Q4 2024 Earnings Call Transcript

Greetings. Welcome to Leidos Fourth Quarter Fiscal Year 2024 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. At this time, I will 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 fourth quarter and fiscal year 2024 earnings conference call. Joining me today are Tom Bell, our CEO; and Chris Cage, our CFO. 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're using today.

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, does include 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, will discuss GAAP and non-GAAP financial measures.

A reconciliation between the 2 is included in today's press release and presentation slides. With that, let me turn the call over to Tom Bell, who will begin on Slide 4.

Thank you, Stuart, and good morning, everyone. I'm happy you could join us to discuss another outstanding quarter for Leidos, capping off a very strong year, delivering 2024 results above the high end of our prior guidance. Leidos' excellent recent performance also allowed us to reach and exceed the 3-year performance targets we set out at our Investor Day in 2021. I'm very pleased we were able to over deliver on those cumulative commitments. Against the target set then, we delivered an organic revenue growth CAGR of 6.6% and well above our goal.

We delivered adjusted EBITDA margin for 2024 of 12.9%, 240 basis points above our goal. And we drove free cash flow conversion of 100% exactly on our commitment. This delivered cumulative operating cash flow to our target of $3.5 billion. Our excellent multiyear performance enabled us to take our gross debt leverage ratio down from 3.4x to 2.2x today.

And now our strong balance sheet and core financial engine give us the financial flexibility to deploy capital to support tangible growth initiatives and drive brilliant shareholder value. All on this call will be aware that since 12 November, our stock has traded down about 25%. As a result, we repurchased an additional $400 million worth of shares in the fourth quarter. That brought our open market repurchases for 2024 to $850 million, significantly exceeding our initial commitment.

As always, I want to thank each of our 48,000 Leidosians who bring our bold vision for Leidos to life every day. Their passion for our customers' mission, their fortitude, resilience and ingenuity enable us to deliver exceptional value to our shareholders even in the most dynamic of environments. Turning to Slide 5. In addition to delivering exceptional performance last year, 2024 was a year of deep strategic thinking. We're calling our new growth strategy, North Star 2030. North Star 2030 keys on a specific group of growth pillars, where we know customer needs are growing, market profitability is robust and Leidos differentiation is evident and accelerating.

We'll fully unpack our North Star 2030 strategy for you at our upcoming Investors Day. But undertaking this strategy effort last year is proving to have been timed perfectly. I mentioned all this now because a natural question today might be, how does North Star 2030 hold up to the priorities of this new administration? And the answer is incredibly well.

You'll recall that our strategy process last year was grounded in a 10-year future-backed Leidos proprietary hypothesis of the future. That work detailed macro domestic and geopolitical mega trends that we predicted would occur over the next decade. Now we see those mega trends coming through at pace. And therefore, we are even more confident our growth pillars position us for success today and in the future because they are all grounded in one unifying theme.

Leidos exists to make our customers' outcomes smarter and more efficient. Everything we do for every one of our customers is linked to that statement. We were created to leverage innovation for our customers to meet the immense and enduring national security challenges faced by America and its allies, from protecting the Homeland to deterring and winning battles abroad, and driving government efficiency is fundamental to everything we do. And of course, that's what's needed to expand America's economic strength.

All that is what we are all about. And that's exactly what our new administration is all about, too. Therefore, we view the new administration's priorities as an opportunity for Leidos. Over the past months, the administration and the Department of Government Efficiency have begun to unveil an agenda to transform government operations and ensure taxpayer dollars are invested more wisely.

This has given us increased confidence in our strategy. The new administration has signaled a focus on eliminating regulations, streamlining procurement and moving to more outcome-based contracting, all of which are exactly in line with the mission and work of Leidos to make government smarter and more efficient. 3 current focus areas are right in our wheelhouse: IT modernization, transformational war fighting capability and increased privatization. First, the new administration has said that IT modernization is low-hanging fruit for government efficiency. We totally agree.

The federal government's ability to reduce costs, bridge outdated [ and desperate ] data silos and facilitate the adoption of enabling technologies like trusted mission hinges on having modern, adaptable IT systems. As the leading provider of IT software solutions for the federal government, we have a proven track record of modernizing and simplifying our customers' complex IT environments, while integrated trust [ and mission ] AI and robust cybersecurity. This allows agencies to achieve their mission objectives smarter, faster and cheaper. For example, the disability case processing system we built for the Social Security Administration has improved processing time of disability claims by over 90%, reducing backlog by over 50% and increasing the accuracy of benefit calculations by 20%.

Leidos is delivering significant cost savings to the SSA through these customer efficiency enhancements and proven anti-fraud tools. In addition, just last year, we also transformed the SSA's National 1-800 number. In just 48 days, we reduced wait times by almost 75% for over 80 million callers each year. The administration's focus on IT modernization also affords us a great refreshed opportunity to accelerate adoption of our existing Defense Enclave Services program.

To date, we've successfully transitioned only 3 defense agency and field activities, or [ DAFAS ], and their 32,000 users, each on time and on budget. As a result, those DoD offices now enjoy better user experiences and better service delivery. But even more importantly, they are now operating seamlessly within a single robust fiber secure, efficient integrated DoD IT system. But there are 11 [ DAFAS ] and nearly 330,000 additional users originally envisioned to be served by this program that are yet to be migrated.

We look forward to helping our new Secretary of Defense greatly enhance user efficiency, hardened IT assets and reduce costs by completing the remaining migrations to DISA's standardized, unified and secured IT network. In turn, this will enable DoD reinvestment of real savings into critical war-fighting capabilities. So speaking of critical war-fighting capabilities; secondly, administration leadership has indicated that the Pentagon's top line budget should focus on the right kind of programs with increased investments in cost-effective and high-performance systems. In anticipation of these demands, we have positioned ourselves as a positive disruptor, rapidly transforming invative ideas into market-ready solutions essential for next-generation war-fighting capabilities.

For example, we lead the way in maritime autonomy. We recently developed an unmanned undersea multi-mission vessel in less than 18 months. With a price that is, to the best of our knowledge, significantly lower than all comparable offerings. This success has enabled the Navy to expand our program size and scope, allowing us to enhance underwater ISR capabilities and develop multisensor UUVs and other unmanned platforms.

We also designed and deployed a small unmanned surface vehicle called Archer. Archer is equipped with a modular mission bay designed for anything, contested logistics, ISR or weaponry. And we did all that in less than 9 months. Archer provides the U.S. and our allies with immediate access to flexible, advanced maritime designs with proven long endurance robust autonomous capabilities.

Additionally, we're developing a new class of small cruise missiles, advancing from concept to successful demonstration flights in under 2 years. And we're achieving dramatic cost savings for this critical capability through a modular design, featuring open architecture that incorporates the best most affordable subsystems and technologies using digital twin philosophies and AI optimization. These groundbreaking developments highlight our defense system team's focus on delivering affordable mass war-fighting capabilities with unmatched speed efficiency and efficacy, which the DoD needs today to prevail across the increasingly complex and contested domains.

Third, leaders are calling for expanded public-private partnerships for essential citizen services to create more efficient and effective outcomes. We have deep expertise and success here, too. For instance, for decades, we've partnered with the Veterans Administration to transform the delivery of health care to our nation's deserving veterans. With our proprietary capabilities to anticipate demand and our ability to innovate at scale, we have established the largest, most flexible network of first-class medical and mobile clinics.

This has allowed us to increase veteran throughput by more than 300% and have the average exam time line. And we've delivered all this efficiency while consistently exceeding VA targets for both timeliness and critically quality of care. As part of this, we're very proud to deliver excellent care coordination for homebound veterans and those in remote locations, bringing first-class care to where the veteran is across all 50 states. These capabilities magnify Leidos' differentiation and recognition as a top managed health services provider for our federal customers.

But our VA work is just one of many examples of successful privatization. Another case study of our success in public-private partnerships is the future flight services program for the FAA. Through this program, we provide critical services to general aviation pilots. By providing this service, we've saved the Federal Aviation Administration more than $2 billion. by significantly modernizing underlying technology, all while maintaining at or above 99.9% system availability. 2025 will be an exciting year as we implement our new North Star 2030 strategy, and we're already seeing great traction in our robust growth ambitions.

In the fourth quarter of 2024, we had net bookings of $7.6 billion, delivering a book-to-bill ratio of 1.7, our highest ever for a December quarter. And 2024 overall was our best growth year since 2020, with an overall book ratio of 1.4 and a year-over-year backlog growth of 18%. I'm very proud of the quality of our backlog achieved through many significant wins, all aligned to durable markets and critical customer missions, which in turn, enjoy bipartisan political support. Let me walk through a few key awards in the quarter.

First, the VA has awarded us a 2-year multibillion-dollar award for medical disability examinations. This award underscores our ongoing ability to deliver excellence for the VA and our nation's veterans. And it aligns with the financial expectations we outlined to you on our last earnings call. Second, we won a $2.6 billion follow-on for our integrated logistics software work for the Transportation Security Administration.

This 8-year award comes with significant increases to our contract size and scope and continues to position us very well with the new administration's determined focus on homeland security. Third, we received a $4.1 billion sole-source IDIQ for our IFPC Enduring Shield Air Defense System. So far, we've only booked on task order under this IDIQ to provide systems for the defense of Guam. But this IDIQ provides us and our customer all the top line room they need to ramp up production of this critical capability for years to come.

And fourth, we secured a $670 million task order to advance our nation's long-range hypersonic weapon, specifically, our development and production of the common hypersonic glide body and its thermal protection system. So in summary, 2024 was a great year for Leidos. But all that success is just prologue for our exciting future. Enabling disruptive progress is core to our work of making all our customers' outcomes smarter and more efficient.

Pure American entrepreneurial spirit was forged at our founding and is alive and growing here today at Leidos. Our passion is to look at problems differently and seek innovative solutions and outstanding customer results. And this drive and culture serve us incredibly well in today's environment. Our new administration is moving quickly with its efficiency agenda, and Leidos is positioned to be a major contributor to the success of that agenda.

Building on the bold vision of our North Star 2030 strategy and in light of the new administration's priorities and the core competencies I've outlined, we've developed a set of fast-paced initiatives in the spirit of those to make our customers' outcomes smarter and more efficient. And over the next 90 days, we will continue executing a purposeful campaign we've already begun to work with our customers, administration officials and elected representatives on these initiatives for a smarter, more efficient U.S. government now. Now is the time for us to act with pace in this new landscape. We are exceptionally well placed to be a critical part of the solution.

And so seizing this opportunity remains our top corporate priority. As a result, we look forward to holding our Investor Day this summer. I'm super excited about our proven track record of performance in dynamic environments. Our strong foundation for executing a successful 2025 and beyond, our bold vision for Leidos and our North Star 2030 strategy and our outstanding outlook.

With that, I'm going to pass the call over to Chris to walk through our 2024 results and give you our enhanced financial outlook for 2025. Chris?

Thanks, Tom, and good morning, everyone. I'd like to echo Tom's remarks on the remarkable journey we've been on. This team has rallied to over deliver at every turn this quarter, this year and over the past 3 years. These accomplishments are rooted in a meaningful cultural transformation in how we manage and operate our business, which enabled us to deliver outstanding results while building a path to a better future.

We delivered industry-leading margins, and we invested to strengthen internal functions, enhanced technical capabilities, doubled down on business development and reward our employees. Now let me walk you through our financial performance for the fourth quarter and full year. Please turn to Slide 6. Revenue for the quarter was nearly $4.37 billion, for a robust organic growth rate of 9.7%. Although the quarter did include an extra week as part of the normal periodic true-up of our 4-4-5 financial calendar.

For the year, total revenue grew 7.9% to $16.66 billion or $212 million above the high end of our prior guidance range. Adjusted EBITDA was $508 million for the fourth quarter and adjusted EBITDA margin of 11.6% was up 20 basis points year-over-year. The fourth quarter margin includes the cost of enhancing some of our employee benefits in light of our strong performance, which rippled through the segment margins as well. On a full year basis, adjusted EBITDA was $2.15 billion, and adjusted EBITDA margin increased 210 basis points to 12.9%, putting us right at the upper end of the high 12% guide from last call.

Our margins have benefited from a fundamental shift in our portfolio. Currently, 43% of our portfolio is fixed price, up from 39% in 2023. As Tom touched on, we view the move to more outcome-based procurement as a continued area of opportunity for Leidos. Non-GAAP net income was $316 million for the quarter and $1.4 billion for the year, which generated non-GAAP diluted EPS of $2.37 and $10.21, respectively. For the year, non-GAAP diluted EPS was up an impressive 40%, almost $3 above 2023 and $0.21 above the high end of our prior guidance range.

The primary driver of the robust EPS growth in 2024, the best in our history, was consistently strong EBITDA generation. Growth was propelled further by our capital deployment as lower share count and interest expense more than offset a slightly higher tax rate. Turning now to an overview of our segment results and key drivers. In the interest of time, I'll focus on the quarterly figures on Slide 7. The full year comparisons are shown on Slide 8. National Security and digital revenue growth accelerated to 5.5%, and spurred by strong business development results in the last 2 quarters.

Segment operating income margin slipped a bit to 9.7%, with normal variations in profitability across multiple fixed price programs. Still, margin of 10.2% for the year was above initial expectations, and we look for profitability to continue to increase through repeatable offerings and higher-margin growth pillars. Health and Civil revenues and profitability remained strong. Revenues were up 16.4% from the prior year quarter, and non-GAAP operating margin was 21.6%.

These results were driven by high demand in our managed health services as well as excellent program execution across the portfolio. With the VBA MD recompete in hand, we remain confident in our ability to win our fair share by continuing to bring innovative solutions to the VA to more efficiently serve our veterans. Commercial and international revenues increased [ 12.3% ] year-over-year with growth across all business areas. Non-GAAP operating margin for the quarter was 7.9%, down 80 basis points from the prior year quarter due to a product mix within SES and increased investments in growth.

Building off this strong top line finish and sunsetting the challenges faced this year in the U.K., we fully expect margins to improve and stabilize going forward. Lastly, Defense Systems revenues increased 6.7%, spurred by this year's wins like [ Tiago and Whitefield ] Tranche 2 as well as additional production on our IFPC Enduring Shield program. Segment non-GAAP operating margin was 3.5%, which included a $21 million write-off associated with an airborne surveillance asset and investments in our proliferated low-earth orbit space architecture. So a short-term pause on the margin momentum built in the second and third quarters, we believe this provides a cleaner and more focused foundation as we enter 2025. Turning now to cash flow and the balance sheet on Slide 9. Operating cash flow for the quarter was $299 million.

DSO for the quarter was 59 days, in line with the third quarter of 2024. For the year, operating cash flow was $1.39 billion, $42 million above our prior guidance. Netting out capital expenditures, free cash flow was $213 million in the quarter and $1.24 billion for the year, which was up 30% compared to 2023. In the fourth quarter, we repurchased $406 million worth of shares and paid $53 million in dividends. As Tom mentioned, we significantly exceeded our $500 million annual share repurchase commitment, keeping our promise to deploy capital in a shareholder-friendly manner. As of quarter end, we had $943 million in cash and cash equivalents, $4.7 billion in debt and a leverage ratio of 2.2x gross debt-to-adjusted EBITDA.

Our healthy balance sheet and financial performance led S&P to enhance our investment-grade rating to BBB flat and Moody's to change their outlook to positive with the potential to upgrade to Baa1 within the next 12 months. These moves strengthen our position as we prepare for the maturation of a $500 million bond this May. We are still weighing our options but given our below target leverage, our current intention is to refinance this debt. Now on to the forward outlook on Slide 10. Coming off a record breaking 2024, we're even more confident in our market positioning and pathways for profitable growth.

Recent wins create a strong growth footing, and our pipeline is robust. We submitted $8.3 billion of proposals in the quarter and have $25.6 billion of bids awaiting adjudication. With broad-based momentum building, we are confident in our ability to navigate any macro uncertainties from a position of strength. Getting to the specifics.

For 2025, we expect revenues between $16.9 million and $17.3 billion, reflecting growth of up to 4% over fiscal year 2024, consistent with our prior messaging of low single-digit growth, but off of a much higher 2024 baseline. Our guidance accounts for the ongoing continuing resolution and a continued pivot away from low-margin work. We anticipate fairly balanced revenue growth across the segments. We're guiding 2025 adjusted EBITDA margin in the mid- to high 12% range, stronger than our prior expectations.

We remain committed to margin expansion over the long term and see potential for higher profitability in all of our segments over time. We're guiding non-GAAP diluted EPS between $10.35 and $10.75, which assumes an effective tax rate of 23.5% to 24%. And share repurchase activity, roughly consistent with last year. In terms of cash, we expect operating cash flow of approximately $1.45 billion, from a free cash flow perspective, we're targeting capital expenditures of approximately $230 million or about 1.3% of revenues.

This generation provides plenty of capital to allocate while also funding growth investments. With that, operator, we're ready for questions.

[Operator Instructions] The first question coming from the line of Matt Akers with Wells Fargo.

One thing that came up on a couple of the other conference calls this quarter, maybe some of the disruption around the new administration, some of the DOGE efforts. I think there was a period where they could sort of try to pause federal spending is [ probably ] a couple of weeks ago. Just curious if you saw any disruption, I guess, kind of in Q1 so far? And if so, if that's kind of behind us or you're still keeping an eye on that.

Thanks for the question, Matt. Good to hear your voice. The short answer is not really. There's been some, let's call it, disturbances in the force perturbations, customers that are obviously, trying to understand the environment themselves.

And that caused some day long, 2-day long pauses in contracting vehicles, but then that picked right back up. So we think our customers are adapting to the current environment. They're figuring themselves out and they're proceeding at pace.

Matt, the only thing I'd add is that we did take the opportunity to carefully evaluate our portfolio and come up with a playbook should those disruptions last longer, as Tom mentioned, we haven't seen that, but we stand ready to maneuver in this environment adroitly.

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

So my question is about a focus on border security and the IRON DOME, you guys have like capabilities across the board from like screening solutions to like counter UAS or like air defense systems? Like how do you see that playing out and where Leidos can actually have an opportunity from this, like this project?

Thanks, Mariana. Yes, both that you mentioned are, again, right in our wheelhouse and in fact, just yesterday afternoon, I was up on Capitol Hill working one of them. I won't tell you which one. But both of them are areas where we've prepared some big ideas that we have been putting forward to the administration and to the senior stakeholders.

As you say, IRON DOME and the executive order on IRON DOME play to everything we do. All the capabilities that are requested in IRON DOME for America from space surveillance and understanding to counter effects for incoming cruise missiles and hypersonic weapons is right in our wheelhouse of what we do. So that's one of the reasons we are really focused on it because the Space Development Agency has asked for RFI responses within 30 days, and our team is laser-focused on answering that mail with compelling, really adroit, to use Chris' word, again, opportunities to satisfy that need quickly and affordably for our customers.

On border security, obviously, border security is a huge area of focus for this administration, and it plays again right to our wheelhouse from the equipment at airports to the equipment on borders and the equipment necessary to see low altitude UAVs coming across borders. Everything I just spoke of is, again, right in Leidos' wheelhouse. So again, another reason we're so optimistic that this environment and this administration's priorities present tremendous opportunities for Leidos growth in the future. We're focused on seeding that field with our ideas, the ideas we've had for a long time for better, faster, cheaper solutions to these customer challenges.

And we're finding now in this environment, a very, very receptive set of stakeholders who want to hear from us and are eager to advance that conversation at pace. So very exciting times, indeed.

Our next question coming from the line Sheila Kahyaoglu with Jefferies.

[ Tom and Chris ], just lots of focus on profitable growth. A lot of that is driven by your Health segment and the fixed price exposure there, which is fairly high. Maybe can you talk about VBA since you've tackled those head on. The VBA recompete was awarded earlier this year.

How we think about that next phase of the program, both the top line and bottom line contribution and what the additional provider if it changes the outlook at all?

Thanks, Sheila. Yes, we're very excited to have booked that substantial award for the continuation of our work there. And as I said in my prepared comments, the award we received gives us the confidence we can liquidate that up that order profitably in line with what we held out to you last quarter. Yes, there is a new entrant into a few of those regions.

That's a participant we dealt with in one of the regions already. Obviously, we're looking forward to our scope, our scale, our technology to continue to allow us to have the volume and the profitability of that business that has satisfied our customers to date. And so over time, we'll have to adjust to a playing field that changes. But for 2025 and 2026, we feel very confident in our ability to execute that program along the lines that we have held out.

I will say, though, this North Star 2030 and its growth pillars, don't just rely on our growing our medical exam business. The growth pillars, as I said in my prepared remarks are all about where we know strong customer demand is growing Robust profitability exists and Leidos differentiation is evident and accelerating. Those are the 3 things that we picked our growth pillars for. Those are the areas in Leidos we're now investing differentially in because we know that's going to bring us differential top line and bottom line results across a wider suite of capabilities within Leidos.

And so we're very excited about North Star 2030, its growth pillars, broadening the number of programs that are high top line growth and bottom line growth in very excited about that. Chris, anything you'd like to add?

Yes. I mean, Sheila, obviously, the teams have been building towards this recompete for some time, and we've been innovating and investing to drive efficiencies into our process. So we won a competitive position. As Tom mentioned, another new entrant, that's fine because the demand signal is very robust.

And this has always been a game around who can deliver outcomes timely with high quality and stand ready to take on increased capacity, and that's where Leidos has been positioned. So team has done excellent work there, and we're already looking ahead a couple of years down the road to make sure we're a step ahead for the follow-on. Inevitably, in this business, there's always a follow-on. So you always got to continue to prepare for that. but for this year, it gives us a great platform to continue the momentum that you've seen out of the health business, and that's our expectation.

Our next question coming from the line of Gautam Khanna with TD Cowen.

You guys obviously guided 2025 and have a longer-term view as well with the North Star road map. I was wondering if you could opine directionally on bookings this year and maybe the growth reacceleration in '26 and beyond? Where do you think we end up kind of mean reverting back to you given the strong performance last year creates a tough compare for this year, but kind of more regularly looking at beyond '25 organic growth and however else you want to take it?

Thanks, Gautam. And good to hear your voice, and pleasure to meet you. Thanks for initiating coverage of us. Let's see.

Obviously, we're very proud of the December quarter, we printed a 1.7 book-to-bill ratio. [ And ] typically the weakest quarter gives us tremendous [ wind ] in our sales coming into 2025 and 2026. And the 1.4 on the whole year, our best year since 2020, again, gives us great confidence. The business development team at Leidos has been fundamentally retooled. We have a new approach to how we are pursuing market opportunities and positioning Leidos for [ win ]. That includes technologies like AI in our proposal activities.

And so we're deploying AI internally and externally to have better outcomes. And I think that's what you're seeing. So while our Chief Growth Officer, will be retiring in a couple of months, and we thank him for helping us win back our hotspot in this area. We're going to be not missing a beat and continuing to improve our performance.

Now obviously, right now, we're dealing with a continuing resolution. So any time you have a continuing resolution situation, that suppresses the amount of orders we see coming out immediately. But we're very hopeful that as the reconciliation package and the budget package moves its way through the administration and the Congress that this year will normalize and new orders will start to come in, and we're very excited about the future. The key to our longer-term top line and bottom line growth is the quality of these wins that I articulated. 2024 has a bunch of programs with very long legs and very long opportunities for single-award IDIQs to have new task orders for many years to come.

And so it's not just winning awards. It's also then on contract growth. Another area where we and Leidos have been investing in our expertise at unlocking on-contract growth within program officers. Chris, anything you'd like to add?

I would -- obviously, you're trying to get at the heart of the matter, what, and looking ahead to our Investor Day, and we feel the story will be compelling. And those financial expectations are set. We've spent time building that up. And you can believe that we see the pace of activity accelerating as it relates to our growth.

And when we have an opportunity to sit down with you all and go through that, I think you'll see our momentum that Tom just talked about on business development, coupled with our ample capacity from a cash generation and quality balance sheet perspective, we are very well positioned to build significant momentum over the next 4 years.

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

You discussed several positive wins for the Dynetics Leidos business with IFPC Enduring Shield and common hypersonic glide body, I was wondering what is taking place with MACH-TB 2.0, Kratos put out an announcement, and they listed you as a teammate. And I was wondering, did you transition from being the prime on that program to a subcontractor?

Yes. On MACH-TB 2.0, we're sub to Kratos and happy to do that. And yes, you're right. We were prime on 1.0. But there's ceiling available still to us on 1.0. And so we're not letting go of our opportunity to serve our customer there.

And there's significant role work share that exists for us as a sub to Kratos on 2.0. So we know Kratos very well. We like working with them, and we feel this relationship will help us advance this capability for our nation at pace and in the end, that's what it's all about.

Great. And on your April earnings call, you indicated that you secured a multibillion-dollar classified takeaway that was under protest. Can you update the investors on the call on like the amount of awards that are under protest. And was this specific contract put into backlog over the past 2 quarters?

So the answer is we prefer not to indicate how much is under protest because talking about protests isn't our jam. But the answer to your second question is no, we don't put contracts under protest in our backlog. Those are still waiting in abeyance.

Okay. So that particular contract still hasn't been adjudicated?

Correct.

Okay. And one last one, if I may, for your Enduring Shield IFPC system, it's obviously gaining traction, is that system viable to be deployed domestically and then it seems that it's meant for cruise missiles and counter drones, but do you think that there's market for that domestically? Or is it better suited overseas? And if it's not viable domestically, what products in your portfolio could fit into the iron dome initiative.

I know that you provide the sensors for the proliferated warfare space architecture. So that is definitely suited, but what else could be applicable.

Yes. Thanks for that, Louie. So the answer is, of course, it can be deployed along any border that you are worried about, cruise missiles or unmanned vehicles being a threat. So domestically, internationally, any countries, borders. And yes, that is a big part of our IRON DOME value proposition to our customers. Thanks, Louie.

Our next question coming from the line of Colin Canfield with Cantor Fitzgerald.

It's great to be back. Can you level set us on what you're assuming for FY '26 budget request? [ The investment ] DC that we're getting is that -- it looks like 10% nominal is probably a good base case. With [ task leadership looking up ] for [ $200 billion ] year-on-year increase. So maybe talk us through kind of what you're expecting in terms of top line for FY '26 request and how you think about that flowing through to your programs?

Thank you, Colin, and welcome back. I appreciate you reinitiating guidance on us. The answer is I don't expect anything at this point. And I know that sounds a little bit cavalier, but we're in a world where there are many different agendas moving and exactly where the DoD budget ends up is one of those factors.

I think there is bipartisan support that the world isn't getting to be a safer place, and that the defense budget needs to go up. But we're focused not only on what top line growth that gives us in new opportunities, but also helping unlock savings in the rest of the defense budget portfolio. I mentioned in my prepared remarks, the Defense Enclave Services opportunity to not only make these [ DAFAS ] more cybersecure and more resilient, better user experience, but unlock tremendous savings for the new Secretary of Defense to deploy for growth in weapons that are the pointy end of the spear. And so we're focused not only on the top line and what it will be for '26, '27, but we're also focused on unlocking savings that can be reinvested by the new Secretary of Defense and this administration in that future to augment whatever top line growth they get.

We'll know more about what exactly we expect in '26 and '27 in 6 months or so. But obviously, between now and then, we're focused on our growth pillars. We know that those growth pillars are independent of specific top line growth because they are enduring existing customer demand that we know is growing over time. So we feel very good about the strategy we've laid out to grow in '25, '26, '27 and '28.

I want to keep it to one, but just picking on that FY '26, '27 comment, are you suggesting that the proposal is going to be a 2-year budget deal like we've seen in the past?

There are people on Capitol Hill that are talking about that, but I'm not basing my expectations that, that will come to pass. We'll see.

And our next question coming from the line of Gavin Parsons with UBS.

In terms of the long-term kind of EBITDA and cash flow outlook when the VBA contract transitions to its next generation will you be able to still grow EBITDA and free cash flow through that contract transition?

Gavin, Chris here. So absolutely. But as Tom talked about, I mean, we're already building momentum in other areas to complement what happens with VBA. And that mission is not going away, but we imagine that there'll be an opportunity to continue to innovate there to drive more efficiency and automation through the whole delivery chain.

But absolutely, our expectations will be growing EBITDA over the time horizon as we've been alluding to. We'll give you our point of view through 2028 on where we see the business going. But the growth pillars are robust, and there are plenty of other areas that will build momentum in the health and civil business along with our other segments.

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

I have a question on the guide. In 2024, you did $10.21 in EPS. And if my math is correct, I think you had a $0.20 impact from the 2Q charge, the U.K. business and roughly an $0.11 impact from the asset write-down this quarter. So if I add those back, the guidance implies almost no underlying EPS growth.

I'm just kind of wondering, is that conservatism based on the change in administration? Or any sort of color you can provide?

Scott, thanks for that. And you're right. Of course, we don't expect some of those things to repeat. Of course, running a business of this size and complexity, you always have to allow for the fact that there's things in the portfolio you have to manage through.

I would say that as the year unfolds, we want to give ourselves the opportunity to invest in the pivot year for the future while delivering great performance. And if that allows an opportunity to increase those expectations over time, we will. I mean I think the other thing I'd point you to, we trailed the debt that we do expect that [ we'll ] be refinancing the interest rate environment is a little bit higher. So we'll see a small headwind on interest and taxes that factor into the EPS guide as well.

But yes, so I think you sluiced it out. The only other thing I'd add, we had an excellent year on EACs on balance, aside from those 2 larger things that you pointed out. And the goal of the team is to continue to do that, but there's always variability in the portfolio you have to allow for.

Okay. And then, Tom, you mentioned that the new administration wants to increase privatization. So although a new competitor has been added to the VBA contract in some of your regions, do you think that, that increased competition could be offset by a greater share of exams being outsourced?

Well, that will be up to the new administration and the new cabinet level appointees and agency, the people running the agencies. What we're focused on is making sure we maintain and grow our market penetration by providing excellent service to veterans, allowing us to have availability for more veterans faster and cheaper. And we're excited about that. If opportunities present themselves for increased privatization in any of our markets, we will be there very eager to help our customers think that through.

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

I wanted to ask about the growth pillars you think about for North Star 2030, Tom, and how you -- the extent to which you think about the challenge of getting not just growth but profitable growth when you've got some new competitors coming into the space with very low cost of capital that are evaluated primarily on their ability to deliver very fast growth and kind of the extent to which you're thinking at all or how you're thinking about the challenge that poses to delivering profitable growth.

Yes. Thanks, Seth. We certainly are aware of these new entrants into the marketplace, and we welcome them. And in fact, we work with them in many occasions.

So we see them as part of the ecosystem that we're eager to work with to deploy better, faster, cheaper solutions for our customers. That being said, our growth pillars, again, are all founded on areas we know we have differentiated capability and we know we can accelerate away from the pack. So we are looking at growth pillars where we know we have something others don't. And yes, others might have low cost of capital and ability to build it over time, but we have these capabilities now.

And so we're very focused in our growth pillars around those markets and those customer needs and those areas where we know we have a differentiated capability, and we're very excited about our ability to accelerate away from the pack in those areas. So not overly concerned and at the same time, looking for us to deploy our unique brand of partnership. We're always open to partners. We've always been open to partners, and we'll remain open for partners as we try to solve our customers' problem in different ways.

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

This is Josh Korn on for David. I wanted to ask you, you mentioned earlier a pivot away from low-margin work next year. I just wanted to dig in a little bit on what exactly does that mean? And are there implications for mix by contract type? What sort of work does that involve?

Yes. Thanks for the question, Josh. And yes, the corollary to our growth pillars is areas where we're going to deemphasize in the portfolio. We're not turning and walking away from any business we have today.

Because of our robust financial results, we've been able to print inside Leidos, we have the ability to continue to invest in all areas of the business while we overinvest in these growth pillars that I've mentioned. That being said, we're also looking at areas where we're not going to continue to invest and over time, allow to attrit. Nothing -- no knee jerks here, nothing, no student body left kind of moves. Over time, we'll simply leave that work for other people on recompetes.

And so look for a gentle, purposeful approach to investing in the growth areas. Continuing to invest in areas we know where we can grow as we always have, and then deemphasizing some of these areas that are low-margin work and really not something that our customer rewards our innovation, our technology and our ability to make their outcomes smarter and more efficient. So that's the long-term playbook over the next 3 years.

Yes, Josh, you can think of things like infrastructure support services, big O&M jobs, things like that. If we're not technically differentiated, you'll see us shift our focus, as Tom mentioned, to the things where there are better opportunities for Leidos. And the pipeline there, it remains very robust.

And better top line and bottom line growth.

Our next question coming from the line of Peter Arment with Baird.

Tom, Chris, nice results.

Thank you.

Tom, just to circle back kind of on this whole cost plus versus fixed price and was mentioned earlier, I think Chris mentioned 43% of Leidos is now a fixed price, but a large percentage of that is in health and civil. How do you think about when you look at your other national security segments and defense about opportunities to grow your fixed price mix there just given the environment of those.

Well, we are always open to and eager for outcome-based contracting, whether that's fixed price or whether that's privatization, whether that's paying for a service at a fixed rate. There's different tunes you can play within that song. But we're -- I'm eager to grow that. I think we excel at that today.

I think we've got a demonstrated track record of providing dramatic cost reductions for our customers and great profitability and revenue growth for our shareholders. And so the Leidos team is all about that. That's because we can unlock technology. When we own the outcomes, we own the inputs and the technologies that we can deploy into these areas that allow us to differentially serve our customers and have better results for them.

And so we're very excited about it and leaning into it. DOGE, the administration I'm very happy that the conversations have begun around increased privatizations and increased opportunities for outcome-based contracting because I think that's an area that Leidos can excel.

Yes, we've seen some of it, Peter, in the defense space, less than we'd like. But in our digital modernization business, for example, cost per user or a cost per person on the network, And of course, some of the things we talked about in our defense systems area in support of IRON DOME and some of those opportunities will ultimately be a fixed price production outcome. So again, we're up for it. We invested robustly in our program execution capabilities.

And so this is a direction that we want to be on.

There are no further questions in the queue. This concludes our question-and-answer session. I would now like to turn the conference back to Stuart Davis for any closing remarks.

Thank you, operator, for your assistance on today's call, and thank you all for your time and 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. You may now disconnect.