Greetings. Welcome to Leidos’ Third Quarter 2024 Earnings Call. At this time, all participants are in 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 call over to Stuart Davis from Investor Relations. Stuart, you may begin.

Thank you, and good morning, everyone. I'd like to welcome you to our third 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 will 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'll begin on Slide 4.

Thank you, Stuart, and good morning, everyone. As always, it's great to be with you all again today. This morning, I'm very happy to report our sixth straight quarter of excellent financial performance and I'm also very proud of the fact that the team has delivered high quality wins across the entire Leidos portfolio. As a result of this strong sustained financial performance, our growing business capture momentum and our increased clarity into important Leidos markets, we are again raising our forward guidance for 2024 across all metrics. Chris will provide full details regarding our outstanding financial performance and our improved 2024 guidance later on this call. This quarter's solid organic growth and industry-leading margins enabled us to deliver substantial earnings growth and free cash flow. With record adjusted EBITDA margin of 14.2%, we've now achieved 12.9% EBITDA over the trailing 12 months. This excellent execution performance is the result of our robust portfolio of programs serving customer priority missions, our investments to drive efficiency, and the team's embrace of a promises-made, promises-kept philosophy throughout our capability-based organization. Our performance in this quarter reflects adjusted diluted EPS growth of 44% and free cash flow conversion of 159%. Our outstanding cash collections this quarter also enabled us to accelerate share repurchases. We purchased $200 million worth of shares on the open market, thereby clearing $450 million of our $500 million planned share repurchases for the year. As a result of our sustained performance and our conviction regarding our portfolio's ongoing earnings and cash profile, we have again increased our quarterly dividend. Shareholders of record on December 16 will receive a dividend of $0.40 a share, a 5.3% increase over our past dividend. The balance sheet strengthening we've undertaken over the past 18 months gives us excellent optionality. And this will be important as we begin to focus more capital in the future on our new North Star growth strategy. But for the remainder of this year, uses of capital will continue to be prudently focused on the potential for additional share repurchases and purposeful down payments on specific growth engines that have come into focus as part of our new North Star strategy. We look forward to sharing more detail about our new North Star strategy and its suite of compelling Leidos growth engines at our upcoming Investors Day in March. Starting today, I'll take the opportunity from time to time to highlight one of our compelling Leidos growth engines. Today, I'll start this practice with an overview and update on our Health & Civil segment. Over the past year, our Health & Civil segment has been a growth and margin leader for us. Our team in Health & Civil is executing extremely well. And within this newly formed segment, they are optimizing performance across their broad portfolio. And in doing so, they are leveraging the synergies of the complete set of scientific experts we employ, what we refer to as our 'ologists,' who come to Leidos to break limits in their careers and deliver superior results for our customers. We're seeing strong performance and positive developments across the full array of Health & Civil’s customers, including our work for NASA, the National Institutes of Health, the various customers of our air traffic management systems, and our virtual health solutions customers. One area of this segment that I know many of you track is managed health services, where we bring truly differentiated solutions to our customers, which in turn unlock truly differentiated performance. Currently, a core offering within our managed health services is disability and occupational health evaluations for a wide range of customers, including the Department of Labor, the FBI, and the U.S. Secret Service. Included in these flagship programs, we perform medical disability examinations for veterans and active-duty members preparing to discharge. Exam volumes for this business have remained elevated based on the permanent increase in the eligible population from the Promise to Address Comprehensive Toxins Act, better known as the PACT Act, signed into law in August of 2022. Because of our continued ahead-of-the-curve investments in this business with AI, virtual health, and other key technology enablers, and investing in overall capacity, we're positioned to continue to respond with quality and speed to the increased volumes and complexity of exams the PACT Act creates. As an example, we've continued to expand our fleet of mobile clinics to meet the needs of underserved veteran populations. These include those living in rural communities, tribe members on Indian reservations, and homebound veterans. And to assist our veterans beyond our own Leidos QTC clinics, we've developed cutting-edge care coordination processes and algorithms for the VA. These help the VA optimize their use of their critical imaging systems, such as CT scan machines, to ensure veterans are receiving quality and timely health care across the whole of the care ecosystem. I'm exceptionally proud of our performance for the VA and for our nation's veterans. And we are focused on working with the VA to continue to drive down case backlog and deliver timely exceptional service to veterans and service members. On our last earnings call, I relayed that volume and profitability of this business might be challenged in the second half of this year. I expressed this caution at that time because of the real customer budget challenges and the lack of clarity regarding an upcoming recompete for some of our work. Consistent with our promises made, promises kept philosophy, we issued improved guidance then that was prudent given the uncertainty at that time. I'm happy to report that we now have much greater clarity on both these fronts. First, Congress approved a $3 billion supplemental funding request by the VA for the government fiscal year 2024, and this was passed with clear bipartisan support. So we fully expect Congress to approve the VA's $12 billion request for fiscal year 2025. And second, the VBA has already exercised the option year contained in our current region's contract. In addition, we've submitted what we believe to be a compelling bid for a new two-year contract for this same work. And we expect to receive a contract award for this important work in the coming weeks. We very much look forward to continuing our long-standing partnership with the VA in service to our nation's veterans. With this current option year in hand and the new two-year contract ahead, we are very confident in the ongoing financial performance of this business. We expect the volume and margins of our future work here to be sustained on the back of the investments we've made and continue to make in throughput and quality. And looking beyond this new two-year award, we remain confident in our ability to continue to differentially serve our nation and its veterans. The VBA is encouraging offers to drive even more innovation into veteran services before they award the next set of long-term contracts, and this plays to our strengths. With our scale and technical depth, our investments in cutting-edge Trusted Mission AI, and the talent mission focus of our team, we are poised to demonstrate our ability to handle even greater volumes of exams with excellent quality, timeliness, and veteran customer satisfaction. Turning now to business development. As you know, we've been focused on fundamentally resetting our future performance expectations by improving the size and quality of our backlog. This third quarter yielded an excellent return on this focus with net bookings of $8.1 billion, representing a book-to-bill ratio of over 1.9x. We ended the quarter with a total backlog of $40.6 billion, including $9.1 billion of funded backlog. And importantly, I'm very pleased with the improved quality of this future work. Quality wins this quarter were balanced across all our segments, with a rich mix of new growth drivers. Here is a sampling. We won over $700 million in new and takeaway wins in full-spectrum cyber. This is a testament to our capability and competitiveness in this market. It's also an early success from the investments we've made in repeatable solutions in our digital modernizations sector. A couple of key awards to mention this quarter include developing the army's new general unified network to deliver a next-gen transport capability compliant with zero trust principles. And we won a large classified takeaway contract for a member of our intelligence community. The Air Force tapped Leidos as its digital integrator to oversee planning, analysis and operations of its advanced battle management system digital infrastructure network, a core component of the Air Force battle network. This comprehensive network links together all Air Force assets, allows for optimal coordination between different units, and enables commanders to respond rapidly to the changing situations on the battlefield. The $300 million award augments our growing portfolio of combined, joint all-domain command and control programs. And we had $1.7 billion of net bookings within our defense systems segments. Reflecting our maturing product portfolio there, on IFPC Enduring Shield, we received an award for additional development work and four more launchers after government-led development tests successfully intercepted a mix of unmanned and cruise missile targets. This means we remain on track to receive a low-rate production contract in 2025 and a full-rate production contract in 2026. We finalized our contract to provide wide field of view Tranche 2 satellite payloads. This means we will continue to serve our nation with payloads on the FDA's Tranche 0, 1 and 2 satellites. We received a contract from the U.S. Special Operations Command to restart production of our small glide munitions program. This program blossomed a decade ago from a Cooperative Research and Development Agreement, and we've now delivered more than 4,000 units. Of note, we're also on CRADA for a next-generation small cruise missile system called Black Arrow. Recently, Black Arrow completed multiple tests at customer ranges and will undertake even more advanced flight tests this fall. We believe that Black Arrow will help meet the DoD's critical need for affordable standoff strike systems that can be quickly produced and fielded in volume. It's encouraging to see these and other significant results from our focus on growth across our entire portfolio. The third quarter was also marked by high volumes of proposal submissions. So looking forward, even with the large number of Q3 awards, our pipeline of bids awaiting adjudication grew by $3 billion and now stands at $29 billion at the end of the quarter. We believe these positions us very well for even greater business capture performance in the future. As referenced earlier in our conversation, because of the hard work that the team has put into our year of deep strategic thinking, our new North Star strategy has come into clear focus. From the kaleidoscope of opportunities in front of us, I can confidently say that the rigorous process we have undertaken has unveiled an exciting set of focused opportunities for us to accelerate Leidos growth, top line, bottom line, and cash over the coming years. That path forward and the compelling financial picture it will spawn will be the focus of our March 2025 Investors Day. I'll now turn the call over to Chris to walk through our financial results in detail and provide additional insight into our improved outlook.

Thanks, Tom, and thanks to everyone for joining us today. Our third quarter results again showcase what is possible, as we lower performance risk focused on high-quality wins and drive efficiency through the organization. This team is laser-focused on sustainably growing earnings and cash and then deploying them responsibly to grow shareholder value. Turning to the income statement on Slide 5. Revenues for the third quarter were $4.19 billion, up 7% year-over-year. Customer demand remains robust, and employee retention remains historically high. Margin performance was once again a standout in the quarter. Adjusted EBITDA of $596 million was up 32% year-over-year, and adjusted EBITDA margin increased 270 basis points to 14.2%, a new high watermark for Leidos. Program-level execution was one catalyst for margin performance. EAC adjustments were a $30 million net positive, our best performance in nearly four years. Non-GAAP net income was $396 million, and non-GAAP diluted EPS was $2.93, up 40% and 44%, respectively. On a year-over-year basis, our slightly higher tax rate in the quarter fully offset our slightly lower diluted share count and net interest expense. Looking at the non-GAAP reconciliation tables in the press release and presentation appendix, you'll see $6 million of GAAP impairment charges from exiting and consolidating underutilized lease basis, and we expect another $15 million or so of charges associated with additional actions over the next five quarters. We're closely managing our corporate costs and lowering our real estate footprint improves our competitiveness and keeps corporate costs in check. The annualized savings from these actions will be in the neighborhood of $25 million to $30 million, which we'll see the full benefit of in 2026. Turning to the segment view on Slide 6. National Security and Digital revenues increased 1% year-over-year. We saw volumes grow broadly across our digital modernization portfolio, which offset slowness across several intelligence community programs. I'm very pleased with the margin discipline of the segment as they continue to perform ahead of plan. National Security and Digital non-GAAP operating income margin increased 70 basis points from the prior year quarter to 10.5%. This was the highest margin of the year, and it reflects early success in digital modernization repeatability and utilization initiatives as well as excellent award fees on our intelligence community programs. As Tom alluded to earlier, Health & Civil continued to deliver for customers and shareholders. Revenues increased 16% over the prior year quarter and non-GAAP operating income margin came in at 24.2%, up from 16.5% a year ago. Revenue and margin overperformance was primarily in the managed health services portfolio that Tom spotlighted, as we receive more disability exam requests than anticipated and our differentiated solutions were able to unlock higher performance and incentives. Profitability was roughly in line with Q2 levels. Commercial & International revenues increased 5%, with increased deliveries of security products and energy engineering services. Non-GAAP operating margins were 8.8%, their highest level this year. The UK business was a positive top and bottom line contributor in the quarter, and I'm pleased with the positive trajectory for this business area and the segment overall. Finally, Defense Systems revenues increased 13% over the prior year quarter, and non-GAAP operating margins increased 280 basis points year-over-year to 10.2%. It's rewarding to see the kind of financial performance that we expected from this portfolio. There were many bright spots in the segment, highlighted by the move to the initial operating test and evaluation stage on IFPC Enduring Shield. Looking across the segments, clearly, Health & Civil continued its strong execution, but I'm most encouraged by the broad-based strength of the entire portfolio. We had two sectors growing at double-digits for the first time in the new organization structure. And if you set Health & Civil aside, margins for the remaining three segments were up 80 basis points from a year ago and higher than they've been as far back as we have recast financials. Turning now to cash flow and the balance sheet on Slide 7. With the end of the government fiscal year, we had exceptional cash performance. We generated $656 million of cash flows from operating activities and $633 million of free cash flow. In Q3, we repurchased a total of $203 million in shares, including $200 million in the open market and paid $51 million in dividends. We ended the quarter with $1.2 billion in cash and cash equivalents and $4.7 billion of debt. We have significant capacity to return cash to shareholders and invest in growth. Next, I'll go through our enhanced outlook for 2024 on Slide 8. We're raising and narrowing our revenue guidance range to $16.35 billion to $16.45 billion, an increase of $150 million at the midpoint. We're increasing adjusted EBITDA guidance from approximately 12% to the high 12% range. We're raising and narrowing our non-GAAP diluted EPS guidance range to $9.80 to $10, which is an increase of $1.10 at the midpoint. And lastly, we're increasing our guidance for operating cash flow by $50 million to approximately $1.35 billion for the year. Our new guidance reflects not just the outperformance in the third quarter but also an improved outlook for the fourth quarter, spurred by positive momentum across all four segments and increasing visibility in our Health & Civil segment through the recompete of the regions contracts. As you put together your models, we're expecting fourth quarter interest expense, tax rate, and diluted share count to remain near Q3 levels. We plan to step up CapEx investments tied to growth in Q4 and end the year at $160 million or about $30 million below our original expectations for the year. Finally, as Tom indicated, our year of deep strategic thinking has brought our North Star strategy into clearer focus. We're not yet ready to give next year's guidance or new long-term targets, but I want to orient you to our current thinking. Our very strong performance in 2024 raises the bar for next year. The midpoint of our revised guidance range yields revenue growth of 6% and diluted EPS growth of 36% in 2024. At this point, we're not expecting to repeat quite that same level of growth in 2025. We see 2025 as the pivot year from the company we are to the company we're building towards as we implement our strategy. We currently expect revenue growth in 2025 to be in the lower single digits, with the longer term growth outlook potentially back to 2024 levels or above. Most importantly, we are committed to retaining margins near current levels and robustly and sustainably growing diluted EPS over time. With that operator, we're ready to take questions.

Our first question comes from Peter Arment with Baird.

Maybe you could elaborate on the $700 million plus in new takeaways and full spectrum cyber, which is quite impressive. It's clear that the company is performing well in many areas. Can you provide more details about this and where we might expect to see the impact of these new takeaways?

Yes, we're very excited about the National Security and Digital segment. As I think about that segment and Leidos, it really is the core of the core of the core of what Leidos has always been and has always done extremely well. And we've got a fantastic history in that segment of winning big franchise programs, multibillion-dollar franchise programs. And so we like that business. We've put a leadership team in that business that we trust. And you're already starting to see in this third quarter, the beginning of us getting our confidence back in our winning ways in that business. So very excited about that, and we look forward to more conversations about cyber wins going forward. At the same time, cyber has been one of the golden bolts that we've been investing in as a core competency of Leidos for our whole history. And so not only are we very proud of the team that's leveraging our cyber expertise for cyber wins, especially for our very, very important intelligence community customers. But we're also very proud of the fact that our cyber capabilities and our zero trust focus is frequently commented on by customers as a reason we win in other markets also. So we're very proud of the return on investment we're getting in our cybersecurity business and as an underlying capability of everything Leidos does. Obviously, these are customers where we can't really say too much more than we already have about where we win and what those programs are, but we're very excited about it and we're very, very committed to expanding our capability to help our government be the smartest government on the face of the earth.

Yes, Peter, obviously, Aegon was certainly something that fits into that arena, but as Tom talks about a lot of classified work there that we can't get too much color on. But clearly, the team has been focused on differentiation and the investments that we've been making and we'll continue to make really positions us well to grow that area of the business more robustly as we head into '25 and beyond.

And our next question coming from the line of Sheila Kahyaoglu with Jefferies.

Thanks for the script, Tom, that was really helpful in focusing on one area. I want to ask about Health & Civil, particularly regarding the significant growth with the VA funding. It seems like there are still outstanding issues, but could you provide some timing on that? Also, how are you thinking about positioning in that area, what potential risks do you see, and how should we consider Health & Civil EBIT as we move into next year?

Yes. So as I tried to highlight in my prepared remarks, we've had a fantastic third quarter in our Health & Civil business. And before I get into managed health services, I want to, again, broadly overview the fact that, that business is much more than just VBA. We serve a variety of customers, everything from NASA and making sure that the logistics to the space station are maintained. We do critical work for our customers at the National Institute of Health and the National Science Foundation. We do exams for the FBI, the Secret Service, and the Department of Labor. So it really is a broad segment of our business and it's a business that is outperforming in all of those facets. On the VA and on the VBA since I appreciate the fact that, that's your question. We had a great quarter that helped us clear the air. Kind of the fog of war has been lifted and now we see our way through for not only the next year or two, but much longer into the future. As I mentioned, the customer has currently extended the current contract we have with them with the option year that they had. We expect them to formally contract for the next two years, along essentially the same terms as the business we have today. We're very confident in the fact that we'll be able to maintain our volume, our throughput, and our profitability of that business over that contract. And as I suggested in my prepared remarks, Sheila, we also are very excited about what the VBA is setting up for the terms of the next competition. It incentivizes innovation, it incentivizes technology. And when you talk about critical customer missions with deep technology needs, you're talking Leidos. So we're very excited about that business. We're currently continuing to invest in it. We're making sure we don't wait for the RFP to innovate and bring even more efficient and effective solutions forward for our customers. And so we're very bullish on the long-term business we're in for Health & Civil. And in fact, spoiler alert, when you come to March, you'll see that growing this business is a core of our growth strategy going forward. So far from us seeing it as a business that is sunsetting or at its apex, we see it as only a business that's just begun to be a growth engine for Leidos. Chris, do you have anything you'd like to add?

A couple of additional points, Sheila. Clearly, again, our third quarter performance, part of that was the incentives related to doing great work with high customer satisfaction, with differentiation. Those are the things that will compel us to be a prominent provider in this space for the foreseeable future. The other thing that you might have seen, it's not done yet. We don't count our chickens, but the customer and the military health side put out a justification authorization to extend our current work on the DHMSM program for an additional three years. That should hopefully sort itself out middle of next year. But that's another strong indication of where customers really want to see the value that Leidos brings and they want to continue that relationship with us. Now as it relates to looking ahead to 2025, that's what we gave our color commentary. This business has outperformed everybody's expectations for this year. Health & Civil has had a fantastic year. Our goal in the near-term is to sustain that level of performance and that's what gives us confidence in our ability to keep margins solidly in the 12% range for the corporation. Growing off of that base will be an area of focus certainly for the intermediate to longer-term horizon and we're very confident we'll be able to do that.

Your next question coming from the line of Tobey Sommer with Truist Securities.

I wonder if you could give us an update on a smallish program that we haven't talked about on these calls in a while. Sort of your capabilities for unclassified data collection in the BuckEye program and others. I'm curious about the utilization of those company-owned assets and what the prospects for growth are like?

Yes, so BuckEye continues to be a very strong business within our Defense segment, where the assets we have deployed for that mission are, I'll call it, fully utilized and we're sweating the assets very well. And in fact, expansions of those missions are part of what we're using some of the capital we have in this fourth quarter for down payments for further growth in the coming years. Personally, I expect that sometime in the next decade or two, manned ISR assets are probably going to be replaced by other capabilities. But in the here and now, these are critical capabilities that our war fighters rely on and we're proud to serve very specific focused niches of those customer capabilities that they need and want. So BuckEye and other programs like it remain a part of Cindy's business and it's a part of the business we're very happy with.

And Tobey, I'd just add, I mean, to Tom's point, we're seeing, even though there's been some programs that we haven't won, we actually are still a strong provider in the ecosystem of airborne ISR support to our customer missions. And to Tom's point, we'll continue to see select opportunities to increase investment. Those are high return on investment types of plays when we make them and so we'll look for those when they make sense.

And our next question coming from the line of Mariana Perez Mora with Bank of America.

So Chris, you said you're not ready to talk about FY'25, but you mentioned the low-single-digit growth. And as you mentioned, DHMSM or MHS GENESIS is already expected to be extended, so that side the risk. Then I see a lot of opportunities coming from August. And at USA, everyone was really enthusiastic about the defense portfolio actually getting some traction, missile, ammunitions, counter missile, hypersonics, all those things. What are the areas that are actually not growing or that you are conservative going into next year to actually think it's going to be the transition year in terms of growth?

You're right, there are a number of things across the portfolio that we're very excited about. But what we've also learned is some of those things take a longer gestation period to manifest themselves like we're seeing in the defense systems business today. Growth has been nice and a good upward momentum, but it took some time to get there. As we look ahead to 2025, we do like our position. We feel really good about how the company is stacking up. But clearly, Health & Civil off of this substantially elevated level of performance is going to be in a more muted growth posture in the near-term, accelerating away. We did talk about some of the wins in national security and digital, we see growth momentum accelerating there. But you look at the backdrop, we're clearly in an election year. There is a risk of potential of there's an extended CR and some disruption. We've seen that play out in the past. So as we see the landscape here today, we're going to be cautious about those things. And if we get more clarity in the several months ahead, we'll be in a better position to refine that point of view going into the early part of next year.

Mariana, I might add, I really appreciate your enthusiasm for the business, too, and optimism. I share it. I think there is tremendous growth available for Leidos. And that will be the feature of our March 2025 Investors Day, focusing on those engines of growth we see within the portfolio that have been clearly identified as a result of our year of deep strategic thinking. So we're very excited about it. But I cannot remind investors and analysts who attended our 2021 Investors Day that back then we promised profitability of 10.5% in 2024. And so here we are committing to guidance this year of 12.9%. And the fact is, even with next year and the solid 12s, we're streets ahead of where this portfolio was envisioned to be just three years ago. We will not be resting on our laurels there. This is just an indication of the kind of pivot year that 2025 brings, but a pivot year is just that. It's a pivot year to greater growth and continued growth for a great portfolio of critical needs that our customers reward us for. So that's the focus over the next coming months. We look forward to having that conversation with you in March, and we're very bullish about the future of Leidos.

And if I may, just a quick follow-up. On the $29 billion that you have of like submitted bids in the pipeline, how much of those are new businesses versus recompetes?

Well, the $29 billion, I can't give you that, but I can tell you that when we look ahead to next year's portfolio, almost 70% of what is in the 2025 portfolio is new business and takeaway. So I don't have the exact point on the $29 billion, but a high percentage of that would also be new business and takeaway, Mariana. The recompete landscape is quite modest. We've talked obviously about the VBA business and have clarity here on the next two years of that here soon if the military health system DHMSM program does play out the way we hope. We're really not talking about any substantial recompete. So that's a great position to be in for our BD team to really be attacking new work with vigor next year.

And our next question coming from the line of Cai von Rumohr with TD Cowen.

Terrific results in Health. The recompete, the profitability is so good. Usually, when you see markets with that kind of profitability, you tend to attract more entrants. Now I know that the entry barriers are pretty high and that's been a plus. But you mentioned incentive improvements. Can you give us any color about the upcoming recompete, and do you expect that the profitability opportunity will be comparable? Or will there be more competitors or a different structure so that they get a good result, and you make good money, but not quite as much as you're making today?

I appreciate the sense of your question. But of course, there's some questions I really can't answer in there. And at the same time, I can say that we're very confident in the continued profitability of this business over the next couple of years, and we look forward to the recompete because, as I suggested, it incentivizes the very things that we're excellent at. So there is, for us, confidence that we'll be able to lean into the business to help the VA get what they want, which is customer satisfaction and volume. At the same time, we feel very good about how we've been able to weave into our solutions in this space Trusted Mission AI and other innovative processes that allowed us to bring down our costs and maximize the use of our fixed assets that we have. And so as a result, the profitability of this business and the opportunity for us to expand it are core parts of our strategy for growth for Leidos. So we don't see it as a net negative, but rather an area where we're going to be able to hold on to the profitability and expand the top line.

I just would remind you, I mean, we did get the option year exercised. So we have clarity on the contract we're performing under right now. The recompete to Tom's point, we can't give a lot of detail there. But again, our team really focused on how do we maintain a competitive position and work with our customers. But at the same time, get a return on the investments we've made. And it's not just the work going on in the VA. Tom spotlighted there's much more going on in managed health services with other customers that we're doing work for. So the expansion of that entire portfolio enables us to have visibility and the confidence in the ability to retain a high level of margin performance there.

And if I may, one more question about Dynetics. For years, it's basically had lots of potential and has had trouble really fully converting that. When you talk about low-single-digit growth next year and then better growth as we move further out, is Dynetics in that bucket?

Dynetics certainly fits into that category. Once again, consider the business development results they achieved this quarter; they are impressive with an excellent book-to-bill ratio, and programs are advancing steadily before accelerating. It will take a couple of years to transition into full-rate production mode, and these factors give us confidence in the expected growth. We still lack complete clarity on how quickly the customer will increase our hypersonics work. We are prepared and ready to expand, although we rely on our industry partners. There are certainly exciting prospects for the future, and we anticipate that the growth momentum will continue, but the most significant years for that business are still ahead.

In fact, Cai, I'll just add on. Chris talks about an excellent book-to-bill. Just to put a little context on that, that's greater than a 3x book-to-bill just for our Defense segment. So that's the kind of quarter they had. And what we're starting to see, Cindy and the leadership team there are starting to really focus from that kaleidoscope of opportunities and the potential that's always been there, to focus on the things that are really important to our DoD customers now to fight for the future. So one of the things we talked about was the SOCOM customer restarting a production line for small glide munitions. In fact, that's huge because that line had gone dormant and the customer has come back to Leidos and said, we need more of that product. And that has spawned the ability for us now to prototype and start to test this small cruise missile, Black Arrow that I referenced. That's a direct result of not only our prowess on small glide munitions. But also remember the Gremlin program, bringing those two capabilities together has put us in a position to test this small cruise missile. And frankly, that's exactly what our warfighters need: the rapid prototyping, rapid production at scale, and affordable capability for standoff weapons. So we're very bullish, as Chris says, about the future of Dynetics and the ability for the current management team to take all of that potential and turn it into successful outcomes.

And our next question coming from the line of Scott Mikus with Melius Research.

Tom, Chris, a little over a year ago, you guys won CHS-6. I was wondering if you could talk about how that's ramped so far? And are the margins for that program accretive to the overall business? Or are they still dilutive as you're making the investments to ramp up?

Yes, Scott, I would say the team has done an excellent job of getting that program underway in the first year. As you can imagine, both programs in their early stages aren't fully optimized, and CHS-6 is no exception. We experienced a surge of purchasing activity for longer lead items, which will help boost revenue in '25 and beyond. However, I would say the margins aren't yet where we anticipate them to be in the long term. Nonetheless, we are seeing strong performance in national security and digital sectors. The team is positioned well, and CHS-6 will eventually be a valuable asset to the portfolio, although it hasn't yet reached its full potential.

Scott, just to pile on a little bit. One of the things we've been doing as we retool our business development approach is, we've also been ensuring we have the experts who can communicate to customers the art of the possible. One of the things we've discovered is that the tool that CHS-6 is, is not universally understood within the army and we have people out there right now, ensuring that our customer understands their ability to use CHS-6 to buy a wide variety of products and capabilities. And so we feel very good about that. And we're incentivizing our program managers to fill out the full potential of the IDIQ contracts that we have. So we feel very good about the fact that maybe we're a little slow out of the blocks on that program, and it hasn't hit its stride yet, but I'm convinced that the army, we, and our business development team are going to be able to help us supercharge that program for part of our success going forward.

Our next question coming from the line of Noah Poponak with Goldman Sachs.

Just want to make sure I have the timeline on the VBA work inside of Health & Civil correct. Because, Chris, I thought you referenced the one year extension from the VA, but then I heard you thought in the Q&A referencing multiple years. So I guess, how much visibility do you have now on what funding mechanisms? And then whenever there is a recompete, when exactly are you now expecting the recompete and how much actual revenue is being recompeted? And then on the margins, am I hearing you correctly that you believe north of 20% adjusted segment operating margin is a reasonable medium- to long-term framework for this business?

No. Let me go first, and I'll give you some big tectonic plates and then Chris will fill in the details. First, as we said, we're currently on an option year to the current contract. So that's ongoing. Second, we expect a two-year award to be made in the coming weeks. So let's call that November, sometime in November. The terms of that contract will be largely similar to what we have now. And then after that two-year contract, the customer assumes they'll be awarding new multi-year contracts for the way forward at that point. So we're currently on an option year. As soon as the new award gets placed, that option year will seed and will be on the terms of the new two-year contract. And then there'll be a multi-year contract beyond that.

That provides an overview of our activities. It's not the complete scope of our work with the VA, as it only covers four regions and there are other contracts as well. However, it represents a significant portion of our business, and we have submitted a strong bid. Regarding margins, I believe you're in the right range, around 20 percent or more for this segment moving forward. We have exceeded that in the past two quarters, with figures around 24 percent. These results are impressive from the team. We are now more optimistic about maintaining performance above 20 percent.

And we're going to achieve that, not only by doing more of what we do now by expanding the suite of services that we provide. More in March.

And our next question coming from the line of Seth Seifman with JPMorgan.

This is Rocco on for Seth. Are there any notable factors that have been weighing on national security and digital growth? And what does the pathway look like to accelerate the growth in the segment moving forward?

Well, so National Security Digital, we featured in our call, there's been some shifting of budgets and priorities in some of our intelligence community customers, not tectonic shifts, but smaller shifts, focused more towards great power competition. Some inability to get the cleared personnel in the right spot that is always an inhibitor. Our team has managed around that very successfully and I think has positioned that business for increased growth going forward. A lot of the key wins that we featured in the call will show up as catalysts in national security and digital and some new work there. There's also been some protests, unfortunately, that's par for the course in this business area, but some of those are substantial growth drivers for us ultimately, once they clear that process. So we're looking forward to a positive resolution there. But the team has been shifting the portfolio, pivoting a bit, and we're seeing early returns on the digital side, the digital modernization part of that portfolio and expect even greater results there going forward.

Rocco, I mentioned to an earlier question that we see our place in the universe as helping our government be the smartest government on the face of the earth. I would suggest that one challenge our customers have in helping us help them fulfill that mission is relatively stable budgets or when you price in inflation flat to declining budgets. And so I know no taxpayer wants to hear that. But our national security and intelligence community work really is challenged with limited top-line growth against a threat environment that is incredibly diverse and not seeding. So I would love to see a little bit more top-line growth, and I know our customers would love to be able to do more things so as to help our government be the most brilliant government on the face of the earth.

Our next question coming from the line of Ken Herbert with RBC Capital Markets.

Tom and Chris, great results. Chris, the updated guidance for 2024 suggests a slight decrease in top-line growth in the fourth quarter, around the 3% range, although we can still expect strong performance from Health & Civil. How should we view the various components within the segments for the fourth quarter? Any specific details you can share would be helpful. Additionally, should we consider the top-line metrics and operating or adjusted EBITDA in the fourth quarter as a potentially good indicator for how 2025 might shape up, based on your earlier comments?

And so again, we've had a fantastic year and that fantastic year has positioned us to be even more intentional around some investments that we're making in the fourth quarter to position ourselves for the long-term, both on innovation and technology, but also on our employees and employee engagement. So you'll see some of those things manifest themselves in Q4. Q4 obviously does have a higher level of time off, right, vacation time that we're baking in. And just allowing for the potential risk around any disruptions in funding and those types of things following on from the election. We hope we don't see any of those, but there's always that potential. I would look more to our comments for next year as it relates to margins, solidly in the 12%. So a modest step down in Q4 is not indicative of how we see the business running into next year. We see strong performance out of the gates there, and so you should expect that. But revenue volumes, there are some puts and takes. There's probably flattish performance from Q3 into Q4 as we look at the disability exam work, timing of some materials that could ebb and flow. But as I mentioned, just a cautionary note on what happens with the budget environment and vacation and leave for our employees because it's been well-deserved.

And our next question coming from the line of Louie DiPalma with William Blair.

You discussed how the PACT Act is stimulating exam volumes. Based on your crystal ball, was the exam volume level in 2Q and 3Q, was that the peak in terms of exam volumes? Or should that continue to trend higher in the fourth quarter and 2025?

Yes. Go ahead, Chris. I'm sorry.

Louie, I mean as I just was saying to Ken, I don't see Q4 showing an uptick over what we've seen for Q2 and Q3 spectacular performance. But broadly, the demand signal is there to sustain that level of performance as we see it going forward. When you look at some of the stats on pending claims and backlog of claims, they remain substantially elevated from where they were a couple of years ago. So in that zone is probably the expectation that we see over the next several quarters and beyond, but not at an elevated level.

Yes, I agree.

And our next question coming from the line of David Strauss with Barclays.

This is Josh Corn on for David. I just wanted to ask, so now that you've done just about the full $500 million of share repurchases that you had been talking about. I just wanted to ask about repurchases and capital deployment priorities in Q4 and going forward.

Yes, we will definitely complete the remaining $50 million, and we will be considering capital uses alongside alternative internal uses at the same time. However, as I mentioned in my formal comments, we will continue to be favorable to our investors this year. You should view the increase in our dividend as an indication of that.

Yes. I mean we're in a great position, Josh, as you realize, with the strong cash position coming out of Q3. We still see value in the stock clearly. And with our best days ahead of us, we'll continue to be comfortable moving into the market when it makes sense.

We have time for just one more.

Our last questioner coming from the line of Matt Akers with Wells Fargo.

I wanted to comment that health margins have significantly improved this quarter, but the other three segments have also seen a solid increase in profitability recently. Could you discuss what factors are contributing to this and how much more potential there is to enhance margins in those segments?

We appreciate your acknowledgment that our success isn't solely attributed to the Health & Civil business. Our other leaders are also seizing opportunities to enhance profitability. Starting with National Security and Digital, we've introduced repeatable offerings. Steve and his leadership team are fully committed to our practice areas and efficiency gains through the franchise programs currently in place. Early results have been promising, and we believe there's additional potential in areas like cloud migrations across our contracts. In defense systems, we're seeing improved program execution and bidding discipline. The team has implemented greater rigor as programs advance beyond initial prototypes, which is yielding positive results. As I mentioned earlier, our EAC performance is the best we've seen in four years, reflecting the outstanding efforts of our program managers across the business. We still have room for improvement and believe there is more potential in our portfolio.

And all I'll add, Matt, is that while all our segments reflect different market realities of the potential profitability, all of our segment leaders are incentivized to be best-in-class profitability. So stand by for more.

I appreciate the question, Matt. And I just want to thank the operator for your assistance on today's call, and thank everybody that joined us here for your time this morning and your interest in Leidos. We look forward to updating you again soon. Have a great day.

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