Leonardo DRS, Inc. Q1 FY2025 Earnings Call

Ladies and gentlemen, good day, and welcome to the Leonardo DRS First Quarter Fiscal Year 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the company’s prepared remarks, there will be an opportunity to ask questions and instructions will be given at that time. As a reminder, this event is being recorded. I would like to now turn the conference over to Steve Vather, Senior Vice President of Investor Relations and Corporate Finance. Please go ahead.

Good morning, and thanks for participating on today's quarterly earnings conference call. Joining me today are Bill Lynn, our Chairman and CEO; and Mike 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 trends and anticipated future performance of the company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors. For a full discussion of these risk factors, please refer to our latest Form 10-K and our other SEC filings. We undertake no obligation to update any of the forward-looking statements made on this call. During this call, management will also discuss non-GAAP financial measures, which we believe provide useful information for investors. These non-GAAP measures should not be evaluated in isolation or as a substitute for GAAP performance measures. You can find a reconciliation of the non-GAAP measures discussed on this call in our earnings release. At this time, I'll turn the call over to Bill. Bill?

Thanks, Steve. Good morning, and welcome everyone to the DRS Q1 earnings call. Our first quarter results show a strong start to the year, significantly exceeding our expectations. We continue to see robust customer demand across our diverse portfolio. In the quarter, we secured nearly $1 billion in bookings, leading to a 1.2 book-to-bill ratio. Demand remains well distributed throughout our operations. We observed particularly strong orders for advanced infrared sensing, electric power and propulsion, tactical radars, laser systems, and force protection technologies. This quarter marks the 13th consecutive time we've had a book-to-bill ratio above one, resulting in record backlog levels. Our backlog now stands at $8.6 billion, reflecting year-over-year and sequential growth. Additionally, we achieved impressive organic growth of 16%, an increase in profit, and enhanced cash flow. Material receipts advanced into the quarter, driving revenue growth well above our projections. We expect this will lead to improved quarterly distribution of revenue and profit throughout the year. As you know, we've been concentrating on achieving a more balanced quarterly performance and reaching our full year financial targets. Alongside solid operational achievements, we initiated our capital return strategies with the first dividend payment and early stock repurchases as authorized last quarter. Overall, our strong Q1 results set a solid groundwork for the year, but we are staying alert due to the changing operating environment we've encountered recently. Let me provide additional insights into the macro conditions. We are currently in a unique situation with our customers functioning under a continuing resolution for FY 2025. This resolution differs from past ones by allowing the DoD to begin new programs. Congress has also granted more flexibility with funding execution and elevated reprogramming authority. So far, there have been no significant shifts in customer procurement behaviors, and leading indicators suggest consistent demand. We are still aiming for a company book-to-bill ratio above one in 2025. Looking forward, we anticipate the FY 2026 President's budget request will likely be issued in the coming month. Historically, the most relevant factor for predicting US defense spending growth has been the global threat environment, which unfortunately remains high and relatively unchanged, necessitating higher investment in the future. We expect the FY 2026 request to provide clearer guidance on funding allocations for the administration's top priorities. DRS remains well-positioned and aligned with significant national defense initiatives aimed at enhancing effectiveness, affordability, and lethality of essential capabilities. Our customers are increasing investments in layered air defense and Counter-Unmanned Aerial Systems (Counter-UAS), improving shipbuilding efficiency, and modernizing technologies in combat platforms to deter near-peer adversaries. We are tapping into our core strengths to address each of these trends. While the tariffs announced last month have been temporarily delayed, I would like to discuss their potential implications. As a defense technology company, we expect to remain largely insulated from direct tariff impacts. Most of our customers are within the US defense sector, and our operations are primarily in the US, aside from activities in Canada and Israel. Additionally, our supply chain mainly consists of US-based firms. However, we are monitoring any indirect effects on our business and instructing our suppliers to identify any tariff-related costs to pursue remedies if necessary. Moreover, China's restrictions on rare earth mineral exports to the US have had limited impact on DRS. Our main reliance is on germanium, essential for our infrared sensing products. Following initial restrictions in mid-2023, we took steps to ensure our raw material suppliers had varied sources. However, we did encounter an issue with a sole-source optics supplier that affected our existing purchase orders, leading to increased costs as we sought alternative germanium sources. Besides this specific supplier challenge, we have not faced significant supply difficulties to date, although pricing has been more volatile. This challenge, along with rising germanium costs, has been factored into our forward estimates and affected quarterly profitability. We are dedicated to enhancing program execution resilience throughout our business and expanding our focus amid a more dynamic environment. In operations, we are making steady progress in several critical areas. Improving and expanding shipbuilding is a national priority, and customer behavior reflects a strong sense of urgency. We are working to speed up the completion of our Charleston, South Carolina facility and rapidly implement the submarine industrial base investment announced last quarter to revitalize our steam turbine capabilities. Additionally, we are in discussions with customers regarding expanding our role to improve overall throughput. We are also seeing new domestic opportunities for our electric power and propulsion technologies and will not disclose specific program names for competitive reasons. However, these developments are promising should they materialize. In the quarter, we successfully showcased our electric propulsion capabilities on a medium unmanned surface vessel, demonstrating the versatility of our technology as the Navy considers increasing the use of unmanned naval platforms. Regarding Counter-UAS, we are advancing our directed energy capabilities through extensive customer testing, with positive results supporting near-term operational deployment alongside existing air defense systems. We are actively collaborating with partners to integrate our Counter-UAS technologies into additional domains and platforms, including maritime applications, to generate growth. Furthermore, in collaboration with top commercial technology partners, we launched our AI processor designed for real-time threat detection, situational awareness, and advanced mission processing in combat vehicles. This processor pairs with AI algorithms to process large volumes of battlefield data and deliver actionable intelligence, including AI-enhanced target recognition. We are also investing in advancing our software offerings to create an Open Operating System Architecture for managing and fusing multiple sensing modalities. We expect that the increasing demand for AI and related applications will drive growth in shipboard processing needs, which is why we are seeing customer interest grow for our advanced cooling technologies that allow for greater computing density. Lastly, our infrared sensing technologies are in high demand across various sectors, from dismounted forces to ground combat vehicles and missiles. We are being integrated into several next-generation missile systems to deliver our distinctive infrared capabilities. The variety and depth of our technology portfolio are defining characteristics of DRS and are creating multiple pathways for future growth. As I mentioned earlier, I’m pleased with our strong start to the year. Our Q1 financial performance boosts our confidence in achieving our 2025 outlook. The operating landscape is notably more dynamic than last year, necessitating our agility to navigate these complexities. Nonetheless, DRS remains well-positioned to meet defense priorities. We are committed to delivering critical innovations quickly, efficiently, and affordably. Now, I will turn the call over to Mike, who will provide a more detailed overview of our financials.

Thanks, Bill. I would echo that we are off to a solid start to the year across our key financial metrics. Overall, the quarter was well ahead of our expectations. In Q1, revenue growth was 16% and ended up being meaningfully above the framework we laid out on the last call. This is mostly due to the favorable timing of material receipts. Late in the quarter, we saw some supplier deliveries pull left by just a few days, which materialized as a sizable tailwind to Q1. Let me reiterate, this will mostly help drive improved quarterly linearity in 2025. Taking a closer look at the quarter, the most notable drivers of growth were programs related to Ground and Naval Network Computing, as well as offerings in Tactical Radars and Electric Power and Propulsion. From a segment perspective, the programmatic increases to Network Computing and Tactical Radars spurred quarterly ASC revenue growth of 18%. IMS revenue was also up nicely at 11%, with growth evident across the segment. Strong contribution from both Electric Power and Propulsion, as well as Force Protection Programs, were visible in the quarterly IMS revenue output. Now to Adjusted EBITDA, adjusted EBITDA in the quarter was $82 million, representing 17% growth from last year. Adjusted EBITDA margin in Q1 was 10.3%, which represents 10 basis points of year-over-year margin expansion. The slight margin expansion was primarily as a result of favorable net contract adjustments and higher volume. Shifting to the segment view, ASC Adjusted EBITDA increased by 2%, but margin declined by 130 basis points, primarily due to negative contract adjustments in the segment. As Bill mentioned earlier, the discrete cost growth from the sole-source supplier on the Infrared Sensing Program, as well as the broader impact of greater germanium costs on our remaining backlog, hampered profitability in the quarter. IMS Adjusted EBITDA was up 38%, and margin expanded by 260 basis points, which was well beyond what we anticipated. Embedded in our baseline plan for this segment was the continued progression of Columbia Class and some operational benefit from increased volume, which both occurred in the quarter. However, incremental to our expectations was the recognition of favorable contract adjustments as a result of risk retirement milestones reached on Columbia Class. On to the bottom-line metrics, first quarter net earnings were $50 million, and diluted EPS was $0.19 a share, up 72% and 73%, respectively. Our adjusted net earnings of $54 million and adjusted diluted EPS of $0.20 a share were up 42% and 43%, respectively. Strong organic operational performance, combined with a reduced effective tax rate and a lower interest burden, drove the favorable year-over-year compare. While the Q1 tax rate was lower due to excess tax benefits on equity compensation, we still anticipate a normalized full-year tax rate of 19%. Moving to free cash flow, our cash usage in the quarter was significantly lower than this time last year, thanks to increased net profitability and enhanced working capital efficiency, partly aided by favorable timing and quarterly cash collections from customers. Our capital expenditures in the quarter were approximately 4% of revenue, in line with our expectations discussed on the last call. Overall, the year-over-year free cash flow improvement in Q1 supports better line of sight into achieving our full year outlook. With only one quarter behind us, we are maintaining our 2025 guidance across our metrics. We delivered a solid Q1, but the more dynamic operating backdrop offers puts and takes that we are still evaluating. As a quick refresher, we expect the following for the full year. Revenue in the range of $3.45 billion to $3.525 billion, implying a 6% to 9% year-over-year growth. Material receipts will continue to be the biggest factor influencing revenue output. We are operating with significant backlog visibility, but a small portion of book-to-bill revenue still remains. Our adjusted EBITDA range is expected to be between $435 million and $455 million. At this time, we expect IMS to offer more growth and margin improvement opportunity relative to ASC. Adjusted diluted EPS remains in the $1.02 to $1.08 per share range. The underlying assumptions on tax rate and fully diluted share count remained consistent at 19% and 270 million shares respectively. Also, we are still targeting 80% free cash flow conversion of adjusted net earnings for the year. Lastly, let me frame up what we are seeing for the second quarter. At this time, we are expecting revenue to trend around $825 million with adjusted EBITDA margin likely in the mid-11% range. I'll wrap up with some quick thoughts. We have an exceptional team. Our strategy is sound and we are well-positioned for long-term success. We are focused on capturing and converting significant demand into strong continued organic growth. Additionally, we are keeping a steadfast focus on program execution to deliver value for our customers and our commitments to shareholders. With that, we are ready to take your questions.

Thank you. We will now start the question-and-answer session. Our first question comes from Michael Ciarmoli with Truist Securities. You may proceed.

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

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

Okay, I understand. Just to piece this together quickly, I believe you mentioned $825 million in revenue for the second quarter. The low end of the guidance suggests that the second half might be flat or possibly down compared to last year. Is there anything to consider regarding the supply chain? We have a solid demand backdrop with bookings above one. Should we be concerned about any potential issues related to tariffs or trade if anything arises?

I think you should think about it a little differently. I would say that we're continuing to push and improve linearity across the business. And I think you're seeing that materialize. So, even if you kind of throw the Q1 results in the Q2 framework, our H2 guide would then say we're going to be somewhere between flat to up 6% on the top line and still showing a margin expansion in the 50 to 80 basis point range. If you look back into 2024, it's relatively consistent with what we started to see in Q4 of '24, right? You saw the acceleration of revenue growth pull in as we improved our linearity. And then on the back end, you started to see the quarters not have the same robust growth. I think you're going to see that trend materialize here in 2025 as well.

Okay. Perfect. Last one for me. Just any concern going forward on that ASC margin? Should we expect a snapback? Or is that program now going to be running at a lower margin given the measures you had to take with that challenged supplier?

Yes. No, good question. And yes, so what we did here is we took the adjustment in Q1 to kind of reset the backlog for the remainder of the program. So the lion's share of the impact is going to be in Q1. And then you'll have obviously a lower gross margin prospectively, but that will be mitigated and you'll see a pop back.

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

Thank you. Our next question comes from Seth Seifman with JPMorgan. You may proceed.

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

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

Got it. Okay. That's helpful. I have another question that looks at the bigger picture. I know you mentioned speeding up investments in the Charleston facility. Additionally, we've seen plans for a reconciliation bill expected to provide $34 billion for shipbuilding. I'm wondering if there's any chance for DRS to become more involved with the current classes of ships at the Charleston facility, considering the influx of funding in the shipbuilding sector. I'm curious about how DRS could participate in this development as well.

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

Got it. That's super helpful. Thank you guys.

Thank you. Our next question comes from Jon Tanwanteng with CJS Securities. You may proceed.

Hi. Good morning. Thank you for taking my questions and really nice quarter. I was wondering if you could just talk a little bit about the guidance. You obviously did much better in Q1. Some of that was pull in, obviously, but the full year was unchanged. I was wondering just does that give you more cushion for the year? Or is that really an offset from higher inputs and tariffs and things like that?

No, John, I view it as our ongoing efforts and the improved consistency. That's what we are focusing on. We are making some adjustments here. As I mentioned earlier, we are still anticipating growth in the range of 0% to 6% in the second half and expect to see significant margin expansion as we progress. So, I would say it reflects less hesitation and more of our commitment to achieving smoother operations from quarter to quarter.

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

Yeah. I mean Jon, obviously, we don't have a budget yet, but I think the trends are good. As you say they're talking about $1 trillion. I assume that means 050 even though it was beyond defense. But that would still mean a meaningful increase in the defense budget year-over-year and over the original Biden program. That's reinforced by the talk about up to $150 billion front-loaded ad in the reconciliation bill. So I think the general trends are up. And then we think the priorities of the new administration as they've been demonstrated in that reconciliation bill that was a congressional and then in the Hegseth memo and other comments that are coming from the new administration. I think they overlap strongly with our core markets in shipbuilding and force protection the nuclear triad represented by Columbia. So we feel like we are well-positioned for this growth and to take our share of it.

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

For us, that's a bit more of a related market. We have a strong foundation in sensors and are recognized for our expertise in this area. Transitioning that capability into missile technology is something we are currently pursuing, and we see it as a new opportunity for us. As missile sensing capabilities and accuracy continue to improve, we believe we can supply the technology needed for that advancement.

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

Yes, exactly right.

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

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

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

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

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

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

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

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

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

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

Got it. Got it. I have another question to follow up on. Considering the adjustments this quarter to address the impact of germanium on the sole source contract, is there a chance that this issue might arise again in the future? How much flexibility does this provide us? It seems like we're good for the remainder of the year, but could this problem come up again later? I know you have several years’ worth of germanium supply and inventory, but I’m still curious.

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

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

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

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

Thanks.

Thanks, Andre.

Our next question comes from Karl Oehlschlaeger with Vertical Research Partners. You may proceed.

Thanks, guys. On ASC, you mentioned the charge related to raw materials. Do you believe you've addressed that issue, and excluding that charge, do you now have a different, potentially lower baseline expectation for margins compared to what you anticipated at the beginning of the year?

I believe that when we examine our overall margin expansion for the year, it's clear that the IMS segment, boosted by strong performance in Colombia, will be the primary contributor. This trend is likely to continue, with most of the margin expansion coming from IMS. The ASC segment will act as a headwind to our overall margin for the year. Reflecting on our previous call, we noted additional investments in IRAD, which will primarily originate from ASC. Therefore, as we look ahead to 2025, I expect IMS to lead in margin expansion, while ASC will likely maintain levels similar to last year.

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

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

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

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

Okay. Thanks, guys.

Thank you. Our next question comes from Kristine Liwag with Morgan Stanley. You may proceed.

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

Yes, we believe the Army will need to invest in longer-range sensors due to the current threats, as demonstrated by events in Ukraine. In the Indo-Pacific region, there is also a focus on extended ranges. Therefore, we feel that our core sensing capability is going to become even more crucial. As the Army adapts, we are confident in our platform-agnostic approach. Even as they pull back on certain new platforms, there will still be a need for enhanced sensing and computing. This will involve upgrading legacy systems and integrating new technology into autonomous vehicles. We are well-prepared to pivot to these new platforms and incorporate modern capabilities. We believe our position aligns well with the Army's priorities. Notably, they have increased funding for air defense and counter-UAS systems, even as they streamline force structure. We expect this focus to continue under the current administration, and we anticipate these priorities will reflect in the upcoming budget.

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

Yes, I can't really comment on other companies. We obviously exceeded our expectations on bookings. Not only did we not see a decline in customer demand this quarter, but we also saw an increase. We had nearly $1 billion in bookings, which was higher than our plan.

Great. I will leave it there. Thanks.

Thank you.

Thank you. Our next question comes from Jan Engelbrecht with Baird. You may proceed.

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

I think what we see is that we want to continue the path we were on. We've been increasing our CapEx. As we mentioned earlier, this supports the submarine and Navy shipbuilding industrial base. We aim to enhance our IRAD and translate that into proactive initiatives with customers, such as our directed energy capability for counter UAS. We are already engaged in fixed-price contracts and aligning with the commercial terms discussed by the new administration. We have been progressing in this direction for a couple of years, and our goal is to continue along this same path.

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

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

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

Great. Thanks Mike. I'll jump back in the queue. Appreciate it.

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

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

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