Title

Presentation

Leidos Holdings, Inc. beats earnings expectations. Reported EPS is $2.97, expectations were $2.47.

Operator: Greetings. Welcome to Leidos First Quarter 2025 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. At this time, I will turn the conference over to Stuart Davis from Investor Relations. Stuart, you may begin.

Stuart Davis: Thank you and good morning, everyone. I’d like to welcome you to our first quarter fiscal year 2025 earnings conference call. Joining me today are Tom Bell, our CEO; and Chris Cage, our Chief Financial Officer. Today’s call is being webcast on the Investor Relations portion of our website, where you’ll also find the earnings release and supplemental financial presentation slides that we will 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 will turn the call over to Tom Bell, who will begin on Slide 4.

Tom Bell: Thank you Stuart. And thank you all for joining us. Today I am pleased to report a strong Q1 for Leidos once again delivering above plan revenue, EBITDA, and EPS. In this excellent quarter for Leidos, our organic revenue increased 7% year-over-year, adjusted EBITDA margins improved again to 14.2%, and non-GAAP diluted earnings per share rose 30%. This strong start to 2025 builds on the significant momentum we have built for our business during 2024. And we continue to push forward with optimism in our outlook. We are uniquely positioned in this environment to solve our customers most vexing challenges by continuing to leverage our investments in and the application of cutting edge technology. At the same time as discussed on previous calls, 2025 was always envisioned to be a pivot year for us as we lock in the gains from our hugely successful 2024, invest in further new business momentum based on our new NorthStar 2030 strategy, and actively get after the priorities of our nation’s new administration.

Given all this, I’m pleased to also announce on this call that we are reaffirming our full year 2025 guidance at this time. Since undertaking our year of deep strategic thinking last year, evidence is everywhere that the future we predicted is racing toward us at pace. It manifests itself in the geopolitics we see around us and the challenges our customers are expressing to us and in the administration’s rapid actions. So we’re excited to be playing offense in 2025. Now in full implementation mode on our NorthStar 2030 strategy and leaning into the robust opportunities this environment is presenting. So let me share with you at a high level our NorthStar 2030 strategy, it’s growth pillars, and their alignment to the new administration’s priorities.

Last year we introduced the Leidos brand promise making smart smarter. That brand promise summarizes in three short words the fact that everything we do, the core of our business model is making customer outcomes smarter and more efficient. That’s why we exist and that’s why we can confidently assert that Leidos is the digital mission and solutions leader serving customers with smarter, more efficient innovations. Under that in tablature our NorthStar 2030 strategy is supported by five growth pillars as shown on Slide 5. First, space and maritime where we will be building off the franchises we have today and further programs in development to provide commercially based, rapidly integrated disruptive hardware products in these two select critical domains to the U.S. military.

Second, energy infrastructure. In this growth pillar we will continue to scale our electrical utility business within Leidos serving commercial customers nationwide making our nations electrical grid more resilient and more secure. And we do this through our core design, engineering, IT and cyber capabilities further enabled by cutting edge Leidos AI tools. Third, digital modernization and cyber. Here we will continue to leverage proprietary innovative technologies to build repeatable offerings at scale to make our customers IT infrastructure more efficient, effective, and secure. Fourth, highly customized critical mission software. Here we turn our deep understanding of our customer’s mission to translate vast amounts of customer data into actionable information.

And we do this through best in class AI deployment, cost integration, commercial development, and productionized software offerings. And fifth, managed health services. In this growth pillar we will use our successful medical examination expertise, our existing infrastructure, and our robust provider network to expand our health business to serve new populations and offer additional related services. These growth pillars have been carefully chosen as our analysis shows clearly that they are areas where customer needs and spending will continue to grow robustly, Leidos has a proven ability to perform cutting edge profitable work and Leidos has clear differentiated technical capabilities that can be actively advanced. Our growth pillars are also squarely aligned with the priorities of our new administration and we are sure they will remain national priorities well into the future.

Our confidence is evidenced by recent executive orders and announcements, like the EOs on the electrical grid and maritime dominance, as well as orders calling for the modernization of federal technology and software. The President and the VA Secretary having been very vocal in advocating for faster, more comprehensive healthcare services for veterans. This administration’s clear preference to work with firms that solve problems and get things done, not consultants that study problems and publish reports. This administration’s drive to make the federal outcomes smarter and more efficient through technology. And this administration’s desire for commercial terms focused on outcomes. In short, our administration is driving towards federal outcomes that are better, faster, cheaper, right in Leidos’s wheelhouse and synonymous with our core business model of making customer outcomes smarter and more efficient.

So we’re now actively advancing our NorthStar 2030 strategy, the right strategy at the right time. We are confident that our business, our strategic investments, and our go-to-market engine are all aligned with the needs and pace of our customers. You can see our conviction in how we’ve allocated capital so far in 2025. We’ve taken advantage of the current market conditions to significantly speed up our planned 2025 share buyback program by executing a $500 million accelerated share of a purchase agreement right out of the gate. This accomplishes the majority of our 2025 share buyback plans. And I’m very pleased to have signed a definitive agreement to acquire a leader in full spectrum cyber. Our first acquisition in two and a half years to accelerate one of our aforementioned NorthStar 2030 strategic growth pillars.

Cyber has long been a core competency for Leidos. With the largest cyber operation across the federal government, we see firsthand every day the complex destructive and coercive actions from nation-state threats, threats our customers defeat with our help. So with the cyber threat growing, customer needs becoming more complex, proven Leidos success in the cyber market, and our tangible ability to double down on technical differentiation, full spectrum cyber is a key piece of our five NorthStar 2030 growth pillars. We’ve also foreseen the cyber risk from AI adoption that creates even more vulnerabilities in attack surfaces for bad actors. Over the past five years, we’ve invested more than $75 million of our own R&D to develop patented technologies that change the cyber paradigm.

Our pending acquisition brings additional exquisite cyber capabilities to strengthen our cyber growth pillar. Their expertise in vulnerability research, reverse engineering, exploit development, and the converging cyber electronic warfare markets are squarely in line with our cyber strategy. Our acquisition is focused on the DOD and the intelligence communities with deep roots in DARPA as well. This delivers to us a unique additional active value added role in the cutting edge future of cyber security technologies for national security. Leidos will leverage this acquisition both directly for our customers and in support of enhanced, informed, and resilient defensive solutions across our own corporation. The acquisition will add to our deep pool of cyber talent and strengthen our competitive position in the $15 billion worth of pure cyber opportunities in our pipeline and even more across the related network and cloud pursuits.

As this is the first acquisition under my watch, I want to make it clear that when I do deploy capital in organically, this is precisely the kind of move you can expect us to make. Focused, technology risk rich companies in the wheelhouse of one of our five growth pillars poised for rapid integration into Leidos with a strong value unlock formula. Another very positive sign for our new NorthStar strategy is the administration’s willingness to collaborate with industry to drive better performance across government. I’ve sought out and secured more meetings with cabinet members and key administration executives in the last month than I was able to secure during the whole of the last administration. And we’re seeing significant receptivity in those meetings to big ideas we are bringing forward.

One of these big ideas is also one of the administration’s highest priorities, establishing our nation’s next generation air traffic control system. Air traffic management in the U.S. is highly fragmented with multiple outdated systems and technologies with an over-reliance on human intuition and intervention. We are deeply aligned with the FAA’s mission. For years, we have invested millions of dollars to develop and deploy both in the United States and overseas essential capabilities for achieving optimal cost-effective air traffic control outcomes. These investments are fueled by our comprehensive understanding of the complex environment, mission critical requirements, and innovation needs, putting us in a great position to help transform the performance and safety of the U.S. air travel for decades to come.

Additionally, our Defense Systems team is moving out quickly on one of the Pentagon’s top priorities, building a next-generation multi-layer mission defense shield or Golden Dome. From the moment that executive order was signed, we have been actively collaborating with key Golden Dome customers and stakeholders. With the administration’s attention on the significance of the space domain for Golden Dome, Leidos stands very well positioned to contribute meaningfully to this mission. Our space-based sensing and tracking capabilities are deployed and in production for low-earth orbit missions across all trenches of the FDA’s tracking layer. At the same time, we are working to expand our role within the broader proliferated warfighter space architecture.

Golden Dome also requires an underlayer to defend against land and surface launch threats, such as cruise missiles and swarming drones, which can originate from virtually anywhere and strike with limited response time. Notably, we already lead the rapid production and deployment of the Army’s latest air and missile defense capability, which plays a vital role in the defense of Guam [ph], a strategic stronghold essential for deterring threats in the Pacific. And we are already getting interest in potential deployments to defend the continental United States and key infrastructure and installations within the U.S. While we expect greater specificity regarding the Golden Dome opportunity to be outlined in the President’s 2026 budget request, early funding signals in both the space and underlayer domain are very encouraging.

And again, supportive of our growth pillar. So in summary, I’m thrilled to be out of the blocks with a strong set of Q1 results. We’re confirming our 2025 guidance. I’m excited to be in the execution mode on 2030 strategy, we are very well positioned as this administration drives its agenda of making government outcomes smarter and more efficient. I hope you all can feel the productive sense of urgency with which we’re approaching this exciting next chapter in our history. Today more than ever, our mission is compelling, our strategy is clear, and our opportunities are growing. With that, I will turn the call over to Chris to walk through our results for the first quarter and our outlook for fiscal year 2025. Chris?

Chris Cage: Thank you, Tom and thanks to everyone for joining us on the call today. Our impressive start to the year is the results of the resiliency and tenacity of our entire team. In the first quarter, we maintain the exceptional level of performance delivered in 2024, while navigating an intensified macro-environment. We work proactively with customers to bring forward innovative ideas and never took our eyes off execution. I think it is clear that the diversity of our portfolio relative to peers benefits us now more than ever, creating fruitful inroads to support a wide range of enduring missions and at the same time providing insulation from meaningful industry shifts. Execution was strong across the entire portfolio. Three of our segments delivered solid mid to high single-digit growth and commercial and international posted double-digit growth for the second straight quarter.

This broad-based performance enabled another quarter of exceptional earnings, well above initial expectations. With that, let’s dive into the details starting with the income statement on Slide 7. Revenues for the first quarter were 4.25 billion, up 7% organically year-over-year. Bottom line performance continues to be a key focus, and it shows adjusted EBITDA was 601 million for the quarter, up 23% year-over-year, and adjusted EBITDA margin increased 190 basis points to 14.2%. Non-GAAP net income was 391 million and non-GAAP diluted EPS was $2.97, up 25% and 30% respectively. Turning to the segment drivers on Slide 8, national security and digital revenues increased 5% year-over-year. We’re seeing traction on the new contract awards from the second half of 2024, as well as additional tasking on some of our franchise programs.

Non-GAAP operating income margin of 10.1% was in line with the prior year quarter. Health and civil revenues increased 8% year-over-year and non-GAAP operating income margin was 23.6%. Continued strong demand in our managed health business, one of the five growth pillars in our NorthStar 2030 strategy, drove the bulk of the revenue and income growth, though the entire portfolio performed ahead of plan. Commercial and international revenues increased 12% year-over-year from robust deliveries in SES, continued strong performance in commercial energy, and increased volumes within the UK business, including reaching a critical milestone on one of the challenge programs from last year. Non-GAAP operating margins were 8.5% up 20 basis points year-over-year.

Finally, defense systems revenues increased 7% over the prior year quarter, driven by increased activity in our space sensing and hypersonic programs. Non-GAAP operating margins of 9.1% expanded by 110 basis points year-over-year from excellent program execution. This portfolio is buzzing with opportunity from a rapidly maturing portfolio of innovative solutions. And in keeping without outlook, defense systems delivered its third straight quarter with a look to bill above one. Now on to cash flow and the balance sheet on Slide 9. In the quarter, we generated 58 million of cash flows from operating activities and 36 million of free cash flow. DSO for the quarter was 62 days, unchanged from a year ago despite modest customer delays from the administration transition.

Let me provide a little context around cash performance. The first quarter of 2025 included an extra week of payroll which hasn’t happened since 2019. Also we made a minor change in our cash accounting treatment effective this quarter. We now exclude outstanding payments from cash and cash equivalents on the balance sheet and statement of cash flows. This presentation is more aligned to industry practice and will enhance the predictability of our cash flow with no change to DSO or the income statement. The new policy had an immaterial impact to cash flow for the quarter and today’s press release has recast 2024 financials for this change. To start this year, we made a series of three coordinated moves to solidify our balance sheet and allocate capital aggressively with conviction in our strategy.

First, we issued 500 million of seven year notes and 500 million of 10 year notes with fixed rates of 5.4% and 5.5% respectively using the proceeds to repay the $500 million bond due in May. Second, we took advantage of the persistent market dislocation and executed a $500 million accelerated share repurchase agreement. And third, we targeted and signed a definitive agreement to acquire a fantastic company to strengthen our cyber Golden Bolt in our digital modernization cyber growth pillar. While the additional debt and higher interest rates add about 30 million of interest expense this year, the share repurchased and pending accretive acquisition more than offset the earnings impact and significantly enhanced our financial and strategic position for the future.

We ended the quarter with 5.1 billion of debt for a gross leverage ratio of 2.3 times. We also had 842 million in cash and cash equivalents at quarter end. Though we still have ample capacity for additional capital deployment, given the current environment, we feel comfortable holding cash in the short term. As we get more clarity through the coming quarters, we expect to further allocate capital, potentially paying down some of our term loans, repurchasing additional shares, or completing additional accretive bolt-on acquisitions to generate long-term shareholder value. Moving to the forward outlook on Slide 10. Tom and I are confident in the enduring missions we serve for our customers. Most of what we do is essential to the customers, their constituencies, and the nation.

No legislator wants to see the sensitive systems vulnerable to hackers or veterans unable to receive their benefits. For example, our exceptional Q1 performance derisks the potential unknowns in this volatile environment. So we are reaffirming our initial guidance of revenue between $16.9 billion to $17.3 billion, adjusted EBITDA guidance in the mid to high 12% range, non-GAAP diluted EPS between $10.35 and $10.75, and operating cash flow of approximately $1.45 billion for the year. This guidance does not include the pending cyber acquisition, although we expect the partial year revenue and EPS contribution to be relatively immaterial to 2025 financials. Consistent with our promises made, promises kept ethos, we take our guidance very seriously.

This quarter, we took a clean sheet view of the risks and opportunities in our plan. We believe that our ranges accurately reflect the current realities and contain the foreseeable outcomes. Relating to the top line, what we have seen so far has confirmed our belief that the year would begin with relatively soft bookings, as is typical with any change in administration. In the first quarter we generated $2.1 billion of net bookings to end with a total backlog of $46.3 billion. Our strong finish to 2024 sustains a solid 1.3 book-to-bill on a trailing 12-month basis. You’ll note that our backlog is up about $3 billion from what we reported last quarter. At the beginning of the year, we adjusted our backlog policy to include the expected value of single-award IDIQs. We believe this approach provides enhanced visibility for investors and more accurately captures the health of the business.

Absent the change, this quarter’s bookings would have increased slightly. You can find the recast quarterly bookings and backlog for 2024 in our press release. With a robust opportunity pipeline of $226 billion, including $25 billion proposals submitted and awaiting adjudication, we remain confident in our awards prospects for the back half of the year. But history suggests those wins will be more impactful to 2026 revenue than 2025. The midpoint of our revenue guidance implies $120 million of growth above our Q1 run rate, which is prudent based on current conditions. And as we look beyond this exciting pivot year for Leidos, we’re confident in our NorthStar 2030 path ahead. With that, operator, we’re ready to take questions.

Operator: Thank you. [Operator Instructions]. And our first question is coming from the line of Peter Arment with Baird. Your line is now open.

Peter Arment: Yeah, thanks, good morning Tom, Chris, nice results. I guess one, Tom, on some of your larger contracts like NGEN and just thinking under like the current contracting environment, we’ve seen some of the Navy leadership kind of canceling some of your peers’ software contracts. I’m just wondering how things are going on that contract, kind of the expected run rate? And then if, Chris, you could just — thanks for giving us the details on the backlog and what the changes were. But just the Health & Civil segment was the only one that saw a decline, and just maybe if you could just give us a little color around that? Thanks.

Tom Bell: Yes. So first on the macro actions this administration is taking, yes, there’s been some impact to our top line revenue in 2025 but I would define it as negligible, Peter. The impact on our revenue is certainly in the very, very, very low 1% range. And so we understand what’s happening and at the same time, we’re seeing the administration lean into some opportunities. You might remember on the last call, I talked about the opportunity that DISA has with The Defense Enclave services, and we’re actually seeing great traction in the DoD for the fourth estate in looking to turn on additional acquisitions and additional modernizations of our IT infrastructure throughout the DoD. So a little bit of what I would call puts and takes. Certainly, there are some minor takes, but there is more opportunity coming our way, and those are the opportunities we’re excited to be leaning into.

Chris Cage: Yes, Peter and I’ll just add. We’ve been contemplating this backlog change for some time. The team did some good work last year to lay the groundwork. And we do think it enhances your visibility into our book of business and our future revenue stream. And so we put those single award values into backlog. As it relates to Health & Civil, they recently just won, as you know, the big VBA recompete that went in last year. There’s not a lot of large single-award IDIQs in that business area, so they didn’t benefit from any adjustment there. And when we look ahead, they’ve got a couple of large things pending this year. The follow-on to the MHS Genesis is still something we feel very good about, the customer’s intent to drive that our way on a sole-source basis that should be a future booking.

And then we’ve got a Reserve Health Readiness program follow-on, too. So there’s some big needle movers out there, but they’re well-funded and have ample capacity as it relates to supporting their trajectory and you see the great start to the year they got off to.

Peter Arment: Appreciate the color. Thanks guys.

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

Joshua Korn: Hi, good morning. Thanks for taking the question. This is Josh Korn on for David today. So wanted to ask specifically about the GSA request that was out about a month or two ago regarding potential contract kind of offerings. I wanted to ask, if you were asked to make any proposals, and if so, what sort of things that you offered? Thanks.

Tom Bell: Sure, Josh. Yes, we were excited to lean into the opportunity to engage the GSA on an active conversation about how we could help them and their charge to make the government smarter and more efficient. And so we actively engaged in both rounds, you might have heard about, two letters and two back and forths between the GSA and WE. That’s been supplemented with face-to-face meetings and an active e-dialogue in the margins. So I feel very good about the relationship we’re building with the GSA. Josh and Stephen are very, very passionate about their role in helping make this government smarter and more efficient. And I believe we’re positioning ourselves to be part of the solution, not the problem in so doing. One of the things that we’ve taken a little bit of issue with is the fact that while we’ve been lumped into a consulting review, we’ve never used those words back the GSA.

Less than 1% of our revenue could generously be considered consulting revenue. And so all of what we do is mission-critical work that is key to our customers’ outcomes, the customers of the GSA, if you will. And so what we’ve been doing is leaning into the GSA and saying, here’s how we can make your customers the active agencies that use our products and solutions better, faster, cheaper by doing smarter things with technology, aggregating contracts, getting to commercial outcome terms and looking for more efficient ways to deliver services. So net-net, we’re in the early innings of this ball game, but we’re leaning in. And we believe Josh, Stephen and the GSA team are leaning in also. Thanks.

Joshua Korn: Great, thank you. I will stick to one.

Operator: Thank you. Our next question coming from the line of Sheila Kahyaoglu with Jefferies. Your line is now open.

Sheila Kahyaoglu: Thank you and good morning guys. Great quarter. Maybe if we could talk about, again, focusing on Health & Civil and diving into the budget a little bit more, the skinny budget included funding accelerating for the VA EHR modernization work where Leidos is a sub to Oracle. How are you thinking about the opportunity there just given the news we’ve had on VA for the last year or so and just the longer-term opportunity for Leidos given the success?

Tom Bell: Yes. Thanks for that, Sheila. Yes, as you will note in our NorthStar 2030 growth pillars, managed healthcare and managed health services is one of our growth pillars. And that’s because everything we knew would happen with demographics last year as we were undertaking our year of deep strategic thinking and every action and comment by this administration has reinforced our view that better choices, faster choices for veteran services will be a key part of the next years for our nation. So we’re leaning into our health business. We’re expecting to grow it over the next five years. And the early indications, the volumes coming through the VBA, the volumes of veterans coming through our clinics and having health benefits exams is actually raising and going up and continuing to go at pace.

So we are very optimistic. We’re bullish about the business. We’re bullish about our opportunity to use the core capabilities we have and pivot into more services for more customers. And we expect to be talking a lot about growing our healthcare business over the coming years.

Chris Cage: Sheila, I’d just add that we’ve had a long successful partnership with Oracle, of course, on the military health side. And our best proof point is to continue to deliver excellence on that program. And as Tom mentioned, we’re a great partner into the VA. You would imagine, over time, there’s opportunities for us to expand our offerings into the EHR rollout there, too. But that is something that’s not directly within our control. But again, at some point in time, you would imagine as they integrate further, we could help them in a more meaningful way. So we’ll continue to position for that.

Sheila Kahyaoglu: Just to follow up quickly on that point, Chris. So are the margins in Q1 reflective of the full year performance, is that how we should think about it?

Chris Cage: Well, the margins in Q1 were excellent. We’re super pleased with how we got out of the gates as a company. And as it relates to Tom’s comment on the managed health services business, the dialogue with the VA on that side is we need to sustain and increase the level of activity going on. We want to continue to work off the backlog. We want to treat the veterans. So we’re well funded. We’re well positioned. We’re thinking about the future but delivering in the present for that business. And so I think that we’re very capable of delivering at that run rate going forward, certainly.

Sheila Kahyaoglu: Thank you.

Operator: Thank you. Our next question coming from Colin Canfield with Cantor Fitzgerald. Your line is now open.

Colin Canfield: Yeah, thanks for the questions. Maybe talking through the takeaways of the Supplemental Defense Bill, what are your understanding in terms of that being more FY 2025 or longer-dated money and then maybe talk through the opportunities that you see at the segment level, specifically missile defense as well as the maritime domain? Thanks.

Tom Bell: Sure. The bill that is currently working its way through Congress, the Reconciliation Bill, represents tremendous upside for our customers and for Leidos. FAA modernization is a net-net winner in the reconciliation bill, and we expect to be a major part of helping the Department of Transportation and the FAA be a solution for the challenges of our nation’s infrastructure when it comes to air traffic control. Border security is also an area that is getting a lot of attention in the reconciliation bill and the skinny budget that’s been published for FY 2026. So again, we have an active dialogue going on with the Department of Homeland Security around how with technology and the deployment of products we have at already today, we can help secure the border even more.

There is a tremendous amount of energy building around Golden Dome, as I said in my prepared remarks. And frankly, while we talked about the space layer and the underlayer, there are a myriad of programs and solutions — technology solutions we have in our defense business that can plug into the various aspects of the Golden Dome architecture that will be required to secure the continent of the United States. So net-net, Colin, again, reconciliation, the skinny budget of FY 2026 points very squarely in the attention of our five growth pillars and gives us great confidence that when we picked these five growth pillars and we picked these subsets of the pillars, we were picking the right decks for us to pivot to, to find new revenue growth in 2026 and beyond.

So very, very optimistic about the early signs we’re seeing.

Chris Cage: And the only thing I’d add, Colin, I mean, Tom mentioned a number of things, didn’t even mention maritime, which is another area the team is very excited about. And we’re seeing customer demand signal for a couple of our unmanned capabilities at record levels. So the team is actively working opportunities there for medium unmanned undersea vessel, for small vessel as well. So we’re excited about seeing those things accelerate as we get into the back half of this year.

Colin Canfield: Thanks, I will keep it to one.

Operator: Thank you. Our next question coming from the line of Mariana Perez Mora with Bank of America. Your line is now open.

Mariana Mora: Thank you, good morning everyone. So when you think about these opportunities but also the risk of actually having a continued resolution — long continued resolution into fiscal year 2026, where the — are these — any of these opportunities are limited by actually the lack of funding, how you think about that? And on the other side, is there any way you could benefit from this administration or the agencies that are actually extending some programs that were supposed to mature or be recompeted within the next like 12 to 24 months and are actually extended by five years to good performers, like do you have any programs like that?

Tom Bell: Well, thank you, Mariana. Yes, is the answer to your question. We think we are in a relatively good position to have programs that are continuing from programs that are already in execution mode. So we’re not looking for new program starts or new technology investments. These are franchises that we’ve invested in over the past five years and are now up and running. I mentioned, for instance, IFPC and the underlayer. That is a program of record within the U.S. Army. And so the DoD can continue to exercise options for additional units as opposed to a new start program. We think the investment we’ve made in our defense business, in our other businesses and the programs of records we have gives us a tremendous opportunity for customers to hit the easy button and extend them and continue to build on them as opposed to requiring a new start program under a continuing resolution, which as your question suggests, is more difficult. Thanks.

Mariana Mora: Thank you.

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

Jason Gursky: Hey, good morning everybody. Tom, I wonder if you could spend a few more minutes on the situation with the FAA here in the U.S. and air traffic control and the system that we have here in the United States. Maybe talk a little bit about, from your view, what’s broken and what it’s going to take to get this fixed, quantum of money that might need to get spent, how much time it’s going to take, and what kind of capabilities and skill sets are going to be needed to fix this problem?

Tom Bell: Thanks, Jason. Yes. So I mentioned in my comments that this administration has been very open to meeting with industry and engaging in conversations about what solutions look like. The Department of Transportation and the FAA are a part of that. And so I’m very pleased to say that we’ve had high-level engagements with those entities, and we’ve discussed very clearly the challenges and opportunities we see to modernize the air traffic control system in the United States and make it the envy of the world which is, as President Trump has suggested, is his goal. The Department of Transportation is keen to do that within this Presidential term. And we are, again, very well positioned with about 10, 12 programs that we do for the FAA now that are both systems that manage air traffic over the oceans, missions that — systems that manage air traffic over land, systems that manage air traffic when it’s on the ground and the terminals that the air traffic controllers use.

So we are positioned throughout the life cycle and throughout the mission of air traffic control both in the United States and globally. We’re a key technology provider for NATS in the UK, which is a very successful country-wide air traffic control system. And we also deploy elements of this system globally for something called Skyline, which is in service in the multiple countries around the world. So we feel like we’re in a great position. The, obviously, Congress and the White House are also poised to fund this. That is the first thing you need. You need determination that you want to do it. And the second thing is you need funding to do it. I’ll leave the quantum of that up to the administration. But suffice to say, as the country puts their system together and their thoughts together about what the future system looks like, I’m very, very sure Leidos is going to be a part of that solution both in pieces and overarching architecture.

Thanks, Jason.

Jason Gursky: Thank you.

Operator: Thank you. Our next question coming from the line of Tobey Sommer with Truist. Your line is now open.

Tyler Barishaw: Good morning. This is Tyler Barishaw for Tobey. Back to that quarter of 12% growth in the Commercial & International segment, can you just discuss some of the drivers of this and maybe the sustainability of this going forward? Thank you.

Chris Cage: Yes. Thanks, Tyler. And no, it’s something we’re really excited to see from the team. They’ve been working very hard towards that goal. And there’s a number of things that are going well in that portfolio. I mentioned in the remarks earlier that on the UK side the team was able to cover from some challenges we encountered last year and get a critical program on the right track, achieve a key milestone that provided some uplift on growth and profitability. We have been working, of course, on the security solution side for the last couple of years to get that business poised for a successful future. A lot of gains have been made there and as Tom trailed earlier, we’re really excited about the opportunities in the ports and borders space.

But core service and maintenance uplift in the portfolio have driven some growth there. And then finally, one of our key growth pillars in commercial energy is in that portfolio. That has been a strong grower now for multiple years. It continues that pace. So those are the elements that we’re seeing taking off, and the future continues to have more prospects internationally for things like AUKUS and other uplift. But the team has made great progress, and we’re excited to see that momentum continue.

Tom Bell: Yes. The second straight quarter of double-digit growth is wonderful, but it’s only a down payment on what we expect from this sector and the segment going forward. The fact is every element within Commercial & International is very robustly positioned for the future. Chris just mentioned at the end, AUKUS. As I’ve said on previous calls, the needs of AUKUS Pillar 2 are exactly in line with the capabilities Leidos brings to fore. So we’re leaning into AUKUS, both in the United States and over in the UK and Australia. Energy is one of our growth pillars. It’s a critical vulnerability. Everybody knows that critical infrastructure in the United States is in a challenged position right now. And especially as energy demands grow, the grid resilience and the need for us to secure our electrical grid is going to grow with it.

So energy is a huge area of focus for us and a huge growth area for Leidos. And last but not least, SES, ports and border security, airport security. We were talking about the FAA before, but we weren’t talking about the airports themselves. We play a key role in securing ports, borders, and airports. And so everything in the Commercial & International business is poised for robust growth as this administration sets about its priorities. And we’re very optimistic that Vicki and her team can continue to turn in great growth quarters as we go out of 2025 and into the future.

Tyler Barishaw: Okay, thank you.

Operator: Thank you. And our next question coming from the line of Scott Mikus with Melius Research. Your line is now open.

Scott Mikus: Good morning Tom and Chris. So a quick question on the decision to reaffirm the guide. Chris, if I add back about $0.35 of charges you booked in 2024, the EPS guide is essentially flat. And if I annualize your first quarter results, your EPS would be 10% above the high end of the guidance range. So the question I’ve been receiving from clients this morning is given the decision to reaffirm the guidance and the 0.5 book-to-bill this quarter, are the core fundamentals of the business expected to significantly deteriorate over the next few quarters or is the guidance just extremely conservative due to DOGE and all the executive orders from the new administration?

Chris Cage: Yes. Thanks for that, Scott. No, there’s nothing in the core business performance that we’re concerned about as it relates to fundamentals. I think those have been proven to the opposite, right. Multiple quarters in a row where the team continues to drive improvement. Our highest margin quarter when it wasn’t even highest Health & Civil margin quarters. So you see uplift in other parts of the portfolio, national security and digital, C&I, defense are all showing strength. It’s more the latter where we’re positioned for helping our customers accelerate. As we see the opportunity set ahead of us, as we’ve laid out NorthStar 2030 and our strategy pillars, we want to make sure we’ve got capacity to provide jump-start in critical areas where there is a unique opportunity here in the coming months to capture significant positions on meaningful priorities of the administration and in addition to partnering with critical agencies like the GSA to make sure we’re part of the solution for the future.

So with one quarter in the books and looking ahead to the landscape that’s robust with opportunities, that’s why it’s now not the time to lean into increasing our guidance. It’s really run the business very successfully, create capacity to invest for the future, and we’re excited about where that takes us this year.

Scott Mikus: Alright, thanks for taking the questions.

Operator: Thank you. Our next question coming from the line of Ken Herbert with RBC Capital Markets. Your line is now open.

Kenneth Herbert: Yeah, hi, good morning. Tom and Chris, thanks for the question.

Tom Bell: Yeah Ken, good morning.

Kenneth Herbert: Hey Tom maybe or Chris, as you look at the recompetes you have coming up for the remainder of this year has anything changed in response to all the executive orders and DOGE and focus on cost, have you seen any pronounced change in expected contract terms, or basically within contract structures, the risk you might be expected to take on these contracts?

Tom Bell: Yes. So the pipeline for this year, you know how this business works, has been set for some time. And we are awaiting adjudication for some $26 billion worth of contracts that are already submitted. We haven’t yet seen customers leaning into changing commercial terms and/or leaning into the opportunity of outcome-based contracting, but we expect that. I’m sure you saw the letters coming out of the administration this past Friday about revising the FAR and leaning into commercial terms. That’s something we welcome. We believe in outcome-based contracting. We believe in sharing risks and rewards. And we feel like we make better outcomes when we’re challenged to insert technology so that customer outcomes are better, faster and cheaper.

So we haven’t seen that yet, but I fully anticipate it. And we’re spending a significant amount of effort in Leidos, making sure we’re prepared for that. And we are leaning into those environments to make our customers’ outcomes better, faster, cheaper. And Leidos is a winner, a net winner in that environment.

Kenneth Herbert: Great, thank you.

Operator: Thank you. Our next question coming from the line of Noah Poponak with Goldman Sachs. Your line is now open.

Noah Poponak: Hey, good morning everyone.

Tom Bell: Hi Noah, good morning.

Noah Poponak: Tom, when you piece together the many cross currents going on at your customers and everything you’re doing at Leidos specifically, do you feel like you can rule out having a year where revenue is down over the next three years or can we not roll that out, and that is possible given everything that’s going on?

Tom Bell: Gee, Noah, you’re asking me to say never say never. And I have to start with that, right. You’re asking about three years, and the future is never certain enough to be able to say it’s absolutely impossible. But at the same time, I’ll say I don’t envision it and I don’t really see it as a high probability. The growth pillars we’ve identified as a part of NorthStar 2030 are very in line with the administration’s needs and the customer missions that are mission-critical. And so we’re very confident that these are going to grow robustly. And I’ll foot stomp. We picked these five because we know customer needs are growing. We know we can make good money leaning into opportunities in those areas. And we know we have technical differentiation that allows us to be more successful than our competitors in those areas.

And every indication from this administration supports the selection of those pillars for our growth engines. And even if it wasn’t areas of the Leidos portfolio that are not selected for growth, we see a status quo maintenance of the growth trajectory they’ve been on. So as we lean into the next three to five years in the whole plan of NorthStar 2030, the macro plan and what we think is absolutely achievable is holding on to the profitability of Leidos that we’ve established, this business is capable of and now growing top line robustly through the selection of these five pillars. So my plan and my expectation is over the next years, you’re going to see revenue increasing better than peers and profitability holding at what you’re used to now.

We’ll continuously update that for you and I bet I’ll be smiling when I do.

Noah Poponak: Thank you.

Operator: Thank you. Our next question coming from the line of Gavin Parsons with UBS. Your line is now open.

Gavin Parsons: Hey, thanks, good morning. Just wanted to clarify the comments on the sub-1% of revenue impacts from the new administration initiatives and the GSA contract review. Have you already taken that out of backlog and does the GSA review complete?

Chris Cage: Yes. Gavin, no, we haven’t taken those contracts out of backlog. There have been some impacts as it relates to those related contract actions, de-scopes, those types of things. Unrelated to Tom’s comment on 1% is consulting. Now some of those consulting-related efforts may or may not continue into the future depending upon the priorities going forward of our customers. And I would say the conversations with the GSA remain ongoing, right. We’ve — as Tom indicated, we’ve put forward, we think compelling ideas around where value can be created and savings can be generated, and we eagerly await ongoing discussions with them.

Tom Bell: And I’ll foot stomp what Chris said in his comments, which is the likelihood of revenue impacts and profitability have been included in our forward guidance. And so the reiteration of our guidance for 2025 assumes some possible degradation of revenue.

Gavin Parsons: That’s helpful. Appreciate it.

Operator: Thank you. Our next question coming from the line of Gautam Khanna with TD Securities. Your line is now open.

Gautam Khanna: Yes, good morning guys.

Tom Bell: Hey, good morning Gautam.

Gautam Khanna: I was wondering if you could elaborate on the Health & Civil profitability in the quarter because it was very strong. Maybe if you could just — was there anything about utilization that was particularly unusual in the quarter in the medical exams business? And if you could also just comment broadly on what you’re seeing in that business given the VA itself is trying to reduce headcount and how that might evolve, how that might impact the business, if at all, in terms of…?

Chris Cage: Yes. Okay. Well, great quarter by the team. And it was more than just the managed health side of the business. We saw strong performance in some of our civilian areas as well, quite honestly. And so very pleased across the portfolio and excited about — we mentioned the FAA a number of times a day, that’s a cornerstone piece of our civil business as we look to the future. We did have an excellent quarter overall as a company on our EAC performance. And again, that’s just what we’re capable of with good program management. So some of those benefits did accrue to the Health & Civil segment. And we don’t, as a matter of course, expect that level of net EAC write-ups to continue, although we strive to make it so. As it relates to the VBA business, the volume — the indications are the customer wants to sustain, if not increase volumes.

And that’s the goal. We haven’t yet seen any impacts from VA staffing reductions on the VBA side that have created any bottlenecks for that workflow. So we’re encouraged that, that momentum can continue. It will be an ongoing process to work actively with them. But the investments we’ve made in our throughput capacity, optimizing our processes just have allowed us to continue to scale up our throughput. So we’re well positioned to do that. And so the expectation is, yes, we can continue to sustain that level of performance as we look to the future.

Gautam Khanna: Thank you. And could you guys quantify the size of the EAC?

Chris Cage: Well, they’ll be in the Q. You’ll see that later today, Gautam, so enjoy.

Gautam Khanna: Sounds good. Thank you. Okay.

Operator: Thank you. And we have a follow-up question from Colin Canfield with Cantor Fitzgerald. Your line is now open.

Colin Canfield: Hey, thanks. I just want to go back to one of the comments you made during your prepared remarks, Tom, about repo, suggesting that the $500 million ASR completed most of the shares — or most of the company’s outlook for repo for the year. So maybe if you could just articulate on capital deployment and level set us on if the $1 billion or kind of the guidance that you gave at the start of the year is still the right expectation for repo, which is in line with 2024? Thank you.

Tom Bell: Yes. Thanks for that. So very happy that we were able to get out of the blocks fast with the $500 million accelerated share repurchase program. Given prudence for the next months and the acquisition that we’ve made, the inorganic acquisition, we’ll probably not move out with additional share repurchases in the near term. But as the year unfolds and we get back into the back end of the year, that’s when capital deployment for share repurchases could be back in place. So as Chris said, we’ll be looking at the environment in the six months of the back end of the year and looking at whether or not there’s another inorganic play we want to make, whether or not share repurchases are the thing we want to do or other shareholder-friendly capital deployments.

Chris Cage: Yes. Colin, I would just add, obviously, the back half of the year is when most of the cash flow is generated in the business. And so while we have a lot of cash on hand and our leverage is comfortably below targets, we’ll continue to be building capacity as we get into Q3 and beyond. So to Tom’s point, we’ll remain flexible, but we’ll have plenty of course, firepower to do a number of things as the year unfolds.

Colin Canfield: Got it. And then we were at the back end of the call, but maybe talking a little bit about selling pieces of the portfolio. We saw that one of your competitors was able to get roughly 30 times EBITDA handle on their defense products business. And so the question is kind of how do you think about being opportunistic on pieces that look really good today?

Tom Bell: Well, we’re going to be opportunistic about all parts of the portfolio in the current environment. The whole concept of the year, deep strategic thinking, included looking at the portfolio for whether or not there were chronic underperformers in the portfolio. And there’s possibly a small divestment we make in the coming months here or there. But nothing large, nothing that would be notable because, frankly, all the parts of the Leidos portfolio are well situated for the environment we’re facing into. So minor divestments are possible, but I like the portfolio we’re playing and the cards we have. And we think we’re well positioned to serve our customers through it.

Colin Canfield: Got it, thanks for the color as always.

Operator: Thank you. And this concludes our question-and-answer session. I would now like to turn the conference back to Stuart Davis for any closing remarks.

Stuart Davis: Thank you, operator for your assistance this morning, and thank you all for your time this morning and your interest in Leidos. We look forward to updating you again soon. Have a great day.

Operator: This concludes today’s conference call. Thank you for your participation, and you may now disconnect.