Q1 2023 Leidos Holdings Inc Earnings Call
Speaker 2: only mode.
Speaker 2: A question and answer session will follow the formal presentation.
Speaker 2: If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad.
Speaker 2: Please note that this conference is being recorded.
Speaker 2: At this time, I'll turn the conference over to Stuart Davis, Senior Vice President of Investor Relations. Mr. Davis, you may begin.
Speaker 2: Having a conference call.
Speaker 3: Thank you, Rob, and good morning, everyone. I'd like to welcome you to our first quarter fiscal year 2023 earnings conference call. Joining me today are Roger Crone, our CEO , and Chris Cage, our chief financial officer.
Speaker 3: Today's call is being webcast on the investor relations portion of our website where you'll also find the earnings release and supplemental financial presentation slides that we'll use during today's call.
Speaker 3: Turning to slide two of the presentation, today's discussion contains forward-looking statements based on the environment as we currently see it and as such does include risks and uncertainties.
Speaker 3: Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially.
Speaker 3: Finally, as shown on slide 3, during the call we'll discuss GAAP and non-GAAP financial measures. A reconciliation between the two is included in today's press release and presentation slides.
Speaker 3: With that, I'll turn the call over to Roger Crone. We'll begin on slide four.
Speaker 4: Thank you, Stuart, and thank you all for joining us this morning. Our first quarter results demonstrate our ability to drive strong organic growth, as record revenue performance was consistent with our long-term target.
Speaker 4: We expect earnings and cash performance to build momentum as we progress through the year and are fully committed to achieving our 2023 guidance.
Speaker 4: As I step down as CEO , I am confident that Leidos is truly the leader in our industry with unmatched talent, technical depth, and market-facing solutions.
Speaker 4: Our dedicated team is at the forefront of our customers' most challenging missions as we make the world safer, healthier, and more efficient.
Speaker 4: As usual, I'll touch on our financial performance, capital allocation, business development performance, and people.
Speaker 4: Number one, our top line financial performance for the quarter was excellent. Record revenues of $3.7 billion were up 6% in total and over 5% organically year over year.
Speaker 4: with our long-term model and we continue to take share from our competitors.
Speaker 4: All three of our segments grew, led by civil and health, which speaks to the power of our diversified portfolio.
Speaker 4: Bottom line performance was lower than anticipated, largely driven by delays in security product deliveries, and continued investment in the security product offerings.
Speaker 4: The delays based primarily on supply chain issues and customer site readiness are fundamentally a matter of timing and will be resolved within the year.
Speaker 4: especially in the health business, will help to accelerate margin and earnings performance throughout the year. As planned, cash generation was decreased by the cash tax payments for Section 174 Expensed for 2022.
Speaker 4: and the final payment on the CARES Act of FURL.
Speaker 4: Absent those unusual items, cash flow from operations was consistent with last year's levels.
Speaker 4: We remain on track to generate more than $700 million of operating cash flow this year.
Speaker 4: to on Capitol allocation.
Speaker 4: Our long-term, balanced capital deployment strategy has always consisted of being appropriately levered and maintaining our investment-grade rating, returning a quarterly dividend to our shareholders, reinvesting for growth, boast organically and inorganically.
Speaker 4: and returning excess cash to shareholders in a tax-efficient manner.
Speaker 4: We've committed to take down our gross leverage ratio to three times, and we expect to achieve that by the end of the year. In the first quarter, we refinanced and extended our debt to position us at a point capital in productive ways.
Speaker 4: We view our strong balance sheet and investment grade rating as a strategic asset in the current market.
Speaker 4: The cash-tack payments and upcoming debt paydown limited our ability to deploy capital in the quarter, but we resolutely believe that our current valuation is not aligned with our fundamental earnings power and cash generation.
Speaker 4: Therefore, we bought back $25 million of shares to open market repurchases in the first quarter.
Speaker 4: As we ramp, free cash generation in the second half of the year, we'll create flexibility to allocate capital to benefit long-term shareholders.
Speaker 4: Number three, business development.
Speaker 4: Most importantly, award activity is returning to normal levels after a protracted period marked by procurement delays and obligations under running budget authority.
Speaker 4: A more active environment boads well for light-o's with our long history of being able to thrive in a competitive market.
Speaker 4: In the quarter, we exceeded our Gross Awards Plan and booked a net of 3 billion in awards for a net book to bill ratio of .8.
Speaker 4: Total backlog at the end of the quarter stood at 35.1 billion.
Speaker 4: of that 8.3 billion was funded, which is up 17%.
Speaker 4: You can read about some of the key awards from the quarter in the press release.
Speaker 4: But we're particularly pleased to see intelligence, to see the intelligence community customers making awards again. Maritime continues as a focus item for us, and international airport security is beginning to rebound.
Speaker 4: To ensure that we bring true differentiation to our bids, we continue to invest in strategic technologies that are core to our business. Last quarter, I talked about cyber, zero trust, confidential compute, and generative AI.
Speaker 4: We also have a rich history of delivering secure software at speed to support critical missions. We protect the software supply chain from development to deployment to operations, delivering software security that goes beyond compliance for customers like the FAA, DOD and DHS.
Speaker 4: And we're investing in cutting edge emerging quantum technologies focused on applications such as quantum augmented communications and the transition to quantum resilient cybersecurity. We see tremendous opportunities ahead.
Speaker 4: We have 30 billion in submits awaiting adjudication and we expect to submit another 35-39 billion over the remainder of the year.
Speaker 4: Based on the successful Tronch Zero launches in April and the Rapid Tronch One timeline, this base development agency is accelerating the wide field of view program, so Tronch 2 should be a 20-23 submit.
Speaker 4: We also expect expanded follow-on bids on our Force protection and hypersonics programs this year.
Speaker 4: In addition, we're pursuing large supply chain modernization efforts for the Army and the Veterans Administration, and digital transformation remains a key priority for our customers. And lastly, point number four. Lighthouse continues to be an attractive designate.
Speaker 4: Destination for talented people.
Speaker 4: In the first quarter, we hired more than 2,500 people and increased head count 7% year over year.
Speaker 4: Even more important, voluntary attrition has dropped down to pre-pandemic levels.
Speaker 4: This improved labor position provides potential uplift to our revenue plan. We're benefiting from the improved labor market for technical talent, but we believe our focus on employee engagement and career development is also a major positive factor.
Speaker 4: Our managers are living their commitments to lightest life by putting their employees' careers, flexibility and well-being first.
Speaker 4: They are connecting with their teams and taking the time to engage with their employees around building a career.
Speaker 4: In our recently completed employee engagement survey, we were above external benchmarks across almost all categories, scoring particularly strong on manager relationships, inclusion and diversity, and employee growth and development.
Speaker 4: If you want to join an inclusive team and build your skills over a fulfilling career, Lighthouse is a great place to work.
Speaker 4: Before turning it over to Chris, I'll touch on the current federal budget environment. The U.S. Congress is currently debating President Biden's $6.9 trillion budget request for for physical year 2024.
Speaker 4: The proposed budget includes increases in critical areas areas that are important to light us such as defense, transportation, veterans affairs, NASA, and energy.
Speaker 4: Last week, House Republicans passed a bill that would raise the debt ceiling and cap discretionary spending. The bill will not pass the Senate, but discussions can now begin in earnest towards resolving the debt ceiling and the government physical year 2024 budget.
Speaker 4: given the enormous challenges that we have as a nation.
Speaker 4: Finally, I want to speak to the CEO transition.
Speaker 4: As I look back on my nine years at Lighthouse, I am proud to say that we have achieved incredible transformation and growth together, almost tripling revenues and establishing ourselves as a premier broad technology provider. Our strong leadership team helped us win numerous large
Speaker 4: our customers.
Speaker 4: Our growth, our efforts have not gone unnoticed, as we have been recognized as a leader in our industry, providing innovative solutions to complex challenges.
Speaker 4: Our commitment to our employees has been a top priority and we have fostered a culture of innovation, engagement and inclusion.
Speaker 4: We have built a team that is passionate about our mission, vision, and values, and conveys that commitment to our customers.
Speaker 4: Throughout the COVID-19 pandemic, we took care of each individual and prioritize safety and well-being above all.
Speaker 4: Our focus on collaboration, innovation, and inclusion has allowed us to create a culture that enables each employee to grow and thrive, driving our success. We have also made a significant impact on our customers and communities.
Speaker 4: We have transformed logistics for the UK Ministry of Defense, enabling them to rapidly respond to the crisis in Ukraine.
Speaker 4: We have driven IT innovation throughout government and helped more than 200 utilities across the U.S. build a more resilient, reliable, and sustainable electric grid. We have modernized healthcare information management across the Department of Defense on cost and on schedule and enabled our veterans to get the disability benefits they have.
Speaker 4: talent of our employees and the unwavering strength of our leadership team. Without their incredible contributions, we would not be where we are today. I am confident with this team in place, Leidos is posed for continued growth in the future.
Speaker 4: As I transition out of my CEO role, I'm excited to welcome Tom Bell to the position. I have worked with Tom over the past month, and I am convinced he is the right person to lead this company into the future.
Speaker 4: With a great foundation in place at Lidos, I believe that Tom's tenure will be rewarding for our employees, customers, suppliers, and shareholders.
Speaker 4: I will end by saying thank you to each of you for your confidence you've showed in me during my tenure. It has been an honor of a lifetime. Thank you.
Speaker 3: Thank you, Roger, and thank you to everyone for joining us today. Let me begin by echoing Roger's assessment of the team. This management team is laser focused on delivering on our financial commitments and driving above market growth across all financial metrics over the long term.
Speaker 3: Turning to slide five, revenues for the quarter were 3.7 billion, up 6% compared to the prior year quarter. Revenos grew organically across all three reportable segments, given strong demand across our customer sets, robust hiring, and better retention. Our growth came despite a $24 million negative impact from foreign currency movements.
Speaker 3: At current foreign exchange rates, FX will become a tailwind sometime in our second quarter. Turning to earnings, adjusted EVA DAW was 346 million for the first quarter for an adjusted EVA DAW margin of 9.4%.
Speaker 3: Non-GAP net income was $205 million, and non-GAP-delitter DPS was $1.47.
Speaker 3: Non-gap net income and diluted EPS were down 8% and 7% respectively compared to the first quarter of fiscal year 2022. I'll get to the underlying drivers next, but let me be clear. The shortfall to the level of performance we expect from this company is temporary, concentrated, and recoverable.
Speaker 3: Turning to those segment drivers on slide 6.
Speaker 3: Defense Solutions revenues increase 3 percent compared to the prior quarter. The largest growth catalysts were the Navy and Gen and SDA wide field of view tranche one contracts as well as the Australian Airborne acquisition.
Speaker 3: For the quarter, defense solutions non-gap operating income margin increased to 8.4 percent, up 30 basis points from the prior year quarter with better program performance and growth in higher margin areas such as airborne surveillance.
Speaker 3: Health revenues increase 9% over the prior quarter, driven by growth on the Social Security Administration IT work, and another strong quarter on the DIMSUM program.
Speaker 3: Non-GAP operating income margin came in at 15.9%, which was up 160 basis points sequentially and at the high end of the mid-teens range we've talked about, bolstered by additional disability exam volume and excellent program execution.
Speaker 3: Civil revenues increased 10% compared to the prior year quarter. The NASA EGIS program was the largest driver, and we also saw increased demand from our commercial energy customer.
Speaker 3: Civil non-gap operative income margin was 6.4%. Compared to 7.7% in the prior year quarter, an 11.2% last quarter.
Speaker 3: The decrease in segment profitability, which led to the sequential and year over year declines at the enterprise level, was focused in our security products business.
Speaker 3: segment profitability, which led to the sequential and year-over-year declines at the enterprise level, was focused in our security products business, driven by three main factors.
Speaker 3: First, certain of our existing programs were delayed due to customers not meeting their schedule commitments. They were unable to take possession of equipment because they had not yet completed site preparation. Second, supply chain disruptions led to higher component prices or shortages, which then impacted maintenance schedules and triggered penalties under certain service level agreements. Third, we're investing in enhancements to our product suite, particularly around our Mosaic software platform.
Speaker 3: which integrates all security components into a single management system. This innovation was key to our recent awards at Frankfurt and Luden Airport.
Speaker 3: Most of the fixes have already been implemented or are in process. We've reconfigured inventory management and rationalized our service provider network. We're working with customers on scheduling and expect that orders in our backlog will be delivered and accepted this year. And we're taking actions to ensure that our investment and delivery model are right sized to withstand.
Speaker 3: flow for the quarter was reduced by $191 million in tax payments for prior your activities.
Speaker 3: primarily related to the Tax Cuts and Jobdact of 2017 provision requiring the capitalization and amortization of research and development costs.
Speaker 3: Cash collections were in line with our expectations in normal Q1 levels. For example, DSOs were at 62 days, which is a one-day improvement from a year ago. We're on a path to take out at least four days over the course of the year, consistent with our usual pattern. Cash generation is a major focus item across the company, involving not only finance, but contracts, business development, and program management. And we expect a drive sustainably improved performance over time.
Speaker 3: with a fixed rate of 5.75%. Refineance, our term loan A and revolver, and paid off the 500 million note that was due in May. On balance, we put more of our debt on long-term bonds and less on the term loan, while upsizing our revolver to 1 billion.
Speaker 3: With strong demand, we were able to price the transaction at very favorable terms in the current rate environment.
Speaker 3: Once we repay the remaining 320 million on the short-term loan, originally tied to the Gibbs and Cox acquisition, our next tranche of debt doesn't come due until 2025. Onto the forward outlook.
We're maintaining our guidance from the Q4 call. Specifically, we expect 2023 revenues between 14.7 and 15.1 billion, adjust the EBITDA margin of 10.3 to 10.5 percent, non-gap diluted earnings per share between $6.40 and $6.80.
and cash from operations at 700 million or greater. With three quarters to go, we believe the current range is still encompassed the likely outcomes for the year. Revenue, margins, and cash should all build throughout the year. As Roger mentioned, strong demand in an improving labor market support revenue growth.
Marginz will improve through a combination of resolving the issues around the security products business, opportunities within the health segment most notably increased medical examinations tied to the PACT Act, appropriate cost reductions, and normal seasonality in our portfolio.
As is our usual pattern, cast generation will be back and weighted in 2023 with a spike in the third quarter, which is the end of the government fiscal year.
In closing, I want to publicly thank Roger for his leadership over these nine years, both in transforming this company and providing valuable mentorship to me. He's hard to replace, but I look forward to welcoming Tom Bell and introducing him to the investment community over the coming months. With that, I'll turn the call over to Rob so we can take some questions.
Roger for his leadership over these nine years, both in transforming this company and providing valuable mentorship to me. He's hard to replace, but I look forward to welcoming Tom Bell and introducing him to the investment community over the coming months. With that, I'll turn the call over to Rob so we can take some questions. Thank you.
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One moment please, I'll be poll for questions. Thank you. Thank you, and our first questions from the line of Robert Spingard with Melius Research. Please receive your questions. Thank you.
Good morning. Hey, good morning, Robby. Rob, your best wishes to you. It's been great working with you all these years.
Thank you very much. It will be a lot of fun.
Well, I think I wanted to start with something kind of high level and has been talked about a lot this quarter so far. But we have these recent leaks of intelligent documents. Intelligence documents.
And I'm just wondering, Roger, if you think that's going to slow down the approval process for security clearances, or it may inhibit the ability of folks to do their jobs as efficiently as possible, or on the other hand, could it provide work, could it provide upside for companies like LIDOS to as DOD tries to re-secure its systems or its process?
Well, so we look back in history at the period of time around the Snowden Leaks. And I'm a believer, at least in general, that history repeats itself. And it made things more difficult. It the—
timeline to get clearances expanded the depth of background investigations. The level of clearance required to do certain jobs where maybe we were on a path for that to be relaxed, maybe like one notch, I suspect it will go the other way. Access to information will be held tighter.
Now, I don't see, first of all, any leak like this is a really bad thing. It hurts our military, it hurts our country, it hurts our standing in the international community. So I don't really see anything positive.
to be quite honest, Rob, coming out of it. There are some companies not us that do background investigations, who do polygraphs. We're not in that business. We are a recipient of clearances. And I can't imagine that this is going to make the clearance process any easier.
In fact, I suspect it's going to go in the opposite direction. And I just, I cannot believe my career is 46 years in the business that after Snowden, we're back here again with this problem. It's very, very unfortunate. Okay.
And just maybe a little bit shorter term looking. You mentioned the procurement and award activity is picking up. Do you think that this is due to some acquisition officials trying to get ahead of the debt ceiling fight and the perturbations that come from that? Yeah, no, I really do.
It's the dead ceiling. We've talked a lot about a CR.
that could go well into 24. And so for people who have program managers, government contracting officials who have, you know, authorizations, appropriations, and what have you to get a program under contract before we hit the fall season. Yeah, I think there's a lot of that going on. And
But it's a positive thing. I think all the political posturing around the debt ceiling and the budget, I know the president is going to have a budget summit in the next few days. Hopefully that will lead to something positive. But...
Yeah, no, there is a positive outcome to that, which is
We've had some programs that have been in the acquisition process for years and they're starting to get awarded and adjudicated and that's a positive thing.
Thank you, Robert. Yes, thank you. Thank you, Rob.
Our next question is from the line of Sheila Kaegu with Jeffries. Let's just see with your questions.
Thank you. Good morning, Roger Crecensdewer. And Roger, it's been an absolute pleasure working with you. So thank you. Thank you, Sheila.
I want to maybe ask first on the supply chain comments you made within civil and the security business there. I think you're nearest pure their OSI grew 13% organically, margins went up. Thanks.
What kind of change in your business specifically seems like you have some investments in MoZick and how do we kind of assume that progress is? Hey Sheila, it's Chris here. So, yeah, there's definitely some positives going on in the business and again, the one contract that was...
impacted by customer-driven delays. We've been executing on that back half last year, and there's plenty of runway ahead of us to continue to execute on that, which will help drive growth. The supply chain challenges were disappointing, and there's some component parts, some CPUs, etc. that are sourced by various suppliers, some in China, and really was just hit us this quarter especially hard because...
As activity levels have ramped up, we weren't able to supply some components and sales that we would have been able to realize. And then, you know, missing some service levels impact this from a distant-sensitive perspective. So I think the team, you know, they've been working hard and they're getting some additional support from our corporate procurement organization. And so we're all in on making sure we've got more redundancy in that supply chain. And we've already made some changes swapped out our...
Our third party logistics provider, so that transition has happened in the quarter and again, we're taking the appropriate actions to position that for growth. There were some positives we talked about. Frank for Luton, there's been some nice awards on the aviation product side and continue to see a pipeline of activity there. So confident the team's going to get a turnaround. Yeah, we're doing some other things.
we just everything seemed to hit us. But the good news is, I mean, the businesses coming back, air travel is coming back. The long-term prospect for SES is really, really positive and we're bullish on the future. And it's, I have the privilege of being involved in some other companies outside of the world.
The business didn't go away. It's in backlog. We'll get our supply chain where it needs to be and we'll deliver this product in the remaining three quarters of a year. Okay, great. Thank you for all that color, guys. And then maybe one more on health, if you don't mind. You called out DIMSOM as a contributor in the quarter.
It continues to grow despite what we think of it peaking in 2023. So how could we kind of think about the revenue expectations for that program over time? Well, Sheila again, Chris here again, and I would say our expectation is again the tail end of this year, last quarter especially, you'll see that begin to tail down.
teams working really hard, continue to do exceptionally well, and Roger's prepared remarks, you know, the on-cost and on-schedule can't be overstated. And so the customer has trust in us and there are additional capabilities we're working to deliver there. But health is a bigger story than just dim sum and we're proving that. You know, the SSA work.
the pipeline, strength, what we're seeing out of the disability exam business. You know, very pleased with how Liz Porter and the team have positioned that business this quarter, 15.9% margins, you know, got to the levels that we committed to and actually see more upside at this point in time than we had previously expected. So...
It's in a good spot and even to withstand the Dim Sum ramp down the RHRP contract is you know, now active and didn't contribute much of anything in the quarter. So we'll see more meaningful contributions beginning in Q2 from that program. So that's what's going on at health. Yes, Sheila. I'll give you a kind of a, this longer term view of Dim Sum. So we have been focused on
rolling out the you know the cerner now oracle software to the military treatment facilities and that is what has has driven top line as We are near the end of the rollout the discussions we're having with the customer is now on the Experience of the people who use it
and to enhance that to make it more doctor and nurse friendly to provide patient access to patient portals, right? And then to capture the data. And you know that if you know many of the people in the call have kind of lived the journey.
from paper records to electronic healthcare records through the high-tech actions, something called meaningful use one and meaningful use two. But the vision was always to get this data into a relational database. So we can then analyze, you know, not just claims data, but clinical data.
to drive improvements in health for everyone and in the DIMSOM program specifically for the active military. So we are excited about partnering with the DHA customer on both user experience and to capture the data to go after some of the root causes of medical issues within our active military.
big data and AI tools and we're really excited about the program as it rolls into this sort of second life, it may not be as large from a revenue standpoint because we're not rolling two waves, a quarter out to multi-treatment facilities, but I think...
The benefit to the active military will be even greater than it has been as we've installed the electronic health care record system. Great. Thank you very much. Our next questions from the light of Peter Armit was there. Please receive your three questions.
Yes, good morning Roger, Chris Stewart, and I'll echo everyone's comments, Roger, so best of luck in the future. Great, thank you. Chris, on the EBITDA margin guidance, it just implies kind of a much stronger mix, probably in the second half. Maybe if you could call out maybe some of the puts and takes.
not the start that we hope for. But fundamentally it begins with getting the SES business back on track and the team has a concrete plan. They've implemented a number of action. There's been some reduction in force. There's been a lot of transition there to make sure that business is in and of itself.
is a strength, not a weakness in the quarters ahead. I've mentioned health, and again, we're very pleased with what we see there and looking ahead to the next few quarters with PACDAQ cases ramping up the SSA program, continuing to run strong. There's margin uplift that we see there. And then the defense business, quite honestly,
and they get recognized. So, you know, it would be a combination of, you know, SES getting returned to the right level of profitability, strength and health, and some program mix and defense, and then, you know, some cost control actions. You know, here I would add, as you know, our business model still has a significant dependency on our great people.
And we had some goals for hiring and retention for the year. And we're very, very pleased that our voluntary nutrition is significantly below what we had planned. And you know, light is still an attractive place for people to come to work. So our hiring...
has not slowed down. We've actually eaten into, if you will, our open, kind of wreck situation where we're in one of the best staffing positions that we have been in for years. Now we may benefit from some of the hyperscalers reducing their staffing, but all be it, we are in one of the best staffing positions that we have been in for years.
as we close out 23.
That's super helpful. If I can just sneak one in, just Roger, can you give us the latest update on the problem business, how that is going, and just any thoughts there. Thanks.
a super helpful and if I can just sneak one in just Roger can you give us a latest update on the problem business how that is going and just any thoughts there. Thanks. I'm sorry, do you ever say that again?
The business you acquired in Australia, Gava? Oh, oh, and I was at the Avalon Airshow earlier this year, which is down in Melbourne. It is at or better than our business case and doing really, really well.
Both of those are performing very, very well. They are, I'd say 75% fully integrated into our Australian operation. You know, the only challenge that we have, which is a worldwide, you know, I know that, on this morning's radio, that American Airlines is pilots, you know, it's a challenge everywhere.
the same types of aircraft in Australia that we're flying here in the US. So our ability to build some cross-linkages and some synergies between the business that Jerry Pazano has and our ASO organization, what Roy has in Australia has been really, really good. So, so far, so good. Actually, maybe a little bit better than we expected. Appreciate it. Thanks, Oscar. Our next questions are from the line of Mad Acres with Wells Fargo. This is your question.
Yeah, hey, good morning guys. Thanks for the question and Roger, like everybody else had a good luck with where it comes next for you. Great. Thanks. I wanted to ask about the orders environment. I guess you'll book the bill a little bit light in the quarter. Do you think that ends up kind of above one for the year? I know you mentioned some of the big pipeline there and is there any risk around that with the debt ceiling? Have you seen any change in kind of customer behavior around some of those talks?
Well, you know, let's say we of course we want to grow we've got a long-term target out there. You can back out of our long-term target that our book to bill has to be greater than one and where we sit today we fully expect our book to bill to be greater than one but that that means and you all know this is that we have to win some programs between now and the end of the year. There are some big programs yet to be awarded. We have done well in winning large programs. We don't win them all unfortunately.
in 24 if we don't get an omnibus, I'd like to think we do get an omnibus, but time will tell. So now we're pretty active. As I said, we still have a lot of proposals to write this year. Some of those might actually get awarded this year. We have a ton, I guess, 30 billion.
maybe more than a ton of awards that need to be adjudicated and many, many of those are going to happen this year. So, you know, we're very optimistic about the future, our track record of winning big awards and we don't talk a lot. Actually, our track record of winning small awards is even better.
than our track record of winning big awards, and that has to do with our customer intimacy and our great program leadership working with our customers. But yeah, I'm actually really good. And then some of we haven't talked a lot about what we call on-contract growth, but our ability to expand our business base with the existing customers. That has always been very strong for us. So I'm optimistic.
You know, Tom Bell has a, you know, he's got a strong business development background. You know, he's sold globally around the world. He's built a terrific business at Rolls Royce and, you know, he's going to, you know, lead the business development effort here and, you know, he'll probably do a much better job than I did of winning.
program. So I'm really optimistic about the future. Great, thanks. If I could do one more, maybe Chris, can you give us any help with sort of the pacing of earnings through the year, just kind of a lot of a lot of moving pieces with, you know, the impacts this quarter from supply chain and then some maybe dipping at the end of the year? I mean, as Q2
kind of flat and then a big ramp up in the second half or more kind of smooth or just anyway we should take it off that. Yeah I mean Matt you know we usually don't give a lot of details quarter by quarter but I would tell you that we'll build clearly the SES turn around the actions that are taken and underway you know they're not gonna.
deliver its full potential overnight, right? So I would expect Q2 to be better, but Q3 and Q4 to be better still. And I think you should expect, we'll be gaining a lot of steam into the summer, we'll get Tom Foley on board, and he'll have a point of view. And he'll want to be aggressive. I expect that fully to make sure we're delivering on our commitments as we all do. So my expectation is Q2 will definitely be better, but you'll see our full potential in the back half of the air.
Great. Thanks very much. Thank you, our next question is from the line of Berk Souvent with Steve Foll. Please receive a third question.
Hi, hey, good morning and congratulations, Roger, on obviously an impressive 10-year Atlantis. Great, thanks, Per. Maybe just to sort of switch gears a little bit. Where do we stand across Diagnetics? You noted the Wide Field View Award. But can you update us on how if pick and the hypersonic's Clive Body Contracts are?
what we call platform or the systems integration business. And generally everything's on track if thickened during is doing well. We expect some additions in the hypersonic glide body business. We want a program called Mayhem.
in the hypersonic world, which is really going to be helpful. If you made the trip to Huntsville, I don't want to repeat a lot of what we presented down there, but we talked about this year being one where we're in development and ramping, and then 24 is, if you will, kind of the payoff.
send people to Huntsville. By the way, Huntsville is one of those places in the US where technical people just want to go. I mean, they love the environment. It's a great outdoor city. There's a huge technology community there. And we've had many, many of our best and brightest self-select.
to go down and work at Dynetics. And that has helped us add depth to the team as we have ramped up the business there. Two things we haven't talked a lot about because I think they are at the high kind of a high beta. We still have a human lander bid that is outstanding. We're one of two.
bidders on that program. And I think it will be a complicated award, but we're hopeful that we will realize something out of our human lander position. And then if you were at Space Symposium, and I know some of you were.
We had a mock-up of our lunar rover, and that it will be more of a 24-a-word, but we're pretty excited about our rover offering. We're actually teamed with NASCAR on our rover. There are some kind of shoot for the stars, literally, programs in the NASA world that could further enhance the portfolio at Dynetics. But so far...
across the board generally doing well, you know, not to say we don't have a program or two that's ever going to have a development problem because when you're doing development, you know, there are issues. But we're pretty much in line with what we showed you when you were down in Huntsville.
Great. Thanks for that, Roger. And maybe just a follow-up question within the defense side. Last quarter, you highlighted that customers wanted to move a little faster on DES, and you were just sort of balancing that against providing sort of the highest quality service you could. Can you update us on where transitions stand and whether your view of the ramp process for that contract has changed at all?
Yeah, our part is going well. We've got the architecture in place and one net and what have you. So now it's getting the next task orders within the the Disah organization we're doing. We're in the middle of the transition.
with Lieutenant General Skinner to make that happen, but it hasn't happened yet. And, you know, would I like to see it ramp faster? You bet I would like to see it ramp faster. But, you know, the best thing we can do is offer a faster, better, less expensive, and more secure network.
to the support agencies within DOD and then help DISA sell those benefits. And you know, that's our job on the program. We have a great team, a great program manager. We have a great relationship with DISA. But we've got some books, some early transformations of networks.
And some of that work is still ahead of us. Great. Thank you, Roger. Yeah. Thanks, Bird.
Our next question is from the line of Seth Seisman with JP Morgan. Please proceed with your questions. Thanks very much. Good morning. Roger, congratulations on everything you've done at LIDOS and all the best. Great, thank you.
Sure, I just wanted to ask about the health business and it sounds like like maybe we should be expecting some margin expansion there in order to to drive the rest of the year and you know That'll be driven in part by by the packed act and so
Can you talk a little bit about how those expectations have changed in terms of the number of exams there and how much of the mix will be coming out of that exam business and what that opportunity is looking like now over time? And are we looking at kind of high teens margins in that business the rest of the year? Yeah, Seth, I'll start and then I'll let Chris in.
We always like to talk about our portfolio. If we have a situation like an SES where the first quarter is a little slow and we look at the full year, we're always looking at other parts of the portfolio that have the potential to outperform. And we'll...
Where we stand today, we're optimistic about both top line and bottom line in health. PACT Act, exams in general, our ability to hit our service level agreements, and in the future, earn incentives based upon performance. So we feel good about that.
HRP, we're finally starting to do events with guardspeople and reservists with Will Drive, top line. But I really want to give kind of a hats off to the whole health team. They have done just an outstanding job of executing on their program, staying close to the customer, providing.
value-added benefit and when you do that then good things happen in the group and you know customers come back they want to do more they want to do expanded work and you know PACT Act is a you know a positive influencer in the future but in the disability exam business
you get more than your fair share because you hit your service level agreements with both timeliness and quality of the exams that you do and our organization at QTC has always been at the forefront of performing in the exam business and it just gives us confidence and
looking to where we think we will over achieve and health is certainly that area this year. Yeah, let me just add, I mean, so don't put us down for high teens as a long-term new goal, but I mean, I think we've demonstrated we're doing what we said. We'll get it to mid teens and you saw Q4, got into the 14 and a half range, we improved it from there to Q1 and...
and we see more improvement ahead of it. Part of what Roger talked about. The team has done an excellent job, focused on quality, that will pay dividends, we believe in the long term. Our throughput has been excellent. And the customer's seen with the PACT Act as a catalyst for more volume that they needed to rethink how they did incentives and disincentives. And that created an opportunity for a contractor like Lidos that has confidence in our ability to maintain high throughput, great quality.
that Chris just to put a little more fine point on it. I mean, if I annualize Q1, it's basically implying that the health earnings are gonna be flat in 23 versus 22, which I think would be a pretty good result given some of the margin headwinds there, is that?
Is that then a sustainable level of earnings going forward? Given the maybe above trend margin that we're going to see in 23 and some of the dim sum headwinds, is it a level off of which the business can grow because it's been executing quite well for the last couple of years or is it?
You know a level that you know you kind of had to run real hard to get there in 23 And so maybe that's a level that's above what's sustainable Yeah, no, we don't we don't look at it as taking all the air out of the balloon just to make 23 numbers I think we're conscious on all the bids that are going through you know there's quality bids in that portfolio We have to continue to win the only upside on dim sum quite honestly is
It's a huge volume program. It's well-run. Well, executed. We're happy with it, but it's not at the top end of the health margins in the business. So as we look at some of the other programs we're bringing on board, we think we can offset that dim sum profitability with a lower top line volume.
And so, you know, our expectation is we set plans for the team every year, and I don't want to get ahead of Tom, but we'll set a 24 plan where the health business should deliver growth and earnings. Quite honestly, that's my expectation at this point in time. Great. Thank you very much.
So our expectation is we set plans for the team every year. And I don't want to get ahead of Tom, but we'll set a 24 plan where the health business should deliver growth and earnings. Quite honestly, that's my expectation at this point in time. Great. Thank you very much. Thank you.
Our next question is from the line of Toby Summer with Truist Securities. Please just leave it to your question.
Thanks. I also hope that you could expand on and contextualize the retention perhaps by quantifying the improvement year-to-date, given us some context for the arc of retention trends in recent years. And what if any financial implications there were in the quarter of maybe happening?
more employees than you anticipated and uh... and and what that could mean for the balance of the year achieving your top-line uh... guidance well let me uh... first i don't think we actually put out hard numbers but let me give you a little bit more
So there are some industry benchmarks that we all track. And pre-pandemic, we were always maybe a point better. Okay, and then during early in the pandemic, everybody's retention went...
to single digits, I mean mid single digits and then coming out of it, right, everybody went to the benchmark, the historic benchmark and actually significantly over it by, you know, a hundred basis points, maybe more than that. And so when we set the level, you know, and we put together a staffing plan that goes with our financial plan and
our great HR team takes that as they plan their recruiting for the year, we had a number that was kind of halfway between the worst of the pandemic heights and the traditional benchmark.
All right, and we have been operating maybe 3% below that, right, to give you just a sense. And if you take an employee base of 46,000 people and you are 3% better on voluntary turnover, then Toby, you can kind of run the numbers in your head.
You don't have to recruit just to stay even right and there's by way There's huge benefits to retention and you know Culture and learning and you're just beyond a numbers game and and being able to do the talent acquisition task What it does for us from a Spre to core and and learning and customer customer in
really thrilled with the feedback that we get, the information that we receive, and we can parse it down to very very small cohorts. And again we are significantly over almost every benchmark that our survey provider provides us. And we spend a lot of time to try to make this a great place to work and to take care of our employees. We have this program I referred to a little bit of my comments around LIDO's life which is around you know their clear their their career development flexibility and mobility in how we get the work done and then this new look at total health.
where all of us grew up in sort of a comp and benefits world and post-COVID, we realized that benefits really have to start with the whole self. You have to think about physical health, mental health, financial health, all of those things that come back together. And the implications, I think, the long term are, by our direct labor base.
probably a little bit higher than we had planned. That can be favorable to rates, right? But it's early, right? And we're only one quarter into it. And, you know, we may see some, you know, some moving in the second half of the year that would be adverse. But given all that we have experienced over the last two or three years to be where we are today on the second of May, it just, you know, makes us feel really, really good about the human talent that we have.
in the organization is only going to provide positive aspects for the company and the positive aspects financially. Because if we can hire faster, we can ramp faster, if we retain more people, it's going to pay off in the top line and bottom line.
Thank you. Thanks Toby. Rob it looks like we're over time so I think we only have time for one more questioner and then we'll wrap up. Sure sure that the last question will be coming from the line of Kaiva and Rumor with TD count.
you joined the company? Well, Kai, thanks. You're sort of the benchmark in our industry having done this for decades. And by the way, I appreciate everyone's comments. And it seems kind of almost icing on the cake. My final question and my final call is...
is coming from you, so I really appreciate that. Great, thank you. So the one question I have, looking at this here, the security products was light in the quarter, and you mentioned some of the reasons, but with each is building presumably quite a bit below average margin.
And, you know, with having to pay higher prices, I think you mentioned some inflation impact. It sounds like security products, excuse me, the totality of civil is probably going to be a little bit lighter than it was, than you expected going into the year. I mean, that's it.
reasonable to expect that the margins there might be midway between the nine two of last year and the ten two of the year prior and that therefore any goodness in health is pretty much offset by a little tougher outlook and security.
Yeah, I don't know why I thought the last question that I would have in my career would be an easy one. But you know, and I think we've we've we've covered everything that's going on in civil. Let's see. There is potential for civil war
to be at the margin it was last year. But there's more risk given the performance in the first quarter. And, you know, I think you appropriately described the portfolio challenge that we have as a company. Jim Moses runs our civil group is all in.
on driving performance both in the SES organization and the other parts of his portfolio. And he has tightened the belt, if you will. We have, I think Chris mentioned that we have done some focused reductions in force. We have reconfigured the value stream in the SES business.
bringing inside and into our control more of the production processes. We've got a very, very strong handle around our inventory and how we distribute spares and what have you. Part of what drives that business is the services side.
And we've got to get the services side, you know, running, you know, like a fine Swiss watch. And Jim knows that. His team is fully committed to that. And I expect him to pick up margins significantly throughout the year, whether, you know, he actually gets all the way to where he was last year. We will talk about it, or Tom will talk about it on a quarter-by-quarter basis. But the potential is there.
We don't need for him, by the way, to be all the way where he was last year to still make our guidance. But it certainly would be helpful. Terrific, thank you so much. All right. Thanks, Kai. Thanks, Kai. Thanks, everyone. Thank you, everyone. I'll turn the call back to Stuart Davis for closing remarks. Thank you, Rob, for your assistance on this morning's call and obviously thank you all for...
your time this morning and your interest in Leidos. We look forward to updating you again soon. Have a great day. This will conclude today's conference. May disconnect your lines at this time. Thank you for your participation.