DRS - NASDAQ

Ladies and gentlemen, good day, and welcome to the Leonardo DRS, Inc. Fourth Quarter and Full Year 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the company's prepared remarks, there will be an opportunity to ask questions and instructions will be provided. 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 correct earnings conference call.

With me today are John Baylouny, our President and CEO, and Michael Dippold, our CFO. We will discuss our strategy, operational highlights, financial results, and outlook. Today’s call is being webcast on the Investor Relations section of the website where you can also find the earnings release and supplemental presentation. Management may also make forward-looking statements during the call regarding future events, anticipated future trends, and the anticipated future performance of the company. We caution you that such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors. For a full discussion of these risk factors, please refer to our latest Form 10-K and our other SEC filings. We undertake no obligation other than as may be required by law to update any of the forward-looking statements made on this call. During this call, management will also discuss non-GAAP financial measures, which we believe provide useful information for investors. These non-GAAP measures should not be evaluated in isolation or as a substitute for GAAP performance measures. You can find a reconciliation of the non-GAAP measures discussed on this call in our earnings release. With that, I will turn the call over to John. John? Thanks, Stephen, and thank you all for joining us today to discuss our fourth quarter and full year 2025 results.

I want to begin by thanking William Lynn for his leadership and commitment to Leonardo DRS, Inc. over the past 14 years as Chairman and CEO. The company is stronger because of his impact. We are grateful for his contributions. I am honored to step into the role of Chief Executive Officer. I could not be more excited to lead the next chapter for Leonardo DRS, Inc. I joined the company nearly 40 years ago as a staff engineer, and over the course of my career, I have had the privilege of serving in operational leadership roles across each of our incredible businesses. That frontline perspective combined with my experience over the past decade as Chief Technology Officer and, most recently, Chief Operating Officer has given me a deep appreciation for our leading market positions, our balanced and diverse portfolio, our truly differentiated technologies, and above all, our exceptionally talented people. As I look ahead, my priorities as CEO are clear. Build on our foundation of success. We have a remarkable business with distinct differentiation that is well positioned for long-term growth. Accelerate our operating cadence. Our goal is to put innovation capabilities into the hands of our customers even faster without compromising the quality, reliability, and affordability that they expect. This is precisely what the Department of Defense is asking of industry. While we have already been operating at speed and investing in innovation for years, we are encouraged by this call to action and are accelerating even further. And three, continue to empower, invest in, and reward our people. There is no question that our talented employees are the bedrock of our success. My formula is straightforward. Maintain a sharp focus on meeting and exceeding customer needs, and that will propel growth for the years to come. Turning to the macro environment, the operating backdrop remains dynamic. Global threats persist and the nature of warfare continues to evolve rapidly. Our customers require next-generation capabilities to maintain a decisive advantage over adversaries. They need them delivered at speed, at scale, and with uncompromising quality. Against that backdrop, our nation and our allies are investing in these capabilities as demonstrated by significant recent and projected increases in defense spending. We are encouraged by the enactment of the fiscal 2026 defense appropriations, early signals for fiscal 2027, and supplemental funding including in last summer’s tax reconciliation package. In aggregate, these indicators support our confidence in sustained demand. Our relentless customer focus, disciplined investment in advanced capabilities, and consistent execution has positioned us well for growth. The results of that strategy are demonstrated by the fourth consecutive year of a book-to-bill ratio of 1.2 or better. Equally important, customer demand is well balanced throughout our portfolio, validating the strength of our technology-led, platform-agnostic approach. That consistent customer demand combined with our strong financial position has enabled significant multiyear increases in both research and development and capital investment. Let me frame the magnitude of investment growth. In 2025, we increased internal R&D investment by 40% and capital expenditures rose more than 60%. Our R&D investment is focused on expanding our footprint in high-growth markets including airborne, missiles, space, and unmanned markets, while continuing to build share in our core ground-enabled domains. Additionally, the emphasis of our R&D initiatives is on advancing platform AI and enabling platform autonomy, stronger security and modularity, and extending our platform-agnostic capabilities to new missions and platforms. With respect to CapEx, our 2025 investments were focused on progressing our new naval power facility in Charleston, South Carolina, along with targeted growth initiatives across the portfolio. In 2026, we expect CapEx to increase even further and trend toward approximately 5% of revenue. We are ramping operations in Charleston as well as expanding production capacity and modernizing facilities to deliver enhanced capability across the business. Key areas seeing upsized investment include our tactical radars, air defense products, and advanced infrared sensing. Additionally, some of the increased CapEx supports dedicated germanium processing capacity with suppliers, an important part of ensuring stable supply going forward. In summary, we intend to maintain our approach of innovating, executing at speed, and investing ahead of demand to support customers and drive long-term growth. Let me briefly highlight our full year 2025 financial performance. We delivered another year of record bookings, and that was accompanied by robust organic revenue growth of 13%, marking back-to-back years of double-digit growth. Year-end backlog stood at $8.7 billion, providing clear visibility into 2026 growth. Full-year adjusted EBITDA growth tracked closely with revenue, while margins were flat. Performance was shaped by several factors. First, we intentionally increased our internal R&D investment substantially. Second, we managed supply chain complexity related to shortages in critical raw materials, most notably germanium. As we enter 2026, these constraints are contained with remediation measures firmly in place and being executed throughout this year with confidence. Through a combination of recycling initiatives, strategic allocations from customers, and securing more reliable North American and European sources, we have adequate coverage for our demand in the short, medium, and long term. We have also entered into firm long-term supply agreements and, as I noted earlier, co-investing to secure dedicated refining capacity. While price volatility may persist in the near term, we will reprice contract renewals on a rolling basis to reflect market conditions and incorporate contractual protections against future potential shocks. Third, as we close out the year, we had two unusual items with largely offsetting revenue and profit impacts. We entered into a 10-year $100 million license agreement with a leading quantum technology company enabling them to leverage certain laser intellectual property for quantum computing applications. This license agreement monetizes an exciting and attractive commercial opportunity while allowing us to remain focused on capturing abundant growth in our core defense markets. We also executed a memorandum of understanding to jointly conclude a legacy foreign ground surveillance program initiated more than a decade ago. Technology evolution and obsolescence issues caused the program to be no longer viable for either party. As a result, we recognized an unanticipated loss on the program. While disappointing, the circumstances surrounding this program were unusual and isolated within our portfolio. To be clear, we do not see any other program with similar characteristics that would be expected to drive comparable impacts. The conclusion of this legacy effort along with the IP license agreement clears the slate and allows us to focus on growth and execution across our core competencies. Finally, despite materially higher CapEx investment, we delivered 19% growth in full-year free cash flow in 2025, driven by higher profitability and improved working capital efficiency. On balance, 2025 was a strong year, and we are focused on building on that momentum into 2026 and beyond. Turning to fourth quarter highlights. First, let me commend the team on a tremendous win in the space market. Space has been a multiyear growth initiative for Leonardo DRS, Inc., and I am pleased that our persistence was validated with a landmark position on the SDA Tracking Layer Tranche 3 program. We are teamed with one of the prime awardees and will deliver a differentiated infrared sensing approach. This is an exciting opportunity not only to showcase our innovation, but more importantly, to advance critical national defense capabilities against missile threats. Now that we have opened the door to this win, our focus shifts to execution excellence to deliver on our commitments. Strong performance will position us for additional SDA opportunities and for other customers, including the potential to leverage our expertise in space-based sensing for the Golden Dome initiative. Also in space, we successfully demonstrated secure data transport using a next-generation crypto multichannel software-defined radio. This innovative capability enables high-performance secure satellite communications across multiple frequencies and networks simultaneously, and we look forward to delivering it to customers in the near term. In infrared sensing, we continue to grow in ground-based applications and are seeing green shoots in adjacencies, particularly space and airborne, across both manned and unmanned platforms. Our high-performance cooled infrared sensors are being leveraged on advanced airborne platforms. Our uncooled capabilities are being adopted on unmanned platforms as customers prioritize an assured electronic supply chain. Our advanced infrared gimbals are being used to designate and direct munitions to neutralize drone threats. We are engaged with multiple primes on several strategic missile programs to provide next-generation sensing capability and expand production capacity. We are also making capital investments to support this demand growth. We remain a market leader in counter-UAS and are closely partnered with customers to field effective solutions. We are committed to a platform- and effector-agnostic approach. Our ability to integrate onto a wide variety of platforms, including the JLTV and unmanned ground vehicles, is why we have demonstrated capabilities across multiple vehicle platforms. We are enhancing both kinetic and nonkinetic effectors in our offerings, including cost-effective munitions and nonkinetic tools such as electronic warfare and directed energy. Turning to tactical radars. We continue to see immense global demand driven by an imperative to field counter-UAS and air defense capabilities. Our radars are not only highly effective at tracking UAS threats, but also in supporting missile defense and active protection missions. We are also seeing increased demand and growing relevance in maritime-based counter-UAS applications alongside the continued momentum on ground-based platforms. More broadly, we are seeing increasing potential beyond tactical radars in the unmanned surface vessel market. Opportunities to pull through an integrated sensing and computing offering across leading platform providers are becoming a growth vector. We are well positioned as the Navy crystallizes its USV strategy and begins deploying funding in this area. Staying with naval, our Columbia-class program continues to execute exceptionally well. We are delivering on time and with quality, and our results reflect the financial benefits of that solid execution. As the Navy adjusts surface combatant and modernization strategy, we remain engaged at the center of propulsion architecture discussions across platforms. Our electric power and propulsion solutions are modular and remain highly relevant to the power demands of next-generation platforms. Finally, I want to congratulate Sallie Wallace on her new role as Chief Operating Officer. Sallie is a strong leader, a trusted partner, and a more than 20-year Leonardo DRS, Inc. veteran with deep understanding of customers and a strong track record of delivering mission-critical technology. We have an exceptional team. We have made a few other changes to the team as a result, and many of those changes reflect expanded responsibilities for long-standing leaders who have delivered strong results. I am confident each of them will be successful in expanding roles. Mike, over to you to walk through the details of our financial performance and 2026 outlook. Thanks, John. I appreciate the team’s steadfast focus in delivering another year of solid financial results, particularly in light of several unique factors we faced in 2025. I will walk through fourth quarter and full year 2025 results by key metric, and then discuss our 2026 outlook. Overall, our full year 2025 results exceeded our expectations. We executed at the high end of or above the guidance range provided on our last call. These results were delivered amid a prolonged government shutdown for most of the fourth quarter. Revenue in the fourth quarter was $1.1 billion, up 8% year over year. Robust demand for tactical radars, electric power and propulsion, and advanced infrared sensing drove core growth. The quarter included a net benefit from the quantum laser IP license agreement partially offset by the conclusion of the legacy foreign ground surveillance program John discussed. For simplicity, I will refer to the net effect of these items as the net non-routine impact.

While the net impact is not significant at the consolidated level, it is more visible in the segment results for both the quarter and for the full year. Full-year revenue was $3.6 billion, representing 13% organic growth versus 2024. This marks back-to-back years of teens revenue growth. Growth was broad-based across advanced sensing, network computing, force protection, and electric power and propulsion, and that was reflected in the segment trends. Our Advanced Sensing and Computing segment delivered revenue growth of 9% in Q4 and 11% for the full year. Our Integrated Mission Systems segment delivered year-over-year growth of 5% in Q4 and a healthy 15% for the full year on the back of robust performance in electric power and propulsion and counter-UAS programs. Moving to adjusted EBITDA. Adjusted EBITDA was $158 million in the fourth quarter and $453 million for the full year, representing year-over-year growth of 7% and 13%, respectively. Margins were 14.9% in Q4 and 12.4% for the full year. Full-year margin was flat as higher volume and improved profitability on the Columbia-class program were offset by higher R&D investment and less efficient program execution driven by material cost growth. Increased R&D created a 70 basis point year-over-year headwind to margin. At the segment level, ASC adjusted EBITDA and margin were bolstered by the laser license agreement in both Q4 and the full year. Excluding this item, ASC adjusted EBITDA and margin have declined, primarily due to higher company-funded R&D and raw material cost headwinds primarily related to germanium. IMS adjusted EBITDA was negatively impacted by the legacy program conclusion in both Q4 and the full year. Excluding this item, IMS adjusted EBITDA and margin would have increased meaningfully, driven by operating leverage from growth and improved profitability on Columbia-class. Now to the bottom line metrics. Diluted EPS and adjusted diluted EPS increased 15% and 11% year over year in the fourth quarter, respectively. For the full year, EPS and adjusted diluted EPS increased by 29% and 24%, respectively. In both periods, strong operating profitability, lower interest and other expense, as well as a lower effective tax rate supported EPS performance. Moving to free cash flow. Fourth quarter free cash flow generation was robust and totaled $376 million, bringing our full year free cash flow to $227 million. Our strong cash generation in 2025 leaves the balance sheet with net cash at year end. Subsequent to year end, we entered into a new $500 million revolving credit facility providing lower interest costs and added borrowing flexibility. Turning to 2026 guidance. Robust customer demand and bookings over the past few years provide visibility into continued growth. We are initiating a revenue range of $3.85 billion to $3.95 billion, implying 6% to 8% organic growth. Our backlog provides a clear path to executing within this range. Key factors influencing revenue include the pace of material receipts, labor execution, and to a lesser extent, the timing of customer orders for book-to-bill revenue. For adjusted EBITDA, we expect $500 million to $525 million in 2026. The implied year-over-year margin improvement is 70 to 90 basis points driven by improved profitability in Columbia-class, favorable program mix, and operating leverage from growth. We plan to continue robust company-funded R&D investment at a comparable percentage of revenue to 2025, but we do not expect it to pressure margins to the same extent as last year. Amortization is expected to be flat in dollars, and depreciation should increase modestly given recent CapEx. Together, they should approximate 3% of revenue. For adjusted diluted EPS, we are initiating a range of $1.20 to $1.60 per share. Our guidance assumes an 18.5% tax rate and a fully diluted share count of 269 million. We also expect free cash flow conversion of 80% of adjusted net earnings. As John mentioned, we are increasing projected CapEx meaningfully in 2026 as we complete the Charleston facility and make additional investments across the business to enhance capacity and capability. As a result, we expect CapEx to be just under 5% of revenue. Improved working capital efficiency is expected to partially offset the higher CapEx. Finally, we expect Q1 revenue to range in the low $800 millions with an adjusted EBITDA margin in the low 11% range. Revenue and adjusted EBITDA linearity is expected to be comparable to recent years. The second half of the year should contribute slightly more than half of revenue and more than half of adjusted EBITDA. We anticipate a similar quarterly trend in our free cash flow with modest linearity improvements as we continue to drive working capital efficiencies. Let me turn the call back over to John for closing remarks.

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

Thank you. Then wait for your name to be announced. To withdraw your question, please press 11 again. Our first question comes from the line of Robert Stallard with Vertical Research. Your line is open.

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

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

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

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

That is great. Thanks very much.

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

Hey, good morning, guys. Nice results. Thanks for taking the questions. Just a follow-up on that last line on growth. I do not know, John or Mike, did you size the ground revenue program that is rolling off? Just trying to get a sense of, you have got a big portfolio. Anything specifically winding down or creating a headwind? I mean, it just seems like the funding environment, the budget environment is getting better. You know, I know you are lapping two years of low teens growth, but why should we think growth is really going to decelerate here?

Yeah. Michael, I will take that. I think that ultimately when you look at the portfolio as diverse as ours, there is always going to be elements that are growing at a different rate. So although we are aligned in a lot of the swim lanes that I think are going to get good allocated funding in terms of shipbuilding and our recent win in space, there are pockets, mainly in the network computing area, that are growing at a little lesser rate, and that is what John was commenting on there.

Okay. And then just one more on kind of cap structure, capital deployment. You know, you are probably going to end the year here with a net cash position of $400 million. You just mentioned the new $500 million revolver. How should we think about putting that balance sheet to work and is that the most optimal structure right now?

Well, thanks, Michael. Yeah. Certainly, our top priority has always been and will continue to be organic investments first. And you are seeing us invest in CapEx. You are seeing us invest in IRAD. We expect that to drive growth in the out years. But organic first and then inorganic. And we are going to be kind of picky about what we look at in the M&A space. But first organic, then inorganic.

Fair enough. Thanks, guys. I will jump back in the queue.

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

Hey. Thanks very much. Good morning, and nice results. Wanted to start off asking about the profitability in IMS in the fourth quarter. If we add back the international program termination, it was a very healthy margin. Was there a catch up on Columbia, or what should we think about what the fourth quarter margin implies for going forward in IMS?

Yes. Thanks, Seth. Appreciate the question. We certainly saw strong demand across the segment of IMS coming from our naval power business, both on Columbia but also on the surface ships. We also had an inflow of revenue on the counter-UAS efforts that we have there. So a lot of the margin was coming from the volume leverage that we saw. So we had a big growth in the quarter which materialized in margin. As you are aware, we have carried expense G&A. We period expense the IRAD, so that operating leverage falls to the bottom. So that was a big element of it. The performance at Columbia certainly continues to be a tailwind. Not a major catch up, but certainly a tailwind for the quarter.

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

Yes. So thanks for the question. Look, I think that we are seeing that space evolve. And we said in the last call, we talked about the need for future combatants to have to fight from greater distances. They need more power to meet that distance need and more powerful radars, more powerful electronic warfare or directed energy, etcetera. And to do that, they are going to need an electronic system that allows them to move energy from one part of the ship to another and make use of all of the energy on the ship. What we are looking at going forward here is, and we are embedded in some of these discussions with the Navy, it is about building a capability for modularity. So whether they build a battleship or a destroyer, a cruiser, a frigate, or even, frankly, a medium-sized USV, they should be using the same architecture, that electric architecture, propulsion architecture that will allow for what I have been calling a common chassis, like you see in the automotive world where all the different size cars are built off the same kind of structure. And so if that is the case and we head down that path, regardless of what the Navy ends up building, we will be able to utilize that capacity down in Charleston for different sized components. We have been investing in different size motors, different size drives, different size components for those ships that would be applicable to any size ship, whether it is a battleship all the way down to a medium-sized USV. So that is where we are headed. That is where we think that the Navy is going to head down that path. Again, that capacity that we built out down at Charleston will be the enabler for that capability.

That is super helpful. Thanks very much.

Our next question comes from the line of Austin Moeller with Canaccord. Your line is open.

Hi, John and Mike. Good morning. So just my first question here. Can you comment on the Tranche 3 Tracking Layer infrared payload award, what the contract value might look like, and how this might grow as part of the Golden Dome now that over $1 billion was appropriated in the Space Force budget for 2026?

We are not going to, Austin, thanks for the question. We are not going to comment on the size of the award due to the fact that that is competitive. But we are really excited about this award. It has taken us some time, an incredible amount of innovation to find a different way to do this mission. Now that we have won that award, we are squarely focused on executing the program and bringing that execution excellence to that team so that we can deliver on time. As we move forward to what other opportunities there might be in space, we look to help solve the bigger question of connecting, potentially for Golden Dome, connecting the interceptor to the threat, which is one of the reasons why we want to put the software-defined radio with the software-defined crypto into space that would allow us—we would put some compute up there as well. So it would allow us to now connect and decrypt the data, compute, and then re-encrypt the data so that we can send it down to the interceptor, so that the yes/no decision happens on the ground, but connectivity happens at the edge in space. And so we are looking to solve the bigger problem that Golden Dome has, which is time. The intercept time has to happen, we believe, up in space, that connectivity. Otherwise, you are not going to make the timeline. So what happens with the SDA Tracking Layer portfolio and how it dovetails into Golden Dome is still a question mark. The preliminary architecture is still being discussed and not completely public. But we believe that all of the sensors that are up in space, all of the sensors on the ground, to include over-the-horizon radar, will be part of the solution for Golden Dome.

Okay. And based on the fiscal year 2026 $27 billion shipbuilding budget and what you are hearing from the Navy, do you expect a higher mix of small or medium USVs in the force structure? And would one design versus the other impact your ability to build an electric drive system or provide compute content on or impact profitability on such a system?

It is a great question. I think you are going to see, and it is an opinion, you are going to see different ship classes being built. The battleship, whether they end up building a battleship or not, we would love to see it, or it becomes a destroyer or a cruiser, but you are going to see a lot more, as you kind of led here, smaller surface combatants, whether they are MUSVs or small USVs, so medium or small USVs, you are going to see a lot more quantity of those. We have been investing in capabilities for those small and medium USVs by putting mission equipment packages on them, putting them to sea to see last year. We think there are missions out there, whether it is counter-UAS or ISR or other missions for those small combatants. As far as the propulsion systems for those, again, we have been investing in small, medium, large, and extra-large different components. We have some of our propulsion components on some of the USVs that are being tested now. And, of course, Columbia-sized motors would be applicable for some of the larger capacity. So we think we can address any number of different size ships, and we do expect that the Navy will buy a whole portfolio of different capabilities.

That is super interesting. Thanks for the color.

Thank you. Ladies and gentlemen, as a reminder to ask a question, please standby for our next question. Our next question comes from the line of Jonathan Tanwanteng with CJS Securities. Your line is open.

Hi. Good morning. Thank you for taking my questions, and congrats on a nice year. Was wondering if you could address the quantum laser license that you signed. Can you go into a little bit more detail what that technology allows the customer to do, number one? And number two, are there more opportunities beyond that as quantum becomes the next tech over the horizon?

Yeah, Jonathan. Let me take that. Thanks for the question. Depending on the architecture of the quantum computing structure, some of them utilize lasers to excite the ions. And in this particular case, that is exactly what they are doing. They are using the quantum laser technology that we make for military use to excite the ions for quantum use. To the question about are there other applications like this, we certainly look for noncore areas of the market to license our technology. We are not in the commercial space. We focus our attention on the military defense space. And so when we see an application like this, and this is the second time we have seen it, we will look for others going forward. We like to license the technology out and allow the other companies to take advantage of the technology in the market that we are not in. And so we will continue to do that in the future. I cannot say we have another one in the bag ready to go, but we will continually look for them.

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

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

Let me just add a little bit more to that. In another area, the missile area, where as you look at the battlefields of the future, they are going to be dominated by autonomous platforms and weapons like munitions and such. And sensing is a key part of every one of those platforms. And, of course, we make exquisite infrared sensors and radars and other sensors as well. The demand signal for those low-cost, highly attributable platforms is there. So we are investing some in capacity to expand those capabilities. And on the missile front, all the way from the very low-end capabilities all the way to the very high-end capabilities are things that we are investing in, including capacity for those capabilities.

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

Certainly. From an IRAD perspective, we expect to see that as a similar percentage of revenue. I think the margin impact that you saw as we ticked it up to that mid-3% of sales range was a one-time thing. I think we are to be stabilized there. That will contribute to our ability to expand margins. And then from a CapEx perspective, I would say that we are looking to pick that up and it will be somewhere in the neighborhood of 5% of sales.

Got it. I think I said OpEx, not CapEx.

Oh, I am sorry. Yeah. I would expect from an OpEx perspective that you see a little bit more moderate of an increase. I think in 2025, we had a big jump that we saw, and I would not expect that to continue at that pace.

Great. Thank you.

Thank you. Our next question comes from the line of Andre Madrid with BTIG. Line is open.

Hey. Good morning, guys. Thanks for taking my question. You know, looking at your prior 2026 target, I know you guys had outlined 40% EBITDA margin, that is obviously not going to be the case with what is implied right now. But when do you think that that could feasibly be achieved? Down the road? And then I guess too, as we just look at 2026 kind of being the endpoint of your targets from the last Investor Day. I mean, what insight can you just provide at large about how the remainder of the decade might look like?

Yes. So our intent is to provide multiyear targets probably in 2027, Andre. So we are not going to get out in front of that now, but I will give you some directional points. The first is we think the business is structured to be in the mid-teens margins. So there is a continued path to grow the margins. I think our guide is showing that in the increase that we are expecting in 2026. And I do not expect that to be any different as we look out into 2027. So we should be able to get into the mid-teens, comfortably there. And that is what I would give you as confidence as we look out into the future.

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

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

Got it. Got it. Alright. I appreciate it. Thanks, John, Mike, and Stephen.

Thanks, Andre.

Thank you. Our next question comes from the line of Ronald Epstein with Bank of America.

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

Yeah. Thanks, Ronald. Let me take that. I think first of all, you are right. There is certainly the macro environment today. The U.S. is looking for speed. Europe is looking to be self-reliant. And there is urgency on both sides, and that is a conducive environment for partnership, frankly. And you mentioned our parent. They are a key partner for us in driving that international growth capability. Given their footprint in Europe and around the globe, we are looking to further leverage that position and accelerate and expand our growth, especially now that they have this Iveco Defence and through their JV with Rheinmetall. Given the fact that they have a strong portfolio, we are looking to utilize those technologies and capabilities in the U.S., apply to the U.S. And, of course, we would have to Americanize the capability to market. But, and vice versa, moving in the other direction. Self-reliance in Europe, we would off-the-source license the technology from the U.S. We have technology that we could do. So this is the right time for us to be having the discussion, and your question is timely, to be having a discussion about increased collaboration with Leonardo to address both the European markets and the urgency on the U.S. side.

Got it. Got it. Got it. And then maybe just a detail. Is the laser IP licensing a sign to just more expanded work outside defense?

Yeah. Look. I think that we want to stay focused. We want to stay focused on defense. We want to make sure that we play to our strengths and our capabilities, but we want to get it out of our portfolio. And so when we see a market like this, it is outside of our core capability and focus. We tend to want to get it licensed out. We want what will help our portfolio and move it into another domain. This will keep us focused on the growth markets for defense, which is our strength.

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

Got it. Alright. Thank you.

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

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