Leonardo DRS, Inc. (DRS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Leonardo DRS Third Quarter Fiscal Year 2026 Earnings Conference Call. As a reminder, this conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Camilla Yanusewski, Director, Investor Relations. Ma'am, please go ahead.

Good morning, and welcome. Thank you for joining today's quarterly earnings conference call. With me today are John Baylouny, our President and CEO; and Mike Dippold, our CFO. They will discuss our strategy, operational highlights, financial results and outlook. Today's call is being webcast on the Investor Relations section of the website, where you can 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, including the expected timing of completion of the transaction, the satisfaction of closing conditions, the receipt of regulatory approvals, the anticipated benefits of the transaction and plans for the integration of the acquired business. 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.

Thank you, Camilla. Good morning, everyone, and welcome to our third quarter 2026 earnings call. I am pleased to share that we delivered another strong quarter. Bookings exceeded $1.6 billion, representing a book-to-bill ratio of 1.5x. Organic revenue grew 11% year-over-year. Profitability grew even faster, driving 180 basis points of margin expansion and a 59% increase in adjusted diluted EPS. This performance, combined with improved visibility into the fourth quarter, gives us confidence to raise and tighten our full year revenue and profitability outlook. I want to thank our entire DRS team for their hard work and dedication. Their high standards and focus on customer success help strengthen the security of our nation and our allies with a dedication and focus on ensuring that our products perform as required the first time, every time. That commitment has never mattered more from the continued defense of Ukraine to rising tensions across the Indo-Pacific to persistence instability in the Middle East. The global security landscape continues to grow increasingly complex. Our capabilities are central to how the U.S. and its allies are responding and adapting to this evolving landscape. Whether it's counter drone defense proven in real-world combat in Ukraine, naval power systems extending our partnership with allied navies in the Pacific or force protection, systems safeguarding soldiers and sellers in the front lines. Our technology is being selected because it works, and our third quarter results reflect this. We expect these security challenges to persist, creating increasing demand for our solutions and supporting a strong bookings environment. Last quarter, we shared that we expected the second half to drive a greater contribution across key metrics, and our third quarter results reflect a solid start. Third quarter bookings span radar and advanced sensing, electric power propulsion and force protection. Both bookings and book-to-bill were our strongest since becoming a public company 4 years ago and lifted our record funded backlog to $5.6 billion. That backlog provides meaningful visibility and underscores the durability of demand for our differentiated capabilities. Mike will share further specifics behind the quarter and our improved outlook in just a moment. But first, I want to provide some additional perspectives on the budget environment. Our customers began the fourth quarter under a continuing resolution currently set to run through December 11. We do not expect the current CR to have a meaningful impact on our business. Regardless of how the continuing resolution resolves or the outcome of next month's midterm elections, we remain confident that the broader threat environment warrants continued growing and bipartisan defense investment. The administration's base budget is a record. The request highlights priority investment areas for our customers, and it's well aligned to our portfolio, allowing us to foresee sustained and growing demand for the solutions we provide. Against this backdrop, our strategy is to deliver differentiated capability to help our customers maintain overmatch and invest ahead of need in both capability and capacity. This enables us to scale when the mission requires it. Let me share a few examples of our strategy in action. Starting with tactical radars, nearly 4 years after acquiring RADA, the business is performing exceptionally well. That performance comes as global security challenges grow more complex and inexpensive drones proliferate at scale, creating an asymmetric threat to critical infrastructure and exquisite systems at home and overseas. Ongoing conflicts have made one thing clear, high-value sensors and defensive systems need an affordable, scalable layer of protection of their own. Responding to these threats begins with sensing. As an early mover in tactical radars, DRS has both the capacity and capability to respond quickly. We are rapidly providing a distributed network of tactical radars and active conflict zones, delivering resilient sensing coverage across large areas, including around allied forces, critical infrastructure and high-value systems. That speed and flexibility are built into our company and are embodied in our radar portfolio, which spans multiple bands and allows us to match the right mix of range, resolution and detection performance to each mission. Our software-defined and AI-enabled architecture also lets us adapt fielded radars as threats evolve without redesigning the hardware. Taken together, our sensors provide range, resilience, affordability and depth of detection. Our differentiation is recognized this quarter with a $500 million contract supporting the Department of War's counter drone office called JIATF-401. We believe our radar's strong record against drone threats across multiple conflicts helped secure this award. While the contract ceiling is not included in backlog, it is a meaningful demand signal and reinforces our position as a radar provider of choice across the counter drone ecosystem. During the quarter, we also received a large order for the extended mass Surveillance System or EMSS, and fielded a system within a week of customers' request, rapidly extending protection for critical U.S. assets in the Indo Pacific and demonstrating our ability to put proven capability to customers' hands with speed and agility. Also this month, the U.S. Army highlighted our radars on a combat-proven robotic combat vehicle. These opportunities reinforce our confidence in sustained demand growth, and we are expanding radar capacity to meet that demand. This includes the establishment of DRS U.K., which we announced this month to better serve customers across Europe, with local capability, content and production. Shifting to counter UAS more broadly. Our radars are integrated into many counter UAS systems in service today. That installed base gives us a clear view of evolving mission requirements and positions us to stay ahead of as those requirements change. For example, we just exhibited a vehicle-agnostic pallet-based counter UAS and short-range air defense system that integrates modular sensors and effectors. Our solution is built around a self-loading equipment dock or SLED, an open reconfigurable platform that can mount on a range of vehicles and combine our radar with mission-tailored sensors and effectors. This effector agnostic architecture supports kinetic and non-kinetic defeat options from missiles and guns to directed energy and electronic warfare. That open approach gives customers flexibility as threats, platforms and available effectors evolve rather than locking them down to a single solution. Shifting to effectors. Operations in Ukraine and more recently in the Middle East have underscored a growing cost asymmetry and expensive threats have been launched in volume, while inventories of costly interceptors remain finite. Our focus is on changing that equation. Directed energy is one way to address it. Recently, a leading high-energy laser provider selected DRS to enable its mobile counter drone laser system under the Army's Enduring High Energy Laser or EHL program, the Army's first production contract for a high-energy laser weapon. That selection builds on years of DRS directed energy integration work, including government live fire evaluations and training in 2024 and 2025. Another way to address the cost per intercept challenge is by lowering the cost of kinetic interceptors. Interceptor drones are one low-cost kinetic option. To support them, we adapted our detector approach around uncooled infrared technology designed to deliver performance at a fraction of the cost of traditional systems. As we discussed last quarter, that capability helped us secure a contract for our tandem orbit thermal core with a leading low-cost drone manufacturer, beginning with an order of more than 50,000 units. Interest from additional manufacturers is accelerating, and we believe demand for thermal cores could grow significantly as low-cost drones proliferate. Our Dallas assembly and test line provides the domestic capacity to serve that opportunity. That same combination of performance and affordability earned us a role this quarter on Dutch, the Army's next-generation thermal imaging initiative. Together with growing demand, this validation supports our view that DRS has a natural path to expand its role as a sensor provider across next-generation effectors. That opportunity advanced this quarter when the Army named us 1 of the 6 finalists in its xTech|Apex Intercept Low-cost seeker category, supporting interceptors designed to operate alongside Patriot. Turning to the Navy. The IndoPacific is a primary theater shaping future fleet requirements. China's deep magazine of short- and medium-range missiles is pushing U.S. and allied forces to operate at greater distances. Ships must detect and defeat threats further out and carry more effectors, driving the need for significantly more onboard power. At our 2024 Investor Day, we laid out a case for integrated electric propulsion on surface combatants, an architecture that places all power generation on a common grid, allowing ships to ship power between propulsion and combat systems as mission needs change rather than limiting it to the driveshaft. We viewed our experience on state-of-the-art Columbia program as the foundation of the broader electric power opportunity. Our performance established us as the provider of critical electric drive components, creating a hard-to-replicate position on one of the Navy's most important programs. For a surface ship, this architecture translates into a system that provides more efficient and flexible power output that is currently available under a traditional mechanical or even hybrid electric architecture, making it ideal for the increased power demands. As shipboard power requirements continue to rise, we anticipate a growing demand from the Navy and allies as we build our Charleston facility to support that growth. That conviction delivered another significant win. This quarter, we were selected to provide the permanent magnet electric propulsion system for the Republic of Korea's Navy's KDDX destroyer program. KDDX establishes an important foothold for DRS in the India-Pacific surface fleet market, expanding our opportunity set with allied Navies and provides a valuable proof point for potential U.S. Navy adoption of this electric power and propulsion architecture across the domestic surface fleet, including new U.S. Navy ship classes and unmanned surface vessels. Complementing the KDDX win, we received additional funding this quarter to advance our steam turbine generator capability, including an award to begin developing the DRS design system. Also for our naval business and Beyond Power and Propulsion this quarter, we received a roughly $40 million award to produce Joint Tactical Terminal Transceiver or JTT-X units for the Navy's EA-18G Growler electronic attack aircraft. JTT-X provides secure beyond line of sight communications, enhances threat warning and improves situation awareness at the edge. We also received $96 million in awards to continue supplying power supplies, launch control equipment and transformer systems for the Navy's Mark 41 vertical launch system. Mark 41 is the common launcher for weapons including Tomahawk and standard missiles and is installed on more than 180 U.S. and allied ships. The system's ability to integrate additional missile types over time also expands its relevance as the U.S. and allied navies invest in deeper magazines to support prolonged operations in increasingly contested waters. More broadly, information superiority is becoming increasingly important across the missions we discuss today. Making sense of the battlefield at the edge continues to be an important focus of our strategy. The faster our customers can move from detection to decision, the greater their operational advantage. Our multiyear investments in open architecture, high-performance computing led to the launch of THOR in March, a rugged embedded computing system that brings AI processing, sensor fusion, communications and command and control capability to the tactical edge. We're proud to see that, that innovation was recognized at the 2026 AUSA Annual Meeting and Exposition in Washington, D.C., where THOR was named Best New product. A key differentiator is its ability to operate in all mission-relevant environments while maintaining full processing capability in extreme temperatures where commercial and competing hardware can throttle or shut down. That need for faster data-driven decisions underpins the strategic rationale for our pending acquisition of Raft, which we still expect to close in the fourth quarter. Raft's AI-focused mission software capabilities will complement DRS' trusted fielded hardware and expand our ability to deliver integrated command and control solutions. The 5-year roughly $100 million NGC2 IDIQ awarded to Raft in early Q3 validates the Army's confidence in this integrated hardware software approach. Taken together, these investments and wins we discussed today from counter drone to infrared sensing and electric propulsion to next-generation communications and innovations like THOR reinforce a strategy that's working, one that turns Foresight into trusted, fielded capability, the capacity to scale and the data to decision advantage. That's why our technology is at the center of how the United States and its allies are responding to today's security challenges, and why we'll continue to translate that mission relevance into strong durable growth. I'll now turn it over to Mike to walk through the financials.

Thanks, John, and good morning, everyone. The headline this quarter is strong execution across the business. As John noted, that execution allowed us to translate solid revenue growth into even faster profit growth. On our last call, we expected third quarter revenue of more than $1 billion, adjusted EBITDA margin in the mid-13% range and modestly positive free cash flow. We finished ahead of that framework on every metric. Revenue exceeded $1 billion. Adjusted EBITDA margin was 14%, driving a year-over-year EBITDA growth rate of 27%. Free cash flow came in at $61 million, well above the modestly positive contribution we anticipated. Importantly, we delivered these results while continuing to invest ahead of need in both capabilities and the capacity required to support future growth. Let me walk through our results, then turn to our updated 2026 outlook and provide some context for the fourth quarter. Starting with revenue. We delivered $1.1 billion in the quarter, up 11% year-over-year. Growth was driven by programs related to tactical radars, electric power propulsion and space sensing. At the segment level, growth was well balanced with IMS up 12% and ASC up 14%. At IMS, electric power propulsion and counter UAS were the primary drivers. At ASC, tactical radars and space payloads led the growth. Through Q3, both segments contributed in a similar measure to our year-to-date growth. That balance underscores the breadth of our portfolio and its alignment with the mission priorities John outlined. Turning to profitability. Our quarterly profit performance was exceptional, and we expect that outperformance to carry through for the full year. In the third quarter, adjusted EBITDA was $149 million, up 27% year-over-year and meaningfully outpacing revenue growth. Adjusted EBITDA margin was 14%, up 180 basis points from the prior year. Profit growth and margin expansion reflected rigorous program execution, favorable mix and operational leverage on the greater volume. By segment, profit growth was strong across both segments with IMS the standout. IMS adjusted EBITDA rose 34% and margin expanded 280 basis points. That performance is particularly notable given a more than 40% increase in R&D spend. Strong naval power execution and operational leverage from the higher volume more than offset that investment. At ASC, adjusted EBITDA increased 22% and margin expanded 80 basis points. This segment also benefited from strong operational delivery, favorable mix and volume leveraging. On a year-to-date basis, both segments delivered strong adjusted EBITDA growth and margin expansion with IMS pacing the gains. Moving further down the P&L, net earnings were $115 million, up 60% and diluted EPS was $0.43 a share, up 65% year-over-year. Adjusted net earnings were $124 million, up 59% and adjusted diluted EPS was $0.46 a share, also up 59% year-over-year. Higher operating profit was the primary driver of that growth with an additional benefit from a lower tax rate. Shifting to free cash flow. We generated $61 million in the third quarter. That was well above the modestly positive contribution we anticipated and meaningfully higher than the second quarter. From a year-to-date perspective, it also represents an improvement in free cash flow linearity compared with last year. Taken together, our cash generation and balance sheet strength give us ample flexibility to fund attractive organic investments and pursue selective M&A to drive long-term shareholder value. The pending all-cash acquisition of Raft is a clear example. It expands our multi-domain AI, data fusion and mission software capability, strengthens our growth profile and meets our disciplined financial criteria. With that, let me turn to our updated 2026 outlook. Our performance through the first 9 months has exceeded internal expectations and strengthened our confidence for the full year. As a result, we are raising and narrowing our outlook across all key metrics. We now expect full year revenue in the range of $3.95 billion to $3.985 billion, implying an 8% to 9% organic growth year-over-year. Our record funded backlog of $5.6 billion provides strong visibility into that range. For the remainder of the year, revenue will be shaped primarily by the timing of material receipts and achievement of program milestones. We now expect adjusted EBITDA of $545 million to $555 million, up from our previous range of $525 million to $540 million. The updated outlook reflects our third quarter outperformance and points to a stronger margin expansion for the full year. Consistent with what we shared last quarter, we expect both segments to make meaningful contributions to full year revenue and adjusted EBITDA growth. As a reminder, year-over-year comps are affected by 2 non-routine items from 2025. The quantum laser license that benefited ASC's 2025 results creates a tough comparison this year. Conversely, the conclusion of a legacy foreign ground surveillance program that weighed on IMS' 2025 results creates a more favorable comparison in 2026. The stronger profitability outlook, combined with a lower tax rate also carries through to the bottom line. We now expect adjusted diluted EPS of $1.50 to $1.53 a share. We have updated our full year tax rate assumption to 13%, while our diluted share count assumption is unchanged at 269 million. As a reminder, our guidance excludes any contribution from the pending acquisition of Graft. Given the expected fourth quarter close, we do not anticipate a meaningful contribution in 2026. And we continue to expect the acquisition to be accretive to adjusted diluted EPS in the first full year of ownership. For free cash flow, we are still targeting a 75% conversion of adjusted net earnings. At the same time, capital expenditures will remain elevated in the fourth quarter with full year CapEx expected to approximate 4% of revenue. Finally, a few comments on the fourth quarter. Our updated outlook implies a solid finish to the year with meaningful sequential growth in both revenue and adjusted EBITDA dollars. On taxes, our full year assumption implies an effective tax rate of approximately 19% in Q4, which is more representative of a normalized go-forward rate. On cash, we expect Q4 to remain our strongest free cash flow quarter even with the improved linearity we've seen year-to-date. As usual, we will provide our formal 2027 outlook with our full year results in February. With that, let me turn the call back over to John for some closing remarks.

Thanks, Mike. Before we take questions, I want to come back to our strategy. Taken together, our performance and the wins we discussed today show that the strategy is working. We provide differentiated capability to help our customers maintain overmatch. That approach is translating into strong bookings, record funded backlog and an improved outlook. Thanks to exceptional execution across our teams, we're delivering affordable, mission-proven capability focused on performing as required the first time every time. That focus is helping protect the U.S. and allied service members, strengthen more fighter readiness and enable mission success around the globe. With that, we're happy to take your questions.

[Operator Instructions] Our first question is going to come from the line of Justin Lang with Morgan Stanley.

John, actually, I wanted to start with the KDDX win. Congratulations on that. I was hoping you could talk a little bit more about the opportunity there and how your content compares to the work you're doing on Colombia today, and if there are other near-term international surface ship opportunities that we should be monitoring as well.

Thanks, Justin. I appreciate the question. Absolutely. This is really a groundbreaking program for us. First and foremost, it gives us the ability to show that our technology is applicable to nations outside of the United States, expanding into Korea is a big deal. Secondly, going back to the comments that I made, we expect that future ship classes are going to go full electric. And the reason for that is distances. We think that war fighters are increasingly going to require fighting ships on the fight from a further distance. That requires more power for radars, more power for electronic warfare, more power for direct energy. You really can't do that without having the ability to ship power from different parts of the ship rather than just making power for the propulsion system and having it dead end there, you have -- and a separate power supply for the sensors and weapons, you really need to be able to pull power from all of those places to increase power for those sensors and effectors. So we think this is an opportunity for us to show that, that architecture, that structure is applicable to surface vessels. We hope that the United States next -- whether it's a battleship or destroyer or Cruiser ends up with the same architecture. And just to compare it against Colombia, it's exactly what we did for Colombia is built a structure that allows us to move power from one place to another inside that ship. So it's the same architecture, the same capability. We do think there's expanding capability in the U.S. for next-generation ship classes and other ship classes around the world.

Great. That's great color. And then maybe just one quick one for Mike. It was another really strong margin quarter for IMS, and I appreciate you had some risk retirement benefits last quarter. But should we think about margin levels in this kind of mid- to high teens realm as a new run rate for the segment? And if you give us a little more color on maybe how much of the margin strength of IMS was driven by Colombia specifically, that would be great.

Yes. Thanks, Justin. First, I'd say the IMS execution continues to be stellar across the segment. This includes really both our land and naval programs. So we do talk a lot about Colombia, but the margin increase and the margin strength that we've been seeing has also been supported by our other naval programs across the fleet. And in this quarter, we saw a particular strength in the counter UAS side also delivering to those high returns. So as we pull back and look at the IMS margin profile, we've always talked about kind of a long-term vision of mid-teens margin profile for DRS, and the way that IMS is executing now, I would expect to kind of see the 16% margin levels hold and that should be the baseline going forward given the performance levels that we've seen and the market position that they have in those kind of key areas.

Our next question comes from the line of Hrishi Kumbhojkar with Guggenheim Securities.

I wanted to kind of staying on margins. I wanted to kind of look at ASC. So certainly appreciate that the margins expanded 80 bps year-over-year. But kind of thinking sequentially, I'm seeing that they're flat. Curious if you can provide some color regarding the drivers there, and how we should think about that moving forward?

Yes. I would say that on the ASC side, we're continuing to predict and project margin expansion throughout the year. I would say a lot of the margin depends on mix from the ASC perspective. So that plays into a large portion of the margin expansion. And I think last quarter, we saw a significant uptick in some of our more favorable mix programs, in particular, some of the tactical radar elements. So I think that's the driver. If you zoom out a little bit from a year-to-date perspective, I think that's where the benefit is more well seen rather than looking at a quarter-to-quarter basis. We continue to execute the margin in an expanding profile as compared to last year. And I expect that Q4 for the ASC segment will actually continue to see maybe a bit more of an accelerated step-up from a margin expansion perspective.

Let me just add a little bit to that, Hrishi. I think that it's important to kind of understand what's going on in the counter UAS market, which is driving some of those margins on the ASC side. First and foremost, you have to sense the drones before you can counter them. And our sensors are being selected more and more time and time again as the sensor of choice, being able to detect the drone, being able to distinguish between drones and birds and other things -- other flying objects, being able to track those drones and giving you the ability to go and counter that. And this is one of the reasons why our margins are rising on the ASC side is because that those radars are part of the picture, and we're solving problems in counter UAS across the entire market.

I appreciate the color. That's helpful. And one more for me regarding kind of zooming out and thinking about the supply chain. You highlighted a lot of the contract wins. But in terms of product sourcing, component sourcing, in material sourcing. Are you seeing any issues or pressures at this point, thinking about the wins?

Yes, it's a great question. So first and foremost, we learned our lesson with germanium. Germanium gave us the ability to now look at holistically the supply chain. We have processes and procedures. We have tools, including AI working on predicting where those supply chain challenges are going to be ahead of challenge coming. We now have a very strong balance sheet. We're using that balance sheet to buy product and material in advance of need, given the event of contract to bring that in-house so that we don't end up with a shortfall of material going forward.

Our next question will come from the line of Jan Engelbrecht with Baird.

I wanted to touch on the timing of new contract wins and how that maybe could affect 2027. I know you guys aren't guiding towards '27 today. But if you just look at that 50,000 unit drone camera win, there's probably some follow-on awards. If you just look at some of the drone dominance guys, they're fairly small companies, and they probably -- they definitely don't have the capabilities that you have. And then you look at the radar IDIQ and then also the Korean destroyer. Just at a high level, could you guys talk about those three contracts and talk about how they potentially ramp in '27 or later this decade?

Yes. I'll start with the contracts. I'd say, first off, on these successes that we've had, this is a manifestation of the investments we've been making. And we've been making these investments in the increased IRAD. You've also been seeing the investments in an uptick in CapEx to increase our capacity. So we're pleased to see these kind of materializing in the successes that they have. If I'm thinking about how that kind of reflects itself into 2027, we'll provide an update to that framework in our earnings call in early February and then you can give some more kind of multiyear guidance at the Investor Day as we're looking to do that in early '27. But that said, kind of given the performance to date, the wins you referenced, the increased backlog, the success we're seeing from the investments, we remain optimistic about kind of growing above what we laid out in the current framework. Additionally, if you put RAF into that, we're looking at '27 driving towards a low double-digit growth profile, but we will give more color to that coming out in early 2027.

Yes. Let me just add that we're very well positioned for sustained growth. Our investments in the cutting-edge technology, some of which you mentioned and alignment to the customers' priorities really give us -- in addition to the investments that we've made in capacity, give us confidence for that framework Mike just mentioned and confident in sustained growth, not just in '27, but beyond '27. Let me -- I want to just go back to the comment about the one-way ors and so forth. I think you're going to start seeing a blending of capability between missiles, high-end missiles and all the way down to one-way drones. You're going to start seeing those blend. Today, you might be able to name missiles with 1 or 2 or 3 hands, 10, 15 different missiles that you can probably name off the top of your head. Tomorrow, you're not going to be able to name them all. They're going to proliferate. They're going to have all different capabilities from very high end to very low end. And the thing -- the common element here is that they're all going to have to see. They're all going to have to seek and DRS is providing that capability with high-end U.S. manufactured infrared capability. We've invested in the facilization, the expansion of our vales-based foundry to be able to address those needs. And you're right, a lot of these suppliers don't have the depth and the financial wherewithal to be able to give larger orders. But we do see that, that order base is going to come, and we are there with the solutions to be able to make those new solutions, those new capabilities of factors affordable and on par with the threats.

Great. Just if I may, a quick follow-up. You guys have previously talked about the proliferation of tactical radars as part of a layer the same system. If you just look at in Epic Fury what happened with some of these exquisite radars, which have exquisite capabilities, but they do take anything from 3 to 8 years to replace, and they've been sort of destroyed. So are you guys seeing sort of a noticeable uptick with the customers in the Middle East to GCC and on sort of these tactical radars that you guys supply. They don't necessarily have a sad sensor capability, but if you employ multiple of them across the Middle East, how should we just think about that business in terms of short range with radar, but also some of the over-the-horizon radar capabilities that you guys have?

Yes. Great, you're spot on. This is exactly the issue that we're -- our customers are seeing. Those big expensive exquisite radars are just kind of like the geosynchronous satellites of yesteryear. You're going to start seeing the proliferation of smaller, tactical, lower-cost radars. We're seeing that demand coming from the Middle East and Eastern Europe. We have thousands of radars in the Eastern Europe right now, doing that very thing is aggregating the radar picture together so that you don't have a centralized sensing capability. I think the U.S. is challenged with the same problem. How do you balance out the need to have an exclusive capability but have the ability to defend it or distribute it. And that's something that we expect the market to move in our direction to be able to solve that problem. But you're right, you're spot on. That's the problem to sure. It's a problem that we think there's a market shift to -- from exquisite capability to centralized to a distributed tactical capabilities.

Our next question will come from the line of Ronald Epstein with Bank of America.

This is Andrew on for Ron. I just wanted to follow up on the earlier questions on KDDX. I'm just looking to get a better idea of what Doosan Enerbility's contribution is on that. And then just in terms of future opportunities, is the Korean Navy's recently announced manned unmanned teaming battle group initiative something you guys are interested in pursuing to roll on?

Yes. So Doosan is our partner here for in-country content as well as integration. And this is bringing this world-class capability into Korea is a nice -- they're a nice partner for us here. As far as the manned unmanned teaming, I'm not aware of Korea moving in that direction. I would expect them to, but I'm just not aware of that move right now.

Yes. It was announced, I think, last week that they are looking to deploy drone aircraft carriers.

Yes. Andrew, thanks for that. Look, at the end of the day, this is where the market has to move. You're going to end up seeing a need for more and more mass on the battlefield. That mass has to be increasingly autonomous, has to be increasingly unmanned or uncrewed. You're going to put those platforms up in the front to be able to sense the battle space, understand the battle space and then potentially even react. And this is where DRS has been investing. This is where we're going, is to being able to provide that -- those sensing capabilities, the computing capabilities, the AI to the edge of the battle space. It's not surprising that Korea is moving in that direction. I think everybody is going to end up having to go there to be able to put that mass on the battlefield.

Got you. And if I could just sneak in a quick follow-up. How are you guys thinking about Anduril's entry into shipbuilding components? I mean I'm just thinking -- it sounds like it would be positive for you guys in the sense that they're looking to build more submarines more quickly, which would bring volume tailwinds to DRS. Is that the right way to think about it?

Yes. I think you got it right. Anything that helps the submarine industrial base produce submarines faster is good for the nation. It's good for the Navy. It's good for us. At the end of the day, our capability is about the propulsion, the power propulsion part of the submarine. We're not challenged by capacity. We've invested there. We're increasing production. That's not an area that I expect to see a lot of competition. In fact, we see the customer, the Navy coming to us to expand their industrial base to provide second source capabilities and specifically in the area of steam turbine generators where the Navy really deserves to have a second source, and they're coming to us to solve that problem. So I think that Anduril's investment, the department's investment in Anduril is a good thing for the industry. It's a good thing for the submarine industrial base, a good thing for the nation.

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