Greetings. Welcome to the Leidos First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. Please note, this conference is being recorded. At this time, I’ll turn the conference over to Stuart Davis, from Investor Relations. Mr. Davis, you may now begin.

Thank you, Rob. And good morning, everyone. I'd like to welcome you to our first quarter fiscal year 2023 earnings conference call. Joining me today are Roger Krone, our Chairman and 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'll use during today's call. Turning to slide 2 of the presentation. Today's discussion contains forward-looking statements based on the environment as we currently see it and, as such, 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, during the call, we'll discuss GAAP and non-GAAP financial measures. A reconciliation between the two is included in today's press release and presentation slides. With that, I'll turn the call over to Roger Krone, who will begin on slide 4.

Thank you, Stuart. And thank you all for joining us this morning. Our first quarter results demonstrate our ability to drive strong organic growth as record revenue performance was consistent with our long-term target. We expect earnings and cash performance to build momentum as we progress through the year and are fully committed to achieving our 2023 guidance. As I step down as CEO, I am confident that Leidos is truly the leader in our industry with unmatched talent, technical depth, and market facing solutions. Our dedicated team is at the forefront of our customers' most challenging missions as we make the world safer, healthier, and more efficient. As usual, I'll touch on our financial performance, capital allocation, business development performance, and people. Number one, our top line financial performance for the quarter was excellent. Record revenues of $3.7 billion were up 6% in total and over 5% organically year-over-year. Our growth is in line with our long term model, and we continue to take share from our competitors. All three of our segments grew led, by Civil and Health, which speaks to the power of our diversified portfolio. Bottom line performance was lower than anticipated, largely driven by delays in security product deliveries and continued investment in the security product offerings. The delays based primarily on supply chain issues and customers site readiness are fundamentally a matter of timing and will be resolved within the year. The strengths that we're seeing across the Leidos portfolio, especially in the Health business, will help to accelerate margin and earnings performance throughout the year. As planned, cash generation was decreased by the cash tax payments for Section 174 expense for 2022 and the final payment on the CARES Act deferral. Absent those unusual items, cash flow from operations was consistent with last…

Thank you, Roger. And thank you to everyone for joining us today. Let me begin by echoing Roger's assessment of the team. This management team is laser focused on delivering on our financial commitments and driving above market growth across all financial metrics over the long term. Turning to slide 5. Revenues for the quarter were $3.7 billion, up 6% compared to the prior-year quarter. Revenues grew organically across all three reportable segments, given strong demand across our customer sets, robust hiring, and better retention. Our growth came despite a $24 million negative impact from foreign currency movements. At current foreign exchange rates, FX will become a tailwind sometime in our second quarter. Turning to earnings. Adjusted EBITDA was $346 million for the first quarter for an adjusted EBITDA margin of 9.4%. Non-GAAP net income was $205 million and non-GAAP diluted EPS was $1.47. Non-GAAP net income and diluted EPS were down 8% and 7%, respectively, compared to the first quarter of fiscal year 2022. I'll get to the underlying drivers next, but let me be clear. The he shortfall to the level of performance we expect from this company is temporary, concentrated and recoverable. Turning to those segment drivers on slide 6. Defense Solutions revenues increased 3% compared to the prior-year quarter. The largest growth catalysts were the Navy NGEN and SDA Wide Field of View Tranche 1 contracts, as well as the Australian airborne acquisition. For the quarter, Defense Solutions non-GAAP operating income margin increased to 8.4%, up 30 basis points from the prior-year quarter, with better program performance and growth in higher margin areas such as airborne surveillance. Health revenues increased 9% over the prior-year quarter, driven by growth on the Social Security Administration IT work and another strong quarter on the DHMSM program. Non-GAAP operating income…

[Operator Instructions]. Now our first question is from the line of Robert Spingarn with Melius Research.

I think I wanted to start with something kind of high level and has been talked about a lot this quarter so far. But we have these recent leaks of intelligence documents. And I'm just wondering, Roger, if you think that's going to slow down the approval process for security clearances or it may inhibit the ability of folks to do their jobs as efficiently as possible? Or, on the other hand, could it provide work, could it provide upside for companies like Leidos as DoD tries to resecure its systems or its process?

Well, shall we look back in history at the period of time around the Snowden leaks. And I'm a believer, at least in general, that history repeats itself. And it made things more difficult. The timeline to get clearances expanded the depth of background investigations, the level of clearance required to do certain jobs where maybe we were on a path for that to be relaxed, maybe like one notch, I suspect it will go the other way. Access to information will be held tighter. First of all, any leak like this is a really bad thing. And it hurts our military, it hurts our country, it hurts our standing in the international community. So I don't really see anything positive, to be quite honest, Rob, coming out of it. There are some companies, not us, that do background investigations, who do polygraphs, we're not in that business. We are a recipient of clearances. And I can't imagine that this is going to make the clearance process any easier. In fact, I suspect it's going to go in the opposite direction. And I cannot believe, my career, 46 years in the business, that after Snowden that we're back here again with his problem, and it's very, very unfortunate.

Maybe a little bit shorter term looking. You mentioned the procurement and award activity is picking up. Do you think that this is due to some acquisition officials trying to get ahead of the debt ceiling fight and the perturbations that could come from that?

I really do. It's the debt ceiling. We've talked a lot about a CR that could go well into 2024. And so, for people who have program managers, government contracting officials who have authorizations, appropriations and what have you to get a program under contract before we hit the fall season, I think there's a lot of that going on. And by the way, it's a positive thing. I think all the political posturing around the debt ceiling and the budget – I know the President is going to have a sort of a budget summit in the next few days. Hopefully that will lead to something positive. But there is a positive outcome to that, which is we've had some programs that have been in the acquisition process for years and they're starting to get awarded and adjudicated, and that's a positive thing.

Our next question is from the line of Sheila Kahyaoglu with Jefferies.

I want to maybe ask, first, on the supply chain comments you made within Civil and the security business there. I think your nearest peer there, OSI, grew 13% organically and margins went up. So what kind of changes in your business specifically? Seems like you have some investments in Mosaic. And how do we kind of assume that progressive?

There's definitely some positives going on in the business. And again, the one contract that was impacted by customer driven delays, we've been executing on that back half of last year and there's plenty of runway ahead of us to continue to execute on that, which will help drive growth. The supply chain challenges were disappointing, and there's some component parts and some CPUs, et cetera, that are sourced by various suppliers, some in China, and really just hit us this quarter especially hard because as activity levels have ramped up, we weren't able to supply some components and sales that we would have been able to realize. And then missing some service levels impacted us from a disincentive perspective. So I think the team, they've been working hard and they're getting some additional support from our corporate procurement organization. And so, we're all in on making sure we've got more redundancy in that supply chain. And we've already made some changes, swapped out third party logistics provider. So that transition has happened in the quarter and, again, we're taking the appropriate actions to position that for growth. There were some positives. We talked about Frankfurt Luton, there's been some nice awards on the aviation product side, and continue to see a pipeline of activity there. So confident the team's going to get it turned around.

Sheila, we're doing some other things, we're bringing more production inhouse where we have more control. We're going to stand up a new facility that we're really excited about. We did have some licensing delays in the period that affected some of the maintenance work that we did. And I don't know why in the quarter, everything seemed to hit us. But the good news is, the business is coming back, air travel is coming back, the long term prospect for SES is really, really positive. And we're bullish on the future. I have the privilege of being involved in some other companies outside of Leidos and they have had these supply chain issues, especially around general purpose processors. And you think you have it nailed down, and then it's the $5 chip that gets you and we had some of that in our own business. Very, very low end stuff that we had reliable supplier, and then we ended up being gapped. The business didn't go away. It's in backlog. We'll get our supply chain where it needs to be, and we'll deliver this product in the remaining three quarters of the year.

Maybe one more on Health, if you don't mind. You called out DHMSM as a contributor in the quarter. It continues to grow despite what we think of it peaking in 2023. So how could we kind of think about the revenue expectations for that program over time?

Chris here again. And I would say our expectation is, again, the tail end of this year, last quarter especially, you'll see that begin to tail down, teams working really hard and continue to do exceptionally well. And Rogers prepared remarks, the on-cost and on-schedule can't be overstated. And so, the customer has trust in us and there are additional capabilities we're working to deliver there. But Health is a bigger story than just DHMSM and we're proving that. The SSA work, the pipeline strength, what we're seeing out of the disability exam business, very pleased with how Liz Porter and the team have positioned that business. This quarter, 15.9% margins, got to the levels that we committed to and actually see more upside at this point in time than we had previously expected. So, it's in a good spot. And even to withstand the DHMSM ramp down, the RHRP contract is now active and didn't contribute much of anything in the quarter. So we'll see more meaningful contributions beginning in Q2 from that program. So that's what's going on in Health.

Sheila, I'll give you kind of this longer term view of DHMSM. So we have been focused on rolling out the starter [ph], now Oracle software to the military treatment facilities, and that has what has driven top line. As we are near the end of the rollout, the discussions we're having with the customer is now on the experience of the people who use it. And to enhance that, to make it more doctor and nurse friendly, to provide patient access through patient portals, right, and then to capture the data. Right? Many of the people on the call have kind of lived the journey from paper records to electronic healthcare records through the HITECH Act, something called Meaningful Use 1 and Meaningful Use 2, but the vision was always to get this data into a relational database, so we can then analyze not just claims data, but clinical data to drive improvements in health for everyone and in the DHMSM program specifically for the active military. So we are excited about partnering with the DHA customer on both user experience and to capture the data, to go after some of the root causes of a medical issues within our active military. And that was always the promise of the program. And now that we have a critical mass of information on the active military, the task now is to improve their health. And that will be through data and data analysis and using big data and AI tools. And we're really excited about the program. As it rolls into this sort of second life, it may not be as large from a revenue standpoint, because we're not rolling two waves a quarter out to military treatment facilities. But I think the benefit to the active military will be even greater than it has been, as we've installed the electronic health care record system.

Next question is from the line of Peter Arment with Baird.

Chris, on the EBITDA margin guidance, it just implies kind of a much stronger mix probably in the second half. Just maybe if you could call out maybe some of the puts and takes around that and the competence level around kind of that seeing that stronger performance?

Absolutely something we've been spending a lot of time on internally, making sure that there's a clear path to get there. Look, it's going to take some hard work. It's not the start that we hoped for. But fundamentally, it begins with getting the SES business back on track and the team has a concrete plan. They've implemented a number of action, there's been some reduction in force, there's been a lot of transition there to make sure that businesses, in and of itself, is a strength, not a weakness in the quarters ahead. I've mentioned Health. And again, we're very pleased with what we see there. And looking ahead to the next few quarters with PACT Act cases ramping up, the SSA program continuing to run strong, there's margin uplift that we see there. The Defense business, quite honestly, they had year-over-year margin increase, but it's not where – it hasn't reached its full potential. And the team knows that. And so, from a mix perspective, we see some programs that are coming online or others that are ramping that will absolutely lift some margins across the board. And then, we're going to have to make sure that we run very efficiently on cost management for the rest of the year. We did that last year the back half and showed what we're capable of. So there's a number of things there that are already in flight. And there is a little bit of seasonality in the portfolio too, Peter. There's definitely – as it relates to award fee timing, incentive fee timing, we've looked hard at when those things should come to pass and when they get recognized. So it'd be a combination of SES getting returned to the right level of profitability, strength in Health and some program mix in Defense and then some cost control actions.

Peter, I would add. As you know, our business model still has a significant dependency on our great people. And we had some goals for hiring and retention for the year. And we're very, very pleased that our voluntary attrition is significantly below what we had planned. And Leidos is still an attractive place for people to come to work. So our hiring has not slowed down. We've actually eaten into, if you will, our open kind of wreck situation where we're in one of the best staffing positions that we have been in for years. Now, we may benefit from some of the hyperscalers reducing their staffing, but albeit we are very comfortable with where we are from a teammate standpoint. I think it's early, but the first quarter performance has really been outstanding. And if we can maintain that throughout the year, that will give us a lot of momentum as we close out 2023.

If I can just sneak one in. Roger, can you give us the latest update on the Cobham business, how that is going and just any thoughts there?

Peter, say that again?

The business you acquired in Australia, Cobham.

I was at the AVALON airshow earlier this year, which was down in Melbourne. It is at or better than our business case and doing really, really well. Peter, I'm an aeroplane guy. So this was like walking in, tall cotton for me. It was just a lot of fun. And we have two contracts, one to do search and rescue, one to do a maritime patrol. Both of those are performing very, very well. They are, I'd say, 75% fully integrated into our Australian operation. The only challenge that we have, which is a worldwide, I know that on this morning's radio that American Airlines' pilots – it's a challenge everywhere. And we wish we could hire more pilots. If we had more pilots, we could we could fly more hours. But Paul Chase in Australia and Roy Stevens who runs that group have really, really leaned forward on integrating that business into our unit in Australia. And we couldn't be more pleased. And again, I was at AVALON earlier this year, and I got to sit in the airplane and talk to the pilots. I went to our training academy, talk to some of the students and it's a vertically integrated airborne operations. And really, we've got the full value stream. And so, yeah, like I said, it is everything that we thought it would be, and probably more so. The other huge benefit for us is they are flying the same types of aircraft in Australia that we're flying here in the US. So our ability to build some cross linkages and some synergies between the business that Gerry Fasano has in our ASO organization, what Roy has in Australia has been really, really good. So, so far, so good. Actually maybe a little bit better than we expected.

Our next questions are from the line of Matt Akers with Wells Fargo.

I want to ask about the orders environment. I guess your book-to-bill a little bit light in the quarter. Do you think that ends up kind of above 1 for the year? I know you mentioned some of the big pipeline there. And is there any risk around that with the debt ceiling? Have you seen any change in kind of customer behavior around some of those talks?

Of course, we want to grow. We've got a long term target out there. You can back out of our long term targets, then our book-to-bill has to be greater than 1. And where we sit today, we fully expect our book-to-bill to be greater than 1. But that means, and you all know this, is that we have to win some programs between now and the end of the year. There are some big programs yet to be awarded. We have done well in winning large programs. We don't win them all unfortunately. We never put a bid in that we don't expect to win, but it's a very, very competitive environment and we have to do better in second, third and fourth quarter that we've done. I don't expect, even with the machinations around the debt ceiling and the budget, for the award process to slow down this year. I think it could get a little rocky in 2024 as we get into presidential politics, if we're in a full year CR, trying to get new starts started in 2024. If we don't get an omnibus, I'd like to think we do get an omnibus, but time will tell. We're pretty active. As I said, we still have a lot of proposals to write this year, some of those might actually get awarded this year. We have a ton, well, I guess $30 billion, maybe more than a ton of awards that need to be adjudicated. And many, many of those are going to happen this year. So we're very optimistic about the future, our track record of winning big awards, and we don't talk a lot – actually, our track record of winning small awards is even better than our track record of winning big awards. And that has to do with our customer intimacy and our great program leadership working with our customers, and I feel really good. Something we haven't talked a lot about what we call on contract growth, but our ability to expand our business base with the existing customers, that has always been very strong for us. So I'm optimistic. And Tom Bell, he's got a strong business development background. He's sold globally around the world. He has built a terrific business at Rolls Royce, and he's going to lead the business development effort here. And he'll probably do a much better job than I did of winning programs. So I'm really optimistic about the future.

If I could do one more, maybe, Chris, can you give us any help with sort of the pacing of earnings for the year? Just kind of a lot of moving pieces with the impacts this quarter from supply chain and DHMSM maybe dipping at the end of the year? Is Q2 kind of flat and then a big ramp up in the second half? Or is it more kind of smooth or just any way we should think about that?

Matt, we usually don't give a lot of details quarter by quarter, but I would tell you that we'll build. Clearly, the SES turnaround, the actions that are taken and underway, they're not going to deliver its full potential overnight. So I would expect Q2 to be better, but Q3 and Q4 to be better still. And I think you should expect we'll be gaining a lot of steam into the summer. We'll get Tom fully on board as he'll have a point of view. And he'll want to be aggressive. I expect that fully to make sure we're delivering on our commitments as we all do. So my expectation is Q2 will definitely be better, but you'll see our full potential in the back half of the year.

Our next question is from the line of Bert Subin with Stifel.

Maybe just to sort of switch gears a little bit. Where do we stand across Dynetics? You noted the Wide Field of View award. But can you update us on how IFPC and the hypersonic glide body contracts or potential contracts progressing? Do you still expect that we'll see a material inflection in that part of the business next year?

Yeah. For those of you who are able to make the trip to Huntsville, you saw a lot of what our future is going to be in what we call platform or the systems integration business. And generally, everything's on track. IFPC Enduring is doing well. We expect some magicians in the hypersonic glide body business. We won a program called Mayhem in the hypersonic world, which is really going to be helpful. If you made the trip to Huntsville, I don't want to repeat a lot of what we presented down there, but we talked about this year being one where we're in development and ramping and then 2024 is, if you will, kind of the payoff year where a lot of these programs are starting to hit production. And so, we see both the top line grow and the bottom line grow with it as we move out of development on a whole series of programs. But we've got great people there. We continue to send people to Huntsville. By the way, Huntsville is one of those places in the US where technical people just want to go. They love the environment. It's a great outdoors city. There's a huge technology community there. And we've had many, many of our best and brightest self-select to go down and work at Dynetics. And that has helped us add depth to the team as we have ramped up the business there. Two things we haven't talked a lot about because I think they are at the kind of a high beta. We still have a human lander bid that is outstanding. We're one of two bidders on that program. And I think it will be a complicated award. But we're hopeful that we will realize something out of our human lander position. And then, if you were at Space Symposium, and I know some of you were, we had a mockup of our lunar rover, and that will be more of a 2024 award. But we're pretty excited about our rover offering. We're actually teamed with NASCAR on our rover. And so there, there are some kind of shoot for the stars, literally, programs in the NASA world that could further enhance the portfolio at Dynetics. But so far, across the board, generally doing well, not to say we don't have a program or two that's ever going to have a development problem because when you're doing development, there are issues. But we're pretty much in line with what we showed you when you were down in Huntsville.

Maybe just a follow-up question within the Defense side. Last quarter, you highlighted that customers wanted to move a little faster on DES and you were just sort of balancing that against providing sort of the highest quality service you could. Can you update us on where transitions stand and whether your view of the ramp process of that contract has changed at all?

Our part is going well. So we've got the architecture in place and ONE-Net and what have you, and so now it's getting the next task orders. Within the DISA organization, we're in the middle of the transition of the DISA environment. So that's actually going well. But the strength of that program is when we start to do networks in the fourth estate outside of DISA, and that hasn't started to ramp yet. And we're working well with Lt. Gen. Skinner to make that happen. But it hasn't happened yet. And would I like to see it ramp faster? You bet. I would like to see it ramp faster. But the best thing we can do is offer a faster, better, less expensive and more secure network to the support agencies within DoD and then help DISA sell those benefits. And that's our job on the program. We have, again, a great team, a great program manager, we have a great relationship with DISA. But we've got to some book some early transformations of networks and some of that work is still ahead of us

Our next question is from the line of Seth Seifman with J.P. Morgan.

Just wanted to ask about the Health business. And it sounds like maybe we should be expecting some margin expansion there in order to drive the rest of the year. And that'll be driven in part by the PACT Act. Can you talk a little bit about how those expectations have changed in terms of the number of exams there and how much of the mix will be coming out of that exam business and what that opportunity is looking like now over time? And are we looking at kind of high teens margins in that business the rest of the year?

Seth, I'll start and I'll let Chris add. We always like to talk about our portfolio. And if we have a situation like an SES where the first quarter is a little slow and we look at the full year, we're always looking at other parts of the portfolio that have the potential to outperform. And where we stand today, we're optimistic about both top line and bottom line in health. PACT Act exams in general, our ability to hit our service level agreements and in the future earn incentives based upon performance. So we feel we feel good about that. I talked at some length about the DHMSM program. The other two programs, what we call, military family life and counseling, and there were reserve health readiness programs are both doing extremely well. And RHRP, we're finally starting to do events with guards people and reservists which will drive top line. But I really want to give kind of hats off to the whole Health team. They have done just an outstanding job of executing on their program, staying close to the customer, providing a value added benefit. And when you do that, then good things happen in the group. And customers come back, they want to do more, they want to do expanded work. And PACT Act is a positive influence in the future. But in the disability exam business, you get more than your fair share because you hit your service level agreements with both timeliness and quality of the exams that you do. And our organization at QTC has always been at the forefront of performing in the exam business. And it just gives us confidence and optimism that, overall, we may see some better performance in Health than we had initially thought. And as we look at our guidance in the balance of the portfolio, when we were behind in one business, we're always looking to where we think we will overachieve and Health is certainly that area this year.

Let me just add. So don't put us down for high teens as a long term new goal. But I think we've demonstrated we're doing what we said. We'll get it to mid-teens and you saw Q4 got into the 14.5% range. We improved it from there to Q1 and we see more improvement ahead of it. Part of is what Roger talked about. The team has done an excellent job focused on quality. That will pay dividends, we believe, in the long term. Our throughput has been excellent. And the customer is seeing, with the PACT Act as a catalyst for more volume, that they needed to rethink how they did incentives and disincentives. And that created an opportunity for a contractor like Leidos that has confidence in our ability to maintain high throughput, great quality. There's an opportunity to continue to do better on the incentive side as we move forward. So, again, that's going well. Our SSA program is going well. There's a lot of things that we're bullish about. And again, I see some upside on margins. But we're not committing to a new long term expectation at this point in time for that business.

Maybe if I could follow up on that, Chris, just to put a little more fine point on it. If I annualize Q1, it's basically implying that that the Health earnings are going to be flat in 2023 versus 2022, which I think would be a pretty good result, given some of the margin headwinds there. Is that then a sustainable level of earnings going forward, given the maybe above trend margin that we're going to see in 2023 and some of the DHMSM headwinds? Is it a level off of which the business can grow? Because it's been executing quite well for the last couple years? Or is it a level that you kind of had to run real hard to get there in 2023, and so maybe that's a level that's above what's sustainable?

No, we don't look at it as taking all the air out of the balloon just to make 2023's numbers. I think we're conscious on all the bids that are going through. There's quality bids in that portfolio we have to continue to win. The only upside on DHMSM, quite honestly, is it's a huge volume program, it's well run, well executed, we're happy with it, but it's not at the top end of the Health margins in the business. So as we look at some of the other programs we're bringing on board, we think we can offset that DHMSM profitability with a lower top line volume. And so, our expectation is we set plans for the team every year, and I don't want to get ahead of Tom, but we'll set a 2024 plan where the Health business should deliver a growth in earnings. Quite honestly, that's my expectation at this point in time.

Our next question is from the line of Tobey Sommer with Truist Securities.

I was hoping you could expand on and contextualize the retention perhaps by quantifying the improvement year-to-date, give us some context for the arc of retention trends in recent years and what, if any, financial implications there were in the quarter of maybe having more employees than you anticipated and what that could mean for the balance of the year in achieving your top line guidance?

First of all, I don't think we actually put out hard numbers. But let me give you a little bit more visibility. So there are some industry benchmarks that we all track. And pre-pandemic, we were always maybe a point better, okay? And then during early in the pandemic, everybody's retention went to single digits, mid-single digits, and then coming out of it, everybody went to the benchmark, historic benchmark, and actually significantly over it by 100 basis points, maybe more than that. And so, when we set the level and we put together a staffing plan that goes with our financial plan and our great HR team takes that as they plan their recruiting for the year, we had a number that was kind of halfway between the worst of the pandemic heights and the traditional benchmark. And we have been operating maybe 3% below that to give you just a sense. And if you take an employee base of 46,000 people and you are 3% better on voluntary turnover, then, Tobey, you can kind of run the numbers in your head what – you don't have to recruit just to stay even. By the way, there's huge benefits to retention and culture and learning. Just beyond a numbers game and being able to do the talent acquisition task, what it does for us from esprit de corps and learning and customer intimacy. So, it's a huge positive for us. And I know good things are going on throughout the industry. Frankly, we're focused on Leidos. And we just completed our all employee engagement survey where we literally go out to everyone who's a Leidos employee around the world and we are just really thrilled with the feedback that we get, the information that we receive, and we can…

That last questions will be coming from the line of Cai von Rumohr with TD Cowen.

Roger, I have to say you've done a terrific job. You've really transformed Leidos significantly from what it was when you joined the company.

The one question I have looking at this year, the security products was light in the quarter and you mentioned some of the reasons. But with AEGIS just building presumably quite a bit below average margin and with having to pay higher prices, I think you've mentioned some inflation impact. It sounds like security products – excuse me, the totality of Civil is probably going to be a little bit lighter than it was, than you're expected going into the year. Is it reasonable to expect that the margins there might be sort of midway between the 9.2% of last year and the 10.2% of the year prior, and that, therefore, any goodness in Health is pretty much offset by a little tougher outlook in security?

I don't know why I thought the last question that I would have in my career would be an easy one. And I think we've covered everything that's going on in civil. Let's see. There is potential for Civil to be at the margin it was last year. But there's more risk, given the performance in the first quarter. And you I think you appropriately described the portfolio challenge that we have as a company. Jim Moos, who runs our Civil group, is all in on driving performance, both in the SES organization and the other parts of his portfolio. And he has tightened the belt, if you will. I think Chris mentioned that we have done some focused reductions in force. We have reconfigured the value stream in the SES business, bringing inside and into our control more of the production processes. We've got a very, very strong handle around our inventory, and how we distribute spares and what have you. Part of what drives that business is the services side. And we've got to get the services side running like a fine Swiss watch. And Jim knows that. His team is fully committed to that. And I expect him to pick up margin significantly throughout the year, whether he actually gets all the way to where he was last year. We will talk about it or Tom will talk about it on a quarter by quarter basis. But the potential is there. We don't need for him by the way to be all the way where he was last year to still make our guidance. But it certainly would be helpful.

Thank you, everyone. I'll turn the call back to Stuart Davis for closing remarks.

Thank you, Rob, for your assistance on this morning's call and obviously 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.

This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.