Q3 2023 Leidos Holdings Inc Earnings Call

Greetings and welcome to the lightest as third quarter 2023 earnings call. At this time, all participants are in a listen only mode.

A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero from your telephone keypad. Please note. This conference is being recorded at this time I'll turn the conference over to Stuart Davis from Investor Relations.

Stuart.

You may begin.

Thank you sure Molly and good morning, everyone I'd like to welcome you to our third quarter fiscal year 2023 earnings Conference call.

Joining me today are Tom Bell, our CEO and Chris <unk>, Our Chief Financial Officer, 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.

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 includes risks and uncertainties.

Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially.

Finally as shown on slide three during the call, we will discuss GAAP and non-GAAP financial measures a reconciliation between the two is included in today's press release and presentation slides.

That I will turn the call over to Tom Bell, who will begin on slide four.

Thank you Stuart and good morning, everyone. It's really good to be with you today.

I am pleased to report another strong quarter for light us this morning.

A quarter of record revenue earnings cash flow bookings and backlogs.

Revenue grew 9% year over year this quarter, our fastest two years and well ahead of the pace implied in our guidance.

Customer demand remained robust across all three of our segments.

And we are proud of the work that we accomplished with our customers to deliver unimportant missions.

non-GAAP EPS was up 28% year over year with an adjusted EBITDA margin of 11, 5% cash.

Cash management and collections were even stronger.

Operations operating cash flow of $795 million was already in excess of our existing full year guidance of at least $700 million.

As a result of this quarter's strong performance and the momentum established in our second quarter, we are raising our 2023 financial guidance across all measures.

This quarter's results and our improved outlook were driven by the substantial progress. The team has made delivering on our performance initiatives articulated during our last call.

First instituting our promises made promises kept culture here at lighthouse.

Second analyzing and improving acquisition performance.

Third enhancing business development performance and backlog quality.

And fourth sharpening lighthouses strategy.

Let me speak to each of these initiatives in turn.

First we're executing well on creating a promises made promises kept culture here at light us challenging ourselves to consistently deliver on the expectations, we set for ourselves.

And ensuring that we're having candid conversations about what is working and what can be improved.

We're taking decisive actions to reallocate resources and course correct when needed.

The team understands that creating this culture is not a one and done or twice as nice event, but rather a quarter by quarter disciplined drumbeat.

Second we're taking definitive actions to enhance performance drive predictability and Derisk, our dynamics and security products or S. Yes businesses.

In Dianetics, where in the final stages of business integration across all financial contracts supply chain manufacturing and HR systems.

This will result in full proactive management visibility into the business better business efficiency and a better employee experience.

We've added significant engineering and program management expertise to dynamics to better serve our customers throughout critical programs of record.

The growth outlook for dynamics is strong and the three priority areas I identified in our last quarter.

And hypersonic, so we're ramping up production rates, while looking to improve effectiveness and lower costs.

And small satellite payloads, we have all four wide field of view tracking layer tranche zero payloads in orbit. Moreover, we're executing on tranche, one and recently submitted our proposal for tranche two.

Enforced protection, we're tracking toward government level development testing of if pick enduring shield in early 2024, and we're making progress on the persistent surveillance needs of the army and Marine Corps.

In SCS, we saw improvement in the quarter on revenue and margin coupled with strong bookings.

We bolstered our supply chain resiliency and took costs out of the business to create more predictability.

At the same time consistent with the promises laid out last quarter. The team has critically evaluated the business to identify unprofitable product lines and unfavorable geographies and we've updated our sales projections to better reflect current customer buying behavior.

Based on these candid the valuations and proactive measures to rightsize. The business, we are taking a noncash pretax charge of $688 million.

As previously disclosed the market has changed since the S. DNA acquisition and won't return to pre pandemic levels as fast as previously expected.

As a proof point the TSA administrator testified to Congress recently that the rollout of <unk> tea at the checkpoint would not be completed until 'twenty 42 at current funding levels.

Broadly customers are delaying recapitalization decisions and hopefully onto existing machines longer.

With this as a backdrop the team has moved to rightsize the business discontinued sales of an unprofitable product line and exit numerous higher risk lower return geographies.

We remain committed to the overall security products market, where we offer differentiated technology driven solutions.

Security concerns will be just as if not more pervasive going forward, providing a long term growth opportunity for lighthouse.

This includes the regulated aviation and ports and border markets as well as commercial infrastructure security and loss prevention markets.

The definitive actions, we have now taken will better position, our security business to grow from here in both margins and earnings.

We also made progress on our third initiative delivering exceptional business development performance in the third quarter.

$7.9 billion in awards is a new quarterly high watermark for light us.

Our book to Bill ratio in the quarter of 2.0 brings our year to date and trailing 12 month ratios to 1.2.

But more important to me our $38 billion of backlog is now $4 billion larger than last quarters and supports our growth and margin objectives.

This is what I was referring to last quarter, when I mentioned growing our total backlog overtime with quality wins.

Let me touch on a few of those quality wins this quarter, which demonstrate the ways lighthouse provides differentiated solutions to meet messages.

The largest win was the army common hardware systems sixth generation known as CHF, six which is a single award <unk> IQ with a potential value of 7.9 billion over 10 years.

Through technology will be streamlining and optimizing complex supply chains, and transforming logistics to be resilient to supply chain disruptions and cyber risks.

Because we offered the army a truly differentiated solution. This award was not protested and task orders are already beginning to flow.

Please note because of the nature of idea IQ contracts C. H S. Six did not material did not contribute to our record Q3 bookings and backlog that I mentioned earlier.

We also had two large Recompete awards in our intelligence group that secure our portfolio for years to come.

On a $900 million contract to support enhanced department of Homeland Security networks will enable cross agency intelligence sharing and secure collaboration while delivering capabilities like quantum resistant crypto cryptographic cryptography excuse me.

I operations robotic process automation and classified cloud service integration.

On a $700 million contract too.

To provide prototype and technology development support to our long time customer will identify emerging technologies and develop new tools techniques and cyber capabilities to enhance their mission.

My final call out is a $125 million contract to defend army weapons systems from cyber electromagnetic activities.

This award builds on the R&D and field testing, we've been doing for years and it's another example of dianetics ability to transition from prototypes to fielded capability.

You'll notice that cyber is a common theme on each of these wins cyber attacks are a persistent vexing problem for our customers and light OS as a top provider of full spectrum capabilities.

And services.

In keeping with our approach of anticipatory technology investment we continue to focus on addressing the next generation of cyber threats with emphasis in zero trust quantum proof of corruption.

Network defense and cyber physical systems.

We also anticipated the convergence of cyber and AI, what we call cognitive cyber years ago.

We have matured a number of technologies and capabilities in this area into pilots that defend against AI based cyber attacks.

As a key driver of our business development strategy, we will continue to invest in differentiators in areas of critical importance to our customers.

Fourth we are executing a multi phased strategic sharpening under the effort we call lighthouse next.

Our robust journey to unlock the next level of technology technological innovation, the next level of execution and performance and the next level of customer success.

The goal of light US next is to create a company, which with a much clearer and even more inspiring vision, our new North star.

We want to become the best company in the World at solving a core set of problems for our customers and the best employer in the world hiring and retaining the most talented people in order to do this.

This is the essence of light us next.

As an enabler of light US next we will be simplifying our organizational structure to promote operational excellence allow for faster decision, making and more tightly aligned our business around key technology discriminator.

This more focused capability oriented structure will better enable us to create clear differentiated growth strategies for each market we serve.

Now for more targeted and efficient investment in the highest areas of potential and enable repeatable solutions to drive profitable growth.

Each new sector has ample room for expansion, while benefiting from the collective strength and scale of our $15 billion company.

Beginning in 2024 will operate in five sectors that are focused on specific defined capability sets, we bring to our customers.

Health and civil will deliver customer solutions with unique capabilities in the areas of public health care coordination life, and environmental Sciences and transportation.

National Security, we will combine all our technology enabled services and mission software capabilities for defense and Intel customers in the area of cyber logistics security operations and decision analytics.

Commercial and international will combine our existing FCS commercial energy UK and Australian businesses.

Digital modernization will bring together, our I T operations and digital transformation programs.

This will allow us to serve all our digital transformation customers with better scale and speed brought about by better repeat repeat ability of best in class solutions with greater efficiency.

And lastly, defense systems will combine elements of dianetics and our prior defense business to develop and produce advanced space Ariel surface and subsurface manned and unmanned defense systems.

By streamlining the organization and encouraging to decision.

Making at the appropriate levels will be more efficient and responsive to market changes and customer needs.

I'm also upgrading several existing executive leadership team positions.

Will centralize strategy business development marketing communications government installations, all in one value stream under our new Chief growth Officer.

As such we will rejuvenate our customer centric business approach.

Our new Chief performance Officer position will spearhead program execution.

To ensure that we keep our commitments to customers as well as drive cost efficiencies through world class supply chain management.

Delivery and real estate portfolio management.

Lastly, our Chief Technology Officer will now also lead link the lighthouse innovation center, adding even more emphasis on technical innovation and development and making a profound organization wide commitment to discovering developing and deploying market differentiating.

<unk> Golden bullets.

We're placing technology innovation at the forefront of our sharpened lightest next north Star strategy.

Later this week, we'll announce our sector presidents and those who will serve in these key positions.

Finally, as I mentioned on our last call. The key element to our approach going forward will be disciplined resource allocation, both internally and externally.

Internally last quarter, we acted to refine our.

Investment strategy toward those areas best overall value to the enterprise.

Our BD teams have removed opportunities that do not have a clear path to an acceptable market and are reallocating, our resources and realigning our pipeline to better achieve top and bottom line growth for lighthouse.

Externally as promised our team deployed capital during the third quarter towards debt reduction to reach and slightly surpassed our previously announced target leverage ratio of three times gross debt to EBITDA.

After reaching this milestone and with near term acquisitions not a priority for this business I recommended and the board of directors approved the first increase in our dividend in over two years.

Shareholders of record on December 15th will receive a dividend of <unk> 38, a share a 6% increase over our past dividend.

Our strong balance sheet enables us to deploy additional capital to shareholder returns.

With our stock price that does not fully capture our earnings and cash generation power, we expect share repurchase to be a primary focus for excess cash in the near term.

And as we look to the future, we expect earnings and cash to grow and remain committed to this disciplined capital management and deployment policy.

In closing we are building momentum with two successful quarters as we work toward ending 2023 and a position of strength.

Our Q3 results speak to our ability to focus and grow the business grow earnings and generate robust cash conversion.

I'm very excited about our new organizational alignment for 2020 for our new North star coming into focus and indications of the full potential of this business becoming evident.

With that I'll turn the call over to Chris for more detail on our financial performance and updated outlook.

Thank you Tom despite our GAAP loss, our third quarter operating results were positive across the board and speak to the underlying strength of the team market position and management discipline revenue growth profitability and cash conversion all improved not only year over year, but also compared to a very strong Q2.

Unknown Executive: Greetings. Welcome to Lighthouse's third quarter, 2023 earnings column. At this time, all participants on a live and only mode.

Our enhanced outlook puts us on track for an excellent 2023.

Turning to slide five revenues for the quarter were $3 92 billion up 9% compared to the prior year quarter.

Unknown Executive: A brief question and answer session will follow the form of presentation. If anyone today should require operators, Assistant Turner Conference, please press star zero from your telephone keypad. Please note, this conference is being recorded.

Revenue growth has accelerated each quarter. This year and was ahead of our long term target in Q3.

Growth was robust in all three of our reporting segments, especially in health customers.

Stuart Davis: At this time, I'll turn the conference over to Stuart Davis from Investi Relations. Stuart, you may begin. Thank you, Shamali, and good morning, everyone.

<unk> continued to expand scope on existing contracts ahead of an uncertain budget environment.

Stuart Davis: I'd like to welcome you to our third quarter, 50th year 2023 earnings conference call. Joining me today are Tom Bell, our CEO, and Chris Cage, our Chief Financial Officer. Today's call is being webcast on the investor relations portion of our websites, where you'll also find the earnings release and supplemental financial presentation slides that we'll use during today's call. 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 includes risks and uncertainties.

Adjusted EBITDA was $451 million for the quarter up 21% year over year, and adjusted EBITDA margin increased 120 basis points to 11, 5%.

I'll get a little more granular later, a big picture Civil and defense profitability were in line with the year ago quarter and health was up substantially.

non-GAAP net income was $283 million and non-GAAP diluted EPS was $2 three <unk>.

Bolt up 28% compared to last year.

Low EBITDA, a lower effective tax rate added about <unk> <unk> to EPS, which offset a two cent headwind from increased interest expense.

Stuart Davis: Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially. Finally, as shown on slide three during the call, we'll discuss gap and non-gap financial measures. A reconciliation between the two is included in today's press release and presentation slides.

Turning to the segment drivers on slide six defense solutions revenues increased 7% year over year, the largest growth catalysts, we're in digital modernization offensive and defensive hypersonic and our Australian Airborne solutions business.

Tom Bell: With that, I'll turn the call over to Tom Bell. We'll begin on slide four. Thank you, Stuart, and good morning, everyone. It's really good to be with you today. I'm pleased to report another strong quarter for Lighthouse this morning. A quarter of record revenue earnings, cash flow, bookings, and backlog. Revenue grew 9% year-over-year this quarter, our fastest revenue years and well ahead of the pace implied in our guidance. Customer demand remained robust across all three of our segments, and we are proud of the work that we accomplished with our customers to deliver on important missions.

Defense solutions non-GAAP operating income margin increased 30 basis points from the prior year quarter to eight 4% with some milestone achievements and strong cost control.

That said, we did have some unfavorable EAC adjustments as we wind down prototype development on a couple of programs, which led to the 90 basis point sequential decline in margin as we complete systems integration and add technical depth, we are committed to delivering better and more predictable returns at dianetics.

Civil revenues increased 6% compared to the prior year quarter, driven by continued recovery in security products infrastructure spending at the FAA and increased demand for engineering support to commercial energy companies.

Tom Bell: Non-gap EPS was up 28% year-over-year with an adjusted EBITDA margin of 11.5%. Cash management and collections were even stronger. Operations operating cash flow of $795 million was already an excess of our existing full-year guidance of at least $700 million. As a result of this quarter's strong performance and the momentum established in our second quarter, we are raising our 2023 financial guidance across all measures. This quarter's results and our improved outlook were driven by the substantial progress the team has made delivering on our performance initiatives articulated during our last call. First, instituting a promises made promises kept culture here at Lighthouse. Second, analyzing and improving acquisition performance. Third, enhancing business development performance and backlog quality. And fourth, sharpening Lighthouse's strategy.

Civil non-GAAP operating income margin was 10, 4% compared to 11% in the prior year quarter. The year over year segment profitability decreased as a result of the mix of security product sales the changes that we've implemented including a leaner cost structure improved supply chain and rationalized product and geographic portfolio.

So we will stabilize and enhance the margin going forward and.

And did contribute to the 130 basis point sequential increase and civil non-GAAP margins.

Health revenues increased 18% over the prior year quarter, driven by higher levels of medical examinations and growth on our social security administration work non-GAAP operating income margin came in at 24% compared to 15% in the prior year quarter.

Tom Bell: Let me speak to each of these initiatives in turn. First, we're executing well on creating a promises made promises kept culture here at Lighthouse, challenging ourselves to consistently deliver on the expectations we set for ourselves, and ensuring that we're having candid conversations about what is working and what can be improved. We're taking decisive actions to reallocate resources and course correct when needed. The team understands that creating this culture is not a one and done or twice as nice event but rather a quarter by quarter disciplined drumbeat.

The increase in segment profitability was driven primarily by the increased volumes from packed act and strong incentive fee performance in the medical examination business.

In addition, we received an equitable adjustment to cover costs incurred as a result of the COVID-19 pandemic.

This adjustment added $14 million to both revenue and operating income similar to the recovery incurred in the second quarter of 2022.

We will operate in and report on these three segments through Q4, and then we'll move to the five sectors structure that Tom described for financial reporting segmentation will combine the national security and digital modernization sectors based on their similar economic characteristics. The remaining three sectors health.

Civil Defense systems in commercial and in international will be their own reporting segments.

Tom Bell: Second, we're taking definitive actions to enhance performance, drive predictability and de-risk our Dynetics and security products or SES businesses. In Dynetics, we're in the final stages of business integration across all financial contracts, supply chain manufacturing and HR systems. This will result in full proactive management visibility into the business, better business efficiency and a better employee experience. We've added significant engineering and program management expertise to Dynetics to better serve our customers throughout critical programs of record.

We believe the new segmentation will enhance visibility and provide investors and analysts a clearer picture of <unk> going forward.

We're still completing the contract by contract mapping into the new sectors are on our Q4 call. We will provide supplemental disclosure to help you with modeling, including revenue and operating income for the new segments for full year 2022 and 2023.

Turning now to cash flow and the balance sheet on slide seven we generated $795 million of cash flow from operating activities and $745 million of free cash flow cash flow benefited from strong collections and ongoing working capital improvement initiatives. In addition, we saw some benefit from our U S government customers acts.

Tom Bell: The growth outlook for Dynetics is strong in the three priority areas I identified in our last quarter. In hypersonics, we're ramping up production rates while looking to improve effectiveness and lower costs. In small satellite payloads, we have all four wide field of view tracking layer tranche zero payloads in orbit. Moreover, we're executing on tranche one and recently submitted our proposal for tranche two. In forced protection, we're tracking toward government level development testing of ifpick and during shield in early 2024 and we're making progress on the persistent surveillance needs of the Army and Marine Corps.

Celebrating payment at their fiscal year end.

S O for the quarter was 57 days, a two day improvement from the second quarter of 2023.

During the quarter, we paid off the remaining $200 million of commercial paper to reach our target leverage ratio of three times gross debt to adjusted EBITDA actually achieving two nine times, which gives us flexibility to return capital to shareholders. We ended the quarter with $750 million in cash and cash equivalents and four.

One 7 billion of debt.

Tom mentioned, the noncash charge recorded this quarter. So let me provide some additional details around that.

Tom Bell: In SES, we saw improvement in the quarter on revenue and margin coupled with strong bookings. We bolstered our supply chain resiliency and took costs out of the business to create more predictability. At the same time, consistent with the promises laid out last quarter, the team has critically evaluated the business to identify unprofitable product lines and unfavorable geographies and we've updated our sales projections to better reflect current customer buying behavior. Based on these candid evaluations and proactive measures to rightsize the business, we are taking a non-cash pre-tax charge of $688 million.

There are three basic components that or add back to net income statement of cash flows a goodwill impairment of 599 million asset impairment of $88 million and $12 million of inventory and other assets associated with product lines, we are exiting.

There are three basic components that or add back to net income statement of cash flows a goodwill impairment of 599 million asset impairment of $88 million and $12 million of inventory and other assets associated with product lines, we are exiting.

Goodwill and asset impairments are both separate lines on the income statement and cash flow statements.

Restructuring charge for inventory is included within the $19 million. Other line in the statement of cash flows and then within cost of revenues on the income statement.

The vast majority of the charges are associated with Ses, but we also held a small unprofitable asset within dianetics for sale, resulting in an $11 million impairment. The sale has been completed and will be reflected in our Q4 financials in both the SCS and dynamics impairments, we've taken action to improve the margin and earnings outlook with no Cigna.

Tom Bell: As previously disclosed, the market has changed since the SDNA acquisition and won't return to pre-pandemic levels as fast as previously expected. As a proof point, the TSA administrator testified to Congress recently that the rollout of CT at the checkpoint would not be completed until 2042 at current funding levels. Broadly, customers are delaying recapitalization decisions and holding on to existing machines longer. With this as a backdrop, the team has moved to rightsize the business, discontinued sales of an unprofitable product line and exit numerous higher risk, lower return geographies.

Second impact to current revenue projections.

Onto the forward outlook on slide eight.

Based on our strong Q3 and year to date results, we're raising our 2023 guidance for all metrics we.

We now expect revenue between 15, 1% and $15 3 billion, an increase of $150 million at the midpoint.

Profitability has been a key focus area over the last two quarters and the team has delivered our new adjusted EBITDA range is 10, five to 10, 7% an increase of 40 basis points on the bottom and 20 basis points on the top of our previous guidance.

Tom Bell: We remain committed to the overall security products market where we offered differentiated technology driven solutions. Security concerns will be just as, if not more, pervasive going forward, providing a long-term growth opportunity for light-ups. This includes the regulated aviation and ports and border markets, as well as commercial infrastructure security and lost prevention markets. The definitive actions we have now taken will better position our security business to grow from here in both margins and earnings.

With an improving revenue and margin outlook, we're raising our non-GAAP diluted EPS diluted EPS 40 at the low end and 30 <unk> at the high end to $6 80.

To $7 10 sets and.

And we are raising our operating cash flow target by $150 million to at least $850 million for the year, which is right at our year to date performance let.

Let me put some context around our guidance related to the current budget environment.

We're hopeful that Congress will be able to avoid a shutdown, but in the spirit of promises made promises kept our guidance explicitly includes our current assessment of the risk of the government shut down.

Tom Bell: Our book to bill ratio in the quarter of 2.0 brings our year to date and trailing 12 month ratios to 1.2. But more important to me, our $38 billion of backlog is now $4 billion larger than last quarters and supports our growth and margin objectives. This is what I was referring to last quarter when I mentioned growing our total backlog over time with quality wins.

A potential full 45 day shutdown could put us closer to the bottom end of guidance for revenue and EPS shutdowns.

Shutdowns impact on cash flow is harder to predict we expect to generate operating cash flow in the fourth quarter, but our revised cash guidance reflects the possibility of a modest disruption associated with the potential government shutdown.

Our strong balance sheet positions us well to navigate this potential headwinds with that Somali we're ready to take some questions.

Tom Bell: Let me touch on a few of those quality wins this quarter, which demonstrate the ways Leidos provides differentiated solutions to meat clutches. The largest win was the Army Common Hardware Systems 6th Generation known as CHS 6, which is a single award IDIQ with a potential value of 7.9 billion over 10 years. Through technology, we'll be streamlining and optimizing complex supply chains and transforming logistics to be a resilient to supply chain disruptions and cyber risks.

Thank you and we will now begin the question and answer session.

To ask a question you May Press Star then one on your Touchtone phone.

If you are using a speakerphone please pick up your handset before pressing the keys.

So it was drawing a question. Please press Star then two.

At this time, we will pause momentarily to.

Assemble our roster.

Our first question comes from the line of Matt Akers with Wells Fargo.

Please proceed with your question.

Yeah, Hey, good morning, guys. Thanks for the question.

I guess the follow up on <unk>.

Tom Bell: Because we offered the Army a truly differentiated solution, this award was not protested and taskwaters are already beginning to flow. Please note, because of the nature of IDIQ contracts, CHS 6 did not contribute to our record Q3 bookings and backlog that I mentioned earlier. We also had two large recompete awards in our intelligence group that secure our portfolio for years to come. On a $900 million contract to support enhanced Department of Homeland Security Networks, we'll enable cross-agency intelligence sharing and secure collaboration while delivering capabilities like quantum resistant cryptography, AI operations, robotic process automation, and classified cloud service integration.

Curious if you could give us an update on.

Some of the insourcing activities and how that's going.

We're on track for Charleston, kind of early next year.

Yeah, Matt Thanks for the thanks for the call and the question.

Yes definitely the team has continued to make steady progress over the course of the last few quarters and in Charleston is really important to our future strategy, where we are on track. It's something that will go live whether it's late Q1 early Q2.

We launched our hiring campaign, we're working on.

Outfitting the facility so that still are still tracking to where we want it to be and we've made other progress as it relates to various supply chain improvements over the course of the quarter. So again one of the reasons why the civil margins trended up this quarter was the SCS business showing some signs of improvement and we're really happy with that progress.

Tom Bell: On a $700 million contract to provide prototype and technology development support to a long time customer, we'll identify emerging technologies and develop new tools, techniques and fiber capabilities to enhance their mission. My final call out is a $125 million contract to defend Army weapon systems from cyber electromagnetic activities. This award builds on the R&D and field testing we've been doing for years, and it's another example of DYNETIC's ability to transition from prototypes to fielded capability.

Just to add Matt.

While your question was tactical so I wanted to Chris to go first I'm.

I'm glad the first question was about SCS because.

While it is unfortunate we have to take the impairment charge. The fact is we are all very bullish about the prospects of this business going forward in fact I referenced in my comments.

Changing customer buying behavior over in Europe at a major trade show, we recently unveiled two new products that directly speak to this changing customer buying behaviors.

Our pro vision, three people scanner, which.

Tom Bell: You'll notice that cyber is a common theme on each of these wins. Cyberattacks are a persistent, vexing problem for our customers, and Lighthouse is a top provider of full spectrum capabilities, and Services. In keeping with our approach of anticipatory technology investment we continue to focus on addressing the next generation of cyber threats with emphasis in zero trust, quantum proof encryption, network defense, and cyber physical systems. We also anticipated the convergence of cyber and AI, what we call cognitive cyber, years ago.

Features wideband AI based gender neutral upper rhythms for higher quality imaging and detection something that customers are asking for the technology to be faster and better and more important to me.

Product, we call pro site, which is a secure and scalable enterprise platform that integrates our customers.

First suite of screening machines and operations that allow them to create and a system wide view of their security operations at any airport any lane. So very excited about not only the tactical decisions since the team is making to rightsize the business for the future.

Tom Bell: We've matured the number of technologies and capabilities in this area into pilots that defend against AI-based cyber attacks. As a key driver of our business development strategy, we'll continue to invest in differentiators in areas of critical importance to our customers.

But also the forward investments in future products that will allow us to compete and win going forward in both the regulated market and the commercial market.

Great. Thanks, and then I guess.

As a follow up could you touch on kind of the cash flow I guess Q4 cash has implied a lot weaker is that just kind of timing of the working capital like you mentioned is there anything else.

Tom Bell: Fourth, we're executing a multi-phase strategic sharpening under the effort we call Leidos Next, a robust journey to unlock the next level of technological innovation, the next level of execution and performance, and the next level of customer success. The goal of Leidos Next is to create a company which with a much clearer and even more inspiring vision are new nor star. We want to become the best company in the world that's solving a core set of problems for our customers and the best employer in the world, hiring and retaining the most talented people in order to do this.

Kind of onetime in there.

No Matt nothing more than that obviously, we're very pleased with the third quarter performance and that allowed us to raise our full year guidance by the $150 million.

We're navigating the risk around the shutdown and the potential challenges that may or may not pose we're hopeful to be able to exceed that performance level and the other thing is we did certainly experience some benefit as I mentioned of customers paying a few things early as we closed out Q3. So you know the team is motivated to finish the year strong.

Tom Bell: This is the essence of Leidos Next. As an enabler of Leidos Next, we will be simplifying our organizational structure to promote operational excellence, allow for faster decision-making, and more tightly align our business around key technology discriminators. This more focused capability-oriented structure will better enable us to create clear differentiated growth strategies for each market we serve, allow for more targeted and efficient investment in the highest areas of potential, and enable repeatable solutions to drive profitable growth.

But we'll just be cautious as we navigate.

Our government customers doing go into Q4.

Great. Thank you.

Thank you.

Our next question comes from the line of Bruce <unk> with Stifel. Please proceed with your question.

Hey, good morning, and congrats on the strong quarter.

So when you think about hey.

Hey, Tom this is probably for Chris.

As we think about <unk> performance relative to the future earnings where their items in the quarter that you anticipate do not recur outside of the $14 million health benefit you just mentioned you're no shutdown case for earnings and <unk> is expected to be closer to just shy of $1 80, which is still a step down from <unk> when factoring in that benefit.

Tom Bell: Each new sector has ample room for expansion while benefiting from the collective strength and scale of our $15 billion company. Beginning in 2024, we'll operate in five sectors that are focused on specific defined capability sets we bring to our customers. Health and Civil will deliver customer solutions with unique capabilities in the areas of public health, care coordination, life and environmental sciences, and transportation. National Security will combine all our technology-enabled services and mission software capabilities for defense and intel customers in the area of cyber, logistics, security operations, and decision analytics.

And the tax benefit so I'm just curious if there was a pull forward of security products or something on ordinary or the business is just performing really well.

Yeah, I'd say, our kind of our base outlook Q4 looks a little bit like Q2.

Burnt there wasn't anything other than the $14 million that we highlighted that was what I consider to be a one timer. The health business performed exceptionally well when you normalize that a one time benefit out the margins we're still in the high 18% range. We did see strong performance from packed acts caseload, we did see strong incentive.

Tom Bell: Commercial and international will combine our existing SES, commercial energy, UK, and Australian businesses. Digital modernization will bring together our IT operations and digital transformation programs. This will allow us to serve all our digital transformation customers with better scale and speed brought about by better repeatability of best-in-class solutions with greater efficiency. And lastly, defense systems will combine elements of genetics and our prior defense business to develop and produce advanced space, aerial surface, and subsurface manned and unmanned defenses, by streamlining the organization and encouraging decision making at the appropriate levels will be more efficient and responsive to market changes and customer needs. I'm also upgrading several existing executive leadership team positions.

Fee performance around that as well and those are things that could moderate a little bit quarter to quarter.

But on the contrary I also pointed to the fact that defense stepped back a little bit due to some EAC adjustments and and those are things that we don't expect to recur on an ongoing basis. So.

Q4, hopefully we're right down the middle if you will see where the government shutdown risk takes us, but really pleased quite honestly with the progress we're seeing across the business on margin and revenue growth.

Great and maybe just as a follow up there.

On the health and the defense side.

I guess, there's three big contracts to think about there is that there's CHF six and Theres Dim-sum can you just give us maybe some viewpoint on sort of how we should think about those contracts going forward I know dim sum was expected to be a headwind. It doesn't seem like that's happened yet maybe you are repurposing some of that ceiling value. So.

Just curious how you think those are going to those two are going to ramp up and then <unk> is going to step down.

Tom Bell: We'll centralize strategy, business development, marketing, communications, government relations, all in one value stream under a new chief growth officer. As such, we'll rejuvenate our customer-centric business approach.

Well, let me let me jump in first part if you don't mind I'll talk about dim sum first and then we will take them take them from there.

Obviously, we're very very pleased and proud of the team and how they deploy dim sum.

Tom Bell: Our new chief performance officer position will spearhead program execution to ensure that we keep our commitments to customers as well as drive cost efficiencies through world class supply chain management, IT delivery and real estate portfolio management.

Two great customer satisfaction great.

It's about 91% and deployed with $7 3 million Conus beneficiaries out of $9 six that we envisioned for full time and we are on track to deliver to all the Dod locations by the end of this year, but what's more exciting to me is while most of us and most of my first six months.

Tom Bell: Lastly, our chief technology officer will now also lead linked the Lighthouse Innovation Center, adding even more emphasis on technical innovation and development and making a profound organization-wide commitment to discovering, developing, and deploying market differentiating technology, golden bolts. We're placing technology innovation at the forefront of our sharpened Lighthouse Next North Star strategy.

Conversations with analysts have been about what are we going to do when dim-sum trails off what I learned this past quarter is actually this program is just in the first phase of a three phased program that the customer.

Expects regarding the whole suite of programs around.

Health margins.

<unk>.

Tom Bell: Later this week, we'll announce our sector presidents and those who will serve in these key positions. Finally, as I mentioned on our last call, the key element to our approach going forward will be disciplined resource allocation, both internally and externally. Internally last quarter, we acted to refine our investment strategy toward those areas best overall value to the enterprise. Our BD teams have removed opportunities that do not have a clear path to an acceptable market and are reallocating our resources and reallining our pipeline to better achieve top and bottom line growth for Lighthouse.

What what is interesting to me is how our excellent customer satisfaction and performance to date positions us not only to continue to.

<unk> on the program of dim sum, but also puts us in a great position to compete for the follow on efforts and the rest of the efforts that the customer is.

Looking for so I'm actually very excited about where we're going while I am too Tom and I think that.

This is definitely has a horizon next horizon two it burden we've talked about trying to once the system got deployed add more capabilities and to that point you to the team was very successful we want to contract this quarter not huge but it's a relatively shorter duration contract digital first under the dim sum umbrella.

Tom Bell: Internally, as promised, our team deployed capital during the third quarter towards debt reduction to reach and slightly surpass our previously announced target leverage ratio of three times gross debt to EBITDA. After reaching this milestone and with near term acquisitions not a priority for this business, I recommended and the Board of Directors approved the first increase in our dividend in over two years. Shareholders of record on December 15th will receive a dividend of 38 cents a share, a 6 percent increase over our past dividend.

And that is starting on the next phase that Tom was just talking about taking digital digitalized the information to digitalization and how patient benefits are extended and modernized and so that will help moderate the impact of the deployments coming to an end.

It is lower in Q4 than it had been earlier this year because the deployment phases, but were able to see line of sight to holding kind of at the Q4 level going into 'twenty, four which is excellent and then quickly on the other two dez Hey, it's performing as expected and we're seeing some ramp up consistent with what we said last quarter.

Tom Bell: Our strong balance sheet enables us to deploy additional capital to shareholder returns. With a stock price that does not fully capture our earnings and cash generation power, we expect share repurchase to be a primary focus for excess cash in the near term. And as we look to the future, we expect earnings and cash to grow and remain committed to this disciplined capital management and deployment policy.

Couple of nice task orders are in the Hopper right now multi $100 million task well in fact, we just got a major award this quarter.

$274 million.

There is likely another one even larger in the near term that's right. So it will be a growth catalyst for us in 'twenty four and then finally CHF six Tom highlighted very proud of the team to <unk>.

Tom Bell: In closing, we're building momentum with two successful quarters as we work toward ending 2023 in a position of strength. Our Q3 results speak to our ability to focus, grow the business, grow earnings and generate robust cash conversion.

Avail without a protest.

We won't see any notable activity from that in 'twenty, three but we're positioned for it to be a growth catalyst in 'twenty four and too early to speculate until we get a little bit more clarity on what those task orders are but we're rounding out the catalog customer seems very motivated to use us to buy as much of the C. Five ISR activities.

Tom Bell: I'm very excited about our new organizational alignment for 2024, our new Norse star coming into focus, and indications of the full potential of this business becoming evident.

Christopher Cage: With that, I'll turn the call over to Chris for more detail on our financial performance and updated outlook. Thank you, Tom. Despite our gap loss, our third quarter operating results were positive across the board, and speak to the underlying strengths of the team, market position, and management discipline. Revenue growth, profitability, and cash conversion all improved, not only year over year, but also compared to a very strong Q2. Our enhanced outlook puts us on track for an excellent 2023.

As they can to support their mission, so really excited about getting that one up and running and just to pile on that one third if you don't mind.

So proud of the team the RFP asked for a transition plan of 60 days.

Team accomplished it in 1919 days to be fully up and running for the customer in this important part of their value stream. So just so super excited about the team that was able to lean into that and satisfy the customer quickly out of the out of the blocks.

Super helpful. Thank you Tom.

Christopher Cage: Turning to slide five, revenues for the quarter were $3.92 billion, up 9% compared to the prior year quarter. Revenue growth has accelerated each quarter this year and was ahead of our long-term target in Q3. Growth was robust in all three of our reporting segments, especially in health. Customers continued to expand scope on existing contracts ahead of an uncertain budget environment. Adjusted EBITDA was $451 million for the quarter, up 21% year over year, and adjusted EBITDA margin increased 120 basis points to 11.5%.

Thanks Bart.

Our next question comes from the line of Mariana Perez Mora with Bank of America. Please proceed with your question.

Good morning, everyone.

Hi, Good morning, two questions first one is more like Big picture, how should we think about the organizational structure in terms of timing how long how much it's going to cost and how should we think about the cost structure.

Workhorse once this is done.

Yes. Thanks, Marianna. So first of all that we will operate in the current structure through the rest of this year. So in fact in all of my communications to the lighthouse team I've been hammering home stay focused to stay focused on the current organizational structure are.

Christopher Cage: I'll get a little more granular later. A big picture, civil and defense profitability were in line with the year ago quarter, and health was up substantially. Non-gap net income was $283 million, and non-gap diluted EPS was $2.03, both up 28% compared to last year. Below EBITDA, a lower effective tax rate added about 8 cents to EPS, which offset a 2 cent headwind from increased interest expense.

Customers rely on us and I'm relying on the team to deliver on our promises this year to our customer.

New organizational structure that I articulated will take place on January 1st.

Christopher Cage: Turning to the segment drivers on slide six, defense solutions revenues increased 7% year over year. The largest growth catalysts were in digital modernization, offensive and defensive hypersonics, and are Australian airborne solutions business. Defense solutions and non-gap operating income margin increased 30 basis points from the prior year quarter to 8.4% with some milestone achievements in strong cost control. That said, we did have some unfavorable EAC adjustments as we wind down prototype development on a couple programs, which led to the 90 basis points sequential decline in margin. As we complete systems integration and add technical depth, we are committed to delivering better and more predictable returns at dynetics.

And frankly, it's not a reorganization, it's simply a realignment of the existing light OS business in a post pandemic.

Fresh look at the organization for efficiency and effectiveness and Thats really the main goal how do we increase repeat ability increase our prowess going to the markets, how do we satisfy customers with better products across customers, where they tended to be size.

Load in the last organizational.

Construct we had and so it's my expectation that the new organization is going to unlock all sorts of revenue and profit opportunities in that regard one of the first things I'll be doing in the new year is challenging the new executive leadership team to create.

Christopher Cage: Civil revenues increased 6% compared to the prior year quarter, driven by continued recovery and security products, infrastructure spending at the FAA, and increased demand for engineering support to commercial energy companies. Civil non-gap operating income margin was 10.4%, compared to 11% in the prior year quarter. The year over year segment profitability decreased as a result of the mix of security product sales. The changes that we've implemented, including a leaner cost structure, improved supply chain and rationalized product and geographic portfolio, will stabilize and enhance the margin going forward and did contribute to the 130 basis point sequential increase in civil non-gap margin.

Full potential growth plans for each of the new five businesses and in those full potential growth plans, we'll be looking at the.

The marketplace that the competition the whole suite of technologies and capabilities, we need to compete and win effectively and I expect that we'll see.

Our growth plans for each business that are unlocking growth that is currently.

<unk> or <unk> in the current environment, So I'm very hopeful about it in terms of in terms of costs Chris.

Christopher Cage: Health revenues increased 18% over the prior year quarter, driven by higher levels of medical examinations and growth on our Social Security Administration IT work. This investment to cover costs incurred as a result of the COVID-19 pandemic. This adjustment added 14 million to both revenue and operating income, similar to the recovery incurred in the second quarter of 2022.

Less is better but.

Listen this is not the primary motivation to do this as Tom talked about I do see each of these businesses having.

Different objectives as it relates to that in the example of defense system to say, we have been investing and we will continue to invest more in engineering and technical depth that is not a cost driven exercise to get those businesses aligned effectively but in the case of digital modernization. This repeatable solutions. This automation, obviously those can lead to <unk>.

More efficient delivery structures back office structure of those types of things. So we're very excited to get to the full potential and we will have a lot more to share on that marianna as we get to that next call of Q4.

Christopher Cage: We'll operate in and report on these three segments through Q4, and then we'll move to the five sector structure that Tom described. For financial reporting segmentation, we'll combine the national security and digital modernization sectors based on their similar economic characteristics. The remaining three sectors, Health and Civil, Defense Systems, and Commercial and International, will be their own reporting segments. We believe the new segmentation will enhance visibility and provide investors and analysts a clearer picture of Leidos going forward.

Thanks, So much and then my follow up it's more specific to health care.

Incentive fee performance on the medical examination was strong once again could you. Please make sure that for the quarter and give us a sense of how are your expectations for that like in the near term to come down or not.

Marianna.

Absolutely. This is an area where the customer has always had both incentives and disincentives associated with these with these contracts and earlier this year as the pack that volume is ramping up.

Christopher Cage: We're still completing the contract by contract mapping into the new sectors. Our on our Q4 call will provide supplemental disclosure to help you with modeling, including revenue and operating income for the new segments for full year 2022 and 2023.

Modified some of those and the team has been doing an excellent job not only on throughput volume, but customer satisfaction timeliness et cetera. The customer is motivated to raise the bar yet again, because they know they want to make sure we're continuing to deliver against a high volume of demand.

Christopher Cage: Turning out a cash flow in the balance sheet on slide seven, we generated 795 million of cash flow from operating activities and 745 million of free cash flow. Cash flow benefited from strong collections and ongoing working capital improvement initiatives. In addition, we saw some benefit from our US government customers accelerating payment at their fiscal year end. DSO for the quarter was 57 days, a two-day improvement from the second quarter of 2023.

And so we'll continue to recalibrate on what that full potential looks like but I would just say that we're excited about the prospect of those incentives continuing to contribute not only in the fourth quarter, but as we look ahead in 2024 and.

And just if you don't mind Marianne piling on so proud of the team.

And frankly as a taxpayer proud of the customer.

Christopher Cage: During the quarter, we paid off the remaining 200 million of commercial paper to reach our target leverage ratio of three times gross debt to adjust the deba-dop, actually achieving 2.9 times, which gives us flexibility to return capital to shareholders.

The customer should be challenging us to raise our standards and raise expectations each contract and so.

They did we performed we threw strikes.

They changed the strike zone and tightened it up a little bit and so I have every expectation that the team.

Christopher Cage: We ended the quarter with 750 million in cash and cash equivalence and 4.7 billion of debt.

Ken throw strikes even better in 2024 than they did in 2023.

Christopher Cage: Tom mentioned the non-cash charge recorded this quarter, so let me provide some additional details around that. There are three basic components that are add back to net income statement of cash flows, a goodwill impairment of 599 million, asset impairment of 88 million, and 12 million of inventory and other assets associated with product lines we are exiting. Goodwill and asset impairments are both separate lines on the income statement and cash flow statements.

Thanks, so much.

Thank you.

Our next question comes from the line of Cai von <unk> with.

Gd Cowen.

Please proceed with your question.

Terrific. Thank you very much great results guys.

Thanks, Scott and maybe follow up on.

Mariano question so if.

Christopher Cage: Restructuring charge for inventory is included within the 19 million dollar other line in the statement of cash flows and within cost of revenues on the income statement. The vast majority of the charges are associated with SES, but we also held a small, unprofitable asset within dynetics for sale, resulting in an 11 million dollar impairment.

If we take out the $14 million Covid, which was kind of prior period, <unk>, six which is terrific and health could you quantify how big the <unk>.

Incentive awards in that quarter.

And give us some sense, if they've tightened it up.

And you know are they going to tighten it so those margins go down because I think at one point.

Christopher Cage: The sale has been completed and will be reflected in our Q4 financials.

You were hoping to do mid teens and now it looks like Youre doing 18 518, six this quarter so.

Christopher Cage: In both the SES and dynetics impairments, we've taken action to improve the margin and earnings outlook with no significant impact to current revenue projections, on to the Forward Outlook on Slide 8. Based on our strong Q3 and year-to-date results, we're raising our 2023 guidance for all metrics. We now expect revenue between 15.1 and 15.3 billion, an increase of 150 million at the midpoint. This points on the bottom and 20 basis points on the top of our previous guidance.

Where is that likely to go and what impact do you see from potential government shutdown, because you mentioned that there's a potential issue going forward yes.

Christopher Cage: With an improving revenue and margin outlook, we're raising our non-gap diluted EPS, 40 cents at the low end and 30 cents at the high end to $6.80 to $7.10. And we're raising our operating cash flow target by 150 million to at least 850 million for the year, which is right at our year-to-date performance.

Yeah, Cai let me.

We could go on here and if Tom wants to add on he can.

Look we're not going to quantify the specifics around the incentives I would just say that.

This year, if you look at 'twenty three.

We will not have a full year worth of those incentives in our results. So the good news is 24, we expect that to be something that can contribute for the full year.

But also we will have to step up our game relative to the customer increasing the standards because we all want to make sure. The veterans are being well served that our timeliness stays high that the throughput stays high and the quality stays high. So it is a you know it's been a nice benefit are we have incentive fee structures across a variety of contract.

And our objective is to deliver exceptional service and try to maximize those these ones just happened to be more noteworthy, but big picture on health. We had previously said a mid teens was a good margin level for the business. Obviously, we think we can do better and we are doing better than that now and whether that's in there.

Christopher Cage: Let me put some context around our guidance related to the current budget environment. We're hopeful that Congress will be able to avoid a shutdown, but in the spirit of promises made, promises kept, our guidance explicitly includes our current assessment of the risk of a government shutdown. A potential full 45-day shutdown could put us closer to the bottom end of guidance for revenue and EPS. A shutdown's impact on cash flow is harder to predict. We expect to generate operating cash flow in the fourth quarter, but our revised cash guidance reflects the possibility of a modest disruption associated with the potential government shutdown.

You know 17, 18% zone, we will endeavor to sustain that level of performance.

On the shut down you know this is an imperfect science, but we've spent a lot of work because we got so close at the end of September Big.

Big picture, we think on the order of $100 million ish of revenue potential risk $10 million to $15 million or LOI risks that we're managing through I mean, the most important thing is we work hand in glove with our customers right up to the deadline and that we work with our employees to make sure they understand.

Christopher Cage: Our strong balance sheet positions us well to navigate this potential headwind.

Unknown Executive: With that, Somali, we're ready to take some questions.

Unknown Executive: Thank you, and we will now begin the question and answer session.

What there to do if theyre unable to perform on the customer mission and hopefully we will find an opportunity to get back to work quickly. If it were to happen, but that's kind of our current assessment, but it's one that we will continuously refresh as we worked through.

Unknown Executive: To ask a question, you may prefer to star than one on your touch tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys.

Unknown Executive: To withdraw a question, please first star than two. At this time, we'll pause to momentarily assemble our roster.

All right up to a potential deadline.

But again just to put.

Just to put stopped at a little bit Kai.

Matt Eggers: Our first question comes from the line of Matt Eggers with Wells Fargo. Please, we'll see with your question. Yeah, hey, good morning, guys. Thanks for the question. But I guess to follow up on the SES, cheers to give us an update on some of the in-sourcing activities and how that's going. If you're still on track for Charles, then I'll kind of early next year. Yeah, Matt, hey, thanks for the call and the question.

As Chris mentioned in his comments.

The risk of a full 45 day shutdown is included in our the lower end of our guidance. So.

Consistent with promises made promises kept given the risk of a full 45 day shutdown is possible.

The guidance incorporates that risk I mean, the good news guys. We have a lot of funded backlog, we have a lot of essential programs and we're well positioned to navigate these headwinds.

Matt Eggers: Yeah, definitely the team has continued to make steady progress over the course of the last few quarters, and Charleston is really important to our future strategy where we are on track. It's something that will go live, whether it's late Q1 or early Q2. We've launched our hiring campaign. We're working on, you know, outfitting the facility. So that's still tracking where we want it to be, and we've made other progress as it relates to various supply chain improvements over the course of the quarter.

So just to be clear.

A follow up the 100 million in the $10 million to $15 million and Oh, why that is for health or that is across Oh, no no no no no across the company as.

As it relates to health, that's probably one of the least impacted areas. So that's across the company veterans veterans as an essential service that's right.

Okay. Thank you very much thank.

Thank you thank you Kai.

Matt Eggers: So again, one of the reasons why the civil margins are trended up this quarter was the SES business showing some signs of improvement, and we're really happy with that progress. I would just add, Matt, you know, that while your question was tactical, so I wanted Chris to go first. I'm glad the first question was about SES because while it's unfortunate, we have to take the impairment charge. The fact is we're all very bullish about the prospects of this business going forward.

Our next question comes from the line of Sheila.

Tayo.

Jeffrey.

You can see with your question.

Good morning, guys. Thank you for the time.

Uh huh.

So I wanted to ask about diabetics, how comfortable are you guys still with the development programs, there and what sort of hurdles that you're looking to get through to sort of get there.

The development stage in time.

Matt Eggers: In fact, I referenced in my comments, changing customer buying behavior over in Europe at a major trade show. We recently unveiled two new products that directly speak to this changing customer buying behaviors, a provision three people scanner, which features why ban AI based gender neutral algorithms for higher quality imaging and detection, something that customers are asking for the technology to be faster and better. And more important to me, a product we call pro site, which is a secure and scalable enterprise platform that integrates the customer's diverse suite of screening machines and operations that allowed them to create and a system wide view of their security operations at any airport or any lane.

On the production on those.

Yeah, Thanks, Sheila and good to speak to you again.

On dianetics.

I am convinced and we are convinced that the best days are still ahead of US we've got a great management team down there and as I alluded to in my comments, we're adding technical and financial expertise to dianetics to ensure its success going forward. So feel really good about the team feel really good about the people who are.

<unk> to go help us find success and be successful at.

<unk> and in our defense business.

The team down there is really focused on those three major markets that I have spoken to now for.

Four five months, which is <unk>.

Small satellite payloads, hypersonic and force protection and on each of them we are tracking Sheila.

Matt Eggers: So very excited about not only the tactical decisions the team is making to fight size the business for the future, but also the forward investment in future products that will allow us to compete and win going forward in both the regulated market and the commercial market.

Biweekly.

The actual burn down plan and the tasks that we have to hit to find success not only as we turn the page from 2023 into 2024, but through 2024. So we've got a complete road map, but the team is knocking down purposefully one by one are there challenges always supply chain.

Tom Bell: Great, thanks. And then I guess, you know, as a follow up, could you touch on kind of a cash flow? I guess the Q4 cash is implied a lot weaker. Is that just kind of timing of the working capital? Like you mentioned is right thing else. Kind of one time in there. Yeah, no, nothing more than that. Obviously, we're very pleased with the third quarter performance and that allowed us to raise our full year guidance by the 150 million.

Challenges.

Testing challenges customer focused challenges, there's there's all sorts of challenges that the team is having too to Russell to ground, but they're on it we're engaged both at the Pentagon and at the operational level the customer demand for the solutions in those three spaces is acute.

Tom Bell: You know, we're navigating the risk around us. The shutdown and the potential challenges that may or may not pose. We're hopeful to be able to exceed that performance level. And the other thing is we did certainly experience some benefit as I mentioned of customers paying a few things early as we closed out Q3. So, you know, teams motivated to finish the year strong, but we'll just be cautious as we navigate with our government customers doing go into Q4.

And frankly world events that are happening right now only heighten their desire for these solutions that we're providing so we feel very good about them.

<unk>.

I think that dynamic is going to benefit from being a part of this new bigger defense business in the organization of 2024 were even more broad engineering program management and technology capabilities will be brought to bear for the benefit of dynamics in our in our Huntsville teammates.

Sure.

Yeah, Sheila I mean, obviously, it's a high priority item, we're putting all the right resources on it and.

Unknown Executive: Great. Thank you.

Very excited about the long term prospects there in any event you know dynamics will be a growing business for us in 'twenty four.

Bert Subin: Our next question comes with a line of birds who've been with people. Keith will see with your question. Hey, good morning and congrats on the strong quarter. And we think about, hey, Thomas Chris, this this supply for Chris, as we think about three Q performance relatives of future earnings, were there items in the quarter that you anticipate do not recur outside of the $14 million health benefit you just mentioned? You're no shutdown case for earnings in 4Q is expected to be closer to, you know, just shy of $1.80, which is still a step down from 3Q and factoring in that benefit and the tax benefit.

The higher steeper ramp the inflection point on related to if pik.

Moving to full or volumes could be later in the year could trend to the 25, but all signs point to that continuing to be the capability. The army focus on deploying.

Yes.

Okay.

I'll follow up on that later, but on the back on time I wanted to ask about that since you mentioned in your prepared remarks, I think you said it grew for the last time, we chatted you mentioned you added a criteria about EBITDA margin two potential wins so.

Bert Subin: So I'm just curious if there was pull forward of security products or something unordinary or the business is just performing really well. Yeah, I'd say, you know, kind of our base outlook Q4 looks a little bit like you too. But there wasn't anything other than the 14 million that we highlighted that was of what I'd considered to be a one timer. The health business performed exceptionally well when you normalize that one time benefit out the margins were still in the high 18% range.

Can you talk about.

How do you think EBITDA margins should be on some of these.

New wins.

And that pipeline now.

Well Youre right, Sheila what I'm doing as we talk about the pipeline for business development opportunities across all the businesses is we're adding the criteria of what is the expected margin and that's why in my comments I talked about not only the increase in the backlog, but that increased support.

Bert Subin: We did see strong performance from pack tax caseload. We did see strong incentive fee performance around that as well. And those are things that, you know, could moderate a little bit quarter to quarter. But on the contrary, I also pointed to the fact that defense, you know, step back a little bit due to some EC adjustments. And those are things that we don't expect to recur on an ongoing basis. So, you know, Q4, hopefully right down the middle, we'll see where the government shutdown risk takes us.

Sorting our margin and cash expectations for light us. So you could assume that the general health of the pipeline has increased in.

Bert Subin: But really, please, quite honestly with the progress we're seeing across the business on margin and revenue growth. So great, maybe this is the follow up there, you know, both on the on the health and the defense side. I guess there's three big contracts to think about. There's dad, there's CHS six and there's dim sum. Can you just give us maybe some of you point on sort of how we should think about those contracts going forward.

It has been accretive in the margin potential.

<unk> is very much on track with helping us.

Day.

Very profitable cash accretive business in the future.

Great. Thank you.

Thanks Sheila.

Our next question comes from the line of Tobey Sommer with she was chief will see with your questions.

Bert Subin: I know dim sum was expected to be a headwind. It doesn't seem like that's happened yet. Maybe you're repurposing some of that feeling values. So I'm just curious how you think those are going to those two are going to ramp up and then dim sum is going to step down.

Yes. Good morning. This is Jack Wilson on for Tobey.

Would you dig down a little bit more into that reallocation of business development resources sort of in light of pursuing those that higher margin work.

Tom Bell: Well, let me, let me jump in first bird. If you don't mind, I'll talk about dim sum first and then we'll take them, take them from there. You know, obviously we're very, very pleased and proud of the team and how they deployed dim sum to great customer satisfaction. It's about 91% and deployed with 7.3 million bonus beneficiaries out of 9.6 that we envisioned full full time. And we're on track to deliver to all the DOD locations by the end of this year.

Sure.

Not really rocket science, it's simply looking at the pipeline, Jack and making sure that.

Where we're spending the talents of our people are on the opportunities with the highest P win and the highest benefit to lighthouse.

It was that each business area in light US was given a general growth target, which was generally the same for each businesses and that's not my philosophy. My philosophy is we're running one company called lighthouse.

Tom Bell: But what's more exciting to me is, you know, while most of us and most of my first six month conversations with analysts have been about what are we going to do when dim sum trails off. But I learned this past quarter is actually this program is just in the first phase of a three phase program that the customer expects regarding the whole suite of programs around health margins. So. What is interesting to me is how our excellent customer satisfaction and performance to date positions us not only to continue to work on the program of Dim Sum but also puts us in a great position to compete for the follow on efforts and the rest of the efforts that the customer is looking for.

Trying to grow the topline and bottomline of lighthouse and as opportunities ebb and flow between the five businesses that we have today or the five businesses that will have in 2024. The key is that we aggregate business development resources and talent to those areas that are going to have the biggest bang for Buck.

And so that's really all it is instead of <unk>.

Trading resources chasing low margin work because each business was incentivized to grow no matter, what I am interested in growing lighthouse as a whole and sometimes that means some businesses will grow disproportionately to others.

Tom Bell: So I'm actually very excited about where we're going. Well, I am too, Tom, and I think that this is definitely has a rise and an extra rise into it, Bert. And we've talked about trying to once the system got deployed, add more capabilities. And to that point, the team was very successful. We want to contract this quarter, not huge, but it's a relatively shorter duration contract digital first under the Dim Sum umbrella.

Chris kind of touched on this a little bit in the future not all five businesses for light OS will have the same topline and bottomline goals I'll be measuring those and putting them out there for the team commensurate with the market that they're in the potential of that market and the competition.

<unk> and the opportunities that present themselves in that market for the next year or two years three years four years and Thats the whole philosophy of redeploying the business development team.

Tom Bell: And that is, you know, starting on that next phase, the Tom was just talking about taking digitalized digitalizing the information to digitalization and how patient benefits are extended and modernized. And so that will help moderate the impact of the deployments coming to an end. It is lowering Q4. Then it had been earlier this year because the deployment phases, but we're able to see line of sight to holding kind of at the Q4 level going into 24, which is excellent.

<unk> and talent to those areas of greatest return for lighthouse, therefore, our customers and by extension our shareholders.

Thank you very much.

Thanks Jack.

Our next question comes from the line is.

Thanks Hamid with Jpmorgan. Please proceed with your question.

Thanks, very much and good morning, everyone.

Hey, Saturday, so hey.

Tom Bell: And then quickly on the other two, you know, Dez, it's performing as expected. And we're seeing some ramp up consistent with what we said last quarter, a couple nice task quarters are in the hopper right now. You know, multi hundred million dollar task. Well, exactly. We just got a major award this quarter of 274 million. And there's likely another one even larger in the near time. That's right. So it will be a growth catalyst for us in 24.

Hey.

Maybe to follow up a little bit on that question about about relative growth rates and kind of the.

The new sectors that you laid out.

Not expecting any kind of numerical targets or anything like that but just in a relative sense, how should we think about.

The growth rates in those in those different sectors that you laid out relative to each other and also how it fits in Tom with your internal capital deployment plans.

Tom Bell: And then finally, CHS 6, you know, Tom highlighted very proud of the team to prevail without approach test won't see any notable activity from that in 23, but we're positioned for it to be a growth catalyst in 24. And, you know, too early to speculate until we get a little bit more clarity on what those task orders are, but we're rounding out the catalog customer seems very motivated to use us to buy as much of the C5 ISR activity as they can to support their management.

Yes, Thank you Seth.

Great question, and you're right I'm not going to get to specifics because frankly, we don't we don't have them, yet, but I have hypotheses.

And so the hypotheses is if you look at the five businesses. Some of them are positioned for top line growth because of customer demand and interest.

Solutions that they can provide us.

Other businesses were going to call them sectors going forward. They are more an aggregation of.

Tom Bell: So really excited about getting that one up and running. Yeah, and just to pile on that one, or if you don't mind, so proud of the team, the RFP asked for a transition plan of 60 days. The team accomplished it in 19, 19 days to be fully up and running for the customer in this important part of their value stream. So just so super excited about the team that was able to lean into that and satisfy the customer quickly out of the out of the blocks. Super helpful. Thank you, Tom. Thanks, Bart.

Programs, so as to bring better bottom line results. My hope is that in time each business overtime over five six years.

Top line growth and bottom line growth may may be counter cyclic cyclical and businesses, but that doesn't mean I ever think any business is not also a topline growth story.

And also a bottomline growth story, so we will be using 2024 to have a very purposeful strategic planning exercise around what is the full potential of each business where are they in the customers' ecosystem, how does the customers' buying behaviors, how do we predict bell boll unfolding.

Mariana Persimura: Our next question comes from the line of Mariana Persimura with Bank of America. These will see you with your question.

Mariana Persimura: Good morning, everyone. Hi, good morning. Two questions. First one is more like big picture.

Tom Bell: How should we think about the organization structure in terms of timing, how long, how much is going to cost and how should we think about the cost structure once and workforce, once this is done. Yeah, thanks, Mariana. So, first of all, we will operate in the current structure through the rest of this year. So, in fact, in all of my communications to the Leidos team, I've been hammering home, stay focused, stay focused on the current organizational structure, our customers rely on us and I'm relying on the team to deliver on our promises this year to our customer.

The coming year, and therefore, what are the goals and objectives for that business in the near term and the long term and.

Business development resources technology resources will be deployed according to those plans, it's simply going to be the money is going to follow the plans that have survived the scrutiny of the strategic planning process and therefore have the most merit for investment of our capital.

That's it in a nutshell and as Chris suggested.

We're excited about 2024 and going through that strategic planning process and sharing more results with you over time as those come to fruition.

Tom Bell: The new organizational structure that I articulated will take place on January 1st. And, you know, frankly, it's not a reorganization, it's simply a realignment of the existing Leidos business in a post-pandemic fresh look at the organization for efficiency and effectiveness. And that's really the main goal. How do we increase repeatability, increase our prowess going to the markets, how do we satisfy customers with better products across customers where they tended to be siloed in the last organizational construct we had.

Great. Okay. Thanks, Tom Thanks, very much and maybe just for for a quick follow up.

Tom Bell: And so, it's my expectation that the new organization is going to unlock all sorts of revenue and profit opportunities. In that regard, one of the first things I'll be doing in the new year is challenging the new executive leadership team to create full potential growth plans for each of the new five businesses. And in those full potential growth plans, we'll be looking at the marketplace, the competition, the whole suite of technologies and capabilities.

Little more model focused as we think out and we think about uses of cash and capital deployment.

Other than I would assume that there would be an intention to repay the 500 million thats due in 2025, just given that it's a pretty.

Low coupon and would probably need to be replaced with something higher and other than that should should we think about that.

The potential for for most cash to be to be returned.

Yes, I mean big picture, Seth I think youre thinking of a REIT.

Hit our leverage target, we're happy with where we are.

The interest rate environment could be vastly different in 25, So that's something we'll pay close attention to but I think you've got it right. We've got a dividend program. Tom just talked about an increase that uses a little over $200 million of your cash.

Capex program at around one to one 5% of revenue and then we've got a lot of excess cash that we'll generate not only in the fourth quarter, but next year.

Delevering further at this time is not a priority, but it's always something we will evaluate relative to the interest rate environment.

There'll be a nice problem that.

Thank you.

Tom Bell: We need to compete and win effectively. And I expect that we'll see growth plans for each business that are unlocking growth that is currently squelched or swandered in the current environment. So, I'm very hopeful about it.

Our next question comes from the line of.

Louie Dipalma with William Blair. Please proceed with your question.

Tom Chris and Stuart Good morning.

Good morning.

Within the health care.

You referenced how dim sum could be stable going into 2024, how should we think about the VA health care exam volumes going forward with the tailwind of the pack back and has there been any changes in the competitive dynamic there.

Christopher Cage: In terms of costs, Chris. Less is better, but listen, it's not the primary motivation to do this as Tom talked about. I do see each of these businesses having different objectives as it relates to that. In the example of defense systems, hey, we have been investing and we will continue to invest more in engineering and technical depth. That is not a cost or the exercise to get those businesses aligned effectively. But in the case of digital modernization, this repeatable solutions, this automation, obviously those can lead to more efficient delivery structures, back office structures, those types of things. So, we're very excited to get to the full potential and we'll have a lot more to share on that, Mariana, as we get to that next call at Q4. Thanks so much.

Yeah, Hey, Louie on again, just a clarification on dim sum stable relative to our Q4 kind of exit rate right it'll be it's been trending a little lower as deployments of ramp down but the good news is we are at this time don't see as significant of a step down in 'twenty four as we once did so that's great news.

On the VA side.

Listen I mean, you always have competitors that are highly motivated to ensure they are stepping up their game to capture as much of the allocation as possible in the VA wants a robust competitive dynamic because we need to keep the throughput high and get veterans the benefits that they deserve at this time, it's hard to predict.

Mariana Persimura: And then my follow-up is more specific to health care. Incentive paper four months on the medical examination was strong once again.

Tom Bell: Could you please make sure that for the quarter and give us a sense of how are your expectations for death in the near term to come down or not? Yeah, Mariana, absolutely. This is an area where the customers always had both incentives and disincentives associated with these contracts. In earlier this year, as the PACDAQ volume was ramping up, they modified some of those. And the team has been doing an excellent job, not only on throughput, volume, but customer satisfaction, timeliness, et cetera.

<unk>.

24, we'll have more color in a few months, but.

We see that stable and it's been a growing part of the portfolio and Theres other good things going on in the VA to the our HRP program sorry in healthy our HRP program will continue to be a growth catalyst for us as well.

So it's not just the <unk> volume, but right now that's trending very favorably and we're very pleased with the performance of the health leadership team and really delivering great results.

Excellent. Thanks.

Thank you <unk> it looks like we have time for just about one more question.

Tom Bell: The customer is motivated to raise the bar yet again because they want to make sure we're continuing to deliver against a high volume of demand. So, we'll continue to recalibrate on what that full potential looks like. But I would just say that we're excited about the prospect of those incentives continuing to contribute not only in the fourth quarter, but as we look ahead in 2020, for. Yeah, and just if you don't mind Mariana me piling on, so proud of the team.

Sure no problem alright.

Last question comes from the line of Ken Herbert with RBC capital markets do you foresee with your question.

Yeah, Hey, good morning, Tom and Christian assure thanks for squeezing me in.

Hey, Tom maybe just to take a step back I appreciate all the detail you've outlined here in terms of the sharper focus and obviously reflected in the backlog and the wins and everything else, but as you think about the business now transitioning into 2024, what do you think are the biggest opportunities from a cost standpoint, as we think about sort of a margin opportunity.

Tom Bell: And, you know, frankly, as a taxpayer, proud of the customer, the customer should be challenging us to raise our standards and raise expectations each contract. And so they did, we performed, we threw strikes, they changed the strike zone and tightened it up a little bit. And so I have every expectation that the team can throw strikes even better in 2024 than they did in 2023.

Obviously, not looking for specific guidance, but but how much of a cost standpoint, do we think there is in the business, which obviously you should support what youre doing in terms of the higher quality bids and business opportunities.

Yes, well I.

I can't put a number on it because we're only now at the point, where we can start to imagine the opportunities that are in front of us, but I'll call your attention to the three functional leaders that I've talked about enhancing their positions.

Mariana Persimura: Thank you so much. Thank you.

Cai Rumohr: Our next question comes to the line of Cai Rumor with GD Cowan. Please see with your question. Yes, terrific. Thank you very much. Great result, guys. To maybe follow up on Mariana's question. So if we take out the 14 million COVID, which was kind of prior period, you did 18, six, which was terrific and health, could you quantify how big were the incentive Accords in that quarter? And give us some sense if they've tightened it up.

First and foremost the chief Technology officer, bringing leak.

Into our Chief Technology Officer is going to help us.

Some more efficient and more effective at creating and deploying technologies for the benefit of all of our businesses I am really excited about focusing our R&D pipeline on those areas of technology that will propel our current business and able us to.

To compete and win and insert technology in those businesses and win new business going forward. So I think there is great opportunity for us in the CTO office in the CTO office, the Chief performance Officer that is the internal wheelhouse of everything that makes light OS and.

Cai Rumohr: I mean, you know, are they going to tighten it so those margins go down because I think at one point, you know, you are hoping to do mid teens. It now looks like you're doing 18, 5, 18, 6, this quarter. So where's that likely to go? And what impact do you see from potential government shutdown? Because you mentioned that as a potential issue going forward. Yeah, Kai, let me go in here and thumb with that on.

<unk> effective Corporation, I mentioned real estate procurement.

I T program management are all going to be a net.

Cai Rumohr: He can. Look, we're not going to quantify the specifics around the incentives. I would just say that, you know, this year, if you look at 23, we will not have a full year worth of those incentives in our results. So the good news is 24. We expect that to be something that can contribute for a full year. But also, we'll have to step up our game relative to the customer increasing the standards because we all want to make sure the veterans are being well-served that are timely to stay high, that the throughput stays high and the quality stays high.

The new leader of our Chief performance Officer will have the responsibility to not only make sure. We are best in class when it comes to the quality of the product we put on the field to make lighthouse as effective as possible, but I'll also be asking that individuals to ensure we are world class.

<unk> as a cost of doing business at the corporate level, and then last but not least aggregating the complete value stream of growth.

Strategy sales marketing communications governments government relations all in the Chief growth Officer.

Cai Rumohr: So it is a, you know, it's been a nice benefit. We have incentive fee structures across a variety of contracts. And, you know, our objective is to deliver exceptional service and try to maximize those. These ones just happen to be more noteworthy. But big picture on health, we had previously said a mid teens was a good margin level for the business. Obviously, we think we can do better and we are doing better than that now.

We will put us in a prime position to ensure we have unparalleled customer understanding for where the customer is going and how we're going to escape the park of where it's going to be as opposed to just chasing rfps. So the net sum of all of that can I believe we will.

Cai Rumohr: And whether that's in the, you know, 17, 18% zone will endeavor to sustain that level of performance. On the shutdown, you know, this is an imperfect science. But we've spent a lot of work because we got so close at the end of September. You know, big picture we think on the order of 100 millionish of revenue potential risk, 10 to 15 million of OIRist that we're managing through. I mean, the most important thing is we work hand in glove with our customers right up to the deadline and that we work with our employees to make sure they understand, you know, what they're to do if they're unable to perform on the customer mission.

Make us a more efficient and effective corporation, but again as Chris said.

It's not this isn't a cost cutting exercise. This realignment. This is a aggregate the capabilities of lighthouse.

Better way to make us more.

<unk> and efficient.

Yeah, and I can only say I mean, we're already seeing and feeling you know kind of a leaner ongoing operating environment now and that's showing up in our results clear.

Clearly.

Focus on next year's 10, 5% plus margin target that is an area that I think we're demonstrating that we have line of sight to delivering on that and.

Cai Rumohr: And hopefully we'll find an opportunity to get back to work quickly if it were to happen. But that's kind of our current assessment, but it's one that we will continuously re-aggress as we work to write up to a potential deadline. But again, just a footstop at a little bit, Cai, as Chris mentioned in his comments, the risk of a full 45 day shutdown is included in the lower end of our guidance.

That's still our goal to corporations rallying behind.

Great I'll leave it there thanks for the color and nice quarter.

Thank you.

And this concludes our question and answer session I would now like to turn the conference back to Stuart Davis for any closing remarks.

Well. Thank you <unk> for your assistance on this morning's call and thank you all for your interest in light of this morning, we look forward to updating you again soon have a great day.

Cai Rumohr: So consistent with promises made, promises kept, given the risk of a full 45 day shutdown is possible, the guidance incorporates that risk. I mean, the good news, Cai, is we have a lot of funded backlog, we have a lot of essential programs, and, you know, we're well positioned to navigate these headlines. So just to be clear, as a follow-up, the 100 million and the 10 to 15 million in O.I. That is for health or that is across the company.

And this concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.

Cai Rumohr: No, no, no, no. Across the company, Cai, as it relates to health, you know, that's probably one of the least impacted areas. So that's across the company. Veterans, veterans is an essential service. That's right. Okay, thank you very much. Thank you.

Cai Rumohr: Thank you, Cai.

Sheila Pylega: Our next question comes from the line of Sheila Pylega, with Jeffree's GFC, which you're a question. Good morning, guys. Thank you for the time.

Tom Bell: So, hey guys, so I wanted to ask about Dianetics and how comfortable you guys feel with the development programs there, and what sort of hurdles you're looking to get through to get through the development stage and to all the production on those. Yeah, thanks, Sheila, and good to speak to you again. You know, on Dianetics, I'm convinced and we're convinced that the best days are still ahead of us. We've got a great management team down there, and as I alluded to in my comments, we're adding technical and financial expertise to Dianetics to ensure it's success going forward.

Tom Bell: So, feel really good about the team, feel really good about the people who are eager to go help us find success and be successful at Dianetics and in our defense business. The team down there is really focused on those three major markets that I have spoken to now for four or five months, which is small satellite payloads, hypersonics and forest protection. And on each of them, we are tracking Sheila bi-weekly the actual burn-down plan and the tasks that we have to hit to find success not only as we turn the page from 2023 into 2024, but through 2024. So, we've got a complete roadmap, but the team is knocking down purposefully one by one.

Tom Bell: Are there challenges? Always, supply chain challenges, testing challenges, customer-focused challenges. There's all sorts of challenges that the team is having to wrestle to ground, but they're on it. We're engaged both at the Pentagon and at the operational level. The customer demand for the solutions in those three spaces is acute, and frankly, world events that are happening right now only heighten their desire for these solutions that we're providing. So, we feel very good about them.

Tom Bell: And I think that Dianetics is going to benefit from being a part of this new figure defense business in the organization of 2024, where even more broad engineering program management and technology capabilities will be brought to bear for the benefit of Dianetics and our Huntsville teammates. Yes, Sheila. I mean, obviously it's a high priority item. We're putting all the right resources on it and very excited about the long-term prospects there. In any event, Dianetics will be a growing business for us in 2024.

Tom Bell: You know, the higher steeper ramping, flexion point on related to if pick Moving to Fuller volumes, could be later in the year, could trend to the 25, but also Einstein's point to that continuing to be the capability, the Army's focus on the point.

Sheila Pylega: Okay, I'll follow up on that later, but on the backline time I wanted to ask about this, you mentioned that in your prepared remarks, I think you said it grew 4 billion. And the last time we chatted, you mentioned you added a criteria about EBITDA margins to potential wins. So, you know, can you talk about how you think EBITDA margins should be on some of these, you know, new wins that you have in the pipeline now.

Sheila Pylega: Well, you're right, Sheila. What I'm doing as we talk about the pipeline for business development opportunities across all the businesses is we're adding the criteria of well, what is the expected margin. And that's why in my comment, I talked about not only the increase in the backlog, but that increase supporting our margin and cash expectations for light us. So, you could assume that the general health of the pipeline has increased in has been a creative in the margin potential and is very much on track with helping us stay a very profitable cash accretive business in the future. Great, thank you. Sheila.

Tom Bell: Our next question comes from the line of Toby Somer, which we'll see with your questions. Yeah, good morning. This is Jack Wilson on for Toby. Could you dig down a little bit more into that reallocation of business development resources, sort of in the light of pursuing those that higher margin work? Sure, I mean, it's not really rocket science. It's simply looking at the pipeline, Jack and making sure that where we are spending the talents of our people are on the opportunities with the highest P win and the highest benefit to light us.

Tom Bell: It was that each business area in light us was given a general growth target, which was generally the same for each businesses. And that's not my philosophy, my philosophy is we're running one company called light us, we're trying to grow the top line and bottom line of light us. And as opportunities, ebb and flow between the five businesses that we have today or the five businesses that will have in 2024, the key is that we aggregate business development resources and talent to those areas that are going to have the biggest bang for the buck.

Tom Bell: And so that's really all it is instead of a treating resources chasing low margin work because each business was incentivized to grow no matter what I am interested in growing light us as a whole. And sometimes that means some businesses will grow disproportionately to others. Chris kind of touched on this a little bit in the future, not all five businesses for light us will have the same top line and bottom line goals.

Tom Bell: I'll be measuring those and putting them out there for the team commensurate with the market that they're in the potential of that market and the competitions and the opportunities that present themselves in that market for the next year or two years, three years, four years. And that's the whole philosophy of redeploying the business development time and talent to those areas of greatest return for light us. Therefore, our customers and by extension are shareholders.

Unknown Executive: Thank you very much.

Seth Seifman: Thanks. Our next question comes from the line of Seth Seifman with JP Morgan. Please we'll see with your question.

Seth Seifman: Hey, thanks very much and good morning everyone. Hey, just maybe to follow up a little bit on that question about relative growth rates and kind of the, you know, the new sectors that you laid out, you know, not expecting any kind of numerical targets or anything like that, but you know, just in a relative sense. You know, how should we think about the growth rates in those in those different sectors that you laid out relative to each other and also how it fits in Tom with your internal capital deployment plans?

Seth Seifman: Yeah, thank you, Seth. Great question and you're right. I'm not going to get to specifics because frankly, we don't we don't have them yet, but I have hypotheses and and so the hypothesis is if you look at the five businesses. Some of them are positioned for pop line growth because of customer demand and interest and in solutions that they can provide. Other businesses, we're going to be calling them sectors going forward.

Seth Seifman: They are more an aggregation of programs so as to bring better bottom line results. My hope is that in time, each business over time over five, six years, you know, top line growth and bottom line growth may may be counter sick or cyclical in businesses, but that doesn't mean I ever think any business is not also a top line growth story and also a bottom line growth story. So we'll be using 2024 to have a very purposeful strategic planning exercise around what is the full potential of each business?

Seth Seifman: Where are they in the customer's ecosystem? How does the customers buying behaviors? How do we predict they'll unfold in the coming year? And therefore what are the goals and objectives for that business in the near term and the long term? And business development resources, technology resources will be deployed according to those plans. It's simply going to be the money is going to follow the plans that have survived the scrutiny of the strategic planning process and therefore have the most merit for investment of our capital. Factored in the nutshell and as Chris suggested, we're excited about 2024 and going through that strategic planning process and sharing more results with you over time as those come to fruition.

Seth Seifman: Great. Thanks. Thanks very much.

Christopher Cage: And maybe just for for a quick follow up, a little more model focused as we think out and we think about uses of cash and capital deployment. Other than I would assume that there would be an intention to repay the 500 million that's due in 2025, just given that it's a pretty low coupon and would probably need to be replaced with something higher. And other than that, should we think about the potential for most cash to be returned?

Christopher Cage: Yeah, I mean, big picture Seth, I think you're thinking of a right we, you know, we hit our leverage target. We're happy with where we are. The interest rate environment could be vastly different in 25. So, you know, that's something we'll pay close attention to. But I think you've got it right. We've got a dividend program. Tom just talked about an increase that uses a little over $200 million a year of cash.

Christopher Cage: You know, a capex program at around one to one and a half percent of revenue. And then we've got a lot of excess cash that will generate not only into fourth quarter, but next year. Delevering further at this time is not a priority, but it's always something we'll evaluate relative to the industry, to be a nice problem. Thank you.

Louis Dipalma: Our next question comes from the line of Louis DiPalma with William Blair. Please do we think about the VA health care exam volumes going forward with the tailwind of the packback and has there been any changes in the competitive dynamic there. Hey, Louis, again, just a clarification on Dim Sum, you know, stable relative to our Q4 kind of exit rate, right? It'll be, it's been trending a little lower as deployments of ramp down, but, you know, the good news is, we, at this time, don't see a significant of a step down in 24 as we once did.

Louis Dipalma: So that's great news. On the VA side, listen, I mean, you know, you always have competitors that are highly motivated to ensure they are stepping up their game to capture as much of the allocation as possible in the VA wants a robust competitive dynamic because we need to keep the throughput high and get veterans the benefits that they deserve. At this time, you know, it's hard to predict. 24 will have more color in a few months, but, you know, we see that stable in it's been a growing part of the portfolio.

Louis Dipalma: There's other good things going on in the VA to the RHRP program, sorry, in health, the RHRP program will continue to be a growth catalyst for us as well. So it's not just the packback volume, but right now that's trending very favorably and, you know, we're very pleased with the performance of the health leadership team and and really delivering great results.

Louis Dipalma: Excellent. Thanks. Thank you.

Unknown Executive: Simole, it looks like we have time for just about one more question.

Ken Herbert: Sure, no problem. And our last question comes from the line of Ken Herbert with RBC capital markets. She will see with your question.

Ken Herbert: Yeah, good morning, Tom and Chris and Stuart, thanks for squeezing me in. Hey, Tom, maybe just to take a step back, I appreciate all the details you've outlined here in terms of the sharper focus and obviously reflected in the backlog and the wins and everything else. But as you think about the business now transitioning into 2024, what do you think are the biggest opportunities from a cost standpoint as we think about sort of the margin opportunity.

Ken Herbert: Obviously, not looking for specifics and guidance, but, but how much of a cost standpoint do we think there is in the business, which obviously you should support what you're doing in terms of the higher quality bids and business opportunities? Yeah, well, you know, I can't put a number on it because we're only now at the point where we can start to imagine the opportunities that are in front of us. But I'll call your attention to the three functional leaders that I talked about enhancing their positions.

Ken Herbert: First and foremost, the chief technology officer bringing leak link into our chief technology officer is going to help us become more efficient and more effective at creating and deploying technologies for the benefit of all of our businesses. I'm really excited about focusing our R&D pipeline on those areas of technology that will propel our current business and able us to compete and win and insert technology in those businesses and win new business going forward.

Ken Herbert: So I think there's great opportunity for us in the CTO office, in the CPO Office, the Chief Performance Officer. That is the internal wheelhouse of everything that makes Leidos an efficient effective corporation. I mentioned real estate procurement, IT program management are all going to be in that. The new leader of our Chief Performance Officer will have the responsibility to not only make sure we are best in class when it comes to the quality of the product we put on the field to make Leidos as effective as possible.

Ken Herbert: But I'll also be asking that individual to ensure we are world class as a cost of doing business at the corporate level. And then last but not least, aggregating the complete value stream of growth, strategy, sales, marketing, communications, governments of government relations, all in the chief growth officer will put us in a prime position to ensure we have unparalleled customer understanding for where the customer is going and how we're going to skate to the puck of where it's going to be as opposed to just chasing RFPs.

Ken Herbert: So the net sum of all of that can, I believe, will make us more efficient and effective corporation. But again, as Chris said, this isn't a cost-cutting exercise, this realignment. This is a aggregate the capabilities of Leidos in a better way to make us more effective and efficient. And I'd only say, I mean, we're already seeing and feeling, you know, kind of a leaner, pongoing, operating environment now, and that's showing up in our results.

Ken Herbert: Clearly, you know, we're focused on next year's 10-and-a-half percent plus margin target. That's an area that, I think, we're demonstrating that we have line of sight to delivering on that. And, you know, that's still a goal to corporations rallying by.

Unknown Executive: Great. I'll leave it there. Thanks for the cover. A nice quarter. Thank you.

Stuart Davis: And this concludes our question and answer session.

Stuart Davis: I would now like to turn the conference back to Stuart Davis for any close remarks. Well, thank you, Shama Ali, for your assistance on this morning's call. And thank you all for your interest in Leidos this morning. We look forward to updating you again soon. Have a great day.

Unknown Executive: And this concludes today's conference. You may disconnect your line at this time. Thank you for your party.