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 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 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 reflect a solid start to the year and meaningfully surpassed our expectations. Strong steadfast customer demand continued to materialize across our broad and differentiated portfolio. We secured a healthy level of bookings that totaled nearly $1 billion in the quarter, which translated to a 1.2 book-to-bill ratio. Demand remains well diversified throughout the business. In Q1, we saw a particular order strength for our advanced infrared sensing, electric power and propulsion, tactical radars, laser systems and force protection technologies. It's also worth noting that this marks the 13th consecutive quarter with a book-to-bill above 1, a trend that has resulted in our backlog pushing to new company records. As a result, that backlog increased to $8.6 billion, which is up on both a year-over-year basis and a sequential basis. Furthermore, in Q1 we saw remarkable organic growth of 16% profit expansion and improved cash flow. Material receipts pulled into the quarter to drive revenue growth well above our forecast. Overall, we anticipate this will translate into better quarterly linearity for the year on revenue and profit. As you know, we have been focused on driving more balanced quarterly distribution and achieving our full year financial results. In addition to solid operational performance, we commenced execution of our capital return initiatives with the payment of our first dividend and initial stock repurchases against the authorization announced last quarter. All in all, our strong results in Q1 laid a nice foundation for the year but we are maintaining a vigilant posture amidst a more dynamic operating environment that has emerged over the past few months. Let me share some more color on our perspectives with respect to the macro conditions. We are in a unique…

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…

Thank you. At this time, we will begin the question-and-answer session. [Operator Instructions] 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 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. Got it. And then just piecing this together quickly here on the fly. I think you just said $825 million revenue in 2Q. I mean the low end of the guidance I mean that would imply second half maybe flat almost down I think year-over-year. I mean is that just -- is there anything? You talked about supply chain. We've got the good kind of demand backdrop bookings above 1. Anything we should read into just kind of leaving the door open for maybe the unknowns on tariff trade if at all anything materializes there?

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? A - Michael D. Dippold 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. And then maybe as a second question, kind of a bigger picture question. I know you guys talked about expediting the investments in the Charleston facility. And another thing we kind of saw related to shipbuilding earlier this week is these plans for this reconciliation bill. And I think there's expected to be $34 billion of funding for shipbuilding. Kind of just thinking about -- is there any opportunity at least with the Charleston facility to maybe get DRS more involved on kind of the current classes of ships, given all this kind of funding going into them -- going into shipbuilding right now? I'm just kind of curious about maybe how DRS could be involved in that 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. And 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 think of it as our continued thrust and that improved linearity. So I think that's what we're doing. We're pulling some things left here. Still have that, as I mentioned earlier, still have the kind of 0% to 6% growth in the second half and still have the lion's share of the margin expansion on the back end. So it's -- I would say it's less conservatism and more our continued thrust to have more linear operations quarter-over-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 little bit more of an adjacent market. We've all -- we have a core capability in sensors. We're world-class in terms of sensors. But moving that capability into missiles is something that we're in the midst of doing and we see it as a new opportunity at greenfield for us. And as the sensing capabilities of missiles the accuracy in missile continues to increase we think that we can provide the technology to do that.

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.

Okay, great. Thank you.

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

Good morning, everyone. This is Mariana [ph] on for Ron today. So my question is going to be the first one on Europe. As these European countries build out their own like defenses and they try to do their own like 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 the 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 like 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 the suppliers like ourselves so that they can produce more submarines faster rather than more content on each submarine. And – 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 like alternative I don't know shipyards or like help to – for the Navy to have not only like 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 of the international customer.

Thank you so much.

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

Hey, good morning, everyone.

Good morning.

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. And then I guess pivoting back now to tag on another question here but I can't help but ask. Given the adjustment this quarter to reset for the germanium impact on the sole source contract, is there a point in time where this problem might creep up again? How much leeway does this provide us, I think? It seems like we're set for -- through the balance of the year but is there a possibility that this might resurface beyond? I know you have several years' worth of supply of germanium and inventory but still.

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 -- and maybe this was for Mike, on this -- on ASC, you had this charge of the raw materials, I guess, and you think you've worked through it but has that sort of excluding that charge, is there a new kind of lower baseline expectation of margin there versus what you kind of thought going into the year?

I think from -- if you're looking at our overall margin expansion for the year, we've always thought it was going to be skewed towards the IMS segment because of the strength of Colombia. And I think that, that remains, I think you're going to see the overwhelming majority of the margin expansion coming out of the IMS segment. The ASC segment, obviously, this will be a headwind to the overall margin for the year. And if you think about where we were in our last call, we were talking about incremental investment on the IRAD front. The overwhelming increase in the IRAD is also coming from ASC. So -- when you think about the kind of segment over segment outlook for 2025, I think that the IMS segment is going to be the driver in terms of the margin expansion while ASC kind of hangs more in line with where they were 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 is 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 in 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. No I mean we feel that we're that we're headed with the Army is going to -- they're going to have to look at longer range sensors given the threat given what you've seen in Ukraine. As you look at Indo-Pac you're looking at longer ranges. So we think our core sensing capability is going to be even more valuable. And then we think as they make adjustments we feel good about the platform agnostic position we have. They make adjustments that pull back on certain new platforms they're still going to have to have improved sensing and computing. That means legacy upgrades. It means putting them in autonomous vehicles. We can -- we are -- it's easy for us to pivot to those new platforms and support putting the modern capabilities in those. So we think we're well-positioned against those Army priorities. And obviously they -- even as they reduce the force structure in the last administration they increased the part of the poor structure that was dedicated to air defense and counter-UAS systems. It's that kind of alignment we think is going to continue in this administration. That kind of priority is going to pass-through as we see the new 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 don't -- I really can't comment on other companies. We obviously exceeded our expectations on bookings. So we did not see customer demand. We saw it not only we not see it flag this quarter. We saw it increase. We had nearly $1 billion in bookings which was higher than we had in our plan.

Great. I will leave it there. Thanks.

Thank you.

Thank you. [Operator Instructions] 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 -- we want to continue the path that we were on. We've been increasing our CapEx. We talked about on an earlier question the support that gives the submarine and the Navy shipbuilding industrial base. We want to increase our IRAD and we try and translate that into proactive moves with the customers in for example the directed energy capability on counter UAS. We're already heavily fixed price. We're I think in the kind of commercial terms that the new administration has talked about. So we've been moving in that direction for a couple of years. I think what we want to do is continue steps down that 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 to fulfill 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 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.