Greetings. Welcome to Leidos' Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-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 second 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 great to be with you all again today to report a record quarter for Leidos. In this quarter, organic growth remained strong, achieving a record adjusted EBITDA margin of 13.5%. Year-to-date, we've delivered industry-leading profitable growth, with adjusted diluted EPS 50% higher than last year. The team is doing an excellent job converting our earnings into cash. In turn, this has allowed us to continue to deploy capital to grow shareholder value per our plan. We're now halfway through our commitment to repurchase $500 million worth of shares this year. I'm also proud of the fact that this robust first half of 2024 allows us to once again raise guidance for the full year. Chris will give you a complete update on our financials and our guidance later in the call. One year ago, on my first call with you all, I laid out four focus areas to begin Leidos' journey to best-in-class performance. Instilling in Leidos a "Promises Made, Promises Kept" culture, sharpening our strategy, improving the performance of previous acquisitions, and enhancing our ability to win new business. I'd like to take this opportunity to update you on the meaningful progress we're making in these areas. I see this progress as foundational to putting ourselves in a great position to execute our forthcoming Leidos North Star strategy. First, our team has fully embraced a "Promises Made, Promises Kept" philosophy. As part of this, we've made a firm commitment to each other to drive operational improvement, profitable growth and robust cash conversion. The evidence of this culture taking hold is clearly visible in the 12-month trend of our results, and our second quarter results, summarized earlier, that are simply our best yet. Our currently strong and strengthening balance sheet puts us in an excellent position to continue to allocate capital prudently over time to grow shareholder value. Further share repurchases this year are possible, but at the same time, I must say that our new North Star strategy work is beginning to bring into focus exciting and compelling growth opportunities potentially worthy of investment. This brings me to that second focus area, creating our new North Star strategy. While we continue to deliver robust in-year program execution, we are also aggressively prosecuting our year of deep strategic thinking. And the energy and insights that are beginning to come into focus because of our purposeful strategy process are very intriguing. We've now completed work on the Leidos proprietary hypothesis of the future, our own exclusive prediction of the challenges our customers will face, the solutions those challenges will require, and the technologies we must create and harness to best differentiate our solutions for our customers. Informed by our hypothesis of the future, we're now halfway through crafting a new business strategy for Leidos. This strategy will both leverage and enhance our current core businesses and uniquely position us for outstanding success in the future we foresee. One clear component of our strategy will remain our focus on technical differentiators, our golden bolts. Technological innovation is and will remain a cornerstone of Leidos. And our enterprise-wide technology investments are now more than 1% of total revenue and growing. At our recent Investor Technology Day, we went in-depth on one of those golden bolts, Trusted Mission AI. Those of you who were able to join us witnessed firsthand our brilliant team in action, demonstrating how we use Trusted Mission AI to drive productive disruption across our customers' missions. We believe that when it comes to AI, the mission is the market. So, everything we do as the number one provider of IT to the federal government and the number eight US defense contractor is an opportunity to exploit and deploy Trusted Mission AI for our customers' mission benefit. Another area of proactive investment for us remains cybersecurity. For instance, we've been investing in Zero Trust for years before there was a requirement for it to be adopted by federal agencies. As a result, over the last three years, we've received more than $5 billion of awards that cite our Zero Trust methodology as a differentiated strength. We're currently pioneering the application of quantum technologies to enable highly secure networks. We're executing contract R&D for DARPA in this area and investing in post-quantum encryption technologies and solutions. These will ensure our customers can rapidly respond to future developments in quantum computing. These examples give you some understanding of our forward-looking approach to the market and our track record of investing ahead of demand. Third, we're on track to unlock the strategic value from the large acquisitions we made in 2020 and 2021, specifically Dynetics in security, detection and automation. On Dynetics, we have doubled down on three specific areas, each of these now on a robust positive trajectory. In satellite payloads, we're a key supplier to the Space Development Agency's wide-field-of-view sensor program within its proliferated warfighting space architecture. We have delivered all our payloads for Tranche 0, and those payloads were the first ones in low-earth orbit providing SDA actual on-orbit imagery. In addition, we remain on track to deliver our Tranche 1 payloads in early 2025. And we are teamed with Sierra Space to be their payload provider on their Tranche 2 birds. The Space Development Agency has recently issued their RFI for Tranche 3. So in sum, we believe our current comprehensive role on all three existing tranches and our current actual mission performance in space position us well to continue to deliver for this critical and expanding mission. On force protection, we've delivered 14 IFPC Enduring Shield prototypes, which are successfully working their way through government testing. The Army recognizes this system's unrivaled air defense capability, and we expect to receive awards soon to begin low-rate production in 2025 and full-rate production in 2026. And in hypersonics, the United States continues to progress in developing and fielding hypersonic weapons. Leidos is supporting this progress by delivering technology advances through our Common-Hypersonic Glide Body and MACH-TB programs. These programs play a critical role in accelerating the pace and scale at which we can produce, test, assess, advance and field our nation's hypersonic capabilities. We remain on track for our Common-Hypersonic Glide Body and thermal protection systems delivery. And all in all, we feel quite positive about this robust pipeline of opportunities in hypersonics. So, 2024 maintains its promise to be the good year for the maturation of these programs. And we're also seeing our focus here translate into better financial performance. Our Defense Systems profitability was double-digits in the quarter, our first time at that level of performance from as far back as we recast financials in the new organizational structure. Turning to security products, the SD&A acquisition is now fully integrated into our SES business area. Though challenges remain, SES is on sound footing because of the swift actions of our new management team that they took last year. We have focused our efforts and investments in product lines and geographies that make the most sense for Leidos and therefore, our shareholders. Our new Charleston manufacturing facility is up and operational, and we're performing better against our service-level agreements with our customers. We've had solid bookings this year and more consistent deliveries of large border solutions. As a result, SES is ahead of plan for revenue and earnings for the quarter and the year. SES revenues are up 11% year-to-date and we've achieved almost 90% of last year's non-GAAP profit in the first two quarters of 2024 alone. A common theme of this improved acquisition performance is the new organizational structure, which brings better alignment of sector resources and new leadership with an increased emphasis on execution and Promises Made, Promises Kept. Fourth, we continue to make significant progress to enhance our business capture performance and backlog quality. We've achieved net bookings of $4 billion this quarter with a heavy emphasis on cyber and dig-mod awards for a book-to-bill ratio of 1.0. We also have nearly $3 billion of awards currently under protest. We ended the quarter with total backlog of $36.5 billion, including $8 billion of funded backlog. While this quarter's performance adequately supports our 2024 growth commitments, we are not at all satisfied, and our growth teams have been working diligently to reignite our winning ways here at Leidos and do much better on top-line growth soon. An element of this is strengthening our customer-centric framework of account management. Over the past six months, we've hired dozens of key account managers and frontline growth leaders, each with deep mission and customer expertise in areas of strategic importance. Each of our account managers has a frontline obsession and seamlessly integrates across both our P&Ls and our office of technology to ensure we couple best-in-class teams with best-in-class technical solutions. Two examples which illustrate this point are our recent hires for INDOPACOM and AUKUS. Because of their respective hard work in very short order, we've won strategic awards to support military exercises that are fundamental to the US Pacific deterrent strategy. Maritime autonomy and undersea sensors work in Australia and hypersonics work in the UK that fit within AUKUS Pillar 2, and US Navy submarine trainer development efforts that fit within AUKUS Pillar 1. We've taken the further step of dedicating some 100 of our top engineers and solution architects to our frontline growth efforts. Operating in full partnership with our account managers and capture teams, they are positioned to bring the best of the best of Leidos to our customer needs. With the improvements we're making in the growth value stream, we are getting set up for a much better business capture performance in the future. At quarter's end, we had $26 billion worth of bids awaiting adjudication. And more importantly, quality is improving dramatically. Our pursuits are more aligned with our strategic direction, our proposals demonstrate greater customer understanding, and we are doing better at pulling through enterprise-wide technical expertise into each customer solution. So in summary, I'm very pleased with our financial results this quarter and the momentum that we're carrying into the back of the year. We're making great progress on our current four focus areas. This puts us in an excellent position to execute our emerging Leidos North Star strategy. I'm very proud of the 48,000 Leidos teammates who collectively every day ensure Leidos is making smart smarter for the benefit of our customers. And I'm honored that every day more and more of the best of the best wicked smart people in the nation join Leidos to break limits. I'll now turn the call over to Chris to walk you through our financial results in detail. He'll also provide insight into our upgraded outlook for the year and then we'll be pleased to take your questions.

Thanks, Tom, and thanks to everyone for joining us today. Our second quarter results demonstrate yet again the power of our focus on profitable growth and cash generation. With clear intent, our team is driving current financial performance while also building for a more prosperous future. Turning to the income statement on Slide 5. Revenues for the second quarter were $4.13 billion, up 7.7% year-over-year. Robust revenue growth reflects the benefits of both the strong demand environment and historically low levels of attrition. The highlight for the quarter was margin performance. Adjusted EBITDA was $559 million for the quarter, up 33% year-over-year, and adjusted EBITDA margin increased 260 basis points to 13.5%. We achieved this record margin through business mix and indirect cost management. Program-level execution was generally very strong, but EAC adjustments were a net $12 million headwind. Non-GAAP net income was $360 million and non-GAAP diluted EPS was $2.63, up 43% and 46%, respectively. Below-the-line items had no material impact on net income or EPS. Turning to the segment view on Slide 6. National Security and Digital revenues increased 1% year-over-year. We saw volume growth on our Sentinel and DES programs, as well as several contracted research and development efforts. You may also recall that last year we had spikes in some of our large digital modernization programs, notably NGEN and AEGIS, which created a tough year-over-year comparison. National Security and Digital is also the segment most impacted by protests. Still, accelerating growth in National Security and Digital is a major focus of the ongoing strategy discussion. National Security and Digital non-GAAP operating income margin increased 20 basis points from the prior-year quarter to 10.4%, with some milestone achievements, strong cost control and excellent program execution. For the first half of the year, National Security and Digital has been solidly ahead of plan on profitability. Health & Civil revenues increased 22% over the prior-year quarter, and non-GAAP operating income margin came in at 24.9%, up from 14% a year ago. The primary driver of revenue growth and increased profitability was higher volumes across our managed health services portfolio and an extra quarter of catch-up on incentive fee awards on our VBA disability exam contracts. Commercial & International revenues increased 3%, paced by an uptick in deliveries on security products, higher volumes in our commercial energy business and a hardware refresh in our Australian IT business. These drivers offset $39 million of write-downs in our UK business, primarily on two fixed-price mission software development programs caused by changing requirements and scheduled slippages. The UK write-down suppressed non-GAAP operating income margin to 0.7% in the quarter. Absent these write-downs, Commercial & International would have posted 9.7% year-over-year revenue growth and non-GAAP operating income margins of 8%. Although these write-downs are disappointing, they underscore the rationale for the new organizational structure. The C&I team is bringing greater focus on programmatic execution within the international portfolio and they quickly took action to ensure the long-term success of our UK operations. We're confident that we'll get back on track towards our financial and operational objectives within the UK. And on balance, we remain encouraged by the strong performance and demand signals across our Commercial & International segment. Finally, in Defense Systems, revenues increased 6% over the prior-year quarter on a total basis and 7% organically. And non-GAAP operating income margins increased 170 basis points year-over-year to 10.3%. Tom touched on the improvements the segment is making on program execution, and it is good to see the kind of financial performance that we expected from this portfolio. As we transition from development to production on some key programs, we see Defense Systems as a growth and margin driver for Leidos. We're making great strides towards unlocking the full potential of this business and are optimistic 2024 marks a significant turning point towards a brighter future. Turning now to cash flow and the balance sheet on Slide 7. We generated $374 million of cash flows from operating activities and $351 million of free cash flow. We had our highest collection week ever, which led to the exceptional Q2 performance. Overall, we're seeing a strong focus on cash throughout the organization. DSOs for the quarter was 58 days, an improvement of one day from a year ago and four days sequentially. In Q2, we repurchased a total of $114 million in shares, including $100 million on the open market, and paid $51 million in dividends. We ended the quarter with $823 million in cash and cash equivalents and $4.7 billion of debt. Our gross leverage ratio now sits at 2.4 times, which gives us plenty of financial flexibility. Next, I'll go through our enhanced outlook for 2024 on Slide 8. We're raising the lower end of our revenue guidance by $100 million, which gives a new range of $16.1 billion to $16.4 billion. We're increasing adjusted EBITDA guidance to approximately 12%. And we're raising our non-GAAP diluted EPS by $0.20 to a new range of $8.60 to $9. Our guidance for operating cash flow remains at approximately $1.3 billion for the year. This enhanced outlook reflects our strong first half performance as well as broad-based momentum across the entire portfolio, but let me walk you through some of the drivers of the second half performance for your modeling. Clearly, we're seeing strong momentum in our managed health services business. Last call, we signaled some potential second half revenue and margin headwind in our VBA disability exam business based on an upcoming recompete, which remains ahead of us. In addition, the unprecedented caseload of disability claims spurred by the PACT Act is straining the VA's budget resources. Earlier this month, the VA urged Congress to approve $15 billion to fund budget gaps in government fiscal years '24 and 2025 for risk cuts to veterans' benefits and care. The VBA customer has implemented several measures to proactively manage through these budget challenges, including dialing back its internal staffing, which suppresses industry case volume. We're already seeing the impact of this change with reductions in our near-term case backlog. Given that veterans benefits work is funded through mandatory, not discretionary budgets, and caring for veterans has broad bipartisan support, we expect underlying caseload to rebound in our fourth quarter. Notwithstanding this temporary funding issue, we stand ready to continue to deliver exceptional service to the nation's service members as a trusted mission partner to the VA. We expect Commercial & International margins to snap back in the second half, and for National Security and Digital margins to moderate somewhat, consistent with our commentary on the last two calls. And lastly, in the back half of the year, we've stood up a robust innovation fund focused on growth. Our bottom-line performance puts us in a favorable position to accelerate investments across the business, as seed corn for our emerging strategy to continue to drive sustainable profitable growth. With that, operator, we're ready to take some questions.

Thank you. We will now begin the question-and-answer session. Our first question comes from Mariana Perez Mora from Bank of America. Your line is open.

Good morning, everyone.

Good morning.

My first question is about managed healthcare and its strong margins. How should we view the competitive edge you have as you move forward amid competition and the upcoming recompete? I can see that your established base contributes to these incremental margins and serves as a significant advantage, but what other technical strengths do you believe you possess to maintain a solid share in this rapidly growing market?

Thanks, Mariana. Really appreciate your question, and obviously, a part of the portfolio we're very, very proud of. The performance we're achieving in this part of the business is directly related to our passion to serve the nation and its veterans and our investment in technologies ahead of the curve, so that we were poised to take additional volume as we came out of COVID and had an opportunity to serve more and more veterans. We're very proud of this and we're very proud of those investments that allow us to serve more veterans. And our modeling for what the output and input of veterans that need case management increases and stays the same over the coming years. So, we're very bullish on the absolute volume. What we're doing to affect our future in that overall volume is ensuring that VA sees us as their partners. So, we've leaned in to help make sure that they understand we are invested in their success and their budgetary challenges that they have right now. And that positions us well for this recompete that's coming in the third or fourth quarter, probably more like the fourth quarter. We expect the customer to expect us to continue to serve the veterans the way we are and we're very bullish about the opportunity for us to continue to invest in technologies that serve our customers even better. So, the challenge that we've given Liz and her team is not how to hold on to this business, but how to increase this business over time. So, as part of our year of deep strategic thinking, we're not seeing 2024 as the peak of this business. We're seeing it as a plateau of this business from which we continue to springboard. That's the challenge we've given Liz, and her and her team are responding very favorably to that. Chris, do you want to add anything?

Yes, Mariana, Tom mentioned the technological aspects, which have been a significant focus under Liz and Larry Schaefer's leadership over the past few years. Additionally, we have been a long-term partner in this area and have successfully won this recompete numerous times. We have invested in physical locations, mobile locations, provider networks, and critical staff, all of which are important factors. Furthermore, the customer will assess our performance, and we can showcase a strong track record of excellent performance, high customer satisfaction, and impressive accuracy and throughput, which are all key metrics valued by the VA. We are working diligently to ensure we are in the best possible position to secure this vital work for ourselves, and we are optimistic about our standing in this area.

Thank you. My next question is about your focus on the account managers and capture teams. What challenges do you face in hiring and training talent, both internally and from external sources?

There's a strong competition for skilled talent, but we are committed to making Leidos the preferred destination for the best talent in the industry. As I mentioned previously, we've begun hiring numerous account managers and have assigned hundreds of people as solution architects for our new offerings. Leidos provides a compelling work environment; we are recognized as an employer of choice. With our successes, more people will want to join our winning team. The real focus is not on the challenges, but on helping potential candidates see the opportunities available at Leidos and the investments we will make in their development. Professionals in this field are driven by a desire to serve their customers. The worst thing we can do for someone passionate about customer service is to not fully support them. Therefore, Leidos is implementing an investment strategy aimed at enhancing the people, processes, and tools that enable our teams to positively impact their customers and deliver unique solutions. This investment is a significant draw for attracting top talent to Leidos.

The only thing I'd add, Mariana, to that is, of course, a very good question, and Tom is right, I mean screening the right people to have the passion to want to serve the right customers' missions is critical. The area that we need to help them the most as they get into Leidos, there's clearly a tremendous amount of capability that we have that can be brought to bear to support those customers in multiple ways. Helping them understand the breadth of our offerings is an area that we are continuing to invest in and that's the reason why partnering them up with so many solutions, architects and other people that have been down that road is critical, but there's technology that's behind that as well. So, Gerry Fasano leads our growth office. He's very focused on that rollout plan and we're excited about that taking a lot of momentum here in the second half of the year.

Thank you very much for the color.

Thank you. And our next question coming from the line of Matt Akers with Wells Fargo. Your line is open.

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

Sure, Matt.

Tom, I wanted to follow up. You talked about kind of some of the portfolio pruning initiatives you're kind of looking at. Kind of could you give us an update on where we stand there and kind of what inning we are at that whole process?

Yeah, sure. Thanks, Matt. As I said in my prepared remarks, we're done with the Leidos proprietary hypothesis of the future. This is our own exclusive proprietary view of what the world looks like in 2033 and therefore, what are the challenges our customers are facing in 2028 in order to affect that future. We're halfway through building our business strategy as a result and affected by that view of 2028. So, it's very much a today forward view and a future back view meeting in 2028. As we are starting that, Chris trailed in his comments that we've put a small investment fund out there, because ideas are starting to emerge from this year of deep strategic thinking that we know are winners. These are areas that we are going to be investing in, in the future. And although we're not going to articulate it, we're putting seed corn out there now in those areas, so that we're not waiting for the whole process to be done to do the obvious compelling things we want to do to affect our future here. So, we're very excited about that. Now, the overall objective and the parameters of our year of deep strategic thinking, I think I mentioned it in our last call, it's not going to be a pivot for Leidos, a 90-degree pivot or 180-degree pivot, it's going to be variations on the cores that we're in now. And so, we're going to be doubling down on our core strengths. We're going to be really focused on repeatable business models. We're going to really focus on speed. We know that our customers are very concerned with speed, but they're concerned also that the people they hitch their wagons to have to have the scale to solve complex problems differentially. So, speed and scale. Trusted Mission AI, there's a reason we had a whole day focused on Trusted Mission AI, because we think it is a compelling technological unlock for the futures our customers are facing across all the markets that we serve. And we're going to continue to look for those areas of white space that are adjacent to the current businesses we're in for investment. Now, obviously, Matt, in the spirit of your question, there's also going to be parts of the portfolio we are not going to differentially invest. I've mentioned this in calls last year. I do not believe in spreading peanut butter around and watching every flower bloom. I think all about differential investment for differentiated results, but there is also not any part of the business yet that is raising its head in the strategy process that is saying it's obvious this does not belong in Leidos. So, don't think of this as portfolio pruning. Think of this as simply investing to maintain, investing to grow and investing to grow exponentially. That's the way we're thinking about our strategy process. All that will be discussed at full in our March Investors Day that we look forward to welcoming you to.

Great. That's helpful color. Thank you. And I guess if I could do one more, just latest thoughts on upcoming recompetes and anything big that we should be watching for this year?

Yes, we discussed the VBA exam business, which is a priority as we transition from Q3 to Q4. Besides that, there aren't many significant changes. However, there's an exciting opportunity in the hypersonics field, particularly with the Common Hypersonic Glide Body and TPS contracts, and we anticipate continuing our collaboration with a key customer there. Additionally, we have an integrated logistics support contract with the TSA that could be finalized either late this year or in the first quarter of next year. This partnership involves our C&I business along with our logistics expertise. Looking forward to next year, another major focus will be the DHMSM contract, which is crucial for us. Our team is already preparing proposals to ensure we present our best efforts, with this project expected to come up around mid-2025.

Hey, just to pile on a bit, Matt, sorry to have a reclama here, color for our pipeline, we've got $15 billion in submits in the second quarter. We've got $26 billion-plus awaiting customer decisions. In the next 12 months, we have a pipeline of almost $70 billion, and our whole qualified pipeline approaches $200 billion. So, we're very excited about the opportunities to grow, and that's why we are very much focused on priming the pump of our business capture teams with talent who can differentially go out there and get this business.

Great. Thank you very much.

Thanks, Matt.

Thank you. And our next question coming from the line of David Strauss with Barclays. Your line is open.

Thanks. Good morning, everyone.

Good morning.

Hey, David.

A question, Tom, on National Security and Digital. I think you guys hit on the slow growth there in the first half, but it sounds like you're talking about an acceleration in the second half, but at the same time it sounds like you're signaling lower margins in the second half. So, could you just dig in exactly kind of what's going on there in the second half versus the first half? Thanks.

Our National Security and Digital segment is central to Leidos, and we have appointed our top leaders, Roy Stevens and Steve Hull, to focus on how we support our customers in deterrence and enhance government effectiveness. We believe there are no pipeline issues; this is a segment where we have succeeded before, and we are confident about future wins. The profit margins will be modest, generally in the low double-digits. However, this segment represents a growth opportunity for revenue. We can significantly assist our customers, who recognize that the magnitude of their challenges necessitates partners equipped with speed and scale to address them. Roy and Steve are collaborating with the entire enterprise, including Jim Carlini in Technology and Gerry Fasano in Growth, to ensure we are committed to serving our nation in this capacity, without any intention to retreat. If we've suggested any weakening, that's certainly not the guidance we wish to convey.

Yeah, David, I'd just add on to that. I mean, I think part of that is because we had an excellent first half of the year on margins. And there are some things that can move around, around milestone timing and things of that nature and how much special project work we see on programs like NGEN, but there's no fundamental issues here. And, in fact, we're actually very encouraged, to Tom's point, this will never be our highest-margin business, but we do see upside here over time and the teams are investing in more repeatable models in the dig-mod space and those will be some unlocks to future margin upside that we're expecting. But I don't want to overlook some important wins that did take place in the quarter. Getting the next Defense Enclave Services task order under contract is critical for us. That is a key unlock for Steve and his team to drive growth into that important program. So that clears the way for 13 additional DoD Fourth Estate agencies to migrate on to the network over time. So, we've been waiting for that and we're excited about what comes behind that as we get into '25 and beyond.

Great. Thanks for that color. Chris, quick follow-up. You noted a pretty good working capital performance in the first half of the year relative to the prior year. How are you thinking about working capital through the rest of the year?

Yeah. So, I'm very pleased with the team's performance on cash management. I think we've done an excellent job. And last year, we made some really strong gains on managing the payable side and more industry standard terms with our vendors, and we've made some more progress in that regard this year. We've been attacking the DSO side. I would say, it's steady as she goes. I don't see anything at this point in time that would be a major use of working capital. We're always interested in great ideas that could be accretive to the business. But right now, we're focused on Q3 and Q4 are usually our strongest performance quarters and I expect this year to follow suit.

Thanks very much.

Thank you. And our next question coming from the line of Cai von Rumohr with TD Cowen. Your line is open.

Thanks so much. And Tom, terrific results.

Thank you, Cai.

You mentioned that you expect the medical exam business is not at its peak but rather at a plateau. With the new contract starting early next year, should we anticipate that margins will decrease? It seems that it will take time to reach a point where the incentives are beneficial. Is it possible that profits in the Health segment will decline next year?

I have to respond to your question this way: we don't know the real answer right now because we are waiting for the RFP that will clarify what the customer actually wants to do. The current contract ends at the close of this quarter, and we are expecting the RFP for future plans. It is uncertain whether we will get an extension of the current contract, a new contract for a fixed duration, or a long-term contract. Additionally, we don't know how the VBA will motivate the industry to provide the best service to our veterans. Therefore, we have no reason to anticipate a decrease in profitability on our part, but there are significant uncertainties as we wait for the RFP.

Yeah, Cai, I'd only add, I mean, what we do know is that the VBA has asked Congress for more money, right? And that's a strong signal that they see the demand out there, more veterans need care, need throughput, and that's always been the priority. Now, we're in, call it, a temporary situation where they have to navigate this funding gap. Tom is right, I mean, a lot of things will become clearer for us as we get through the next quarter or two, but you can imagine that our early conversations with the Health team about '25 is how do we grow off of '24 levels. And that's the way we're approaching it. And so, everybody's clear-eyed around looking at every opportunity to make sure we optimize our performance levels there and elsewhere to continue to grow earnings.

Perfect. One quick one on your new business. You had $15 billion of submits, you have $26 billion awaiting. What should we think about in terms of your book-to-bill? You also have $3 billion in protest. I think there's a big classified award in there. Should we see book-to-bill pick up in the second half? And are you guys chasing some of the large takeaways you've been so successful in?

The team remains committed to a book-to-bill ratio slightly better than 1 for the year of 2024 and they are determined to meet or exceed that. There are some big swingers in there and it's possible that if many of these break our way, we'll far exceed the book-to-bill ratio that they have. But Cai, again, in my earliest call I talked about the fool's mission that chasing quarterly book-to-bills was in my mind, and the fact that what we should be focused on is building a quality backlog over time of profitable business. And that's really what I'm more incentivized and really focused on with the business capture team; how do we look at that trailing 12 months of book-to-bill and how is that looking at our future growth potential with the backlog that we've got on the books? The team is very focused on that. As I mentioned in my prepared remarks, we're doing a better job of bidding for the things that will reward Leidos adequately for technology and the capability we bring, and I feel as if many of those that are in our backlog will start to break our way. So, we're very bullish on the future without getting ahead of our skis.

Terrific. Thank you so much.

Thank you. And our next question coming from the line of Peter Arment with Baird. Your line is open.

Yeah, thanks. Good morning, Tom, Chris, Stuart.

Hey, Peter.

Terrific results. Hey, Tom, maybe just the focus on Commercial & International, just you had the write-down in the quarter. Absent the write-down, you would have had pretty good margin performance. Maybe just talk a little bit about, I guess, either the write-down or just confidence level in kind of the back half of the year, where your margins are, I guess, expected to be better? Thanks.

Yeah, sure. Thanks. Well, first of all, this is very much the benefit of having new eyes and a new organization structure that's looking with fresh perspectives on the business. As Chris mentioned, this is primarily two fixed price contracts that we have in the UK that through increased and very robust conversations with the customers, we've decided we have to take a write-down because of changing requirements and schedule slippage. But we feel confident that we've also taken a lap around the block and looked under the rocks to make sure that there's not more. So, Vicki and her team are doing a great job scrubbing the portfolio. She's cut the number of watch programs in her portfolio by half in these first two quarters. And we feel very bullish about the prospects for her business. I mentioned and I featured in our last call last quarter that we want to make Leidos synonymous with AUKUS Pillar 2. And as you heard in this call, we've taken some steps by really allocating and hiring some talent that can really get after making that so. So, Vicki and her team are very focused on bringing the team together around AUKUS. We've got excellent customer touchpoints in the UK and Australia, and obviously, here in the United States, and we're very bullish on the opportunities for Commercial & International. Also, I want to tip a hat to the SES team. They had a very good first half of the year and that is all credit to Mike Van Gelder and to Vicki, who have really gotten their arms around that business and really made sure that we're on a solid platform from which to grow. So, very optimistic about where that business is heading in her portfolio also.

The only thing I'd add there, Peter, is the piece of the business there that Tom didn't mention is our commercial energy business and that has been performing extremely well and tends to have a pattern where the back half of the year is stronger on a margin basis. There are some critical incentive and award fee determinations that happen sometime later in the year. So, a well-run business that we expect to continue to deliver great results, and the other piece of the portfolio we believe are on strong footing for the second half.

Yeah, that's very helpful commentary. And then just Tom, just quickly the DoD continues to make a lot of evolving changes or strategies around Counter-UAS and I know that Leidos through Dynetics has some exposure here. How are you guys thinking about the portfolio when you're thinking about the Counter-UAS business today?

It's a very timely question, Peter. I have a classified briefing later this week to dive deep into all our capabilities for Counter-UAS. Obviously, IFPC and Enduring Shield is the thing we talk most about, about Dynetics. But within our Leidos Innovation Center, the LInC, and our Defense Systems segment, we've got a myriad of other technologies that can affect Counter-UAS capabilities for our customers. So, we're going to take a step back, kind of look at everything that we've got in the pantry when it comes to technology and decide, are there some things we should be investing in this year to help our customers with this very, very vexing problem that they're uncovering now. So, very bullish about our opportunity to serve. The question is, do we have something in the pantry that will be compelling for the customer.

Appreciate the color. Thanks, Tom.

You bet.

Thank you. Our next question coming from the line of Jason Gursky with Citi. Your line is open.

Hi. Jeremy Jason from Jason Gursky's team.

Hey, Jeremy.

Hello? Sorry.

Go ahead, please. Go ahead.

I kind of have a math question. Could you walk us through the pipeline for each of the segments for '25 and '26? And kind of give us an update on production capacity and how that might impact growth outlook? Thanks.

Well, Jeremy, Tom gave you some high-level metrics. We're probably not going to be able to dissect the pipeline by segment by year for you, but rest assured that we feel it is robust and each of the segments has opportunities north of $1 billion all the way down to some strategic small opportunities in the tens of millions of dollars. So, we like our positioning there. The big ticket numbers again, $26 billion pending, 200 overall pipeline, approximately $70 billion we expect to be decided in '25, two-thirds of that being new work and takeaway, great position on our BD side and the growth teams are highly energized. As it relates to production capacity, the good news is the Dynetics team had built up some capabilities down in Huntsville. We feel like we've augmented that in areas like the wide-field-of-view satellite payload needs. We've got a facility that we've been waiting to fill up from a capacity standpoint on the IFPC side, the Enduring Shield. So, we're excited about the ability to take full advantage of what we've got in place there. And then, we spoke previously on the SES side about our new Charleston facility that we toured just in the last few months. It's a great facility that the team has built out and in fact there's plenty of room to expand capability even in the footprint that we built out. So, I don't see a big need on major investments in those areas. It's always something that we look at and we're happy to entertain great ideas if there's a compelling expansion to the pipeline, but we're in good shape to be able to expand up to the needs that we foresee over the next 18 months or so.

To add to that, Jeremy, the $26 billion in pending awards we have represents not only several significant opportunities but also around 40 to 50 major awards of $50 million or more. We have numerous proposals in progress, so we expect a positive outcome. Internally, we've recognized a challenge in our business capture efforts, and to overcome that, we've injected new energy through new talent and improved processes and tools. We're very optimistic about the momentum we anticipate building over the next 12 to 15 months. It's important to understand that in our customers' environments, decision-making takes time and most of these decisions face challenges that prolong the process. Thus, while we may initially inject energy to overcome inertia, it requires time before we experience the actual wins that reflect that momentum. However, we are very confident that we're in a strong position, and Gerry is the right leader to guide us forward.

Thank you so much.

Thank you.

Thank you. And our next question coming from the line of Ken Herbert with RBC. Your line is open.

Yeah, hi, good morning. Tom and Chris, really nice quarter.

Hey, Ken.

Thanks, Ken.

I just wanted to first start off, you obviously raised the guidance with the exception of the cash from operations. Is there anything in particular when you think about the cash flow outlook in the second half of the year we should keep in mind or maybe driving a little bit more conservatism there?

Yeah. Hey, Ken. Chris here. Obviously, we stepped up our cash guide last quarter by $200 million, a pretty significant increase. We're clearly focused on converting these extra earnings that you're going to see here into cash and there's always the chance that some of that comes in January versus December. So, at this point in time, with two quarters to go and two-thirds of our cash commitment for the year ahead of us, we just didn't feel it was prudent to increase the guidance at this time. But there's no headwinds that we're foreseeing, we're just kind of managing it down the middle.

And just to build on that, right, at the beginning of the year, we talked about the uncertainty in the market heading into an election year. Obviously, we're still dealing with some uncertainty. We're still dealing with customers that have budget challenges and issues around their performance of their business. And so, while we're extremely pleased with the first half of the year that allows us to raise our guidance again, we're not going to get ahead of our skis or over promise. We're going to keep our powder dry to make sure that the third and fourth quarter deliver the way we expect them to.

That's great. Thanks, Tom. And if I could, it sounded like from your prepared remarks that there could be upside as well to the expected buyback this year, the $500 million. I guess maybe part of that's timing, but can you just reset in terms of what you might want to see to deploy more capital there? And maybe any change in how you think about the framework around returning capital to shareholders considering some of the investments you're talking about here today? But great, great cash in the quarter, really nice.

Sure. The strong cash flow this quarter is why I was cautious and didn't commit to more. As you know, our cash flow tends to fluctuate like a sine wave. Typically, the third quarter is a solid cash quarter for us, and we had a strong second quarter as well. I've reaffirmed our plan to repurchase $500 million in shares this year, and we're halfway through that process. We'll keep that going, and if the cash flow aligns with historical patterns in the third quarter, that may allow us to reevaluate it. We'll have more to share as the third quarter progresses and as we look ahead to the fourth quarter. One thing I want to emphasize, Ken, is that we're going to remain careful and responsible in how we allocate cash in a way that's beneficial to our shareholders. So, there's no need to worry about excess cash burning a hole in my pocket, as my grandmother would say.

Perfect. Thank you.

Thanks, Ken.

Thank you. And our next question coming from the line of Noah Poponak with Goldman Sachs. Your line is open.

Hey, good morning, everyone.

Hi, Noah.

The EBITDA margin will need to be significantly lower in the second half compared to the first half to achieve the 12% for the year. Additionally, the second half's EPS percentage of the total needs to be considerably less than historical levels to stay within the earnings range for the year. The Health & Civil margin was quite strong in the second quarter, but we are also factoring in the C&I margin. Chris, could you elaborate on which segment's revenue growth or margins will see a notable reduction? How are you planning for the Health margin for the latter part of the year?

Sure. No, thanks, Noah. And we get it, right, excellent first half of the year, excellent full year guidance, but the second half relative to the first half looks a little bit more modest. But stepping back, the guidance implies, let's call it, roughly 11% margins in the second half of the year. And just six months ago, we opened the year with an expectation of 10.5% to high 10%s on margin. So, we're pleased to be able to look ahead and say, even in a scenario where the disability examination work levels perhaps come down, we still see line of sight to, let's say, 11% margins kind of being delivered by the business. And that's really the primary reason, right, as we look at as the VA is kind of navigating the next few months, we're expecting those throughput to be lower, and then we've allowed ourselves some cautiousness as we look into the fourth quarter around how quickly that will snap back. So, there are certainly scenarios where that could do much better, but that's the primary backdrop. As we look at the rest of the portfolio, obviously, we did signal that National Security and Digital has had a very strong first half on margins. There's always the potential those are able to sustain at those levels, but again, looking at some of the milestones, we pulled back a bit on that for the second half guidance. And then, the last piece, Noah, that I'd point to is the investments. Taking advantage of this opportunity to make sure we're funding an innovation fund that we can dial up or dial back depending upon the progress that's being made and really make sure that we've got a jump start on 2025. So, the fundamentals of the business across the board are in great shape. We feel good about that. In fact, there are some areas still on the optimization side that we still have ahead of us to get after on indirect cost management. So, I feel like we're really well positioned as we look ahead at '25.

Noah, I'll just foot stomp something Chris said in his prepared remarks, and that is our 2Q profitability was aided by having two quarters worth of incentives in – hit in the second quarter. So, the profitability of that business was enhanced because of that. The underlying business remains as solid as it ever has been.

Okay. And Chris, the VBA, I guess, it sounded like you guys are saying you don't have an RFP yet. It sounds like recompetes imminently without an RFP yet.

Yeah.

It's maybe unlikely, I don't know. Is that sliding out? Does that make an extension more likely?

That's how we see it. It's been fluid. We've been rehearsing and preparing and can adapt to any scenario, but it's becoming more and more likely that there is an extension of some kind versus recompete, but we can't commit to that. We're just prepared for whatever the VA is able to do in a short order here.

But you still expect them to slow down the activity while that's being sorted out?

At least until they have a new government fiscal year, which will help them enter a new budget environment. They could be supported by Congress in the near term, but our baseline assumption right now is that activity levels will be more subdued over the next few months.

Okay. Thank you.

Thank you.

Olivia, it looks like we've gone beyond the hour. So, I think we'll call the Q&A at this point. So, I want to thank you for your assistance on the call and thank everybody on the call today for your interest in Leidos and we look forward to catching up with you in the future.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.