管理層發言
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.
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 include 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 and 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?
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 as a direct result of 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 base 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 do 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, not only for counter-UAS missions but more broadly. Staying ahead of 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 was 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 demonstrated interoperability seamlessly and quickly in a matter of a few hours. Modularity, open 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. 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 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 adversaries target high-value assets that degrade sensing and 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 to 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 the 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 primes 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 an 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 Defense prioritizes affordable drones built at higher volume, the sensing payload is increasingly what differentiates one platform from the next, and our sensing and 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 an 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 significant scale. Turning from sensing and effectors to the maritime domain and naval power, expanding shipbuilding capacity to grow the nation's naval fleet of operational surface and subsurface platforms remains an important priority. I am pleased to report that we saw steadfast demand materialize in the quarter not only for our propulsion content but also for our naval network computing capabilities. While 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, and 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 mid-term 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 evolving our platform-agnostic and modular counter-UAS solutions, enhancing our tactical radars, and expanding naval propulsion capabilities. Similarly, we are stepping up 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 our customers place in us 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.
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 can 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.
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.
分析師問答
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.
Good morning, John, Mike, Steve. Nice results. Mike, this question may first be for you. On IMS, the margin performance, obviously, was 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 could you give us an update on where things stand on Columbia in terms of shipset volume and where you are?
Yeah, sure. Thanks, Peter. Margins were strong really on improved execution across the entire segment. It is led by the naval propulsion business, but the execution gains are 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 strong execution across our counter-UAS portfolio, really highlighting portfolio-wide execution improvements. If I take out the risk retirement, I would think of the IMS margin closer to the 15% range for the quarter. So that is the magnitude there, Peter. And from a Columbia perspective, things continue to go very well. We are seeing the benefits of the long-term contract and the procurements of the materials that we front-end loaded. The team's executing well. Charleston is on pace. Things are really hitting on all cylinders within the segment.
Let me just add to that quickly, Peter. I wanted to highlight that 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.
Appreciate that. And just as my follow-up, John, could you give us an update on how things are progressing in your counter-unmanned area? I know you guys have made some investments there. The over-the-horizon radar seems like a great opportunity for Golden Dome. Maybe if you could touch upon both of those. Thanks.
Sure, Peter. Certainly, in the short-range air defense and counter-UAS area, there is a lot of change. We are seeing lessons from Ukraine and changes in capability almost on a weekly basis. We expect that market to continue to evolve, and we have to evolve with it. We are investing ahead of need on a lot of capabilities and bringing new technologies into play. We have moved our UAS program onto a sled so it can be platform-agnostic like the rest of our business, and we are moving forward on that. On over-the-horizon radar that could apply to Golden Dome, we are seeing positive movement there as well. I will not get into specifics, but we are definitely moving forward and we see that as a nice growth factor for us. Appreciate the color. I will jump back in the queue. Great results.
One moment for our next question. Our next question comes from the line of Robert Stallard of Vertical Research. Your line is now open.
Thanks so much. Good 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?
Yeah, absolutely, Robert. We are actually doing a lot of that right now. 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 U.S. is on a wartime footing and the demand and urgency are high. The same thing is happening in Europe. In Europe, they want some sovereign capabilities and there are gaps, so we are looking at pushing and pulling technology in both directions together with our parent.
Okay, that is great. And then a follow-up for Mike on the Raft acquisition: could you 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?
Yes. We are not going to comment on the sizing of the revenue yet. We will come out with that with our 2027 guidance given the expected late fourth quarter close. What we will say to give you some direction is, as was in the prepared remarks, that the EBITDA multiple paid is inside DRS' current trading multiple. When you think about the financial profiles of the business, it is going to be accretive to DRS from a growth profile and from a margin perspective. 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.
One of the things I will add, Robert, is that we really think about this strategically and the gaps we are filling. If you think about DRS as a business, we have been really focused on sensing, computing, communications, and force protection. The sensors we created and have in the marketplace need to have that intelligence—sensors need a brain, as Ralph likes to say. In the future, autonomous platforms will increasingly need to sense the battlespace, make sense of it, and act. We have been working on the front end providing the sensors and the computing infrastructure; Raft fills the slot of the thinking part of what is actually happening on the battlefield. They have been focused on the edge with software; we have been focused on the edge with hardware. These are very nice synergistic plays for us.
One moment for our next question. Our next question comes from the line of Andre Madrid of BTIG. Your line is now open.
Hey, this is actually Ned Morgan on for Andre this morning. I just wanted to build on that. Could you provide some specific examples of programs where combining your hardware with RAFT software capabilities creates new opportunities? And when we could expect those opportunities to begin contributing?
Yes. Thanks, Ned. Let me start by saying the U.S. Army has selected RAFT for their data layer. What that means is our sensors and other sensors would have their data converted in a way that AI algorithms can read it across the enterprise, starting at the edge and moving to the enterprise. This is an area where we are already playing from a computing and sensing standpoint, and now RAFT has been selected for the data layer. This is a big step forward and an area where we immediately have synergies. I also want to point out the customer profile: this acquisition fills two gaps—technology and customer footprint. RAFT has a large presence in the Air Force, special operations, Space Force, and the intelligence community. It opens up a lot of doors for us and we will be opening doors for them. So there will be many synergies between the two businesses.
Great. And then just a follow-up: you have highlighted space as a big growth driver. I know you won work on the Tranche tracking layer, but any opportunities you are pursuing right now and where you are seeing the strongest demand?
I would tell you there is a lot of opportunity in space right now. We are looking at different sensing and communication opportunities across the board. Of course, RAFT will play into some of that as well. I am not at liberty to talk about particular opportunities, but there is a lot of demand. In the President's 2027 budget request, the Space Force funding is growing significantly, so there is a big market here.
One moment for our next question. Our next question comes from the line of Jonathan Tanwanteng of CJS. Your line is now open.
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 mentioned in the prepared remarks. How big is that business today, number one? And number two, how should we think of growth going forward, especially focused on the capacity side, because I know you had issues with germanium in the past 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 execute.
Thanks, Jonathan. The munition business is growing very, very quickly and you are seeing some primes print significant growth numbers because of that. We have exposure across the board—from sensing for Patriot components down to low-cost drones—and there are elements in between. Our core capability in infrared sensing is applicable to different vectors and missiles. You will see missiles and effectors, and what you might call one-way drones, start fusing together. We are on a number of different platforms through the primes. We see this as a growth path, but it is a small part of our business today. It will grow and will outpace the growth of the company, but I will leave it at that.
Okay, great. And then second, you mentioned you are increasing R&D and CapEx for the year. Were there any specific numbers attached to that, and what programs are they associated with?
Yeah. There are a couple numbers to note. R&D is going to approach 4% of sales during the course of the year. From a CapEx perspective, we are looking in the mid-4% range. We continue to invest heavily in growth given the demand signals we are seeing. The investments are in areas like space, counter-drone, enhancements to our tactical radars, and investments in power and propulsion. John, do you want to add?
Let me add one point: space-based interception is an area we are investing in. It aligns to our core competency in infrared sensing and addresses a national need to have a low-cost interceptor. We are focused on investment there to try to bring that cost down. That is just one example we are working on.
One moment for our next question. Our next question comes from the line of Seth Seifman of JPMorgan. Your line is now open.
Hey, thanks very much, and good morning and good results. Wanted to ask about 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 given how much demand there is?
From a bookings perspective, we remain confident in the trajectory because of the threat environment and where we are aligned. Hopefully that 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 will impact 2026 revenue significantly. I would think of it more as our record funded backlog indicating we are moving up the value chain and the value stack in the solutions we are providing. We are in the midst of a transition from components to solutions, which will elongate the conversion of backlog into revenue. That record funded backlog is an indication that we have a platform for sustained success and confidence into 2027 and beyond.
I will just add, Seth, that we are seeing the money from the reconciliation bill flowing into core areas of our growth. That money is actually flowing now.
Okay. And maybe to follow up, could you talk a little more about naval computing? You highlighted it as a growth driver. As we think about that environment and the potential for further growth there, how does that stack up within the company? Is that mainly associated with mods and upgrades on existing ships and submarines, or is it tied more to new builds? How should we think about it?
It is both. The traditional approach has been weapon system by weapon system compute capabilities for new ships and backfits, and we get incremental awards for those capabilities. The future, we believe, will look different: central computing onboard ships more like a cloud architecture where you process sensors and weapon systems centrally on the edge of the ship. We are preparing for that and investing in areas that allow the Navy to move in that direction so they can have cloud computing and AI on the edge onboard the ship. That is what we think the future holds.
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.
Good morning, guys. Been a lot of questions so far on RAFT. Maybe one more: does that signal you want to move more into AI-enabled mission software given software tends to have a different margin structure, or is this more of a strategic enabler for your hardware? How are you thinking about that?
Acquisition reform has moved the customer away from buying components and subsystems to solutions. We have been investing in capabilities that provide solutions to our customers for a while. This was one of the missing pieces we needed to get to that level. Customers now say, 'Can you solve the problem for me with a solution that includes a lot of our components and core capabilities?' Whether it is sensing, computing, communications, power propulsion, or protection, this gives us the ability to address those needs. So this represents a structural change in both how customers are buying and what we are selling and how we are selling. It is a strategic enabler to deliver integrated solutions.
Got it. And then, I know nobody's asked this yet, but I think it is an important one: how is your supply chain doing given the increase in demand? You had some issues a while back on critical minerals. How are you doing there? Broadly, any pinch points?
We strengthened our supply chain significantly since the germanium issues you mentioned. We have a regular cadence of detection and mitigation that is deeper and faster than ever. We manage a couple of areas of risk at all times and are willing to accept a bit less efficient working capital to secure critical material so we do not run out of them. The germanium picture is positive: we have a great flow of germanium and are not going to run out even with the increases in demand. In terms of magnet material and memory devices, we are in good shape. Across the board, availability of materials in the right place is good. Costs can be variable at times, and we will deal with that, but the processes we put in place are robust and have been successful at mitigating these risks.
For our next question. Our next question comes from the line of Noah Poponak of Goldman Sachs. Your line is now open.
Hey, good morning, everyone. Is DRS taking market share, or is there more opportunity in the forward here to take market share in a world where your customers are potentially looking to grow faster? Also, in a world where customers sign contracts that put schedule risk on them, making second sources more important, is that an opportunity for you given your reliable sourcing? Should we think of that as a growth kicker, or is it mainly end markets and positions driving growth?
I would say both are areas of growth for us, but I would not lean on market share as the predominant element. The market itself is growing considerably and that is the predominant part of our growth. The point you made about schedule risk and second sources is helping us and is an element of our growth, but the market's expansion is the main driver.
I would add that being a reliable provider is creating opportunities. These emerging opportunities are in part because of our execution and the ability to ramp and scale effectively and predictably. That is why the Navy is lining up to see us as a second source on steam turbine generators and why we were successful in getting the camera cores for attritable drones that John discussed.
Appreciate that. Then I wanted to get a sense for how big a piece of the strategy M&A could become over the medium term now with RAFT. The business was not super acquisitive prior to that. Is there a lot to do? Your balance sheet has capacity and perhaps greater relative buying power now. How acquisitive should we expect the business to be over the next two to three years?
We will repeat what we have said in the past: our primary focus is organic investment—IRAD and CapEx. We will continue to look for key capabilities outside the company that fill gaps, but we will be picky and disciplined. RAFT is an example of that disciplined approach—finding the right product capability that fills our gaps technologically and from a customer standpoint. You can count on us continuing that approach.
One moment for our next question. Next comes from the line of Kristine Liwag of Morgan Stanley. Your line is now open.
Hi. This is Austin on for Kristine this morning. Thanks for taking the questions. Mike, you mentioned the Charleston facility earlier. Could you provide more of an update on the facility build-out? You have talked about taking on incremental marine industrial-based work on top of the Columbia-class sub work at the facility. Any update and potential margin implications for IMS?
Phase 1 of the Charleston facility is nearing completion. We are starting to put the equipment in and take possession and occupy the facility. Phase 1 was geared toward driving the insourcing of Columbia, which is the margin opportunity. We had put that out as a second half of 2027 uplift and that remains on track. Phase 2, which was the upside opportunity for further expansion to take on new scopes of work like the steam turbine generator, continues to move in the right direction. Funding continues to flow and we are progressing on capacity build-out and design for the second source opportunity. Things are moving at or even a bit better than initially planned, and we are optimistic on the outlook for that facility.
Great. The Navy just announced a large set of submarine contracts including Columbia. Does that change the profile for DRS on the program at all?
We are contracted separately. We negotiated the long-term contract for the multiboat buy a while back, so we have been in the position of having the full contract already. The rest of the shipyards are catching up. I would also add that the Virginia portion of the award will flow down to us because we do not have a multiyear for Virginia, so we will see flow-down from the Virginia part of that order over time.
If I could sneak one more in: the Navy is moving out on the new battleship class BBG(X). You flagged DDG(X) in the past as a good opportunity. How are you thinking about addressability there and can the customer sustain both programs?
We view BBG(X) as an opportunity. We believe the Navy should focus on a modular architecture that allows them to design a ship applicable to whatever size they choose—battleship, cruiser, destroyer, or frigate—and that architecture needs to be electric. Those ideas are getting traction. We believe the battleship is an opportunity for industry and for the Navy to shorten the time it takes to design a new ship.
One moment for our next question. Our next question comes from the line of Alexandra Mandery of Truist Securities. Your line is now open.
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?
We are confident in our bookings trajectory. We do not lay out bookings guidance, but we have said we will continue to print bookings better than 1.0x. We are off to a good start for the year based on the first half. Obviously, a continuing resolution can impact on the fringes, but I do not see it having a material impact on our bookings trajectory.
We are likely to see a continuing resolution as we said in the opening remarks. The effect on us is minimal. Even if it is extended, we do not see a lot of impact. If there is an extended CR, we expect the Hill to provide some flexibility 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.
Great. Given these long-term contracts for missiles, including THAAD as you mentioned, what are your margin expectations on missiles and the potential there as these long-term contracts ramp?
We are still approaching missiles and seekers as a new market for us, but these products are born off our indigenous capabilities in the infrared spectrum. We expect these products, because they are mature in the detector and sensor, to carry a margin consistent with what we see in our legacy profile.
One moment for our next question. Our next question comes from the line of Austin Moeller of Canaccord Genuity. Your line is now open.
Hi, good morning, John and Mike. Nice quarter. You had a great program win on the tracking layer Tranche 3 program. More recently, there have been contract awards for the AMD T3 program. Would it be good intuition to think there could be some contracts coming associated with the sensor payload for that?
I do not want to guess what the SDA will do. We believe the recent award you described is an acceleration or increase on Tranche 2, but we are moving forward on Tranche 3 and making great progress. We believe that capability is useful in the end architecture and that we will be successful there.
Okay. On the ground component of Golden Dome, we are seeing some contracts come out. What is the latest you have heard from Space Force or General Guetlein about deploying multi-hemispheric radars or multi-domain radars at bases around the country or overseas? They are already talking about a capability in Grand Forks, for example.
This is an area we are focusing a lot of attention on and General Guetlein is moving ahead with his program. We are definitely chasing this on multiple vectors. We have discussed over-the-horizon radar as an opportunity for MHR and our radar infrastructure. What we have done in Ukraine—deploying thousands of radars networked together to supplement or replace the big radars—illustrates a distributed, proliferated sensing architecture. We think that is a structural change in the marketplace and the department sees it that way as well.
I am showing no further questions at this time. I will turn the floor back to John Baylouny for closing remarks.
Thanks everyone for joining us today and for the great discussion. Our second quarter results reflect a strong market position, solid execution, and the overall momentum we have in our business. Robust bookings, accelerating organic growth, expanding margins, and profitability round out a strong first half. That performance, coupled with a funded backlog, provides 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 next quarter. Thank you.
This concludes today's conference. You may disconnect now. Thank you for your participation.