Leonardo DRS, Inc. Q4 FY2025 Earnings Call

Good morning, and welcome, everyone. Thank you for joining today's quarterly earnings conference call. With me today are John Baylouny, our President and CEO; and Mike Dippold, our CFO. They will discuss our strategy, operational highlights, financial results and outlook. Today's call is being webcast on the Investor Relations section of the website, where you can also find the earnings release and supplemental presentation. Management may also make forward-looking statements during the call regarding future events, 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 other than as may be required by law to update any of the forward-looking statements made on this call. During this call, management will also discuss non-GAAP financial measures, which we believe provide useful information for investors. These non-GAAP measures should not be evaluated in isolation or as a substitute for GAAP performance measures. You can find a reconciliation of the non-GAAP measures discussed on this call in our earnings release. With that, I will turn the call over to John. John?

Thanks, Steve, and thank you all for joining us today to discuss our fourth quarter and full year 2025 results. I want to begin by thanking Bill Lynn for his leadership and commitment to DRS over the past 14 years as Chairman and CEO. The company is stronger because of his impact. We're grateful for his contributions. I am honored to step into the role of Chief Executive Officer and could not be more excited to lead the next chapter for DRS. I joined the company nearly 40 years ago as a staff engineer and over the course of my career, I've had the privilege of serving in operational leadership roles across each of our incredible businesses. That frontline perspective, combined with my experience over the past decade as Chief Technology Officer, and most recently, Chief Operating Officer, has given me a deep appreciation for our leading market positions, our balanced and diverse portfolio, truly differentiated technologies and above all, our exceptionally talented people. As I look ahead, my priorities as CEO are clear: build on our foundation of success; we have a remarkable business with distinctive differentiation that is well positioned for long-term growth; accelerate our operating cadence. Our goal is to put innovation capabilities into the hands of our customers even faster without compromising the quality, reliability, and affordability that they expect. This is precisely what the Department of Defense is asking as an industry. While we've already been operating at speed and investing in innovation for years, we are encouraged by this call to action and are accelerating even further; and continue to empower, invest in and reward our people. There is no question that our talented employees are the bedrock of our success. My formula is straightforward—maintain a sharp focus on meeting and exceeding customer needs and that will propel growth for the years to come. Turning to the macro environment. The operating backdrop remains dynamic. Global threats persist and the nature of warfare continues to evolve rapidly. Our customers require next-generation capabilities to maintain the decisive advantage over adversaries. They need them delivered at speed, at scale, and with uncompromising quality. Against that backdrop, our nation and our allies are investing in these capabilities as demonstrated by significant recent and projected increases in defense spending. We are encouraged by the enactment of the fiscal '26 Defense Appropriations early signals for fiscal '27 and supplemental funding, including in last summer's tax reconciliation package. In aggregate, these indicators support our confidence in sustained demand. Our relentless customer focus, disciplined investment and advanced capabilities, along with consistent execution has positioned us well for growth. The results of that strategy are demonstrated by the fourth consecutive year of a book-to-bill ratio of 1.2 or better. Equally important, customer demand is well balanced throughout our portfolio, validating the strength of our technology-led platform agnostic approach. That consistent customer demand, combined with our strong financial position, has enabled significant multiyear increases in both research and development and capital investment. Let me frame the magnitude of investment growth. In 2025, we increased internal R&D investment by 40% and capital expenditures rose more than 60%. Our R&D investment is focused on expanding our footprint in high-growth markets, including airborne, missiles, space, and unmanned markets while continuing to build share in our core ground enabled domains. Additionally, the emphasis of our R&D initiatives is on advancing platform AI, enabling platform autonomy, stronger security and modularity, and extending our platform-agnostic capabilities to new missions and platforms. With respect to CapEx, our 2025 investments were focused on progressing our new naval power facility in Charleston, South Carolina along with targeted growth initiatives across the portfolio. In 2026, we expect CapEx to increase even further and trend toward approximately 5% of revenue. We are ramping operations in Charleston as well as expanding production capacity and modernizing facilities to deliver enhanced capability across the business. Key areas seeing upsized investment include our tactical radars, air defense products, and advanced infrared sensing. Additionally, some of the increased CapEx supports dedicated germanium processing capacity with suppliers, an important part of ensuring stable supply going forward. In summary, we intend to maintain our approach of innovating, executing at speed, and investing ahead of demand to support customers and drive long-term growth. Let me briefly highlight our full year 2025 financial performance. We delivered another year of record bookings, and that was accompanied by robust organic revenue growth of 13% marking back-to-back years of double-digit growth. Year-end backlog stood at $8.7 billion, providing clear visibility into 2026 growth. Full year adjusted EBITDA growth tracked closely with revenue. While margins were flat, performance was shaped by several factors. First, we intentionally increased our internal R&D investments substantially. Second, we managed supply chain complexity related to shortages of critical raw materials, most notably germanium. As we enter 2026, these constraints are contained with remediation measures firmly in place and being executed throughout this year with confidence. Through a combination of recycling initiatives, strategic allocations from customers, securing more reliable North American and European sources, we have adequate coverage for our demand in the short, medium, and long term. We've also entered into firm long-term supply agreements. And as I noted earlier, we are co-investing to secure dedicated refining capacity. While price volatility may persist in the near term, we will reprice contract renewals on a rolling basis to reflect market conditions and incorporate contractual protections against future potential shocks. Third, as we close out the year, we have two unusual items with largely offsetting revenue and profit impacts. We entered into a 10-year $100 million license agreement with a leading quantum technology company, enabling them to leverage certain laser intellectual property for quantum computing applications. This license agreement monetizes an exciting and attractive commercial opportunity while allowing us to remain focused on capturing abundant growth in our core defense markets. We also executed a memorandum of understanding to jointly conclude a legacy foreign ground surveillance program initiated more than a decade ago. Technology evolution and obsolescence issues caused the program to be no longer viable for either party. As a result, we recognized a non-anticipated loss on the program. While disappointing, the circumstances surrounding this program were unusual and isolated within our portfolio. To be clear, we don't see any other program with similar characteristics that would be expected to drive comparable impacts. The conclusion of this legacy effort along with the IP license agreement clears the slate and allows us to focus on growth and execution across our core competencies. Finally, despite materially higher CapEx investment, we delivered 19% growth in full year free cash flow in 2025 driven by higher profitability and improved working capital efficiency. On balance, 2025 was a strong year, and we're focused on building on that momentum in 2026 and beyond. Turning to fourth quarter highlights. First, let me commend the team on a tremendous win in the space market. Space has been a multiyear growth initiative for DRS and I'm pleased that our persistence was validated with a landmark position on the SDA tracking layer Tranche 3 program. We're teamed with one of the prime awardees who will deliver a differentiated infrared sensing approach. This is an exciting opportunity, not only to showcase our innovation, but more importantly, to advance critical national defense capabilities against missile threats. Now that we've opened the door to this win, our focus shifts to execution excellence to deliver on our commitments. Strong performance will position us for additional SDA opportunities and for other customers, including the potential to leverage our expertise in space-based sensing for the Golden Dome initiative. Also in space, we successfully demonstrated secure data transport using a next-generation crypto multichannel software-defined radio. This innovative capability enables high-performance secure satellite communications across multiple frequencies and networks simultaneously and we look forward to delivering it to customers in the near term. In infrared sensing, we continue to grow in ground-based applications and are seeing green shoots in adjacencies, particularly space and airborne, across both manned and unmanned platforms. Our high-performance cooled infrared sensors are being leveraged on advanced airborne platforms. Our uncooled capabilities are being adopted on unmanned platforms as customers prioritize an assured electronic supply chain. Our advanced infrared gimbals are being used to designate and direct munitions to neutralize strong threats. We are engaged on multiple primes on several strategic missile programs to provide next-generation sensing capability and expand production capacity. We're also making capital investments to support this demand growth. We remain a market leader in Counter UAS and are closely partnered with customers to field effective solutions. We are committed to a platform and effective agnostic approach which is why we have demonstrated capabilities across multiple vehicle platforms, including the JLTV and unmanned ground vehicles. We're enhancing both kinetic and non-kinetic factors in our offerings, including cost-effective munitions and non-kinetic tools such as electronic warfare and directed energy. Turning to tactical radars. We continue to see immense global demand driven by an imperative to field Counter UAS and air defense capabilities. Our radars are not only highly effective in tracking UAS threats, but also in supporting missile defense and active protection missions. We're also seeing increased demand in growing relevance and maritime-based Counter UAS applications alongside the continued momentum on ground-based platforms. More broadly, we're seeing increasing potential beyond tactical radars in the unmanned surface vessel market, opportunities to pull through in integrated sensing and computing offerings across leading platform providers are becoming a growth vector while we're well positioned on the Navy's USV strategy and begins deploying funding in this area. Staying with Naval, our Columbia Class program continues to execute exceptionally well. We're delivering on time and with quality and our results reflect the financial benefits of that solid execution. As the Navy adjusts surface combat and modernization strategy. We remain engaged at the center of propulsion architecture discussions across platforms. Our Electric Power and Propulsion solutions are modular and remain highly relevant to the power demands of next-generation platforms. Finally, I want to congratulate Sally Wallace on her new role as Chief Operating Officer. Sally is a strong leader, a trusted partner and a more than 20-year DRS veteran with a deep understanding of customers and a strong track record of delivering mission-critical technology. We've made a few other changes to the team. As a result, we have an exceptional team, and many of those changes reflect expanded responsibilities for long-standing leaders who have delivered strong results. I'm confident in each of them and they will be successful in expanding roles. Mike, over to you to walk through the details of our financial performance and 2026 outlook.

Thank you, John. I appreciate the team's consistent dedication in achieving another year of strong financial results, especially considering the various challenges we encountered in 2025. I will review the fourth quarter and full year 2025 results by key metrics and then provide our outlook for 2026. Overall, our full year 2025 results surpassed our expectations, operating at the high end or above the guidance range shared during our last call. These outcomes were achieved during a prolonged government shutdown throughout most of the fourth quarter. Revenue in the fourth quarter reached $1.1 billion, an increase of 8% from the previous year. Strong demand for tactical radars, electric power, propulsion, and advanced infrared sensing fueled core growth. The quarter included a net benefit from the quantum laser IP license agreement, slightly offset by the conclusion of the legacy foreign ground surveillance program that John mentioned. For clarity, I will refer to the net effect of these items as the net non-routine impact. While the net impact is not substantial at the consolidated level, it is more apparent in segment results for both the quarter and the full year. Full year revenue totaled $3.6 billion, signifying a 13% organic growth compared to 2024. This marks two consecutive years of double-digit revenue growth. Growth was widespread across demand sensing, network computing, force protection, and electric power and propulsion, which reflected in the segment trends. Our advanced sensing and computing segment achieved revenue growth of 9% in Q4 and 11% for the full year. Our Integrated Mission Systems segment showed year-over-year growth of 5% in Q4 and a robust 15% for the full year, driven by strong performance in electric power and propulsion and counter UAS programs. Adjusted EBITDA was $158 million in the fourth quarter and $453 million for the full year, representing year-over-year growth of 7% and 13%, respectively. Margins were 14.9% in Q4 and 12.4% for the full year. Full year margins remained flat as increased volume and improved profitability on the Columbia Class program were counterbalanced by higher R&D investments and less efficient program execution due to material cost increases. The rise in R&D contributed a 70 basis point year-over-year headwind to margin. At the segment level, ASC adjusted EBITDA and margin were supported by the laser license agreement in both Q4 and the full year. Without this item, ASC adjusted EBITDA and margin would have decreased primarily due to higher company-funded R&D and raw material cost challenges, particularly related to germanium. IMS adjusted EBITDA faced negative impacts from the conclusion of the legacy program in both Q4 and the full year. Excluding this item, IMS adjusted EBITDA and margin would have increased significantly, benefitting from operating leverage and improved profitability related to the Columbia Class. Regarding the bottom line metrics, diluted EPS and adjusted diluted EPS rose by 15% and 11% year-over-year in the fourth quarter, respectively. For the full year, diluted EPS and adjusted diluted EPS grew by 29% and 24%, respectively. In both periods, strong operating profitability, lower interest and other expenses, as well as a reduced effective tax rate contributed to EPS performance. As for free cash flow, the fourth quarter saw robust generation totaling $376 million, bringing our full year free cash flow to $227 million. Our strong cash generation in 2025 led to a year-end balance sheet with net cash. Following the year-end, we established a new $500 million revolving credit facility, offering lower interest costs and increased borrowing flexibility. Turning to 2026 guidance, strong customer demand and bookings in recent years give us confidence in continued growth. We are setting a revenue range of $3.85 billion to $3.95 billion, indicating a 6% to 8% organic growth. Our backlog supports our ability to operate within this range. Key factors shaping revenue include the pace of material receipts, labor execution, and, to a lesser extent, the timing of customer orders affecting book-to-bill revenue. For adjusted EBITDA, we anticipate $505 million to $525 million in 2026. The expected year-over-year margin improvement is 70 to 90 basis points, aided by enhanced profitability in Columbia Class, positive program mix, and operating leverage from growth. We plan to maintain a robust investment in company-funded R&D at a similar percentage of revenue as in 2025, but we do not foresee it adversely impacting margins to the same degree as last year. Amortization is expected to remain stable in dollar terms, while depreciation should rise modestly due to recent capital expenditures. Together, they should account for approximately 3% of revenue. For adjusted diluted EPS, we are setting a range of $1.20 to $1.26 per share. Our guidance factors in an 18.5% tax rate and a fully diluted share count of 269 million. We also anticipate free cash flow conversion to be 80% of adjusted net earnings. As John noted, we are significantly increasing projected capital expenditures in 2026 as we complete the Charleston facility and make additional investments across the business to enhance capacity and capability. Consequently, we expect capital expenditures to be just under 5% of revenue. We expect improved working capital efficiency to partially offset the higher capital expenditures. Lastly, we project Q1 revenue in the low 800s with an adjusted EBITDA margin in the low 11% range. Revenue and adjusted EBITDA linearity should mirror recent years, with the second half of the year expected to contribute slightly more than half of revenue and adjusted EBITDA. We foresee a similar quarterly trend in our free cash flow with moderate improvements in linearity as we continue to enhance working capital efficiencies.

Let me turn the call back over to John for closing remarks. Thanks, Mike. I'm incredibly proud of the team's relentless focus and their immense contributions in support of our critical national security priorities. The results we delivered in 2025 and over the past few years reflect the strength of our portfolio and the soundness of our strategy. DRS is in an excellent position, and we're building on this strong foundation to drive another year of significant growth while also nurturing long-term opportunities that will define the next chapter of the business. We are investing, innovating and executing at a time when our customers need these capabilities more than ever. As we look ahead, we remain focused on delivering these cutting-edge capabilities to the customers with speed, quality, and scale, positioning us for continued growth. With that, we're ready to take your questions.

Our first question comes from Robert Stallard with Vertical Research.

John, maybe just to kick things off. You mentioned at the start of your comments the potential benefits from the reconciliation bill that was passed last year. We're starting to get some details on that, and I was wondering if you've seen anything there that suggests some upside for DRS?

Well, thanks, Rob. Yes, we are starting to see some of the money flowing now and we believe that we have alignment in some of the priority areas where some incremental funding could flow. Again, it's early days, though. I think we haven't seen the money get all the way to our customers yet, but there is certainly some alignment with where we're investing and where the money is going.

Okay. And then as a follow-up, you highlighted that you've seen 4 years of at or above 1.2x book-to-bill. I was wondering, does this suggest there's going to be a step-up in your revenue growth in the years ahead? Or does this order intake just extend similar kind of growth further into the future?

Well, Rob, we're certainly optimistic on growth. But I want to acknowledge that we do have a diverse portfolio and due to the fact that we're stepping up to a higher level in capabilities and solutions, we do have an elongated conversion cycle. It's certainly our goal to continue growing like we did in 2025, and we're optimistic. But you have to acknowledge there are other elements.

Our next question comes from the line of Michael Ciarmoli with Truist.

Nice results. Just following up on that last point regarding growth. John or Mike, did you estimate the ground revenue program that's ending? I'm trying to understand if there's anything specific in your large portfolio that is winding down or creating a challenge. It seems like the funding and budget conditions are improving. I know you’re coming off two years of low teens growth, but why should we expect growth to slow down now?

Yes, Mike, I'll address that. When considering our diverse portfolio, there will always be aspects that grow at varying rates. While many areas are receiving significant funding, particularly in shipbuilding and recent initiatives, there are segments, particularly in network computing, that are experiencing slower growth. That's what John was referring to.

Okay. And then one more question about capital structure and deployment. You're likely to finish the year with a net cash position exceeding $400 million, and you've mentioned the new $500 million revolver. How should we consider utilizing that balance sheet? Is this the most effective structure at the moment?

Thank you, Mike. Our main focus has always been and will continue to be on organic investments first. We are currently investing in capital expenditures and independent research and development, which we expect will drive growth in the future. Our priority is organic growth, followed by inorganic opportunities, and we will be selective in our approach to mergers and acquisitions. So, first organic, then inorganic.

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

Nice results. I wanted to start off by asking about the profitability in IMS in the fourth quarter. If we add back the international program termination, it showed a very healthy margin. Was there a catch-up in Colombia? Or how should we interpret the implications of the fourth quarter margin for IMS moving forward?

Yes. Thanks. I appreciate the question. We certainly saw strong demand across the segment of IMS coming from our naval power business, bolt-on Colombia, but also on the surface ships also had an inflow of revenue on the counter UAS and efforts that we have there. So a lot of the margin was coming from the volume leverage that we saw. So we had a big growth in the quarter which materialized the margin. As you're aware, we've peer to expense G&A, we peer to expense the IRAD. So that operating leverage fell to the bottom. So that was a big element of it. The performance at Colombia certainly continues to be a tailwind, not a major catch-up but certainly a tailwind for the quarter.

Okay. Okay. Excellent. And then maybe following up when we think about Charleston and the new capacity coming online there. It seems now that we might have some new ships a little bit faster than previously expected when you guys announced that in terms of a new frigate, and we'll see what happens, but maybe even a battleship. What are discussions like at this point about your ability to use that capacity on these new ship processes?

Yes, thank you for the question. We're observing the evolution of the space. In our last call, we discussed the requirement for future combatants to engage from greater distances, necessitating more power for that purpose, including enhanced radars and advanced electronic warfare systems. To achieve this, they will require electric propulsion systems that enable the efficient transfer of energy throughout the ship. Our focus moving forward, especially in collaboration with the Navy, is on developing modular capabilities. This means regardless of whether they construct a battleship, destroyer, cruiser, frigate, or even a medium-sized unmanned surface vehicle, they should employ the same electric architecture and propulsion systems. This approach would allow for a common framework, similar to what is seen in the automotive industry, where various vehicle sizes are based on the same structure. If we follow this path, regardless of what the Navy ultimately decides to build, we will be able to utilize our capacity in Charleston for various component sizes. We have been investing in a range of motors, drives, and components suitable for ships of all sizes, from battleships to medium-sized unmanned surface vehicles. That's the direction we are heading, and we believe the Navy will pursue this as well. The capacity we have developed in Charleston will support this capability.

Our next question comes from Austin Moeller with Canaccord.

So just my first question here. Can you comment on the Tranche 3 tracking layer infrared payload award, what the contract value might look like and how this might grow as part of the Golden Dome now that over $13 billion was appropriated in the space force budget for '26?

Thank you for your question, Austin. We aren't able to discuss the size of the award as it's competitive information. However, we're very enthusiastic about receiving this award. It has required considerable time and innovation to develop a new approach for this mission. Now that we've secured the award, we are fully committed to executing the program and achieving excellence in that execution to ensure timely delivery. As we explore other opportunities in space, we aim to address the critical issue of connecting the interceptor to the threat for the Golden Dome. This is one of the reasons we plan to deploy a software-defined radio with software-defined crypto into space, along with some computing resources. This setup will enable us to connect, decrypt data, and then re-encrypt it to send to the interceptor, allowing decision-making on the ground while the connection takes place in space. Our focus is on addressing the Golden Dome’s major challenge: timing. We believe that the intercept time must occur in space to meet the timeline. The details regarding the SDA tracking layer portfolio and its integration with Golden Dome are still under discussion and not fully public. However, we believe that all space-based sensors and ground-based sensors, including over-the-horizon radar, will contribute to the Golden Dome solution.

Okay. And based on the fiscal year '26, $27 billion shipbuilding budget, and what you're hearing from the Navy, do you expect a higher mix of like small or medium USVs in the force structure and would one design versus the other impact your ability to build an electric drive system or provide compute content or impact profitability on such a system?

It's a great question. I think you're going to see different classes of ships being built. Whether they ultimately build a battleship or it ends up being a destroyer or cruiser, we would love to see it. However, there will be a significant increase in smaller surface combatants, whether MUSVs or small or medium USVs. We've been investing in capabilities for those small and medium USVs by incorporating mission equipment packages on them. We believe there are various missions for these small combatants, including counter UAS, ISR, and others. Regarding propulsion systems, we have also been investing in various components for small, medium, large, and extra-large sizes. Some of our propulsion components are currently being tested on USVs. Additionally, Columbia Size motors would be suitable for some of the larger vessels. We believe we can accommodate a range of different-sized ships and expect the Navy to purchase a diverse portfolio of capabilities.

Our next question comes from Jon Tanwanteng with CJS Securities.

Congrats on a nice year. I was wondering if you could address the Quantum laser license that you signed. Can you go into a little bit more detail what that technology allows the customer to do, number one? And number two, are there more opportunities beyond that as quantum becomes the next tech over the horizon?

Yes, John, let me take that. Thanks for the question. Depending on the architecture of the quantum computing structure, some of them utilize lasers to excite the ions. In this particular case, they are using the quantum cascade laser technology that we produce for military applications to excite the ions for quantum use. Regarding the question about other applications like this, we actively seek non-core areas of the market to license our technology. We are not focused on the commercial sector; our emphasis is on military and defense. When we encounter an application like this, which is the second instance we have seen, we will look for additional opportunities in the future. We prefer to license the technology and let other companies benefit from it in markets where we do not operate. We will continue to seek these opportunities moving forward. While I can't confirm that we have another one ready to go, we will keep looking.

Okay. Great. A question about the CapEx. You mentioned that you're increasing for the year. What are the specific programs that the increase is tied to? Is it production of components? Is it other stuff that's going on?

Yes, Jon, I'll take that one for you. So thanks for the question. From a CapEx perspective, as John alluded to earlier, organic investment is where we're focused. And right now, from a CapEx perspective, that's about capacity. So we spoke about the naval elements that we're doing down in South Carolina, but also throughout the whole naval portfolio, we're looking to expand capacity and make sure that we're contributing to the more efficient shipbuilding aspirations of the department. So there's an element of CapEx going there. I would also say from a counter UAS and maybe more finite, the tactical radars, the demand continues to be robust. I think we're continuing to see the performance of these radars, and that's requiring us to also increase capacity for that output. So those are the two primary areas that we're seeing. But the other things we're trying to do is also continue to have demo assets ready to meet the need of this kind of speed to market. So we want to have mission equipment packages to go on USVs that are ready to go. That's also an element of the CapEx, but mainly capacity, but also some demo assets for demonstration and speed to market.

Let me add a bit more on the missile area. As we look ahead, it's clear that future battlefields will be dominated by autonomous platforms and weapons, including low emissions systems. Sensing capabilities are crucial for all these platforms. We produce high-quality infrared sensors, radars, and other sensors, and there is a strong demand for those low-cost, highly attributable platforms. Therefore, we are investing in expanding our capacity to enhance these capabilities. Additionally, we are focusing on a range of missile capabilities, from low-end to high-end, and are investing in the capacity needed for these advancements.

Understood. If I could sneak one more in there. How do we expect OpEx and R&D to grow maybe as a percent of revenue this year? Or do they stay roughly the same?

Certainly, from an IRAD perspective, we expect to see that as a similar percentage of revenue. I think the margin impact that you saw as we ticked it up to that mid-3% of sales range was a onetime thing. I think we're going to be stabilized there that will contribute to our ability to expand margins. And then from a CapEx perspective, I would say that we're looking to pick that up and it will be somewhere in the neighborhood of 5% of sales. I'm sorry. Yes, I would expect from an OpEx perspective that you see a little bit more moderate of an increase. I think in 2025, we had a big jump that we saw, and I would not expect that to continue at that pace.

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

Looking at your prior 2026 target, I know you guys had outlined 14% EBITDA margin. That's obviously not going to be the case with what's implied right now. But when do you think that could feasibly be achieved down the road? And then I guess, too, as we just look at 2026 kind of being the endpoint of your targets from the last Investor Day, I mean what insight can you just provide at large about how the remainder of the decade might look like?

Yes. So our intent is to provide multiyear targets probably in the first quarter of 2027, Andre. So we're not going to get out in front of that now, but I'll give you some directional points. The first is we think the business is structured to be in the mid-teens margins, right? So there is a continued path to grow the margins I think our guide showing that in the increase that we're expecting in '26. And I don't expect that to be any different as we look out into '27. So we should be able to get into the mid-teens comfortably there. And that's what I'd kind of give you that confidence there as we look out into the future.

Got you. Got you. And then I guess as we look at book-to-bill, I mean, demand has just been so strong. I mean we've looked at 16 consecutive quarters either at or above 1 time. I mean, are you worried about this softening at any point? Or is there any particular area in which we might see a softening?

Well, Mike explained that we are looking at some of the areas that are not going to grow as fast as other areas. But we focus all of our attention on the portfolio to see where we can invest to increase the speed of growth. And so I wouldn't point out any one particular area of the business that we say is the demand is going to fall off. I just think it's a matter of how fast they grow.

Our next question comes from the line of Ron Epstein with Bank of America.

So you've covered a lot of ground already, but maybe one area where we really haven't talked much is what are you seeing for the company in terms of opportunities in Europe, right? European defense spending should, I don't know, go to, I don't know, what, $850 billion by the end of the decade, maybe if everybody spends what they say they're going to do. That's a pretty big market. And then also, how has sort of the transatlantic tension impacted your business, be it that your primary shareholder is a European company?

Yes, thank you, Rob. I'll address that. First, you're correct that the current macro environment shows the U.S. seeking speed and Europe aiming for self-reliance, creating urgency on both fronts. This presents a favorable opportunity for partnership. As you mentioned, our parent company plays a vital role in enhancing our international growth, especially with their presence in Europe and globally. We're eager to leverage their position to accelerate and broaden our growth, particularly now that they have the Iveco defense line and their joint venture with Rheinmetall. With a strong portfolio, we aim to utilize these technological capabilities in the U.S., recognizing the need to adapt them for the American market. Conversely, Europe’s push for self-reliance often begins with licensing U.S. technology, which we possess. This is an opportune moment for these discussions, and your question is timely regarding increased collaboration with Leonardo to tap into both European markets and the pressing needs in the U.S.

Is the laser IP licensing an indication of increased efforts outside of defense?

Yes. I believe we should remain focused on defense and leverage our strengths and capabilities. When we encounter a market that is outside of our core focus, we generally prefer to license it out. We will support this move, but our aim is to remove it from our portfolio and transition it to a different area. This approach allows us to concentrate on the growth markets in defense, which is where we excel.

Yes. And Rob, I'll just add one thing here. The laser IP that we're talking about has a lot of utility in nondefense outlets. So we've looked at this in the past, we have had some successes. We're going to continue to do so. But really, where John is going is that utility of that IP, just as broad-based applicability. And we're not going to be able to chase every one of those opportunities. So we're keeping focused on the defense space and get a look for these license opportunities as they emerge.

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

Thank you. I want to thank everyone for joining today's call. We're proud of our strong continued organic growth, our expanding presence in the space market and our disciplined investment alignment with customer needs. We're excited about the opportunities ahead. Focus remains on driving profitable growth and delivering differentiated capabilities for our customers. If you have any further questions, Steve and the team will be available after today's call. We look forward to speaking to you again. Thanks, again, and have a great day.

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