Greetings, and welcome to Leidos First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listener-only mode. A brief question-and-answer session will follow the formal presentation. Please note this conference is being recorded. At this time, I'll turn the conference over to Stuart Davis from Investor Relations. Stuart, you may begin.

Thank you, operator, and good morning, everyone. I'd like to welcome you to our First Quarter Fiscal Year 2024 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'll use during today's call. Turning to Slide 2 of the presentation. Today's discussion contains forward-looking statements based on the environment as we currently see it, and as such, includes risks and uncertainties. Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially. Finally, as shown on Slide 3, during the call we'll discuss GAAP and non-GAAP financial measures. A reconciliation between the two is included in today's press release and presentation slides. With that, I'll turn the call over to Tom Bell, who will begin on Slide 4.

Thank you, Stuart, and good morning, everyone. It's very good to be with you again today. And I'm thrilled to report a very robust start for Leidos in 2024, a substantial raise to our full year guidance, and some additional details around the purposeful steps we're taking to position Leidos for an exciting future. The Leidos team got out of the starting blocks impressively this year, addressing our customers' most vexing challenges with passion and pace, and as a result, delivering an excellent quarter of top and bottom line results. First quarter revenue grew 7.5% year-over-year, all organically. First quarter adjusted EBITDA margin was 12.3%, a record for Leidos. And year-over-year non-GAAP EPS grew 56%. These results demonstrate that our new capability-based organization is unlocking significant value across the company. With good cash generation, as promised, we began our 2024 stock buyback program by repurchasing $150 million worth of shares on the open market during the quarter. You'll remember that during our last earnings call, I framed our initial 2024 guidance against the backdrop of a very good year for Leidos in 2023 and a very uncertain 2024 customer budget environment. Happily, since then, the House and Senate have passed appropriations for all the federal government. And now with funding in place, our customers have the resources and direction they need to confidently execute their missions. With that certainty in our customers' budget, the quick success of our organizational realignment, and our team's strong start to the year, we have increased confidence in our near-term growth prospects. As such, we are significantly increasing our 2024 guidance and now expect to far exceed our previous multi-year financial commitments. Chris will detail our new 2024 guidance later in the call. As I round out my first year at the helm of Leidos, I remain impressed with the capability of our people to deliver for our customers and shareholders. Over the last 4 quarters, revenue has grown 8% and non-GAAP EPS has grown 25%. We've delivered adjusted EBITDA margins of 11.5% and free cash flow conversion of 109%. And we've maintained rigorous investments in IRAD and business development. I'm very pleased that we've been able to refine the conversation about what's possible here at Leidos, especially around profitability. Leidos is indeed a healthy business. So for the remainder of my prepared remarks, I'd like to share some additional details about the purposeful steps we are taking to position Leidos for an exciting future. We are achieving and propelling superior profitable growth by focusing on 3 key elements: first, continuing to unlock full value and flawless execution in our new capabilities-focused organization; second, increasing investment in distinct organic disruptive technologies; and third, developing a robust value-creating, merit-based Leidos' profit and growth strategy. Let me walk through each of these elements with you. First, we're very happy with the quick wins we're achieving from our capability-based organizational realignment. And we're anticipating that this move will continue to unlock significant value going forward. For example, by consolidating our commercial and international business into a single segment for the first time, we're now better able to truly serve our global customers. In February, I had the opportunity to attend the Munich Security Conference. It was a sobering affair, which made abundantly clear that pervasive global threats are, in fact, growing and our collective efforts to help our allies and partners are becoming even more crucial. To give you an idea of where and how the new Leidos can help, global battlefields of the future demand ever more custom interoperability and leading-edge technical solutions. As we collaborate with our customers and allies around the world, we gain valuable insights into their interconnected issues across borders. Our realignment, which integrates all our international customer touchpoints into one organization, enables us to better correlate and quickly respond with a whole of Leidos' solution to their critical emerging needs. Also, globally, the AUKUS Trilateral Security partnership represents a unique opportunity for Leidos as Australia, the U.K., and the U.S. seek to work even more closely together. The focus of AUKUS Pillar 2 is seamless information sharing, AI and autonomy, advanced cyber, hypersonics, and electronic warfare. This list reads like a catalog of Leidos' strengths. We believe Leidos, through our new Commercial International segment, is uniquely positioned to serve these ambitions like no other. Second, we will continue to accelerate investment in distinct organic disruptive technologies. On my first earnings call, I highlighted technology innovation as a core of Leidos. Nearly a year into this role, I can confidently reaffirm that the technology prowess at Leidos is impressive, broad, and deep. Continually sharpening our portfolio of cutting-edge technologies, what I call golden bolts, to lead the market or remain foundational to our North Star. At Leidos, innovation is everywhere, but we have a particular passion and focus on remaining best-in-class in three technologies: Trusted Mission AI, full-spectrum cyber, and secure rapid software. In each, we maintain a robust IRAD pipeline in what we call accelerators, staffed with incredibly smart people who work across the entire customer solution set. And we combine the resulting immense organic technical prowess with a best-in-class commercial partnership program to truly bring Making Smart Smarter to life. Let's talk about one of these accelerators. Trusted Mission AI spans the breadth of our portfolio and is integral in practically all our customer solutions. Our Trusted Mission AI solutions work as a partner to humans in transforming the way we deliver high-quality, rapid, and secure outcomes for our customers' most complex missions. For example, across the intelligence community, we have several large classified contracts where we're leveraging Trusted Mission AI to exploit vast amounts of data to address ever-changing national security challenges. In the cyber realm, our team of experts has spent the last 3 years developing the next generation of defensive cyber tools. These tools use AI to automate the discovery of new vulnerabilities and the development of novel defenses. This unique solution allows us to proactively deploy defenses before attacks occur, which is crucial in foreseeing, averting, and defeating cyber risks. In Defense Systems, Trusted Mission AI is the enabling technology that anchors all our autonomy work. We've built the first generation of autonomous vessels for the U.S. Navy, several of which recently transited the Pacific twice as part of a manned, unmanned task force, and we're now applying this proven Trusted Mission AI technology to the next generation of unmanned surface vessels. In software and IT, we're leveraging our exclusive relationships with key emerging technology providers to bring the best of the latest generation of Generative AI to our customers. This enables us to uniquely position our customers to operate more efficiently, delivering real quantifiable impact. Let me share a couple of examples here. Our partnership with Sourcegraph leverages their commercial cutting-edge, GenAI coding assistant to transform the way we develop software. In just a few months, by combining our unparalleled government customer knowledge with their tool's power, we've proven productivity increases in software development of one-third. And we know these solutions are deployable even into the most secure customer environments. Our exclusive partnership with Moveworks gives us a differentiated ability to bring our customers the best in GenAI-based IT service desk solutions. We've already deployed their technology within the Leidos IT environment and have completely automated processing of thousands of service requests. Our focus on integrating Trusted Mission AI into our customer solutions rather than just selling AI labor positions us uniquely to meet the growing demand for AI solutions across our customers. I trust these examples begin to give you a sense of our leadership position in all our golden bolts, but especially Trusted Mission AI. But if you'd like to see more of our solutions in action and meet some of our incredibly smart people, I invite you to an Investors event, we will be hosting here at our global headquarters in Reston on June 12. Finally, I'd like to give you an update on the development of our strategy for Leidos' second decade of growth. As I mentioned during our last call, this is a year of deep, formally structured strategic conversations across the whole of the business. And while this effort will not be complete until early next year, I did want to share with you now some high-level principles that are guiding our work. Principles of our upcoming strategy will be doubling down on our core strengths, seeking to exploit the power of repeatable business models, making speed a conscious competitive discriminator, differentially investing in the areas of greatest potential, building Trusted Mission AI into everything we do, and uncovering unique opportunities to expand Leidos into logical, closely adjacent growth markets. These guiding principles will enable us to stay true to what we do best, while being quick to respond to the opportunities that are emerging at pace in our market. Also of note, importantly, as we think about our strategy, we will continue to view our balance sheet and cash generation capacity as key strategic assets. I remain committed to a disciplined capital management and deployment policy, continuing a focus on shareholder returns in the near term. In closing, we're off to a great start this fiscal year. We are committed to building on our successes and delivering smarter outcomes for our customers, shareholders, and each other. As we continue to push the boundaries and challenge ourselves to think bigger, I am confident that 2024 will be Leidos' best year so far. We'll see tremendous achievements and a crystallizing compelling growth strategy. With that, I'll pass the call to Chris to discuss our financial results for the first quarter and our financial promises to you for the full year. Chris?

Thanks, Tom, and thanks to everyone for joining us today. The first quarter operating in our new organization was a great one, far surpassing our initial expectations. While Health and Civil was a standout, each segment's relentless focus on innovation and operational efficiency led to above-plan performance in revenue, profit, and cash in every reporting segment. Putting these results into the context of the full year, we are well on track to deliver an exceptional year of top and bottom line performance. Turning to the income statement on Slide 5. Revenues for the first quarter were $3.98 billion, up 7.5% year-over-year. With appropriations in place, our teams are working with their customers to execute on vital missions. Strong top line growth in the first quarter enabled us to achieve record profitability. Adjusted EBITDA was $490 million for the quarter, up 42% year-over-year, and adjusted EBITDA margin increased 290 basis points to 12.3%. Non-GAAP net income was $313 million and non-GAAP diluted EPS was $2.29, up 53% and 56%, respectively. This explosive earnings growth was the result of core operating performance. The net impact of a slightly lower net interest expense and share count was wholly offset by a slightly higher tax rate compared to the prior year period. This bottom line performance not only boosted our cash flows, but has put us in a favorable position to continue reinvesting across the business to support the execution of our longer-term strategic objectives. Turning to the segment drivers on Slide 6. National Security and Digital revenues increased 2% year-over-year. The largest growth catalysts were increased volumes on the Sentinel and DES programs, which more than offset the focused box loss early in 2023. National Security and Digital non-GAAP operating income margin increased 120 basis points from the prior year quarter to 10.1%, with some milestone achievements, strong cost control, and excellent program execution. Health and Civil revenues increased 19% over the prior year quarter and non-GAAP operating income margin also came in at 19%, up from 12.2% a year ago. The primary driver of revenue growth and increased profitability was higher volumes across our managed health services portfolio. We entered the year with tempered expectations around medical exam volumes but we're seeing increased complexity on PACT Act cases. And although we're investing heavily to drive throughput, the team did an amazing job at improving efficiency, optimizing resources, and delivering exceptional service to the nation's active duty members, reservists, and veterans. Commercial and international revenues increased 4%, and non-GAAP operating income margin was 8.3%, up 360 basis points compared to the prior year. We had increased deliveries of security products, and we're seeing the impact of the changes we made in the SES business, including a leaner cost structure, improved supply chain, and rationalized product and geographic portfolio. Though our work is not done in fully optimizing the security products business, I'm proud of the team for their performance and recovery since this time last year. Finally, Defense Systems revenue increased 7% year-over-year, with increased volumes in our airborne ISR and hypersonics businesses. Defense Systems non-GAAP operating margins of 8% declined 170 basis points over the prior year quarter, but were up 30 basis points sequentially, and we remain committed to margin improvement for this segment for the full year. Turning now to cash flow and the balance sheet on Slide 7. We generated $63 million of cash flow from operating activities and $46 million of free cash flow. Days Sales Outstanding (DSO) for the quarter was 62 days, unchanged from a year ago. In Q1, we repurchased a net of $170 million worth of shares, including $150 million on the open market and paid $53 million in dividends. We ended the quarter with $633 million in cash and cash equivalents and $4.7 billion of debt. Our gross leverage ratio now goes at 2.6x, comfortably below our 3x target. On to the forward outlook on Slide 8. As we look ahead to the rest of the fiscal year 2024, we are poised to capitalize on the momentum we've been building. Based on our strong Q1 and improved outlook, we are raising our 2024 guidance for all metrics. We now expect revenue between $16 billion and $16.4 billion, an increase of $300 million to the range. Our new adjusted EBITDA margin range is mid- to high 11%, which would be record profitability for a full fiscal year. With an improving revenue and margin outlook, we're raising our non-GAAP diluted EPS by $0.90 to a new range of $8.40 to $8.80. And finally, we're raising our operating cash flow target by $200 million to approximately $1.3 billion for the year. Underpinning this updated guidance is a positive outlook on business development. In the first quarter, we booked a net of $3.7 billion, which translated to a book-to-bill of 0.9x for the quarter, and 1.1x for a trailing 12 months. The quarterly bookings total excludes a multibillion-dollar classified award that is currently under protest, and a $630 million Defense Systems award received on April 1, both of which are new work for Leidos. We're seeing positive business development momentum, and we expect our awards this year to support our growth objectives. Finally, let me give you some sector-specific movements that color our full year guidance. On the fourth quarter call, we highlighted that Health and Civil had the potential to outperform if medical examination volumes remain high. Since then, volumes have actually increased given the complexity of PACT Act cases. The second quarter should see similar levels of performance or even a little better. However, as a result of the increased volumes, the VBA has burned through some of its contracts sooner than planned, and we'll have to recompete them early. We are well-positioned to continue our best-in-class service as a long-standing trusted mission partner to the VA, but we are planning for performance in the Health and Civil segment to moderate in the back half of the year through the competitive process. First quarter revenue growth in the Defense Systems and Commercial International segments was more robust than anticipated. Although we see some potential for growth in both segments, we still see the full year revenue performance as relatively flat. In Commercial and International, some of the SES geographies and products we exited will begin to weigh on revenue, and Defense Systems is still working to mature some of its developmental programs. Taken together, with funding certainty, positive demand signals, and the performance seen across all 4 segments this quarter, we feel confident in our ability to deliver within these new ranges. With that, operator, we're ready to take some questions.

Our first question comes from Bert Subin with Stifel.

Tom, when you started, I guess, about a year ago, you said you wanted to evaluate allocation of capital to each business based on the business case supporting the return on capital for each. It would seem like capital is being put to best use right now in Health and Civil. Is that a near-term phenomenon being driven by the PACT Act? Or is there a case for that business to be your fastest-growing and most profitable longer term as well?

I did say that, and I do believe in a merit-based strategy process. I mentioned that in my prepared remarks because what we are doing in 2024 as we undertake this year of deep strategic thinking is analyzing all the business cases and the sub-business cases for where the best use of capital is to draw superior top line and bottom line growth for Leidos. And so as a result, we're able to put some seed corn in areas that are emerging in this year, even though the strategy process is not done. And yes, in fact, the investments we've made in our managed health care business are absolutely paying dividends now, and that is the reason that business under Leidos' leadership has been so well positioned to respond to the increased demands that have come our way. So we're very excited about the strategy process we've got underway. We're very excited about the ideas that are emerging from that strategy process. And we're seeing great benefit from past decisions we made through last year about where to invest, how to invest and which businesses to position for future growth. Chris, did you want to add anything to that?

The Health and Civil organization has clearly been a standout, and we expect that momentum to continue. It’s important to acknowledge that our multiyear investment strategy has placed us in a strong position to deliver excellent results for our veterans. However, we are also enthusiastic about other areas of our portfolio. Therefore, we should not limit our focus and investments solely to Health and Civil. Additionally, some of the results from the Health and Civil organization have benefited from our investments in AI and other applicable capabilities at our center. You can anticipate that these strategies will persist, and we will continue to accelerate those investments as the year progresses.

That's great. Tom, you talked for several minutes about AI in your prepared remarks. One of your competitors gets a lot of recognition for leading in the AI field and has shared sales data and its impact on win rates for certain contracts. It appears you're quite confident in your own efforts in this area, and it seems to have significantly benefited your Health business with the VA. Can you provide some examples or numbers related to AI to help us better understand your positioning moving forward?

Well, thanks, Bert. Yes. And yes, the fun thing about capitalism is many people look at the same market and decide to approach it in different ways. We're aware that our competitors are looking at selling AI labor and think it's a market unto itself. That's not how we see the world. We see the world as difficult customer challenges, and we see ourselves as solution providers into that space. We see Trusted Mission AI as a huge key enabler to unlocking superior value for our customers and the solutions we bring forward. So we're going to continue to avoid breaking AI out as a specific target. But in the spirit of your questions, I can share with you some anecdotal evidence. For instance, while we've been investing in AI, the deployment of that has enabled us to improve quality on about $1 billion of those health exams. In other words, some of the throughput we've been able to have in our clinics is the direct result of the efficiency that the AI tools we have embedded in our solutions unlocks. We've been able to put AI in our SES airport security business by linking things together there. We've been able to put AI in our unmanned systems, command and control systems that will enable us to help unmanned systems quickly speak to each other and aggregate their effects. So we're going to continue to see Trusted Mission AI not as an end but as a means to serving customer missions. And I hope that differentiation is something that you can join us on the 12th of June to understand even more.

Our next question comes from the line of Tobey Sommer with Truist Securities.

This is Jasper Bibb on for Tobey. I think last call, you talked about the initial mid- to high 10% guidance range on margin as a base to sustainably grow off. And then you raised the '24 guides significantly this quarter. So I guess looking forward, how are you thinking about progression on margins given the progress you've already made this year?

Yes, Jasper, thanks for that. Obviously, we're very pleased with the start to the year. And as in our prepared remarks, we indicated it wasn't just the Health and Civil business. It was really all of our teams that got out of the gate strong. And so now our full year outlook has been updated to mid- to high 11%. We think that's an area that, obviously, we're ahead of that in Q1, but that will be strong performance across the business as the year unfolds. And you think about some parts of the portfolio, for example, Commercial International and Defense Systems, both of which had good first quarters, but aren't yet where we expect that they will be on a margin performance basis. So there's uplift there over the course of this year and into the future. And for Health and Civil, sustaining this level of performance through Q2 is what we indicated, and we'll have to see how the competitive process plays out on the recompetes in Q3 and Q4, but there is the potential for that business to continue this momentum, certainly through the back half of this year and into '25.

Just pivoting off of that a little bit, I want to give a shout-out to the team for how they've embraced this whole concept of a promises-made, promises-kept culture. So while we have a standout first quarter performance in our Health business, they are not the only business committed to continuing to perform through the year. So we're very confident in our ability to hit the current range, and we're very excited about the degrees of freedom that gives us to invest differentially in our future and really propel our next growth strategy to great heights.

That makes sense. And then you mentioned the improvement in managed health programs for the Health and Civil segment this quarter. I guess I'm just curious what the trends were on the legacy Civil side of the segment as part of the growth in margins Leidos had driven in the first quarter.

Yes. The Civil part of the portfolio has some excellent programs in there. And as Leidos and the team are bringing that all together, it's more about the energy and the synergies that we see across those businesses on personnel and in software capabilities that can be extended to both sides of the equation. I wouldn't think there are any particular standouts in the Civil portfolio. It was a solid first quarter out of the gate. So we're looking forward to building on that momentum as the year unfolds, especially with regard to our FAA business and where that can extend capabilities to certain international customers, et cetera, as a particular area of interest for us.

But I can't let that question go without a little bit of a foot stomp on the great performance we're having in the Health side of the business. We are continuing to invest in innovation there. And some of the innovations that Bert asked us about before that were built during the COVID crisis put us in this position to do exams better for the VBA, and some of the results that are behind the financial results are that Leidos investments have allowed us to increase the total number of veterans served by 27% in 2023. And as Chris mentioned in his comments, the volume is even increasing now in 2024. More than just that, we're able to serve our rural veterans better by 33%, and we're able to serve our homebound veterans by over 55%. So the investments we've made in technology and capability to take the clinics to the veterans are serving our veterans in ways that are enabling us to then unlock volume and unlock financial results. We're very excited not only about the whole of Leidos' portfolio but this part of the portfolio in particular.

Our next question comes from the line of Sheila Kahyaoglu with Jefferies.

Kudos to the Leidos Board for choosing the right candidate, clearly, Tom, great results, the whole Leidos team. So maybe on Health, we talked about it a little bit and Chris mentioned it in his remarks in terms of the PACT Act moderation. Can you maybe frame how we should think about the upside and downside scenarios there?

Yes. So the PACT Act volumes are racing forward. We're in a unique position to liquidate that volume on behalf of the Veterans Administration and feel very good about that. But as Chris mentioned in his comments, that puts pressure on reaching the contract ceiling value for the Veterans Administration, and they may have to recompete that contract early. However, we've got a great position for that recompete. We feel very confident in the technology, the capabilities, and the team we have assembled to continue to serve veterans in this nation. And so while, as Chris said in his comments, we've provisioned for some slight moderation in profitability in the second half of the year just because of the competitive dynamics and our being unsure of exactly how the Veterans Administration is going to put that RFP out, we feel very good that, that's a business we're in. That's a business we can continue to grow, and that's a business that we can continue to serve our nation and its veterans very robustly.

Yes, Sheila, I'd just add, I mean, we have invested. We'll continue to invest in increasing our ability to drive throughput and drive excellent service for the veterans. We've gotten the strongest signal yet from the customer that the volume of activity should remain elevated, and we see that continuing into 2025. And it's not just the number of cases, it's the complexity of those cases. So we believe we're still in the early innings of where this can play out, and we're going to continue to invest accordingly to make sure veterans are well served with great experiences. I would say that even our first quarter results, which were quite strong, weren't aided by incentive fees as part of that, too. So there's still some opportunities to drive that performance higher over time. So I really like how we're positioned in that business right now.

And then maybe on Defense Systems margins, they were better sequentially but down 170 bps year-on-year. So how do we think about maybe just focusing on Dynetics, the key milestones there in terms of improvement in profitability?

Yes. So, I mean, a couple of things we're tracking, and Cindy, leading that business is all over this with her team. But as we said in our remarks, we're actually pleased with the way we performed out of the gates in the first quarter. We're ahead of pace. There are some specific things we're focused on to drive margins higher over time, one of which we just completed at the end of last year, getting Dynetics fully integrated into the Leidos set of systems, whether that's financial, HR, et cetera, and our rate structure. And so there's a lot more collaboration, resource sharing, efficiencies that are unlocked as part of that. So that's a very exciting program execution. It's a strength of Leidos, and it's an area that we've seen improvements in talent upgrades and process upgrades, and that's an area that we can identify mile markers along the rest of this year that will drive our program performance higher and our profitability higher as the year unfolds. And then finally, transitioning into the next phase of key programs. We know sometimes on developmental programs, the early phases are not the most profitable, lessons are learned, and those are applied into the next round of bidding. And I think the team has incorporated those and we feel good about the bids we've been putting out, and they are well positioned to win and keep growing that business.

Yes. I want to emphasize that all the businesses are staying true to their commitments regarding their full year performance. I’m pleased to share that Cindy is among them, showing determination despite a slower start to the year than we anticipated. She and her team are focused on achieving or surpassing their goals for the full year.

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

This is Rocco for Seth. On margins, milestone achievements supported the National Security and Digital margin in the quarter. Should we expect additional milestones in the coming quarters? Or should the margin rate there normalize? And then on Health and Civil, Q2 is expected to be stronger than Q1, but should we think about the back half falling into the mid-teens on margins seen as the strongest in the business, obviously, pending the recompete?

Yes, I'll start and Tom can jump on. Obviously, National Security and Digital, excellent program execution is what we expect from that team because they've consistently delivered it. And sometimes you're not able to anticipate that you'll knock it out of the park on award fees the way they have continued to do so, but I wouldn't bet against them. So we'll continue to see program execution as a strength there. And as it relates to Health, yes, when we started the year, we signaled that in the mid-teens was a reasonable expectation for the year. We've exceeded that. We'll continue to exceed that level through Q2. And I think even in the second half of the year, there's the possibility and potential that it could be better than that, and we'll be able to give you some better color on that as we get closer to the recompete process.

I would just say that my whole promises-made, promises-kept culture never uninvites overperformance. So overperformance is welcomed. Overperformance is understood as a goal we all look to achieve, and I have every confidence that Roy and his team are going to work to overperform both in this year and in the future.

That makes sense. And then you mentioned the improvement in managed health programs for the Health and Civil segment this quarter. I guess I'm just curious what the trends were on the legacy Civil side of the segment as part of the growth in margins Leidos had driven in the first quarter.

Yes, the Civil part of the portfolio has some excellent programs in there. And as Leidos and the team are bringing that all together, it's more about the energy and the synergies that we see across those businesses on personnel and in software capabilities that can be extended to both sides of the equation. I wouldn't think there are any particular standouts in the Civil portfolio. It was a solid first quarter out of the gate. So we're looking forward to building on that momentum as the year unfolds, especially with regard to our FAA business and where that can extend capabilities to certain international customers, et cetera, as a particular area of interest for us.

But I can't let that question go without a little bit of a foot stomp on the great performance we're having in the Health side of the business. We are continuing to invest in innovation there. And some of the innovations that Bert asked us about before that were built during the COVID crisis put us in this position to do exams better for the VBA, and some of the results that are behind the financial results are that Leidos investments have allowed us to increase the total number of veterans served by 27% in 2023. And as Chris mentioned in his comments, the volume is even increasing now in 2024.

Our next question comes from the line of Sheila Kahyaoglu with Jefferies.

Kudos to the Leidos Board for choosing the right candidate, clearly, Tom, great results, the whole Leidos team. So maybe on Health, we talked about it a little bit and Chris mentioned it in his remarks in terms of the PACT Act moderation. Can you maybe frame how we should think about the upside and downside scenarios there?

Yes. So the PACT Act volumes are racing forward. We're in a unique position to liquidate that volume on behalf of the Veterans Administration and feel very good about that. But as Chris mentioned in his comments, that puts pressure on reaching the contract ceiling value for the Veterans Administration, and they may have to recompete that contract early. However, we've got a great position for that recompete. We feel very confident in the technology, the capabilities, and the team we have assembled to continue to serve veterans in this nation. And so while, as Chris said in his comments, we've provisioned for some slight moderation in profitability in the second half of the year just because of the competitive dynamics and our being unsure of exactly how the Veterans Administration is going to put that RFP out, we feel very good that, that's a business we're in. That's a business we can continue to grow, and that's a business that we can continue to serve our nation and its veterans very robustly.

Yes, Sheila, I'd just add, I mean, we have invested. We'll continue to invest in increasing our ability to drive throughput and drive excellent service for the veterans. We've gotten the strongest signal yet from the customer that the volume of activity should remain elevated, and we see that continuing into 2025. And it's not just the number of cases, it's the complexity of those cases. So we believe we're still in the early innings of where this can play out, and we're going to continue to invest accordingly to make sure veterans are well served with great experiences. I would say that even our first quarter results, which were quite strong, weren't aided by incentive fees as part of that, too. So there are still some opportunities to drive that performance higher over time. So I really like how we're positioned in that business right now.

And then maybe on Defense Systems margins, they were better sequentially but down 170 bps year-on-year. So how do we think about maybe just focusing on Dynetics, the key milestones there in terms of improvement in profitability?

Yes. So, I mean, a couple of things we're tracking, and Cindy, leading that business is all over this with her team. But as we said in our remarks, we're actually pleased with the way we performed out of the gates in the first quarter. We're ahead of pace. There are some specific things we're focused on to drive margins higher over time, one of which we just completed at the end of last year, getting Dynetics fully integrated into the Leidos set of systems, whether that's financial, HR, et cetera, and our rate structure. And so there's a lot more collaboration, resource sharing, efficiencies that are unlocked as part of that. So that's a very exciting program execution. It's a strength of Leidos, and it's an area that we've seen improvements in talent upgrades and process upgrades, and that's an area that we can identify mile markers along the rest of this year that will drive our program performance higher and our profitability higher as the year unfolds. And then finally, transitioning into next phase of key programs. We know sometimes on developmental programs, the early phases are not the most profitable, lessons are learned, and those are applied into the next round of bidding. And I think the team has incorporated those and we feel good about the bids we've been putting out and they are well positioned to win and keep growing that business.

Yes. I would like to emphasize that all the businesses have been fulfilling their commitments to Chris and me regarding their performance for the full year, adhering to a promises-made, promises-kept approach. I am pleased to report that Cindy is among them, remaining steadfast despite a slower start to the year than we had hoped. She and her team are fully dedicated to achieving or surpassing the full-year results.

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

This is Rocco for Seth. On margins, milestone achievements supported the National Security and Digital margin in the quarter. Should we expect additional milestones in the coming quarters? Or should the margin rate there normalize? And then on Health and Civil, Q2 is expected to be stronger than Q1, but should we think about the back half falling into the mid-teens on margins seen as the strongest in the business, obviously, pending the recompete?

Yes, I'll start and Tom can jump on. Obviously, National Security and Digital, excellent program execution is what we expect from that team because they've consistently delivered it. And sometimes you're not able to anticipate that you'll knock it out of the park on award fees the way they have continued to do so, but I wouldn't bet against them. So we'll continue to see program execution as a strength there. And as it relates to Health, yes, when we started the year, we signaled that in the mid-teens was a reasonable expectation for the year. We've exceeded that. We'll continue to exceed that level through Q2. And I think even in the second half of the year, there's the possibility and potential that it could be better than that, and we'll be able to give you some better color on that as we get closer to the recompete process.

I would just say that my whole promises-made, promises-kept culture never uninvites overperformance. So overperformance is welcomed. Overperformance is understood as a goal we all look to achieve, and I have every confidence that Roy and his team are going to work to overperform both in this year and in the future.

That makes sense. And then you mentioned the improvement in managed health programs for the Health and Civil segment this quarter. I guess I'm just curious what the trends were on the legacy Civil side of the segment as part of the growth in margins Leidos had driven in the first quarter.

Yes, the Civil part of the portfolio has some excellent programs in there. And as Leidos and the team are bringing that all together, it's more about the energy and the synergies that we see across those businesses on personnel and in software capabilities that can be extended to both sides of the equation. I wouldn't think there are any particular standouts in the Civil portfolio. It was a solid first quarter out of the gate. So we're looking forward to building on that momentum as the year unfolds, especially with regard to our FAA business and where that can extend capabilities to certain international customers, et cetera, as a particular area of interest for us.

But I can't let that question go without a little bit of a foot stomp on the great performance we're having in the Health side of the business. We are continuing to invest in innovation there. And some of the innovations that Bert asked us about before that were built during the COVID crisis put us in this position to do exams better for the VBA, and some of the results that are behind the financial results are that Leidos investments have allowed us to increase the total number of veterans served by 27% in 2023. And as Chris mentioned in his comments, the volume is even increasing now in 2024.

Our next question comes from the line of Sheila Kahyaoglu with Jefferies.

Kudos to the Leidos Board for choosing the right candidate, clearly, Tom, great results, the whole Leidos team. So maybe on Health, we talked about it a little bit and Chris mentioned it in his remarks in terms of the PACT Act moderation. Can you maybe frame how we should think about the upside and downside scenarios there?

Yes. So the PACT Act volumes are racing forward. We're in a unique position to liquidate that volume on behalf of the Veterans Administration and feel very good about that. But as Chris mentioned in his comments, that puts pressure on reaching the contract ceiling value for the Veterans Administration, and they may have to recompete that contract early. However, we've got a great position for that recompete. We feel very confident in the technology, the capabilities, and the team we have assembled to continue to serve veterans in this nation. And so while, as Chris said in his comments, we've provisioned for some slight moderation in profitability in the second half of the year just because of the competitive dynamics and our being unsure of exactly how the Veterans Administration is going to put that RFP out, we feel very good that, that's a business we're in. That's a business we can continue to grow, and that's a business that we can continue to serve our nation and its veterans very robustly.

Yes, Sheila, I'd just add, I mean, we have invested. We'll continue to invest in increasing our ability to drive throughput and drive excellent service for the veterans. We've gotten the strongest signal yet from the customer that the volume of activity should remain elevated, and we see that continuing into 2025. And it's not just the number of cases, it's the complexity of those cases. So we believe we're still in the early innings of where this can play out, and we're going to continue to invest accordingly to make sure veterans are well served with great experiences. I would say that even our first quarter results, which were quite strong, weren't aided by incentive fees as part of that, too. So there are still some opportunities to drive that performance higher over time. So I really like how we're positioned in that business right now.

And then maybe on Defense Systems margins, they were better sequentially but down 170 bps year-on-year. So how do we think about maybe just focusing on Dynetics, the key milestones there in terms of improvement in profitability?

Yes. So, I mean, a couple of things we're tracking, and Cindy, leading that business is all over this with her team. But as we said in our remarks, we're actually pleased with the way we performed out of the gates in the first quarter. We're ahead of pace. There are some specific things we're focused on to drive margins higher over time, one of which we just completed at the end of last year, getting Dynetics fully integrated into the Leidos set of systems, whether that's financial, HR, et cetera, and our rate structure. And so there's a lot more collaboration, resource sharing, efficiencies that are unlocked as part of that. So that's a very exciting program execution. It's a strength of Leidos, and it's an area that we've seen improvements in talent upgrades and process upgrades, and that's an area that we can identify mile markers along the rest of this year that will drive our program performance higher and our profitability higher as the year unfolds. And then finally, transitioning into next phase of key programs. We know sometimes on developmental programs, the early phases are not the most profitable; lessons are learned, and those are applied into the next round of bidding. And I think the team has incorporated those, and we feel good about the bids we've been putting out, and they are well positioned to win and keep growing that business.

Yes. To emphasize, I previously highlighted that all the businesses are staying true to their commitments for full-year performance. I'm pleased to report that Cindy is among those who are dedicated, undeterred by a slower start to the year than we anticipated but fully committed to achieving full-year results, and she and her team are focused on meeting or exceeding those goals.

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

This is Rocco for Seth. On margins, milestone achievements supported the National Security and Digital margin in the quarter. Should we expect additional milestones in the coming quarters? Or should the margin rate there normalize? And then on Health and Civil, Q2 is expected to be stronger than Q1, but should we think about the back half falling into the mid-teens on margins, seen as the strongest in the business, obviously, pending the recompete?

Yes, I'll start and Tom can jump on. Obviously, National Security and Digital, excellent program execution is what we expect from that team because they've consistently delivered it. And sometimes you're not able to anticipate that you'll knock it out of the park on award fees the way they have continued to do so, but I wouldn't bet against them. So we'll continue to see program execution as a strength there. And as it relates to Health, yes, when we started the year, we signaled that in the mid-teens was a reasonable expectation for the year. We've exceeded that. We'll continue to exceed that level through Q2. And I think even in the second half of the year, there's the possibility and potential, it could be better than that, and we'll be able to give you some better color on that as we get closer to the recompete process.

I would just say that my whole promises-made, promises-kept culture never uninvites overperformance. So overperformance is welcomed. Overperformance is understood as a goal we all look to achieve, and I have every confidence, Roy and his team are going to work to overperform both in this year and the future.

That makes sense. And then you mentioned the improvement in managed health programs for the Health and Civil segment this quarter. I guess I'm just curious what the trends were on the legacy Civil side of the segment as part of the growth in margins Leidos had driven in the first quarter.

Yes, the Civil part of the portfolio has some excellent programs in there. And as Leidos and the team are bringing that all together, it's more about the energy and the synergies that we see across those businesses on personnel and in software capabilities that can be extended to both sides of the equation. I wouldn't think there are any particular standouts in the Civil portfolio. It was a solid first quarter out of the gate. So we're looking forward to building on that momentum as the year unfolds, especially with regard to our FAA business and where that can extend capabilities to certain international customers, et cetera, as a particular area of interest for us.

But I can't let that question go without a little bit of a foot stomp on the great performance we're having in the Health side of the business. We are continuing to invest in innovation there. And some of the innovations that Bert asked us about before that were built during the COVID crisis put us in this position to do exams better for the VBA, and some of the results that are behind the financial results are that Leidos investments have allowed us to increase the total number of veterans served by 27% in 2023. And as Chris mentioned in his comments, the volume is even increasing now in 2024.

Our next question comes from the line of Sheila Kahyaoglu with Jefferies.

Kudos to the Leidos Board for choosing the right candidate, clearly, Tom, great results, the whole Leidos team. So maybe on Health, we talked about it a little bit and Chris mentioned it in his remarks in terms of the PACT Act moderation. Can you maybe frame how we should think about the upside and downside scenarios there?

Yes. So the PACT Act volumes are racing forward. We're in a unique position to liquidate that volume on behalf of the Veterans Administration and feel very good about that. But as Chris mentioned in his comments, that puts pressure on reaching the contract ceiling value for the Veterans Administration, and they may have to recompete that contract early. However, we've got a great position for that recompete. We feel very confident in the technology, the capabilities, and the team we have assembled to continue to serve veterans in this nation. And so while, as Chris said in his comments, we've provisioned for some slight moderation in profitability in the second half of the year just because of the competitive dynamics and our being unsure of exactly how the Veterans Administration is going to put that RFP out, we feel very good that, that's a business we're in. That's a business we can continue to grow, and that's a business that we can continue to serve our nation and its veterans very robustly.

Yes, Sheila, I'd just add, I mean, we have invested. We'll continue to invest in increasing our ability to drive throughput and drive excellent service for the veterans. We've gotten the strongest signal yet from the customer that the volume of activity should remain elevated, and we see that continuing into 2025. And it's not just the number of cases, it's the complexity of those cases. So we believe we're still in the early innings of where this can play out, and we're going to continue to invest accordingly to make sure veterans are well served with great experiences. I would say that even our first quarter results, which were quite strong, weren't aided by incentive fees as part of that, too. So there are still some opportunities to drive that performance higher over time. So I really like how we're positioned in that business right now.

And then maybe on Defense Systems margins, they were better sequentially but down 170 bps year-on-year. So how do we think about maybe just focusing on Dynetics, the key milestones there in terms of improvement in profitability?

Yes. So, I mean, a couple of things we're tracking, and Cindy, leading that business is all over this with her team. But as we said in our remarks, we're actually pleased with the way we performed out of the gates in the first quarter. We're ahead of pace. There are some specific things we're focused on to drive margins higher over time, one of which we just completed at the end of last year, getting Dynetics fully integrated into the Leidos set of systems, whether that's financial, HR, et cetera, and our rate structure. And so there's a lot more collaboration, resource sharing, efficiencies that are unlocked as part of that. So that's a very exciting program execution. It's a strength of Leidos, and it's an area that we've seen improvements in talent upgrades and process upgrades, and that's an area that we can identify mile markers along the rest of this year that will drive our program performance higher and our profitability higher as the year unfolds. And then finally, transitioning into next phase of key programs. We know sometimes on developmental programs, the early phases are not the most profitable, lessons are learned, and those are applied into the next round of bidding. And I think the team has incorporated those and we feel good about the bids we've been putting out and they are well positioned to win and keep growing that business.

Yes. I want to emphasize that all the businesses are staying true to their commitments regarding full-year performance, and I'm pleased to report that Cindy is one of them. Although the year started off less robustly than we hoped, she and her team are dedicated to achieving or exceeding the full-year results.

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

This is Rocco for Seth. On margins, milestone achievements supported the National Security and Digital margin in the quarter. Should we expect additional milestones in the coming quarters? Or should the margin rate there normalize? And then on Health and Civil, Q2 is expected to be stronger than Q1, but should we think about the back half falling into the mid-teens on margins, seen as the strongest in the business, obviously, pending the recompete?

Yes, I'll start and Tom can jump on. Obviously, National Security and Digital, excellent program execution is what we expect from that team because they've consistently delivered it. And sometimes you're not able to anticipate that you'll knock it out of the park on award fees the way they have continued to do so, but I wouldn't bet against them. So we'll continue to see program execution as a strength there. And as it relates to Health, yes, when we started the year, we signaled that in the mid-teens was a reasonable expectation for the year. We've exceeded that. We'll continue to exceed that level through Q2. And I think even in the second half of the year, there's the possibility and potential that it could be better than that, and we'll be able to give you some better color on that as we get closer to the recompete process.

I would just say that my whole promises-made, promises-kept culture never uninvites overperformance. So overperformance is welcomed. Overperformance is understood as a goal we all look to achieve, and I have every confidence that Roy and his team are going to work to overperform both in this year and the future.

That makes sense. And then you mentioned the improvement in managed health programs for the Health and Civil segment this quarter. I guess I'm just curious what the trends were on the legacy Civil side of the segment as part of the growth in margins Leidos had driven in the first quarter.

Yes, the Civil part of the portfolio has some excellent programs in there. And as Leidos and the team are bringing that all together, it's more about the energy and the synergies that we see across those businesses on personnel and in software capabilities that can be extended to both sides of the equation. I wouldn't think there are any particular standouts in the Civil portfolio. It was a solid first quarter out of the gate. So we're looking forward to building on that momentum as the year unfolds, especially with regard to our FAA business and where that can extend capabilities to certain international customers, et cetera, as a particular area of interest for us.

But I can't let that question go without a little bit of a foot stomp on the great performance we're having in the Health side of the business. We are continuing to invest in innovation there. And some of the innovations that Bert asked us about before that were built during the COVID crisis put us in this position to do exams better for the VBA, and some of the results that are behind the financial results are that Leidos investments have allowed us to increase the total number of veterans served by 27% in 2023. And as Chris mentioned in his comments, the volume is even increasing now in 2024.

This concludes the Q&A portion.

Thank you, operator, for your assistance on this morning's call, and thank you all for your time this morning and your interest in Leidos. We look forward to updating you again soon. Have a great day.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.