Leonardo DRS, Inc. Q2 FY2024 Earnings Call

Thank you for joining us. Welcome to the Leonardo DRS Second Quarter 2024 Earnings Call. Currently, all participants are in listen-only mode. After the presentations, there will be a question-and-answer session. I will now turn the call over to Steve Vather. Please go ahead.

Good morning, and welcome, everyone. Thanks for participating on today's quarterly earnings conference call. With me today are Bill Lynn, our Chairman and CEO; and Mike Dippold, our CFO. They will discuss 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 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 the 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.

Thanks, Steve, and thank you all for joining us. DRS continues to perform well as evidenced by the impressive quarterly results we are releasing this morning. We are experiencing steady customer demand across our diverse portfolio of differentiated technologies. As a result, we posted another consecutive quarter of 1.2 book-to-bill. In Q2, there was particular strength to our capabilities in advanced infrared sensing, electric power and propulsion, network computing and ground systems integration. Additionally, our total backlog ascended to new company records and now stands over $7.9 billion, which is up 82% year-over-year and also up sequentially. The robust demand we continue to experience, coupled with the easing of supply chain constraints, unlocked another quarter of 20% year-over-year organic revenue growth. We also grew our adjusted EBITDA by 32% and delivered margin expansion of 100 basis points in the quarter. Adjusted net earnings and adjusted diluted EPS increased by 21% and 20% compared to last year, thanks to solid operational execution. I want to take a moment to thank the broader DRS team for driving such marvelous results. The team's steadfast focus and our exceptional performance in the first half is prompting us to adjust our outlook for the full year. Mike will walk through the detail of our increased guidance a little bit later on the call. To give you some thoughts on the macro environment, Congress has made preliminary progress on FY '25 appropriations. However, consistent with prior years, we expect to enter the fiscal year under a continuing resolution. Looking beyond the near term, we believe that the elevated global threat environment will remain as the single most important factor driving defense investment by the U.S. and its allies. Technology advancements are changing the nature of warfare and our national security strategy remains consistently focused on deterring and, if necessary, contesting near-peer adversaries. Both of these factors reinforce the imperative to modernize. DRS is well-positioned to continue supporting our customers as they enhance their capabilities to address new mission complexities. Shifting to supply chain, I mentioned that improvements on this front are partially responsible for unlocking incremental revenue growth. We have seen a steady and gradual recovery across most but not all of our supply chain and year-to-date 2024. Additionally, our steadfast and proactive management of the supply chain, coupled with broader improvement, are resulting in better predictability and delivery timelines, increased component material availability as well as improved consistency and quality. Overall, these positive developments are accelerating the pacing of revenue for the year. That said, the revenue step-up from the supply chain recovery is expected to be contained to this year, with future growth to be more in line with our previous projections in the mid-single-digit growth range. We believe that we are close to a new steady state with respect to lead times and input pricing, which, of course, are both significantly higher than pre-2020. While inflation has been a lessening factor for us in 2024, there are still some stubborn pockets within our business where we are still absorbing higher input pricing. Shifting to our operations, let me highlight a couple of items this quarter. As I mentioned earlier, we are continuing to see strong demand across our broad and differentiated portfolio. In our sensing business, our technologies continue to be well recognized as the go-to standard. This is evident in our outstanding quarterly bookings as well as the clear long-term opportunity set bolstered by our customers' modernization push for next-generation technologies. We are also advancing our leading market positions by partnering with commercial players to jointly develop cutting-edge capabilities that meet emerging customer requirements. An example of this is our active work to integrate edge AI processing into sensors. At the same time, our agility and commitment to excellence make us a partner of choice across the defense ecosystem. We were recently recognized with the Partner 2 Win award from our customer, BAE Systems, for best-in-class performance and delivering exceptional capability, quality and on-time delivery. This award, among many others received over the years embodies our culture and commitment to ensuring our customers have the very best technology to execute their missions. Our innovation continues to be matched with healthy customer interest, which validates the close alignment of our R&D strategy to future mission needs. Earlier this year, we unveiled a new family of lasers that cover a wider spectrum of light. These lasers were specifically designed for quantum information science applications. I am pleased to report that we have already secured several orders and continue to gather demand for our state-of-the-art capability in this domain. Additionally, we are seeing considerable domestic and international customer appetite for our multi-domain force protection solutions. Counter-UAS and force protection capabilities remain critical to survivability and operating effectively in today's battlefield. Our tactical radars, advanced sensing and active protection technologies as well as our systems integration expertise continued to be key enablers. I want to briefly mention that in this quarter, we also secured a $417 million contract to provide critical electronic combat control and sonar systems across U.S. and allied Navy submarines. We are pleased that we will be continuing to support the Navy on this important network computing contract for many years to come. This win also provides us with increased visibility into the year as it clears our largest recompete for 2024. Moving to a quick update on our facility expansion efforts in Charleston, South Carolina, we continue to make steady progress as demonstrated by the ramp-up of CapEx in the quarter. As planned, CapEx will continue to pick up in the second half. Lastly, I want to commend our team in Danbury, Connecticut for their superb commitment to industrial security. This year, DRS was one of 14 recipients of the Cogswell Award, out of more than 12,500 eligible cleared facilities. This honor now marks our 22nd award which demonstrates our continued and unwavering company-wide commitment to security. Overall, there is a lot to be proud of, and I am pleased with our outstanding year-to-date results. That said, I am most proud of the team's continued focus on delivering the very best technology to our warfighters. Our talented people, sound strategy and leading market positions are generating spectacular outcomes for both customers and shareholders. We remain focused on driving sustainable growth, execution consistency and prudent investment, all of which are critical components to our long-term value creation formula. Let me now turn the call over to Mike, who will walk you through our second quarter results and revised 2024 guidance in greater detail.

Thanks, Bill. I'm pleased with our strong continued momentum. I also want to extend my thanks to the team for executing another great quarter. As Bill mentioned earlier, impressive customer demand and a continued supply chain recovery is driving revenue growth well above our prior expectations. Revenue growth in the quarter was 20% and entirely organic. A sizable portion of the growth stemmed from increases in our advanced infrared sensing, electric power and propulsion as well as our tactical radar programs. Moving to the segment view. ASC segment revenue was up 22% due to growth in programs related to advanced infrared sensing and tactical radars. Our IMS segment revenue was up 18% year-over-year, with solid performance evident across the segment. Now to adjusted EBITDA. Adjusted EBITDA in the quarter was $82 million, representing 32% growth from last year. Increased volume was the primary catalyst for the 100 basis points of margin expansion in the quarter. At the segment level, quarterly adjusted EBITDA and margin performance continues to be fairly lumpy. The trending is clearer when extrapolated to an annual view. That said, for the core ASC segment, adjusted EBITDA increased by 53% and with margin up 230 basis points due to favorable program mix, higher volume and improved program execution. IMS segment adjusted EBITDA was up 4%, a margin contracted by 130 basis points due to unfavorable program mix and less efficient execution related to a ground surveillance integration program. It is important to note that our Columbia-class program continues to trend positively with improved year-over-year profitability. Since it's evident, first half compare where segment adjusted EBITDA is up 47% with 140 basis points of margin expansion over last year. Moving to the bottom-line metrics. Second quarter net earnings were $38 million and diluted EPS was $0.14 a share, up 9% and 8%, respectively. Our adjusted net earnings of $47 million and adjusted diluted EPS of $0.18 a share were up 21% and 20%, respectively. Strong operational execution outweighed the headwind from increased taxes and a higher relative tax rate in the year-over-year compare. Moving to free cash flow. Cash collections were slightly better than last year with a small free cash generation in the quarter, a great outcome driven by higher net profitability and better working capital efficiency, which more than offset the increased year-over-year CapEx investment. Let me shift to a discussion on our updated guidance. Based on the remarkable first half performance, we are increasing our guidance across all key metrics. We are now expecting a higher revenue range between $3.075 billion and $3.175 billion, which represents a 9% to 12% year-over-year growth, all of which is still organic. We have solid visibility for the year as we recently secured recompetes and continued to execute from our sizable backlog position. However, our revenue output will largely depend on the timing of material receipts, progress of labor input as well as the level and pacing of customer orders. For adjusted EBITDA, the range has also increased and is now between $375 million and $395 million. We are still expecting healthy margin improvement year-over-year primarily from the Columbia-class transition to production as well as some operational leveraging from higher volume. The implied margin improvement is a little lower than our prior guide due to less favorable program composition from the increased revenue output, some discrete, less efficient program execution as well as the lingering impact of inflation in pockets of the business. Overall, we expect both our ASC and IMS segments to contribute to our revenue growth and annual margin improvement. The adjusted diluted EPS range was increased to between $0.82 and $0.88 a share. Embedded in this range are lower expected tax rate of 20.5% but our fully diluted share count remains consistent with our prior guide at 268 million shares. Lastly, we are still targeting 80% free cash flow conversion of adjusted net earnings for the year. When we think about the likely cadence of the second half, consistent with prior years, it is our expectation that the fourth quarter will contribute strongly to the financial performance of the year. Obviously, a significant portion of the guidance increase is coming from the outperformance in the second quarter, the balance of the increase will manifest primarily in the fourth quarter. As a result, we are anticipating a small step-up in Q3 from Q2, translating to revenue around $775 million, with adjusted EBITDA margin in the low to mid-11% range. Our revised 2024 guidance does not change our three-year financial targets. We remain committed to driving mid-single-digit revenue growth annually, albeit from a higher revenue base while driving towards approximately 14% adjusted EBITDA margin by 2026. Let me wrap up with a few quick closing thoughts. We are pleased with our performance to-date and applaud the broader team in achieving these results. That said, we are maintaining a steadfast focus on driving execution to meet our commitments to our customers and shareholders.

Our first question comes from Robert Stallard with Vertical Research. Your line is open.

And I've got a couple for you. First of all, wondering if you could elaborate on these, what I think you call them efficiency issues in the IMS division in the quarter, and whether you're expecting them to continue going forward.

Mike, why don't you go ahead?

Sure. Yes. So, Rob, this is a program, it's a land integration program that we have within the IMS segment. It's a program that's a handful of years old, and we had anticipated kind of closing that out this year. We've had some delays that we've had in the program testing and completion of the program, which has extended it out a bit. That’s really what the headwind is. We believe that this is at the 10-yard line, we can see the light at the end of the tunnel here. It's just taking us a little longer and will cost more to complete than we had previously anticipated. So, I believe it's contained to '24. I don't think it will impact anything in the long term, but it is a headwind we're dealing with for the current year.

Okay. Then as a follow-up, it sounds like the overall supply chain situation is getting better, but I was wondering if you could sort of contrast where it's got better than most perhaps and where there is still some work to do.

Yes. As I said in the opening comments, Rob, we are seeing a better environment, both in terms of the supply chain and the market itself, lead times have come down, availabilities are up. We are not, though, back to or anywhere close really particularly in things like electronic components to the pre-2020, pre-COVID timeframe. The other factor in this is we are much more heavily managing the supply chain than we did in the past. Obviously, like everyone else, we've moved away from just-in-time delivery and are looking at resilience in the supply chain. I think part of the improvement we saw this year was that proactive management.

Okay. And then just a final one for me, one for Bill probably. Looking on the funding outlook for the DoD and obviously, the political uncertainty we have later on this year, I was wondering what sort of risk DRS might have if the Ukrainian supplemental were to be zeroed? And what sort of offset perhaps there could be from European demand?

Yes. Overall, I think the change in administration, whether under Harris or Trump, will have a modest impact on the defense budget since the threats remain the same. The primary concern continues to be China in the Pacific, while the immediate threat is still Putin in Ukraine. The main distinction between a Democratic and Republican White House is in their approach to Ukraine. I would be somewhat surprised if there was a sudden halt in Ukraine spending. Currently, most funding is to replenish U.S. equipment rather than being direct transfers to Ukraine. Therefore, it is likely that there would be less spending under a Republican administration compared to a Democrat, but I expect any changes would be gradual.

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

Bill, Mike and Steve, this is actually Alex Ladd on for Seth today. First, kind of wanted to dig more into the change in the outlook that we saw for adjusted EBITDA margins. I think if you take the midpoint of the sales and adjusted EBITDA guidance, it implies a step down to 12.3% margins for the year. And I certainly get that there's a stronger sales outlook, but it seems like the release in kind of your prepared remarks earlier imply that there's a bit of less drop-through, and less favorable mix and some program execution headwinds are kind of driving this. So, I was wondering if you could kind of provide more color on this. I'd assume, given the margin improvement that you're expecting from Columbia in the second half, it's not related to that, but maybe if you could kind of highlight more specifically what type of programs we should be driving that?

Yes. I'll start and then let Mike provide additional details. You're correct; we are now anticipating about an 80-basis point improvement year-over-year from 2023 to 2024, which represents a significant improvement. This is largely driven by the Columbia program, and each year we transition to contracts that offer a better mix and higher profit margins. This trend is ongoing. The challenges we noted include the surveillance program winding down more slowly than we had anticipated this year. Additionally, the increase in revenue is skewed towards the lower end of our margin portfolio, creating a mix issue. We're also still encountering some inflation, with about one-third of our contracts priced based on inflation assumptions, which we expect to be the last year for this situation. Mike, would you like to elaborate?

I think you covered it pretty well. I'll just answer the latter part of your question, which was on the kind of H2 outlook. So, we do expect to see a little tick up in the profitability in the second half to drive us to the guide range that we just put out, and that's going to be driven by the Columbia and as Bill mentioned, as we start to execute on the later shift sets, they will come with a higher margin and you're going to see even in-year shift as we execute that program in the second half of the year.

Great. That's helpful. And then maybe as a follow-up. Obviously, sales growth was pretty strong in the first half at about 20%. I appreciate the sales guide being up more towards the double digits. And I think you also pointed to Q3 being up a little bit year-over-year. So, that kind of implies a pretty decent decline in the fourth quarter. Just thinking about the Company having a book-to-bill above one, the growth you're seeing in the backlog and the general strength we're seeing in the demand environment, it seems like there could be some opportunity for upside. So curious, if you can kind of level set us on this and how we should think about that progression maybe in Q4 a little bit more, too.

Yes. I think the one factor you missed there, Alex, is the improved linearity that we're experiencing this year. This has been a drive we've had. So, when you're looking at year-over-year comps, the easier ones are in the front end of the year and the tougher ones are in the back end because of the math of the increased linearity of '24 versus '23. It is still driving to that 9% to 12% year-over-year increase, which we do think is a strong year.

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

I wanted to begin by discussing the South Carolina facility. Have you started considering what recruitment will look like for this facility once it's operational? Looking at the broader naval supply chain, skilled labor has been challenging to find, and we've seen this issue among some of your small to mid-cap peers as well.

Yes, we have. The decision to locate in South Carolina was intentional as we believe there is a strong potential workforce there. Importantly, it is outside the areas served by the two major nuclear shipyards, Newport News and Electric Boat. A key goal is to expand the submarine industrial base, which the Navy supports. We believe that broadening the geography of this industrial base will provide us with a capable pool of employees. We've already started construction and are about a quarter of the way through the build process for Charleston. As we progress, we will ramp up our recruiting efforts to attract a talented workforce.

Understood. Understood. And if I could follow that up still on the naval front. I mean when you look at Columbia-class, the ramp there is pretty well underway. I mean what other opportunities for power and propulsion do you think are available moving forward? I know DDG(X) was supposed to see supplier down selection earlier this year, but I think that got pushed out. Is there any other color there?

Yes, I see three main opportunities for DRS in the propulsion area over the mid to long term. One is DDG(X), as you mentioned, but there are other classes of ships as well, with DDG(X) and SSN(X) being the most significant. There is a strong rationale for incorporating electric power technology into these new ships because it is quieter, which is crucial for combat effectiveness, and it lowers operational costs due to reduced fuel expenses. Moreover, the power demands of future ships will significantly increase, driven by the propulsion systems and the growing power needs of sensor suites. Given that these ships are expected to have lifespans of 30 to 50 years, directed energy capabilities must be considered, which require substantial power. All these factors point towards electric power as the preferred option for propulsion. We believe there is a strong case for this in the mid to long term. The second opportunity is international markets, like the one in Korea that we've discussed. We haven't made a decision on that yet, but it represents just the beginning of international possibilities, as foreign navies are also moving towards electric power similarly to the U.S. Navy. The third opportunity involves increasing content in existing programs as we expand the submarine industrial base and optimize work between shipyards dedicated to producing more submarines quickly and the supplier base that will contribute more to each submarine's content. We see significant potential in this market driven by these three opportunities.

That's very helpful color. If I could just squeeze in one more. What would some of that increased content look like? I mean, are you able to break that down? Or is that a little too granular?

It's probably a little too granular at this point because we're under negotiation. We talked about the way we've set the Charleston facility up, it’s that the initial phase, the business case is justified just based on the contracts we now have for Columbia that go all the way through the 2030s. That visibility gave us the business case to invest in greater efficiency and capacity to execute that work in a better way. But there's a second phase that we could bring work in a number of types into that facility with investment from the Navy, to expand that submarine industrial base. But I can't really give you much specifics in terms of the exact content of that expansion. That's what we're discussing now with both the shipyards and the Navy.

Next question comes from the line of Mariana Perez Mora with Bank of America. Your line is open.

So, you mentioned in the prepared remarks, a lot of developments to actually implement AI, quantum and cybersecurity to the edge. Could you please describe how are your investments there? How much of those are customer R&D versus your own R&D? And which specific arenas you're seeing the opportunities for this? It's like the traditional Navy and Army, or do you actually have a way to get into unmanned air or space?

Yes, there’s a lot to cover, Mariana. Regarding AI, our investment focuses on enhancing processing capabilities at the edge and improving our sensors, which include both ground and space-based sensors. We utilize AI processing at the edge to boost performance. This investment involves collaboration with several commercial companies, as much of the AI expertise is found within the commercial sector. In terms of quantum technology, our entry point is through lasers, as a photonics engine is essential for quantum computing and sensing. We possess one of the top laser capabilities globally at Daylight Solutions, and we’ve conducted internal R&D to advance this technology. We’re now receiving co-investment from customers and starting to secure initial orders and contracts that will help with financing. While we're still in the early stages of quantum development, we believe that the photonics engine holds significant potential.

And the other one is about Columbia. In their earnings call, General Dynamics mentioned that they are seeing some progress in the shipyards. I'm curious if you're noticing any of that progress influencing your work. Additionally, what are the key milestones that we should be monitoring to observe the advancement towards production?

Yes. I think the important thing for us to realize with DRS is that we did get the entirety of the contract led to us last year for all 12 ships as to maintain the continuous production. We're a little disconnected from any comments that GD makes there because we are executing on the existing stand-alone contract. We continue to progress well there. From a financial perspective, the indicator is going to be the continued margin expansion as you see that we're continuing to hit those milestones and execute effectively.

Our next question comes from the line of Sam Struhsaker with Truist Securities. Your line is open.

I'm speaking on behalf of Mike Ciarmoli this morning. I would like to request more details on the upper revision for revenue. Could you break down the drivers for the two segments, IMS and ACS? Additionally, regarding the mild margin pressure for the year, how should we approach the future trajectory of margins in the second half?

Mike, why don't you take that?

Yes. Let me begin with the revenue aspect and the overall performance. We are experiencing a strong demand across both segments, and we are confident about our backlog, which supports our revenue growth across all areas. You will notice that both segments are expected to contribute fairly equally to the revenue growth for DRS this year. In terms of margins, both segments are performing similarly and will contribute to our year-over-year margin expansion. This is the expectation we started the year with, and we are maintaining it despite the increased revenue.

Okay. That's great. So I guess it's just about one program that you are seeing some pressure on. Is there anywhere else that you are encountering issues, or is that really isolated to that one program?

Yes. We're 85% firm fixed price. So, there are always some opportunities; there may be some risk. What we've done well as a management team is to make sure that we're identifying risk early, understanding the mitigation of those risks, and maybe equally as important identifying opportunities. We look forward, yes, we have some fixed price development efforts, but we also have an incredible balance between our risks and our opportunities. That's really what underpins our confidence that we're going to be able to execute effectively and then deliver on our EBITDA margin commitments all the way through 2026.

Okay. Great. And then just one final follow-up, if I could. On the CapEx for the South Carolina facility, should we expect a pretty steady increase or ramp on that? Or is there kind of a peak and then ramp back down with that trajectory that we could think about?

For the remainder of the year, I would expect to see kind of the CapEx commitments looking pretty similar to Q2 with a slight ramp up as we get into the latter Q3 and into Q4. You'd see a gradual step-up, and that's the expectation that we have in terms of the cadence of the execution of the South Carolina facility for the remainder of the year.

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

Great quarter and outlook. I was wondering if you could talk a little bit more about the long-term expectations for defense spending. Maybe a split between domestic and international and kind of ex the Ukraine supplementals, it seems like there's been a push to grow defense spending at the DoD at a higher percentage than it's been in the past, broadly, you're seeing that among Allied Nations as well. How does that factor into your long-term growth expectations, if it's any different from what you've presented at the Investors Day before?

Thanks, Jon. I don't think it's different than what we presented at the Investor Day. There, we did talk about that at this point, the international environment, broadly speaking, is growing faster than the U.S. defense budget. We are seeing that in our revenue mix. We've doubled to about 10%, our international revenue over the last three or four years, and we're still on that trajectory of increase. We do think we'll see an increase this year in our international and projecting forward. We think that, that environment that you talked about where Europe is increasing and now the U.K. is talking about 2.5% of GDP. Similarly, in Asia, you're seeing strong increases in Australia and Japan. That gives us, I think, opportunity to further increase the international content of our revenue base.

Okay, great. Do you have any updates on capital allocation, particularly regarding mergers and acquisitions? We've noticed some very attractive assets being sold for reasonable multiples, and I'm curious if you're considering those deals or if you're encountering additional opportunities.

We have been seeing more opportunities. We've been quite active and diligent over the past six months. We don't have anything to announce, but we're continuing to see opportunities in the four core markets that our strategic framework and where we would want to do any kind of M&A. We continue to have the strict financial criteria, and we evaluate them against this. But as I said, we are seeing opportunities. We're prudent, but we do think we will be able to execute on an M&A strategy over the near to midterm.

Okay. And if I could squeeze one more in. Any update on just what your parent, Leonardo, is doing? They've been active in M&A markets as well.

We are focused on our mergers and acquisitions, working closely with our 70% shareholders under a shareholder agreement. Their interests are directly linked to our value increases, as any growth benefits their share price. We have a shared vision for our goals and collaborate with them in this regard.

Our next question comes from the line of Jan-Frans Engelbrecht with Baird. Your line is open.

I have a question about force protection, as there seems to be significant demand, particularly in the Middle East. Could you share the growth outlook for that market in 2024? Additionally, are there any milestones or programs we should be aware of in late 2024 as we move into 2025, specifically regarding force protection?

Yes, I believe you accurately capture the underlying market dynamics. The conflicts in Ukraine and Israel have underscored the need for organic force protection as we navigate a world with air threats, which have been intensified by drone technology that even lower-tier military forces can deploy. This has influenced our decision to invest in the Army's short-range air defense, Counter-UAS, and active protection systems, all of which are experiencing growth. As mentioned in a previous call, the Army has doubled its force structure for short-range air defense this year, increasing from four to nine battalions, despite having fewer overall assets, they are allocating a greater proportion toward short-range air defense. We're also beginning to observe international demand, which we've supported by creating a single vehicle solution for the Counter-UAS, enhancing operational efficiency and reducing costs, thus improving our competitiveness in global markets. Overall, trends in this area appear very positive.

That's really helpful. And just a quick follow-up, I guess, also sort of high level, but we've seen this growing trend or call, I guess, from the industry for the need for interoperability between the U.S. NATO Allied Nations in terms of weapon platforms. Is there any opportunity that you guys are targeting? I know it's early days, but maybe I would think top of mind would be sensors or anything like that, anything that you can comment maybe on the longer term there?

Yes. Frankly, the NATO Alliance has always been present, and we just celebrated its 75th anniversary. The strong alliances in Asia have also always existed. You're right that these relationships have been reemphasized due to the conflicts we face and the threat from China. We see opportunities in areas like sensing, and even more so in computing and communications. We provide battlefield computing for the U.S. military and identify international opportunities for that as well. We already sell to the U.K. and it forms part of foreign military sales of vehicles to Eastern Europe. There's a dynamic at play, especially for those buying U.S.-sourced vehicles, as there's a strong incentive to incorporate the same network computing. This is integral to the vehicle and provides the interoperability you mentioned.

Our next question comes from the line of Kristine Liwag with Morgan Stanley. Your line is open.

This is Justin on for Kristine. I think a lot have been covered already, but maybe just a quick one on ASC. I think last quarter, you mentioned mix was shifting from development to production over the course of the year. I guess, how much of that shift manifested here in 2Q results? And still fair expectations for further tilt towards production type work in the back half for the segment?

Yes, I think you're spot on with your assessment. We are starting to see some of those development programs move into production, and the production efficiencies are improving on those programs, which has certainly helped in both the revenue growth as well as the margin. I would expect to see that trend continue into the second half of the year.

Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Steve for closing remarks.

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

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