Okay, I think we're ready to get started. Good morning, and welcome everyone, to the Leonardo DRS Investor Day. I'm Steve Vather, Vice President of Investor Relations and Corporate Finance. We appreciate you guys being here in person, as well as tuning in virtually. We're excited, very much so, to share much more on DRS, and this is our first Investor Day since our return to the public markets in late 2022. Couple of reminders, today's presentation is being webcast live and it also recorded. Before we get started, I have a couple of housekeeping items that I just wanna cover. First, electronic devices, we'd appreciate if you put them on silent mode. Second, we'd encourage you to stay seated throughout the presentation as much as possible.
Third, the full presentation will be posted after the conclusion of prepared remarks, so we'd ask you to follow along in the room and then via the webcast. Lastly, we'd ask you that you hold your questions till the end. We will have a dedicated Q&A session, and we'll go through instructions at that time. I'm obligated to cover this, so I'll read the disclaimers here really quickly. I'd like to just call to your attention the use of forward-looking statements in this presentation that address future events, the 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 risk factors.
For a full discussion of these, please refer to our latest Form 10-K and our other SEC filings. We undertake no obligation to update any of the forward-looking statements made today. Also, just as a reminder, we're gonna be using 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, and you can find a reconciliation of the non-GAAP measures discussed today in the appendix of the investor presentation. With me today are Bill Lynn, our Chief Executive Officer, John Baylouny, our Chief Operating Officer, Mike Dippold, our Chief Financial Officer, Dr. Phil Perconti, who's our Chief Technology Officer, and Jon Miller, who is the head of our Naval Power Systems business.
We've included backgrounds on each of them on this slide, just for your reference. So shifting to the agenda for today, Bill is gonna get started here this morning with an executive overview of the business. He's gonna talk about the transformation of the company and our strategy. He's gonna be followed by John Baylouny, who is our Chief Operating Officer, who's gonna discuss operations, our differentiators in the marketplace, and our programs. And then Phil will lead a discussion on our investments in R&D, as well as the alignment that we have to emerging customer missions. We'll pause after Phil for a 15-minute break, and then we'll have Jon Miller kick off a discussion on the Naval Power Systems business and the power of naval electrification.
The reason that we have J on here today is that the big driver for the EBITDA growth and the margin that we expect to see over the next couple of years is gonna be coming from the naval power business. Mike will then shift to a financial discussion of three-year targets, our capital allocation framework, and our compelling equity value proposition that we have in the market. And then we'll have Bill conclude the presentation before we shift into Q&A and before we break for lunch. So we have a robust discussion set up for today, and before we get into the details, we just wanna cover a half dozen key messages that we hope that you come away from today's conversation with. One, DRS is a unique story amidst a scarce mid-cap universe.
Two, our diverse platform-agnostic business is aligned to enduring customer priorities. Three, the team has an excellent execution track record. Four, we've got incredible revenue visibility, and that's backstopped by robust backlog and the multi-growth prong strategy that, John's gonna cover a little bit later today. Fifth, DRS is agile. We have technology differentiation, and we're customer-focused, and that's translated to franchise positions, many of which are sole source. And the last message that we hope that you come away with from today is that the team is committed to driving solid organic growth, margin expansion, and that, coupled with patient, value-accretive capital deployment, is gonna unlock further shareholder value. Before Bill takes the stage, I'm gonna share a quick video on DRS.
Agility. You need it to succeed in today's complex threat environment. At Leonardo DRS, our agility brings trusted experience, unfettered innovation, and reliable solutions. Our customers look to us to solve their most critical needs and prepare them for what lies ahead. Agility is the foundation we're built on, and we understand our customers don't have time to wait. Our cutting-edge technologies are used across multiple domains, providing a distinct advantage when it's needed. We are dependable, always thinking ahead of the trends, and our customers rely on us because our people push the envelope of what's possible.... listening and working closely to ensure the expected is not just met, but exceeded. We are a force multiplier, delivering innovative technologies to solve the most crucial needs today and into the future. Because at Leonardo DRS, our agility is their advantage.
With that, let me extend a warm welcome to our Chairman and Chief Executive Officer, Bill Lynn.
Thanks, Steve. Welcome everyone. Happy to see you. We've got a full room and nice attendance online. I really appreciate your interest in DRS, and look forward to spending the morning going through a little more detail how we see DRS stacking up and going several years into the future. But before we get to that, let me just start with a little background on DRS. Although we were only listed about 15 months ago, we actually have a 50-year history. We started out in the late 1960s as a spin-out of the old Loral Corporation to do a passive naval sonar. And for 20 years, we were a small, think $50 million-$100 million defense company.
And then in the early 1990s, the son of one of the founders took over as CEO, and he began building the company by acquisition, really building scale. And over the course of a decade and a half, a little bit longer, he built the company up to a multi-billion dollar defense company. At that point, then Finmeccanica, now Leonardo, acquired DRS. It was part of their strategy to be a global aerospace and defense company, and to get a position in the world's largest defense market. At the time of that acquisition in 2008, DRS was a very different company, where over 60% of our revenue was coming from the Army, and more than half of that came from the conflicts that we were in at that time in Afghanistan and Iraq.
That reliance on wartime supplementals proved to be a vulnerability as those conflicts wound down in the post-2008 period, and we saw a significant drop in revenue between 2009 and 2013. At the end of that period, in 2012, I came to the company as CEO. I just left a couple of months earlier, the Obama administration, where I was the Deputy Secretary of Defense, and I came in with a mandate to change, to really try and transform DRS. We started with the organization. There was a bifurcated security structure. We had both an SSA and a proxy in the parlance. We consolidated that security structure. We streamlined the organization. We eliminated a series of the intermediate headquarters. We closed several sites.
We upgraded the financial processes. We unified the IT process. We improved our and standardized our HR processes, all towards integrating the company further. We also reshaped the company strategically. We focused on four core markets that we'll talk a lot about, but the differentiator in those markets was all of them had above-market growth. That is, the growth in those four markets was greater than the growth in the defense budget itself. In all four of those markets, DRS came with a strong leadership position, top player in all of them. None of them, you'll see, were dependent on single-platform solutions. These were, as we'll talk about, platform-agnostic markets. And then finally, they were all driven by technology. They were all product-based.
As a consequence of that last fact, that with a technology product base, we began to divest our service businesses. We wanted to be a pure-play technology company. We first divested the technical service and aircraft maintenance business, and then more recently in 2022, we divested the satellite communications bandwidth reselling business that we had. That gave us that pure-play nature that we wanted. And at the same time, although we focused on organic growth, we also did some targeted acquisitions to unlock value as well. We bought Daylight Solutions, a laser company, in 2017, and then more recently in 2022, we bought RADA, the tactical radar leader.
That was part of that reverse merger that brought DRS to the public markets, brought us here to the Nasdaq. That step really completed our transformation and put us in a position then to do what we just did, which was to go public. Let me show you in a few numbers how that transformation looked. Here I'm using 2008 as the departure point. That was the acquisition of DRS by Leonardo. But most of this occurred post-2012, 2013. So in 2008, we were about 60% Army revenue. Today, we're about half that.
About half our about 30% of our revenue is Army, and the largest part of our revenue is now in the Navy, which is about 40%. As I said, in 2008 through 2012, that period, over a third of our revenue came through the wartime supplemental accounts, the old OCO accounts, if you remember. Today, in terms of the Ukraine-Israeli conflicts, 1% or so of our revenue is dependent on those conflicts. That gives us a much greater predictability and much greater stability, not having the ups and downs of wartime supplementals. Third, in 2008, in that early period, our largest program was a service program that supported the army in war zones.
Today, our largest program is the Columbia-class electric propulsion system that we provide for the new ballistic missile system. There is a point of commonality there, though. In both cases, we are quite a diverse company. We don't have a large program taking, you know, 30%, 40%, 50% of our revenue. Our largest program is still in the 10% range. And then finally, we went from a mix of products, technology, and service-based revenue to really a pure-play defense company with more than 90% of our company being in that space. And let me stress that all of these changes were purposeful. We had a goal of transforming the company into a focused, pure-play defense company in order to bring it to the public market.
Let me dig down a little bit on DRS today. We have 6,600 employees, about $3 billion in revenue, with margins of about 12%. We're well-positioned for strong organic growth as well as a structural margin expansion. We have a robust and growing backlog, now nearly $8 billion, across that balanced portfolio, and that gives us visibility on that growth. As I said, we concentrated on four core defense markets: Advanced Sensing, Network Computing, Force Protection, and Electric power and propulsion. In the latter part of the last decade, in each of those four markets, we went on targeted campaigns to try and win franchise positions that would provide the foundation for our growth in those markets.
Let me just give you one example of that, one of those new franchises, and that's the Columbia-class electric propulsion system. In the middle of the last decade, we set out on a campaign to combine our long support of naval propulsion system with the somewhat newer permanent magnet motor technology we developed, and to really try and be the provider of the integrated propulsion system on the new flagship program for the Navy, the high-priority Columbia-class submarine. That campaign was successful, and it has made us a leader, probably the leader, in electric propulsion for the Navy. And we did similar things in network computing, force protection, again, finding those franchise positions that give a foundation for the growth we've had.
The result, as you can see here, is that we're a pure-play defense company. About 80% of our revenue comes from the DoD, U.S. Department of Defense, another 10% from international defense budgets, and then 10% is in the other category, some commercial, a variety of others. Our commercial work is generally derivative. It's opportunistic from our defense technology. In other words, we don't consciously go into the commercial markets from the start, but when we see opportunities in those markets with our defense technology, we look to take advantage. We are split 60% subcontract, 40% prime. We're a little bit different than the larger prime. We don't, it's whether to prime or sub is a strategic decision for us. We don't have a preference.
It's not an ego-based decision. It's based on our probability of winning the work and our profitability of the work. We're prepared to go either direction, whichever is best for the customer and for us. We're a product-focused company, as I said. That leads us to about 85% of our business is fixed price. Most production contracts are going to be fixed price, so that drives that number. Finally, the fact that 60% of our revenue is sole source shows the high barriers to entry that we've been able to create around our many of our positions. Let me talk a little bit about what's happened in the last 15 months since we went public.
In the first year, we were able to deliver on all of our financial commitments in each quarter and then for the full-year. We accelerated our growth to 7% organically. Mike's gonna talk more about how we see the future in mid-single-digit growth there, going through 2026. We drove our backlog up to $8 billion. That's about a move of about 2.5 times. That gives us visibility into the sources of that growth. Our free cash flow has returned to relatively normal levels after some disruption from the pandemic and the accompanying supply chain disruptions. And then lastly, we are investing in growth. Our internal R&D is now up to 3% of our revenue.
We announced $120 million capital expenditure, a capital investment in a naval facility in South Carolina that Jon Miller will talk about. That's gonna drive both margin and growth in our naval propulsion business. And we're exploring actively M&A investments across all four of those core markets.... The foundation of our company and the key to our success, it really starts with our people. They're the fabric of who we are. They embody our cultural values. Those values start with agility. It's our most defining characteristic. We've shown time and again, we can move fast to meet customer needs. We're able to make decisions faster because we have a much less layered decision structure. We can move investments quickly to where they're needed, and we can accelerate development and production.
Phil Perconti will talk about a couple of examples where we've been able to move at light speed compared to what the Department of Defense is normally able to achieve. That agility, I think, is unique among defense companies. The same time, excellence in our performance is embedded in our DNA, and that's because we're not a commercial company. We understand that the men and women in uniform are dependent on our technology succeeding for them to protect themselves and the country. Finally, we stress diversity in our workforce.
That's not as a social good, but really as a business imperative for two reasons: diversity of thought and people has proved time and again to lead to better, more robust decisions, and a diverse and welcoming workforce that reflects the communities in which we reside leads to strong recruiting and even better retention. Let me turn to our relationship with our largest shareholder, Leonardo. That relationship starts with the security agreement Leonardo signed when they acquired DRS back in 2008. Such an agreement, it's called a proxy agreement by the Department of Defense, is required for foreign ownership of a U.S. defense company. That agreement constrains Leonardo's influence over DRS in several ways. First, it bars them from having any member, any, any of their staff as members of our board or as employees.
Second, it restricts their operational involvement and establishes processes for sharing any technical data. It also narrows their focus to financial performance and management. In that regard, alongside the proxy agreement, we also signed a shareholder agreement with Leonardo as part of the public listing. The focus of that agreement is to ensure DRS helps Leonardo meet its reporting obligations under IFRS, which are the European accounting standards. As would be expected, Leonardo also has oversight of major transactions, major capital allocation, and that's defined as 2% of trailing twelve months revenue. Bottom line, DRS and Leonardo share a view that maximizing shareholder value for both the majority and minority shareholders is our most important objective. Toward that end, our relationship with Leonardo has been and continues to be both strong and positive. The board that we have is independent, diverse, and experienced.
As I said before, there are no Leonardo representatives on the board, but we do have five proxy members, and those are listed there in the red. The proxy members are in red on that chart. Eight of the nine are independent. I'm the only exception. The board, as you can see, has deep industry and government experience, coupled with strong financial and operational acumen that help the management maximize our shareholder value. Looking at the market environment, as I mentioned, 90% of our revenue is coming from defense investment budgets worldwide, but most of that is coming from the U.S. Department of Defense. So when I talk about the market, I start with the Department of Defense and the defense budget.
That budget, in my view, is driven by three major macro factors, and the first and the most important is the threat environment. Today's threat environment's the highest that we've seen since the end of the Cold War. China is on the rise economically, and they've turned that economic power into military strength. Putin is now, with his invasion of Ukraine, has changed the equation in Europe and brought a threat to Europe that we haven't seen in 80 years. Then non-traditional threats like Hamas and Hezbollah continue to be active and continue to be part of the security equation. Given this threat environment, all other, all other things being equal, you will expect to see that threat environment to drive higher defense budgets. But there are two other factors. The second factor are national deficits.
Right now, our national deficit is about equal to our economy. That's quite high historically. But concern about deficits is not as high as it has been in, say, the 1980s. And so it's a modest drag on defense budgets, but it isn't, you're not gonna see Gramm-Rudman-Hollings, the kind of things you saw in the 1980s that drove defense budgets down. And that's partly because I think each of the parties have higher priorities than the deficit. The Republicans are more interested in tax cuts, the Democrats are more interested in social spending, and that lack of focus on the deficits, as I said, has caused it not to be that much of a drag on defense spending. The third factor is the broader political environment.
Here, I think if you look across both houses of Congress, you'll still see strong bipartisan support for defense spending and defense increases due to the threats that I talked about. But that support has been muted in Washington by political polarization. The splits in Congress, the difficulty of getting anything done, I think has resulted in delays in budget. We're still waiting for a budget. And the increases, I think, have slowed from what they would otherwise be. So the bottom line of all this is I think the threat is driving defense increases, but those defense increases are a little bit, are somewhat slower and more modest than they would otherwise be.
But we do expect modest increases in the defense budget, and they, they're likely to be supplemented by added spending for Ukraine, Israel, and the other conflicts. Finally, the other part of defense spending, international defense spending, is actually rising faster than the U.S. defense budget at this point. As a consequence, that's helping drive international become a larger part of our revenue base. It's doubled over the last three or four years to where it's now about 10% of our revenue base, and we think it will continue to grow as a percentage of our revenue base. Let me shift focus a little bit more on defense strategy and then how that affects our market.
U.S. defense strategy took a major pivot in the 2017-2018 timeframe under Jim Mattis, where the department focused much more on near-peer threats from Russia in the immediate term and then China really as the pacing threat over the longer term. Insurgent threats still continue to be part of the equation, the Houthis attacking commercial vessels being the latest incident. And additionally, advances in commercial technology that have driven military capabilities have made higher-end military capabilities far more accessible to a much wider variety of actors. Think advances in autonomy, digital connectivity, computer processing, leading to a proliferation of cheap drones, very, very accessible to a wide variety of actors.
All of these strategic changes have refocused customer priorities towards maintaining U.S. technological superiority over the full range of adversaries. Let me just unpack that a little bit further on the next slide here. To meet this new threat, we really have to deal with a different type of battlefield. It's more transparent and connected. Forces, as a consequence, need organic protection across the battlefield, not just at the front line. It's a more autonomous world. Think drones today, autonomous vehicles and ships tomorrow. Advanced capabilities like hypersonic missiles have shifted missile warning, missile defense to space-based platforms. Integration of multiple sensors is critical now to gaining full battlefield awareness. To be able to get decision-quality data, you have to integrate all of the input from all of the sensors.
And then finally, weapons, sensors, and propulsion all have much greater power needs. That increase in power is one of the defining characteristics. And it's recognition of these trends that drove us to shape our company around those four markets: Advanced Sensing, Network Computing, Force Protection, and Electric Power. As we see it, the future is gonna be defined by forces that can see further, process more data more quickly, protect across the battlefield, as I said, not just on the front line, and to be able to provide the needed power across the full spectrum of weapon and sensor capability. So we're gonna hear much more about those four markets and these characteristics as the morning goes forward. Let me talk about our position in the market. We're a mid-tier company.
As you can see, from this chart, the mid-tier ranks have thinned. It would have been 20+, you know, 20 years ago. We're now just down to a handful. But we don't think that changes, and that was due to the consolidation at the larger tiers. We don't think that changes the advantages that mid-tier companies like DRS has. We think there are some significant inherent advantages to being a mid-tier. First of all, as I talked about, have much greater agility due to a leaner, less layered structure. We have a tighter strategic focus that guides our investments. We have a better ability to choose our markets based on their growth and our competitive position.
We're also able to maintain a platform-agnostic position that allows us to pivot between new platforms and upgrades to legacy platforms as the budget drives changes in the content of the service requests. The bottom line is, we think that DRS as a mid-tier provides a unique opportunity for defense investors seeking a more targeted portfolio. I want to talk about our strategic focus over the next few years. So, as I've said, we're focused on those four core markets, and our goal is to build out from there. We want to leverage our strengths to expand to adjacent positions and to support new customers in those markets.
We want to utilize technology to drive operational efficiency and excellence, and we're making organic investments, such as that new naval facility in South Carolina, to allow margin growth and organic margin expansion and organic growth. Finally, we have a strong focus on the continued strengthening of our engineering and manufacturing base. Recruiting and retention are a core strategic focus for DRS. Let me close my section with my view on how we can outperform the market. First, DRS has some clear competitive advantages. We have a business focused on a set of long-term growth markets. We're not, unlike some of our competitors, an index fund for the defense budget. We don't. The companies that have exposure across the full span of the defense budget, I think, become that index fund. We're very focused on growth markets.
We have a diverse and platform-agnostic business that is insulated from large changes in single programs. We have a strong portfolio of intellectual property that provides barriers to entry, and that's evidenced by the fact that 60% of our contract base is sole source. Finally, we have a seasoned team of leaders, engineers, and production line personnel with strong and deep ties to DRS. Equally importantly, our financial position allows us to compete from a position of strength. We have a sizable backlog that offers great revenue visibility, we have a clear path to double- and triple-digit margin expansion, and we have a strong balance sheet that will support both organic growth and acquisitions in the four core markets. In short, we have a clear strategy and a unique market position that provides a path to a bright future.
I'm gonna come back and close, but now I would like to turn it over to John Baylouny, our COO, to provide more detail on our growth strategy and business operation.
Thank you, Bill. Thanks, everybody, for attending this today. It's my pleasure to present to you a little bit more detail than Bill got into for our operations, our capabilities, programmatic presence, and our growth strategy. Let me start with the organization. As Bill indicated, several years ago, we were able to flatten the organization. We did this purposefully to build a structure that could operate faster, with agility, to allow information flow from the businesses to corporate and back, be able to make decisions faster. This provides better focus and outcomes for our customers, our employees, and the shareholders. We're built as two segments, as you know, each with seasoned and experienced general managers running them and senior staff.
We've maintained a robust succession plan to ensure continuity from the bottom of the organization to the top of the organization. Let me dig in a little bit. Advanced Sensing and Computing segment right now is made up of six businesses, and we focus on technology products in lasers, cameras, electronic warfare capabilities, computing, and radars. In Integrated Mission Systems segment, we focus mostly on integration and power and propulsion and integration of force protection equipment. Let me dig a little bit further into this. The ASC segment is close to about two-thirds of our business, where the IMS segment is about a third. Our segments have some interesting similarities, richness of technology, our portfolio of diversity and sole-source content, and revenue visibility and profitability profiles.
That said, there are some distinct differences that I'd like to highlight. ASC is more of a ground, Army-focused business, but address all services, and generally, more often act as a prime with a shorter revenue cycle. IMS is partnered with more shipyards and vehicle OEMs, more often a subcontractor and with a longer revenue cycle. Both are incredible businesses that provide us a real great balance that we enjoy at the DRS level. Many of you who've engaged with us over the last year know that we like to talk about our four core technology areas. As Bill said, these core technology areas align to our customers' future needs, including seeing further, making sense of the battle space, protecting what matters most, and increased power capacity. Over 90% of our business is focused in these core areas of growth.
It's important to note that we expect strong growth in each of these four markets, but we expect Advanced Sensing, Force Protection, and Power Propulsion to grow the fastest. Each of these have technologies that are being leveraged across a wide set of domains, and we'll talk more about this in a minute. The yellow check marks are more of the emerging growth areas of our market, and I'll be talking about some of those later as well. Let me point out a couple of examples where we are in these markets. In dismounted sensing, for instance, DRS is a dominant player. We make all types of family of weapon sights. Those are the sights that go on rifles for soldiers. We make thermal weapons, or thermal cameras for goggles, and we make the targeting systems for soldiers.
On force protection on aircraft, for instance, DRS is becoming a dominant player. We have missile warning capabilities for aircraft, we have lasers to spoof missiles, and all-in-one systems that have both capabilities in the same system. So let me take you to the future for a second as we see it. In each domain, the platforms on the front of the battle space are not just unmanned, but also autonomous. Those platforms have to sense and make sense out of the battle space and then communicate back up to the command structure what's actually happening up here in this, in the forward deployed area. They have to power themselves, and they have to protect themselves from weapons. In this vision, those platforms aren't as important as what's on them.
Our focus is sensing the battle space in as many modalities as possible: infrared, visible cameras, RF sensing, radars, et cetera, and making sense out of that data to make actionable information for the command structure, and then communicating it back to the command structure, protecting what matters most, our soldiers, their platforms, and the data. And then powering that platform and being able to adapt the power from weapons to the actual propulsion of that platform. This is why we believe these four markets are gonna grow, continue to grow faster than the overall defense budget, 'cause this is the future in all domains and all platform types. This is the wrong one. Let me touch the formula for success.
We've often been asked, "What's our right to win?" When DRS was first started, our founders created a novel new sensor, a new sonar sensor, and they immediately found a submarine following that ship, as soon as it went on the ship. That innovative spirit is alive and present at DRS, and it's in our culture, and it's pervasive through all levels of our business. Our customers select DRS over others because we know them, and they know us, and we know how to solve their challenges. Let me give you an example of this partnership. When the Army was looking for enhanced capability for their soldiers, DRS was a provider of thermal weapon sights, the sight that goes on the rifles.
The Army said, "What can you do to enhance the survivability and the effectiveness of our soldiers?" We went and studied some battles, and we proposed to the Army that they connect that weapon sight to the goggle on the helmet wirelessly. That allows the soldiers to be able to engage the target without removing his goggle and reacquiring. It gives them situation awareness that they have with the goggle, but also knowing where that rifle is pointing. The Army loved that. They went and got that funded. Of course, DRS won the contract. So very nice partnership with our customer. Second, we have the technology, and we have the technological edge that our customers are looking for to solve their problems. Lastly, we execute for them. We deliver, even when it's hard.
We stick with them and get it done. And so those three things bring us a competitive advantage. We do have competitors, but it's a limited set. It's a limited set because we are unique. We prefer to team sometimes with our primes, with the big primes. If we can't, we generally will compete against them, and we generally will win. Let me illustrate that for a second. I'll give you another example. We competed against a very large prime for the third generation of ground vehicle sensing in infrared. This sensor is the next generation of ground vehicle sensing, and we've been providing the second gen for many, many years and decades, and Phil's gonna talk about that. This sensor senses in two colors simultaneously, two colors in the infrared, and it gives greater range capability. We competed against that prime.
We ended up winning. We're the only qualified supplier for that program today, and we have some patents and some know-how, intellectual property, trade secrets that keep us there. Our competitive formula and our customer intimacy result in a very strong portion of our business being sole source, as Bill talked about, and the balance being limited competition. Now, I know a number of you would love to see the insides of some of our factories. I'm gonna give you a couple of pictures here to show you some of the things that we do. Going back to Bill's discussion about consolidating the business and making it leaner, we today, we enjoy centers of excellence in our business that are very unique and diverse.
In Dallas, for instance, we have the ability to grow crystals, to grow infrared sensing systems, and those, those crystals that we grow are only grown in a couple different places in the world, including Japan. Our competitors buy them from Japan at a much higher price. We grow them ourselves. In Fitchburg, we have the largest vacuum pressure impregnation system. Let's call that a tank. That tank is used for the Columbia motor when it's being built. It's the largest one in the United States, and it's needed for Columbia. In Menomonee Falls, we have the unique ability to test the entire drive system at full power. There's no other facility in the United States that has that capability. In Largo and Netanya, Israel, we have unique radar RF anechoic chambers for naval testing and calibration.
And lastly, I'm gonna save Charleston for Jon later. He'll talk about what we're gonna put there. These facilities, powered by our employees, the employees of DRS, make a difference every day through their agility and our customer partnering. Now, DRS is very customer-focused, and part of our commitment to our men and women in uniform is that we strive for excellence, and excellence in everything that we do, whether it's business excellence or operational excellence, everything in our business, we strive for excellence. And this is our APEX program, called Always Performing for Excellence. So the idea here is, we're gonna achieve... We're never gonna achieve excellence. We're gonna always try to get better and better and better.... and the idea is that the peak is always in front of us.
We have a five-pillared framework to drive that APEX program, and we've allowed our employees to align their efforts to the company strategy, to drive innovation, to unify our processes and procedures and metrics, as well as enhance their own capability and their own growth. It's been a huge success, and it's been a success because we've challenged our employees to create this program and to perpetuate it. So we're very pleased with the results, and I'll just give you some examples here. The transformation of the design process, the design of new products and capabilities and solutions. Today, we're doing this much more as a model system on a computer.
If we can model the system in advance and create an understanding about whether that system will do what it's supposed to do before we build it, we get first-pass success, and that's the goal, is to get faster and faster, get to a first-pass success of a new system design. We also get ideas from our employees for operational efficiencies, and those ideas come from the bottom. Every place in the organization comes up with these. I'm most proud of the ones that are get categorized as "just do it." Come up with an idea, just go do it, and those are just perpetuating across the business now. And lastly, reaching for excellence at the program execution level. This means identifying risks in advance, identifying opportunities, mitigating risks, and capturing those opportunities.
Program translates to enhanced customer satisfaction, better financial results, and advancing the development and retention of our employees. Now, one element of business excellence is strengthening and driving our strategic supply chain, and as you know, the COVID pandemic, during that pandemic, supply chains were less than predictable. We had limited availability, longer lead times, lower quality, and lack of predictability in general. We knew we had to do something about this and get in front of it. So we quickly realized that we needed strategically to look at reserves, putting material on order in advance of contract, placing more of those advanced contract, developing deeper relationships with our suppliers to give them visibility in our order forecast, and then combining like buys and commodities.
We also worked the design side to ensure that we were designing new products to account for this new reality of the supply chain. As a result, our suppliers have been getting better, and lead times are stabilizing, and quality is improving, and as a result, our revenue predictability has gotten better, and our financial results have followed that. So from the very beginning, DRS was a sensor house. That sonar that I talked about, not only was it a sensor, but it also had a lot of compute power. In order to do sonar back then, it had to have a monster computer. So today, from those beginnings, we've been able to expand our sensing capabilities. We did this in all domains and in all modalities because in order to sense the battle space, you need to do it in multiple modalities, and this is...
What I mean by this is, see what's in the infrared, see what's in the RF domain, see what's in the visible domain, and then some other sensors as well, and then try to make sense out of it. It's like seeing something and then being able to hear it. You say, "Oh, now I know what that is," 'cause you're sensing in multiple modalities. So we have that ability. We also have computing systems that are now orientated towards putting that capability of thinking on those platforms. But those, these platforms also have to protect themselves, and the threat is evolving. IEDs were prevalent in past wars, and now we see UAVs and drones and other loitering munitions, so these platforms have to protect themselves, so we have a series of products in those areas and solutions in that area. And lastly, power.
No platform can operate without power. On the sea, the more power a ship has, the further away it can fight, and in the South Pacific, further away is everything. Our power and capability and propulsion capability provide that flexibility. Jon will talk about that later. Okay, if you've heard nothing else today, it's that we're platform-agnostic. This slide embodies that, what we've told you consistently. This is a small sampling of some of the platforms that we support. We have products on nearly every U.S. naval ship and all service combatants. We have products on every U.S. submarine, every U.S. Army ground vehicle, nearly all U.S. Air Force platforms, some satellites, and many others. Think about what happens when the owners of these platforms come and they want something new, some new capability. Who are they gonna come to?
They come to us 'cause we're already on their platform. We're already solving their problems. They come to us and say: "How do you add this capability to this platform for us?" They know us, they know we can help them, and we've already - we're already performing for them. So as an example, I'll just talk about the Bradley Fighting Vehicle over there on the left. We provided the gunner sight for decades to the Bradley Fighting Vehicle, but today, that gunner sight has new technology in it. It can see farther, it has higher resolution, and it gives that gunner a higher level of capability. So we've solved our customers' challenges in new technology 'cause we're already there. We're already their partner.
Let me select a couple of places where I can illustrate our capability, a couple different product types on these platforms. We have a very wide, diverse technology base resident on these platforms, and I'll strive to say that we try to get as much capability on every platform. Let me focus on the helicopter platform first. As you're likely aware, in some of the wars, we lost a lot of helicopters and pilots and crew due to when they were landing in sand and dust. Pilots just can't see where the ground is. DRS took that on. We created a product, a camera that can see through the sand and dust, and those are being deployed now. That saves lives, and we're the only supplier of that technology.
For surface ships, we have a long history of providing displays and workstation and computer infrastructure. Think about what's gonna happen in the future. Those ships are gonna be cloud computing infrastructure. They're gonna have to think on the ship, not go back to the cloud in Denver. They're gonna have to do it right there. That's where that capability of our computers what that means. We're also making radars and communication equipment for surface ships. Wanna highlight that these examples show our focus to sense further, make sense of the battle space, protect what matters most, and provide power and propulsion on nearly all types of platforms. Okay, so the question of: How do we grow? So let me lay out the growth strategy here. First, this is a long-term growth strategy.
First, we have to start with our organic sales. Execute on the programs that are core to us, and then expand them. Second, increase the scope around those core capabilities and programs through our customer relationships and our partnerships. Those two parts of our growth strategy, part of the numbers that Mike is gonna talk about later. As an upside to those targets, we're gonna increase penetration in our markets, shaping future procurements, broadening customer awareness and platform presence, leveraging our Advanced Sensing and Computing and power and propulsion and our integration capabilities. And then, lastly, we're consistently investing in capabilities, technologies, the broad applicability, and it's in the form of investment, of organic investment in R&D, CapEx, but we also look at M&A, and we expect those investments will yield new opportunities of growth.
As I said, DRS's technologies and capabilities are aligned to the future defense needs. Now, back to that future concept where the unmanned platform is sensing and thinking to understand the battle space, to be autonomous. Sensing in one modality, say, infrared, is very common today, but now or add RF and others. That platform can see what it thinks is a tank. It can hear a radio that would be on that tank, and then some other senses that say, "Maybe it's a tank," right? When you start thinking about those different modalities, now these platforms cannot just. They're not just unmanned. Now they can be autonomous. Now, there's a difference between unmanned and autonomous. To be autonomous, this platform has to think, and it has to sense. That's where we are. That's what we're providing.
You could ask, "Why don't we do this today?" Well, today, our sensing systems on the battle space are all directed to one eye, set of eyeballs and one brain, and the human brain is what's doing the thinking, and it's gotta do the fusion of the sensors. Tomorrow, that's gonna be done in a computing infrastructure. So we bring multiple sensing modalities, almost uniquely, along with the computing and integration capabilities. This allows us to target new growth opportunities and shape the future architectures of these new modernizing platforms. So unmanned platforms is a target for us to make them autonomous. So our growth vectors for the longer term are, first, integrated solutions, putting our capabilities together and bringing out the best-of-class solutions together onto platforms.
Second, to move more significantly into the international marketplace, taking products and technologies that we've built for the United States, that have been qualified by the U.S., and bringing them and adapting them to international markets. And lastly, to expand into new markets where we have limited exposure today: missile seekers, unmanned platforms, autonomy, and lastly, to innovate in missile defense and space, point defense. We have technology in all of those areas, and we'll have a right to win. So let me conclude that I've never been more proud of this company than I am today. We have deep technological capability and a right to win and an innovative team. We're partnered with our customers and their success, and we're winning. Our company's never been stronger or better equipped to grow in these markets, and I thank you for your attention.
I'm gonna turn it over to Phil, Dr. Phil Perconti, for a discussion about our technologies.
Good morning, everyone. Thanks, thanks, John. It's really a pleasure to be here today to talk to you about DRS's continuing innovation and the roadmap that we're on technically as a company. But before I start, I'd really like to do a little table setting. You know, today's world events underscore the complexity of modern warfare. It's still becoming a problem, and it's evolving rapidly. Every day, it seems to be that new, the new character of war is changing. So as Bill talked about, and John alluded to, you need only look at what's happening in the Ukraine to see what's being deployed and to see, in large-scale combat operations, how things are really changing. Yet, of course, recent events in Israel and in the Red Sea remind us that you really can't forget the lessons of counterinsurgency.
So, as a result of these astonishing outcomes, our customers are rethinking their operational approaches to warfare, and they're adapting in real time to address these emerging threats. So today, I'm gonna talk about our R&D strategy and how it has us well-positioned to provide technology solutions for these evolving concepts and to capture new and emerging markets as a result. So peace through strength remains a fundamental axiom of national defense. Military power to stave off war against very capable adversaries remains key. But for our customers, deterrence is always the first line of defense. However, because modern warfare occurs over multiple domains, deterrence has to be present simultaneously over the air, land, the sea, space, and cyberspace. So this is increasing complexity, but despite that, safety and security remain paramount for all of us.
And so for our customers, their primary mission still endures: protect and defend what matters most, people, allied partners and nations, weapons platforms, and information or data. So as you're gonna hear, our customers want to see everything on the battlefield. They want to connect every sensor, and they want to understand what matters most by receiving secure, accurate, timely, and actionable information, both in the local tactical environment and at the operational and strategic levels via joint coalition networks. So as a technology company, DRS is intimately connected to advancing our customers' missions. Our understanding of the evolving character of war, how, where, and with what technologies wars are fought, combined with our rich intellectual property portfolio, allows us to align our R&D systematically and strategically to anticipate these emerging requirements from our customers.
We also help shape them, and then we also designed our strategy to meet them. So you see, the innovations occurring in today's fight are causing yet another threat-informed turn in our customer, customer's modernization strategy. And as I'm gonna show you, this ongoing pivot aligns well with DRS's core markets, our key technical capabilities, and our R&D strategy. So our R&D portfolio is balanced to meet our customers' requirements. We build their priorities into our strategy to maximize outcomes for them while maintaining our financial return. So our customers must always be ready to conduct military operations. So to support them, 80% of our R&D is aligned to existing markets, with near-term products that enable our company to give our customers the chance to enhance their war-fighting capabilities and effectiveness today.
Yet, as the former Chief of Staff of the U.S. Army used to say, "You can't modernize by buying more new, old stuff." So 20% of our R&D portfolio is aligned toward growth in new and emerging markets. What we're doing is supporting our customers' desire to buy more new, new stuff. We have a long history of performing research and development with our customers. We use collaborative research and development agreements to do so. We work side by side with our government engineers and scientists, mostly on pre-competitive technology, and this allows us to align our technology roadmaps with their modernization strategies while maintaining our intellectual property. These agreements are mutually beneficial. We give government partners access to our prototyping and manufacturing expertise, and we receive access to government facilities, test ranges, and test data.
This is a very different model than many of our peers in our weight class, and again, this model difference emphasizes revenue visibility, margin profile, and our annual IR&D spend. Last point I want to offer is that we conduct a rigorous R&D rules-based evaluation for our investments, and that includes when undertaking fixed-price development projects. So bear in mind, excuse me, not all fixed-price development is created equal, and we have a clear lessons learned on this front. But we do manage our risks appropriately, but we recognize that this is structurally part of the defense industry today.
So we are different, as Bill already spoke to the scarcity and the power of the mid- tier, and we place a premium on our innovation, our agility, and our engineering know-how to rapidly design and manufacture complex systems that must operate reliably under the most austere conditions. For example, DRS is the lead integrator on the SHORAD program. In record time, this system closed a critical capability gap for the Army to find, track, and defeat drones, rotary wing, and other fixed-wing threats. It took us just 19 months from the time the service generated this requirement to delivery of testable prototypes. In my world and in my experience, this is incredible and rare in the world of DoD. Also, we enable our customers to scale and modify their capabilities quickly.
We build our products using modular systems and open standards to provide interoperability across all military branches and programs. Open standards enable rapid insertion of technologies that are like full life cycle cost improvements, and this results in low-risk solutions for our customers. We also serve as leads on multiple standards committees and are leading participants in what's called CMOSS, which is an open standard for communications and systems and networks, and in SOSA, which is an open standard for sensors and embedded computing. As you've heard from both Bill and John, we are platform agnostic. So what does that mean from a technical point of view, is that we recognize that our customers want standardization and modularity, so we don't design our products specific to any one vehicle or platform. Rather, we design and engineer to meet specific mission requirements using best-of-breed technologies.
A couple of examples you can see on this chart include our cyber-secure mounted family of computers. This is the largest fleet of computers in the U.S. Army. MFoCS runs critical battle management software on a variety of missions and a variety of platforms. Another example not on this chart is our secure communications tactical data link products, which are installed on over 2,500 platforms worldwide, supporting the Air Force and Navy, both platforms and ships. Because we're agile, we integrate technologies across our four core markets to maximize financial returns, but we don't stop just at DRS technologies. Whenever it's appropriate, we partner with platform providers and other subsystem and technology companies so that our customers receive the best-in-class solutions.
Our ability to anticipate our customers' requirements gives us a unique opportunity to provide a diverse set of technologies for the most disruptive markets in our sector. For example, and you've heard this again from Bill and John, our R&D is well positioned to provide a variety of sensors for both unmanned and autonomous systems, drones, but also robots. I wanna talk a little bit about that. The Army wants to integrate robots into their armor and light infantry formations. To quote the commanding general of the Army Futures Command, he says: "Robots don't bleed. Our war fighters should never again have to make first contact with an adversary. We want the robots to do the dangerous things." There's a developing sense of urgency to get robots into the Army's formations now.
Of course, the Navy is already deploying unmanned surface vessels, and the Air Force is prototyping the Collaborative Combat Aircraft. My point in telling you this is that not one of these autonomous systems can function without onboard sensors, computers, embedded edge processing, and advanced networking capability. For DRS, from mobility sensors to intelligence, surveillance, and reconnaissance sensors, to electronic warfare sensors, to sensors for platform protection, to secure communications, all with embedded AI and compute, DRS has a competitive sensor technology for every autonomous mission. Also, as drones proliferate on the battlefield, we expect our counter-drone technology to proliferate as well to protect what matters most. The Joint All-Domain Command and Control concept will require pervasive network computers and sensors on unmanned space, manned platforms, and unmanned platforms, sorry. I'll have more to say on this in a little bit.
Of course, as you'll hear later, our naval power projection technologies will provide a significant increase in shipboard power on demand from electric drive and energy storage technologies. Just gonna touch a few minutes on what DRS can provide the quantum technologies, information technologies market. The military is interested not only in quantum computing, but it's also interested in quantum sensing for measuring gravitational and magnetic fields to detect the presence of threats, and quantum clocks that enable extremely precise navigation and timing for days on end without GPS. So for DRS, our target market is lasers for quantum information technology. As hard as it is, and as uncertain as it is to build a quantum computer, there is one thing that is certain: You can't build a quantum computer without lasers. So DRS's infrared laser technology will disrupt the quantum technologies market.
Our ability to manufacture photonics modules that contain all the laser colors needed to realize these advanced applications in small, easy to control and package, is gonna revolutionize the way these quantum systems are engineered... DRS has a diverse set of technology differentiators across our four core markets. I'd like to give you a few examples of the technology that sets us apart. So our receivers and tuners permit our customers to hear the smallest signals, even in the presence of interference or RF jamming. With our technology, if you emit, you can be heard, and you can be located. Signals, electronics, radar, tactical radios, cellular, 5G, Wi-Fi, doesn't matter. We can hear just about everything. We're experts in RF design and the leading COTS RF solution provider to military forces, intelligence agencies, and prime contractors worldwide.
Also on this chart, our IR sensors are essential if you wanna see in the dark without being seen, or if you wanna find threats without turning on a radar. That's our sensors see heat instead of light, and they work 24/7. That's why our uncooled IR technology is ubiquitous. It's used by individual soldiers, used on ground vehicles, drones, helicopters, even in space. These uncooled sensors are designed for our customers' highest volume applications. They want the world's best-performing uncooled sensors at the right price point, with very low size, weight, and power consumption. And we're delivering, and we're using our R&D to continue to improve our manufacturing processes, which is increasing our margins. Last thing I'll highlight on this chart is our radar technology. Our electronically scanned radars offer some of the highest performing detection and tracking quality for applications that need modest price points.
We do this because our radars incorporate commercial power amplifiers that are military-grade, and were combined with software-defined back-end processing. Our radars provide exceptional situational awareness and platform survivability as well for our customers. We provide the tracking accuracy needed to defeat drones, and we're the backbone for vehicle active protection systems. Recent R&D has allowed us to push these radars into adjacent markets in the maritime domain. Believe it or not, radars don't like seagulls. Turns out that birds are one of the leading causes of false alarms. But it makes sense when you think about it. Birds can look an awful lot like drones to a radar. But our embedded AI tracking and clutter mitigation algorithms are more than capable of finding drones, despite the best efforts of the birds.
So DRS's existing technology exceeds our customers' expectations for many standalone applications across multiple domains, as you can see on this chart. One example is our BlackLab sensor. BlackLab is the next-generation intelligence sensor that can rapidly detect and locate a wide range of RF signals and supports real-time analysis of the signal environment. Now, BlackLab is demonstrating capability in an adjacent market for passive RF sensors that detect and locate drones. So unlike a radar, which actively transmits a radio frequency, RF, for detection, BlackLab is only listening for RF signals. By listening instead of transmitting, BlackLab can protect what matters most by finding loitering munitions, surveillance-gathering drones before they can find the operator. So for time, I won't talk about the other technologies shown on this chart and the competitive advantages that each one offers.
Rather, I'd like to discuss with you an ambitious technology demonstration that we're undertaking to connect and integrate many of these technologies on individual platforms. I mentioned briefly that our customers are modernizing for Joint All-Domain Operations, and Joint All-Domain Command and Control, or JADC2, is a critical emerging concept. JADC2 will connect and manage sensors, platforms, weapon systems, and provide actionable information to decision-makers. It's intended to be decentralized, to be resilient, and to provide a common operating picture for all the services. As I said, see everything, connect everything, understand everything, and protect what matters most. But to realize JADC2, our customers need a sensing network or a layer on every platform. JADC2 must start on the platform. So we're starting with the convergence of our sensors and our computing.
We're embedding artificial intelligence algorithms into every sensor and sending back processed data and information from our RF sensors and radars, and data and imagery from our IR sensors. And we're using our advanced networking compute infrastructure to build platform data fusion processors for high-throughput processing, again, at reduced size, weight, and power. We're building this digital architecture specifically designed with open standards to handle high-throughput, high-fidelity video and sensor data with low latency and efficient processing for AI algorithms, and this is gonna enable faster, more accurate decisions at the battlefield edge. And we're designing it to enable connection of sensors found on every platform into the JADC2 network. Scalable sensors and software and architecture that can ride within existing network stacks as an applique for existing platforms and be customized for mission, capability, and price point. This is truly a JADC2 enabler...
Okay, so I know I've thrown a lot of technical jargon at you during this talk. It's, it's really my inner geek speaking, it's hard to control. So what I'd like to do is end my talk by showing you the impact our technology has in support of our customers. You're looking at a representation of one of DRS's crown jewels. That's our high-performance cooled infrared sensors. DRS's infrared sensors are a national treasure. For over 50 years, we've delivered the highest quality IR sensors, which our customers rely upon for their tactical sighting systems in their most important weapons platforms. Our sensors provide situational awareness and detect adversarial threats at the longest ranges possible. So the smallest yellow box represents the instantaneous field of view for a second-generation sensor.
Second-generation sensors are found on every U.S. combat platform in the Army, and DRS has been the major supplier for those sensors for over 30 years. Second-gen started in the early 1990s, and with the end of life approaching for second gen, we were funded by our customers to build third-generation high-definition IR sensors for platform upgrades. We see the market opportunity to replace many of these second-generation sensors over time with third gen. As you can see from the second yellow box, our high-definition third-generation sensors provide much wider fields of view for greater situational awareness at longer ranges. The image quality is also much better than second-generation sensors. As John already said in our foot stomp, DRS is the only qualified supplier of third-generation sensors for the U.S. Army. Our third-generation product is mature, and low-rate initial production is underway.
As our customers now pivot their acquisition strategy, we expect to see increased market penetration for third gen into future programs like XM30 and the Future Tank. So in preparation, our third-generation IR&D is now focused on increasing margins via manufacturing and process improvements. One final word on the future of warfighting, which will require a new capability, and we're working with our customers and receiving some funding to provide a new capability that provides thermal imagery that's panoramic, highest resolution and image quality possible for what's called a persistent infrared surveillance mission, and you can see that in the largest yellow box there. So we're developing what we call Ultra-Infrared. It's being designed specifically for rapid wide-area search to find adversarial threats. It's embedded with AI, and it's the, it's using automated detection of threats.
And we are very, very excited about Ultra IR and its potential for growth in new and adjacent markets. So in summary, at DRS, we are enabling our customers to see everything, to connect everything, to understand everything, and to protect what matters most. Bottom line for us, our R&D strategy is designed to maximize our financial return. So that's it for me. There's a break now. After the break, you'll hear from Jon Miller about another one of DRS's crown jewels, that's naval electrification. Thanks!
... You know? All right, folks, I'm gonna give everybody one more minute, and then we're gonna get started. All right. So I, I have the luxury of being the last person standing between you guys and Mike's, Mike's numbers, so I hope I can hold your attention here for a little bit. So thank you, and welcome back from the break. I'm gonna touch on four topics and a handful of charts here. I'm gonna give an overview of the Naval Power Systems business. I'll talk about the electric propulsion technology that we have, and then I want do a little bit of a deep dive into the Columbia program, both what we do in Columbia and also where we are in the, in execution.
Then last, I'll talk about the new facility project that we announced in our Q4 earnings call a couple of months ago. All right, so I'll just briefly touch on, in the upper left-hand corner of the chart, we really are part of the story that Bill told, which is a collection of businesses that were acquired in the early 2000s, and then after Bill took the helm, several years later, we basically transformed into the business we have today. We're in four locations, soon to be five. I'll talk about the fifth in a minute. We have 1,400 employees, and I guess the point I would like to make: we've heard a lot today from various people about our workforce and how proud we are.
The thing about the thing I would characterize our 1,400+ people is, when you walk into our factories, you can tell they are, they're sort of a lean, continuous improvement-type culture. Our facilities are very clean. You can eat off the floors. They're very organized, and you can see the sort of the foundation of the patriotic pride in what we do, supporting sailors and U.S. Navy and other navies. So I also wanna point out that the leadership team, John has talked about that a little bit across DRS, but the leadership team in Naval Power Systems, exceptional team. We've built a lot of bench strength over the last few years, and so we're really confident about our ability to execute going forward. So a little bit about the business.
Believe it or not, we actually do more than the Columbia program. We get a lot of press for that these days, but we do everything from generating, creating the electricity on the ship to power conversion, distribution, and everything associated with power, right out to the end user, whether it's powering sensor systems or weapon systems or whether it's a motor controller or an interface to a mechanical device on the ship, like an elevator or a pump or a valve. So if it's power on a ship, we do it. We do a couple of unique things around that. We have a business that specializes in cooling equipment that both cools our equipment and also does refrigeration and HVAC on ships.
We do gas turbine packaging, which is, if you think about looking out your airplane window at the jet engine and making that, adapting that for shipboard use, adding all the controls and monitoring, putting it in a giant box and making it a ship engine, we do that. We do that for both Rolls-Royce and General Electric. We do energy storage, which is fairly new. We're the supplier for the U.S. Navy right now for energy storage. It's also called an energy magazine. I'll touch on this a little bit more in a minute, but you know, you think about the up-and-coming demand for surges of power to support large sensors and directed energy weapons. That's the purpose of that. And then we also do nuclear instrumentation and controls on the nuclear submarines and aircraft carriers in the U.S. fleet.
So we are actually. We have product on every single U.S. aircraft carrier, submarine, and surface combatant. So the thing about that I'll touch on with the customers, it's in some ways a broad customer suite, but our biggest customers are the shipyards. We also deliver directly to the Navy in some cases. What's important about the shipyards to us as primes, as I described, we generally build big products. So the ships get built around our products in a lot of cases. When you think about large electric propulsion, you think about switch gear, things like that. Big switch gear cabinets that, you know, would fill up this room for something like an aircraft carrier.
So we've become very close partners with our primes, because not only is the technology important, but our ability to deliver on time and not mess up their shipbuilding schedule is also very important. So we're often critical path suppliers. So through that, we, coming through a lot of challenging programs over the last several years, like Columbia, we've really earned the right to grow in our market space. We've turned those challenging programs into very strong relationships. I'll cite one story from the U.S. Navy Nuclear Reactors Group. Change of command, the outgoing admiral, in talking about his career, cited the collaboration with us on Columbia, getting through implementing this new technology for submarines, as one of the highlights of his eight years of tenure in the position. That's the kind of relationship we take great pride in.
It's the kind of relationship that we work very hard to earn and keep. On the next couple of slides, I wanna talk a little bit about electric propulsion. So on this one, if you'll just look at the right-hand side of the slide, the thing I want you to take away from it is there are a lot of dedicated engines. They may be gas turbines, they may be diesel engines, but they're dedicated to a purpose on the ship. So the gas turbines, for example, in this, in this picture, they drive through reduction gear, they drive the propellers, and that's all they do. The diesel engines, they're hooked through generators to provide power for ship service, for sensors, for weapon systems, et cetera, on the ship.
If you go to the left side of the chart, what you see is all the diesel engines, all the gas turbine engines, all connected through generators to an electric bus, so that all of the energy being created on the ship is converted to electricity. And now you have that electrical power to do anything, from propulsion to weapons, to whatever you wanna do on the ship. So with that, I wanna flip over to talk a little bit about why we care about about electric propulsion. So a couple of key examples I think that make the point of the value of electric propulsion. Some of the people that spoke before me talked about the sensing systems and the growing importance of them, if you think about radars on a ship.
So a radar technology today uses a lot more power than the radar technology did years ago. And if you look at radars in general and their progression path looking forward, they're gonna continue to require more and more power. And that's because they want to sense things that are further and further away, and they wanna sense more things at one time. If you add on top of that the directed energy expectations coming to ships these days, whether it's lasers or microwave, what's driving that is if you look in the news, and Phil touched on this a little bit, if you look at the news and you see that over in the Middle East, we're basically shooting down RadioShack drones with multimillion-dollar missiles, that's really unsustainable for our, for our Department of Defense.
So they're looking at putting these high-energy weapons on ships to use energy bursts to take out these, these targets. So these energy bursts, they get their energy from the electrical distribution system on the ship. So the ability in an integrated electric propulsion system on a ship to basically put the energy wherever it's needed, whenever it's needed, is becoming an imperative in the world that we're in, with the advent of all the technologies around us. As John said, really, the more electrical power you have available on a ship, the further away you can sense from and fight from, and keep that ship further from harm's way, in an environment where the adversary's reach is getting longer and longer and longer. So this is really a capability on a ship that is becoming an imperative.
So the other things that are, maybe a little less obvious, maybe they're obvious, but when you remove all that mechanical equipment from a ship, you remove the reduction gears, the lube oil systems that go along with that. You also remove a lot of the noise from the ship. You can imagine that's important on a submarine, it's also important on a surface ship. You also have the ability in an integrated system to turn those engines on, operate them at optimal speeds, and turn them on and off, depending on how much power you need at any given moment. And significantly increase your fuel, your fuel efficiency, the range of the ship, and the operating cost of the ship.
So you have the fuel savings, but you also have the fact that now you're spending a lot of time with some of your engines turned off, and so you reduce the maintenance need for the ship. So you've increased the availability of the ship. So there are many advantages of transitioning over to electric propulsion. With all this as a backdrop, kind of what electric propulsion is and the benefits of it, I wanna talk a little bit about what is special about our electric propulsion from DRS Naval Power Systems. So, electric propulsion is a very mature technology. It's been used on commercial ships for years to basically reduce operating costs and reduce their costs in a commercial industry. We've taken that technology and pushed it really hard in a couple of key directions that are important to the Navy.
First of all, we've invested a lot of calories in what we refer to as power density. How do we make that motor as small as possible with the, with the most power output as possible? You can imagine that's important when you start thinking about putting a motor on a submarine or on a ship, where there's a lot of spatial constraints. Getting the most torque out of the smallest packages becomes more and more critical. The other key element is making it quiet. If you think about, if you think about a motor that fills up about half of this room, and it weighs over 150 tons, and think about standing right underneath that motor, and it's running full speed. So you know what your car engine sounds like when it's running full speed?
Think about standing under a motor that large, right over your head, it's running full speed. The inside's turning pretty fast. It's turning a shaft pretty fast. And you stand there, and you listen, and you hear water running in a sink off in the distance somewhere, or you hear a desk fan running nearby. We have the ability to make our motors that quiet. That's a, that's a highly sought-after trait in the technologies for the platforms that we're supporting with navies around the world. The third thing I'll say about our technology is, we have come through the testing rigor of the U.S. Navy's nuclear reactor group, and everybody in our Navy, as well as allied navies, know that it is the most comprehensive, most rigorous test environment in all of the maritime industry.
We're the only ones that have this pedigree on our technology, and not just our motors, but our drives, our power distribution equipment. Most of our power products have come through that program. So now let's talk about Columbia. Talked a lot about motor and propulsion. We actually do a lot on the Columbia that reflects what we do on a lot of other ships, really. So obviously, we do the propulsion system, but we also do the instrumentation and controls for the nuclear plant and the propulsion system. We do power conversion and distribution for everything on board the submarine. We do motor controllers that interface to mechanical equipment on the sub. We have about 100 motor controllers of various shapes and sizes on every submarine. We also do cooling equipment.
We do the cooling technology for our own products, as well as refrigeration and HVAC. And then, in addition to what Naval Power Systems does, my sister business, Naval Electronics, that's part of the Advanced Sensing and Computing segment, they do the computing framework for combat systems and battle management systems on Columbia. So we have a lot of content here. So now I wanna transition over to the program itself a little bit, and talk about sort of where we are and some of the recent things that have really enabled us as a business to start making smart business decisions. So a lot of you are aware, late last year, we received a $3 billion contract for the rest of class for Columbia, for the propulsion system. That was preceded the year before by a contract a little over $1 billion.
So we're under a firm fixed price contract for the entire class of Columbia submarines. So this is enabled by the fact that Columbia, well known to be the highest priority program in the U.S. Navy. So the Navy, the government, they're confident that this program is gonna run its course as planned. We had to earn our right to get a contract like this. We're the only business that has a contract like this. We're under contract for shipsets than our customer is under contract for. A pretty unique circumstance. And we earned this through the confidence that we gained through the really hard work of doing the development work in the beginning, and then producing and testing the shipset and delivering the shipset ahead of need date on Columbia.
Because of all that, we basically now have very clear visibility all the way through 2035 of our revenue, our margins, and our cash for Columbia. This really enables us to make very informed investment decisions, and it's really critical to the way we're shaping our business as we look forward. We can take our lessons learned from all this, since we get the advantage of any investment we make in this long-term firm fixed price contract, we can take these lessons learned and apply them to future submarines like SSN or surface ship programs. I think as a side note, it's important to understand how this compares to a normal contracting cycle within the Navy shipbuilding industry.
Normally, what happens is you get a contract for one ship, maybe two ships, and when the customer comes to you for the shipset, basically, the value of that next contract is based on your actuals from the contract that you're working on now or just completed. So the industry in that scenario is not really motivated to invest their own money to get cost out. So this is part of the win-win for all players here on this program. The Navy and the shipyard gets the benefit of contained risk, and we get the benefit of being able to invest our money and know we can get returns in the program over the next 10+ years. So with that, I wanna flip to the chart that's got a couple of dollar signs on it.
Mike doesn't really let me talk about financials very much, but I got one slide that's got a couple of dollar signs on it. I'm gonna try to steal as much of his thunder as I can here. So, what's important about this, with the sort of program backdrop that I just talked through, is if you look at the numbers, sort of left to right, what you see is the revenue numbers grow over time, and that's really a function of the escalation factors that we negotiated in the contract. And that was a part of, you know, us agreeing to take on the risk from the customer to contain their risk. And we came through the negotiations in a healthy place, I think.
If you look at the margins, there's really two things going on driving the increase in margins. One is, as you saw on the last chart, you know, we've come, we've for quite some time now had the risk of development and development testing retired. We also have the risk of developing the shipset, getting through production testing, retired. So all the engineering work is really behind us, and now we're into production. The other thing that the increasing margins reflect is, we're able, in this contracting scenario, to negotiate strategic agreements with our supply chain, just like General Dynamics has done with us. We're able to do that with our supply chain, and we're able to be much more strategic about our manufacturing efficiencies inside of our factories.
You know, we can take -- we can look at all shipsets in front of us, and we can make business decisions about, "Hey, we may wanna lean in and build shipsets worth of this subassembly to get a lot of efficiency out of it," even if we need to manage our cash to be able to do that ahead of the cash that's coming from the customer. Our ability to do that allows us to manage our cash, it allows us to manage our margins and make very informed decisions about all of those financials. So next, I wanna talk about the new Charleston facility. This is really completely made possible by the Columbia-class contract. It's fully funded by the Columbia-class contract.
We chose the Charleston area because if you look at demographics in our industry, there are resources available in Charleston, but their utilization by the Navy is very low at the moment. If you've been around for a while, you may remember there used to be a Navy yard there. The Navy presence there is less. So the U.S. Navy was very happy with us choosing an area where we're not right next door to a shipyard competing with them, that type of thing. I would even say they sort of encouraged us to look there. The facility itself, primary reason for the specific location in Charleston is we found a site that is ready for us to transform on a fast enough pace to support our production plans for Columbia.
We plan to transition over shipset 5, the final assembly and integration testing for the motor. What's made all this possible is really, really the fact that we're insourcing two layers of supply chain for building our motor. What's important about this is, we're able to basically eliminate the various levels of overheads from those businesses, the oversight associated with those different businesses, and the inefficiencies from the geographical separation from those businesses as well. So think about taking something that's previously been spread out across multiple businesses, bringing it all into one business, all under one roof, and consider the efficiencies you get from that. There's no way we could have done this without best in class.
So, this morning, somebody asked me about, you know, "How long has this been in the works?" Rest-of-class contract was the milestone we had to get through in order to commit to something like this, because that's how it gets funded. So we needed a facility with capabilities we don't currently have, so, and capabilities that were not easily added to our current facilities. So think about larger cranes, larger, higher hook heights. Think about higher power utilities available. Think about a barge slip, because what we're delivering out of this facility to a shipyard is far too big to consider putting on a road, so we, you know, we have to be on the water. So these are features that we, we didn't have anywhere. And from a capabilities perspective, John talked about some of the unique capabilities across our sites.
He mentioned the tank in our Fitchburg facility, where the large motors or the stators are made. He mentioned high power testing in our Wisconsin facility, where we can test our drives at full power. This facility will allow us to do full power testing of a fully integrated, complete propulsion unit for a submarine or a surface ship. And nowhere else in the world can you do that right now. So this is gonna become a national asset as we come through completing the facility and getting it online. So I've talked about sort of the business case for why we did this, and how it's paid for, and how we're getting our returns. I wanna touch on the opportunity that it also brings us.
So we've, to the best of our ability, we've held hands with the Navy as we've come through the process of specifying the building, doing our concept design for the building. And we've talked about not only the capabilities the facility needs today for what we wanna do now, but we've also talked about potential future capabilities. And when you put that in the context of what's going on with the Navy and submarines right now and the industrial base, I'll revisit this again, I think, on my last slide.
But when you think about what's going on in the industrial base in our industry, where the government's trying to push funds into the industrial base to increase the throughput of our industry, this facility positions us to get a lot more of that funding and to expand our capabilities beyond what we're planning to do right now. And it's great to have the Navy's interest in what we're doing. They need us like we need them, and the partnership continues to strengthen. So I'm gonna wrap up with this last chart, and I guess the three points I wanna make here is, first, on the left, you see a depiction of the electrical power available on a platform comparing traditional propulsion systems to an integrated electric propulsion system.
What you see there is, in a typical scenario, on a surface combatant ship, an increase of fivefold the amount of power available. So based on what I talked through before and the significantly increasing need for electrical power on ships, this is something that we believe it's not only an imperative, it's really, it's inevitable at this point in time. If you look around the globe, South Korea, Japan, Italy, even China, if you look at their shipbuilding plans, their next large surface combatants are all fully integrated electric propulsion, with the kind of electric power available on their platforms, shown here in this, in this picture. So at this point, we've kind of gone from compelling to imperative to it's really inevitable, and it's coming soon.
The middle of the chart really talks to what I mentioned a minute ago, which is, the submarine community is sort of the poster child for this, but it's, it's really broader. If you look around the globe at shipbuilding plans, all the navies, their, their defense budgets are creeping up, and a lot of it is, is in the Navy arena. But right now, the U.S. Navy is trying to go from 1.3 submarines a year to more than three submarines a year, plus AUKUS. And so that's driving a lot of the industrial base funds that are being pushed into... not just into the shipyards and the primes, but being pushed through the primes into the mid-tier folks like us.
Last, I'll just kinda revisit what I mentioned a minute ago, which is, we have a very broad, very broad exposure across navies, Navy ships and Coast Guard ships, and that's our base. But if you look at what this scenario that we've come through with Columbia-class investment in a new facility, if you look at the opportunities it brings us, it not only brings us an opportunity to capture more industrial base funding, it also strengthens our position to compete on any ship program that has an integrated electric propulsion system anywhere around the world. Because we'll have unique capabilities, unique facilities, unique testing capability, and we also have a one-of-a-kind pedigree behind our technology that's proven in the environment that we're gonna operate in.
So I guess I want the primary takeaway to be here that, we, we believe this is imminent, we believe it's barely getting started, and we believe we're in a unique position. I also believe that as Phil and John both talked about in the unmanned world, as unmanned platforms become more prevalent, we believe that electric propulsion is gonna be key there as well. When you think about, unmanned underwater vehicles especially, electric propulsion, we believe, is gonna be a critical element of those platforms. So with that, I'm gonna wrap up and turn it over to Mike Dippold, our Chief Financial Officer.
All right. Thanks, Jon, and thank all of you for coming out today. As Bill said earlier, it's great to see such a full room, and maybe more importantly for me, see a lot of familiar faces. I'm taking that as a sign that we've done all right here in our first year of operating as a public company... and appreciate your commitment and your support here. So thanks, everybody, for coming out. The financial overview, the financial presentation here is gonna have a couple of themes that are gonna be repetitive, and really, those two key themes are gonna be visibility and confidence.
And what I mean by confidence is confidence in our ability to execute to our commitments, confidence in our ability to grow revenue, and our confidence in our ability to have that revenue expanding margins and expanding profitability. And lastly, maybe most importantly, is the confidence to continue to drive share price increases and enhancing shareholder value. Okay, so that confidence is really underpinned by our past performance. Our past performance plus what you just heard from the previous speakers in terms of our foundation for future success. We have demonstrated the ability to grow revenue historically.
Since 2018, we've had a 5% organic revenue CAGR, and that has been really achieved through our ability to defend our incumbent programs, expand that scope on those incumbencies, move into adjacent and rapidly evolving markets such as Force Protection, and continue to grow our position in the Navy, which we've said today is now our largest customer. Over that same time period, we've driven our EBITDA up 12% CAGR over that time period, which has grown our margin by 350 basis points. That was achieved through solid execution through the transition of some of these development programs into production, and taking advantage of our competitive position in the marketplace, starting to realize that we had technical differentiators that could command a higher price.
I'll point out also that we accomplished this EBITDA expansion and this margin expansion in the face of a tough supply chain, inflationary pressures, against what was predominantly a fixed-price portfolio for us, so we take that as even better credibility in our continued ability to expand margins beyond where we are today. The combination of these two led to an adjusted net earnings increase of over 20% since 2018, and maybe more importantly, all of that has come with positive cash generation. We think this is where we differentiate ourselves from a lot of our peers in this weight class, is that cash consistency and cash conversion.
In 2023, we kinda got back to what I call our normal conversion rate in that 80%-90% range of adjusted net earnings after having a couple years of just the supply chain, lack of predictability, extending lead times that impacted our conversion in the 2020-2022 timeframe. I do believe that you'll see this type of consistency prospectively, and we expect DRS to continue to be very efficient in our cash conversion of our profit. I mentioned the themes of consistency and visibility, and it starts right here with our bookings and backlog profile. We have a strong business with healthy customer demand coming from, really, from three key themes that you've heard throughout the course of the day.
The first is alignment with the needs of the Department of Defense, especially as there's an emphasis on modernization. Additionally, we have an agile and innovative culture that's creating real-time solutions for real-time and emerging threats, and we have that platform-agnostic approach, which is maximizing our product reach. When you look at the bookings, we are conservative in what we call a booking. I wanna be clear on that. So we do not count a booking in our financial statements until the award has been won and the funds have been allocated, so it is the most conservative definition of a booking that you can have in the industry. So with that as the backdrop, anything over a one-to-one book-to-bill ratio is going to be a foundation for growth. That's kinda how we view it at DRS.
You can see over the past couple of years, we've been well in excess of that target, including the past two years, where we've done a 1.2-to-1 book-to-bill ratio. This is really creating that foundation and confidence for future growth. Maybe more importantly than the raw number from the bookings perspective of that 1.2-to-1 book-to-bill ratio is the diversity. We keep talking about the diversity of the DRS assets, the diversity of the intellectual property, and that's very important as we look forward. No one program in that bookings number is more than 10% of our overall bookings.
This is giving us a lot of that diversity, so as the budgets tighten, as there's different procurement decisions made, we still have the confidence that there's a holistic demand across our whole product portfolio that's going to foster future growth. I think you can kinda see where that resides as you look down to the backlog. So our backlog is approaching $8 billion, which has been a 24% annual growth rate since 2018. And although that 24% growth rate in backlog is impressive, where I'm really proud and confident in that it's going to propel our future growth is if you focus on the funded backlog itself. That funded backlog has grown at an annual growth rate of 8%, including 20% in 2023 alone.
Unlike our total backlog position, there's that large unfunded piece that's dominated by the Columbia-class program. The funded backlog isn't dominated by one program. It has that same diversity that I just mentioned on the bookings side, and that's what's giving us the confidence and the springboard for our future revenue growth. So if you put all this together, our backlog position, it's the limited recompetes we have on our incumbent technologies for the next couple of years, our technology differentiation, you can see why we're starting to get optimistic in terms of what the future holds for DRS.
Before I get into the future, I wanted to stop here and just talk a little bit about our compensation plans as we're relatively new to the market, and trying to articulate to everybody that the alignment between what you're looking for, which is the shareholder and share value enhancement, and how we compensate our employees at DRS. So if you look at the chart here, the first four metrics are metrics that we include in our short-term annual compensation. The first two, bookings and revenue, are geared to ensure that we're driving growth at the top line. From a bookings perspective, we expect that book-to-bill ratio to be greater than one, continuing to foster that foundation for growth.
On the revenue side, we expect to continue to expand revenue and drive you know, a growth rate that's in line or better than peers. While that revenue's growing, we expect to see growth in Adjusted EBITDA and also margin enhancement, and we project that there will be an efficient conversion of that profit into free cash flow. That's how we're compensating from a short-term perspective. The other two metrics are geared towards our long-term incentives, that are three-year metrics, and that's the adjusted earnings per share. We anticipate that we're gonna have a three-year growth profile in our EPS, and that's how we're incentivizing our employees.
And in doing so, with all those investments that we're making to drive that growth, we included ROIC as a metric as well, to make sure that those investments are yielding the returns above and beyond our weighted average cost of capital. So collectively, that's how we're incentivizing the employee base. And there's one other metric that's not depicted here, but it actually is the largest allocation of our compensation for the long-term incentive structure, and that's relative shareholder return. And we think that's important because we wanna be in a situation when you win, we win. And we believe these other six financial metrics are going to set the foundation to do that.
If we can drive this and achieve these bonus targets, then we're gonna drive shareholder return and then drive that relative shareholder improvements versus our peer set. Maybe one last point on this chart is maybe more importantly than the metrics is how and the depth of the organization in which these are the key metrics that the employees are focused on. This is not just for the leadership. We push these metrics down into the organization so that everybody's rowing in the same direction. We wanna make sure that everybody has the same goals in mind because we believe this is what's really gonna maximize the shareholder value. So with that, let me get into the three-year projections.
Our future projections are really a continuation of the success that we've demonstrated to date, and, and they're underpinned by our consistency, our predictability, and, and our commitment and ability to deliver to the commitments we put forth. As such, we're presenting the following, financial metrics. From the revenue side, we are anticipating a 4%-7% annual growth rate through 2026, all of which is organic. So we're gonna talk about capital deployment, in a bit, and that will be additive, to what you see here. In addition, on the profit side, you can see that the Adjusted EBITDA is gonna grow at a pace faster than revenue, driving 250 basis points of margin enhancement, and we believe that'll be around 14% by 2026.
As I've mentioned earlier, we expect that, that profit generation and that profit growth to come with efficient cash conversion over the time period. Our conviction in, in these metrics is really predicated on our past performance being an indicator of future success, our record backlog position, our alignment with the needs of the war fighter, and the elevated threat global threat levels. The combination of this and, and DRS's kind of technology differentiators provides a path for strong and visible revenue growth, clear and tangible path for margin expansion, and efficient cash conversion of that profit. Let me jump into each one of these metrics in a bit more detail, starting with revenue. I just mentioned that the, the, the past is the indicator for success. It's the best way to measure, and, and that's where we're feeling confident here.
We have demonstrated a 5% CAGR since 2018, and that consistent execution underpins our confidence prospectively through 2026. In addition to the past performance, we have a record backlog position, a global threat environment that's driving the need for modernization, limited near-term recompetes on our incumbent programs, inflation recapture. I'm gonna pause on that one for a minute because that, that's a, a key, a key point for DRS in both the revenue growth and the margin expansion, in that what we've seen in 2022 and 2023 is we have a fixed price portfolio, and as we've seen increases in pricing for materials and labor, that has been a headwind to margin. As we start to move forward into 2024 and 2025, the revenue contribution that's gonna be yielded is coming from programs that we've been able to reprice. We put that higher material cost into our proposals.
We put the higher labor cost in. So what was a headwind to margin is now gonna be a little bit of a tailwind to the revenue and revenue growth confidence. And lastly is supply chain stabilization. This is another tailwind to us because we're finally starting to see predictability into the supply base, and this is giving us more confidence in our ability to generate revenue and see that revenue visibility. We also see other opportunities to penetrate adjacent markets and to grow market share, both domestically and internationally. I think John Baylouny went through this earlier. And that's those are the tailwinds that we see and are giving us the confidence to continue to drive this growth rate in that 4%-7% over the next couple of years.
While we're optimistic, there are certain headwinds as well. As Bill mentioned, the overall defense budget is flattening, and despite our confidence in the alignment of the needs of the war fighter, there is gonna be, you know, procurement trade-offs, and that's a risk for us as we look forward. Collectively, though, we see the positive tailwinds, and the macro environment outpacing some of the concerns, and that's what's given us high confidence to execute the growth path that we just laid out. With the solid understanding of the top line, I just wanna move to EBITDA. As I mentioned before, EBITDA, we expect to grow 250 basis points to about 14% over the three-year period. This is really going to be attributed to three distinct levers.
The first of which, Jon already stole my thunder and talked about Columbia. But that is the largest and most impactful margin expansion lever that we have going into the next couple of years. And I'm gonna reiterate what Jon said, because in Columbia, if you think about our 2022 margins and our 2023 margins, the majority of the revenue coming from Columbia, which is our largest program, was coming shipset 1 shipset 2. And shipsets were bid before the design was complete on the platform itself, before the testing had been complete, and all of that rigor put into making sure we had a quality product. They were also bid before the inflationary shock in terms of material pricing and labor pricing. So that was what we've been dealing with from a margin perspective.
Now, as you move to 2024, 2025, and 2026, that revenue contribution is going to move from the newer and more recently negotiated ship shipsets 3, 4, and 5. Those were negotiated after the design was complete. Those were negotiated after we've already proven from a test and quality perspective that we had the answer. They were proposed after the inflation adjustment, so the new material costs were included in there, the new labor costs were included in there, and has an increase in kind of escalation built into the shipsets. so, I'm gonna foot stomp what Jon said one more time, which is, we are executing the same scope of work shipset 1 shipset 2 as we are respectively. It's just at a higher price point.
This is what's giving us high conviction in the ability to deliver the margin expansion, which should impact overall DRS's margin, EBITDA margins by 155 basis points. The next lever is similar in nature. We have other development programs that are moving into production, similar to Columbia, and also included in this second bar on the chart here is also that inflation recapture. As that headwind that we've experienced on our fixed price portfolio for increased labor and material costs subsides and is recaptured in higher pricing, we're gonna see that pressure alleviate, and that'll drive another 35 basis points of margin expansion over the period. And then lastly, operational leverage. We talked about the confidence in revenue growth.
We see the backlog, and this revenue growth will outpace our G&A costs, and that's what's gonna drive that additional profitability. I'll point out here that netted against that 60 basis points increase is our expectation to maintain the internal research and development at about 3% of sales. That is not where you're gonna see the operational leverage. We're committed to investing at that level, as we think that's important to continue to advance our technology and maintain our market-leading positions. The other lever we have and key value driver sits on the balance sheet side. We have a healthy financial position, and we also have this solid free cash flow conversion that I mentioned earlier.
Over 2023, we averaged about one turn of net debt compared to EBITDA, and we also mentioned, we expect to continue to drive efficient free cash flow in the 80%-90% range of adjusted net earnings. The combination of these two is gonna offer a significant opportunity to deploy capital in strategic ways to enhance value. These investments are gonna be focused on growth, whether they're organic or inorganic. And we look to deploy about 75%-100% of our annual free cash flow in these investment opportunities. From a capitalization perspective, we'd feel comfortable taking these investments to get us to a leverage point of about two as we look forward. With that background, let me expand a little bit more into our capital allocation framework.
I mentioned that we're growth-oriented, and what I mean by that is, we believe we have a unique, diverse foundation of technologies, of programs that offer us significant avenues to deploy capital effectively and drive value effectively. This could be the form of organic investments that we put as increased R&D, if we see the opportunities. It could be increased CapEx, like in the coastal facility that we just announced and Jon Miller went through, or it could be inorganic in the form of M&A, which is our top focus from a capital deployment perspective, outside of organic opportunities. In either investment case, we're going to adhere to a disciplined evaluation criteria, ensuring that the returns that we put on our investments are adequate and are driving that increase in the return on invested capital.
Lastly, while we are potentially open to a capital deployment strategy that would return capital back to shareholders in the future, right now our focus is on M&A. M&A that fits our strategic criteria, M&A that fits our financial criteria, and we do believe that this is going to be the most direct path to value enhancement for DRS.
I alluded to the importance of the organic investment, and I wanted to just go into a little bit more detail for the coastal facility investment that Jon Miller laid out and articulated a bit earlier, and really focus on that this $120 million investment is a one-time spike to our CapEx, but it offers a unique investment opportunity that's gonna drive a return in excess of really any alternative investment that we could have thought, and it's underpinned and underwritten by the Columbia-class program, and how we execute through that.
The spike in CapEx is one time, and it's fleeting, so what you're gonna see is over the 2024-2026 timeframe, that our CapEx, as a percentage of revenue, hovers between 3% and 4% of sales, and then it'll settle back down to our historic rate of about 2% of sales. Think of the cash conversion in tandem with that. We're going to be between 80% and 90%, and as we get back to 2% of sales and CapEx, our conversion should be at that 90% range. We're not a very capital-intensive business outside of what you're seeing here with this one-time investment in the naval facility. So with that, let me dive a little bit more beyond the organic investments into M&A.
So M&A right now, the valuations remain challenging, but we are certainly interested in supplementing our organic growth profile through M&A that will enhance the business and growth areas that Phil and John had discussed earlier. These areas could include the space domain, where we really need to enhance our customer intimacy with SDA in missile tracking and communications. We have great products, we have great payloads. We need to break into that set. We think M&A is an opportunity to do so. As Phil alluded to, in integrated sensing and force protection, we need to add sensor fusion capabilities. We need to add machine learning capabilities to really make sense of that battlefield. Those are areas that we'd also look at from an M&A perspective.
Of course, we'd like to continue the investment to broaden our naval exposure, whether in the undersea capabilities, in power, or in taking our world-class capabilities and breaking through in the international market. These are just some of the ideas that we have in our pipeline from an M&A perspective. Our financial criteria for M&A is pretty straightforward. We're looking at targets that would be, you know, kinda have a sustainable long-term growth opportunity that's on par with DRS or better. Similar on, on the EBITDA side and the margin, we would expect this to be accretive to DRS. And then the last two bullet points is, we also are going to maintain that fiscal discipline to ensure that we're paying the right price, so in year one, it's accretive to our EPS.
Then, as we look out beyond year one, in a multi-year outlook, we want to make sure that the return on invested capital for these assets exceeds our WACC plus, you know, a hurdle rate. So this is how we're viewing the M&A opportunity. Let me close here by kinda articulating what I still see as a competitive and comparative advantage versus our mid-cap peers. We are a unique, pure-play defense investment in a rapidly disappearing mid-cap space. And even beyond that, with the remaining mid-cap peers that we have, we think we have some distinct advantages. The first is our great revenue visibility. That backlog position of $8 billion is high. We had a 20% growth in our funded backlog. We have a clear line of sight on this revenue growth that we're projecting.
And maybe more importantly, as I keep saying, more importantly than just having the revenue growth, is we're not this one-trick pony. We have a diverse portfolio of intellectual property, which distinguishes us from some of our mid-cap peers. Not one program is more than 10% of our revenue. We have market-leading positions in four key areas where we're considered one of the global leaders. We have decades of past performance credentials. All of this should build confidence in our ability to deliver this revenue growth. On the profit side, we went through the tangible nature of that margin expansion. So that margin expansion is real, and it's underpinned by Columbia, and we have high conviction that we're gonna continue to see this outsized profit growth versus our peers. And with that profit comes efficient cash conversion.
I think this is really where we can differentiate ourselves in the marketplace versus mid-cap peers. Despite generating a $120 million investment in CapEx for the coastal facility, we're still projecting higher cash conversions and higher just free cash flow growth than most of our peers. And lastly, we have that financial position, which is an asset compared to our peer group. We have that healthy balance sheet. We have the ability to deploy capital in inorganic ways, to drive additional shareholder return and shareholder value. Despite all these characteristics that we see, we're still trading at a discount compared to the mid-cap peers. And this is why we think that there's still a compelling investment opportunity here for DRS and look forward to taking that journey with you. With that, let me pause here and give it back to Bill for closing remarks.
Thanks. Thanks, Mike. Thanks, everyone, for joining us today and listening to the DRS story. I hope you came away with some clear messages. First, DRS has a unique market position. Our mid-tier position and platform-agnostic approach gives us the agility to respond quickly and decisively to market changes. We're concentrated in growth markets, which means our margin expansion over the next few years is largely based on structural changes in our revenue base. And finally, our balance sheet offers options to strengthen both growth and margins with organic investment and acquisitions. In short, for DRS, the best is yet to come. Thank you. We're gonna turn now to questions. I'll turn it back to Steve.
Thank you, Bill. All right. Thank you, everyone. We really appreciate your attention this morning. This concludes the formal prepared remarks portion of the presentation. We're gonna shift to Q&A. And as a reminder, we are webcasting, so we are gonna take questions from the web as well as in the room. But while we wait for the web participants to populate their questions, maybe we'll take a couple from the room. And I'll ask the team to please move to the front of the stage. Please wait for the microphone. That's the only way that the webcast participants can actually hear you. And once you have the microphone, state your name, company, and fire away with your question. Thank you.
Hey, good morning, guys. Thanks for all the great information. Mike Ciarmoli, Truist Securities. Mike, just on the longer-term targets, I guess looking specifically at the EBITDA margin expansion, looks like we get roughly half of that this year in 2024, and then the pace of expansion slows a little bit. Maybe can you just decompose that? Is there anything driving disproportionate expansion this year? You know, was it Columbia? And then, you know, just how to think about 2025, 2026.
No, is this on? There we go. No, I don't think there's anything special. I think that the path will be linear, as you kind of grow each year. Columbia's gonna be a driver in 2024, and then it's really gonna kick in in 2025 and 2026. On the ASC side, I think you'll see some margin expansion happening in the near term, which is kind of accelerating some of that growth profile into the earlier year and the earlier guide.
Okay. And then just one more. I think you guys talked a lot about M&A, basically, I guess, taking that leverage up. You know, you could probably deploy $800 million-$1 billion, maybe by $60 million-$80 million of EBITDA. What specifically are you looking for in terms of capabilities, targets, you know, any areas of expansion that are really in the crosshairs? Thanks.
Yeah. Thanks, Mike. What we're looking for is to expand our capability in those four core markets. We really have confidence in those four core markets. What we would like to do is expand. By that, I mean, we, you know, adjacent space, new customers, you know, moving sensing beyond the Army and the Navy, enhancing capabilities. For example, in space, we have a strong niche capability, particularly in weather satellites, but moving it into missile defense is a goal of ours. So, you know, acquisitions that would enable that climb from a niche to a core market is -- Mike talked about in the network computing area, cyber assurance is a key capability, so acquisitions in that space. So it's that -- we're very focused on our space and how do we strengthen ourselves. That's the approach to M&A.
Thanks very much. Rob Stallard from Vertical Research. Maybe just to follow-up on that question, you've got some pretty sensible criteria for valuation and things like that. What if you're not able to find these assets at the right prices, and you talked about, you know, potentially returning cash to shareholders? Is there a, like, a threshold we're looking at here, is it, you know, get to net cash or something like that? How do you talk about that?
Yeah, I mean, so you're saying we're sensible, the market's not, I think. Yeah, I don't think we're to that point. I mean, valuations are a little frothy, but they're we are seeing properties, and we're moving. We have an active pipeline. I think we're gonna be able to do something. But you're right, if we get to some point down the road, you have to look at other capital allocation strategy, which probably takes you to a dividend rather than buyback, given our flow.
Yeah, I see. Thanks for all the information on the Columbia, which is very helpful. I was wondering, what sort of protections or contingencies do you have in case something goes wrong? Even if it's nothing to do with you, you know, if the Columbia program gets delayed or something like that.
So that's a great question. I think when you look at the program, it is the highest priority program for the U.S. Navy, and if you look at what's going on in the Navy today, they seem very determined to keep Columbia on course. Some of the detailed logistics, you know, we're in our contract, we're protected for changes that are driven by the outside world, if you will. But I don't really expect to see much variation, because I think they'll continue to build to fund ours on a path that supports the shipbuilding schedule. Even if a boat gets behind, they're gonna they want to keep us building.
Hi. Jon Tanwanteng with CJS. I was wondering if you could talk a little bit more about the international business. It appears to be a source of above corporate average growth for you. How fast is that growing, number one, as you look forward, and how much do national security concerns limit the upside there, maybe, from selling to our allies and partners? If you could talk about that, and then, can you leverage the Leonardo relationship there a little bit more than you have in the past?
Yeah, a good, good question, Jon. Two, two dynamics I think are driving international sales for us. One is just the market is now growing faster than the U.S. defense market, and that, that extends across—I mean, in Europe, obviously, they're trying to meet the 2% goal. NATO, that's driving European budgets up. In the Gulf, you've got the Iranian threat, that's driving Gulf. And then in Asia, you've got the Chinese threat, which is driving Asian spending, all of which, you know, are moving up. At the same time, internally for us, we make international sales when we have production programs. We don't generally have international customers pay for the development. We develop something for the Department of Defense, and then when it reaches the production stage, we look for international opportunities.
As we talked about, the reason for our margin expansion is that it's not just Columbia. A series of our programs in sensors and Force Protection are hitting that production plateau, and that's where we get international opportunities. So it's that combination of internal where we are in the internal cycle, and the growth in the international market is driving us now to really, it's doubled over the past few years to 10%, and it's still, I think, a path, a path up. In terms of your question of, are we restricted? You always have to work with the country that's buying in order to have either offsets or provide jobs, so that that's always an additional step. But we've been able to do it, and other companies have been able to do that.
U.S. foreign military sales are way up. So that's a step, but it's not, I would say, a barrier. And then in terms of Leonardo, we have worked with them in the past to develop opportunities. We're actively working with them now. We have a very good relationship, and as it's opportunity-dependent, but as we see those opportunities, that is a lever that we can use.
... Thank you. And then second, just on overall growth, I mean, you're guiding to mid-single digit growth. Do you see any lumpier years in your future, you know, beyond 2025 and 2026? And maybe just address a little bit the degree of trailing book-to-bill, which is much higher. Was that just simply a function of getting the supply visibility more so than, you know, translating to organic growth number in the future?
Yeah. So from a growth profile, we do expect it to be pretty linear over the time period, and that's really going to be evident by where we are on that backlog position, as you mentioned. So now that we have the supply chain laydown in terms of a more consistent. The lead times are still elongated, right? So that's why you're not gonna see an explosive jump because of the backlog position. Supply chain is still... Lead times are still elongated, but now they're predictable. So that's why we think we can kinda contribute this growth rate in a linear profile throughout the period. And I forgot the second part, Jon.
Just in terms of the, you've been generating 1.2 book-to-bill for the past two years. For most companies, that translates to a 20% growth rate sometime in the future. So help me understand the timing.
Yeah, I think ultimately what you're hearing from John Baylouny and from Phil is that as we're offering integrated solutions, we're moving up the value chain a little bit, so the conversion of that backlog is a little longer than when we were more of a component provider and single solution provider rather than the integrated system. So if you track DRS historically to where we are now, that conversion of that backlog and that booking is a little elongated than what it has been historically.
Yeah, Peter Arment from Baird. On your M&A, and following up on Michael's question about, you know, kinda how much you could deploy, could you maybe walk us through a little bit of how that works with Leonardo, the parent? You know, because obviously you fund it with cash, but if you have to take on some debt, it gets consolidated. So maybe if you could maybe walk us through a little bit of that.
Yeah, no, we do – we're consolidated on their books, so debt, when it gets to a certain level, becomes material to them, and that's the reason I think for that provision that I mentioned, that if we get beyond 2%, which is, you know, $60 million-$70 million, so if we get into a substantial acquisition, which we are looking at-
Yeah
... we're, you know, as we said, we can certainly get up into the hundreds, maybe a little higher with capacity. We will have to go through a process to ensure Leonardo supports that. Now, even before we were public, we did that.
Okay.
You know, with the Daylight Solutions, with RADA, they approved it. They have the same interest in as us in driving shareholder value. They like the criteria that Mike laid out, that it's accretive, that it has a strong ROIC, that it drives growth. Because in the end, that will drive value in our stock, and when people do sum of the parts analysis, you can see their stock has risen as our stock has risen.
Right.
So it's that same dynamic. We're gonna have to justify this to them, but it's the same criteria. So it's been a very strong supportive relationship.
Thank you for that, and thanks for all the details from everyone. It was really helpful today. Mike, just a quick one for you. On just the EBITDA margin target, I know we didn't get into segment details on those, but it feels like you gave a big lift from Columbia on IMS, but you also talked about, you know,
Mm
... Advanced Sensing has got some upside. So are they both kind of tracking towards ultimately kind of that same target as we think about the out years? Just so maybe any color on that.
Yeah, and obviously, we don't guide on the segments, but from a margin perspective, if you think about it, similar customer sets, similar, you know, their end customer is the same, still a lot of sole source contribution, so the margin's gonna track. So if you think that through, in 2024, I think you'll see, you know, pretty equal margin expansion coming from the segments. And then, as you get into 2025 and 2026, when Columbia starts kicking in full out of shipsets 3, 4, and 5, you'll see that's when IMS starts to catch up.
Terrific. Thanks.
Yeah, good morning. Seth Seifman from JP Morgan.
Hi, Seth.
Hi. I guess, following up on the M&A questions, I think you kinda answered this, but, you know, given the capabilities you're looking to develop, it would seem that there might be opportunities to buy companies out there, where it's almost a form of investment or R&D in making the acquisition, but it sounds like that's very much not what you're interested in. Even though some of the capabilities that you're looking to develop are kind of, you know, cutting edge and things that require new investment, it sounds like you're looking for to buy companies that are already have some scale, already profitable, at least to the level of DRS, and you know, will be in line with or accretive to margin.
Yeah, I think it's a fair observation. I wouldn't go too far with that. We do look at technology investments, and we have in the past. We didn't mention them, but we've done some smaller investments that would be just what you described. In the EOIS world, as well as in the laser world, we've bought some smaller companies that were really... It wasn't really an acquisition as much as it was an R&D investment, a technology investment. So we would still look at that. But the thrust of your question is right, that we're looking for a financial contributor to the enterprise, which takes you more to, you know, companies that have a backlog, have established financials, and that's how you would meet the criteria that we've laid out.
Right. Okay, and following up on that, you know, you talked about M&A as potentially an avenue to reach out into different customer sets. Obviously, the company's, you know, pretty well penetrated in the Army, pretty well penetrated in the Navy. You know, is the Air Force a place where there's an opportunity to do more long term? Does that take you into, you know, tougher competition with some of the bigger players that you know, may or may not be advisable in different places? How do you think about that?
Yeah, I'm gonna ask John to expand on this, but yes, I mean, one of the principal reasons we would do an acquisition would be to expand our customer base. So taking sensing to not just the Air Force, but the Space Force, to the intelligence agencies, those would all be certainly a strong rationale for us to do an acquisition. But let me let John-
Yeah, I think that's exactly right. I think, you know, think about the Air Force, think about space. A lot of the missions that the Air Force flies now are moving into low Earth orbit. And so I think that you know, as we start looking at those, applying our technologies to those missions, we're really looking at space. But yeah, so we're gonna be looking at all of those markets that we don't fully address today.
Thank you.
Yeah. Mariana Pérez Mora , Bank of America.
Nice to see you.
First one... Nice to see you, too. First one on Air Force, as a follow-up. Do you have any exposure or what is the opportunity related to CCA, Replicator, all those?
Yeah, great question. We do have exposure to the Air Force today. We have products in almost every Air Force platform, mostly in the RF receiver world and communications gear, things like that. It just doesn't move the needle from a revenue standpoint. But we have the exposure, we have the relationships with the customers, and we have the pedigree and the technology to apply. As far as CCA is concerned, we see that program evolving, and we see it evolving the way that we've kind of predicted in terms of, you know, autonomy. Rather than having co-pilots being piloted remotely, we're seeing autonomy will kick in. So that's where we're gonna apply our capabilities and our technologies to those sensing and making sense, those computing systems that are gonna need to be present on those platforms.
Question on R&D to Phil, how do you prioritize where you put the internal money on, and how you measure how effective is that spending?
The priority is really driven by the customer needs. So we, as I said in my talk, we spend a lot of time with our customers to understand how they're gonna pivot left and right, what does the future look like from a capabilities point of view? And we have a very deep understanding of these mission requirements. So oftentimes, it's a little bit of give and take with them to understand how we should make investments. Also, they make investments in us. We do quite a bit of collaborative R&D together, so it's mostly that, and basically, the priorities flow from that. So it's a mix. You know, we work a distribution across our FYDP, and we work a distribution across the outyears.
So we look, as I talked about in my section, about 20% of what we do is sort of outyear and later in the FYDP, and the rest is really driving toward the nearer term.
Uh, Byron?
Sure. Byron Callan, Capital Alpha Partners. Couple of things. I know you talked about the investment budget, you know, down 1% in the FY 2025 request, but the O&M budget is up, and Air Force leadership in particular, has come out and said there's a much greater focus on readiness. How does that translate into what you guys do if you think about the spares, you know, the support for the systems you have fielded?
Yeah, as I said, we consciously got out of the service business, where a lot of the O&M dollars... We do have some support, but if you, so there is some of that.
Like, ship availability-
Ship-
that's come up, you know?
Ship availability, but a lot of our products don't have as much support. For example, the network computing, what you do, it's like your laptop. Instead of fixing it, you replace it every three or four years. And so it's the traditional spares business is not as big for us because of the timeline of... There's some of it, but it's not as big for us as it might be for an engine manufacturer.
Okay. And you guys talked about kind of this mid-tier, and I agree, it's definitely changed. But you have this other kind of sub-tier of emerging technology companies, Anduril, Shield AI, all these guys. How do you see them? Are you working with them? Are they opportunities to team? You know, talk a little bit about that part of the ecosystem.
Yeah, with them, we definitely see the opportunity to team. In particular, I would say the biggest opportunities there are in the Force Protection area. It's the least mature of our four market areas. The other three have been around for decades. The Force Protection was kind of around in the Cold War and then went down, is now, you know, now coming back up, and you're seeing a lot of the Force Protection opportunities are being chased by these new entrants. Similarly in space is another area and so again, in both of those, we look for opportunities to team with them. And maybe John...
Yeah, just to add to that a little bit, I think it's important to understand that while these companies have some great technology in specific areas, they're not as broad as we are. So that's where the partnership comes in, right? Where they can bring some AI potentially to a capability or to a solution, and we would provide sensors. So yes, we do work with them. It is an area that we're working on to grow those relationships, but they're coming to us just as much as we're going to them.
Yeah. My, my last one, Bill, I appreciate, you know, you started out talking about human resources and the diversity of the company-
Yeah
... but if we think about the organic growth targets you've laid out, I assume your headcounts are probably gonna grow a little bit less now. But talk a little bit about kind of the recruitment and retention challenge you see to hit these targets, and maybe even go a little bit beyond them.
... Yeah, I mean, the recruiting challenge, retention challenge, I'd say is changed a bit. There was a period there where we saw the attrition rate go up as you saw the great resignation, people kinda changing their approach to lives and thinking about what they wanted to do beyond just traditional work. And we saw that spike some. That's come back down. We're now at a normal attrition rate, and as I said, there's a deep loyalty to DRS. We have a very long retention.
If you come, and we hope we, you know, future Investor Days, we'll actually get you to facilities, I think you'll see that people have been there a long time, and they're there because they wanna, they wanna be there, and so that, you know, that's really part of the culture of the company. Final point, you're saying, where are we seeing issues? At this point, generally, I think we're strong. There are still pockets of challenges in different geographies. Milwaukee, for example, as John could talk to this, has a very, very low unemployment rate. It's one of the nation's lowest. And then in certain engineering specialties, you see. So we're trying to, you know, like other companies, we're trying to manage our way through that. We have strong, strong benefits, strong culture, but that's... The challenges, I would say, are now targeted as opposed to general.
Hi. Thanks for the inaugural Investor Day today. It's been terrific. Jeff Bernstein from Silverberg Bernstein Capital. Just wanted to get an update on RADA, and I think the M- SHORAD revenue is actually down a little bit in 2023, but obviously a high priority for the U.S. and other countries. Can you talk about M- SHORAD and APS a little bit?
Yeah, I mean, the Army has just made a decision to expand the—as part of their, they do a force analysis every couple of years, and they're—so they're moving, they're expanding the commitment to force protection as a way of shifting the force. As we talked about, it's as Ukraine really has vividly demonstrated, your forces are now vulnerable anywhere on the battlefield. It's not just the front line. So you have to have... That means you really, that means you take assets like SHORAD, and you don't just put it at the front line. You have to make it organic to all the units because of that battlefield transparency. Let me, I'll let John address where we are with RADA.
Yeah, so certainly SHORAD is a foundational program for RADA, but there are many others. The APS, as you indicated, and we're built into the CV90 programs through APS. That program is expanding right now. We're also building into some U.S. programs on Bradley and, for instance, on APS. We're seeing an increased demand across the globe for the tactical radars, and because of these conflicts, so we're gonna start seeing an uptick in the revenue with RADA. They're doing an incredible job of in their in Israel. Obviously, we are supporting our employees the best we can during these difficult times. But they are doing an incredible job of supporting their country.
George Ferguson with Bloomberg Intelligence. So I was wondering if maybe we could talk a little bit about labor inflation, and you could give us a sense for how deficient are you now in the increase in cost of labor for some of your fixed-price contracts, and what does the recovery look like going forward? What are you assuming labor inflation is, going forward the next couple of years?
Yeah, good question, and appreciate it. The way we view the labor inflation and the recovery of it is, typically, our fixed-price programs run about three years in duration before they're reset. So in 2022 and 2023 was the largest impact from all inflations, material and labor. Now, what we're gonna start to see in 2024 is it's a relatively split revenue base between the contracts that were priced pre and the contracts that were priced post. So that's where we're gonna get the recovery from that labor inflation. In terms of what's prospectively included, we've been in and around, you know, kind of that low- to mid-single digits compounding inflation on our new programs. The customer has been pretty receptive of including those in there.
They know that the industry had it hard with the shock to inflation, and they've been pretty, you know, accommodating for future proposals.
and so that low to mid-single digits, does that catch you up in two years? Does that catch you up in-
Well, it catches us up immediately because we're getting the new pricing for the material, plus the escalation assumption, prospectively.
Maybe one last question. On the electric propulsion business, who's your biggest competitor? Like, one that can really bring the same technology you can in that business.
I would actually say there's not a single competitor out there that can bring everything we bring to the table. We, as is common in our business, we have competitors that overlap with portions of our business, and I would say, largely, we tend to collaborate with them as much as we can. So I think we're actually in a very unique position in terms of the whole suite of technology that we bring.
Thank you.
Okay. Yeah. Not sure if this is, this question makes sense, but, as computing moves more out to the edge, it, does it become harder to become platform-agnostic?
Let me let Phil address that.
No, it really, it really doesn't. It actually enables our ability to be platform-agnostic because the processing that we're putting forward is simply that, it's processing. It's like a microprocessor in your computer or a GPU that's for AI processing. It's really the algorithms and the data and the training that goes with it, which is specific to individual platforms, but it goes across any platform you really wanna employ it on.
So it's not like you have to decide early on with someone because it's out at the edge to be their provider?
Well, what we do is we design to the mission, right? By training and using data and things like that, but the individual compute and that processing power can go across many, many platforms.
Wait for you to get the mic there.
Someone-
Otherwise, nobody hears you online.
Thank you. On the South Carolina facility, how are you thinking about margins there? Do you think you could have more upside, or it depends on the volume?
Go ahead.
Yeah, I'll take this and get the microphone away from John before he starts talking about numbers again. No, ultimately, the South Carolina facility and the insourcing that we're going to do is going to... If you look at and remember that chart, it talked about kinda this, the mid-teens plus. So what this facility is gonna enable us to do is, now that we have the fixed price contract negotiated, insource that and really drive some upside to the margin capabilities that's going to make this investment an attractive return. So we're gonna start shipset 5, and it's gonna run all the way shipset 12, and it's gonna give us that enhanced profitability throughout the remaining life of the ship class, and that's what made this investment pretty attractive.
When you think about the risks, what are the risk of that running on time or to the-
Now, I'll hand it back over to Jon.
I tell these guys about once a week that, "What could possibly go wrong?" So, you know, I think, there's always risk inherent in anything like this you take on. I will say that we've positioned ourselves to very largely mitigate those risks. I would also say that the work that we're doing there, even though we've pulled it in from our supply base, it's work that on this program we've had a lot of oversight on, and it's also work that's identical to work that we've done on other programs in the past. So I don't see a large technical risk, and we're on a schedule that really mitigates our schedule risk.
Thank you.
Just to add, the other one of the things that mitigates the risk is the length of this contract. It's one of the reasons we made this event, because one of the risks you would see is, well, what if they stop buying them? That isn't gonna happen in this. As Jon said, there's technical risk, there could be inflation risk, but the risk that they're gonna, you know, cut the line short, no. That's why we went forward with this investment with confidence. Where are we? Oh, over here. Sorry.
It's Jon Tanwanteng again. Just wondering what the upside is beyond the 14% for EBITDA margins. You have the new facility coming on. Obviously, there's gonna be accretive beyond 2026 and 2027 as it ramps and gains efficiency. What other levers do you have to pull? I assume new ship classes may come through there, you know, improving your mix further. Just help me understand what the upper limit is to EBITDA margins.
Yeah. First, I think your timeframe is right. I think, you know, the upside is gonna be beyond that 2026 timeframe because the facility is gonna come online in 2026. So we do see some upside to the 14% if we look out beyond because of this, this ship class, just on Columbia alone. If you start compounding that with potential for new ship classes, if there is the international penetration, all of that is going to be allowed from this facility. So we do see some upside opportunity to the 14% if you look beyond 2026. But I'll just remind everybody that the sole source allocation that we have of revenues does limit that profit, right? Part of that sole source is gonna be limited to certain fee allocations from the government.
We're gonna be in that mid-teens, but I think, you know, you can scale a little higher than the 14 because some of the good stuff that John's doing here on the Columbia.
Great. Thank you. And then could you just talk about exactly how fixed your OpEx is? Obviously, your 3% of revenues R&D is gonna go up, you know, proportionately. You know, you have labor inflation. What else will move in there and what doesn't?
It's relatively fixed. I know you'll see in our financial statements this year that we had a big jump, right, from our G&A from 2022 to 2023. That was really attributed to the public tax, as well as the increase in R&D. With the public tax behind us, we see kind of a much more moderate increase in G&A, which is gonna allow us to scale the revenue to provide the operational leverage.
I wanna be respectful of time. You know, there's probably tons and tons more questions that we can go through, but I, I know we're a little bit over. We really appreciate you all coming out in person and, and participating virtually, and for your interest in the company. For those of you that are joining virtually, this is gonna conclude our program, and we look forward to connecting with you in the coming weeks. For those of you that are here in person, the conversation continues with lunch outside. We'll be around for another hour or so, so we welcome the dialogue. Again, thank you all for, for being here today.