DRS

Ladies and gentlemen, good day and welcome to the Leonardo DRS first quarter fiscal year 2026 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 provided at that time. As a reminder, this event is being recorded. I would now like to turn the call over to Steve Vather, Senior Vice President, Corporate Development and Investor Relations. Please go ahead.

Good morning, and welcome, everyone. Thank you for joining today's quarterly earnings conference call. With me today are John Baylouny, our President and CEO, and Michael Dippold, our CFO. They'll discuss our strategy, operational highlights, financial results, and outlook. Today's call is being webcast on the investor relations section of the website, where you can also find the earnings release and supplemental presentation. Management may also make forward-looking statements during the call regarding future events, future trends, and the anticipated future performance of the company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors. For a full discussion of these risk factors, please refer to our latest Form 10-K and our other SEC filings.

We undertake no obligation other than as may be required by law to update any of the forward-looking statements made on this call. During this call, management will also discuss non-GAAP financial measures, which we believe provide useful information for investors. These non-GAAP measures should not be evaluated in isolation or as a substitute for GAAP performance measures. You can find a reconciliation of the non-GAAP measures discussed on this call in our earnings release. With that, I will turn the call over to John. John?

Thank you, Steve, and welcome everyone. We appreciate you joining us to discuss our first quarter 2026 results. This morning, we're pleased to report strong quarterly results and an excellent start to 2026. The team's steadfast execution is translating into tangible financial outperformance, as results clearly demonstrate. Revenue for the first quarter was up 6% year-over-year. Adjusted EBITDA grew 28% year-over-year, allowing us to deliver adjusted diluted EPS of $0.26 a share. Importantly, we're delivering these results while maintaining healthy levels of organic investment in R&D and capital expenditures. This disciplined approach reflects our commitment to meeting both current and future customer needs as we continue to build on our foundation of growth. Let me share a few performance highlights from the quarter.

Robust customer demand drove our 17th consecutive book-to-bill of at least one times revenue, bolstering our funded backlog to new company records and enhancing visibility and growth for the full year. That momentum, coupled with favorable material receipt timing, accelerated revenue growth and enabled outperformance against our expectations in Q1. Increasing volume, favorable program mix, and solid operational execution unlocked higher profitability and margin expansion. Overall, the strength delivered in the first quarter gives us confidence to raise our expected growth and profitability for the full year. Our differentiated technology portfolio and exceptional people are foundational to these results. I want to thank the entire team for their dedication and unwavering commitment to our customers, partners, and shareholders. The global threat environment remains elevated, with limited signs of near-term easing.

Against that dynamic backdrop, our focus remains on delivering differentiated technologies that drive overmatch and mission success for our customers. Our customers are operating with the clarity of a full-year appropriations for fiscal year 2026. Additionally, there are indications that supplemental defense funding enacted through last summer's reconciliation package will be deployed this fiscal year, accelerating the procurement of critical capabilities. The overall funding and budget environment continues to be favorable. Last month, the administration released its fiscal year 2027 budget request, proposing $1.5 trillion in total defense spending. As usual, Congress will consider and negotiate the final funding allocations. Importantly, we remain strongly aligned with our customers' spending priorities, including shipbuilding and industrial base resiliency, layered air and missile defense, counter-UAS, unmanned systems, space and missile replenishment.

Furthermore, the recent tensions in the Middle East, along with ongoing conflict in Ukraine, continue to reinforce several key lessons shaping requirements and budgets. First, missiles and one-way drones are now so widespread that attacks that were once anomalous are expected at scale and are proliferating. This reality is fundamentally reshaping requirements and the nature of warfare. Layered air defense and counter-UAS are no longer optional. They are now required. Second, adversaries are increasingly targeting large radars and other high-value assets that degrade infrastructure, sensing and defensive capabilities to quickly create exploitable vulnerabilities. This is accelerating the shift towards distributed, resilient, and modular sensing and battle management architectures that can be rapidly proliferated, replaced, and scaled.

We're already seeing this trend in space with the shift from geosynchronous to low Earth orbit satellites and is also beginning to manifest in the ground and naval arenas, where unmanned vessels can be utilized as sensor and effector equipped perimeters deployed around manned platforms. Third, volume scalability and effector cost symmetry are essential to counter-growing threats. Magazine depth and munition stockpiles are a key factor in operational endurance. We're supporting production ramps across several weapon systems, advancing seeker capabilities for improved sensing on next generation missile platforms, and introducing lower cost seekers to enable more symmetric countermeasures. Each of these trends represents a fundamental shift in place directly to DRS' strengths. DRS is a market leader in tactical radars, and our technology continues to deliver significant operational and mission impact.

Additionally, our tactical radars continue to see immense global demand, and we are aggressively increasing throughput and production capacity to satisfy that appetite. Recent hostilities have again demonstrated that force protection cannot be confined to to fixed sites. It must also be embedded in maneuver units and proliferated at scale. Our force protection solutions span multiple domains. In the quarter, we received a $533 million production contract IDIQ with the Distributed Aperture Infrared Countermeasure system, or DAIRCM, for aircraft survivability. DAIRCM combines both missile warning and infrared countermeasures into 1 system and leverages multiple sensors to provide a 360 degree threat picture, each with a laser director to defeat increasingly capable missiles that threaten aircraft. As recent operations have demonstrated, both rotary and fixed wing platforms without this capability are vulnerable in contested airspace.

Across our portfolio, our capabilities are modular and platform agnostic, optimized for size, weight, power and cost to meet customers' specific needs. Let me illustrate that with a few examples. We can deploy power and propulsion technologies on a platform as compact as a medium unmanned surface vessel and scale all the way to the Columbia-class submarine. That modularity approach is one we strongly advocate for as the U.S. Navy considers future surface combatant platforms. Similarly, our infrared sensing capabilities span deployment from attritable Class 1 drones to the most sophisticated ground combat vehicles. Because our technologies are domain agnostic, that same sensing capability can deploy across ground, air, sea, and space. We also stand to benefit as customers accelerate modernization and expand production rates, a tailwind evident throughout our portfolio. We're investing in both research and development and capital against that broader demand.

Overall, we view these trends as part of an enduring structural shift, and they align directly with our core strengths. The business continues to perform well, and we remain focused on three key strategic priorities: innovation, growth, and execution. The diversity and differentiation of our portfolio creates multiple growth avenues. Our increased investment in innovation is evident through the accelerated pace of procurement ready prototypes that meet the needs of our customers. Those capabilities include next generation multi-domain counter-UAS solutions, key technologies underpinning next generation command and control architectures, and cutting-edge space sensing capabilities, among others. In the quarter, we demonstrated counter-UAS mission execution from both unmanned ground and unmanned naval platforms, further validating a platform agnostic approach where our enabling technologies can be integrated into virtually any platform. We also released THOR, a tactical high-performance embedded computing product.

THOR is an open architecture, rugged chassis designed to deliver high-density processing at the tactical edge with native support for AI enabled operations and multi-sensor data fusion. We remain deeply committed to a truly open architectural approach, giving our customers the flexibility to deploy best of breed hardware and software solutions, not locked to a single provider. Our approach is open, flexible, modular and affordable, enabling customers to scale sustainably. Our capabilities extend beyond hardware into integration and software. We apply the same open and modular philosophy to software as we do hardware. Our platform level operating system, Sage Core, accelerates data fusion across disparate sensor and effective solutions, converting that data into actionable intelligence for improved and faster decision making. Sage Core is a key component of the integrated counter-UAS solution being tested with our customers today.

Our innovation and growth initiatives are backstopped by customer trust earned through consistent execution. As we add new efforts to the portfolio, including the SDA Tracking Layer Tranche 3 Program, we're applying the same operational rigor that guides execution across the company. Our customers operate in some of the most demanding and consequential environments in the world. Earning their trust requires more than great technology. It requires consistent, reliable delivery and partnership. We take that mandate seriously, and our ultimate measure of success is ensuring that our customers have what they need when they need it. We believe that solid execution enables growth and that philosophy is embedded in everything that we do. With that, I'll turn it over to Mike to walk through the financials.

Thanks, John.

John covered the strategic backdrop and why our portfolio remains well-positioned. Let me walk through first quarter results by key metric and then discuss our revised 2026 outlook. Our first quarter results were well above the framework we provided on our last call, as both revenue and profitability came in stronger than expected. Revenue in the first quarter was $846 million, up 6% year-over-year. Quarterly revenue exceeded expectations on favorable receipt timing, and the year-over-year growth came from programs related to tactical radars, infrared sensing, and electric power and propulsion. The strong contribution from tactical radars and infrared sensing was evident in the increased ASC segment revenue. In IMS, Q1 revenue growth was more modest, as electric power propulsion strength was offset by a tough compare in force protection program, mostly attributed to timing.

Moving to profitability, adjusted EBITDA was $105 million in the first quarter, representing year-over-year growth of 28%. Adjusted EBITDA margin was 12.4%, reflecting 210 basis points of year-over-year margin expansion. The increased adjusted EBITDA and margin came from strong program execution across the business, favorable mix, and operational leverage from higher volume. Switching to the segment view, in Q1, ASC adjusted EBITDA was up 48%, with margin expanding by 290 basis points, reflecting improved execution, better mix, and operational leverage. For IMS, adjusted EBITDA growth of 8% outpaced the top line, with margin expanding 90 basis points driven by strong program execution, including on the Columbia-class.

Turning to the bottom line metrics, first quarter net earnings were $62 million, and diluted EPS was $0.23 a share, up 24% and 21% respectively. Our adjusted net earnings of $69 million and adjusted diluted EPS of $0.26 a share were up 28% and 30% respectively. The favorable year-over-year compares were driven primarily by strong operating profitability and lower net interest expense. Moving to free cash flow. Free cash flow in the quarter reflected typical seasonality with a modest outflow. However, relative performance improved meaningfully versus last year. Higher profitability, better working capital management, and solid program execution drove the improvement. We are only one quarter into the year. Our strong start to that year gives us confidence to increase our full year outlook across metrics.

We are increasing our range for revenue to $3.9 billion to $3.975 billion, implying strong year-over-year organic revenue growth of 7%-9%. Our funded backlog continues to provide a healthy visibility into growth. That said, the timing and level of material receipts, pace of program execution, and the capture and book-to-bill revenue remain as the primary drivers behind the variability in the range. Additionally, we are increasing the range of adjusted EBITDA to between $515 million and $530 million, which also assumes an improved margin expectation over our prior guide. As you know, we do not provide granular guidance on our segments, to help with your modeling, let me provide some directional color. We continue to expect strong revenue growth from both our segments.

Adjusted EBITDA dollar growth is expected across both segments, but the margin improvement over the as-reported 2025 will come from IMS. Stronger operational execution combined with reduced assumptions for net interest expense is flowing through to our bottom line metrics. We are now projecting adjusted diluted EPS to be in the $1.26 to $1.30 per share range. Our underlying assumptions for tax rate and diluted share count for the year remain unchanged at 18.5% and 269 million respectively. We are now targeting free cash flow generation at approximately 75% of adjusted net earnings for the year. Despite the lighter capital expenditures in the quarter, we still expect increased capital investment for the balance of the year.

The slight revision to our free cash flow conversion for the year is largely driven by increased assumption for working capital investment to fund future growth. Let me give you some color on our current expectations for the second quarter. We expect revenue to trend around $900 million, and adjusted EBITDA margin should be comparable to Q1 in the mid-12% range. Additionally, we expect to be modestly free cash flow positive in the quarter, alleviating some of the cash generation load from the second half. Let me turn the call back over to John for closing remarks.

Thanks, Mike. I wanna recognize our team for the dedication and mission focus they bring every day in support of our customers and the nation's most important security priorities. Our team understands the stakes. Our nation is at war. Our service members are counting on the technology and products that we deliver. That's why we're operating on a wartime footing across the company. Our first quarter performance, along with the progress we've made over the last several years, highlights the quality of our portfolio and validates the strategy we've been executing. We're starting this year from a position of strength. We intend to build on that momentum, driving meaningful growth in the near term while continuing to develop the longer horizon opportunities that will shape the next phase of DRS.

We're investing in innovation and capacity at the moment when the demand for these capabilities is both urgent and enduring. Looking forward, our priority is clear: provide differentiated next-generation solutions with speed, quality, and the ability to scale so we can deliver the consistent performance our customers and shareholders have come to expect. With that, we're happy to take your questions.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star followed by the number 1 on your telephone keypad to join the queue. If you would like to withdraw your question, simply press star and then the number 1 again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute while asking your question. Just a reminder, we ask you that you please limit yourself with 1 question and 1 follow-up only. After that, you can simply join the queue again. Thank you. Your first question comes from the line of Peter Arment from Baird. Please go ahead.

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

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

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

Got it. Just quickly, Mike, as a follow-up, CapEx to start the year started a little light. You know, any change or just how should we think about kind of cadence of CapEx for this year? Thanks again.

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

Your next question comes from the line of Seth Seifman from JP Morgan. Please go ahead.

Yeah. Hey, guys. This is Alex on for Seth today.

Hey, Alex.

Hey, you know, wanted to ask kind of on, you know, the IMS margin, specifically, I mean, it got off to a good start here in Q1 at a 14.6%. You know, it comes off of Q4, where if you kind of adjust out that 1-timer, you know, kind of ends up in the, in the high teens range. You know, curious kind of if you guys could elaborate a little bit more on, you know, the recent momentum you've been seeing with IMS profitability. You know, has there been any sort of unlock with respect to maybe the Columbia-class program specifically? You know, I know you guys talked about, you know, the IMS, margin expansion kind of expected to drive the overall company's margin expansion for the rest of the year. You know, curious if you guys could kind of elaborate a little bit more on that.

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

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

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

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

Got it. Thank you.

Your next question comes from Andre Madrid from BTIG. Please go ahead.

Hey, good morning, John, Mike, and Steve.

Good morning, Andre.

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

Okay. Hello, Andre.

Yep.

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

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

Yeah. Andre, thanks for the question. We had a little bit of a gap in your question, but I think we got it. Look, our primary focus for capital deployment is really, as we've talked about before, organic. We are spending more on IR&D, more on CapEx, focusing a lot on building capability inside the business. That said, we are still looking for technology gap fulfillment and kind of tuck-ins in the M&A pipeline.

That pipeline does span the gamut of capabilities from hardware to software, where we see areas of growing demand and growing a market poll, if you will, as well as, you know, aligning with gaps. When I talk about gaps, I'm talking about areas where if for want of a piece of technology, we could provide a solution to the customer. So those are the kinds of things that we're looking for. Typically, we do a lot of partnerships for fulfilling those kind of gaps, but we look for them in the M&A market as well. Hopefully that answers your question.

Yeah. Yeah, no, that's definitely helpful. I guess on that point, you know, you mentioned the organic investments you're making, you know, higher IRAD spend. I guess when you look at IRAD, like, what is most of your attention going towards? If you could maybe provide like a top three, you know, kind of areas in which you're looking to invest specifically through the balance of 2026.

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

Got it. That's very helpful. Thanks, John. I appreciate the color.

Thanks, Andre.

Your next question comes from Austin Moeller from Canaccord Genuity. Please go ahead.

Hi, good morning, John and Mike. Just my first question here. The adjusted EBITDA margin improvement within ASC, is that partially being driven by improvement in germanium availability and supply? Is it being driven by any inflation cost escalators of renegotiation of contracts, or is it just more favorable mix of tactical radars and DAIRCMs and volume moving through the factory?

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

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

Yeah, Austin, we were referring to unmanned surface vessels. What we've done is we've taken our counter-UAS mission equipment package, really kind of taken it off a tank and putting it on unmanned surface vessels. We put it on unmanned ground vehicles. We believe that the future of warfare is increasingly gonna be robotic. You're gonna have unmanned platforms out in front protecting manned platforms. What we've done is we've put these on the ground, on the ground vehicle side, on the surface side, we put it at sea, we demonstrated this capability. Again, there's a lot of money that the Navy will spend on unmanned surface vessels. The money is in the reconciliation bill from 2026.

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

Great. That's very interesting. Thank you.

Your next question comes from Jonathan Tanwanteng from CJS Securities. Please go ahead.

Hi. Good morning, and thank you for taking my questions. Really nice quarter and outlook there.

Thanks, John.

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

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

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

Yeah. It's a great question. Look, I'm not gonna kind of predict what happens to the overall to Congress or to the budget, but I would just go back to the point of what's in the budget. I think that the prioritization of capability that we provide is clear in that budget request. No matter what happens on the Hill, no matter what happens with the funding level, first of all, I, you know, there'll be an increase in budget. Whether it goes to 1.5 or not is another question. There'll be an increase. The more important point is that the focus of attention and the prioritization in that budget is aligned to DRS and aligned to our capabilities.

Got it. Thank you.

Your next question comes from Michael Ciarmoli from Truist Securities. Please go ahead.

Good morning. Nice results, and thanks for taking my question. Given the strong defense demand environment across domains, how are you prioritizing resources internally, given opportunities across naval, ground, space, and in the air? Where do you expect the most growth in 2026 and into 2027?

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

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

Take that.

Yeah. I'll take that. I'll say one of the major elements was what I alluded to earlier on the call, which is we've got a little bit more line of sight from what we've done from a raw material and supply perspective. The material favorability that we've seen, both from a timing perspective driving the revenue as well as from an execution perspective helped on the margin side there. The other elements were really more attributed to the actual volume of revenue and the operational leverage driving that additional revenue and gross margin contribution down to the bottom line as the IRAD spend and the G&A spend were much less of a headwind in Q1 2026 than they were in the prior year.

Awesome. Thank you.

Before we proceed, again, I would like to inform everyone that if you want to join the queue, simply press star one on your telephone keypad. Your next question comes from Ron Epstein from Bank of America. Please go ahead.

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

Yeah, sure. Let me take that. First of all, we are working with our customer on second sourcing the steam turbine generators for the submarine industrial base. We're seeing that, you know, at the end of the day, the Navy deserves to have at least 2 sources for these capabilities. Right now, they have 1. We're starting to see some of the money move out of the reconciliation bill out of OMB to the customer set. Some of that money's made its way to us already. This is 1 area of focus for us, is to continue growing content to be a steam turbine generator second source.

Another area that I'll point you to is the U.S. Navy's focused on a battleship. One of the things that we believe is that whatever the U.S. Navy ends up trying to design in the next generation surface combatant, they need to have an electric propulsion system. That electric propulsion system's really necessary to be able to move power around within the ship. We know that those ships are gonna have to fight from a from a longer distance because the anti-ship missiles are have higher, greater range today. Having an electric propulsion system allows those ships to provide power to radars for longer range radars, for directed energy weapons, for electronic warfare for a longer range.

We believe that's the architecture of the future. Going one step further than that, we believe that the Navy should be focused on a modular architecture, an architecture that would provide the capability from all the way from a battleship down to a cruiser to a destroyer or a frigate or a corvette, even a USV, a medium-sized USV. When the Navy would design an architecture once and then move forward. We're investing in these components, power components, that would provide that flexibility for the Navy to basically build whatever they wanna build once they've designed and tested an architecture. We're focused there on providing that capability for the Navy. We think that the Navy is moving in that direction.

We're helping them with some ideas here on how to do that. We'll I think that's another big vector for us, and that's where we're investing some money.

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

It's a great question, Alex. I think that, you know, as you look at the bill, a lot of the reconciliation elements are things that are needed right now. I think that the administration did that purposely. I would say that if you looked at the base budget, they have the same kind of prioritization that aligns well with DRS' capabilities. Certainly our capabilities are applicable to the reconciliation portion of the bill. Very well aligned to the base bill as well. I would tell you that our plan does not include, it's not dependent on a $1.5 trillion budget.

We're, I wouldn't say we're expecting, but this isn't, we're not dependent on a one and a half trillion dollar budget. Whatever comes out of the Hill on the other side is gonna have the same prioritization that that base bill has, which aligns directly with the DRS capabilities.

Got it. Thank you very much for taking my question. Appreciate it.

You're welcome.

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

Well, I wanna thank everyone for joining today's call. This quarter underscores the momentum in our business, strong profitability, sustained organic growth, and a disciplined approach to investing. We're off to a strong start in 2026. Our execution and visibility support raising our full year outlook. As I discussed earlier, we continue to see a rapid rate of change in the nature of warfare, and we believe the theme of capability proliferation is enduring, and it's driving the shift toward distributed, resilient, modular architectures that can be quickly replaced and scaled. DRS has a strategic advantage because we provide enabling technologies, and we pair that with deep integration expertise and growing software capabilities. As our funded backlog reaches new company records, we continue to invest in innovation and capacity to execute on the clear multi-year demand in front of us.

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

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

Thanks for your help today. Really appreciate it.

Thank you very much as well. I hope everyone will have a good day ahead of them.

Great. Thank you. Have a good one. Bye now.

Thank you. Bye-bye.