Q4 2023 Leidos Holdings Inc Earnings Call

Operator: Greetings and welcome to the Leidos 4th Quarter Fiscal Year 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode.

Greetings and welcome to the lightest fourth quarter fiscal year 2023 earnings conference call.

At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question you will need to press star one one on your telephone you will then hear an automated message advising your hand is raised. Please note. This event is being recorded I would now like to turn the conference over to stew.

Operator: After the speaker's presentation, there will be a question and answer session. To ask a question, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. Please note, this event is being recorded. I would now like to turn the conference over to Stuart Davis of Investor Relations. Stuart, you may begin. Thank you, operator. And good morning, everyone.

Davis of Investor Relations Stuart you may begin.

Thank you operator, and good morning, everyone.

Stuart Davis: I'd like to welcome you to our fourth quarter and fiscal 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 website, where you'll also find the earnings release and supplemental financial presentation slides that we're using today. Turning to slide two of the presentation, our discussion today contains forward-looking statements based on the environment as we currently see it. And as such, it does include 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.

Stew Davis: I'd like to welcome you to our fourth quarter and fiscal year 2023 earnings Conference call.

Stuart Davis: Joining me today are Tom Bell, our CEO and Chris Cage, our Chief Financial Officer.

Stuart Davis: 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're using today.

Stuart Davis: Turning to slide two of the presentation. Today's discussion contains forward looking statements based on the environment as we currently see it and as such does include risks and uncertainties. Please refer to our press release for more information on the specific risk factors that could cause actual results to differ.

Stuart Davis: Finally, as shown on slide three, we'll discuss GAAP and non-GAAP financial measures. A reconciliation between the two is included in today's press release and presentation slides. With that, let me turn the call over to Tom Bell, who will begin on slide four. Thank you, Stuart, and good morning, everyone.

Stuart Davis: Materially.

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

Stuart Davis: With that let me turn the call over to Tom Bill, who will begin on slide four.

Thank you Stuart and good morning, everyone. It's good to be with you today to report another strong quarter for light OS and to put a bow on a very successful 2023.

Tom Bell: It's good to be with you today to report another strong quarter for Leidos and to put a bow on a very successful 2023. I'll frame my part of our conversation today in three parts. First, our 2023 results. Second, the progress we've made towards building a brighter future. And third, what you can expect from us this year.

Tom Bill: I'll frame my part of our conversation today in three parts first our 2023 results second the progress we've made towards building a brighter future.

Tom Bill: And third what you can expect from us this year.

Tom Bell: First, in our fourth quarter, we delivered 8% revenue growth for record quarterly revenue just shy of $4 billion. EBITDA margin was an outstanding 11.4%. And we grew non-GAP diluted EPS at 9% year over year. Operating cash was also well ahead of plan. This means we delivered full-year results that were above the high end of the guidance we set last quarter. For the full year, revenue growth was 7%, non-gap diluted EPS growth was 11%, and Operating Cash Flow growth was 17%, consistent with my previous commitment to you about disciplined cash management. We repurchased more than $200 million worth of shares in the fourth quarter of 2023.

Tom Bill: First in our fourth quarter, we delivered 8% revenue growth for record quarterly revenue just shy of $4 billion.

Tom Bill: EBIT margin was an outstanding 11, 4% and.

Tom Bill: And we grew non-GAAP diluted EPS at 9% year over year.

Tom Bill: Operating cash was also well ahead of plan.

Tom Bill: This means we delivered full year results that were above the high end of the guidance, we set last quarter.

Tom Bill: For the full year revenue growth was 7%.

Tom Bill: non-GAAP diluted EPS growth was 11%.

Tom Bill: And operating cash flow growth was 17%.

Tom Bill: Consistent with my previous commitment to you about disciplined cash management, we repurchased more than $200 million worth of shares in the fourth quarter of 2023.

Tom Bell: I continue to be very impressed by the people and sound business engine we have here at Leidos, and I believe our top and bottom line financial performance over the last three quarters of 2023 just begins to hint at our full potential. Even while affecting our recent organizational realignment, the team ran through the tape to deliver an impressive 2023. I want to thank my leadership team and our 47,000 people who made these results possible through their hard work and dedication to both Leidos and our customers, Michigan. This brings me to my second point.

Tom Bill: I continue to be very impressed by the people and sound business engine, we have here at lighthouse.

Tom Bill: And I believe our top and bottom line financial performance over the last three quarters of 2023, just begins to hint at our full potential.

Even while affecting our recent organizational realignment the team ran through the tape to deliver an impressive 2023.

Tom Bill: I want to thank my leadership team and our 47000 people who made these results possible through their hard work and dedication to both lighthouse and our customers' missions.

Tom Bell: The progress we've made towards building a better future. We're already working well in our new capability-focused organization and seeing the first fruits from these changes. For example, we're sharing best practices much better across digital modernization programs for greater efficiency and efficacy, both in commercial and international.

Tom Bill: This brings me to my second point.

Tom Bill: The progress we've made towards building a better future.

Tom Bill: We're already working well in our new capability focused organization and seeing the first fruits from these changes.

Tom Bill: For example, we're sharing best practices much better across digital modernization programs for greater efficiency and efficacy.

Tom Bill: In commercial and international.

Tom Bell: We're quickly redeveloping our growth playbook, especially internationally, which we'll use to extend several of our business lines outside the United States, and we're aggregating and better leveraging our robust engineering talent across our platform businesses within defense systems. As we go through this year, we'll see many more ways this new organization structure unlocks value. Chris will describe a few of the tangible financial benefits of this realignment, which we already have a line of sight on. But the team and I are acting quickly on two additional critical components to building for our future, reinvigorating our business capture prowess and ensuring we remain the best employer of top talent in the market. On the business capture front, we finished the year with a solid book-to-bill ratio of 1.1 times.

Tom Bill: <unk> Redeveloped, our growth playbook, especially internationally, which we'll use to extend several of our business lines outside the United States.

Tom Bill: And we're aggregating and better leveraging our robust engineering talent across our platform businesses within defense systems.

Tom Bill: As we go through this year, we will see many more ways. This new organization structure unlocks value.

Tom Bill: Chris will describe a few of the tangible financial benefits of this realignment on which we already have line of sight.

Tom Bill: But the team and I are acting quickly on two additional critical components to building for our future.

Tom Bill: Reinvigorating our business capture prowess and ensuring we remain the best employer of top talent in the market.

Tom Bill: On the business capture front, we finished the year with a solid book to Bill ratio of one one times.

Tom Bell: As we focus on building quality backlog over time, this gives us a healthy $37 billion backlog, $8.8 billion of which is funded. And my new chief growth officer has stepped up to his new responsibilities in this regard with vigor. He shares my passion for winning, and we are committed to delivering industry-leading win rates and above-market organic growth. My Chief Technology Officer is aggressively focusing our total IRAD expenditures in select areas to ensure we always have differentiated solutions for our customers. And my HR lead is undertaking an intense effort to rebuild our entire employee value proposition so we remain the best employer in the market for the best talent. Cindy Gruensfelder joins Leidos to lead our defense system sector. She brings extensive aerospace and defense leadership expertise and is excited to take this part of our portfolio to the next level, and Dan Antle will rejoin Leidos as general counsel in April. So he will be able to hit the ground sprinting with us.

Tom Bill: As we focus on building quality backlog over time. This gives us a healthy 37 billion dollar backlog $8 8 billion of which is funded.

Tom Bill: Still I believe lighthouse has another gear in terms of business capture.

Tom Bill: And my New Chief growth Officer has stepped up to his new responsibilities in this regard with vigor.

Tom Bill: He shares my passion for winning and we are committed to delivering industry, leading win rates and above market organic growth.

Tom Bill: My Chief Technology officers aggressively focusing our total Iran expenditures in select areas to ensure we always have differentiated solutions for our customers.

Tom Bill: And my HR lead is undertaking an intense effort to rebuild our entire employee value proposition. So we remain the best employer in the market for the best talent.

Tom Bill: Cindy Grins Felder joined <unk> to lead our defense systems sector cheaper.

Tom Bill: She brings extensive aerospace and defense leadership expertise and is excited to take this part of our portfolio to the next level.

Tom Bill: And Dan Antal will rejoin lighthouse as general counsel in April.

Tom Bill: So he will be able to hit the ground sprinting with us.

Tom Bell: As a result of these and other changes I've made, 75% of my ELT is now new, in new positions, or has newly enhanced and more focused areas of responsibility. The momentum is building, having the right people in the right positions, rightly aligned. Not only is this team rightly aligned to the jobs they now perform, but I've recommended and the board has approved fundamental changes to our incentive compensation plan. This means our incentives are much better aligned to our shareholders' and customers' interests. These changes are fully laid out in our upcoming proxy statement. But in the big picture, you'll see simpler metrics around revenue, profit, and cash with an increased emphasis on margin, while retaining a heavy focus on relative TSR performance. This brings me to my third point.

Tom Bill: As a result of these and other changes I've made 75% of my E. L. T is now new in new positions or have newly enhanced and more focused areas of responsibilities.

Tom Bill: The momentum is building, having the right people in the right positions tightly aligned.

Tom Bill: Not only is this team rightly aligned to the jobs. They now perform but I've recommended and the board has approved fundamental changes to our incentive compensation plans.

Tom Bill: This means our incentives are much better aligned to our shareholders and customers interests.

Tom Bill: These changes are fully laid out in our upcoming proxy statement, but big picture, you'll see simpler metrics around revenue profit and cash with increased emphasis on margin, while retaining a heavy focus on relative <unk> performance.

Tom Bill: This brings me to my third point expectations for 2024.

Tom Bell: Expectations for 2024. Chris will provide specifics on our 2024 financial commitments in a few minutes. Notably, our guidance fulfills the three-year commitments that were articulated at our previous investor dinner. We've already exceeded the margin target that we set in 2021.

Tom Bill: Chris will provide specifics on our 2024 financial commitments in a few minutes.

Tom Bill: Notably our guidance fulfills the three year commitments that were articulated our previous Investor day.

Tom Bill: We've already exceeded the margin target that we set in 2021 and this level serves as a great foundation from which to grow in the future.

Tom Bell: And this level serves as a great foundation from which to grow in the future. Our three-year cash conversion results ought to be right at that 100% target, which is the right level of performance for our business. And we have a clear line of sight to our three-year revenue growth partner. While it is important to me that we meet our prior commitments to you, I expect us to do better going forward. Our financial performance should be at or near the top of the industry. And to bring this improved profitable growth trajectory to life, 2024 will include deep strategic analysis within Leidos. Let me summarize this strategy process for you.

Tom Bill: Our three year cash conversion results ought to be right at 100% target, which is the right level of performance for our business.

Tom Bill: And we have clear line of sight to our three year revenue growth target.

While it is important to me that we meet our prior commitments to you.

I expect us to do better going forward.

Tom Bill: Our financial performance should be at or near the top of the industry.

Tom Bill: And to bring this improved profitable growth trajectory to life 2024 will include deep strategic analysis within lighthouse.

Tom Bill: Let me summarize this strategy process for you.

Tom Bell: Each new sector president will bring forward a best-in-class, three- to five-year growth and profitability plan for their markets in a Today Forward View, and our growth and technology organizations will work together to create a proprietary hypothesis of the future, a future back look at customer challenges and needs for 2033 and 2028. We will synthesize these today forward and future back views to identify market gaps in growth, and choosing among them will enable us to crystall This process is being engineered to position Leidos to lead the industry in revenue, profit, and cash growth. And we look forward to sharing our plan with you at our next full Investor Day, likely early next year. In the meantime, this year, we'll look forward to opportunities to showcase for you many of the differentiated technology solutions, what I call golden bolts, we already use and are creating to solve our customers' most vexing problems.

Tom Bill: Each new sector President will bring forward a best in class three to five year growth and profitability plan for their markets and are today forward view.

And our growth and technology organizations will work together to create a proprietary high parts to the future of future back look at customer challenges and needs for 2033 in 2028.

Tom Bill: We'll synthesize these today forward in future back fused to identify market caps and growth opportunities and.

Tom Bill: In choosing among them will enable us to crystallize, our new North star.

Tom Bill: This process is being engineered to position <unk> to lead the industry in revenue profit and cash growth.

Tom Bill: And we look forward to sharing our plan with you at our next full Investor day likely early next year.

Tom Bill: In the meantime, this year, we will look forward to opportunities to showcase for you. Many of the differentiated technology solutions, what I call Holden boats, we already use and are creating to solve our customers' most vexing problems.

Tom Bell: Finally, you may have already noticed the launch of a new branding campaign for Leidos this year, Making Smart Smarter. While we've gained important name recognition over our first 10 years, this campaign is about capturing brand recognition for life. As you can see in the example on slide five, making smarter is centered around our people, and how the breakthrough technologies they create in a unique ecosystem with our partners and customers truly set Leidos apart from everyone else. With these three simple words, we'll tell the story of the collective intelligence that is uniquely Leidos.

Tom Bill: Finally, you may have already noticed the launch of a new branding campaign for <unk> This year, making smart smarter.

Tom Bill: While we have gained important name recognition over our first 10 years. This campaign is about capturing brand recognition for lighters.

Tom Bill: As you can see in the example on slide five making smart smarter is centered around our people.

Tom Bill: Are they in the breakthrough technologies, they create and a unique ecosystem with our partners and customers truly set light us apart from everyone else.

Tom Bill: With these three simple words will tell the story of the collective intelligence that is uniquely lighthouse.

Tom Bell: Our campaign will catapult understanding of what Leidos does differently and better than anyone else and also serve as a beacon for present and future best of the best employees. In closing, with the growing Promises Made, Promises Kept culture at Leidos, we've put many of the commitments I've made to you over the past nine months in the done category.

Tom Bill: Our campaign will catapult understanding of what <unk> does differently and better than anyone else and also serve as a beacon for present and future best of the best employees.

Tom Bill: In closing with a growing promises made promises kept culture at lighthouse.

Tom Bill: We've put many of the commitments I've made to you over the past nine months in the done category.

Tom Bell: We've exceeded our 2023 financial commitment. We've enhanced our focus on cost controls and cash generation. We've taken down leverage substantially.

Tom Bill: We've exceeded our 2023 financial commitments.

Tom Bill: We've enhanced our focus on cost controls and cash generation.

We've taken down leverage substantially.

Tom Bell: We've allocated more capital to shareholders, and we've moved expeditiously to a leaner, more focused organizational structure. By delivering on our 2024 plan, we'll soon put our full 2022 to 2024 Investor Day commitments in the done category, too. But we are far from done.

Tom Bill: We've allocated more capital to shareholders and.

Tom Bill: And we've moved expeditiously to a leaner more focused organizational structure.

Tom Bill: By delivering on our 2024 plan will soon put our full 2022 to 2024 Investor day commitments in the done category also.

Tom Bill: But we are far from done.

Tom Bell: We have a busy and productive year ahead of us at Leidos. We will continue to drive toward great, full, profitable growth, not just revenue growth. We will aggregate our efforts toward better customer outcomes and better business pursuits. And the new leadership team and I will be working every day to make Leidos not just successful but awesome in every way for every stakeholder. With that, I'll turn the call over to Chris for more details on our 2023 results and our 2024 outlooks. Chris.

Tom Bill: We have a busy and productive year ahead of us the lighthouse.

Tom Bill: We will continue to drive toward great full profitable growth not just revenue growth.

Tom Bill: We will aggregate our efforts towards better customer outcomes and better business pursuits.

Tom Bill: And the new leadership team and I will be working every day to make light of snot just successful.

Tom Bill: But awesome in every way for every stakeholder.

Tom Bill: With that I'll turn the call over to Chris for more details on our 2023 results and our 2024 outlooks Chris Thanks.

Chris Cage: Thanks, Tom, and thanks to everyone for joining us. Let me echo Tom and express my gratitude to the entire Leidos team for how we performed in 2023. On balance, 2023 was an excellent year, and our financial performance was well ahead of the pace we set for ourselves in the 2021 investment year. Turning to slide six, revenues for the quarter were $3.98 billion. Revenues came in stronger than expected as customers continued spending despite a continuing resolution, and Congress acted to avert a government shutdown. In each quarter of fiscal 23, each segment grew year over year. Adjusted EBITDA was $452 million for the fourth quarter, for an adjusted EBITDA margin of 11.4%.

Chris Cage: Thanks, Tom and thanks to everyone for joining us today.

Let me Echo, Tom and express my gratitude to the entire <unk> team for how we executed in 2023.

Chris Cage: On balance 2023 was an excellent year in our financial performance was well ahead of the pace, we set for ourselves at the 2021 Investor day.

Chris Cage: Turning to slide six revenues for the quarter were $3 nine 8 billion revenues came in stronger than expected as customers continued spending despite a continuing resolution in Congress acted to avert a government shutdown.

Chris Cage: And each quarter of 2003, each segment grew year over year.

Chris Cage: Adjusted EBITDA was $452 million for the fourth quarter for an adjusted EBITDA margin of 11, 4%.

Chris Cage: Health sustained its excellent performance, and we saw good sequential improvement in the defense solutions and civil segment. With a keener focus on margins, we exceeded our 2021 Investor Day target of 10.5% plus one year ahead of schedule. Non-GAAP net income was $276 million for the quarter and more than $1 billion for the year, which generated non-GAAP diluted EPS of $1.99 for the quarter and $7.30 for the year, increases of 9% and 11%, respectively. This strong bottom-line performance came despite a drag from non-operating drivers. The non-GAAP effective tax rate for the quarter came in at 25.2%.

Chris Cage: Health sustained its excellent performance and we saw good sequential improvement in the defense solutions and civil segments.

Chris Cage: With a keener focus on margins, we exceeded our 2021 Investor day target of 10, 5% plus one year ahead of schedule.

Chris Cage: non-GAAP net income was $276 million for the quarter and more than $1 billion for the year, which generated non-GAAP diluted EPS of $1 99 for the quarter and $7 30 for the year increases of nine and 11% respectively.

Chris Cage: This strong bottom line performance came despite a drag from nonoperating drivers.

non-GAAP effective tax rate for the quarter came in at 25, 2%.

Chris Cage: Net interest expense was a $2 million tailwind for the quarter based on debt pay-down, but a $13 million headwind for the year given the higher interest rate environment. Taken together, tax rate and interest lowered non-GAAP diluted EPS by $0.13 for the quarter and $0.14 for the year. Now for an overview of our segment results by key drivers, beginning with revenues on slide 7. With a lot to cover today, I'll focus on the quarterly figures, but you can also see the full year comparisons on slide 8. Defense Solutions revenues were up 7%, driven primarily by digital modernization, especially NGIN, offensive hypersonics, and the Sentinel Program. Civil revenues were up 2% compared to the prior year quarter. The primary growth driver in the quarter was infrastructure spending by the FAA, while health continued to be a stand-alone business.

Chris Cage: Net interest expense was a $2 million tailwind for the quarter based on debt paydown, but a $13 million headwind for the year, given the higher interest rate environment taken.

Chris Cage: Taken together tax rate and interest lowered non-GAAP diluted EPS by <unk> 13 for the quarter and 14 for the year.

Chris Cage: Now for an overview of our segment results and key drivers beginning with the revenues on slide seven.

Chris Cage: With a lot to cover today ill focus on the quarterly figures, but you can also see the full year comparisons on the slides.

Chris Cage: <unk> solutions revenues were up 7% driven primarily by digital monetization, especially engine offensive hypersonic and the Sentinel program.

Chris Cage: Civil revenues were up 2% compared to the prior year quarter. The primary growth driver in the quarter was infrastructure spending by the FAA.

Chris Cage: Quarterly revenues increased 17% year-over-year, ending the year north of $3 billion. Higher levels of medical examinations were a key driver, as well as expanding capabilities on DMSM, increasing group events on RHRP, growing our Social Security Administration work, and breaking into new customer spaces like ARPA-H. On the margin front, on slide 8, defense solutions showed consistently strong profitability growth; non-GAAP operating margin was 9% for the quarter, up 40 The increase in segment profitability was primarily attributable to improved program execution and disciplined cost management. Civil non-GAAP operating margin was 10.8%, compared to 11.2% in the prior year quarter, which had a rich mix of security product sales. What's especially rewarding to see is sequential improvement in civil margins for three straight quarters. Health's non-GAAP operating margin for the quarter was 19%, which was essentially unchanged sequentially after excluding the $14 million ECOROLL adjustment received in Q3.

Chris Cage: Health continues to be a standout performer quarterly.

Chris Cage: Quarterly revenues increased 17% year over year, ending the year north of $3 billion.

Chris Cage: Higher levels of medical examinations was a key driver as well as expanding capabilities on dim sum increasing group events on our HRP growing our social security administration work and breaking into new customer spaces like ARPA H.

Chris Cage: On the margin front on slide eight defense solutions showed consistently strong profitability growth.

Chris Cage: non-GAAP operating margin was 9% for the quarter up 40 basis points year over year.

Chris Cage: The increase in segment profitability was primarily attributable to improve program execution and disciplined cost management.

Civil non-GAAP operating margin was 10, 8% for the quarter compared to 11, 2% in the prior year quarter, which had a rich mentioned mix of security product sales.

What is especially rewarding to see a sequential improvement in civil margins for three straight quarters.

Chris Cage: <unk> non-GAAP operating margin for the quarter was 19%, which was essentially unchanged sequentially. After excluding the $14 million Echo roll adjustment received in Q3.

Chris Cage: The 470 basis point increase in quarterly margin was primarily driven by increased volumes, greater efficiency, and better program execution in the medical examination business, all of which led to higher incentive awards. Turning out the cash flow in the balance sheet on slide 9, operating cash flow for the quarter was $304 million, and free cash flow net of capital expenditures was $226 million.

Chris Cage: The 470 basis point increase in quarterly margin was primarily driven by increased volumes greater efficiency and better program execution and the medical examination business.

Chris Cage: All of which led to higher incentive awards.

Chris Cage: Turning now to cash flow and the balance sheet on slide nine.

Chris Cage: Operating cash flow for the quarter was $304 million and free cash flow net of capital expenditures was $226 million.

Chris Cage: Net cash provided by operating activities benefited from strong collections and working capital management. Today's sales outstanding for the quarter was 56, a one-day improvement from the third quarter of 2023 and a two-day improvement from the fourth quarter of fiscal year 2022. For the year, operating cash flow was just shy of $1.2 billion, and free cash flow was $958 million. Excluding the $260 million of one-time cash tax impacts, primarily from Section 174, free cash flow conversion would have been $121 million.

Chris Cage: Net cash provided by operating activities benefited from strong collections and working capital management.

Chris Cage: Days sales outstanding for the quarter was 56, a one day improvement from the third quarter of 2023, and a two day improvement from the fourth quarter of fiscal year 2022.

Chris Cage: For the year operating cash flow was just shy of $1 2 billion and free cash flow was $958 million for 95% conversion rate.

Chris Cage: Excluding the $260 million of one time cash tax impacts primarily from section 174 free cash flow conversion would have been 121%.

Chris Cage: In the fourth quarter, we repurchased $202 million of shares and paid $51 million in dividends. As of quarter end, we had $777 million in cash and cash equivalents and $4.7 billion in debt. With a leverage ratio of 2.8 times gross debt to adjusted EBITDA, we are comfortably below our three times target. Our strong balance sheet gives us flexibility to return capital to shareholders, and we have 13 million shares remaining under our repurchase authorization. On to the Forward Outlook on slide 10. For 2024, we expect revenues between $15.7 and $16.1 billion, reflecting growth of 2 to 4% over fiscal year 2023. Customer demand remains strong for our products and solutions, and our programs are well insulated from significant budgetary risk. But we are erring on the side of caution given the realities of the current funding environment. The government is still operating under a continuing resolution.

Chris Cage: In the fourth quarter, we repurchased $202 million of shares and paid $51 million in dividends as of quarter end, we had $777 million in cash and cash equivalents and $4 7 billion in debt.

Chris Cage: With a leverage ratio of two eight times gross debt to adjusted EBITDA. We are comfortably below our three times target our strong balance sheet gives us flexibility to return capital to shareholders and we have 13 million shares remaining under our repurchase authorization.

Chris Cage: Onto the forward outlook on slide 10.

Chris Cage: For 2024, we expect revenues between 15, 7% and $16 1 billion, reflecting growth of 2% to 4% over fiscal year 2023.

Chris Cage: Customer demand remains strong for our products and solutions and our programs are well insulated from significant budgetary risk.

Chris Cage: But we are erring on the side of caution given the realities of the current funding environment the.

Chris Cage: The government is still operating under a continuing resolution.

Chris Cage: Although we believe Congress will likely pass a budget within the next month or so, we cannot rule out the possibility of a sequester and a year-long continuing resolution. We are also provisioning for a slight temporary revenue headwind as our business leaders shift their team's focus to higher reward opportunities for Leidos. We expect 2024 adjusted EBITDA margin to again be in the mid to high 10% range, above the target that we laid out at our October 21 investor conference. We remain committed to long-term margin expansion. To begin the year, we are guiding to non-GAAP-diluted earnings per share between $7.50 and $7.90 on the basis of 134 million shares outstanding.

Chris Cage: Although we believe Congress will likely pass the budget within the next month or so we cannot rule out the possibility of a sequester and the year long CR.

Chris Cage: We are also provisioning for a slight temporary revenue headwind as our business leadership their team's focus to higher reward opportunities for lighthouse.

Chris Cage: We expect 2024, adjusted EBITDA margin to again be in the mid to high 10% range.

Chris Cage: Above the target that we laid out at our October 21 Investor day.

Chris Cage: We remain committed to long term margin expansion.

Chris Cage: To begin the year, we are guiding to non-GAAP diluted earnings per share between $7 57.

Chris Cage: $7 90 on.

Chris Cage: On the basis of 134 million shares outstanding.

Chris Cage: This is down an average of 4 million shares from fourth-quarter levels based on Q4 repurchases accomplished and another 500 million of repurchases anticipated in 24. This level of repurchase activity still allows for significant flexibility for additional share repurchases and other responsible capital deployment. Assumed in the EPS guidance is an effective tax rate of 23% and net interest expense of $225 million. Finally, we expect another strong year of operating cash flow at approximately $1.1 billion. Fiscal Year 2024 cash flow guidance reflects approximately $60 million of cash tax payments related to Section 174.

Chris Cage: This is down an average of 4 million shares from fourth quarter levels based on Q4 repurchases accomplished and another $500 million of repurchases anticipated in 'twenty four.

Chris Cage: This level of repurchase activity still allows for significant flexibility for additional share repurchases and other responsible capital deployment.

Assumed in the EPS guidance is an effective tax rate of 23% and net interest expense of $225 million.

Chris Cage: Finally, we expect another strong year of operating cash flow at approximately $1 1 billion.

Chris Cage: Fiscal year 2020 for cash flow guidance reflects approximately $60 million of cash tax payments related to the section 174.

Chris Cage: 2023 cash performance was exceptional, and we expect conversion to return to normative levels near 100% in 24. From a free cash flow perspective, we're targeting capital expenditures of approximately $190 million, or about 1.2% of revenue. With broad bipartisan support, the House passed a tax package that restores immediate expensing of R&D costs under Section 174 with retroactive effect for 2022. The bill has yet to be taken up by the Senate.

Chris Cage: 2023 cash performance was exceptional and we expect conversion to return to normative levels near 100% in 'twenty four.

Chris Cage: From a free cash flow perspective, we're targeting capital expenditures of approximately $190 million or about one 2% of revenues.

Chris Cage: With broad bipartisan support the house passed the tax package that restores immediate expensing of R&D costs under section 174 with retroactive effect for 2022.

Chris Cage: The bill has yet to be taken up by the Senate.

Chris Cage: Our guidance assumes the Section 174 cost capitalization rules remain in place, so we would have additional cash to deploy if the House bill becomes law. In 2024, we'll be operating our new segment structure, and to help your modeling, we recast 2022 and 2023 financials in the new structure and filed them with our press. Let me spend a few minutes outlining these segments and how we see them performing in 2020. The largest, National Security and Digital, includes core defense and intelligence services, digital modernization for U.S. federal customers, and our Leidos Innovation Center. Flagship programs include ENGEN, AEGIS, DES, and large cyber analysis and mission software development contracts with the intelligence community.

Chris Cage: Our guidance assumes the section 174 cost capitalization rules remain in place. So we would have additional cash to deploy if the house Bill becomes law.

Chris Cage: In 2024 will be operating our new segment structure and to help your modeling, we recast 2022, and 2023 financials and the new structure and filed them with our press release, let me spend a few minutes outlining these segments and how we see them performing in 2024.

Chris Cage: The largest national security and digital includes core defense and Intel services digital modernization for U S federal customers and our <unk> Innovation Center.

Chris Cage: <unk> flagship programs include engine ages.

Chris Cage: And large cyber analysis and mission software development contracts with the intelligence community.

Chris Cage: In 2023, revenues for this segment were $7.2 billion, up 7% year-over-year, with a non-GAAP operating income margin of 10%. In 2024, we expect revenue growth within our guided range with margins contracting slightly. Long term, we see margin upside with shared resources and best practices across the digital modernization. The health and civil segment will deliver customer solutions with unique capabilities in the areas of public health, care coordination, life and environmental sciences, and transportation. Key programs include our disability exam work, DIMSUM, National Airspace System Support for the FAA, and our DOE and National Science Foundation-based support contracts. Last year, Health and Civil generated $4.2 billion in revenues, up 7% year-over-year, with non-GAAP operating income margins of 14.5%.

Chris Cage: 2023 revenues for this segment were $7 2 billion up 7% year over year with non-GAAP operating income margin of 10% and.

Chris Cage: In 2024, we expect revenue growth within our guided range with margins contracting slightly.

Chris Cage: Long term, we see margin upside with shared resources and best practices across the digital modernization space.

Chris Cage: The health and civil segment will deliver customer solutions with unique capabilities in the areas of public health care coordination life, and environmental Sciences and transportation.

Chris Cage: Key programs include our disability exam work.

Chris Cage: Some national Aerospace system support for the FAA and our <unk> and.

Chris Cage: National Science Foundation based support contracts.

Chris Cage: Last year health and civil generated $4 2 billion in revenues up 7% year over year with non-GAAP operating income margin of 14, 5%.

Chris Cage: In 2024, we expect robust growth beyond the corporate average with margins coming down slightly. This segment offers the most potential upside in 24 with growing examination volume. Commercial International combines our existing SES, commercial energy, UK, and Australian businesses. Last year, Commercial International generated $2.1 billion in revenues, up 12% year-over-year, with about five points of growth coming from the Airborne Solutions Business Fund and a non-GAAP operating income margin of 7.8 percent

Chris Cage: In 2024, we expect robust growth beyond the corporate average with margins coming down slightly.

Chris Cage: This segment offers the most potential upside in 'twenty four with growing examination volumes.

Chris Cage: Commercial and international combines our existing SCS commercial energy UK and Australian businesses.

Chris Cage: Last year commercial international generated $2 1 billion in revenues up 12% year over year with about five points of growth coming from the airborne solutions business acquisition.

Chris Cage: And non-GAAP operating income margin of seven 8%.

Chris Cage: Based on actions taken in 2023 within SES, an indirect structure tailored to non-federal work, we expect margins to increase in 2024. However, revenues, however, should be relatively stable and reflect a similar seasonal pattern to 2023. Finally, Defense Systems combines our core Dynetics work with our maritime and U.S.-sponsored airborne surveillance support. In 2023, defense systems accounted for $1.9 billion in revenues of 4% year-over-year with a non-GAAP operating income margin of 8.3%. With additional engineering discipline from the combined organization, we expect to increase margins through better program execution, but revenue should remain relatively flat compared to 2020. In the fourth quarter of 2023, our customers accelerated hypersonic weapon testing, resulting in pull-through of work previously scheduled for the first and second quarters of 2024. As a result, the defense system's segment revenues will be back-end loaded in 2024. So, rolling up to the enterprise level, we expect bulk revenues and margin to step down from Q4 levels in Q1 and then grow throughout the year. The Q1 step-down in margins will outpace that in revenue, given the timing of incentive and award fee payments.

Chris Cage: Based on actions taken in 2023 within Ses and the indirect structure tailored to non federal work, we expect margins to increase in 2020 for.

Chris Cage: Revenues, however should be relatively stable and reflect a similar seasonal pattern to 2023.

Chris Cage: Finally defense systems combines our core dianetics work with our maritime and U S sponsored airborne surveillance support in.

Chris Cage: In 2023 defense systems accounted for $1 9 billion in revenues up 4% year over year with non-GAAP operating income margin of eight 3%.

Chris Cage: With additional engineering discipline from the combined organization, we expect to increase margins through better program execution, but revenue should remain relatively flat compared to 2023.

Chris Cage: In the fourth quarter of 2003, our customers accelerated hypersonic weapons testing, resulting in pull through of work previously scheduled for the first and second quarters of 2024 as a result, the defense systems segment revenues will be backend loaded in 2024.

Chris Cage: So rolling up to the enterprise level, we expect in both revenues and margin to step down from Q4 levels in Q1, and then grow throughout the year.

Chris Cage: Q1 step down in margins will outpace that of revenue given the timing of incentive an award fee payments, but we have good line of sight into strong margin performance for the year.

Chris Cage: But we have a good line of sight into strong margin performance for the year. With that, operator, we're ready for some questions. Thank you. We will now begin the question and answer session. As a reminder, to ask a question, you will need to press star one on your telephone and wait for your name to be announced. If you are using a speakerphone, please pick up your handset before pressing the. To withdraw your question, please press star 11 again.

With that operator, we're ready for some questions.

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

Speaker Change: A reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press star one again at this time, we will pause momentarily to assemble our roster.

Operator: At this time, we will pause momentarily to assemble our roster. Your first question comes from Jason Gursky with Citi. Your line is open. Good morning, everybody.

Speaker Change: Our first question comes from Jason Gursky with Citi. Your line is open.

Jason Gursky: Thanks for taking the question. I'm just kind of curious about some of the assumptions that are going into the outlook. On two fronts.

Jason Gursky: Yes, good morning, everybody. Thanks for taking the question.

Jason Gursky: Just curious as you're putting about some of the assumptions that are going into.

Jason Gursky: The outlook.

Jason Gursky: So I guess on.

Jason Gursky: First, the assumptions that are embedded in your guidance related to the DOD budget, both in fiscal 24 and beyond as you think about your medium-term targets and just kind of the growth rate that you're assuming in the DOD budget. And secondly, just whether you have anything in your backlog today associated with some of the supplemental funding that has been passed here over the last several years. That's the first question here. Thanks, Jason. Tom here.

Jason Gursky: On two fronts first would be kind of the assumptions that are embedded.

Jason Gursky: Bedded in your guidance related to the Dod budget.

Jason Gursky: And both in fiscal 'twenty four and beyond.

Jason Gursky: You think about your medium.

Jason Gursky: Term targets, just kind of a growth rate that youre assuming in.

Jason Gursky: And the Dod's budget.

Jason Gursky: And then.

Jason Gursky: Secondly, just whether you have anything in your backlog today associated with some of the supplemental funding that has been passed here.

Jason Gursky: Over the last several years.

Jason Gursky: First question there.

Tom: Thanks, Jason Tom Here I'll go first and then ask Chris to chime in.

Tom Bell: I'll go first and then ask Chris to chime in. On the macro picture, as Chris articulated, our 24 guidance is somewhat conservative given the funding uncertainties on Capitol Hill. So we're not leaning forward, assuming that there's growth in the defense budget this year. It all depends on what Congress decides to do in the coming weeks and months.

Jason Gursky: Macro picture as Chris articulated our 24 guidance is.

Jason Gursky: Somewhat conservative given the funding uncertainties on Capitol Hill.

Chris Cage: So we're not leaning forward assuming that there is growth in the defense budget. This year. It all depends what Congress decides to do in the coming weeks and months, but longer term sadly the world is not becoming a safer place and we don't see that.

Tom Bell: But longer term, sadly, the world is not becoming a safer place, and we don't see that; customers are going to be spending less on national security and defense. So, generally speaking, we see a three to four percent increase in defense budgets over time, but we're going to model all that as we go through this year of deep strategic analysis in 24 to make sure that our assumptions going from 25 to 28 are in keeping with what the budget assumptions are from the Pentagon and other intelligence agencies in the U.S. Chris, anything you'd like to add? Yeah, Jason, good to talk to you this morning and a good way to get us started trying to give us long-term guidance and questions. I would say on the second part of your question, relative to the supplemental, it's not an area that we've had very much exposure to at all.

Chris Cage: Customers are going to be spending less on national security and defense. So generally speaking we see three.

Chris Cage: 3% to 4% increase in defense budgets over time, but we're going to model all that as we go through this year of strategic analysis in 24 to make sure that our assumptions going from 25 to 28 are in keeping with what.

What the budget assumption is from the Pentagon and other.

Speaker Change: Intel agencies in the U S. Chris anything you would like them, yes, Jason.

Chris Cage: Talk to you this morning and way to get US started trying to give us long term guidance.

Correct.

Chris Cage: I would say on the second part of your question relative to the supplemental it's not an area that we've had very much exposure to it all.

Chris Cage: Some of the work that we've done there has actually been through our UK customer and a little bit of airborne support work. So that hasn't been a driver for us, and therefore it's not a risk as that particular funding stream potentially comes under some pressure going forward. Okay, great. I'll leave it at one so the others can get in and ask some questions.

Jason Gursky: Some of the work that we've done there has actually been through our UK customer.

Jason Gursky: Airborne support work, so that's not a hasnt been a driver for us and therefore it is not a risk is that particular funding stream potentially.

Jason Gursky: It comes under some pressure going forward.

Jason Gursky: Okay.

Speaker Change: Okay, Great I'll leave it to one so that others can get in and ask some questions. Thanks gentlemen, Thank you Jason.

Jason Gursky: Thanks, gentlemen. Thank you, Jason. One moment for our next question. Our next question comes from Ken Herbert with RBC Capital Markets. Your line is open. Yeah, good morning, Tom and Chris. How are you?

Speaker Change: One moment for our next question.

Speaker Change: Okay.

Speaker Change: Our next question comes from Ken Herbert with RBC capital markets. Your line is open.

Kenneth George Herbert: Hey, good morning, Tom and Chris how are you.

Kenneth George Herbert: Good morning, Ken. Yeah, just wanted to first start on the health segment, if we could, the legacy health segment, I guess. I mean, pretty significant outperformance as you've gone through 23, and it seems like each quarter it continues to be better than expected. Can you just maybe walk through, as you look at the guide for 24, I know obviously you've got health and civil combined, but as you think about health in particular, how does that continue to trend and what's the visibility on continued strength, especially if you look at the examinations and everything else that have driven much of the upside. Thanks, Ken. I'll start and then hand it over to Chris.

Kenneth George Herbert: Morning, Ken.

Kenneth George Herbert: Hey, I just wanted to first start on the health segment, if we could legacy health segment, I guess I mean, it's been.

Kenneth George Herbert: Pretty significant outperformance as you've gone through 'twenty, three and it seems like each quarter. It continues to be better than expected can.

Kenneth George Herbert: Can you just maybe walk through what you look at the guide for 'twenty four I know, obviously, you have got now health and civil confine, but as you think about it helps in particular, how does that continue to trend and what's the visibility on continued strength, especially if you would could be.

Jim <unk> and everything else that have driven much of the upside.

Speaker Change: Thanks, Ken I'll start and then hand, it over to Chris.

Tom Bell: You know, we are so proud of Liz and the health team for their performance, their sustained performance that you call out over time. And, you know, it is important to recognize that that's a unique mix of unique customer understanding that we feel we have and then unparalleled service to our veterans and others that we serve through the deployment of technology and artificial intelligence in the solutions that allow us to have more throughput for our customers so that our customers can be served faster. Obviously, 13% revenue growth for the year is based on excellent program execution and profitability, and passing the $3 billion threshold for that business is huge, if you don't mind me saying so. So, we're very proud of Liz and the macro team, and we see that continuing in 24. Chris?

Chris Cage: We are so proud of lives in the health team for.

Chris Cage: Their performance their sustained performance that you call out over time.

Chris Cage: And.

Chris Cage: It is important to recognize that that's a unique mix of unique customer understanding that we feel we have and then unparalleled service to our veterans and others that we serve through the deployment of technology and artificial intelligence in the solutions that allow us to have more throughput.

For our customers so that our customers can be served faster.

Chris Cage: Obviously, 13% revenue growth for the year is based on excellent program execution and profitability.

Chris Cage: Passing the $3 billion thresholds for that business is.

Speaker Change: Huge if you don't mind me, saying, so we're very proud of Liz and the team macro and we see that continuing in 'twenty four Kris King.

Chris Cage: Yeah, I can just add a little bit. Obviously, the disability examination work has been a standout, but there's a lot more going on, as I mentioned in my prepared remarks, and we're really looking to extend our reach on some existing programs, and there's plenty more new programs in the pipeline the team's pursuing. So, you know, excited about the prospects there. As we said in our guidance, we'll continue to outperform from a top-line growth perspective heading into 24. On the margin front, there was a slight pullback.

Speaker Change: Ken just to add on a little bit obviously, the disability examination work has been a standout but theres a lot more going on as I mentioned in my prepared remarks, and really looking to extend our reach on some existing programs and there is plenty more new programs in the pipeline the teams pursuing.

Speaker Change: No.

Speaker Change: So excited about the prospects there as we said in our guidance. We will continue the outperformance from a topline growth perspective heading into 'twenty four on the margin front, a slight pullback, but that's really because we're continuing to invest or investing in our capabilities. We are investing to improve the workflow and the infrastructure to allow for that.

Chris Cage: But that's really because we're continuing to invest. We're investing in our capabilities. We're investing in the workflow and the infrastructure to allow for that increased volume on the disability exam front. And, you know, really what's important about that is making sure the veterans get served, and we love to see those volumes increase. And clearly, that's not a baseline assumption in our forward guidance that we see a higher level of activity there, but it's certainly a scenario that we have to be prepared for.

Speaker Change: That increased volume on the disability exam front and really what's important about that is making sure. The veterans get served and we love to see those volumes increase and clearly that's not a baseline assumption in our and our forward guidance that we see a higher level of activity there, but its certainly a scenario that we have to be prepared for and so were made.

Kenneth George Herbert: And so we're making sure we're ready to step up to meet that demand if it happens. Great. Thank you very much.

Speaker Change: Sure, we're ready to step up to meet that demand if it happens.

Sheila Kahyaoglu: I'll keep it there. One moment for our next question. Our next question comes from Sheila Kalaglu with Jefferies. Your line is open. Good morning, Tom and Chris. Thank you so much.

Great. Thank you very much I'll keep it there.

Speaker Change: Yes.

Speaker Change: One moment for our next question.

Speaker Change: Our next question comes from Sheila <unk> with Jefferies. Your line is open.

Good morning, Tom and Chris. Thank you. So much two questions. If you don't mind, maybe one big picture and then one on the segment restructuring.

Sheila Kahyaoglu: Two questions, if you don't mind, maybe one big picture and then one on the segment restructuring and re-segmentation. So first on the re-segmentation, national security, it seems like it mostly split off from defense. The margins in 23 are about 10%.

Sheila: And so first on the re segmentation.

Sheila: National Security it seems like it mostly split split often defense the margins in 'twenty three are about 10% and I think Chris you Might've mentioned that there is opportunity for more margin expansion in that segment can you just talk about what you see there.

Chris Cage: And I think, Chris, you might have mentioned that there's opportunity for more margin expansion in that segment. Can you just talk about what you see there? Sure, Sheila.

Chris Cage: Yeah, absolutely, Sheila. Thank you. So, you know, the national security and digital segment combines a couple pieces of our business, one of which is our new digital modernization sector. And that's the one that we see a lot of uplift in. You know, Steve Hull and the team are already highly energized around bringing together some commonality that we've been using to serve multiple customers and bringing those into repeatable solutions. And so, you know, we're often running there and really looking at how we get that leverage from a combined bench, a combined workforce, and investing class tools and repeatable solutions.

Chris Cage: Sure Sheila.

Speaker Change: Yes, absolutely Sheila Thank you so the national security and digital segment.

Speaker Change: Combines a couple of pieces of our business one of which is our new digital modernization.

Sheila: Sector and Thats, the one that we see a lot of uplift over time, Steve Hall, and the team are already highly energized around bringing together some commonality that we've been using to serve multiple customers and bringing those into repeatable solutions and so.

Sheila: We're often running there and really looking at how we get that leverage from our combined bench combined workforce and best in class tools and repeatable solutions. So so we see that opportunity and then of course within the core National Security work, we do with our Intel customers that has been exceptionally well run and we continue to expect excellent program.

Chris Cage: So, we see that opportunity. And then, of course, within the core, you know, national security work we do with our Intel customers, that has been exceptionally well run. And we continue to expect excellent program execution and performance and, you know, maximizing our opportunities with that client base as well. But the longer-term margin improvement that we see in the near term relates to, you know, the gains we can make in digital modernization. Just for clarification, the third part of that business is our link, our Leidos Innovation Center. And so while that has historically been housed under our Dynetics subsidiary, we've pulled that up to the CTO level so that the innovation and entrepreneurial spirit that it deploys can be deployed across all the sectors and all the segments of Leidos. That's the third part of that component, Sheila, just for clarification. Okay, I got it. And then Tom, maybe the big picture for you.

Sheila: Execution and performance and maximizing our opportunities with that client base as well, but.

Sheila: The longer term margin improvement that we see in the near term relates to the gains we can make in digital modernization space.

Sheila: And then just just for clarity the third part of that businesses are linked through our latest innovation center and so while that has historically been home roomed under our Dianetics subsidiary, we've pulled that up to the CTO level, so that the innovation and entrepreneurial spirit that it.

Sheila: Deploys can be deployed for all the sectors in all the segments of lighter. So that's the third part of that component Sheila just for clarity.

Sheila: Okay got it and then Tom maybe Big picture for you you talked about.

Tom: Incentive comp changes that will come out in the past.

Tom: You highlighted profitability I think I know why you did that but where do you think profitability could go just given peers in this business are at the 11% Mark at mode.

Yes, how how high is high.

Tom Bell: You talked about, you know, incentive comp changes that'll come out in the proxy, and you highlighted profitability. I think I know why you did that.

Tom: We don't know Sheila and that's part of the enjoyment of 2024 and the challenge that we're giving each of the sector presidents to come forward with their sector best in class growth and profitability plan.

Tom Bell: But where do you think profitability could go just given peers in this business are in the 11% market? Yeah, how high is high? We don't know, Sheila, and that's part of the enjoyment of 2024 and the challenge that we're giving each of the sector presidents to come forward with their sector best-in-class growth and profitability plan. Obviously, we're guiding to the mid to high teens in 2024. Obviously, that is already at a pretty world-class level. Excuse me.

Obviously, we're guiding to mid to high teens in 2024.

Tom: Obviously that is already in a pretty world class level.

Speaker Change: Excuse me.

Speaker Change: Not teams that would be.

Speaker Change: Someday Toms someday, but mid to high tens.

Speaker Change: But.

Speaker Change: In the fourth quarter, we hit 11 four so.

Speaker Change: <unk> is cresting over 11 out of the range of possibilities some year in the future.

Tom Bell: Someday, Tom. Someday. But in the mid to high tens.

Chris Cage: But, you know, in the fourth quarter, we hit 11.4. So is cresting over 11 out of the range of possibilities some year in the future? I don't know. We'll see. But we're very focused on restoring bottom line growth as we increase top line growth. And as a result of both of them, it'll be a very accretive business from a cash perspective. And Sheila, I'd only add, you know, obviously, again, as we gave you some color commentary on the new segments, there's a lot of gas in the tank that we see on defense systems in Commercial International. They'll step up in margins in 24, but, you know, that could be a multi-year runway for those pieces of the business, and so, you know, we've been on this journey for a period of time now. Tom's come in and accelerated that journey, and I think we're seeing what the team's capable of, and I'm excited about where the margins could go over time. Great, thank you.

Speaker Change: We'll see but we're very focused on.

Speaker Change: Restoring bottom line growth as we increased topline growth and as a result of both of them. It will be a very accretive business from a cash standpoint, so she'll I'd only add on obviously again as we gave you some color commentary on the new segments Theres a lot of gas in the tank that we see on defense systems and commercial.

Speaker Change: National they'll step up in margins in 'twenty four but.

Speaker Change: That could be a multi year runway for those pieces of the business.

Speaker Change: And so we've been on this journey for a period of time now Tom's come in an accelerated that journey and I think we're seeing what the team's capable of so excited about where the margins can go over time.

Great. Thank you.

Speaker Change: One moment our next question.

Speaker Change: Yes.

Speaker Change: Our next question comes from Mariana Perez Mora with Bank of America. Your line is open.

Sheila Kahyaoglu: One moment for our next question. Our next question comes from Mariana Perez Mora with Bank of America. Your line is open. Hey everyone. Hey, good morning.

Speaker Change: Everyone.

Speaker Change: Good morning.

Speaker Change: A follow up on defense systems in commercial and international.

Speaker Change: So you think defense systems is going to be flat this year, but hypersonic should be something that like Anthony has hit a lot of upside opportunity and I would imagine the same from the auto steel in international could you. Please give us a sense of like how the cake or should look like in the three to five year range from now.

Mariana Perez Mora: I'll follow up on defense systems and commercial and international. So you think defense systems are going to be flat this year, but hypersonic should be something that actually has a lot of upside opportunity. And I could imagine the same from the all-cost deal in international. Can you please give us a sense of how the CAGR should look in a three to five year range from now? So, uh, she, uh, I'm sorry, Mariana.

Speaker Change: So.

Speaker Change: I am sorry, Marion I think youre, asking about hypersonic and customer demand for hypersonic and then international.

Tom Bell: I think you're asking about hypersonics and customer demand for hypersonics and then international. The hypersonics is, um. Hypersonics is a good news story, and as Chris alluded to in his comments, we saw a pull-in to 23 of work we thought was going to be in the first half of 2024 on our customer demand signal for hypersonics. We're in deep dialogue with customers about how we continue to accelerate that business because that is a capability that the United States needs to deploy robustly. So, again, it's kind of like I answered Sheila. I don't know how high is too high, but there is a very, very strong demand for the United States to field hypersonic capabilities that are in the world-class range.

Speaker Change: The hypersonic.

Speaker Change: Is.

Speaker Change: The hypersonic is a good news story and as Chris alluded to in his comments.

Speaker Change: We saw pull in to 'twenty three of work, we thought was going to be in the first half of 2024 of our customer demand signal for hypersonic <unk>, where we are in deep.

Speaker Change: Deep dialogue with the customers about how we continue to accelerate that business.

Speaker Change: Because that is a capability that the United states needs to deploy robustly. So.

Speaker Change: Again, it's kind of like I answered Sheila I don't know how high is high but there is very very strong demand for the United States to field hypersonic capabilities that are in the world class <unk>.

Tom Bell: And obviously, we are in a very good position to be a key component of those hypersonic systems going forward. So I think you're going to continue to see pull through there and focus. I think on the international side, one of the most exciting things we have going for us is the strong footprint we have organically and already, obviously, in the United States, but also in the UK and Australia. And there is a great customer interest in what Leidos can do around AUKUS, not in Pillar 1. I have no interest in building nuclear submarines, but I really am interested in helping those customers in what they call Pillar 2 and Pillar 3, which are in the Intel data and digital systems worlds. So, very much in our wheelhouse for what we do here in the United States and in the UK and Australia, and a very much a growth engine for us should be how we leverage AUKUS going forward. Chris, anything you'd like to add? Well, one more point, Mariana, on back to defense systems.

Speaker Change: Range and obviously, we are in a very good position to be a key component of those hypersonic systems going forward. So.

Speaker Change: I think youre going to continue to see pull through there and and focus I think on the international side one of the most exciting things we have.

Going for US is the strong footprint, we have organically and already obviously in the United States, but also in the UK and Australia and there is.

Speaker Change: Great customer interest in what <unk> can do around August not in pillar one.

Speaker Change: No interest in building nuclear submarines, but I really am interested in helping those customers in what they call pillar, two and pillar three which are in the Intel data.

Speaker Change: And.

Speaker Change: Digital systems worlds, so very much in our wheelhouse for what we do here in the United States and in the UK and Australia and very much.

Speaker Change: Growth engine for us should be how we leverage August growing going forward or is there anything you'd like to add one more point Mariano on back to defense systems, We talked about hypersonic, but in addition to that in the forest protection work that we've talked about in the past.

Chris Cage: You know, we talked about hypersonics, but in addition to that, you know, the force protection work that we've talked about in the past, you know, the team has been working hard on the IFTIC enduring program, and we're excited about the fact that we delivered some of the first fieldable prototype launchers in December. You know, that'll transition into a business phase here early in the year, but, you know, we're looking forward to a potential award in that particular area on LRIP and then full-rate production later in the year. And that also is a growth catalyst that we see. So you start to look at that kegger over a multi-year time horizon, you know, our expectations are that those businesses will be accelerating. And Tom talked about a couple of the key points there that we see driving that activity. Thanks so much.

Speaker Change: The team has been working hard on the epic enduring program and we're excited about the fact that we delivered some of the first prototype.

Speaker Change: Prototype launches in December that will transition into a phase here early in the year, but we're looking forward to a potential award in that particular area on L. Rip and then full rate production later in the year and that also is a growth catalyst that we see so you start to look at that CAGR over a multiyear time horizon or X.

Spectation as those businesses will be accelerating and Tom talked to a couple of key points, there that we see driving that activity.

Speaker Change: Thanks, so much and if I may MOSFET program related question.

Tom Bell: And if I may, more of a program-related question, do you have an update on how CHS6 is trending and how much do you expect the program to contribute in 2024? Yeah Mariana, let me start and then I'll hand it over to Chris also. Obviously, CHS6, a major franchise win for Leidos in the fourth quarter of last year, one we're very proud of the team for, and it's a model that we expect to deploy going forward where we bring customers a value proposition that is compelling to them both in the delivery we can give them and the speed with which we can spool up to solve their problems. But one of the things that is not understood about CHS6 is it's actually a very broad mandate for the customer, and it's not just IT, it's the whole C5 ISR domain, and so not only is it broad in what the customer can procure through CHS6, but it's also a great example of how we can use the breadth and scale of Leidos to solve problems for customers.

Speaker Change: I have an update on how CHF six is trending and how much do you expect that program to contribute yet tiny tiny form.

Speaker Change: Yes, Mariano let me, let me start and then I'll hand, it over to Chris also obviously CHF six a major franchise win for light OS in the fourth quarter of last year, one were <unk>.

Chris Cage: Very proud of the team for and it's a model that we expect to deploy <unk>.

Chris Cage: Going forward, where we bring customers a valley.

Chris Cage: Value proposition that is compelling to them both in the.

Chris Cage: The delivery, we can give them and the speed with which we can spool up to solve their problems but.

Chris Cage: One of the things that is not understood about CHF six years, it's actually a very broad mandate for the customer and it's not just it. It's it's the whole C. Five ISR domain and so.

Chris Cage: Not only is it broad and what the customer can procure through CHF six but it's also a great.

Chris Cage: Example of how we can use the breadth and scale of lighthouse to solve problems for customers. So not only is that home roomed in one sector, but the dynamics business is going to be a key part of <unk>.

Tom Bell: So not only is that concentrated in one sector, but the Dynetics business is going to be a key part of helping it deliver for our customers. So we're very happy about that. And the basic catalog is being built out, and the orders are starting to come in, but Chris will give you some more details on that. Yeah, just to add some color, and we'll stay away from specifics, but obviously, this is a program we expect to build revenue and profitability over the life of the contract. And a long contract like this does have a ramp-up period. Tom's right.

Chris Cage: Helping it deliver for our customers. So we're very happy about that and the basic catalog is being built out and the orders are starting to come in but Chris will give you some more details on that.

Chris Cage: Just to add some color and I will stay away from specifics, but obviously this is a program we expect that we'll build in revenue and profitability over the life of the contract.

Chris Cage: A long contract like this does have a ramp up period sounds right. I mean, we are encouraged by the order activity. Some long lead items that will actually contribute to revenue in.

Chris Cage: I mean, we're encouraged by the order activity, some long-lead items that will actually contribute to revenue in 25 even, but we're rounding it out. The profile is going to depend greatly upon what those particular technical solutions are, but we're leveraging our vendor network. We're leveraging AI. We've got a great team.

Chris Cage: In 25, even.

Chris Cage: But we're rounding it out.

Chris Cage: Profile is going to depend greatly upon what those particular technical solutions, but we're leveraging our vendor network, we're leveraging AI, we've got a great team.

Chris Cage: There are some activities that we're not interested in, low-margin work. So some of the pass-through will not show up as revenue for Leidos, but overall, you can expect this to be an accretive margin program for Leidos overall, and with a ramping revenue profile, probably more later in the year. Thank you so much.

Chris Cage: There is some activity that we're not interested in low margin work. So some of the pass through will not show up as revenue for <unk>, but overall you can expect this to be an accretive margin program to <unk> overall and with the ramping revenue profile probably more later in the year.

Speaker Change: Thank you so much.

Tom Bell: One moment for our next question. Our next question comes from David Strauss with Barclays. Your line is open. Hi, good morning. This is actually Josh Corn on behalf of David.

Speaker Change: One moment for our next question.

Speaker Change: Okay.

Speaker Change: Our next question comes from David Strauss with Barclays. Your line is open.

Speaker Change: Hi, Good morning, this is actually Josh <unk> on for David.

Josh Corn: Hey Josh, so, hi, I wanted to ask about the revenue guidance for next year. When you have, as you just discussed, CHS-6 and ramping and some of the health care programs really strong, what are some of the, are there any offsets to get to, you know, the only 2 to 4% growth next year?

Josh: Hey, Josh.

Josh: Hi, I wanted to ask about the revenue guidance for next year. When you have as you just discussed CHS back setting ramping in some of the health care programs really strong.

Josh: What are some of the are there any offsets to get to.

Josh: Only 2% to 4% growth next year.

Chris Cage: Yeah, David, let me start and Tom can make some bigger picture comments. I mean, we've talked in the past about, you know, health has been great, but the Dim Sum program, as an example, we're through the deployment phase, essentially. And so even though we've won some additional work there with Digital First, there is a step down in volumes on that particular program. There was a National Security Intel program that transitioned away from us earlier last year. So that's a little bit of a headwind.

Speaker Change: Yes, David let me start and Tom can make some bigger picture comments I mean, we've talked in the past about health has been great, but the dim sum program as an example, working through the deployment phase essentially and so even though we've won some additional work here with digital first there is a step down in volumes on that particular program.

Speaker Change: There was a national security Intel program that transitioned away from US earlier last year. So that's a little bit of a headwind. So there's always some puts and takes in the portfolio, but more big picture. We're focused on there is some budget uncertainty customer demand has been very strong in Q3, and Q4 and that led to our outperformance, but as we look at.

Chris Cage: So there's always some puts and takes in the portfolio. But more big picture, you know, we're focused on there's some budget uncertainty. You know, customer demand has been very strong in Q3 and Q4, and that led to our outperformance. But as we look ahead to the early parts of the year, you know, a lot of the activity will need to transition into Q3 and Q4. So it all depends upon how quickly we can introduce some uncertainty in our budget environment and make sure customer demands remain robust. Tom, anything you'd add to that? Well, I would just add, Josh, there are two macro headwinds that we have taken into account that have informed the conservative end of our range. One was the overperformance in 2023 that makes year-on-year comparators difficult, and, in this case, challenging.

Speaker Change: Ahead to early parts of the year a lot of the activity, we will need to transition into Q3 and Q4. So it all depends upon how quickly we can get some months certainty in our budget environment and make sure customer demands remain robust Tom anything you'd add to that I would just add Josh theres two macro headwinds that we.

Speaker Change: That informs the conservative end of our range one was the over performance in 2023 that makes year on year comparator.

Speaker Change: Difficult.

Speaker Change: This case challenging.

Speaker Change: We are very proud of our performance in 'twenty, three but that creates a headwind for 2004 year on year revenue growth.

Speaker Change: Against also the backdrop of the budget situation that is not yet crystal clear here in Washington D C and so while the 2% provisions against the.

Chris Cage: We are very proud of our performance in fiscal year 23, but that creates a headwind for 24-year-on-year revenue growth against the backdrop of the budget situation that is not yet crystal clear here in Washington, D.C. And so while the 2% provisions are against the worst-case scenario in that, we will be working with the team to meet or exceed the high end of that range as we proceed through the year. So you can be sure we won't be satisfied if we just hit the bottom end of that.

Speaker Change: The worst case scenario in that.

Speaker Change: We will be working with the team too.

Speaker Change: <unk> or exceed the high end of that range as we prosecute the year. So you can be sure.

Speaker Change: We won't be satisfied.

Speaker Change: If we just hit the bottom end of that range.

Speaker Change: Great. Thank you.

Speaker Change: One moment our next question.

Speaker Change: Our next question comes from Louie Dipalma with William Blair. Your line is open.

Tom Bell: Great, thank you. One moment for our next question. Our next question comes from Louie DiPalma with William Blair. Your line is open, Chris and Stuart.

Louie Dipalma: Chris and Stuart Good morning, Good morning, good morning.

Louie Dipalma: Tom You discussed how you believe <unk> can increase its business capture.

Louie Dipalma: Good morning. Tom, you discussed how you believe Leidos can increase its business capture. Does Leidos consider its Gremlins air vehicle a viable candidate for the emerging high-profile drone replicator program? The Gremlin program was a fantastic demonstration of our prowess in aerospace. For those that don't know it, it was a remotely piloted vehicle that was also recaptured and then brought on board another manned aircraft.

Louie Dipalma: It does let us consider its gremlin air vehicles, a viable candidate for the emerging high profile drawn replicator program.

Louie Dipalma: The Gremlin program was fantastic demonstration of.

Speaker Change: Our prowess in aerospace for those that don't know it.

Speaker Change: It was a remotely piloted vehicle that was also recaptured and then brought onboard another manned aircraft so a fantastic.

Tom Bell: So a fantastic capability. But at this point, no, there's no discussions going on with the customers around that program going forward, although it has spawned other unmanned capabilities that we are talking to customers about that help inform possible growth aspects for our defense systems business. Great. So is there a possibility that some of the Dynetics drone assets can be involved in Replicator? There is certainly a possibility, yes.

Speaker Change: Capability, but at this point no there's no discussions going on with the customers around.

Speaker Change: That program going forward, although it has spawned other unmanned capabilities that we are talking to customers about that help.

Speaker Change: In form.

Speaker Change: Possible growth aspects for our defense systems business.

Speaker Change: Great.

Speaker Change: Is there a possibility that some of.

Speaker Change: The dynamics drone assets can be involved in replicating.

Speaker Change: There is there is certainly a possibility yes.

Tom Bell: Great. And I'll follow up on the international opportunity. You mentioned how there is demand on the international front for Leidos data and digital services. It would seem that allies have similar IT cloud networking and zero trust ambitions as the U.S., and you are obviously the largest provider of these types of megaprojects. And I was wondering if you could bring variants of IT megaprojects such as the Navy NGEN, the NASA AGES, and Enclave, two allies, or are there security restrictions as it relates to personnel?

Speaker Change: Great and a follow up on the international opportunity you referenced how there is demand on the international front for the latest data and digital services and would seem that allies have similar.

Speaker Change: Cloud networking and zero trust ambitions as the U S and Europe, obviously, the largest provider of this.

Speaker Change: Types of Mega projects and I was wondering can you bring.

Variance of.

Speaker Change: <unk> Mega projects, such as the Navy engine, the NASA ages and enclave.

Speaker Change: Two allies are there security restrictions as it relates to personnel and are you focusing more on services.

Louie Dipalma: And are you focusing more on IT services or hardware as it relates to the international opportunity? Thanks. Thanks, Louie. Yes, so the beauty of Pillar 2 of AUKUS is not only our presence in the U.S., the U.K., and Australia, but the fact that the work that is being done in those countries right now in the area that you reference is, to a large degree, already a place that we're playing in. So the beauty of AUKUS is an incentive for the nations to collaborate.

Speaker Change: Services are hardware as it relates to the international opportunity. Thanks.

Speaker Change: Thanks, Louie yes.

Louie Dipalma: Yes, so the beauty of pillar two abacus is not only our presence in the U S. The UK and Australia, but the fact that the work that is being done in those countries right now in the area that you reference is to a large degree already a place that we're playing in.

Louie Dipalma: So the beauty of <unk> is.

Louie Dipalma: And incentive for the nations to collaborate.

Tom Bell: We're very excited about the opportunities that this gives us to lower the thresholds of sharing, and obviously, there are big parts of the AUKUS legislation that lower those trade barriers, lower the ITAR restrictions, and allow greater data sharing. So we see it as an open door for us to promulgate Leidos capabilities that heretofore, Louie, kind of to your question, have been stovepiped in one country or the other across all those countries and allow these great allies to punch above their weight collectively. Great, that's it for me. Thanks, everyone. Thanks, Louie.

Louie Dipalma: We are very excited about the opportunities that gives us to lower the thresholds of sharing data and obviously theres also big parts of the office legislation that lower those trade barriers lower the ISR restrictions and allow greater data sharing so we see it as a opened door for us to.

Louie Dipalma: Promulgate light OS capabilities that heretofore Louie kind of to your question had been stove piped in one country or the other across all those countries and allow these great allies to.

Louie Dipalma: Punch above their weight collectively.

Speaker Change: Great. That's it for me thanks, everyone. Thanks Louise Thank you.

Louie Dipalma: One moment for our next question. Our next question comes from Peter Arment with Baird. Your line is open. Good morning, Tom and Chris. Nice results.

Speaker Change: One moment for our next question.

Speaker Change: Our next question comes from Peter Arment with Baird. Your line is open.

Peter J. Arment: Hey, Thanks, Good morning, Tom and Chris Peters Alts.

Peter J. Arment: Hey, quick one on just maybe an update on DES and how that's kind of projected for the year. And then, Tom, just more of a bigger picture question on, you know, kind of capital deployment versus M&A, done and made. It's just a tremendous amount of progress realigning the businesses, and you've turned over roles or have been replaced. Just how are you thinking?

Peter J. Arment: A quick one on just maybe an update on <unk> and how that's.

Peter J. Arment: Projected for the year and then Tom just more of a bigger picture question on kind of capital deployment versus M&A.

Peter J. Arment: <unk> made a tremendous amount of progress realigning the businesses and you've turned over I think what you said, 75% I think of your executive leadership team is either a new roles or has been in place.

Chris Cage: It's 24 more of a year, internally focused and kind of showing progress. What do we think about that? Yeah, Peter, it's Chris.

Peter J. Arment: Just how are you thinking its 24 more of a year, where you're just going to continue to be internally focused on kind of showing the progress versus how.

Peter J. Arment: How do we think about that versus M&A and just regarding <unk>.

Buybacks as a preference.

Tom Bell: Let me get started with a little bit of color on DES and then turn it to Tom. I mean, you know, again, this has been a longer growth story than we originally anticipated, but it's a nice one. The team is performing exceptionally well. We've actually extended from one task order now to five active task orders under the program. And, you know, it will be on a growth trajectory for the next couple years. Twenty-four will be stronger than twenty-three on both the top and bottom line.

Peter J. Arment: Yes, Peter it's Chris let me get started with a little bit of color on that.

Speaker Change: Ill turn it to Tom.

Speaker Change: Again. This this is Ben.

Speaker Change: A longer growth story than we originally anticipated, but it's a nice one the team is performing exceptionally well.

Speaker Change: We've actually extended from one task order now to five active task orders under the program.

Speaker Change: And it will be.

On a growth trajectory over its still the next couple of years 24 will be stronger than 'twenty three on both the top and bottom line and we've seen good migration on the planning efforts and working closely with the customer.

Chris Cage: And we've seen good migration on the planning efforts, working closely with the customer and the DAFAs to, you know, get them ready for more migrations as we progress through 2024. So, all I can tell you is it'll be a contributor to growth this year, not as significant as maybe once envisioned, but really looking forward to that growth rate continuing to accelerate later this year and into twenty-five. Thank you. And Peter, I'm going to answer the punchline first and then give you some color.

Speaker Change: And the Daffock to get them ready for more migrations as we progress through 2024 so.

All I can tell you is it will be a contributor to growth this year not as significant as maybe once envisioned but really looking forward to that growth rate continuing to accelerate.

Speaker Change: Later, this year and into 'twenty five.

Speaker Change: And Peter I'm going to I'm going to answer your the Punch line first and then give you some color.

Tom Bell: No, M&A is not a priority in 2024. It continues to be in the playbook but subordinated to other deployments of cash. As Chris articulated in his prepared comments, we've already provisioned to repurchase $500 million worth of Leidos shares this year. But I'm happy to share with you that that is not all the bullets in our ammunition.

Speaker Change: No M&A is not a priority in 2024 it continues to be in the playbook, but subordinated to other deployments of cash as Chris articulated in his prepared comments, we've already provisioned two.

Speaker Change: Repurchased $500 million worth of lighthouse shares this year.

Speaker Change: I'm happy to share with you that that is not all the bullets in our ammunition, we have other ability to deploy cash for great ideas that start to come out of the strategy process that I spoke to.

Tom Bell: We have another ability to deploy cash for great ideas that start to come out of the strategy process that I spoke to. And we're very excited about bringing forward those ideas and deploying cash responsibly organically into great capabilities and great technologies that will enable us to have differentiated solutions going forward. Ultimately, the five sector strategies that the presidents are building will not ignore M&A, but the primary focus first and foremost will be what are the gaps, what are the needs we see our customers meeting, and how do we position Leidos best for those over time. Obviously, if we can build it, we have the funds and the capability to provide for that. But if it's better, faster, cheaper, and more expeditious for us to buy that, then M&A can come back into the playbook. But it will be a very thoughtful process through this year of strategy where we carefully think through the playbook for what inorganic plays make sense for the North Star strategy we're creating. I hope that that helps, Peter. Very much so. Thanks.

Speaker Change: And we're very excited about.

Speaker Change: Bringing forward those ideas and deploying cash responsibly organically in great capabilities and great technologies that will enable us to have differentiated solutions going forward.

Speaker Change: Ultimately the the five sector strategies that the President's are building, we will not ignore M&A, but the primary focus first and foremost will be.

Speaker Change: What are the gaps what are the needs we see our customers.

Speaker Change: Meeting and how do we position light OS best for those over time, obviously, if we can build it we have the funds and the capability to provision for that but if it's better faster cheaper and more expeditious for us to buy that then M&A can come back into the playbook, but those will be.

Speaker Change: Very thoughtful process through this year, a strategy, where we carefully through the playbook for what inorganic plays makes sense for the North Star strategy, we're creating I hope that helps Pierre.

Peter J. Arment: Thanks, Tom. One moment for our next question. Our next question comes from Noah Poponak with Goldman Sachs. Your line is open. Hi, good morning, everyone. Hey, Noah.

Pierre: Very much so thanks, thanks, Tom I appreciate it.

Pierre: One moment for our next question.

Pierre: Our next question comes from Noah <unk> with Goldman Sachs. Your line is open.

Noah: Hi, good morning, everyone.

Noah: Hey, Noah.

Noah Poponak: The civil margin, I guess, for the full year ended up flat year over year, and not a ton of discussion. The prepared remarks here, I guess, despite the consternation there early in the year. So, you know, have we sounded the all clear? Maybe you could just spend a little more time on where you stand and stabilize, the challenges you've had there. And is the quarterly progression on the civil margin through 2024 a ramp-up like the last two years, or is it more stable? Yeah, Noah. Hey, this is Chris.

Noah: The civil margin I guess for the full year ended up flat year over year.

Speaker Change: And not a kind of discussion.

Speaker Change: The prepared remarks here I guess despite.

Speaker Change: The consternation there early in the year so.

Noah: Have we sell it will be all clear maybe you could just spend a little more time on where you stand and stabilizing.

Noah: The challenges you've had there.

Noah: And is the quarterly progression on the civil margin through 2024.

Noah: Our ramp up like the last few years or is it more stable.

Chris Cage: I'll get started, and maybe Tom can talk about the big picture. So, civility is obviously more than SES, but that kind of is implicit in where you're going. And I really applaud the team for great progress in 23 to right the ship, and ultimately, revenue and margins were in line with our expectations. You know, so the SES business itself is improving. We were higher on revenues year over year, but we made minimal contributions sequentially from product mix.

Noah: Yes, no Hey, this is Chris I'll get started and maybe Tom can talk Big picture. So civil is obviously more than STS, but that kind of is implicit is where you're going and I really applaud the team for a great progress in 2003 to right the ship.

Chris: And ultimately revenue and margins were in line with our expectations.

Tom: So the SCS business itself is improving we were higher on revenues year over year, but minimal contribution sequentially from product mix. So as we pivot into 'twenty four we will expect the pattern to kind of not be us.

Chris Cage: So as we pivot into 24, you know, we'll expect the pattern to kind of not be as pronounced as in 23, but probably lower in the early part of the year, accelerating towards the back half of the year, as we see that rolling out right now. We're, you know, not all the way done, but we are, you know, well down the road to executing all of the turnaround efforts that we put in place. And some of the things where we're, you know, exiting certain geographies, you know, that's a thoughtful, carefully orchestrated process, right? That sometimes takes many quarters to fully see it through.

Tom: Pronounces in 'twenty, three but probably lower in the early part of the year accelerating towards the back half of the year, how we see that rolling out right now we're <unk>.

Not all the way done, but we are well down the road on executing all of the turnaround efforts that we put in place in some of the things where were X exiting certain geographies. That's a thoughtful carefully orchestrated process right that takes.

Tom: Sometimes many quarters to fully.

Chris Cage: But I'd say, you know, we're in line with where we had hoped to be at this point in time, and I think the business is looking forward to better days ahead. Yeah, I would echo that, Noah, and just give a quick shout out to Vicky, who has taken on the responsibilities of this sector with great vim and vigor, and the person leading SES, Mike Van Gelder, is just a rock star for us at Leidos. And they are taking this reset business, and really excited about the opportunities that the market is presenting to them to grow, both in traditional places and non-traditional places. So they and we remain bullish on the long-term outlook for this business, and we're excited to be in this aspect of the market. Okay, great. And then just on health.

Tom: See it through but I would say we're in line with where we'd hope to be at this point in time and I think the businesses looking forward to better days ahead.

Speaker Change: I would echo that.

Speaker Change: Noah in and just give a quick shout out to Vicki who has taken on the responsibilities for this sector with <unk>.

Speaker Change: Great Vim, and vigor and the person leading SCS, Mike Van Gilder, just a rockstar for asset light OS and they are taking.

Speaker Change: Taking this reset business.

Speaker Change: And really they are excited about the opportunities that the market is presenting to us to grow both in the traditional places and non traditional places so they and we remain bullish on the long term outlook for this business and we're excited to be in this aspect of.

Speaker Change: The of the market.

Speaker Change: Okay great.

Noah Poponak: You've sort of touched on this, but just the, you know, the year over year comparison will be pretty different in the first half versus the back half next year. And then, you know, the exit rate on the margin is a lot different from where you started the year. Any color you can provide on the cadence of the growth rate and the margin through the quarters of the year? Not to ask, you know, don't like to ask quarterly questions, but it just seems like we could all be kind of thrown off by it versus what you're expecting there. Yeah. I mean, no; it's a little nuance there.

Speaker Change: And then just on health.

Speaker Change: You've sort of touched on this but just.

Speaker Change: The year over year comparison will be pretty different in the first half versus the back half next year.

Speaker Change: And then the <unk>.

Speaker Change: Right on the margin is a lot different than where you started the year.

Speaker Change: Any any color you can provide on the cadence of the growth rate and the margin through the quarters.

Speaker Change: The year.

Speaker Change: I'd like to ask quarterly questions, but it seems like.

Speaker Change: We could all be kind of thrown off on virtual versus what youre expecting there yes.

Chris Cage: And, you know, again, without too many specifics, just keep in mind that in Q3, we did have a request for equitable adjustment, and that contributed to some uplift in profitability. In Q4, we benefited from, you know, nice incentive performance. I think our commentary in the past, and it still holds true, is that the customer is expecting the industry to continue to step up volumes to meet the increased demand. And, therefore, the threshold on throughput continues to rise to achieve full incentives.

Speaker Change: It's a little nuance, there and again without too many specifics just keep in mind in Q3, we did have a request for equitable adjustment that contributed some uplift in profitability in Q4, we benefited from.

Speaker Change: A nice incentive performance I think our commentary in the past and it still holds true is the customer.

As expecting industry to continue to step up volumes to meet the increased demand and therefore, the the threshold on throughput continues to rise to achieve full incentives. So.

Chris Cage: So, you know, early in the year, our expectation is that we'll have some work to do to be ready to be able to prosecute that level of demand to earn full incentives. So, therefore, it's probably safer to assume that pattern will improve as the year progresses. But the main point is, you know, investing to make sure the veterans get treated and seen and get the care and the benefits they're entitled to. And we're looking forward to continuing to make those investments to carry out that work as timely as possible. Okay, thanks so much.

Speaker Change: Early in the year, our expectation is.

Speaker Change: We will have some work to do to be ready to.

Speaker Change: To be able to prosecute that level of demand to earn full incentives. So therefore, it's probably safer to assume that pattern will improve as the year progresses forward for them.

Speaker Change: Main point is investing to make sure are the veterans.

Speaker Change: <unk> treated and seen and get the care and the benefits, they're entitled to and we're looking forward to continue to make those investments to prosecute that work as timely as possible.

Chris Cage: Thank you. One moment for our next question. Our next question comes from Bert Subin, with Stiefel. Your line is open. Hey, good morning. Hey, Bert.

Speaker Change: Okay. Thanks, so much thank you.

Speaker Change: One moment for our next question.

Speaker Change: Our next question comes from Bert <unk> with Stifel. Your line is open.

Bert: Hey, good morning, Tom Chris.

Bert Subin: This morning, Chris, if we think about the revenue growth for you in terms of hiring and, Two to 4% growth indicates you're carrying some additional costs just because inflation is going to be in that range and hiring is presumably positive, and then on www.thevenusproject.com, Yeah Bert, obviously, the inflationary environment has been volatile, but it's been improving, and so you know as we progress into 24, our outlook in that regard is it's moderated down So you know I'm not worried that we've got an imbalance between our top line and bottom line as it relates to inflationary impacts on the business. We've anticipated a robust merit pool for our labor costs, and you know we understand how those will be passed along to certain customers under our cost-reimbursable programs, but our pricing patterns have anticipated this inflationary environment over the last couple years. So as it relates to protecting the margin of the downside on inflation, I feel good about where we're positioned there. Obviously, on the outlay side, you know there's always this lag right between the budget and the outlay and the timing that it's difficult to project.

Bert: Hey, Barry good morning.

Bert: Chris If we think about the revenue growth for you in terms of hiring an inflation, 2% to 4% growth indicate youre carrying some additional cost just because inflation is going to be in that range and hiring is presumably positive.

Bert: And then on.

Speaker Change: Another sort of related question on the revenue side as we think about outlays likely normalizing at some point soon how do you capture that in that two to four is that correct.

Chris: Yes Bert.

Chris: Obviously, the inflationary environment has been volatile, but its been improving and so as we progress into 'twenty for our outlook in that regard as it's moderated down relative to where we were a year ago.

Chris: So.

Bert: I'm not worried that we've got an imbalance between our topline and bottom line as it relates to inflationary.

Bert: Impacts on the business.

Bert: We have anticipated.

Bert: Robust merit pool for our labor cost and we understand how those will be passed along to certain customers under our cost reimbursable programs, but our pricing patterns have anticipated. This inflationary environment now over the last couple of years, so as it relates to protecting the margin of the downside on inflation.

Bert: I feel good about where we're positioned there obviously.

Bert: On the outlay side, yes, there is always this lag between the budget and the outlay and the timing of that is difficult to project.

Chris Cage: Certainly, it's an area that we could see some things accelerate in the near term, depending upon how we get through March in the budget environment. But right now, I'd say that it's not a significant driver as far as any pent-up outlays that we're waiting to have happen to drive significant growth catalyst for us. And if you don't mind, Bert, I'm going to piggyback on that to give some comments about our people.

Bert: Certainly, it's an area that we could see some things accelerate.

Bert: In the near term.

Bert: Pending upon how we get through March and the budget environment.

Bert: But right now I'd say that that's not a significant driver as far as any pent up outlays that we're waiting to have happened to drive significant growth catalyst for us.

Bert: And.

Speaker Change: If you don't mind bird I'm going to piggyback on that to give some comments about our our people. We ended the year with 47000 employees up 3% year on year, but the most exciting thing about our whole HR system in 2023 was attrition at very good levels for <unk>.

Tom Bell: We ended the year with 47,000 employees, up about three percent year on year, but the most exciting thing about our whole HR system in 2023 was attrition at very good levels for our industry, low levels for our industry. And one of the reasons we do that is not only do we have a competitive structure in our compensation plan, but we are also investing in our talented employees with technical upskilling, which is being taken up by thousands of our employees who remain curious about things like AI and cyber and autonomy. And the technical upskilling we have allows us to hold on to those employees and upskill them in place, because, as you'll appreciate, it's one thing to pay for talent; it's a whole different ball of wax to have to constantly bring in new talent. So we're very excited about the attrition rates being low, the uptake in our technical upskilling being very high, and therefore that being a lever that we're using to manage our personnel. I got it.

Speaker Change: Our industry low levels for our industry and one of the reasons. We do that is not only do we have a competitive.

Speaker Change: Structure in our compensation plan, but we also are investing in our talented employees with technical Upskilling, which is being taken up by thousands of our employees, who remain curious about things like AI and cyber and autonomy and the technical Upskilling, we have <unk>.

Speaker Change: How's us to hold on to those employees and upskill them in place because as you'll appreciate.

Speaker Change: It's one thing to pay for talent, it's a whole different all of wax to have to constantly bring on new talent. So we're very excited about the attrition rates being low.

Speaker Change: Taken our technical Upskilling being very high and therefore, that's being a lever that we're using to manage our personnel costs.

Bert Subin: Okay. Thanks, Tom and Chris. Just a follow-up, you know, I've had a lot of questions on the VA side. I'm curious, Tom, as you've gone through sort of this review of the business. You know, how big do you want the clinical business to be? Clearly, the VAMDs have been a pretty material driver of profitability upside, and I'd have to assume the ROIC profile is sort of on the higher end of the company. Are there other meaningful opportunities out there, like not maybe the VAMDs, but like RHRP and military family counseling and others in the backlog, in the pipeline? you know, could make clinical a bigger part of the business.

Speaker Change: Got it okay. Thanks, Todd what Chris just just a follow up on.

Speaker Change: We've got a lot of questions on the VA side, I guess I'm curious Tom as you've gone through sort of this review of the business.

Speaker Change: How big do you want the clinical business to be clearly the AMD has been a pretty material driver of profitability upside and I'd have to assume the ROIC profile of sort of on the higher end of the company.

Speaker Change: There are other meaningful opportunities out there like not maybe at the VA or Mds, but like our HRP and military family counseling and others in the backlog and the pipeline that you think could make clinical a bigger part of the business longer term.

Tom Bell: Yeah, the short answer to that is yes, we do think there are opportunities for us to grow this business. And that is the very task that Liz and her team are undertaking. It's one thing to say, yes, there are opportunities; it's another thing to think, how do we prudently and purposefully execute a plan to grow that business at the lowest risk possible?

Speaker Change: Yes, the short answer to that is yes, we do think there are opportunities for us to grow this business and that is the very task that Liz and her team are undertaking.

It's one thing to say, yes, there are opportunities. It's another thing to think how do we prudently and purposefully.

Speaker Change: Execute our plan to grow that business.

Speaker Change: In the lowest risk possible, that's very much what Liz and her team are focused on right now and part of the process that we'll be reviewing through the year.

Bert Subin: That's very much what Liz and her team are focused on right now and part of the process that we'll be reviewing through the year. Great, thank you for the comments. Abigail, we're at the top of the hour, so we'll just take one more question. Thank you. Our last question. We'll have one moment for our last question. Our last question comes from Matthew Akers with Wells Fargo. Your line is open. Yeah, hey, guys. Good morning. Thanks for squeezing in. Tom, you alluded to some IRAD kind of targeted investments in the opening remarks. Can you elaborate on those at all?

Speaker Change: Great. Thank you for the comments.

Speaker Change: Abigail were at the top of the hour. So we'll just take one more question.

Abigail: Thank you our last question.

Speaker Change: One moment for our last question.

Speaker Change: Our last question comes from Matthew acres with Wells Fargo. Your line is open.

Matt Akers: Yeah, Hey, guys. Good morning, Thanks for squeezing me in.

Matt Akers: Tom.

Matt Akers: In sum I read kind of targeted investments in the opening remarks can you elaborate on those at all which.

Matt Akers: What capabilities are you going after? Sure. There's actually two parts of that equation, Matthew.

Matt Akers: Kind of what capabilities you're going after.

Tom: Sure. There is actually two parts of that equation Matthew one of the things that we're focused very much on with our link being elevated to our CTO office is crab, so making sure that we get customer focused Iran, which has a two prong.

Tom Bell: One of the things that we're focused very much on with our link being elevated to our CTO office is CRAD, so making sure that we get customer-focused IRAD, which has a two-pronged benefit. First, it is doing the things that the customers need done, so that points you in the direction of what is the scratch they want to itch, but also, it's funded work that we can, you know, co-invest in. So, we're very focused on targeting CRAD in the areas of technology that are going to differentiate us going forward, and we're very much focused on matching our investment, our IRAD, in those focused areas. Macro picture. Obviously, software, cyber, AI, maritime autonomy are four of the top things we're investing in.

Tom: <unk> benefit.

Tom: It is doing the things that the customers need done so that points you in the direction of what is the scratch they want to edge, but also its funded work that we can.

Tom: Co co invest and so we're very focused on.

Tom: Targeting kras in the areas of technology that are going to differentiate us going forward and we're very much focused on matching our investments are I read in those focused areas also.

Tom: Macro picture, obviously software cyber AI maritime autonomy are are four of the top things, we're investing in but again as part of the strategy process, we're asking each sector to identify the golden bolt.

Tom Bell: But again, as part of the strategy process, we're asking each sector to identify the golden bolts that will truly differentiate them over the coming three to five years so as to give them solutions to the customer problems that are emerging over that same period of time. So, we have an articulated playbook of focused IRAD. We have an articulated playbook of CRAD that we're going after, but we're also creating organically a pull from the businesses of what would you have me invest in that will differentiate my solutions and my capabilities to solve my customers' problems.

Tom: That will truly differentiate them over the coming three to five years, so as to give them solutions to the customer problems that are emerging over that same period of time. So we have a articulated playbook of focused Iran. We haven't articulated playbook of crap that we're going after.

Tom: But we're also.

Tom: Creating organically a pull from the businesses.

Speaker Change: What would you have me invest in that will.

Speaker Change: We will differentiate <unk> solutions and my capabilities to solve my customers' problems.

Matt Akers: Great, thanks for the call. And I guess one for Chris, on section 174, can you just remind us how much you could potentially recover if that does get overturned? Yeah, sure, Matt. And I mean, it's a nuanced situation.

Speaker Change: Great. Thanks, Thanks for the color and I guess one for Chris.

Speaker Change: And section 174 could you just remind us how much you have that you could potentially recover that.

Speaker Change: That does get overtime.

Chris: Yes, sure, Matt and I mean, it's a nuanced situation. So there are some variables you've got to think through obviously looks.

Chris Cage: So, you know, there are some variables you got to think through. Obviously, it looks like it may be retroactive. And so if that were to be the case, and if there is a path forward to recovery of monies that were previously paid in the year, and then we have some state taxes that have to follow suit, it could be north of $200 million of benefit to Leidos. There'd be a little bit of a modest uplift on the effective tax rate, but net net, it would be a great benefit to the company and add to that additional amount of capital we would have to consider how we deploy appropriately in the latter part of the year. So, you know, a little bit over $200 million plus not having to pay the $60 million that we've got teed up in 2024.

Speaker Change: It looks like it may be retroactive and so if that were to be the case and if there is a path forward to recovery monies that were previously paid in the year and then we have some state taxes that have to follow suit if all of that lines up it could be north of $200 million of benefit till items.

Speaker Change: There'll be a little bit of <unk>.

Speaker Change: Modest uplift on the effective tax rate, but net net it would be a great benefit to the company and add to that additional amount of capital we would have to consider how we deploy appropriately in the later part of the year, So a little bit over 200 million plus not having to pay the $60 million that we've got teed up in 24 so.

Matt Akers: So, goodness all around. Great, thank you. Thank you. This concludes our question and answer session. I would now like to turn the conference back to Stuart Davis for any closing remarks. Thank you, Abigail, for your assistance on this morning's call, and thank you all listening on the line today and this morning for your interest in Leidos. We look forward to updating you again soon. Have a great day! Thank you for your participation in today's conference. This does conclude the program. You may now. The Gentleman's Gazette theme song

Speaker Change: Goodness all around.

Speaker Change: Great. Thank you. Thank you.

Speaker Change: This concludes our question and answer session I would now like to turn the conference back to Stuart Davis for any closing remarks.

Stuart Davis: Thank you Abigail for your assistance on this morning's call and thank you all listening on the line today in this morning for your interest in lighthouse, we look forward to updating you again soon have a great day.

Speaker Change: Thank you for your participation in today's conference. This does conclude the program you may now disconnect.

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