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DATE

Thursday, July 30, 2026, at 10 a.m. ET

CALL PARTICIPANTS

• Senior Vice President, Corporate Development and Investor Relations — Stephen Vather
• President and CEO — John A. Baylouny
• CFO — Michael Dippold

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TAKEAWAYS

• Revenue -- $913 million, up 10% year over year, driven by growth in tactical radars, electric propulsion, and force protection programs.
• Adjusted EBITDA -- $128 million, representing a 33% increase versus the prior year, reflecting disciplined program execution and operating leverage.
• Adjusted EBITDA Margin -- 14%, an expansion of 240 basis points year over year, aided by favorable program mix and the retirement of program risk.
• Bookings -- Exceeded $1 billion for the quarter, resulting in a book-to-bill ratio of 1.2x and marking the 18th consecutive quarter at or above 1.0x.
• Funded Backlog -- Reached a record level at the end of the second quarter, providing visibility into future growth through conservative booking methodologies.
• Adjusted Diluted EPS -- $0.35 per share, up 52% year over year, driven by operational strength and a lower effective tax rate.
• IMS Revenue Growth -- 15% year over year, outpacing segment performance due to broad-based contributions across the mission systems portfolio.
• ASC Revenue Growth -- 8% year over year, supported by programs related to tactical radars and infrared sensing technologies.
• Raft LLC Acquisition -- $450 million all-cash agreement announced to expand multi-domain AI, data fusion, and mission software capabilities.
• IRAD Investment -- Approached 4% of revenue in the first half of the year, a 16% increase year over year, focused on space-based sensing and counter-UAS technologies.
• Full Year Revenue Guidance -- Maintained at $3.9 billion to $3.975 billion, implying 7% to 9% organic growth for the fiscal year.
• Full Year Adjusted EBITDA Guidance -- Raised to a range of $525 million to $540 million, reflecting expectations for continued margin expansion.
• Full Year Adjusted Diluted EPS Guidance -- Increased to $1.34 to $1.39 per share, up from the previous range of $1.26 to $1.30 per share.
• Q3 2026 Outlook -- Management expects revenue above $1 billion with an adjusted EBITDA margin in the mid-13% range.
• Drone Technology Order -- Secured a high-volume production contract for 50,000 uncooled long-wave infrared camera cores with a leading drone manufacturer.
• DAIRCM Program -- Received a $533 million production IDIQ contract for Distributed Aperture Infrared Countermeasure systems to support aircraft survivability.
• Naval Propulsion Orders -- Booked orders for surface and subsurface platforms, including the Columbia class, Virginia class, DDG-51, and LPD ship classes.
• Capital Expenditures -- Expected to remain in the mid-4% range of revenue for the full year, supporting capacity expansion for tactical radars and naval propulsion.
• Full Year Tax Rate -- Updated expectation to 16.5%, aiding the improved bottom-line earnings outlook.
• Free Cash Flow -- Management maintained a target of 75% conversion of adjusted net earnings into free cash flow for the full year.

SUMMARY

Leonardo DRS (DRS -1.98%) management reported accelerated organic revenue growth and significant margin expansion during the second quarter, driven by execution across the Advanced Sensing and Computing and Integrated Mission Systems segments. The company announced a strategic acquisition of Raft LLC to integrate multi-domain AI and mission software with its hardware platforms, targeting the Army's Next Generation command and control requirements. Demand remained high across naval propulsion, tactical radars, and counter-unmanned aerial systems, leading to a record funded backlog and an 18th consecutive quarter with a book-to-bill ratio at or above 1.0. Consequently, the company raised its full year profitability and earnings guidance while maintaining its original top-line revenue outlook.

• CEO Baylouny noted the strategic fit of the latest acquisition, stating, "RAFT software, AI, and Data Fusion are complementary to our core strengths in sensing, computing, and mission systems."
• Management highlighted a shift in naval computing toward cloud-based edge architectures, moving away from traditional weapon-system-specific hardware.
• The company is investing in steam turbine generator capacity, with Baylouny stating that the Navy needs a "second source for critical components" as shipbuilding budgets are projected to increase.
• The Raft acquisition is expected to expand the company's footprint within the Air Force, Space Force, and intelligence community while closing in the fourth quarter of 2026.
• CFO Dippold indicated that the Q3 2026 margin outlook reflects the absence of nonrecurring program risk retirement gains that benefited the second quarter.
• Management reported that supply chain risks for critical materials like germanium have been mitigated, ensuring consistent flow for infrared sensing and missile programs.
• Execution in the naval propulsion business in Charleston remains on schedule, with Phase 1 facilities preparing for the insourcing of Columbia-class submarine work in late 2027.

INDUSTRY GLOSSARY

• ASC: Advanced Sensing and Computing segment, focused on infrared and radar technologies.
• Book-to-bill: The ratio of orders received to units shipped and billed for a specific period.
• C-UAS: Counter-Unmanned Aerial Systems, technologies designed to detect and neutralize drones.
• DAIRCM: Distributed Aperture Infrared Countermeasure, a system used to protect aircraft from heat-seeking missiles.
• IDIQ: Indefinite Delivery, Indefinite Quantity, a type of federal contract that provides for an indefinite number of supplies or services.
• IMS: Integrated Mission Systems segment, encompassing power, propulsion, and force protection.
• IRAD: Internal Research and Development, company-funded research to develop new products or technologies.
• SDA: Space Development Agency, a U.S. Department of War agency focused on space-based capabilities.

Full Conference Call Transcript

Operator: Ladies and gentlemen, good day, and welcome to the Leonardo DRS Second Quarter Fiscal Year 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the company's prepared remarks, there will be an opportunity to ask questions. Instructions will be provided at that time. As a reminder, this event is being recorded. I would now like to turn the conference over to Stephen Vather, Senior Vice President, Corporate Development and Investor Relations. Please go ahead.

Stephen Vather: Good morning, and welcome, everyone. Thank you for joining today's quarterly earnings conference call. With me today are John A. Baylouny, our President and CEO and Michael 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 find the earnings release and supplemental presentation. Management may also make forward-looking statements during the call regarding future events, 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. These statements, including those relating to the pending acquisition of Raft LLC, including the expected timing of completion of the transaction, the satisfaction of closing conditions, the receipt of regulatory approvals, and the anticipated benefits of the transaction in plans for the integration of the acquired business. For a full discussion of the 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 the 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?

John A. Baylouny: Thank you, Steve, and good morning, everyone. We appreciate you joining us for a review of our second quarter 2026 results. Q2 was another strong quarter that builds directly on the foundation that we have laid over the past several years. Organic revenue growth accelerated to 10% year over year. Bookings exceeded $1 billion driving book-to-bill to 1.2x for the quarter. Demand was apparent throughout the portfolio and our Q2 book-to-bill extended our streak of 18 quarters with book-to-bill at or above 1.0. Furthermore, we exited the quarter with a record funded backlog given our conservative bookings and backlog methodology, this provides meaningful visibility into future growth.

The highlight of the quarter was the 33% year-over-year growth in adjusted EBITDA and 240 basis points of margin expansion. Execution, favorable program mix, and the retirement of program risk, were the linchpins of our success. Mike will expand on the drivers later. These strong results once again demonstrate the benefits of DRS' diverse portfolio and platform-agnostic approach. The top and bottom line outperformance further validates our strategy is a direct result. Of the sound execution across the portfolio. Additionally, I am pleased to highlight that we announced an agreement to acquire RAFT, expanding our multi-domain AI data fusion, and mission software capabilities.

This $450 million all-cash acquisition reflects a disciplined deployment of capital in line with our strategy and supportive of continued long-term growth. Overall, the solid first half trajectory reinforces our confidence in raising our full year profit outlook. I want to thank the entire DRS team for the relentless effort and unwavering focus on execution to convert demand into these outstanding results. Let me offer some framing comments with respect to the macro and operating backdrop. The global threat environment remains elevated. And demand fundamentals remain supportive across our diverse portfolio. Customers are prioritizing modernization and the procurement of production-ready capabilities. And those demand signals are clearly evident in our book-to-bill.

On the U.S. budget, Congress is working through the fiscal 2027 funding and we expect a continuing resolution to govern the calendar fourth quarter. I will not speculate on the timing or final level of fiscal 2027 defense appropriations. And we recognize the path may not be linear. What we are confident in is that the threat environment warrants continued and growing defense investment. Beyond the near-term funding mechanics, and the record based budget request, the reconciliation dollars flowing to priority programs reinforce a durable, demand signal for exactly the capabilities that we provide Top line, and timing alone does not determine the opportunity set for DRS. What matters more are the underlying priorities and thematics.

Where we remain closely aligned. Customer priorities are increasingly shaped by operational lessons from recent and ongoing conflicts in the Middle East and in Eastern Europe. These structural trends are the ones I discussed last quarter, to refresh, they are first, the necessity of layered and effective air defense and counter-UAS. Second, the shift towards proliferated resilient sensing across domains. Third, the depth and cost asymmetry of effectors, to counter growing threats. We saw each of these trends further manifest in our business this quarter. With that, let me discuss how these trends as well as other customer priorities are materializing in our results. As you know, the DRS portfolio is diverse.

Platform agnostic, and benefits from a number of different defense thematics. Starting with air defense and counter-UAS, the proliferation of unmanned threats keeps accelerating adoption of counter-UAS technology and the customer pull is evident in our results. Our tactical radars are essential enabling technology embedded in counter-UAS systems fielded around the globe and order flow continues to run ahead of supply. So we are aggressively adding capacity. We also continue to see robust global appetite as international allies quickly work to fill air defense gaps highlighted by recent conflicts. We think we are in the early innings of tactical radar proliferation, only for counter-UAS missions, but more broadly.

Staying ahead of the sensing only matters if you can turn it into decisions. Our advantage is combining sensing, computing, and networking. To act on that data across a connected force. Not just deliver a standalone component. That is exactly the capability we are expanding on with our acquisition of Raft. A recent example of this is what we saw firsthand in Operation Jailbreak. And I want to spend a moment on it because I was there on the ground. Operation Jailbreak the Army's first industry hackathon. A live effort to get systems to talk to one another. They brought roughly 20 companies together to break down the barriers between systems that are not originally designed to connect.

It is the first step in what the Army calls its right to integrate. And the foundation for the next-generation command and control system. I am pleased to report that our team had a meaningful role in that exercise. And that our technology has demonstrated interoperability seamlessly and quickly in a matter of a few hours. Modularity opens standards platform-agnostic approach, and scalability are designed into the entirety of our technology portfolio. And it is just one of the latest proofs of that point. Next generation command and control is among the Army's top modernization priorities. Customers are managing growing volumes of data from distributed sensors and systems. With fragmented architectures that slow decision making.

As such, there is a need for a resilient network and a unified data layer that turns that data into decisions. And this is also what is driving our customers towards integrated hardware and software capabilities. that is why we announced an agreement to acquire RAFT earlier this week. RAFT is a provider of open architecture, mission software for multi-domain data fusion, and AI, supporting real-time situational awareness and faster decision making for national security customers. Importantly, RAFT was selected by the Army's Next Generation C2 software architecture. The very priority I just described. Additionally, the company expands our customer footprint within the Air Force, Space Force, special operations, and the intelligence community.

We have long said that we apply the same open or modular philosophy to software as we do hardware. Giving customers the flexibility to deploy the best of breed solutions without being locked into a single provider. RAFT advances that approach and checks the boxes that matter to us most. Outstanding people. A mission-first culture, and a proven open architecture technology. RAFT software, AI, and Data Fusion are complementary to our core strengths in sensing, computing, and mission systems. Combining those franchises is expected to open growth avenues not available to either company on a standalone basis. It also accelerates our R&D emphasis on platform AI, autonomy and extending our platform-agnostic capabilities to new missions.

Put simply, RAFT helps us own the edge. Putting sensing, computing, and integration where the decision gets made. Reducing the cognitive burden on operators and improving decision speed. Coming back to counter-UAS, we continue to see adversary target high value assets that degrade sensing to defensive capability. This only reinforces the need for proliferated and resilient sensing architectures. It also puts a premium on the open software and data layer that sits one level up from those sensors and that is what RAFT provides. It unifies fragmented data into a single common operating picture. So the force keeps a coherent view even when individual nodes are degraded or lost. Our counter-UAS work extends into systems and platform integration.

As unmanned threats evolve, we expect the technologies and systems used to neutralize them. To also evolve rapidly. Customers increasingly seek counter-UAS solutions that are platform and vehicle agnostic. For example, the Army is iterating on its approach for the next tranche of ground-based air defense capabilities. To that end, we are maturing our palletized counter-UAS offerings by incorporating different effectors and technologies that will broaden the flexibility of capability development. Given our enabling technologies are modular and integrated across vehicles, we are not tied to any single platform procurement line. And we stay aligned as mission needs evolve across configurations.

Last quarter, I mentioned that we received a $533 million production IDIQ contract for the Distributed Aperture Infrared Countermeasure system, or DAIRCM for aircraft survivability. Demand for aircraft protection remains elevated across infrared countermeasure programs, and order flow is accelerating given how critical these systems are to airborne platform survivability. Recent conflicts have put these systems to the test. And they delivered. Pushing the urgency to field more of these systems quickly. I am proud of our work to help ensure the safety of Airmen. Beyond protecting our soldiers and platforms, we are also growing on the munitions side. Equally important is sensing and countermeasure systems are effectors.

While our footprint today in this area is modest, our involvement is expanding meaningfully. This is similar to how you saw DRS take the preeminent weather satellite position in space and leverage that pedigree to drive adjacent growth into missile tracking and warning via the SDA Tranche contract. That same sensing pedigree positions us for homeland defense, where investments in infrared space-based interception are directly poised to support missile defense mission. Our exposure to missiles and effectors spans tactical to strategic balanced between existing platforms seeing urgent multifold increases in demand and next-generation systems that will see growth for years to come.

Today, we are providing essential components to platforms such as THAAD and as a qualified supplier on those platforms, we are leaning in to add capacity and depth. As the prime scale these programs under the multiyear munitions frameworks, we are leaning in right alongside them. And investing in ramping capacity to support higher level production of our content. As I have mentioned before, we are also being designed in as advanced sensing provider for future missile platforms. What is also exciting is that our infrared capabilities are starting to see notable traction in low-cost drone platforms. Our investments in size, weight, power, and cost optimized uncooled long-wave infrared detection are paying off.

As the Department of War prioritizes affordable drones, building at higher volume, the sensing payload is increasingly what differentiates 1 platform from the next. And our sensing and our infrared pedigree plays directly into that need. In the quarter, we secured a contract with a leading low-cost drone manufacturer for high volume production of the camera cores with initial order of 50,000 units. We are seeing appetite and interest from additional drone OEMs given our quality capability, and ability to deliver at a significant scale. Turning from sensing and effectors to the maritime domain and naval power, expanding shipbuilding capacity to grow nation's naval fleet of operational surface and subsurface platforms remains an important priority.

I am pleased to report that we saw a steadfast demand materialize in the quarter not only for our propulsion content, but also for our naval network computing capabilities. While many of many know DRS for its innovative full electric propulsion work on Columbia-class, We offer naval propulsion capabilities that include traditional, and hybrid electric approaches. In the quarter, we booked orders for content across power capabilities, for a diversity of subsurface and surface platforms, including Columbia class, Virginia class, DDG-51, LPD. Additionally, existing naval platforms still require regular network computing modernization to enhance and scale processing at the edge.

We are supporting these initiatives through our delivery of advanced platform based processing solutions critical to onboard sensing, combat weapons, communications, and other mission systems. While executing on this demand is driving near and midterm growth, we continue to progress efforts to expand our involvement in steam turbines, as well as grow our sensing footprint and content more broadly on unmanned surface vessels. Stepping back from the individual mission areas, our results reinforce our strategy. Delivering differentiated capability to help our customers maintain overmatch, is core to DRS. We are capturing growth through consistent delivery and disciplined investment. We have proactively and methodically stepped up organic investment over the past few years and are doing so year-to-date.

Investment in internal research and development was up 16% year-over-year in the first half and approached 4% of revenue. Our increased investment is going towards innovation initiatives such as infrared sensing technologies for space-based interception, further involving our platform-agnostic and modular counter-UAS solutions, enhancing our tactical radars, and expanding naval propulsion capabilities. Similarly, we are stepping up the capital investment to further expand capacity across the board, scaling tactical radar production, revitalizing our foundry to drive next-generation infrared sensors, and detectors and, of course, deepening our naval propulsion and shipbuilding presence in Charleston. These investments position us well to address the mission critical needs of our customers, capture market share, and drive growth.

RAFT is the same strategy at work through M&A. Adding to an already strong organic growth profile. To bring it together, we delivered a robust second quarter with growth. Accelerating, margins expanding and steady execution across the portfolio. That combination is what compounds over time and gives us confidence in the year ahead. These results rest on the trust of our customers placed in us. Trust to earn the same way every quarter. By delivering mission critical capabilities at speed, with quality, and at scale. With that, I will turn it over to Mike to walk through the financials.

Michael Dippold: Thanks, John, and good morning, everyone. As John noted, the second quarter was a strong one for DRS. With standout performance evident across our financial metrics. At a high level, our strong execution drove us to exceed the framework we had set last quarter. Revenue came in ahead of our expectations and even more notably, posted significant outperformance across our profit metrics. Importantly, we delivered these results while continuing to invest organically in R&D and capacity to fuel future growth. Let me walk through our Q2 performance in greater detail, and then I will turn to our revised 2026 outlook and offer a few thoughts on Q3.

We generated $913 million of revenue in the quarter, up 10% year over year. Growth rate accelerated from Q1 and a solid first half reinforces our confidence in achieving the full year revenue outlook. Growth in the quarter was led by programs related to tactical radars, electric power and propulsion, infrared sensing, and force protection. The IMS segment led the way with 15% growth, while ASC contributed a healthy 8% increase. At IMS, the gains were broad-based with contributions spread across the segment. At ASC, programs related to tactical radars, and infrared sensing bolstered the top line growth. When evaluating the half-year results, you could see that both segments are contributing evenly to growth.

Underscoring the momentum we see across the business. As I noted at the outset, our quarterly profit metrics were outstanding. Overall, we expect that outperformance to carry through to our full year 2026 outlook. In Q2, adjusted EBITDA was $128 million, up 33% year over year, and meaningfully outpacing the top line. Adjusted EBITDA margin was 14%, up 240 basis points versus the prior year. The increased adjusted EBITDA and margin expansion reflected disciplined program execution across the portfolio, favorable program mix, and operating leverage on higher volume. it is also worth noting that part of this operational execution drove program risk retirement. Which acted as a tailwind to profitability given the cumulative catch-up nature of fixed-price contract accounting.

Breaking it down by segment, as with revenue, IMS paced our year over year adjusted EBITDA growth in the quarter. IMS adjusted EBITDA rose 55% over the prior year Q2, translating to 460 basis points of margin expansion. Higher volume, together with broad-based execution and program risk retirement, propelled net margin. In ASC, adjusted EBITDA increased 19% and margin expanded 110 basis points as sound program execution favorable mix, and operational leverage from higher volume more than offset increased investment in research and development versus Q2 2025. Again, on a first half basis, the two segments growth and margin gains were far more balanced than the quarterly figures alone suggest. Turning to earnings for the quarter.

Our operational strength flows straight to the bottom line. Net earnings were $86 million, up 59% and diluted EPS was $0.32 per share, up 60% year-over-year. Adjusted net earnings were $94 million, up 52%, and adjusted diluted EPS was $0.35 per share, up 52% year-over-year. These gains were driven primarily by stronger operating performance and aided by a lower net interest expense and lower tax rate. Turning to free cash flow. We are seeing improved quarterly linearity relative to last year. Free cash flow was positive in the quarter, supported by higher profitability and greater working capital efficiency. Furthermore, we delivered this while maintaining our planned level of capital investment to support future growth.

More broadly, our strong balance sheet and cash flow generation let us deploy capital across both organic and inorganic growth. The pending all-cash acquisition of RAFT embodies that go-forward strategy. Reflects disciplined capital deployment and is being funded from a position of financial strength. Given the momentum in our business and solid first half performance, we are raising our 2026 outlook across profit metrics. We still expect healthy full year revenue performance and are maintaining the range of $3.9 billion to $3.975 billion which implies a 7% to 9% organic growth year over year. Guidance reflects a balanced view of second half revenue shaped by the timing and level of material receipts and achievement of programmatic milestones.

If you look back at 2024 and 2025, you will see that we generated approximately 45% of full year revenue in the first half. Our revenue outlook assumes a similar first half versus second half cadence in 2026. Our record funded backlog gives us tremendous visibility and confidence in delivering on that outlook. We now expect adjusted EBITDA of $525 million to $540 million up from $515 million to $530 million previously. This increased adjusted EBITDA outlook implies a path to greater margin expansion for the year. Disciplined operational execution favorable program mix, and leverage from higher volume are all contributing to improved profitability and margin.

Consistent with what we shared last quarter, we still expect revenue and adjusted EBITDA growth to be visible at both segments The margin expansion will come primarily from IMS. That stronger profitability carries through to our improved bottom line outlook We now expect adjusted diluted EPS of $1.34 to $1.39 per share and we have updated our full year tax rate assumption to 16.5%. Our diluted share count assumption is unchanged at 269 million shares. Please note that our guidance excludes any contribution from the pending acquisition of RAFT. We do not anticipate a meaningful contribution in 2026 given the expected fourth quarter close.

However, we expect the acquisition to be accretive to adjusted diluted EPS in the first full year of ownership. Lastly, the implied EBITDA multiple being paid net of the tax assets acquired, is in line with our own and reflects a disciplined deployment of capital. We are maintaining a 75% conversion of adjusted net earnings into free cash flow for the full year. You should assume that the increased adjusted diluted EPS implies a modest uplift to free cash flow as well. That said, we still expect high capital expenditures in the second half with full year CapEx running likely in the mid-4% range of revenue.

Broadly, we expect the second half to drive a greater contribution across key metrics And as we have consistently said, we are working to drive better linearity on profit and cash. Finally, a quick view on the third quarter. We expect revenue to be above $1 billion and adjusted EBITDA margin should be in the mid-13% range. The sequential step down in margin simply reflects the nonrecurring program risk retirement gain that lifted Q2. Not any change in underlying execution. Additionally, we expect free cash flow to be modestly positive and above our Q2 level. Let me turn the call back over to John. for closing remarks.

John A. Baylouny: Thanks, Mike. Before we take your questions, I want to close on what this quarter reaffirms about our strategy. Continue to execute with strength quarter after quarter. In Q2, we delivered double-digit revenue growth, profitability that significantly outpaced the top line and bookings that once again exceeded revenue. We are deploying capital with discipline organically and through M&A. Investing ahead of the shifts that we see coming. This quarter, we agreed to acquire RAFT, extending our platform-agnostic approach into multi-domain software and AI as customers increasingly demand integrated hardware and software. Our portfolio is differentiated and throughout our business, we are well aligned through an enduring customer demand signal as evidenced by our multiyear book-to-bill trends.

Thanks to our talented people, strong execution, strategic investments, and differentiated portfolio, DRS is well positioned to deliver durable profitable growth. We will keep delivering with the speed, quality, and scale that our customers demand. With that, we are happy to take your questions.

Operator: Thank you. At this time, we will conduct a question and answer session. To ask a question, you will need to press star 1 on your telephone, and wait for your name to be announced. To withdraw your question, please press star 1 again. We ask that you please limit your questions to one question and one follow-up. Please stand by while we compile the Q&A roster. Our first question comes from the line of Peter Arment of Baird. Your line is now open.

Peter Arment: Good morning, John, Mike, Steve. Nice results. Mike, this question may this question may first be for you. On IMS, the margin performance, obviously, excellent. You mentioned volume execution and then the program risk retirement. Could you either size that for us or give us some more color on what that specifically was, and if you could kind of give us an update on where things stand on Columbia, in terms of shipset volume where you are?

Michael Dippold: Yeah. Sure. Thanks, Peter. So margins were strong really on improved execution across the entire segment. It is led by the naval propulsion business, but the execution gains are really more broad-based than just Columbia The favorable programmatic risk retirement that did occur in the naval business is on a surface ship. We also saw some real good execution across our counter-UAS portfolio, really highlighting this kind of portfolio wide execution improvements If I take out the risk retirement, I would think of the IMS margin kind of closer to the 15% range. For the quarter. So that is that is the magnitude there, Peter. And from a Columbia perspective, things continue to go very well.

Seeing the benefits of the long-term contract. And the and the procurements of the materials that we front end loaded. The team's executing well. Charleston is on pace. So things are really hitting on all cylinders within the segment.

John A. Baylouny: Let me just add to that real quickly, Peter. I just wanted to highlight the fact that as you know, we are very optimistic about the budget environment for the navy. We are looking at a 50% increase. Obviously, the navy needs a second source for critical components like the steam turbine generator, and we are investing in that capability. To bring that to the navy. They deserve it. So we are investing in that as well. Just wanted to add that point.

Peter Arment: Appreciate that. And just as my follow-up, just could you John, could you give us maybe an update on kinda how things are progressing in your counter unmanned area? I know you guys have made some investments there. The over-the-horizon radar, it seems like a great opportunity for Golden Dome. Maybe if you could just touch upon both of those. Thanks.

John A. Baylouny: Sure, Peter. Yeah. Certainly, in the short range air defense and counter-UAS area, there is a lot of change. We are seeing from Ukraine lessons learned and changes in capability almost on a weekly basis we would expect that market to continue to evolve. And, and we have gotta evolve with it. So we are investing ahead of need on a lot of capabilities. We are bringing new technologies to the play. We have kinda moved our, UAS program onto a sled so it could be platform-agnostic like the rest of our business, and we are moving forward on that.

On the on the over the horizon radar for that could apply to Golden Dome, we are seeing some great positive movement there as well. I will not get into the specifics, but we are definitely moving forward and we are looking at that as a nice growth factor for us. Appreciate the color. I will jump back in the queue. Great results.

Operator: One moment for our next question. Our next question comes from the line of Robert Stallard of Vertical Research. Your line is now open.

Robert Stallard: Thanks so much. Good morning. Morning, John, you mentioned that you are seeing strong demand coming out of Europe for a range of your different products. I was wondering if there is an opportunity for you to, in some way, pull forces with your parent to get some of these deals over the line and potentially grow your market share into the European region?

John A. Baylouny: Yeah, absolutely, Robert. We are actually doing a lot of that right now. it is a it is a push for us to do more and more together with Leonardo As you know, the macro environment is ripe for this. The US is on a wartime footing, and the demand is high and urgency is high. Same thing is happening in Europe. In Europe, they wanna have some internal capabilities, sovereign capabilities. And there are gaps. So we are we are looking at pulling and pushing technology in both directions. Together with our parent.

Robert Stallard: K. that is great. And then follow-up for Mike. On the Raft acquisition, I was wondering if you could give us some idea of what sort of revenue, this business could generate, on an annual basis and how its margin maybe compares to the overall EBITDA margin of DRS?

Michael Dippold: Yes. So we are not going to comment on the sizing of the revenue yet. We will kinda come out with that with our 2027 guidance given the late fourth quarter close. But what we will say to kind of give you some direction is as was in the prepared remarks, that the EBITDA multiple paid is going to be kind of inside of DRS' current trading multiple. And when you think about the financial profiles of the business, it is gonna be accretive to DRS from a growth profile and from a margin perspective. So as you know, we have been very disciplined in our approach towards M&A. We have been looking for the right target.

Both strategically and financially. And that is the shot we took here. We feel real confident about this deal.

John A. Baylouny: 1 of the things, Robert, I will just add on to that to say that you know, we really think about this strategically. Think about the gaps that we are filling here. If you think about DRS as a business, we have been really focused on sensing and computing and communications and force protection. And those sensors that we created and have in the marketplace really need to have that intelligence. And as Ralph likes to say, sensors need a brain. And in the future, autonomous platforms are gonna increasingly need sense the plat the battle space make sense out of those battle space, and do something about it and act.

So we have been working really on the front end of that, providing the sensors and the computing infrastructure. Raft fills that slot of the thinking part. Of what is actually happening on the battlefield. They have been focused on the edge. We have been focused on the edge for with our hardware. They are focused on it with the software. So these are these are really nice synergistic play for us. Yep, that is great. Thanks, Richel.

Operator: One moment for our next question. Our next question comes from the line of Andre Madrid of BTIG. Your line is now open.

Andre Madrid: Hey, this is actually Ned Morgan on for Andre this morning. I just wanted to build on that. You know, could you provide some specific examples of programs where combining your guys' hardware with RAFT software capabilities creates new opportunities? And when we could expect those opportunities to begin contributing.

John A. Baylouny: Yes. Thanks, Ned. Let me start by saying, you know, the US Army has selected RAFT for their data layer. And so what that means, is that our sensors and other sensors would be converted that data would be converted in a in a way that the AI algorithms can read it. Across the enterprise. And from the from the starting at the edge and moving to the enterprise, So this is a is an area where obviously, we are already playing from a computing standpoint, from a sensing standpoint, and now they have now Raft has been selected for the data layer. This is a big step forward.

I think it is a it is an area where, immediately have synergies. I also wanna point out the customer profile here. Because when we when we talked about filling gaps with M&A, we talked about filling technical gaps customer gaps, and geographic gaps. Well, this acquisition really fills 2 of those. It fills the technology gap and the and this and the intelligence piece that I just spoke to, but also expanding our customer base They have got a large presence in the air force. They have got a large presence with special operations in space force as well as in the intelligence community. So it opens up a lot of doors for us.

And, of course, we are gonna be opening doors for them. So there is gonna be a lot of synergies between the 2 businesses.

Andre Madrid: Great. And then just a follow-up, another 1. You guys have highlighted space as a big opportunity in growth driver. I know you guys won work on the Tranche tracking layer, but any opportunities you are pursuing right now? And where are you seeing the strongest demand Yeah, Ned.

John A. Baylouny: I would tell you that there is a lot of opportunity going on in space right now. We are looking at different sensing, different communication opportunities across the board. Of course, Raft is going to play into some of that as well. I am not gonna be at liberty to talk about any particular opportunity that we are that we are focused on, but there is a lot of opportunity there. Space is, you are probably aware in the in the president's budget request. '2027 budget request is growing 100%. So there is a lot of opportunities. it is a big market Thank you.

Operator: One moment for our next question. Our next question comes from the line of Jonathan Tanwanteng of CJS. Your line is now open.

Jonathan Tanwanteng: Hi, good morning, and thank you for taking my questions, and congrats on a nice quarter and outlook. I was wondering if you could drill a little bit more into the drones and munitions business. John, that you mentioned in the prepared remarks. How big is that business today number one? And number two, how should we think of growth going forward And especially focused on the capacity side just because I know you have had issues with germanium in the past, and I am and I am wondering what happens when you start putting on these higher volume programs like low-cost drones and munitions, and if that strains your ability to go there.

John A. Baylouny: Alright. Thanks, John. I appreciate the question. Obviously, the munition business is growing very, very quickly. You are seeing some of the primes print some very incredible growth numbers because of that. We have got exposure across the board from you know, that sensing Patriot components all the way down to low-cost drones. And there is a few elements in between. So we see this core capability that we have in infrared sensing as applicable to a lot of different of these of these vectors and missiles. You are also gonna see that missiles and effectors one-way drones, if you will, are gonna start fusing together.

You are gonna start seeing all of these different types of capabilities between the 2 capabilities. But we are on a number of different platforms, number of different missile platforms through the primes. We see this as a growth path, but obviously, a small part of our business today. Can you frame the relative size and the growth rates that you are seeing there? I am not gonna put the relative size. It is a it is a small part of our business today, but it is gonna be growing it is gonna it is gonna outpace the growth of the company. So I will just leave it there.

Jonathan Tanwanteng: Okay. Great. And then second, I think you mentioned you are increasing your R&D and CapEx for the year. Were there any specific numbers attached to that, and then kind of what programs are they associated with?

Michael Dippold: Yeah. there is a couple numbers to attest to that, John. We would mention that R&D is going to approach 4% of sales. During the course of the year here. And from a CapEx perspective, we are looking in the mid 4% range. So we continue to invest heavily in the growth given the demand signals that we are seeing. I will let John elaborate on the R&D projects, but it is not going to be a surprise that we are looking in areas like space and counter drone and continuing to affect our tactical radars. As well as the investments we are making in the power and propulsion domain. But, John, you want to add?

John A. Baylouny: Yeah. Let me just let me just add one point to that. And I am gonna just point out space-based interceptions is an area that we are investing in. it is it is aligned to our core competency, our core capabilities in infrared sensing. It is a national need to have a low-cost interceptor. So we are focused on our investment there to try to bring that cost down. that is just an example, John, so that we are working on.

Jonathan Tanwanteng: Got it. Thank you.

Operator: For our next question. Our next question comes from the line of Seth Seifman of JPMorgan. Your line is now open.

Seth Seifman: Hey, thanks very much, and good morning and good results. Wanted to ask about the, you know, the booking environment from here. The fact that there is still a bunch of money that has not been on contract yet from last year's reconciliation bill. Do you expect significant order activity and backlog growth coming up here in the third quarter? And if so, does that create some potential revenue upside for the year? Or is the top line really about the supply side of the business right now? You know, given the how much demand is out there.

Michael Dippold: Yeah. I think from a bookings perspective, we continue to confident in the trajectory, just holistically because of the threat environment and where we are aligned. Hopefully, will result in some awards here in the second half as they start to let some of the OVA money out, as you alluded to. From a revenue perspective, however, I would not assume that the bookings cadence is going to impact the revenue for 2026 significantly I would think of it more as we talk about our record backlog that we are moving up the value chain and the value stack from the solutions that we are providing.

So we are really in the midst of that transition from components to solutions, which is going to elongate that conversion of backlog into revenue. What I would say is that rec that record backlog that we talked about, record funded backlog, is the indication that we have a platform for sustained success. So that is the way I would look at that. Not so much a 26 item, but continued confidence into 27 and beyond.

John A. Baylouny: And I will I will just add, Seth, that we are seeing the money from the reconciliation bill flowing. In core areas of our of our growth that money is actually flowing now. Excellent. Excellent.

Seth Seifman: Okay. And may maybe to follow-up, if you talk a little bit more maybe about naval computing, I know you highlighted it as a growth driver. And just as we think about that environment, the potential for further growth there and kind of how that stacks up within the company? And maybe just a little bit more about how that market works. Is that mainly associated with mods and upgrades on existing ships and submarines? Is it is it tied more to new builds? How should we think about it Yeah.

John A. Baylouny: it is both. The traditional approach here is weapon system by weapon system compute capabilities for new ships and backfits. And we get incremental awards for those capabilities. What the future looks like is quite a bit different. What we believe is gonna happen onboard ship is you are gonna see central computing more like a cloud computing architecture And so you are gonna you are gonna process sensors and weapon systems centrally virtually, on the edge on the edge in on the ship. And so we are preparing for that. We are we are investing in areas that allow the Navy to go off and move in that direction.

So that they can have cloud computing and AI on the edge on the ship, And so that is what we think the future the future holds. Right. Very helpful. Thanks very much.

Operator: One moment for our next question. Our next question comes from the line of Ronald Epstein of Bank of America. Your line is now open.

Ronald Epstein: Good morning, guys. Been a lot of questions so far on RAFT. Maybe just one more Does that signal that you guys want to move more into AI enabled mission software you know, given, you know, software tends to have a different margin structure, and so on and so forth? Or is this just more of a strategic enabler for your hardware? How are you thinking about that?

John A. Baylouny: Yeah. Thanks, Ronald. Let me let me take that. Acquisition reform has I think, been very successful in one thing. it is moving the customer away from buying components and subsystems to solutions. We have we have been investing in capability that provides solutions to our customers for a while. This was 1 of the missing pieces that we needed to fill to get to that level. So our customer is now saying, hey. Can you solve the problem for me? With a solution that includes a lot of our components, our core capabilities, whether it is sensing, computing, communications, and power propulsion and, of course, protection. But this gives us the ability to address those kinds of needs.

So we are kind of heading them off at the pass where the where the customers are moving. And, yeah, so that is a that is a big structural change in both the way that the customers are buying and what we are selling and how we are selling. Got it. Got it. Got it. And then I know anybody's asked this yet, so but I think it is an important 1. How is your supply chain doing given, you know, the increase in demand? You had, you know, some issues a little while back on critical minerals. I mean, how are we doing there? Just kinda broadly, are there any pinch points, and how's it going?

Well, we strengthened our supply chain pretty significantly since we had some trouble with the germanium, as you as you alluded to. We have got a regular cadence of detection, mitigation, and that is deeper and faster than it is ever been. And we are maintaining you know, we manage a couple of areas of risk at all times. And we are willing to accept a little bit less efficient working capital to secure the critical material so we do not run out of them. So the germanium picture is a positive story. We have got a great flow of germanium. We are not gonna run out. Even with the areas that we are chasing in missiles and other places.

In terms of magnet material, I think we are in good shape. We talked about memory devices, and we are in good shape there. I think across the board, the availability of materials in the right place. The cost is always sometimes a little bit variable, and we will deal with that. But the process that we put in place now is very robust. And has been successful at mitigating these risks. Great. Thank you very much.

Operator: For our next question. Our next question comes from the line of Noah Poponak at Goldman Sachs. Your line is now open.

Noah Poponak: Hey, good morning, everyone. Morning. Morning. Is DRS taking market share, or is there more? Kinda opportunity in the forward here to take market share, I guess, in a world where you know, your customers are potentially looking to grow faster than they had for a bit. And then also, I guess, specifically, in a world where your customers maybe signing contracts that put schedule risk on them more than it has in the past that would make me think would maybe want more sourcing of given components or more reliable sourcing, which DRS is. So is that an has that been happening recently? Is that an opportunity going forward?

Should we think of that as a growth kicker, or should we just be thinking your end markets and your positions in them drive your growth? Well, no.

John A. Baylouny: I would say both of those avenues are areas of growth for us. But I would not lean on market share as the predominant element. Of our growth. I would say that the market itself is growing considerably. I do think that the point that you made about schedule risk and really the idea of second sources is helping us. It is an element of our growth, but I would say that the market itself is growing fast. And that is the predominant part of our growth.

Michael Dippold: Yeah. And let me just add on to that real quick. I think the other thing that you touched on is a reliable provider. So these opportunities that are emerging, I think, are in part because of our execution and what we have been able to demonstrate that is why the Navy's lining up to see us as a second source on the steam turbine generators. I think that is why we were successful in getting you know, the camera cores for the attritable drones that John talked about in the prepared remarks. it is because of the ability to ramp, the ability to scale, and to do that effectively and predictably. Okay.

Noah Poponak: Appreciate that. And then I also wanted to just try to get a little bit more of a sense for I guess, how big a piece of the strategy M&A could become for DRS over the medium term now? With RAFT, I guess or I guess the business was not super acquisitive prior to that. For a little bit of a window of time. Is there a lot to do? Is there a little to do? I and I obviously, your balance sheet has a lot of capacity. And maybe it is a little bit too early for this, but you know, we have had this kind of violent derating of the broader defense tech landscape.

Your stock price and multiple on a relative basis have been more spared from that. So the so your kinda relative buying power would be arguably greater from that. Maybe that is too soon or too short term, but I do not know. How would you frame how acquisitive we should expect the business to be over the next two or three years?

John A. Baylouny: Well, no. I would I would repeat what we have said in the past I think our primary focus is on organic investment IRAD, CapEx. We are we are gonna be looking for and have continue to look for key capabilities outside inorganically that would fill gaps But I we are gonna continue to be picky about it. and make sure that we are really filling gaps and that we get the value out of that. RAFT is an outstanding example of kind of disciplined approach to M&A. Finding the right product capability that fills our gaps from a technology standpoint and from a customer standpoint, I think you can you can count on us continuing that approach. Okay.

Thanks very much.

Operator: One moment for our next question. Next comes from the line of Kristine Liwag of Morgan Stanley. Your line is now open.

Kristine Liwag: Yeah. Hi. This is Austin on for Christine this morning. Thanks for taking the questions. So Mike, hey, Mike. You mentioned the Charleston facility earlier. Was hoping maybe you could provide a little more of an update on the facility build out. And you have talked about taking on incremental marine industrial based work on top of the Columbia-class sub work at the facility. Just curious if you could update us on that front any potential margin implications for IMS?

Michael Dippold: Yeah. So Phase 1 of the of the Charleston facility is getting towards completion. We are starting to put the equipment in and you know, take possession and occupy the facility. The Phase 1 was always geared towards driving the insourcing of Columbia. that is the margin opportunity. We had kind of put that out as a as a second half of 2027. We will start to see some of the uplift from that insourcing that is still on track and going well.

The Phase 2, which was, you know, when we when we announced that the investment was always kind of the upside opportunity, which was further expansion of the facility to take on new scopes of work things like the steam turbine generator. That funding continues to flow. We are moving in the right direction there, both from a capacity build out and also you know, getting the design for the for this second source opportunity under our belt. So things are moving at or maybe even little better than the pace we had initially laid out. And we are still very optimistic on the outlook for that facility.

Kristine Liwag: Great. And the Navy just yesterday, I think, announced it was $76.6 billion worth of submarine contracts, including about $29.5 billion for Columbia. Curious for any color there. I mean, does that change the profile for DRS on the program at all?

Michael Dippold: Or are you contracted separately? Yeah. We are we are contracted separately. So we were able to negotiate the long-term contract for the multiboat buy you know, a while back. So we have been in that luxurious position of having the full contract already and I think the rest of the shipyards here are catching up to where we are. Okay. Would just add that the Virginia part of that will flow down to us because we do not have a multiyear for Virginia, but we will we will we will see the flow down from the Virginia part of that order to us over time. Okay. Great.

Kristine Liwag: If I and I could sneak maybe one more in. You know, the Navy is moving out on the new battleship class. I guess the designation is BBG(X). Just curious how you are thinking about addressability there and you flagged DDG(X) in the past as a good opportunity. I am just wondering if you think the customer can sustain both programs in tandem. Thanks.

John A. Baylouny: Yeah. Thanks, Austin. I think that we view BBG(X) as a as an opportunity in the following way. We believe that the navy should be focused on a modular architecture that allows them to design a ship that is applicable to whatever size ship they wanna build. Whether it is a battleship or a cruiser or destroyer or frigate. And we believe that architecture needs to be electric. That those ideas are getting some traction. And so we believe that the battleship is an opportunity not just for the industry and us, but also for the Navy to make sure that they can shorten the amount of time it takes to design a new ship. Got it. Great color. Thanks.

Operator: One moment for our next question. Our next question comes from the line of Alexandra Mandery of Truist Securities. Your line is now open.

Alexandra Mandery: Hey. Nice results, and thanks for taking my question. Following up on the earlier bookings question, do you see any headwinds for the remainder of the year, including maybe a potential continuing resolution that might impact the booking cadence?

Michael Dippold: I think we are pretty confident. You know, we do not lay out a bookings guidance, but we have kinda said we are gonna continue to print the bookings better than 1.0x. I think we are on a good start to the year. In what we have shown for the first half. Obviously, a CR can impact on the fringes, but I do not see it having a material impact to our bookings trajectory.

John A. Baylouny: No. We are we are likely to see a CR here as we said in the opening remarks. The effect on us is really minimal. it is really kinda normal for us to see that. Even if it is an extended CR, we do not see a lot of impact We if there is an extended CR, we do expect the Hill to provide some flexibility in the CR that would give the department the ability to move forward with new starts and things like that. I do not see that as a risk to DRS.

Alexandra Mandery: Great. Then I guess given these long-term contracts for missiles, including THAAD, as you mentioned, what are your margin expectations on missiles? And what is the potential there as these long-term contracts ramp?

Michael Dippold: Yeah. I would say we are still approaching the missiles and the and the seekers here as a new market for us. But what it is born off of is our indigenous capabilities in the infrared spectrum. So we are expecting that these products, because they are mature in the detector and the sensor, to carry a margin consistent with what we see in our legacy profile. Great. Thank you.

Operator: One moment for our next question. Our next question comes from the line of Austin Moeller of Canaccord Genuity. Your line is now open.

Austin Moeller: Hi, good morning, John and Mike. Nice quarter. So recently, you had a great program win on the tracking layer tranche 3 program. And more recently, there have been some contract awards that have gone out for the AMD T3 program. Would it be good intuition to think that there could be some contracts coming associated with the sensor payload for that?

John A. Baylouny: Yeah. I would I do not wanna guess as to what the SDA is gonna do. We believe that second award that you just described is a acceleration or an increase on tranche 2, award But, you know, we are we are moving forward on tranche 3. We are making great progress We believe that capability is useful in the in the end architecture and, you know, I think we are gonna be successful there.

Austin Moeller: Okay. And on the ground component of Golden Dome, we are starting to see some contracts come out for that as well. what is the latest that you have heard from Space Force or General Guetlein about the potential of deploying Stout STRIKERs or multi-hemispheric radars at various bases around the country or overseas. They are already talking about a such a capability in Grand Forks, for example.

John A. Baylouny: Yeah. This is definitely an area that we are focusing a lot of attention on. And General Guetlein is moving ahead with his with his program, as you indicated. We are we are definitely chasing this on multiple different vectors We spoke about OTHR over-the-horizon radar as an opportunity for us to MHR and our radar infrastructure Like, we see in Ukraine is an area that we have been discussing with that office. Just to reiterate what we have done in Ukraine is with thousands of radars all networked together, to supplement or even replace the big radars that you saw that in Ukraine, we lost the big TPY-2 radar, which is a very expensive radar.

You know, the approach that we have in other places of the world is a distributed, proliferated sensing architecture We think that is a structural change in the marketplace. And I think that the department sees it that way as well. Excellent. Thanks for all the color there.

Operator: I am showing no further questions at this time. I will turn the floor back to John Baylouny for closing remarks.

John A. Baylouny: Thanks everyone for joining us today. And for the great discussion Our second quarter results reflect a strong market position solid execution, and overall momentum we have in our business. Robust bookings, accelerating organic growth, expanding margins and profitability. It rounds out a strong first half and that performance coupled with a funded backlog that will keep us pushing to new record provide us with solid visibility into the year ahead and the confidence to raise our full year profit outlook. We continue to invest in innovation and capacity to execute on the demand ahead. If you have any follow-up questions, Steve and the team will be available after the call. We appreciate your time and continued interest in DRS.

We look forward to updating you again in the next quarter. Thank you.

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