Leonardo DRS, Inc. Q4 FY2024 Earnings Call

Ladies and gentlemen, good day, and welcome to the Leonardo DRS Fourth Quarter Fiscal Year 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the company's prepared remarks, there will be an opportunity to ask questions. Instructions will be given at that time. As a reminder, this event is being recorded. I would now like to turn the conference over to Steve Vather, Senior Vice President of Investor Relations and Corporate Finance. Please go ahead.

Morning, and welcome, everyone. Thanks for participating in 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 in 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 measures. You can find a reconciliation of the non-GAAP measures discussed on this call in our earnings press release. At this time, I'd like to turn the call over to Bill.

Thanks, Steve, and thank you all for joining us today to discuss our fourth quarter and fiscal year 2024 results. The DRS team continues to execute impeccably. Before we get into the details of our performance, I want to express my genuine appreciation to our talented people for their steadfast focus and significant contributions that drove another strong year for our customers and our shareholders. In 2024, we delivered record bookings, mid-teens organic revenue growth, healthy adjusted EBITDA margin expansion, and steady free cash flow generation. Our business saw broad-based customer demand, which was reflected in the over $4 billion of contract awards secured throughout the year. The robust level of bookings translated to a 1.3 book-to-bill ratio for both the fourth quarter and the year. Solid execution, strong international demand, and a more normalized supply chain enabled the acceleration to 14% revenue growth, with double-digit growth evident in both segments for the year. Furthermore, we delivered 23% adjusted EBITDA growth along with 90 basis points of margin expansion in the year. More importantly, we achieved the increased profit margin while maintaining steady investments for future growth. I'm pleased to report that in 2024, we increased our investment in internal research and development and capital expenditures by approximately 25% year over year. We are committed to stepping up both R&D and CapEx investment in 2025 as we invest to unlock incremental avenues of future long-term growth. Some of these investments include the expansion of our sensing modalities, directed energy capabilities, enabling the application of AI and quantum in sensing and processing, and, from a CapEx standpoint, our new facility in Charleston, South Carolina. Additionally, we generated $190 million of free cash flow in line with our targeted conversion of approximately 80% of adjusted net earnings. Our crisp execution in 2024, coupled with a record $8.5 billion total backlog, provides visibility into driving continued growth and margin expansion into 2025 and in achieving our multiyear investor day target. Moving to some comments on the macro backdrop, as we look across the globe, the threat environment remains elevated. We expect the need to contest and deter global threats to continue to apply steady upward pressure on U.S. and allied defense investment. The imperative and focus remain on building next-generation strategic capabilities as well as modernizing existing platforms. We are operating in a more dynamic environment. The new administration has brought an emphatic focus on speed, innovation, efficiency, and best-in-class technology. It is evident that DRS is well-positioned across all of these things. Since our inception, DRS has earned a reputation for agility and cutting-edge innovation. This has been consistently demonstrated through our capacity to rapidly deliver advanced capabilities with exceptional quality and reliability in an affordable manner for our customers. Furthermore, DRS enjoys a differentiated market position as a growth-focused critical defense technology company. Our diverse portfolio is intentionally designed to be platform-agnostic, which buffers us from budget volatility. Columbia class is our largest program at approximately 10% of revenue and is a top national priority and a key leg in the nation's nuclear deterrent modernization effort. Beyond electric power and propulsion, the balance of the portfolio is aligned to enduring missions ranging from counter UAS to multi-domain and multimodal advanced sensing to next-generation network computing solutions for secure mission management, communications, combat systems, and fire control. The bottom line is that we have incredible technology depth. As you know, our entire business model is predicated on delivering technology and integrated solutions that are critical to our customers executing their mission successfully and effectively. Our ability to consistently produce technologies that meet and exceed the most stringent operational requirements at scale makes us a trusted partner to U.S. and allied defense customers. With this new administration considering a greater shift toward fixed-price contracts, I want to remind you that our mix already significantly skews fixed-price and has for some time. As a result, we have a rigorous understanding of how to deliver innovative capability in an affordable manner to customers while managing risk and generating appropriate returns for shareholders. We are also continuously identifying and driving improvements enterprise-wide to optimize performance. In 2025, we are maintaining that steadfast focus on execution excellence. Additionally, in the coming months, we look forward to gaining better clarity and a deeper understanding of the new administration's key priorities as well as the finer details of their initiatives. I want to emphasize that for over 55 years, we have been delivering on our commitment, innovating for future growth, and leveraging our market-leading capabilities to provide our customers a decisive edge. Our steady stream of bookings and growing backlog across our differentiated portfolio of advanced sensing, network computing, force protection, and electric power and propulsion technologies provide us confidence that DRS is well aligned to critical enduring defense priorities. In short, our fundamentals are solid. I expect 2025 to be another strong year of performance for DRS. Our success remains evident throughout the entire portfolio. Let me expand with some observations on our notable operational and technical accomplishments exiting 2024. In our advanced sensing business, we continue to expand into attractive market adjacencies, which is a testament to our differentiation and further broadens our growth vectors. In the quarter, we received several over-the-horizon radar contracts, clearly demonstrating our growing technical leadership in this arena. Additionally, we were selected to provide infrared sensing on several missile programs, including those utilized for counter UAS as well as more strategic mission applications. It's worth noting that these recent wins are an expansion of our presence in the missile domain. DRS has diverse content on several missile programs such as THAAD, Patriot, and Aegis. Moving into our tactical radar business, it continues to enjoy exceptional demand as it remains one of the most compelling commercial off-the-shelf solutions to enable on-the-move counter UAS, short-range air defense, and active vehicle protection. Furthermore, our expanded capabilities in electronic warfare and software-defined radios were also met with healthy customer interest and demand. From a network computing standpoint, we continue to progress next-generation architecture that leverages open standards, modularity, advanced cooling, and the ability to utilize AI sensing and processing at the tactical edge. Also pleased to announce that we were able to begin performing on a contract to help the Army modernize its mortar fire control. Again, a very complementary and logical expansion of our network computing offering. Moving to our electric power and propulsion business, I'm pleased to report that over the course of 2024, we were able to secure more than $45 million of submarine industrial base funding commitments from the Navy and our prime customers, namely HII and General Dynamics. This industrial base funding will be utilized to equip and expand our capabilities in our new Charleston, South Carolina facility. Specifically, the investments will strengthen our capacity and capabilities in the design, manufacture, integration, and test of steam turbine systems. Additionally, we continue to make solid progress toward the targeted facility completion by 2026. As a reminder, the rationale for building this facility was to more efficiently execute the Columbia class program but also create capacity for next-generation platforms. These future platforms are a critical part of the long-term growth opportunity that we see in expanding our electric power and propulsion business. While these platforms remain further out, recent data points continue to bolster our strategy. Current design requirements for DDG(X) call for 40 megawatts of power generation as well as a design approach that is focused on platform modularity to accommodate regular modernization, as well as the deployment of next-generation combat systems. These advanced combat systems are moving from concept to reality. For example, the Navy recently tested a surface combatant-based directed energy weapon. Whether it be directed energy or other future combat communications and sensing systems, we expect the shipboard power requirements to only increase, which is most effectively addressed by electric power and propulsion architecture. Shifting to force protection, we are the key enabler and integrator of the directed energy counter UAS system, which is currently undergoing tests and demonstration by the Army. The system continues to show strong performance, and we look forward to working closely with our customer to operationalize and field this capability in the medium term. Moreover, we are seeing distinct international demand for our integrated solutions in counter UAS and short-range air defense. As a result, we are focused on progressing the ability to export these capabilities to close allies. Speaking of international, we saw a percentage of revenue coming from international customers rise to 13% in 2024. This demonstrates remarkable year-over-year growth and marks the fourth consecutive year of increased international business. The elevated global threat environment continues to catalyze an urgent push for capability modernization, which we view as lasting for years to come. We continue to see clear international growth opportunities across the entire portfolio, but particularly for our multi-domain sensing and network computing technologies. On the leadership front, I'm pleased to announce that we have appointed Bill Guyan as our Senior Vice President of Business, and he is also leading our international expansion efforts. Bill has made an incredible impact in a number of roles at DRS throughout the course of his over 20 years of service at the company, including most recently, leading our land electronics business. In his new role, I look forward to working with him closely to sharpen the competitive positioning of our business to drive growth in core, adjacent, and new markets both domestically and internationally. With Bill in a new role, we have promoted Denny Brumley to succeed him as Senior Vice President and General Manager of our Land Electronics business. Denny has been at DRS for nearly 15 years and has both deep customer intimacy and domain expertise in the ground network computing market. These promotions reflect the incredible depth of talent resident at DRS and also exemplify our steadfast commitment to leadership and employee development. Furthermore, our strong culture and competitive employee proposition are enabling our success in driving record hiring and retention rates. Now to a discussion on our capital deployment strategy. In our earnings press release, we announced a shift toward a more balanced capital allocation approach. Let me reiterate that our value creation strategy remains focused on driving growth, both organically and through M&A. That said, our steady cash generation and our strong balance sheet enable us to commence a capital return program comprised of a cash dividend and a modest share buyback, which will supplement our priority for value-additive M&A. With respect to the dividend, our Board of Directors has declared a cash dividend in the amount of $0.09 per share. The dividend is payable March 27, 2025, to shareholders of record at the close of business on March 13, 2025. We intend to begin payments of regular quarterly cash dividends subject to the discretion and final determination by the Board. We are also announcing that the Board has authorized the company's first share buyback program. It is an authorization totaling $75 million over the next two years. The program is expected to commence early next month and is designed to mitigate the dilutive impact of shares issued under the company's employee stock plan. Before I turn the call over to Mike, let me conclude my remarks by stating that our nation continues to operate in a complex global threat environment. Foundational to our country's ability to deter and contest these increasingly sophisticated threats is the technological competitive edge provided by companies like ours. It's our strategy and our talented people that enable DRS to meet our customers' most challenging needs. Our focus remains on driving innovation and capability to enable our customer success as well as drive value for our shareholders through steady growth, margin expansion, and cash flow generation. Mike? Over to you to review our recent financial performance and 2025 outlook.

Thanks, Bill. I also want to commend the entire DRS team for delivering another year of exceptional financial results. As a quick note, I have structured my comments to review both our fourth quarter and full-year 2024 results by key metrics and then will discuss in detail our 2025 outlook. First, revenue was $981 million and up 6% year over year for the quarter. Our programs related to tactical radars, naval network computing, advanced infrared sensing, and electric power propulsion were key drivers to growth. On a full-year basis, revenue was $3.2 billion, representing a 14% organic growth over 2023. Similar to the quarter, we saw consistent strength in our advanced infrared sensing, tactical radars, and electric power propulsion businesses, as well as healthy growth from our force protection programs. Broad-based strength was evident across both segments. Our Advanced Sensing and Computing segment increased revenue year over year by 9% in the fourth quarter and by 16% for the full year. For our Integrated Mission Systems segment, revenue was down slightly in Q4 by 1% due to program timing but was up a healthy 11% for the full year thanks to solid growth throughout the segment. Moving to adjusted EBITDA, adjusted EBITDA was $148 million for the fourth quarter and $400 million for the full year, representing year-over-year growth of 13% and 23% respectively. Resulting margins were 15.1% for the fourth quarter and 12.4% for the full year, a year-over-year expansion of 100 basis points and 90 basis points respectively. Increased program profitability on Columbia class, improved deck program execution, favorable mix, and operational leverage from higher volume helped drive the margin expansion. Moving to the segment trends, ASC segment adjusted EBITDA increased 9% on higher volume as margin was flat year over year in Q4. For the full year, ASC segment adjusted EBITDA was up 22% and margin expanded 70 basis points on improved program execution, favorable program mix, and higher volume. IMS segment adjusted EBITDA was up 24% in Q4, 27% for the full year, which translated to a margin expansion of 290 basis points and 140 basis points respectively. Margin was up in both periods thanks to increased profitability in our Columbia class program; the full year also enjoyed the benefit of higher volume. Now to the bottom line metrics. Diluted EPS and adjusted diluted EPS were up 18% and 23% year over year in the fourth quarter respectively. Solid operational performance combined with lower interest expense drove the favorable comparables. For the full year 2024, diluted EPS and adjusted diluted EPS were up 25% and 27% respectively. A full-year result similarly reflected strong execution and lower interest expense, but the more normalized tax rate was a slight headwind to the compare. Moving to free cash flow, Q4 free cash flow generation was robust and totaled $416 million, driving the full year to $190 million. Our implied free cash flow conversion was consistent with expectations of 80% of adjusted net earnings. Adding to Bill's discussion earlier, our balance sheet is now in a net cash position, and this is spurring us to adapt our capital deployment strategy to a more balanced approach and maintain the focus on M&A but also incorporate an element of consistent shareholder return. Now to our 2025 guidance, we are focused on building upon our strong execution track record, driving healthy organic growth and margin expansion. I am pleased to report that the range of guidance that we are formalizing today sits slightly above the framework that we outlined on our Q3 call back in October. We are now expecting revenue to range between $3.425 and $3.525 billion, which implies a 6% to 9% organic growth. Our growing backlog provides us with ample visibility. As usual, the variability of performance will rely on the pace of material receipts, progress of labor inputs, as well as the timing and level of customer orders that comprise the smaller portion of book-to-bill driven revenue. Assumed in our guidance is the passage of FY 2025 appropriations and a stable supply chain. Additionally, we continue to monitor and evaluate the executive orders that are being rapidly executed and implemented, but do not see any material business impact at this time. Moving to adjusted EBITDA, we are expecting between $435 million and $455 million for 2025. The implied year-over-year margin improvement is in the range of 30 to 50 basis points. Margin expansion continues to be driven by improved profitability on Columbia class, the steady transition from development to production on smaller programs, favorable program mix, and growth operational leveraging. Given our strong focus on growth, we have opted to increase our investment into our business development and company-funded R&D over the prior year and also over our prior expectations for 2025. As a percentage of revenue, depreciation and amortization expense should remain comparable to 2024. Now to adjusted diluted EPS, we are initiating a range of $1.02 a share and $1.08 a share. Embedded in our guidance is a tax rate of 19%. We are assuming a fully diluted share count of 270 million. Note that we will adjust our share count expectations after we better understand the pace of our stock buyback program execution. Additionally, we are anticipating an 80% conversion of adjusted net earnings into free cash flow for the year. While our Charleston, South Carolina facility investment is tracking to schedule, we saw CapEx coming lower than expected in 2024 largely due to timing of spend. We anticipate catching up in 2025, and as a result, CapEx should trend around 4% of revenue. Lastly, I expect that our quarterly cadence for revenue and adjusted EBITDA should be largely comparable to the improved linear progression we saw in 2024. In Q1, we are expecting revenue around $725 million with mid-10% adjusted EBITDA margins. Pre-K cash outflow should also closely mirror our Q1 2024. Let me quickly wrap up before we move to questions. Our team continues to build upon its execution track record as demonstrated by another year of exceptional financial results. DRS remains attractively positioned to continue to drive growth based upon our sizable backlog and our strong alignment to well-funded customer priorities. Our strategy, culture, people, and platform-agnostic portfolio are foundational in generating long-term value for our customers and shareholders. As we look ahead, we are increasing investments to best capitalize on the abundant opportunities in front of us. With that, we are ready to take your questions.

Again, if you have a question or comment at this time, please press star one on your telephone. Please standby while we compile the Q&A roster. Our first question or comment comes from the line of Robert Stallard from Vertical Research. Mr. Stallard, your line is open.

Thanks so much. Good morning. Couple questions from me. First of all, for Bill, more of a big picture question. Have you seen any impact as yet from the whole 'Doge' effort? Or is everything at this stage still being focused on the Department of Defense and has yet to flow down? And then secondly, a technical question for Mike. There were a couple of one-off items in the fourth quarter. I was wondering if you could elaborate on what those were and if you've got any further adjustments anticipated in your 2025 guidance. Thank you.

Thanks, Rob. With regard to 'Doge,' no, they haven't really reached the Department of Defense. They've been focused on federal workforce and things like grants, which we're not part of. Our focus is really on the new administration's strategic priorities and how their 2026 budget bill is looking. That's where we're focused.

Rob, on the one-off adjustments, I'm assuming that you're referring to the adjustments in the adjusted EBITDA reconciliation. The primary change there is attributed to a currency shift. We put the FX impact to some of our balance sheet items that are adjusted in that line item. That's the only real non-operational change in that reconciliation. It's not a pacing item from prior quarters or the prior year.

Great. Thanks so much.

Thank you. Our next question or comment comes from the line of Peter Arment from R.W. Baird. Mr. Arment, your line is open.

Yeah. Thanks. Good morning, Bill and Mike, Steve. Nice result. We think about your margin targets for 2026 and we know that Columbia has a favorable impact on that. What other areas, whether a program or a product area such as force protection, are helpful in the margin progression when we think about it outside of Columbia?

It's some of the smaller sensing and force protection programs. They're on a similar track to Columbia in that they're moving from a development phase into a production phase, so they're moving into a lower risk profile and generally a higher margin profile. Collectively, they're not as big as Columbia, but they still represent roughly a quarter to a third of that margin improvement.

Got it. That's helpful. And then on the over-the-horizon radar investments you've mentioned in the last couple of quarters — you also said you received a contract. What is the opportunity that you think about in that area?

For us, this is a move up the value chain. We are moving from doing components to securing prime contracts, which is an important step. This area is becoming more important. The administration is still assessing what a missile defense architecture might look like, but over-the-horizon radar is certainly a candidate to be part of that. There is potential under the new administration's missile defense priorities for this growing area.

Okay. And just lastly, you have a high percentage of fixed-price business, so you seem well set up for this administration's focus. How do you see that evolving across the rest of the industry, given many peers are more mixed?

I think the rest of the industry will need to move toward where we already are. We operate in a fixed-price environment — about 85% fixed price — which requires a robust risk process, careful bidding, and understanding how development risk affects production costs. Those factors must go into pricing and bids. We've become quite good at that, and I think others in the industry will need to follow.

Appreciate the call. Thanks, Bill.

Thank you. Our next question or comment comes from the line of Andre Madrid from BTIG. Your line is open.

Hey, everyone. Thanks for taking my question. Looking at IMS, continued strong demand there, and the Navy just released renderings of what DDG(X) looks like. Is any of this being factored into the 2025 outlook? And how do things stand on KDDX, and what could we expect there, if anything?

On KDDX, we're actively engaged with the Korean customer and shipyards, and we've kept our bid updated, but we don't have a decision yet. We think it's coming but do not have a timeline. Regarding DDG(X), there is growing attention in Congress and the Navy for the electric propulsion option to meet increasing power requirements, including for directed energy. In terms of timing, 2025 is a little early — DDG(X) is more of a 2030 ship — but the electric power system work we think will begin in the next couple of years.

Excellent. Thank you for the color, Bill. If I could follow up and pivot more to raw material supply: back in December, China banned the export of germanium, which is a component in sensing. Are there other materials we might have to worry about in terms of sourcing and access?

Germanium remains our primary focus with respect to supply risk. We've increased safety stock to protect against a supply absence; we haven't tapped into that inventory because supply is still available. We've seen some volatility in pricing. Beyond germanium, we are not seeing other materials that are particularly concerning at this time. Lead times remain elongated compared to pre-pandemic levels, but predictability and availability have stabilized. As of now, nothing outside of germanium is keeping us up at night.

Appreciate the color, Mike. I'll leave it there. Take care.

Thank you. Our next question or comment comes from the line of Michael Ciarmoli from Truist Securities. Your line is open.

Good morning, guys. Good results. Thanks for taking the question. Bill, the House Armed Services Committee was asking the Pentagon for a list of potential cuts by March 1st, and there are reports of budget pressure. You have a lot of exposure to the Army historically. Could some Army-related revenues or ground systems be a headwind for you? Might this impact 2025?

We're monitoring the new administration closely. There's always turbulence with a new administration resetting priorities. We're roughly 30% exposed to Army programs. Over the past five or six years, we've realigned and are more balanced across services; Navy is now larger than Army. Columbia is our largest program at about 10% of revenue; nothing else approaches that. So no single decision should fundamentally change our direction. We consciously targeted growth areas across services — counter UAS, AI-supported computing, longer-range sensing — which are growth sectors under multiple administrations. When priorities are finalized, we expect continued opportunities in these areas. We're not focused on large platform builds, which tend to be more vulnerable in budget shifts.

Got it. That's helpful. On margins, you mentioned increasing IRAD investment in 2025. Can you quantify the magnitude? What is the IRAD headwind and is there anything preventing IMS from continuing to drive higher margins?

We plan to increase IRAD by roughly 20 basis points as a percentage of revenue. That implies double-digit growth in our IRAD spend that exceeds revenue growth. We believe the investment is important given the administration's emphasis on agility and rapid prototyping. IMS remains the key driver of margin expansion on the back of Columbia, and Columbia continues to perform well.

Perfect. Thanks, guys. I'll jump back in the queue.

Thank you. Our next question or comment comes from the line of Ronald Epstein from Bank of America. Mr. Epstein, your line is open.

Good morning, guys. Given your experience running the company and time in the DOD, how are you thinking about this 8% reallocation? What could it be reallocated to, and how is that impacting how you're thinking about running your business?

They're still assembling where the 8% is coming from and where it's going. The biggest indication so far has been the executive action focused on Iron Dome, which signals more funding for missile defense broadly — from counter UAS up to space. We're active in much of that portfolio: over-the-horizon radar, counter UAS, and space capabilities are areas of opportunity for us. There may also be a shift toward the Indo-Pacific focus, which implies longer ranges and a different mix of Navy and Air Force requirements, though the Army remains important. We'll see more clarity in the coming weeks.

Got it. And have you thought about implications if we end up in a continuing resolution for fiscal 2025 and potentially 2026?

It's possible, but historically the defense budget hasn't typically experienced a CR to the same extent as other areas. For us, a CR would likely have incremental program impacts more meaningful in 2026 than 2025. About 75% of our 2025 revenue is already in backlog. The real programmatic exposure would show up in 2026.

And a final one: given the geopolitics around Ukraine and Russia, what impact do you think this could have on foreign military sales? NATO may need more equipment, but there are complexities in transatlantic relations. How do you think about positives and negatives there?

In the near term, we saw a modest uptick in Ukraine-related revenue at low single digits, and we've assumed that will decline in 2025 and taper in 2026 as negotiations progress. For European demand broadly, if urgency to procure grows, many will look to U.S. suppliers because certain capabilities, like counter UAS systems we produce, are already in production and can be delivered more quickly. So there are opportunities as partners seek urgent capability modernization.

Got it. Thank you very much.

Thank you. Our next question or comment comes from the line of Jon Tanwanteng from CJS Securities. Your line is open.

Most of my items have already been answered, but I wanted to touch on the Navy investment into Charleston. Could you talk about the opportunity there? What are you expecting in terms of market size for steam turbines and advanced components, and are those expected to be at accretive margins given the required investments?

We view the Charleston facility as a major move by the Navy and a significant development for the submarine industrial base. We initially designed the facility to support Columbia execution more efficiently and to provide capacity for next-generation platforms. The Navy's $45 million commitment supports steam turbine capacity, which is a critical node to expand submarine production throughput. Being a source on that industrial base node and investing in Charleston is a strategic, long-term opportunity for us.

We began this investment with a thesis that efficiencies on Columbia would underwrite the South Carolina facility, and that continues to play out. The facility gives us a seat at the table to expand our relationship with the Navy and help industrial base throughput. It will be longer term — beyond the next couple of years — in terms of revenue impact, but it has the opportunity to contribute significantly to revenue as we look out five to six years.

Great. And then following up on margins into 2026: at the midpoint of your guidance, you're doing just under 13% EBITDA margins this year. Could you break down the components of getting to that 14% in 2026, especially with stepped-up R&D intensity?

I'll zoom out to our overall 2026 commitment from Investor Day. Revenue growth is running ahead of that earlier framework; the 6% to 9% growth we now guide on is on a higher base. On the profit side, Columbia has always been the primary driver of margin expansion, and that performance continues to go very well. While progress to the 14% target hasn't been strictly linear, we remain committed to achieving those targets as we look into 2026, balancing higher IRAD and investments with operational leverage and favorable program mix.

Okay. Great. Thank you.

Thank you. Again, ladies and gentlemen, if you have a question or comment at this time, please press star one. I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to management for any closing remarks.

Thanks, and thank you all for your time this morning and your interest in DRS. If you have follow-up questions, please don't hesitate to call or email me. We look forward to speaking to you all again soon. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.