The operator welcomes participants to Leidos' Third Quarter 2023 Earnings Call and introduces the CEO and CFO. The call will discuss forward-looking statements and will include a discussion of GAAP and non-GAAP financial measures. The CEO reports a strong quarter with record revenue, earnings, cash flow, bookings, and backlog. Customer demand was robust across all three segments and the company is proud of their work with customers to deliver on important missions.

Leidos reported a 28% increase in non-GAAP EPS and an 11.5% adjusted EBITDA margin in the second quarter. They also exceeded their operating cash flow guidance and raised their financial guidance for 2023. This was due to the progress made in their performance initiatives, including creating a promises made, promises kept culture, improving acquisition and business development performance, and sharpening their overall strategy. They have also taken steps to enhance performance and de-risk their Dynetics and security products businesses. This includes integrating systems and adding expertise to better serve customers.

Dynetics has a strong growth outlook in their three priority areas of hypersonics, small satellite payloads, and force protection. They have seen improvement in revenue and margin in their SES division and have taken steps to improve supply chain resiliency and reduce costs. However, due to changes in the market, they are taking a non-cash pre-tax charge of $688 million and have made adjustments to their sales projections. They remain committed to the security products market and offer differentiated technology-driven solutions.

Leidos has identified security concerns as a long-term growth opportunity and has taken definitive actions to position their security business for success. They have also achieved exceptional business development performance in the third quarter, with a record high of $7.9 billion in awards. This has increased their backlog to $38 billion and supports their growth and margin objectives. They have won quality contracts, such as the Army Common Hardware Systems' sixth generation, which was not protested due to their differentiated solution. Additionally, they secured two large Recompete awards in their Intelligence Group.

Leidos has recently won three major contracts totaling $1.725 billion, all of which have a focus on cybersecurity. These contracts include support and enhancement of Department of Homeland Security's networks, prototype and technology development for a longtime customer, and defense of army weapons systems from cyber electromagnetic activities. Leidos continues to invest in anticipatory technology to address the next generation of cyber threats, including zero trust, quantum proof encryption, network defense, and cognitive cyber capabilities. They are also executing a strategic sharpening effort called Leidos Next to further advance their technological innovation, execution, and customer success.

Leidos Next aims to become the best company in the world by solving problems for customers and being the best employer. To achieve this, they will simplify their structure, focus on key technology strengths, and operate in five specific sectors: Health and Civil, National Security, Commercial and International, and Digital Modernization. This will allow for targeted growth strategies, efficient investment, and repeatable solutions to drive profitable growth.

The company will combine elements of Dynetics and its prior Defense business to develop advanced Defense systems, streamline the organization, and upgrade executive leadership positions. The new Chief Growth Officer will centralize strategy, business development, marketing, communications, and government relations, while the Chief Performance Officer will focus on program execution and cost efficiencies. The Chief Technology Officer will also lead the Leidos Innovation Center to drive technology innovation. The company will announce its sector presidents and key positions later this week and will prioritize disciplined resource allocation internally and externally.

During the third quarter, the company met its goal of reducing debt and surpassing its target leverage ratio. As a result, they were able to increase their dividend for the first time in two years. The company plans to focus on returning capital to shareholders through share repurchases. The company's strong balance sheet and positive financial results demonstrate their ability to grow and generate cash. The company is optimistic about their future and is aligned for a successful 2024. Revenues for the quarter were $3.92 billion, a 9% increase from the previous year.

In the third quarter, the company's revenue growth has exceeded their long-term target and was strong across all three segments, particularly in Health. Adjusted EBITDA and non-GAAP net income and diluted EPS also saw significant increases compared to the previous year. Defense Solutions revenue increased due to digital modernization and other factors, while Civil revenue was driven by recovery in security products and infrastructure spending. However, margin for both segments decreased slightly.

Leidos has made changes to improve their cost structure, supply chain, and product portfolio, leading to a 130 basis point increase in Civil non-GAAP margins. This was driven by higher revenues in the Health segment, particularly in medical examinations and SSA IT work. The company also received an equitable adjustment to cover COVID-19 related costs. They will continue to operate in three segments until Q4, when they will transition to a five-sector structure. This will provide better visibility for investors and analysts. Leidos generated $795 million in cash flow from operating activities and $745 million in free cash flow.

Cashflow for the company has improved due to strong collections and working capital initiatives, as well as accelerated payments from US government customers. The company has paid off its commercial paper and has a strong cash position. The non-cash charge recorded this quarter includes a goodwill impairment, asset impairment, and inventory charges associated with product lines being exited. The company has taken action to improve margins and earnings and has raised its 2023 guidance for all metrics.

The company has been focused on profitability and has seen success in the last two quarters. They have raised their adjusted EBITDA range and non-GAAP diluted EPS. They have also raised their operating cashflow target and are prepared for a potential government shutdown. The company is on track with their insourcing activities and plans to open a location in Charleston early next year. They are ready to take questions from investors.

The company is on track to launch a new project in late Q1 or early Q2 and has launched a hiring campaign and is outfitting the facility. The Civil margins have improved due to progress in the SES business. The company is optimistic about the future prospects of the business and has unveiled two new products that cater to changing customer buying behavior. The team is making tactical decisions and investing in future products to compete and win in both the regulated and commercial markets. The Q4 cash flow may be weaker due to timing of working capital.

Chris Cage and Matt Akers discuss the third quarter performance of their company and how it has allowed them to raise their full-year guidance by $150 million. They also mention the potential risks and challenges they may face, such as a government shutdown, but are hopeful to exceed their performance level. The company experienced some one-time benefits, but their base outlook for the fourth quarter is similar to the second quarter. They attribute their strong performance to the Health business and PACT Act's caseload.

The speaker discusses the potential for fluctuations in revenue and margins in the upcoming quarter due to various factors. They also mention three major contracts in the Health and Defense sectors and provide updates on their progress, particularly the successful deployment of DHMSM. They note that this program is just the first phase of a larger project that is expected to contribute to the company's overall Health margins.

The speaker is excited about the company's success in customer satisfaction and performance, which positions them well for future contracts. They have recently won a contract to digitalize patient information and are expecting more growth in their DES and CHS-6 programs in 2024.

Tom Bell and Bert Subin discuss a customer who is motivated to use C5 ISR activity to support their mission. The team was able to quickly satisfy the customer's request in just 19 days, exceeding the 60-day deadline. Tom Bell also mentions that the current organizational structure will remain in place for the rest of the year, and a new structure will be implemented on January 1st for efficiency and effectiveness. The main goal is to increase repeatability and better serve customers across different markets.

The speaker expects the new organization to bring in more revenue and profit opportunities. They will challenge the new executive leadership team to create growth plans for each of the five businesses, taking into account the market, competition, and necessary technologies. They believe that these plans will unlock growth that is currently hindered. The primary motivation for this change is not cost reduction, but each business will have different objectives. In the case of Defense systems, the focus will be on investing in engineering and technical depth, while in digital modernization, there is potential for more efficient delivery structures. The speaker is excited to share more details on this in the next call. In terms of healthcare, there are both incentives and disincentives for the customer in these contracts.

The company has been performing well in terms of throughput, volume, customer satisfaction, and timeliness. They have been meeting the customer's expectations and are motivated to continue delivering against a high volume of demand. The team is proud of their performance and expects to do even better in the future. The customer has raised the bar and tightened up the strike zone, but the team is confident they can continue to perform well. The company's results were strong, with $18.6 million in the quarter, excluding $14 million in COVID-related expenses. The impact of potential government shutdowns is uncertain.

Chris Cage and Tom are discussing the incentives for 2023 and 2024, but they will not disclose specific details. They mention the importance of maintaining high standards for customer service and the potential risks of a shutdown, estimating a potential loss of revenue and operating income. They emphasize the need to work closely with customers and employees in the event of a shutdown.

Tom Bell and Chris Cage discuss the potential impact of a 45-day shutdown on the company's guidance. They also mention that Dynetics is an essential program and that the company is confident in its development and future success. They are adding technical and financial expertise to ensure its success.

The team at Dynetics is focused on three major markets: small satellite payloads, hypersonics, and force protection. They are tracking their progress biweekly and have a roadmap in place to achieve success in these areas. While there are challenges, the team is engaged and the demand for their solutions is high. Dynetics will continue to grow in 2024, with the potential for a steeper ramp in 2025 related to IFPC. The backlog was also mentioned in the prepared remarks.

The speaker discusses the increase in the company's backlog and the addition of a new criteria for evaluating potential wins, which is EBITDA margins. They mention that the health of the pipeline has improved and is expected to contribute to the company's profitability and cash flow. The speaker also talks about reallocating business development resources to focus on opportunities with higher profit potential. This decision is based on the goal of growing the company as a whole, rather than individual business areas.

Tom Bell, CEO of Leidos, discusses the company's strategy for business development and growth. He explains that instead of chasing low-margin work, the company will focus on areas with the biggest potential for return. This may result in disproportionate growth among the five businesses, but Bell is interested in growing Leidos as a whole. He plans to measure and set goals for each business based on their market potential and opportunities. Bell also mentions that he has hypotheses about the relative growth rates of the different sectors and how it fits into the company's internal capital deployment plans.

Tom discusses the hypotheses regarding the five businesses and their potential for topline and bottom-line growth. He mentions the importance of strategic planning and how resources will be allocated based on the plans with the most merit. Chris adds that they are excited about the strategic planning process for 2024 and the potential results. Seth asks about potential uses of cash and capital deployment, to which Tom mentions the intention to repay a $500 million loan in 2025 and the possibility of returning most of the cash to shareholders.

Chris Cage, Tom Bell, and Stuart Taylor from the company have discussed their leverage target and their plans for the future. They have a dividend program and a CapEx program, and they will continue to evaluate their leverage in relation to the interest rate environment. They also mentioned that the DHMSM could be stable in 2024, and there have been no significant changes in the competitive dynamic for the VA healthcare exam volumes.

The VA is experiencing growth and success in various areas, including the RHRP program and PACT Act volume. The Health leadership team is delivering strong results. There is potential for cost savings and increased efficiency with the transition to a sharper focus on bids and business opportunities. The three functional leaders, including the Chief Technology Officer, are expected to play a key role in this transition.

The speaker is excited about focusing the company's R&D pipeline on technologies that will improve their current business and help them win new business. They have created new positions, such as Chief Performance Officer and Chief Growth Officer, to increase efficiency and effectiveness. This realignment is not about cost-cutting, but about aggregating the company's capabilities in a better way. The company is already seeing a leaner operating environment and is focused on meeting their 10.5% margin target for next year.

The speaker thanks the operator and participants for their contributions and interest in the Leidos conference call. They look forward to updating them again in the future. The operator then concludes the call and participants may disconnect.

This summary was generated with AI and may contain some inaccuracies.