the linearity. And cash, too, was as bad as it had been because of the outflows you've had in the past in Q1. Is Q2 and Q3 going to be kind of similar to what you've had in the past, though, where it's sort of more of a break-even and then a pretty big Q4?

Yeah, so I think, yes, the trend line is going to be similar. We accelerated some cash into Q1. I think some of that Q1 overperformance was some accelerated payments we received from certain customers. So I think when you're looking at Q2's cash, we probably won't get to that same break-even level that we were in last year. We probably have a little bit still on the negative side, just giving back a little bit of the overperformance we had in Q1. But trend line is the same, just making our incremental benefits in the overall linearity, and I think you saw that in Q1.

Okay. And then maybe this one's for Bill. This $150 billion that's getting talked about, the shipbuilding angle was discussed a bit, but maybe give a little bit more color on other opportunities within that, like this Golden Dome is a big portion. And when you think about that $150 billion, do you think – have a bigger share of that 150 than you do of the overall budget? Does it just kind of skew better towards DRS than kind of the overall budget that the U.S. has?

Hard to say because we haven't seen a new budget from the administration, but I think I said at the outset, we do think the broad priorities that are reflected in that reconciliation bill towards shipbuilding you mentioned, towards force protection, counter UAS, the support for the the Golden Dome where we think we have you know multiple options at the lower end encounter UAS and the sensing end with things like over the horizon radar and then in the space we're competing I think that you know the tranche 3 is going to be part of Golden Dome it looks that way anyway and we're competing in that area with our space sensing capabilities So we think we align with multiple dimensions of this reconciliation bill. Okay. Thanks, guys.

Thank you. Our next question comes from Christine Lewag with Morgan Stanley. You may proceed.

Hey, this is Justin. I'm for Christine this morning. Thanks for taking the questions. Bill, one for you. It looks like the Secretary of Defense is pushing for a pretty big transformation of the Army with new details trickling out this week. Just wanted to ask, to what extent you see any risks or opportunities here for some of the changes announced, given the service accounts for about a third of your revenue base?

Yeah, no, I mean... We feel that the, you know, where that we're headed with the army is, is, uh, is gonna, they're going to have to look at a longer range sensors, given the threat, given what the you've seen in, uh, um, uh, Ukraine, uh, as you look at Indo pack, you're looking at longer ranges. Uh, so we think our, our core sensing capability is going to be even more valuable. And then we think as they make adjustments, we feel good about the platform agnostic position we have. They make adjustments that pull back on certain new platforms. They're still going to have to have improved sensing and computing. That means legacy upgrades. It means putting them in autonomous vehicles. It's easy for us to pivot uh to those uh new platforms and support putting the uh uh modern uh capabilities in those so we think we're uh well positioned uh against those army priorities uh and obviously they've even as they reduced the force structure in the last administration They increased the part of the force structure that was dedicated to air defense and counter UAS systems. It's that kind of alignment we think is going to continue in this administration. That kind of priority is going to pass through as we see the new budget.

Got it. Super helpful. And then maybe just another quick one. A couple of peers have called out marginally slower contracting activity in recent weeks. Are you seeing any evidence of this? And, you know, the press release called out sort of no change to customer behavior and bookings were quite healthy. So just trying to square some of the commentary we're seeing across the space. Thanks.

Yeah, I really can't comment on other companies. We obviously exceeded our expectations on bookings, so we did not see customer demand. Not only did we not see it flagged this quarter, we saw it increased. We had nearly a billion dollars in bookings, which was higher than we had in our plan. Great. I'll leave it there. Thanks. Thank you.

Thank you. And as a reminder, to ask a question, please press star 1-1 on your telephone. Our next question comes from Jan Engelbrecht with Spared. You may proceed.

Good morning, Bill, Mike, and Steve. Another good quarter. A lot has been talked, obviously, about the supplementals, but the funding and the strong expected 26 budget requests. But Would you say that there's any increased confidence from your side to pursue high-growth opportunities and perhaps self-fund product development, just given the signals that you've seen by the new administration in terms of hardware support and just the areas that you play in?

I think what we see is we want to continue the path that we were on. We've been increasing our CapEx. uh we talked about on an earlier question the support that gives uh the the submarine and the navy a shipbuilding industrial base uh we want to increase our irad and we try and translate that into uh proactive moves with the customers supporting for example the directed energy capability on counter UAS. We're already heavily fixed price. So we're, I think, in the kind of commercial terms that the new administration has talked about. So we've been moving in that direction for a couple of years. I think what we want to do is continue steps down that same path.

And I'll just add on to what Bill's saying here is, For the quarter, we increased our IRAD by about 40% compared to the prior year. So we are making the investment in areas, as we discussed on last call, to get our mission equipment package on unmanned surface vessels, getting it on robotic combat vehicles. We do think we're going to have to be agile in terms of to fulfill the procurement desires of getting things in the hands of the warfighters faster, getting innovative tech quicker, faster. And we're making the investments to make that a reality. And you started to see that immediately here in the Q1 numbers with that uptick in our IRAD spend.

Great. Thanks. Well, thanks, Mike. And then just, Mike, just a quick follow-up, perhaps an easy one. Just on interest expense, just the cadence for the year, we obviously saw it looks like $1 million for this quarter, much lower than prior quarters. But just how should we think about that for the rest of the 25 years?

Yeah, well, there's likely going to be a tailwind from lower interest expense. It carries into the full year. We wanted to see another quarter or so play out before we took that to the bench. But what we do believe, given our cash position, what we've seen from an improved cash linearity perspective, that even with the capital allocation we implemented, we probably will see a lower interest burden than we did in the prior year.

Good. Thanks, Mike. I'll jump back into you. Appreciate it. Thanks. Thank you.

Thank you. At this time, I will turn the floor back to Steve Vather for any closing remarks.

Thank you all for your time this morning and your interest in DRS. Of course, if you have any follow-up questions, please don't hesitate to contact me. We look forward to speaking to you all again soon. Enjoy the rest of your day. Thank you.

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