Greetings. Welcome to the Leidos' second quarter 2022 earnings call. This time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. Please note that today's conference is being recorded. At this time, I'll now turn the conference over to Stuart Davis, Senior Vice President, Investor Relations. Mr. Davis, you may begin. Thank you, Rob, and good morning, everyone. I'd like to welcome you to our second quarter fiscal year 2022 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'll begin on slide four. Thank you, Stuart, and thank you all for joining us this morning. Leidos remains on track for another year of solid organic growth and core business profitability. The affirmation of our Defense Enclave Services contract award by the Government Accountability Office demonstrates our leadership in digital modernization across the federal government, with strong demand for our technology solutions and services across our diversified business portfolio. We continue to execute on our disciplined and balanced capital allocation strategy to drive shareholder value, and we are proving our ability to compete successfully for talent with another quarter of robust hiring. I'll now expand on these four points. Number one, our financial performance for the quarter was strong, ahead of consensus at both the top and bottom lines. Revenues of $3.6 billion were up 4.3% in total and up 4% organically year-over-year. Non-GAAP diluted EPS for the quarter was also up 5% to $1.59, with an adjusted EBITDA margin of 10.2%. We also generated $40 million of cash flow from operations and are on track to generate at least $1 billion of operating cash flow this year. Number two, our business development results demonstrate our strong positioning in the government technology marketplace. We achieved net bookings of $2.2 billion in the quarter, representing a book-to-bill ratio of 0.6. Over the past twelve months, net bookings are $15.4 billion, and book-to-bill is 1.1. Total backlog at the end of the quarter stood at $34.7 billion, which was up 4% year-over-year, with funded backlog at $7.5 billion, up 5%. On a constant currency basis, backlog was $268 million higher. You can read about some of our awards in the press release, but let me highlight a few developments in the quarter. Most importantly, the GAO affirmed the $11.4 billion DES award to Leidos. We'll support DISA's mission by consolidating enterprise IT services at a global scale and by providing standardized, responsive, and cost-effective solutions. This program should have a several-year runway of growing revenue and expanding profitability, but will not add materially to the 2022 revenue or earnings. We also had an outstanding outcome on our Social Security Administration position. The SSA recompeted all of the work under its primary IT services IDIQ, known as ITSSC II, in two task orders, and we significantly expanded our role. We were the sole large business awardee on both task orders. On the first, we'll modernize and manage the SSA's IT infrastructure, including data center, data operations, networks, telecommunications, cloud, and user services, and all of this is new work for us. On the second, we'll now perform all of the software development and mission application work that we previously split with other providers. As expected, both of the awards were protested last week. Should we prevail, we could double our revenue at SSA and make ITSSC II a top ten program. Finally, we've seen some initial indications of an improving airport screening landscape. We were selected by the Dominican Republic's Punta Cana International Airport to upgrade both people and baggage screening at all security lanes within the Terminal B checkpoint. In addition, bid volume and bid scale has increased meaningfully when compared to the first half of 2021, and we're getting great feedback on our ability to differentiate our offerings by bringing broader Leidos capabilities like cyber protection. Although we're not expecting a full recovery in the airport screening business until 2024, it's good to see some positive trends here. That said, the overall bookings environment has been challenging as procurement timelines continue to extend. DoD outlays, for example, are down 2% this government fiscal year to date compared to fiscal year 2021, despite a higher budget. Still, our book-to-bill ratio understates the true strength of the business development performance in the quarter as it includes nothing for DES and the protested SSA awards. Our win rates and submit volumes remain high, and we expect procurements will pick up to match the improved budget environment. Number three, our approach to capital allocation is a core part of our investment thesis. We've talked about being appropriately levered and maintaining our investment-grade rating, returning a quarterly dividend, reinvesting for growth both organically and inorganically, and returning excess cash to shareholders in a tax-efficient manner. We're doing all of that. In Q1, we executed a $500 million accelerated share repurchase, and we've just entered into a definitive agreement to acquire Cobham Aviation Services Australia's Special Mission business for about $215 million. The transaction is subject to regulatory approval and other customary closing conditions, and we expect to close by the end of the year. We expect the acquisition to be immediately accretive to non-GAAP EPS. The business owns and operates 14 modified aircraft, providing Border Force airborne surveillance and maritime safety search and rescue to the Australian Federal Government are a critical element of Australia's national security. This acquisition diversifies our Australian portfolio into capability and mission services work with both the Defense Maritime and Homeland Affairs programs. Finally, integration risk is manageable because airborne surveillance is what we know how to do well, and we already have strong local leadership and infrastructure to support success. Number four, Leidos is an attractive destination for talented people. In the second quarter, we hired nearly 3,600 people, a number we've only surpassed once in five years, and that's when we were simultaneously staffing the Navy NGEN program and the Military and Family Life Counseling program. Year to date, we've hired more than 6,200 people. Quarter after quarter, we've demonstrated that talent acquisition is a core Leidos strength. On the Q1 call, we talked about challenges around retention. Competition for talent remains high as critical skills for us, such as software engineers and developers, are in demand by both tech and non-tech companies. Even though voluntary attrition seems to have peaked, we remain focused on keeping engaged with our people. In fact, our June leadership offsite was focused on retention, and we're now implementing many of the ideas that came out of that session. Before turning it over to Chris, let me touch on the federal budget landscape. The House and Senate Armed Services Committees approved versions of the fiscal year 2023 National Defense Authorization Act, both of which recommended healthy increases to the president's request. Congress fully recognizes the urgency of investing in our national security in the face of global security threats. The fiscal year 2023 appropriations process is also underway, which should result in significant nominal increases to 2022 levels. We expect that the government will begin the fiscal year with a continuing resolution that should be resolved before the end of the 116th Congress. Finally, I'm pleased to announce that we'll be hosting an investor site visit at Dynetics in Huntsville, Alabama this fall. Dynetics is an important part of our value proposition for investors and a key differentiator for us in the marketplace. The event will start with a dinner with the leadership team on November 30, with a mix of briefings, tours of the production facilities, and Q&A with the team on December 1. Expect to come away with a much better understanding of the culture and key growth drivers for Dynetics, including the hypersonics, Indirect Fire Protection Capability, and space-based missile defense programs. Please reach out to Stuart if you're interested in attending. I'll now turn the call over to Chris. Thanks, Roger, and thanks to everyone for joining us today. Second quarter results were very positive overall. There are a number of moving pieces I want to cover this morning, starting with the income statement on slide 5. Revenues for the quarter were $3.6 billion, up 4.3% compared to the prior year quarter. Revenues grew organically across all three reportable segments, given robust hiring in our recent program wins. Adjusted EBITDA was $366 million for the second quarter, which was up 1.9% year-over-year, and adjusted EBITDA margin decreased from 10.4% to 10.2% over the same period. Non-GAAP net income was $220 million for the second quarter, which was up immaterially year-over-year, and non-GAAP diluted EPS for the quarter was $1.59, up 5% compared to the second quarter of fiscal year 2021. The performance of the base business is solid and stable. A couple of factors below EBITDA that drive EPS are worth noting. Net interest expense increased to $50 million from $46 million in the second quarter of fiscal year 2021, with higher borrowing and the rise in interest rates. The weighted average diluted share count for the quarter was 138 million, compared to 143 million in the prior year quarter. The current share count benefits from the retirement of 300,000 shares as part of the final settlement of the ASR program. Now for an overview of our segment results and key drivers on slide six. Defense Solutions revenues increased by 2.4% compared to the prior year quarter. The largest growth drivers were the NGEN and IFPC ramps, which more than offset the end of our Afghanistan support contracts and reduced material purchases supporting hypersonics programs. In addition, the strengthening dollar represented about a $24 million year-over-year headwind for our U.K. and Australia businesses, which lowered the segment growth rate by about a point. Defense Solutions' non-GAAP operating margin for the quarter came in at 8.3%, which was unchanged compared to the prior year quarter. Civil revenues increased 7.3% compared to the prior year quarter, primarily driven by the startup of the NASA AEGIS program and increased demand on existing programs, including the support to Hanford and our engineering support to commercial energy providers. Civil non-GAAP operating income margin was 6.5% compared to 9.1% in the prior year quarter as a result of an adverse arbitration ruling, which led to $17 million of additional expense related to a dispute arising out of the acquisition of the IS&GS business from Lockheed Martin in 2016. Excluding this arbitration write-down, civil margins would have been up sequentially to 8.5%. Health revenues increased 6.7% over the prior year quarter. We continue to benefit from the ramp on the Military and Family Life Counseling program, and DHMSM had a nice year-over-year increase based on de-obligation timing. In addition, we had a $28 million equitable adjustment to cover costs incurred as a result of the COVID-19 pandemic, which caused non-GAAP operating margin to improve to 19.8% from 17.8% in the prior year quarter. We had originally anticipated to receive this payment in the second half of the year, so we're pleased to resolve this matter earlier than expected. Turning now to cash flow and the balance sheet on slide 7. Operating cash flow for the quarter was $40 million, and free cash flow, which is net of capital expenditures, was $19 million. While DSOs in the quarter came down two days sequentially to 61, $110 million of collections that we anticipated in Q2 came in during the first week of July. We're targeting another three days of DSO improvement over the back half of the year, which is consistent with our historical pattern. During the second quarter, we returned $51 million to shareholders, primarily through our ongoing dividend program. We also rolled over the $380 million dollar term loan related to the Gibbs & Cox acquisition that came due in May. At the end of the quarter, we had $339 million in cash and cash equivalents and $5.2 billion in debt, including $150 million of commercial paper notes outstanding. The purchase price for the Cobham Aviation Special Mission acquisition was AUD 310 million, which we hedged to lock us in at the $215 million US purchase price that Roger quoted. With that acquisition, we expect 2022 will follow our standard capital allocation approach with a balance of organic and inorganic growth investments, dividends, share repurchases against the backdrop of a leverage ratio trending towards 3x. On to the forward outlook. As shown on slide 8, we're maintaining our guidance ranges for fiscal year 2022. The guidance does not include the impact of the Australian Aviation acquisition, which should be relatively small for this year. Taking a big picture view, when we put together our plan for 2022, we had expected to build momentum through the year. Our guidance calls for the second half to be more in line with the first half from a revenue, EPS, and EBITDA perspective. Part of that shift is driven by overperformance in the first half, but there are a number of other factors that I'll address as I walk through the individual guidance elements. On revenues, we're ahead of where we expected coming into the year, stemming from the build-out of our recent wins and on-contract growth through trusted customer relationships. This gives us increased confidence in being in the upper half of the revenue range. Increased legal expenses and the unexpected arbitration ruling are pressuring EPS and EBITDA margin, and we're experiencing a larger than expected headwind from broader economic issues, including foreign exchange rates and interest expense. In addition, we've had more margin dilution than anticipated from the startup of some newer programs. Accordingly, it'll be challenging to perform at or above the midpoint of the EPS and EBITDA margin ranges. Even though most of the causal factors are transitory in nature, we're taking actions on items within our control. We haven't changed our long-term view of margins. Finally, we're maintaining our operating cash flow guidance of at least $1 billion. The arbitration ruling will result in a $25 million cash payment. We'll have to offset that payment, but I have confidence in our team's ability to deliver on the cash commitment. We continue to monitor the potential for Congress to act on the new tax research cost capitalization rules. At this time, we do not expect to make any federal tax payments related to the amortization of research costs this year. If the 2022 effective date of the Tax Cuts and Jobs Act research cost capitalization provision remains in place, we expect our income taxes payable and net deferred tax assets will each increase by approximately $150 million in fiscal 2022, and the related negative impact to cash will be realized in fiscal 2023. With that, I'll turn the call over to Rob so we can take some questions. Thank you. We'll now be conducting a question-and-answer session. If you'd like to ask a question today, please press star one from your telephone keypad and a confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants who are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Thank you. Our first question comes from the line of Peter Arment with Baird. Please proceed with your questions. Yes, good morning, Roger, Chris, Stuart. Good morning. Hey, hey, Roger. I guess, you know, you gave us some high-level color on the budget and the backdrop. I was wondering if just the way you look at it, you know, longer term, we're seeing the plus ups. Do you think, you know, just given the wins that you've had, your ability to net revenues could actually begin to accelerate as we think about, you know, longer-term picture? I know you're not giving 2023 guidance, but I appreciate any color. Thanks. Yeah, you know, we're still really optimistic about the out years. You know, we made, you know, the comment, I think both Chris and I, that, you know, long term, we don't see anything that changes the conversation that we've had in the past. Frankly, since, you know, we were all together in New York last fall, the budget environment actually has gotten better, and better in the areas where we're focused and differentiated. I am still very bullish on the future. Just as a quick follow-up on anything to highlight in terms of the Dynetics program of record outlook? Seems like that continues to be something I think that's gaining a lot of attention. Well, you know, it's really exciting across the board. The hypersonic program, strong support. We have actually three enduring fires program, one with a laser, one with a missile, and one with a high-powered microwave, and those are all strongly supported. The space business, there's things that hopefully we'll be able to talk about next quarter that are really great developments there. We are, you know, I don't wanna overemphasize this, but we're really, really pleased with how that has worked out. Of course, that's why we chose it for the visit in the fall. I can't wait to walk you through the plant and let you meet some of the team down there. I think you'll be really excited too. Appreciate the details. Thanks. Yeah. The next question comes from the line of Sheila Kahyaoglu with Jefferies. Please receive your question. Hey, good morning, and thank you. Hey, good morning, Sheila. Morning. Roger, I appreciate your comments on, you know, talent hiring and your retention focus. When we look at your headcount, it was up 10%, I believe, year-over-year, with organic growth of 4%. Maybe if you could square that disconnect for us a little bit. You know, it's a little bit complicated. I'll try to make it very simple. Direct labor is really important to us. You know, it's how we absorb a lot of our costs. If we can have higher direct labor under the same revenue bucket, that's a positive for us. We're trying to increase the Leidos content of the work we have across the board. Now, I'll also tell you quarter to quarter, month to month, it's gonna fluctuate. We have a long-term effort to increase our content. Sheila, as you know, a significant part of our content is the work that our great people do every day. You know, seeing headcount grow faster than revenue, we actually view that as a positive. That means we are implementing our strategy, and we're having success in attracting and retaining the people that we need to help us be successful. Okay. Thank you. I wanted to ask about how the business has been very good and maybe on two specific opportunities, with burn pits currently facing some hurdles in the Senate. How do you think about that and how it could be potentially incremental to your VA medical business? The second with Cerner and their EHR modernization program, it's currently paused again. What are your thoughts there on the opportunity for Leidos? Yeah. Sheila, this is Chris. I'll get started. Maybe Roger can comment on the VA program. Obviously, we're very pleased with the health team and their ongoing performance. We had told you in Q1 that we had won a recompete successfully that was critically important, although that, you know, there was an increased amount of competition introduced on that program. We also won some new work on international. Both of those dynamics are shaking their way out, and we'll continue to see international ramp up, and we might see some pressure on the legacy side on the pre-discharge work. You talked about burn pit. That's something we're watching very carefully. The team believes there is a significant increase in demand that will come from that. Obviously, we had hoped and expected that legislation would have passed by now. We're monitoring that, you know, daily, hourly, and we hope to have some good news soon. That's something that there is a modest amount of increased volume in the back half of the year associated with that coming through. You know, we think hopefully we'll be in a position where we could do better than that, if things work through quickly. Roger might comment on the VA. Yeah. Thanks, Sheila. You know, obviously, we watch the VA program very closely. We have a relatively small role in supporting Cerner on the program. The movement of Cerner to Oracle, you know, I think is gonna be a positive for the program. You know, Oracle is a real strong company, very strong software and data management. You know, there's the Oracle Cloud. I think that will all be favorable for the VA. I know that they are paused while they reassess their go-forward plan. We stand ready to support Oracle, Cerner, the VA, any one of those organizations with, you know, the best of Leidos and, frankly, members of our DHMSM team. We'll just, you know, have to sit back and see how it develops. Again, I know they're paused, but the VA needs a single electronic healthcare record system, and they need the interoperability with the active military, and we're strongly supportive of both of those. Thank you very much. You're welcome. Our next question is from the line of Robert Spingarn with Melius Research. Please proceed with your questions. Hey, good morning. Morning. Good morning. Hey, Rob. Roger, one thing that we're noticing with, you know, in your numbers today and also happened for Booz, but flat sequential sales in defense. I wanted to ask why we didn't see a sequential uptick from the March quarter to the June quarter, just given that the CR concluded in March. What's going on? Is it just slow acquisition activity out of the Pentagon, and why? Yeah, it is slow acquisition activity. It's slow ramp on the programs that we won. Of course, some of the programs that we won got protested, so they got pushed further into the year. Outlays are actually down. Mm-hmm. I really can't tell you why, what's going on in the acquisition in the Pentagon. Although we do talk to the Pentagon officials, head of acquisition, head of research. They fully intend to spend the money, you know, and they've got the money authorized and appropriated. I think they're a little bit like everyone, that a lot of their talent retired. They're still working remote, you know, so things are just taking longer. Something that's really important to us is what we call special project work on a lot of our contracts. This is where we have a base contract with a defined statement of work, and the customer says, "Gosh, while you're doing that, well, could you do these other things?" That's really beneficial to us, both from a top line and a bottom line. That project work got delayed because of the budget uncertainty, and we're optimistic that we'll see more of that in the second half of the year, but we're cautious to forecast it, as you noticed in Chris's remarks. You know, I think overall there's good news. I think short term, it's just kind of getting the machine running again and getting them to spend the money. Well, just on the back of that, is there anything particular about the types of awards that are being delayed or the size that are being delayed? Is it more common for larger awards and task orders to be delayed? It's a good question, and I'm kind of thinking of looking at Chris. I think that's typically what we would see, the larger, more complicated to evaluate, multiple competitors, longer EN evaluation process. Yep. I think you know, where we do best is on contract growth on existing vehicles. There's no competition. Again, there's hope that we'll see more of that come through in this, in the fall quarter leading up to government fiscal year-end. The more complicated procurements, and you've seen that, you know. I mean, different agencies are different, but we've seen more consolidation into larger vehicles is often the case, and so those things can tend to push out the procurement cycle. Yeah. You know. Okay. Rob, I would comment, and this isn't absolute, but if a program is over $1 billion, I think the customer runs the acquisition process with the knowledge that there'll be a protest. I think in- Mm-hmm. In both peer review and in, you know, writing the acquisition opinion and the sourcing letter, I think they're taking more time to get it right, to either avoid the protest, which obviously hasn't been happening, or to ensure that the award will be upheld. You know, we've got protested again. You know, it happens to us almost every quarter now in our large Social Security win. I think in the government that they are now kind of like a protest is almost the normal. The bigger the program, the more likely to protest. Okay. That's very helpful. I just wanted to ask for clarification on the hiring. You said, you know, attrition is coming down. Is that because fewer people are going into the tech market, the tech hiring is slowing, I guess, the best way to ask it? Yeah. You know, of course, I mean, you know, you and I are both speculating on why. I think there's a concern about the economy. Some of Big Tech. Mm-hmm. has slowed their hiring. Some Big Tech has actually announced some layoffs. It's the summer, you know, and just a lot of people are on vacation. There is sort of a cycle and a seasonality to when people leave and when people stay. You know, very few people leave before, like, incentive awards are made in March. You know, I hope we're seeing a change in our long-term trend, but you know, we've all been here before. It could spike back. We are still not back to pre-COVID levels. You know, although we have started to see some moderation in attrition, which I view as favorable, but I do worry a little bit about the economy and, you know, I'm not forecasting a recession, but I am forecasting maybe a little toning down in growth. I think for a lot of people. By the way, we have great jobs. We have great work. I mean, we pay really great salaries. We have really cool stuff to do, and we're able to attract some really great people. I think once they get here and they start doing some of the fantastic stuff that we do, they go, "Gosh, I wanna do that." That message has gotten through to our employees, and I think we've benefited from that. Very helpful. Thank you. Yeah. Our next question is from the line of Gavin Parsons with Goldman Sachs. Please proceed with your questions. Hey, good morning. Morning, Gavin. Good morning. Roger, I think you said you didn't book anything for DES, but just any update on your expectations for what that ramp could look like or how much that could contribute in the future and whether or not that could ultimately be a top ten program? Yeah. You know, on DES, we've been turned on for the first task order, which is very small. Let me spend at least 15, 20 seconds to describe the program. In DES, we work with DISA to create a common architecture called DoDNet. Once we've established that architecture, then we will migrate 20-some odd federal agencies to the new architecture. The first thing we have to do is partner with our customer and define the architecture. That is really hard work, but a small number of people working in partnership with a DISA customer, and that's gonna go on for months. It's gonna be really low. You know, I don't think we put numbers out, but as I think I said, not significant impact to top line or bottom line. Next year, right, we start to do migrations. Mm-hmm. In the third year, we do even more migrations. Again, I think we said this last quarter that you'll, when we cleared it was going to be a very slow ramp. It will ramp into a significant program. You know, whether it will ever achieve the IDIQ value of $11.5 billion, you know, I guess we'll have to tune in 10 years from now. It has the potential to do that. Mm-hmm. Because we believe the architecture and the cost savings and the increased cybersecurity and the efficiency of this new DoDNet will be so advantageous to the government customers that people will wanna migrate maybe even more agencies over time. It's gonna take a while to get there. Okay, that's helpful. Maybe just in terms of margins, you know, it looks like it was 9.9% in the quarter, excluding the charges. Maybe if you could just give us kind of an around the horn by segments, what that looks like through the rest of the year with, you know, health down from these elevated levels, maybe defense and civil, what those trajectories look like. Yeah. Gavin, you know, we'll, we won't put too fine of a point on margins by segment, but I think you've got it right. We've been signaling health is an area that we would expect to moderate down. We still expect that to be the case. Again, we love the team's performance. We talked earlier about burn pit legislation. There's some dynamics there that could help us, but it will not run at these levels because there's been a couple one-timers in Q1 and Q2 in health. Civil, I think again, AEGIS was a program, brand new start. We knew it was gonna be certainly at the front end of this program, multi-year program on the lower margin range, and that will continue to ramp up. Civil is also where we absorbed a lot of the legal charges that I talked about. We see those margins trending better. We, you know, Roger spoke about some areas of improved activity in our security products business. I don't wanna get ahead of ourselves, but that's an area that I'd say the back half will be stronger than the first half on profitability and margins. Civil's a well-run business overall. I think the civil performance should trend a little bit higher. Then defense, quite honestly, is probably over time, it will be higher. Whether that occurs in the back half of this year is TBD. I mean, the special project work that Roger talked about is something that we'd love to see that come on at a higher volume. We're not yet seeing that and therefore don't anticipate that will change in the very near term. There is some transition. You know, the Afghan work moderated down. There's some great airborne opportunities that the team is pursuing. That's something we hope to speak about in the future that will be a growth catalyst and margin catalyst for us. Right now, I'd say probably, you know, along this current trajectory on the defense margin side for the near term. All right. Thank you. Thanks, Gavin. The next question is from the line of Colin Canfield with Barclays. Please proceed with your questions. Hey, good morning. Good morning. Tying together perhaps Peter and Rob's question, can you just discuss some of the bigger drivers of next year's growth acceleration? It sounds like the defense hardware pieces with Dynetics seem to be adding outsized lift. Obviously, you know, DISA, I think, takes time to get all the headcount added and, you know, commercial aero, you know, are delayed returns in 2024. I guess it's still a TBD given the kind of exposure that you guys have to wide body traffic. Maybe if you could tie together kinda, you know, what are your biggest uplifters into next year? Yeah, I mean, Colin, we're early to get in detail about 2023, right? We'll certainly speak about that more as we get to next year's guidance. Again, I think Roger talked about the budget backdrop as a foundational starting point, and that's favorable. Therefore, the volume of things that we're seeing and bidding on continues to be strong and favorable. You know, defense activity is one that, you know, we've seen a lot of throughput and opportunities, more DigMod opportunities, more C4ISR opportunities. I mentioned hopefully some airborne opportunities where we've demonstrated a great capability that the customer is interested in seeing more of. Dynetics in the defense hardware side, absolutely, there are some programs that we'll be ramping up. There's also some programs that we'll be moderating as we transition towards proof of concept, completing demos, and getting into, you know, hopefully a production cycle award, which will probably be more likely 2024. You know, those things all should do fine. Civil, again, would probably be the aviation hardware accelerating growth, but not back to pre-COVID levels. The trends are positive there and more, you know, civil agency digital modernization opportunities we continue to see and bid on that we're pursuing. The wild card is health. Now, the one big catalyst that we've been waiting on is the Reserve Health Readiness Program. We spoke about that for over a year now. That had been delayed, was originally in this year's expectation. It's now fully out of any contribution for 2022, but we see that as a big program that we've already won and should ramp up nicely in 2023. Those are a few things that come to mind, but again, we'll talk in more detail about 2023 as we get to that time of the year. Got it. longer term strategic question, but can you just talk about how you're preparing the business for a structurally impaired headcount environment? Both you and Booz are kind of talking about, you know, IT cyclical benefits and the software economy freeing up headcount. If you look at, you know, the population statistics, labor force participation isn't coming back and, you know, U.S. population growth is almost close to shrinking. If you think about how you guys are structuring the business around kind of that environment. Yeah. Hey, Colin, I'll touch on it a little bit. You know, I'm not sure we have enough time on the call to talk about all the things we're doing, but I think we all realize that we are in an era where there are gonna be more jobs than people. I mean, it's just a fundamental structural problem, you know, if you look at college grads and where we can source. And so that from a long-term standpoint, talking with our HR and our leadership team, it's about, okay, what can we automate? How can we put RPAs into our administrative and functional organizations and free the talent up so that they can provide value-added, you know, goods and services to our customers? And then what is our new knowledge worker work look like in this industry? How do we hire them, retain them, upskill them, right, and grow them over time? We have a long, long-term view of our labor strategy and how we wanna take people and create multiple gates and multiple steps in their career. They graduate from college, they come here, you know, they pick up some stackable credentials. They add another computer language. They, you know, they pick up Python. They get a master's degree. We continue to invest in them. They continue to grow and move professionally, and they go, "Wow, I'm doing great work. I'm making competitive salary, and I see my career, you know, advancing at the company, opportunities for growth and management." You know, we're growing, and that's a terrific place to be, where we're growing and hiring people. we do realize that the world that I grew up in is no longer here, and we have to be very thoughtful about where we wanna put our people and frankly, maybe what we wanna do with partners and then what we wanna do with automation. The only thing I'd add to that is, you know, again, we've been talking about some of these businesses, but clearly we see as growth catalysts some of our businesses that are less headcount dependent, what's happening in Dynetics, what's happening with the security products business. Again, they're not a huge part of the portfolio, but they'll be becoming an increasingly larger part of the portfolio over time. Mm-hmm. Got it. Thanks for the color. Thanks. Thank you. Good question. Our next question comes from the line of Cai von Rumohr with Cowen. Please proceed with your question. Yes. Thank you. So you and Booz had some trends that were very similar. Strong sales, very anemic bookings, although very strong fundings, which I don't understand how you'd get those two together, and very weak cash, which slips into the next quarter. Maybe give us some color on how we could get to see the incongruity of bookings and funding. Looking forward, you know, we've got all that funding is there. Are we gonna have the super blowout September quarter in bookings that we could, or is that still gonna be slowed by the issues you discussed, Roger? Yeah. Cai, I think the next quarter will be better, but I don't see the super blowout. I think, you know, and we clearly, Booz and all the other competitors, we all work in the same industry. We're all facing the same acquisition issues. A point I would make, which is, you know, something I can speak to from Leidos. I don't know about the other companies, is our win rates are about the same, right? We didn't lose a lot of programs in first quarter or second quarter. There wasn't a lot of opportunities that were canceled, right? Things just moved to the right, and we saw that, you know, across our entire value stream. Again, as you pointed out, some of our cash payments that we thought were gonna happen in the quarter, you know, got paid in the first week or two of July. Chris talked about that being, I think, over $100 million. It's just the process with the customer is slow. Then we got a couple protests, which really hurt our book-to-bill. You know, we kind of planned those. Every once in a while, we get surprised, we don't get a protest, but more likely than not, we get a protest. The Social Security bid probably won't turn around, you know, provided we prevail on the protest, not until third quarter, but in- Mm-hmm. In fourth quarter. That's not really gonna give us much lift in third quarter. Again, it should be stronger, but I think it is a slower ramp from the budget problems that we had earlier this year and the end of last year. I think, Cai, as you know, increasingly we're talking about the mega awards, the larger awards, those just don't often line up with the government fiscal year-end third quarter cycle. You know, you could see the bigger quarters at any time, like we had a great first quarter. On the funding side, I mean, again, I think, you know, that's conversion of previous prior awards, unfunded to funded. That's not always gonna follow the same cycle. It's easy for a contract officer to make that action on something they've already awarded and give you incremental funding dollars versus a whole new procurement decision process. You know, to me, it's great. We like to see our funded backlog improving, but I don't think you can read too much into the cycle around when those activities take place versus brand-new award decisions. Yeah, Cai, I think a good example is this program we call FENS, which is a sort of a network infrastructure program for the FAA. You know, a year ago, we thought it would have happened in first quarter. In first quarter, it got delayed to the second half of the year. Now it's a little bit uncertain, even when they're gonna make the award. I think we can almost count on a protest. So even if they make the award in the third quarter or fourth quarter, that could be extended, well into 2023. We just have that kind of uncertainty, and we've seen more of that trend and more of that behavior, perhaps than we have over the past couple of years. Thank you. Can you give us just some quick color on what are you seeing in terms of July? Is there being any pickup or is it still at the same level? What are you seeing there? Well, cash was good in July. From awards. Well, we have a couple strategic wins we'll be able to talk about that happened in. Yeah, we did. They're not quite announceable yet. Yeah, I always think every month we have great wins. I mean, that's just sort of me. Sometimes the wins I'm most excited about probably, you know, don't make the print because they're strategic and there's technology involved. We had some of those in July that we'll be able to talk about in the next quarter. There was no mega win in July. Probably our next biggest win on the horizon. There's a couple programs. There's a big IDIQ that might get awarded, but then we have to fight for task orders. It's probably that FAA FENS program. Thank you very much. Yeah. Thank you. Our next question comes from the line of Matt Akers with Wells Fargo. Please proceed with your questions. Hey, good morning, guys. Thanks for the question. Hey, good morning. I wonder if you could comment on your international business? You know, you did the acquisition in Australia. Obviously, you know, a lot of our allies are talking about spending more on the defense. Just curious if that could be a bigger part of the business in the future. Let's see. We're really pleased with our international work, and we're a little under 10% by revenue of dollars that come from outside the U.S., right? We're gonna be very selective. We tend to follow the U.S. and Five Eyes. You know, we're strong in the U.K. Australia has always been a traditionally strong market for us. By the way, they're a terrific ally of the United States. They have fought, I think, in every war alongside the U.S. since the turn of the century. Growing more in Australia is definitely a priority for us. We wanna grow in the right way and think of us as, you know, kind of growing country by country. We wanna be in a country grow large enough where we're gonna have infrastructure and critical mass, and then use that country to maybe move regionally. We are not gonna be, you know, like some of our competitors, where we're big enough that we can have offices in every country. We think the international is a nice mix in the portfolio. It could be countercyclical with some of the priorities within the US. I put into a whole different category our SES business, our security business, which by its nature is global. I mean, it's just the way that business works, both at airports and ports and borders, the machines are easily transportable. By the way, the specs and the requirements are relatively uniform. You know, if you can put a Pro:Vision at Dulles, you can put a Pro:Vision in Hong Kong, usually with small mods. That equipment for us is manufactured in the U.S., and then we export it around the world. Around the world looks to the U.S. as the standard setter. In the SES business, you know, we're probably in nearly 125 countries. Mm-hmm. It doesn't mean that we have necessarily a large organization in those countries. We might have a field service tech in an airport, or we might have a couple people doing maintenance and support. That business, I would tell you today, is already global and isn't gonna become more global. We're about in every country that we feel is appropriate for us to sell in. I really understood your question to be more of, okay, well, you bought another business in Australia, which, you know, we think is a real positive. We're really excited about the business. It's a critical mission for the Australian government, and growing larger in Australia is absolutely part of our strategy. That's great. Thanks. I guess just one more on kinda DES and you know the long-term targets that you guys gave at the Investor Day last fall. You know how much was DES included in that not only from kind of a I guess a growth standpoint but also you know margins and is you know any potential dilution from that contract we should think about as that program ramps up over the coming years? Well, Matt, I would tell you that certainly in the near term, we don't expect the margins on that program to, you know, get at or above the corporate average. We recognize there's some initial investment. In fact, you know, that's part of what we're seeing this year, quite honestly, is while we're in the protest process, the team was building out the PMO staff. They were getting ahead of transition working jumpstart. We're spending money on DES, and we'll continue to do so because we're taking a big picture, long-term view on that. I would just tell you that I expect 2024 to be, you know, more of a significant contribution than 2023. We've got this ramp-up that Roger spoke about. You know, it's early, so we can't give you a lot of precision on exactly the timing and customer adoption. Certainly by 2024, it should be a more significant part of the growth story for us. Great. Thank you. Thank you. The next question is from the line of Bert Subin with Stifel. Please proceed with your questions. Hey, good morning, and thank you for the time. Hey, Bert. Good morning. Morning, Bert. Roger, you noted that SD&A will not recover until 2024. You had previously guided that business, I guess if we go back to early 2020, to low teens annual sales growth with expanding margins, back when you did that deal with L3. How should we think about the path forward for SD&A now? Does it get back onto that track, or are you really just sort of thinking about it in terms of pro forma 2019 sales? No. You know, the way we look at it is, we had a path when we bought the business, you know, and we signed a deal before COVID. Then there's this huge trough in our revenue, and it has affected margin, too, although it's still a nice margin business, right? We hit bottom, and now we've seen it start to recover, and we are seeing double-digit growth in that business year-over-year. Our forecast is it will continue, where in 2024 we'll hit the pre-COVID level, and then it will continue to grow beyond that as airports, both in the U.S. and in the rest of the world, end up modernizing their equipment, one, because of age, but secondly, because of evolving threat. Mm-hmm. Which is new chemicals, fentanyl, other chemicals, meth, that the old machines couldn't detect. What we call touchless is the big demand at airports, as we all know, is to be able to just walk through. The technology is emerging where most airports ten years from now will have a touchless experience for the passenger, and we expect that to drive significant demand. I know I would go down a lane that was touchless versus one that was not. Well, I think plus that improves throughput. Right. Right? Which is a huge deal. Efficiencies. We have been, during this sort of troughed area, investing heavily in technology so that we are ready to compete as the business comes back. Just a clarification question on that. Where does border security fit in? I know you have some products there, and that seems like there's going to be a lot of future demand. Does this acquisition in Australia have any relation to what you might be doing in that business, or are they completely separate? No, they're completely separate. This is more the Australia business are airplanes with sensors flying over pretty much blue water and littoral water, looking for boats that are in distress. Mm-hmm. Maybe boats that shouldn't be there. Right. Our other business is literally where you drive a car through, you drive a truck through. We have a rail business where, at the Mexican border, where the rail cars go through one of our machine, and then we do personnel screening. They're very, very different. It is, you know, I think you are right. The customer, when you go way to the top, is the same in Australia, but it's probably a different organization of that customer. We were not interested in the Cobham business because of a crossover to our SES business. Got it. Just a quick follow-up, if I may. The appropriations process is likely to yield, you know, I think you mentioned earlier, Roger, you know, defense budget that's higher than the initial request, but that's likely to put pressure on non-defense, just in terms of thinking about total spending. Is that a good outcome in your view? I know you have, you know, pretty similar exposure to both. I'm just curious. Yeah. First of all, let me tell you what I think is gonna happen. If you want an editorial of what do I think, I you know, you deserve to hear that too. I think that non-defense will move with defense. I don't think you get an omnibus without moving the non-defense budget in the same direction. I think that's what we've seen in the past couple years. I think that's what will happen this year. Whether we do this in the lame duck, which is what I think is gonna happen, and people are gonna wanna move non-defense and defense sort of in lockstep. We will get an omnibus. It will get done before the next Congress comes in, and we will move on. I think that will be good for Leidos across the board, both our defense business, our intel business, our health and civil. Now, if you ask me if that's good, by the way, I think it's good for the company. I think it's good for our employees and our shareholders. I have 30-year-old kids, and, you know, there are times where I wonder, you know, when we're gonna have to pay this back. And, you know, that means maybe there's a tax increase sometime in the distant future or another source of revenue for the federal government. But from a Leidos standpoint, from an investor standpoint, I expect the budget environment to be very, very healthy for us for years. Thanks, Roger. Thanks, Chris. Yep. Okay, Bert. Our next question is from the line of Seth Seifman with JPMorgan. Please proceed with your question. Hey, thanks very much and. Hey, Tobey. Good morning. Hey, it's Seth. Just a quick one from me this morning. Keep it short, but the release mentions the reduction in materials intake at Dynetics as a driver for defense. Does that have to do with sort of scheduled changes in activity there, or is that more of a you know supply chain issue kind of as we've seen across the industry you know including at some companies in similar areas like Raytheon and Aerojet? Yeah, Seth, it you know, obviously, supply chain is a factor that we're seeing here and there, but the particular issue on hypersonics was kind of planned. The cycle production schedule for that program, it's following you know, a course that we expected it to. Now, we're hopeful for some more authorizations from a funding perspective that could help the program as a growth catalyst in 2023. That's something we're paying attention to. Right now, no, there's not a big issue from a supply chain bottleneck, although I would say that we're still not out of the woods on that as it relates to certain component parts in various parts of the business, but it hasn't been a major factor for us this quarter. Great. Okay. Thank you. Yeah. I'll speak to one today. Thanks. Great. Appreciate it. Thank you. Our final question is coming from the line of Tobey Sommer with Truist Securities. Please proceed with your question. Hey, good morning. This is actually Jasper Bibb for Tobey. Thanks for taking our question. I just wanted to ask about margins in the civil segment. I think you highlighted SD&A and the contract ramps there, but can you provide a bit more color on when you expect that segment to return to more normalized 2018, 2019 profitability levels? Yeah. Yeah, that's certainly something we have ongoing discussion with the leadership team and, you know, there's a lot of catalysts within the civil business. Certainly, SES is a big part of the longer term margin strategy. I've mentioned some of the nice program wins that we've had on the digital modernization side and, you know, those will be on the lower margin side in the near term. Where we do really well on margins in our commercial energy business has been a strong margin catalyst for civil. We're continuing to see that grow, although it's a smaller part of the portfolio. We do well in our transportation aviation business with the FAA, quite honestly, and, you know, that's subject to FAA budget environment, new program starts. The, you know, the anchor is some of our M&O support contracts, mission ops, whether that's with DOE or other customers or tend to be on the lower margin side. I would say in the near term, you know, to get back to those levels is probably a multi-year undertaking as we look to, you know, win and execute more DigMod portfolio and see SES rebound. Some small improvements in other parts of the portfolio are what we're after with the team. That's how we see it right now, Jasper, in the near term. Okay. Yeah. Appreciate the detail there. Thanks for taking the questions, guys. Okay. Great. Thank you. Thank you. On that, we've reached the end of our question and answer session, and I'll now turn the floor back to Stuart Davis for closing remarks. Thank you, Rob, and thank you for your assistance on today's call, and thank you all for joining us 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 this time, log off your webcast, and have a wonderful day.