Greetings, and welcome to Leidos Fourth Quarter Fiscal Year 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers presentation there will be a question-and-answer session. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Stuart Davis, of 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 2023 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 are using today. Turning to slide two 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 three, 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, let me turn the call over to Tom Bell, who will begin on slide four.

Thank you, Stuart, and good morning everyone. It's good to be with you today to report another strong quarter for Leidos and to put a bow on a very successful 2023. I'll frame my part of our conversation today in three parts. First, our 2023 results; second, the progress we've made towards building a brighter future; and third, what you can expect from us this year. First in our fourth quarter we delivered 8% revenue growth for record quarterly revenue just shy of $4 billion. EBITDA margin was an outstanding 11.4% and we grew non-GAAP diluted EPS at 9% year-over-year. Operating cash was also well ahead of plan. This means we delivered full year results that were above the high end of the guidance we set last quarter. For the full year revenue growth was 7%. Non-GAAP diluted EPS growth was 11% and operating cash flow growth was 17%. Consistent with my previous commitment to you about disciplined cash management, we repurchased more than $200 million worth of shares in the fourth quarter of 2023. I continue to be very impressed by the people and sound business engine we have here at Leidos and I believe our top and bottom line financial performance over the last three quarters of 2023 just begins to hint at our full potential. Even while affecting our recent organizational realignment, the team ran through the tape to deliver an impressive 2023. I want to thank my leadership team and our 47,000 people who made these results possible through their hard work and dedication to both Leidos and our customers’ missions. This brings me to my second point, the progress we've made towards building a better future. We're already working well in our new capability focused organization and seeing the first fruits from these changes. For…

Thanks, Tom, and thanks to everyone for joining us today. Let me echo Tom and express my gratitude to the entire Leidos team for how we executed in 2023. On balance, 2023 was an excellent year, and our financial performance was well ahead of the pace we set for ourselves at the 2021 Investor Day. Turning to slide six, revenues for the quarter were $3.98 billion. Revenues came in stronger than expected as customers continued spending despite a continuing resolution, and Congress acted to avert a government shutdown. In each quarter of ‘23, each segment grew year-over-year. Adjusted EBITDA was $452 million for the fourth quarter for an adjusted EBITDA margin of 11.4%. Health sustained its excellent performance, and we saw good sequential improvement in the Defense Solutions and Civil Segments. With a keener focus on margins, we exceed our 2021 Investor Day target of 10.5% plus one year ahead of schedule. Non-GAAP net income was $276 million for the quarter and more than $1 billion for the year, which generated non-GAAP diluted EPS of $1.99 for the quarter and $7.30 for the year, increases of 9% and 11% respectively. This strong bottom-line performance came despite a drag from non-operating drivers. The non-GAAP effective tax rate for the quarter came in at 25.2%. Net interest expense was a $2 million tailwind for the quarter based on debt paydown, but a $13 million headwind for the year given the higher interest rate environment. Taken together, tax rate and interest lowered non-GAAP diluted EPS by $0.13 for the quarter and $0.14 for the year. Now, for an overview of our segment results and key drivers, beginning with the revenues on slide seven. With a lot to cover today, I'll focus on the quarterly figures, but you can also see the full year…

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Jason Gursky with Citi. Your line is open.

Yeah, good morning, everybody. Thanks for taking the question. Just kind of curious as your putting – about some of the assumptions that are going into the outlook. So I guess on two fronts. First would be kind of the assumptions that are embedded in your guidance related to the DOD budget, both in fiscal ‘24 and beyond as you think about your medium-term targets. Just kind of the growth rate that you are assuming in the DOD's budget. And then secondly, just whether you have anything in your backlog today associated with some of the supplemental funding that has been passed here over the last several years. That's the first question there.

Thanks, Jason. Tom here. I'll go first and then ask Chris to chime in. Macro picture, as Chris articulated, our ‘24 guidance is somewhat conservative given the funding uncertainties on Capitol Hill. So we're not leaning forward assuming that there's growth in the Defense budget this year. It all depends what Congress decides to do in the coming weeks and months. But longer term, sadly, the world is not becoming a safer place, and we don't see that customers are going to be spending less on National Security and Defense. So generally speaking, we see a 3% to 4% increase in Defense budgets over time. But we're going to model all of that as we go through this year of deep strategic analysis in ’24, to make sure that our assumptions going from ‘25 through ‘28 are in keeping with what the budget assumption is from the Pentagon and other Intel agencies in the U.S. Chris, anything you'd like to add?

Yeah Jason, good to talk to you this morning and way to get us started trying to give us long-term guidance questions. But, I would say on the second part of your question relative to the supplemental, it's not an area that we've had very much exposure to at all. Some of the work that we've done there has actually been through our U.K. customer and a little bit of Airborne Support work. So that's not a – hasn't been a driver for us and therefore it's not a risk as that particular funding stream potentially, comes under some pressure going forward.

Okay, great. I'll leave it at one, so the others can get in and ask some questions. Thanks gentlemen.

Thank you.

Thanks, Jason.

One moment for our next question. Our next question comes from Ken Herbert with RBC Capital Markets. Your line is open.

Yeah, hey. Good morning, Tom and Chris. How are you?

Good

Good morning, Ken.

Hey, I just wanted to first start on the Health segment if we could, Legacy Health Segment I guess. I mean it's been pretty significant outperformance as you've gone through ‘23 and it seems like each quarter, it continues to be better than expected. Can you just maybe walk through as you look at the guide for ‘24? I know obviously you've got now Health and Civil combined, but as you think about the Health in particular, how does that continue to trend and what's the visibility on continued strength, especially if you look at the examinations and everything else that have driven much of the upside?

Thanks, Ken. I'll start and then hand it over to Chris. We are so proud of Liz and the Health team for their performance, their sustained performance that you call out over time. And, it is important to recognize that that's a unique mix of unique customer understanding that we feel we have and then unparalleled service to our veterans and others that we serve through the deployment of technology and artificial intelligence in the solutions that allow us to have more throughput for our customers, so that our customers can be served faster. Obviously, 13% revenue growth for the year is based on excellent program execution and profitability and passing the $3 billion threshold for that business is huge, if you don't mind me saying. So we're very proud of Liz and the team, macro, and we see that continuing in ‘24. Chris?

Yeah Ken, just to add on a little bit, obviously the disability examination work has been a standout, but there's a lot more going on as I mentioned in my prepared remarks, and really looking to extend our reach on some existing programs and there's plenty more new programs in the pipeline the team's pursuing, so excited about the prospects there. As we said in our guidance, we'll continue the outperformance from a top-line growth perspective heading into ‘24. On the margin front, a slight pullback, but that's really because we're continuing to invest, we're investing in our capabilities, we're investing to improve the workflow and the infrastructure to allow for that increased volume on the disability exam front. And really what's important about that is making sure the veterans get served and we love to see those volumes increase. And clearly that's not a baseline assumption in our forward guidance that we see a higher level of activity there, but it's certainly a scenario that we have to be prepared for, and so we're making sure we're ready to step up to meet that demand if it happens.

Great. Thank you very much. I'll keep it there.

Thanks Ken.

One moment for our next question. Our next question comes from Sheila Kahyaoglu with Jefferies. Your line is open.

Good morning, Tom and Chris. Thank you so much. Two questions, if you don't mind. Maybe one big picture and then one on the segment restructuring, resegmentation. So first on the resegmentation, National Security, it seems like it mostly split off on Defense. The margins in ‘23 are about 10%. And I think Chris, you might have mentioned that there's opportunity for more margin expansion in that segment. Can you just talk about what you see there?

Sure. Yeah, absolutely, Sheila. Thank you. So, the National Security and Digital Segment combines a couple pieces of our business, one of which is our new digital modernization sector, and that's the one that we see a lot of uplift over time. Steve Hull and the team have already highly energized around bringing together some commonality that we've been using to serve multiple customers and bringing those into repeatable solutions. And so we're often running there and really looking at how we get that leverage from a combined bench, a combined workforce and investing class tools and repeatable solutions. So we see that opportunity. And then, of course, within the core, National Security work we do with our Intel customers, that has been exceptionally well run. And we continue to expect excellent program execution and performance and maximizing our opportunities with that client base as well. But the longer term margin improvement that we see in the near term relates to the gains we can make in digital monetization space.

And just for clarity, the third part of that business is our LinC, our Leidos Innovation Center. And so while that has historically been home roomed under our Dynetics subsidiary, we've pulled that up to the CTO level, so that the innovation and entrepreneurial spirit that it deploys, can be deployed for all the sectors and all the segments of Leidos. So that's the third part of that component Sheila, just for clarity.

Okay, got it. And then Tom, maybe a big picture for you. You talked about incentive comp changes that'll come out in the proxy. And you highlighted profitability. I think I know why you did that. But where do you think profitability could go just given peers in this business are at the 11% mark at most?

Yeah, how high is high? We don't know, Sheila. And that's part of the enjoyment of 2024 and the challenge that we're giving each of the sector presidents to come forward with their sector best-in-class growth and profitability plan. Obviously, we're guiding to mid to high teens in 2024. Obviously, that is already at a pretty world class level. Excuse me, high tens.

Mid-high 10s.

Yeah, high 10s, not teens. That would be...

Someday Tom.

That would be someday. But mid to high 10s. But you know, in the fourth quarter, we hit 11.4. So is cresting over 11 out of the range of possibilities some year in the future? I don't know. We'll see. But we're very focused on restoring bottom line growth as we increase top line growth. And as a result of both of them, it'll be a very accretive business from a cash standpoint.

Sheila, I'd only add on, obviously again, as we gave you some color commentary on the new segments, there is a lot of gas in the tank that we see on Defense Systems and Commercial & International. They'll step up in margins in ’24, but that could be a multi-year runway for those pieces of the business and so we've been on this journey for a period of time now. Tom's come in and accelerated that journey, and I think we're seeing what the team's capable of. So excited about where the margins could go over time.

Great. Thank you.

One moment for our next question. Our next question comes from Mariana Perez Mora with Bank of America. Your line is open.

Hi everyone.

Hey, good morning.

I'll follow-up on Defense Systems and Commercial & International. So you think Defense System is going to be flat this year, but hypersonic should be something that like actually has a lot of upside opportunity. And I could imagine the same from the [inaudible] in international. Could you please give us a sense of like how the CAGR should look like in a three to five year range from now?

So she – I'm sorry Mariana, I think you're asking about hypersonics and customer demand for hypersonics and then international. The hypersonics is a good news story. And as Chris alluded to in his comments, we saw a pull in to ‘23 of work we thought was going to be in the first half of 2024 of our customer demand signal for hypersonics. We're in deep dialogue with the customers about how we continue to accelerate that business, because that is a capability that the United States needs to deploy robustly. So again, it's kind of like I answered Sheila, I don't know how high is high, but there is very, very strong demand for the United States to field hypersonic capabilities that are in the world class range and obviously we are in a very good position to be a key component of those hypersonic systems going forward. So, I think you're going to continue to see pull through there and focus. I think on the international side one of the most exciting things we have going for us is the strong footprint we have organically and already, obviously in the United States, but also in the UK and Australia. And there is great customer interest in what Leidos can do around AUKUS, not in Pillar 1. I mean, I have no interest in building nuclear submarines, but I really am interested in helping those customers in what they call Pillar 1 and Pillar 3, which are in the Intel data and digital systems worlds. So very much in our wheeled house for what we do here in the United States and in the UK and Australia, and very much a growth engine for us should be how we leverage AUKUS going forward. Chris, anything you'd like to add?

Well, one more point Mariana, back to the Defense Systems. We talked about hypersonics, but in addition to that, the force protection work that we talked about in the past. The team has been working hard on the IFPC Enduring program and we're excited about the fact that we delivered some of the first fieldable prototype launchers in December. That will transition into a phase here early in the year, but we're looking forward to a potential award in that particular area on LRIP [ph] and then full rate production later in the year and that also is a growth catalyst that we see. So when you start to look at that CAGR over a multi-year time horizon, our expectations is those businesses will be accelerating, and Tom talked to a couple of key points there that we see driving that activity.

Thanks so much. And if I may, more of a program related question. Do you have an update on how CHS-6 is trending and how much do you expect the program to contribute into 2024?

Yeah Mariana, let me start and then I'll hand it over to Chris also. Obviously CHS-6, a major franchise win for Leidos in the fourth quarter of last year, one we're very proud of the team for. And it's a model that we expect to deploy going forward where we bring customers a value proposition that is compelling to them, both in the delivery we can give them and the speed with which we can spool up to solve their problems. But, one of the things that is not understood about CHS-6 is it's actually a very broad mandate for the customer and it's not just IT, it's the whole C-5 ISR domain. And so not only is it broad in what the customer can procure through CHS-6, but it's also a great example of how we can use the breadth and scale of Leidos to solve problems for customers. So not only is that home-roomed in one sector, but the Dynetics business is going to be a key part of helping it deliver for our customers. So we're very happy about that and the basic catalog is being built out and the orders are starting to come in, but Chris will give you some more details on that.

Yeah, just to add some color and I will stay away from specifics, but obviously this is a program we expect that will build in revenue and profitability over the life of the contract and a long contract like this does have a ramp up period. Tom's right, and we were encouraged by the order activity, some long lead items that will actually contribute to revenue in ‘25 even, but we're rounding it out. The profile is going to depend greatly upon what those particular technical solutions, but we're leveraging our vendor network, we're leveraging AI, we've got a great team. There are some activity that we're not interested in low margin work, so some of the pass through will not show up as revenue for Leidos, but overall you can expect this to be an accretive margin program to Leidos overall and with a ramping revenue profile probably more later in the year.

Thank you so much.

One moment for our next question. Our next question comes from David Strauss with Barclays your line is open.

Hi, good morning. This is actually Josh calling on for David.

Hey, Josh.

So hi. I wanted to ask about the revenue guidance for next year. What when you have as you just discussed CHS-6 and ramping and some of the Health care programs really strong. What are some of the – are there any offsets to get to the only 2% to 4% growth next year?

Yeah David, let me start and Tom can make some bigger picture and comments. I mean we've talked in the past about Health has been great, but the DHMSM program as an example, we're through the deployment phase essentially and so even though we've won some additional work there with Digital First, there is a step down in volumes on that particular program. There was a National Security Intel program that transitioned away from us earlier last year, so that's a little bit of a headwind. So there's always some puts and takes in the portfolio, but more big picture, we're focused on – there's some budget uncertainty. Customer demand has been very strong in Q3 and Q4 and that led to our performance. But as we look ahead to early parts of the year, a lot of the activity will need to transition into Q3 and Q4. So it all depends upon how quickly get certainty in our budget environment and make sure customer demands remain robust. Tom, anything you'd add to that?

Well, I would just add Josh, there's two macro headwinds that informed the conservative end of our range. One was the over performance in 2023 that makes year-on-year comparators difficult, and in this case challenging. We are very proud of our performance in ‘23, but that creates a headwind for ‘24 year-on-year revenue growth, against also the backdrop of the budget situation that is not yet crystal clear here in Washington, DC. And so while the 2% provisions against the worst case scenario in that, we will be working with the team to meet or exceed the high end of that range as we prosecute the year. So you can be sure we won't be satisfied if we just hit the bottom end of that range.

Great, thank you.

One moment for our next question. Our next question comes from Louie DiPalma with William Blair. Your line is open.

Tom, Chris and Stuart, good morning.

Good morning.

Good morning.

Tom, you discussed how you believe Leidos can increase its business capture. Does Leidos consider its Gremlins Air Vehicle a viable candidate for the emerging high profile drone replicator program?

The Gremlins program was a fantastic demonstration of our prowess in aerospace. For those that don't know it, it was a remotely piloted vehicle that was also recaptured and then brought on board another manned aircraft. So a fantastic capability. But at this point, no. No, there's no discussions going on with the customers around that program going forward, although it has spawned other unmanned capabilities that we are talking to customers about, that help inform possible growth aspects for our Defense Systems business.

Great. So is there a possibility that some of the dynamics drone assets can be involved in replicator.

There is certainly a possibility, yes.

Great. And a follow-up on the international opportunity. You referenced how there is demand on the international front for the Leidos data and digital services. It would seem that allies have similar IT Cloud networking and zero trust ambitions as the U.S. and you are obviously the largest provider of these types of mega projects. And I was wondering, can you bring variance of IT mega projects such as the navy NGEN the NASA AEGIS and Enclave to allies or are there security restrictions as it relates to personnel. And are you focusing more on IT services or hardware as it relates to the international opportunity. Thanks.

Thanks. Thanks, Louis. Yes, so the beauty of Pillar 2 of AUKUS is not only our presence in the U.S., the UK and Australia. But the fact that the work that is being done in those countries right now in the area that you referenced, is to a large degree already a place that we're playing in. So the beauty of AUKUS is an incentive for the nations to collaborate. We are very excited about the opportunities that gives us to lower the thresholds of sharing data. And obviously there's also big parts of the AUKUS legislation that lower those trade barriers, lower the ITAR restrictions and allow greater data sharing. So we see it as an open door for us to promulgate Leidos capabilities that hereto for Louis, kind of to your question, have been so piped in one country or the other across all those countries, and allow these great allies to punch above their weight collectively.

Great. That's it for me. Thanks everyone.

Thanks, Louis.

Thank you.

One moment for our next question. Our next question comes from Peter Arment with Baird. Your line is open.

Thanks. Good morning, Tom and Chris. Excellent results.

Thank you.

Hey, a quick one on just maybe an update on DES and how that's kind of projected for the year. And then Tom just more of a bigger picture question on kind of a capital deployment versus M&A. You've done – made just a tremendous amount of progress realigning the businesses and you've turned over I think, what you said, 75% I think of your executive leadership team I see there in new roles or has been replaced. Just how are you thinking, is ‘24 more of a year where you’re just going to continue to be internally focused and kind of showing the progress versus how do we think about that versus M&A and just regarding you know buybacks as a preference. Thanks.

Yeah Peter, it's Chris. Let me get started with a little bit of color on DES and then turn it to Tom. I mean. You know again this has been a longer growth story than we originally anticipated, but it's a nice one. The team is performing exceptionally well. We've actually extended from one task order now to five active task orders under the program, and it will be on a growth trajectory over the still the next couple years. ‘24 will be stronger than ‘23 on both the top and bottom line and we've seen good migration on the planning efforts, working closely with the customer, and the DAFA’s to get them ready for more migrations as we progress through 2024. So all I can tell you is it'll be a contributor to growth this year, not as significant as maybe once envisioned, but really looking forward to that growth rate continuing to accelerate later this year and into ‘25.

And Peter, I'm going to answer you’re – the punch line first and then give you some color. No, M&A is not a priority in 2024. It continues to be in the playbook, but subordinated to other deployments of cash. As Chris articulated in his prepared comments, we've already provisioned to repurchase $500 million worth of Leidos shares this year. I'm happy to share with you that that is not all the bullets in our ammunition. We have other ability to deploy cash for great ideas that start to come out of the strategy process that I spoke to. And we're very excited about bringing forward those ideas and deploying cash responsibly, organically in great capabilities and great technologies that will enable us to have differentiated solutions going forward. Ultimately the five sector strategies that the Presidents are building will not ignore M&A, but the primary focus first and foremost will be what are the gaps, what are the needs we see our customers needing and how do we position Leidos best for those over time. Obviously if we can build it, we have the funds and the capability to provision for that. But if it's better, faster, cheaper and more expeditious for us to buy that, then M&A can come back into the playbook. But those will be a very thoughtful process through this year of strategy, where we carefully think through the playbook for what inorganic plays make sense for the North Star strategy we're creating. I hope that helps Peter.

Very much so thanks. Thanks Tom. I appreciate it.

One moment for our next question. Our next question comes from Noah Poponak with Goldman Sachs. Your line is open.

Hi. Good morning everyone.

Hey Noah.

Hey Noah.

The Civil margin, I guess for the full year ended up flat year-over-year and not a ton of discussion in the prepared remarks here, I guess, despite the consternation there early in the year. So have we sounded the all clear? Maybe you could just spend a little more time on where you stand in stabilizing the challenges you've had there. And is the quarterly progression on the Civil margin through 2024 a ramp up like the last two years or is it more stable?

Yeah Noah. Hey, this is Chris. I'll get started and maybe Tom can talk big picture. So Civil is obviously more than SES, but that kind of is implicit is where you're going. And I really applaud the team for great progress and ‘23 to right the ship, and ultimately revenue and margins were in line with our expectations. So the SES business itself is improving. We were higher on revenues year-over-year, but minimal contribution sequentially from product mix. So as we pivot into ’24, we'll expect the pattern to kind of not be as pronounced as in ’23, but probably lower in the early part of the year, accelerating towards the back half of the year, how we see that rolling out right now. We're not all the way done, but we are you know well down the road on executing all of the turnaround efforts that we put in place and some of the things where we're exiting certain geographies. That's a thoughtful, carefully orchestrated process, right, that takes sometimes many quarters to fully see it through. But I'd say, we're in line with where we had hoped to be at this point in time and I think the business is looking forward to better days ahead.

Yeah, I would echo that Noah. And just give a quick shout out to Vicki who has taken on the responsibilities for this sector with great vim and vigor, and the person leading SES, Michael Van Gelder, just a rock star for us at Leidos. And they are taking this reset business and really they are excited about the opportunities that the market is presenting to us to grow, both in the traditional places and non-traditional places. So they and we remain bullish on the long term outlook for this business and we're excited to be in this aspect of the market.

Okay, great. And then just on Health. You've sort of touched on this, but just the year-over-year comparison will be pretty different in the first half or the back half next year. And then, the exit rate on the margin is a lot different than where you started the year. Any color you can provide on the cadence of the growth rate and the margin through the quarters of the year, not to ask – like they ask quarterly questions, but just seems like we could all be kind of thrown off on versus what you're expecting there.

Yeah, I mean Noah, it's a little nuance there, and you know again without too many specifics, just keep in mind, in Q3 we did have a request for like a little adjustment. That contributed some uplift in profitability and Q4 we benefited from nice incentive performance. I think our commentary in the past and it still holds true is, the customer is expecting industry to continue to step up volumes to meet the increased demand and therefore the threshold on throughput continues to rise to achieve full incentive. So early in the year our expectation is we'll have some work to do to be ready to be able to prosecute that level of demand to earn full incentives. So therefore it's probably safer to assume that pattern will improve as the year progresses forward. The main point is, investing to make sure are the veterans get treated and seen and get the care and the benefits they are entitled to and we are looking forward to continue to make those investments to prosecute that work as timely as possible.

Okay. Thanks so much.

Thank you.

One moment for our next question. Our next question comes from Bert Subin with Stifel. Your line is open.

Hey, good morning, Tom, Chris.

Hey, Bert. Good morning.

Chris, if we think about the revenue growth for you in terms of hiring inflation, does 2% to 4% growth indicate you're carrying some additional costs just because inflation is going to be in that range and hiring is presumably positive. And then on, I guess, another sort of related question on the revenue side, as we think about outlays like the normalizing at some point soon, how do you capture that in that 2% to 4%?

Yeah Bert, obviously the inflationary environment has been volatile, but it's been improving. And so as we progress into ’24, our outlook in that regard is it's moderated down relative to where we were a year ago. So I'm not worried that we've got an imbalance between our top line and bottom line as it relates to inflationary impacts on the business. We've anticipated a robust merit pool for our labor costs and we understand how those will be passed along to certain customers under our cost reimbursement programs. But our pricing patterns have anticipated this inflationary environment now over the last couple years. So as it relates to protecting the margin, the downside on inflation, I feel good about where we're positioned there. Obviously, on the outlay side, there's always this lag, right, between the budget and the outlay and the timing that it's difficult to project. Certainly it's an area that we could see some things accelerate in the near term, depending upon how we get through March in the budget environment. But right now I'd say that, that's not a significant driver as far as any pent up outlays that we're waiting to have, happen to drive significant growth catalyst for us.

And I – if you don't mind, Bert, I'm going to piggyback on that to give some comments about our people. We ended the year with 47,000 employees, up about 3% year-on-year. But the most exciting thing about our whole HR system in 2023 was attrition at very good levels for our industry, low levels for our industry. And one of the reasons we do that is not only do we have a competitive structure in our compensation plan, but we also are investing in our talented employees with technical upskilling, which is being taken up by thousands of our employees who remain curious about things like AI and Cyber and Autonomy. And the technical upskilling we have allows us to hold on to those employees and upskill them in place, because as you'll appreciate, it's one thing to pay for talent. It's a whole different ball of wax to have to constantly bring on new talent. So we're very excited about the attrition rates being low, the uptake in our technical upskilling being very high, and therefore that being a lever that we're using to manage our personnel costs.

Got it. Okay. Thanks, Tom and Chris. Just a follow up on – we've had a lot of questions on the VA side. I guess I'm curious, Tom, as you've gone through sort of this review of the business, how big do you want the clinical business to be? Clearly the VA-MDs have been a pretty material driver of profitability upside, and I'd have to assume the ROIC profile is sort of on the higher end of the company. Are there other meaningful opportunities out there, like not maybe the VA-MDs, but like RHRP and Military Family Counseling and others in the backlog and the pipeline that you think, could make clinical a bigger part of the business longer term?

Yeah, the short answer to that is, yes, we do think there are opportunities for us to grow this business, and that is the very task that Liz and her team are undertaking. It's one thing to say yes, there are opportunities. It's another thing to think how do we prudently and purposefully execute a plan to grow that business in the lowest risk possible. That's very much what Liz and her team are focused on right now and part of the process that we'll be reviewing through the year.

Great. Thank you for the comments.

Abigail, we're at the top of the hour, so we'll just take one more question.

Thank you. Our last question. One moment for our last question. Our last question comes from Matthew Akers with Wells Fargo. Your line is open.

Yeah, hey guys. Good morning. I think we're squeezing me in. Tom, you alluded to some IRAD targeted investments in the opening remarks. Can you elaborate on those at all? What capabilities you're going after?

Sure. There's actually two parts of that equation, Matthew. One of the things that we're focused very much on with our link being elevated to our CTO office is CRAD [ph]. So making sure that we get customer focused IRAD, which has a two prong benefit. (A), it is doing the things that the customers need done. So that points you in the direction of what is the scratch they want to itch, but also its funded work that we can co-invest in. So we're very focused on targeting CRAD in the areas of technology that are going to differentiate us going forward, and we're very much focused on matching our investment, our IRAD in those focused areas also. Macro picture, obviously Software, Cyber, AI, Maritime Autonomy are four of the top things we're investing in. But again, as part of the strategy process, we're asking each sector to identify the Golden Bolts that will truly differentiate them over the coming three to five years, so as to give them solutions to the customer problems that are emerging over that same period of time. So we have an articulated playbook of focused IRAD. We have an articulated playbook of CRAD that we're going after, but we're also creating organically a poll from the businesses of what would you have me invest in that will differentiate my solutions and my capabilities to solve my customers problems.

Great. Thanks for the color. And I guess one for Chris. On Section 174, can you just remind us how much you have you could potentially recover if that does get overturned?

Yeah, sure Matt. And I mean, it's a nuanced situation, so there's some variables you got to think through. Obviously, looks like it may be retroactive. And so if that were to be the case, and if there is a path forward to recovery, monies that were previously paid in the year, and then we have some state taxes that have to follow suit. If all that lines up, it could be north of $200 million of benefit to Leidos. There'd be a little bit of modest uplift on the effective tax rate. But net-net, it would be a great benefit to the company and add to that additional amount of capital we'd have to consider how we deploy appropriately in the later part of the year. So a little bit over $200 million plus, not having to pay the $60 million that we've got teed up in ‘24. So goodness all around.

Great. Thank you.

Thank you.

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, Abigail, for your assistance on this morning's call, and thank you all listening on the line today and this morning for your interest in Leidos. We look forward to updating you again soon. Have a great day.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.