The operator welcomes participants to the Leidos Fourth Quarter Fiscal Year 2023 Earnings Conference Call, where the CEO, Tom Bell, and CFO, Chris Cage, will discuss the company's financial performance. The call is being webcast and contains forward-looking statements, with a focus on GAAP and non-GAAP financial measures. Tom Bell outlines the three main topics of discussion: the company's 2023 results, progress towards a brighter future, and what can be expected in the coming year. The fourth quarter saw 8% revenue growth and record quarterly revenue of almost $4 billion.

The company had a successful year in 2023, exceeding their guidance and showing growth in revenue, EPS, and operating cash flow. They also repurchased shares and credit their success to their dedicated employees and efficient business engine. The company has recently undergone an organizational realignment and is already seeing positive results, such as improved sharing of best practices and plans for international growth. The new structure is expected to bring even more benefits in the future.

The team at Leidos is focused on two critical components for building their future: improving their business capture and remaining the best employer of top talent. They have a solid book-to-bill ratio and a healthy backlog, but believe they can do even better. The company has made changes to their executive leadership team and incentive compensation plans to better align with the interests of shareholders and customers. They have also hired new leaders, such as Cindy Gruensfelder, to help take their defense sector to the next level.

The upcoming proxy statement outlines changes in metrics and expectations for 2024, with a focus on revenue, profit, and cash margin. The company has already exceeded its margin target for 2021 and expects to meet its three-year commitments. However, they aim to do even better and be at the top of the industry in terms of financial performance. To achieve this, each sector president will present a growth and profitability plan for their markets, and the company will also conduct a strategic analysis to identify future growth opportunities. This process is designed to position Leidos as a leader in revenue, profit, and cash growth, and the company plans to share their plan at the next Investor Day.

Leidos plans to showcase their innovative technology solutions, known as "Golden Bolts," to solve customer problems. They have launched a new branding campaign, "Making Smart Smarter," which highlights their unique ecosystem of employees, partners, and customers. The campaign aims to increase brand recognition and attract top talent. Leidos has already fulfilled many of their commitments and exceeded financial targets, but they remain focused on driving profitable growth and improving customer outcomes.

The new leadership team at Leidos is committed to making the company successful and awesome for all stakeholders. The company had an excellent year in 2023, with revenues exceeding expectations and growth in all segments. Adjusted EBITDA margin was ahead of schedule, and non-GAAP net income and EPS increased. Non-operating factors such as tax rate and interest had a slight negative impact on EPS. The segment results and key drivers are outlined on slide seven.

The quarterly figures for the company show positive growth in Defense Solutions, Civil, and Health segments. Defense Solutions saw a 7% increase in revenue due to digital modernization and other programs. Civil revenues were up 2%, with infrastructure spending by the FAA as the main driver. Health was a standout performer with a 17% increase in quarterly revenues, driven by higher medical examinations and expanding capabilities. The company also saw strong profitability growth, with Defense Solutions and Health showing consistent improvement in margins. Operating cash flow for the quarter was $304 million, and free cash flow net of capital expenditures was $226 million.

The company's strong operating cash flow and free cash flow were aided by efficient collections and working capital management. They also had a solid balance sheet with low leverage, allowing for flexibility in returning capital to shareholders. For the upcoming year, they expect a 2-4% growth in revenue, but are being cautious due to the current funding environment. They anticipate maintaining a mid to high 10% adjusted EBITDA margin, which is in line with their long-term margin expansion plans.

The company is expecting a strong year in 2024, with a projected non-GAAP diluted earnings per share of $7.50 to $7.90 and significant flexibility for additional share repurchases and other capital deployment. They anticipate an effective tax rate of 23% and net interest expense of $225 million, as well as strong operating cash flow of $1.1 billion. The company also expects to see a return to normal levels of cash conversion in 2024. They are targeting capital expenditures of $190 million, and their financials have been recast in their new segment structure. The largest segment, National Security and Digital, includes core Defense and Intel services, digital modernization for U.S. federal customers, and their Leidos Innovation Center. Flagship programs for this segment include NGEN, AEGIS, DES, and large contracts with the Intelligence Community for cyber analysis and mission software development.

In 2023, the Health and Civil Segment had revenues of $7.2 billion, with a 7% increase from the previous year and a non-GAAP operating income margin of 10%. In 2024, revenue growth is expected to be within the guided range with a slight decrease in margins. Long term, there is potential for margin growth through shared resources and best practices. The segment focuses on customer solutions in public health, care coordination, life and environmental sciences, and transportation. The Commercial & International segment, which includes SES, Commercial Energy, and businesses in the UK and Australia, had revenues of $2.1 billion in 2023, with a 12% increase from the previous year and a non-GAAP operating income margin of 7.8%. Margins are expected to increase in 2024 due to actions taken in 2023, but revenues should remain stable. The Defense Systems segment, which includes Dynetics, Maritime, and Airborne Surveillance Support, had revenues of $1.9 billion in 2023, with a 4% increase from the previous year and a non-GAAP operating income margin of 8.3%.

The company expects to see increased margins through better program execution, but revenues will remain relatively flat compared to 2023. The Defense System segment will see a shift in revenues due to accelerated Hypersonics Weapon Testing by customers. At the enterprise level, revenues and margins will step down in Q1 but grow throughout the year. The company is ready to answer questions and the first one is related to assumptions in their guidance, specifically the growth rate in the DOD budget and whether they have any backlog associated with supplemental funding. The company's ‘24 guidance is conservative due to funding uncertainties on Capitol Hill.

The company predicts a 3-4% increase in defense budgets in the long term, but will conduct a strategic analysis to ensure their assumptions align with the Pentagon's budget. They have minimal exposure to the supplemental funding stream. In the Health segment, there has been significant outperformance and the company expects it to continue in 2024.

The speaker expresses pride in the performance of the Health team and their sustained revenue growth of 13%. The team's success is attributed to their unique customer understanding and use of technology. The team is expected to continue their strong performance in 2024. The speaker also mentions plans to expand their reach and invest in capabilities to handle increased volume.

The speaker discusses the company's resegmentation and the potential for margin expansion in the National Security and Digital Segment. They mention the combining of their digital modernization sector and the opportunity for leverage and investment in repeatable solutions. They also highlight the well-run core National Security work with Intel customers and the potential for longer-term margin improvement in the digital modernization space.

Tom Bell discusses the three components of Leidos' business, including the Leidos Innovation Center which has been pulled up to the CTO level. Sheila Kahyaoglu asks about profitability and Tom Bell mentions the challenge of reaching high profitability by 2024. He also mentions the possibility of cresting over 11% in the future and the focus on increasing both top line and bottom line growth. He adds that there is a lot of potential for growth in the Defense Systems and Commercial & International segments.

The company is expecting a multi-year runway for growth in margins in 2024, thanks to the efforts of their team and new leadership. They are also seeing strong demand for hypersonic capabilities, with work being pulled in to 2023 from 2024. The company is in a good position to meet this demand and is in deep dialogue with customers to accelerate this business. It is uncertain how high the demand will go, but it is a positive development for the company.

The CEO of Leidos discusses the company's strong international presence and interest in the AUKUS partnership for Pillars 1 and 3. The company's Defense Systems division is also expected to see growth from hypersonics and force protection work, with potential awards and production in the near future. The CHS-6 program, a major win for the company in the fourth quarter, is also expected to contribute to growth in 2024.

The speaker discusses the success of the CHS-6 model and its broad mandate in the C-5 ISR domain. They mention the use of Leidos' breadth and scale to solve problems for customers and the involvement of the Dynetics business. The program is expected to bring in revenue and profitability over the life of the contract, with a ramp up period and a focus on high-margin work.

Josh is asking about the revenue guidance for next year and Chris Cage and Tom Bell explain that there are some factors that could potentially offset the expected 2% to 4% growth, such as the transition away from certain programs and budget uncertainty. They also mention that the strong performance in 2023 creates a challenging year-on-year comparison for 2024. However, they are confident in the team's ability to meet or exceed the high end of the range.

The speaker discusses Leidos' potential for growth in the international market and mentions the Gremlins Air Vehicle program as a demonstration of their aerospace capabilities. They also mention the possibility of their drone assets being involved in the replicator program. The speaker also mentions that there is demand for Leidos' data and digital services from international allies and that they are exploring opportunities in both IT services and hardware.

The speaker discusses the benefits of Pillar 2 of AUKUS, which involves collaboration between the US, UK, and Australia. This collaboration will lower trade barriers and ITAR restrictions, allowing for greater data sharing and the opportunity for Leidos to expand its capabilities. The speaker also mentions that DES is projected to perform well this year. The question then shifts to the company's capital deployment strategy, with the speaker noting that Leidos has made significant progress in realigning its businesses and leadership team. The speaker suggests that 2024 may be a year of internal focus, but also mentions the possibility of M&A and buybacks.

The company's growth has been longer than expected, but the team is performing well and they have expanded to five active task orders. The company expects growth to continue in 2024 and 2025, and M&A is not a priority for 2024 but remains in their playbook. They have already allocated funds for share repurchases and have other options for deploying cash, such as investing in new capabilities and technologies. The focus is on meeting customer needs and positioning the company for success.

The company is considering M&A opportunities that align with their North Star strategy. There has been no discussion of the Civil margin in the prepared remarks, but the team has made progress in stabilizing the challenges. The SES business is improving and the revenue and margins were in line with expectations. They expect the pattern to be lower in the early part of 2024 and accelerate towards the end of the year. The team is executing turnaround efforts and exiting certain geographies.

Tom Bell and Noah Poponak discuss the progress of Leidos' business and their outlook for the future. They mention the careful and lengthy process of resetting the business and the positive impact of Vicki and Michael on the SES sector. They also touch on the changes in growth and margin for the Health sector and mention that Q3 saw an uplift in profitability and Q4 benefited from incentive performance. They expect the customer to continue increasing demand and for industry to meet these expectations in order to achieve full incentive.

Tom Bell and Chris Cage discuss the company's expectations for the year and the level of demand they anticipate. They plan to invest in order to ensure timely care for veterans and are prepared for potential inflationary impacts. They do not anticipate any imbalances between their top and bottom lines due to inflation.

The speaker discusses the potential for growth in the company's budget and personnel, citing the lag between budget and outlay as a potential factor. He also mentions the company's focus on technical upskilling and low attrition rates as ways to manage personnel costs. The speaker also mentions potential opportunities for growth in the clinical aspect of the business, which is being pursued by a specific team.

Tom Bell discusses the company's focus on targeted investments in IRAD (Independent Research and Development) in areas such as Software, Cyber, AI, and Maritime Autonomy. This is in line with the company's strategy to differentiate themselves and provide solutions to customer problems over the next three to five years. The company is also matching their IRAD investments with customer-focused CRAD (Customer Research and Development) work.

The speaker discusses the company's plans to invest in CRAD and gather input from businesses to differentiate their solutions and solve customer problems. A question is then asked about the potential recovery of $200 million if Section 174 is overturned, and the speaker confirms the possibility and the positive impact it would have on the company's finances. The call concludes with closing remarks and the operator thanking participants for their interest.

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