ENTRUST Solutions Group, LLC (VRT) Earnings Call Transcript & Summary

Greening. Welcome to the Leidos conference call to discuss the pending acquisition of ENTRUST Solutions Group. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker, Stuart Davis from Investor Relations. Stuart, you may now begin.

Thank you, and good morning, everyone. I appreciate everyone tuning in on such short notice. Joining me on today's call are CEO, Tom Bell; and CFO, Chris Cage. We'll be using the presentation slides that are located on the Investor Relations portion of our website for today's discussion. Beginning on Slide 2, today's call will contain forward-looking statements based on the environment as we currently see it, and thus includes risks and uncertainties. Our press release contains more information on the specific risk factors that could cause actual results to differ materially from anticipated results. Also, our presentation includes non-GAAP financial measures. These measures are defined at the back of today's presentation and should not be considered in isolation or as a substitute for performance measures prepared in accordance with GAAP. And now let me turn the call over to Tom, who will begin on Slide 4.

Thank you, Stuart, and good morning, everyone. Today marks an important day for Leidos as we move with conviction in the execution of our NorthStar 2030 strategy. We announced the acquisition of ENTRUST Solutions Group, a premier power and energy service provider, in the support of our energy growth pillar. As we discussed on our last earnings call for more than 2 decades, Leidos has provided world-class engineering services for commercial electric utilities with a focus on transmission and distribution. And now with the acquisition of ENTRUST, we will turbocharge our energy business, which is at the core of this administration's economic agenda. Like us, ENTRUST is a top power and utilities engineering and design firm. They bring a focus on electric and gas infrastructure with a consistent track record of growth and strong profitability. Their financial performance is underpinned by highly visible revenue streams tied to long-term master service agreements with diversified blue chip clients across the country. Turning to Slide 4. There are 5 primary strategic reasons that ENTRUST is the right acquisition for Leidos now. First, as I already mentioned, it's fully aligned with our well-thought-out NorthStar 2030; second, ENTRUST's capabilities and customers perfectly complement our own thriving energy business; third, our 2 businesses are culturally aligned, so we can integrate rapidly and hit the ground running on day 1; fourth, the nation is at the early stages of a transformational investment in our energy infrastructure; and fifth, the energy market is fragmented and beginning to consolidate. Now Leidos will become a scaled player in this market, which will accelerate growth and enhance margins. Perhaps most importantly, though, this deal generates a strong return on invested capital for our investors, and it preserves our significant balance sheet capacity. Chris will cover this last aspect of the deal shortly. But in the meantime, let me dive a little deeper into the compelling strategic rationale for this move beginning on Slide 5. When we rolled out our NorthStar 2030 strategy last year, we identified 5 growth pillars, each having 3 distinct characteristics: customer needs and spending would grow robustly, Leidos had a proven ability to perform cutting-edge profitable work, and Leidos had clear differentiated technical capabilities that could be actively advanced. Our energy Infrastructure business, where we make our nation's electric grid more resilient and more secure, fits that description precisely. Our energy business has long been a hidden gem within Leidos with its double-digit growth and double-digit margins. As a growth pillar, we've stepped up investment in our proprietary grid engineering and AI design tools, including Skywire that makes Leidos' design processes smarter, more efficient and more effective for our customers. And in preparation for today, last year, we divested a noncore legacy energy asset from this growth pillar known as Varec. Now with the ENTRUST acquisition, we cement our position in exactly the area where the market is growing robustly, and we're confident we can leverage Leidos' AI prowess and technical investment to drive top and bottom performance and better serve our customers. I'm excited to increase our exposure and competitiveness in this high-growth, profitable commercial market. Turning to Slide 6. ENTRUST is the perfect complement to our capabilities and customers. Each of the 3 revenue pies represented here is enhanced by the combination of our 2 companies. Together, Leidos and ENTRUST will create an integrated platform with industry-leading capabilities in engineering and program management. Our complementary service offerings will provide a broad range of engineering, design and analysis support for power generation, power delivery and gas transmission and distribution. While we share clients amongst the major utilities, our services are highly complementary, which paves the way for deeper relationships across the power delivery sector. ENTRUST increases our exposure to power engineering, providing entry into the electric power generation and gas. In turn, we see opportunity to expand our core Leidos nonengineering services, especially cyber and IT to ENTRUST customers. This acquisition also expands our national footprint. It allows us to deepen our reach to an expanded set of blue chip companies and utility customers who are looking for partners located in their service regions. Turning to Slide 7, due diligence revealed a unique cultural alignment between our 2 businesses. We approached the market in a similar fashion, measure and drive to the same KPIs, have similar organization structures and have similar compensation and benefits levels. ENTRUST brings us 3,100 new Leidocians. They possess a great mix of skills and a like focus on flawless program execution, what I call promises made, promises kept. They also share our passion for unparalleled customer understanding to drive superior growth. The key takeaway here is that there is shared excitement about this acquisition across both companies. And our consistent cultures, outlooks and practices means we can integrate rapidly and deliver on our acquisition business case right out of the gate. Regarding the market we serve, you can see on Slide 8 that our nation is currently in a robust investment stance for its energy infrastructure. As noted in the executive order on Strengthening the Reliability and Security of the United States Electric Grid, the U.S. is experiencing an unprecedented surge in electric demand. This is driven by technological advancements, the expansion of data centers and an increase in domestic manufacturing. This increase in demand, coupled with the existing capacity challenges, places a significant strain on our nation's power grid. So energy companies are investing more on a sustained basis, both in power generation to meet the massive demand from the AI economy, and transmission and distribution to increase the resilience of aging infrastructure. Together, these forces are driving large capital investments for the decades to come, all of which requires engineering support. And these investments are supported by the administration, which rightly recognizes energy as the fundamental driver of our economy and our national security. Finally, on Slide 9. This transaction will make us a scale player in a market where scale is increasingly important. Our clients require partners that bring the full range of engineering depth, excellent technical innovation and geographic reach. Upon closing, we will be the third largest provider of transmission and distribution engineering services and the fourth largest power engineering firm in the country. Importantly, the ENTRUST acquisition also keeps us as a power engineering pure play without exposure to construction risks. In summary, the ENTRUST acquisition marks a significant advancement in our NorthStar 2030 strategy. It adds depth and breadth to our energy service offerings, which in turn will enable us to more effectively compete for future opportunities in a fast-growing market essential to our nation. This is exactly what our customers need and exactly what this administration is looking for. And so with that, I'll now pass the call over to Chris to run through the financial aspects of the transition.

Thank you, Tom, and thank you, everyone, for joining us today. I'm now on Slide 10. This acquisition offers compelling returns for our shareholders. ENTRUST will bring about $650 million in annual revenues at attractive margins along with clear line of sight to double-digit revenue growth. Together, we are a $1.3 billion powerhouse with the ability to accelerate revenue growth and margins significantly. For example, we can now apply our Skywire AI tool to ENTRUST accounts, delivering proven savings to date of 30% while improving efficiency for clients. Please turn to Slide 11 for the financial highlights of the transaction. We're acquiring ENTRUST for an all-cash purchase price of approximately $2.4 billion. Net of the present value of a tax asset this represents a multiple of around 16x ENTRUST's next 12-month EBITDA, which is favorable compared to similar transactions in the market. When factoring expected revenue and cost synergies, we see a tremendous opportunity to unlock value for our shareholders. Considering the impact of onetime transaction-related expenses, the combination is expected to be accretive to adjusted EPS in 2027, with significant accretion thereafter as we realize synergies. Importantly, we are not sacrificing our strong balance sheet with this transaction. We have a committed bridge facility in place, but we plan to issue $1.4 billion in bonds during the next open window. We expect to finance the remainder of the acquisition with $500 million of cash on hand and $500 million in commercial paper that we would pay down over the course of 2026. Post closing, we expect leverage of 2.6x gross debt to trailing 12 months EBITDA on a pro forma basis, which is within our target range and leaves us with plenty of firepower for further capital deployment to drive long-term shareholder value. Finally, in terms of timing, we expect the transaction to close in the second quarter of 2026, subject to regulatory approvals and other customary conditions. With that, operator, we're ready to take questions.

[Operator Instructions] Our first question comes from Scott Mikus with Melius Research.

It's nice acquisition. ENTRUST has very good margins. I'm just curious how sustainable those are. You also called out that it has long-term master services agreement. So I'm just curious how long are those agreements typically?

Scott, Chris, I'll get started here. I'd say that on the master agreement side, I mean, they vary and this is our business model as well. Sometimes you're talking 3- to 5-year arrangements, and if you're performing well, those are consistently reupped, sometimes there's no end date, right? Those are the relationships that are in place. Regarding the margins, I mean, we've seen steady progress in our business. And as we surveil the landscape for companies, it's not unusual to see margins like this, but this is a well-run business that clearly, the work that they do is highly valued by their clients. And what we're most excited about is the ability to bring these 2 companies together, leverage our technology solutions as part of their delivery offering, and that's what gives us confidence that this has got a lot of runway on the margin side.

Okay. And then a quick one, just is there any overlap or -- between the 2 portfolios or any parts of ENTRUST that may be noncore that you could potentially divest after closing the deal?

As we see it right now, Scott, no. The due diligence didn't give us sight of any part of the company that we don't like. The only part of the combined entity that we didn't care for was what I referenced in my prepared remarks with the divestment of Varec by us last year. But this is a very synergistic merger between the 2 companies. As I tried to talk about a little bit, it gives us upstream in the energy value stream into power generation, and it gives us an adjacency into the gas transmission and distribution market. And those are the key synergies that we're excited about. We see nothing that isn't core to the business we want to build.

Our next question comes from the line of John Godyn with Citi.

I just wanted to follow up on a couple of things in the slides to the extent you can elaborate. You guys mentioned a clear visibility into revenue and cost synergies. I'm curious if there's any way to kind of put a dimension around that, frame that for us? And then there is this comment about significant firepower remaining in the balance sheet for future deals. I just wanted to give you an opportunity to elaborate on that, that kind of struck me as interesting given the size of this deal.

John, sure. This is Chris. Let me get started here. On the balance sheet side, again, as we've talked about in the prepared remarks, 2.6x leverage at close on a pro forma basis, part of the financing would be commercial paper, as I pointed out, and that would get paid down over the course of the year. So you can imagine that leverage point by the end of '26 is even lower than that. So we're below a target range there. The business that we have is growing. This business is growing, so the capacity will continue to increase. We're not foreshadowing a next move here, but we're saying that we're not locked out of anything else that we find that could help accelerate the NorthStar 2030 strategy. So I think it's just paying off the hard work we -- the groundwork we've laid over the last 18, 24 months to get the balance sheet in great shape, which gives us tremendous flexibility. Regarding the synergies here, I mean, again, this is 2 complementary businesses, well-run, low execution risk. They plug right in. We'll get them integrated into our common financial BD, HR platforms by the end. The teams will be off and running. And on the cost synergy side, it's mostly again driven by our technology insertion around AI and helping them take manpower away from the engineering effort for their clients. And as Tom alluded to, the gas market opens up for Leidos. There's cross-selling opportunities there. There's cross-selling opportunities for us on the IT side, which we do for our clients that they don't do today. So there's a lot of touch points for us to expand our reach here.

And just building on that last point, John, the -- we're very excited to have 3,100 new Leidocians that have all the tickets, if you will, or the stamps that they can do this work, and yet, we've been a technology company that have been investing in technology, AI-enabled power engineering. And we feel very good about our opportunity to take those tools into those 3,100 employees and make them ever more efficient, which then gives us better customer satisfaction, more work and more pennies drop into the bottom line.

That's great. You guys have done a lot of deals historically. Is there a percentage of revenue that synergies typically kind of find their way to? Is there any way to kind of put some math around that?

Yes, I'd say when we come out, John -- if you bear with us, when we come out and lay this into our guidance when the deal closes, we can put more specificity around that. But there's tens of millions of dollars we ultimately expect will be realized on the synergy front on the bottom line from these transactions coming together.

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

Congratulations on your first big deal, Thomas.

Thank you, Sheila.

Maybe if you could just talk about, you called out the mid-teens growth rate, if you could elaborate on that a bit more. And how -- you mentioned scale several times, how that really helps ensure you guys are winning more business? And can you just talk about the overall market size and what you think share growth could look like?

Well, let me start at the end and work my way back, Sheila. The market is growing by leaps and bounds. And of course, we're all at work today or working from home today knowing that 1 million Americans are out of power because of this storm that has just hit our country over the weekend. Statistically, there's projected to be a 1/3 increase in electricity demand across the United States over the next 5 years. That's tremendous demand on an aging infrastructure. The infrastructure today averages 40 years old and has some 409,000 miles of wire and cables to carry that electricity across the United States. So we know that resilience of that infrastructure is fragile, and companies are working hard to invest in revitalizing them. We also know that cybersecurity is a key demand. One of the things that we're looking forward to bringing into this market on an increased basis as a result of this acquisition is the cybersecurity tools that Leidos is known for as a national defense, national security contractor. In terms of scale, as Chris mentioned in his comments, it essentially doubles the size of our business, and it makes us the third largest transmission and distribution engineering company, and it makes us the fourth in the whole design process. So this gives us the scale and the geographic reach to reach customers, on customers where there is an existing Leidos relationship and also an existing ENTRUST relationship. We've looked at that as a part of due diligence and can see tremendous synergy even there. We were doing different things for those companies than ENTRUST was doing. And so we see opportunity for us to simply do more for those customers as a one-stop shop, if you will. And so we're very excited about that and the opportunity to expand Leidos into new geographic regions that we were serving, but not with a main focus. So very exciting expansion for Leidos.

Our next question comes from the line of Ken Herbert of RBC Capital Markets.

Tom and Chris, congrats on the deal.

Thank you, Ken.

Thanks, ken.

I wondered, Tom or Chris, if you can comment on customers. Is there any material customer concentration? Or as you look at customer credits, any unique concern there with the ENTRUST customer base?

In terms of customers, we know the market well. So there's no customers that ENTRUST is bringing us that we don't know who they are or what they're about. It's just they have a privileged position with those customers. And then there's some customers, as I was just saying to Sheila, where we both have relationships, but they're highly complementary and synergistic. In terms of the second part of your question...

That was about credit risk, ken, was asking about. These guys pay their bills and the answer is yes. Something we looked hard at in diligence, Ken, is how is the AR turning over, who is their customer base? And everything we saw says that they're doing work with blue chip clients, and that's something we'll continue to diligently approach as we move forward here. But to Tom's point, I mean, there is some alignment within the customer sets. We serve similar customers, but we do different things for them. So that's why this is, we believe, highly complementary.

And as we look at the customer base, are there any customers that are over 10% of sales, or is this more details emerge?

Not that we've identified yet at this point, Ken. So I don't expect that to be the case. But again, as we get this transaction closed and roll out some additional information for you in the coming months, we'll make sure we share any of those highlights, but I don't see that being an issue.

[Audio Gap] the line of Peter Arment of Baird.

Tom, Chris, nice deal. Is there any -- I'm sorry if I missed this. Is there any disclosure on kind of current backlog? And then, Chris, is the typical contracts here fixed price? And what's the best way to think about that?

Yes. Peter, first on backlog. I mean this is a little different business model. We've talked about the master service agreements. And so those are frameworks. Think of those as IDIQ types that put us in the game and allow us to serve a client. But typically, you're going to see shorter duration projects and tasks underneath that, that might turn over in months or certainly inside of a year. You're not going to see any long-term contracts under backlog. So it will churn highly. But as we've proven with our business, I mean, it is on a nice upward trajectory on growth, and you just got to keep feeding that engine, but we've got a robust business development model to do that. Second part of your question was, remind me. Oh, contract type...

On the fixed price, yes.

Yes. So what you're typically going to see here is a lot of time and material type of work. I mean, sometimes there's fixed price arrangements. There's no cost plus here, but it's either going to be T&M, sometimes you'll have a fixed price arrangement and opportunities, again, to attract high margin on your delivery performance there.

Got it. Looks like a great fit. Congrats guys.

Low execution risk on these projects. We're talking about things that -- again, that's the part that we like to boast as this is a business that can run exceptionally well and you've got -- you're not taking on fixed-price development efforts whatsoever.

Our next question comes from Seth Seifman of JPMorgan.

Can you hear me now?

Yes.

So I guess maybe just not being kind of as familiar with this market, maybe can you just walk us through an example of what one of these agreements is like? And it sounds like -- I think we all know that kind of there's a lot of demand for power, and we all see stuff about data centers and need for gas turbines and all that. It sounds like this is more focused on transmission and distribution. So kind of walk us through what are customers looking for you guys to do? And how that sort of market is -- what real underlying thing is driving the growth in that part of the transmission and distribution market?

Yes. Let me go first, Seth, and then we can see if Chris wants to add any color. The key here are these master service agreements. And if you think about traditional government contracting, think of them as an IDIQ. You develop a relationship with a customer, you prove to them that you can do work on smaller projects, and as you deliver, you are invited to do more robust work for that utility. Think of things like redesigning the power distribution cables that come out of a power distribution factory. Think about the transmission lines in your neighborhood. Think about the distribution lines that exist on the large infrastructure that you see around the nation. These are all parts of the value stream that we deliver engineering products for. Sometimes those lines are affected by storms as we're seeing right now. Sometimes those lines need to be replaced because of aging. Sometimes they need to be moved because of human traffic flows. And so you have a relationship, you have the capacity, you have the full spectrum of capabilities to satisfy what a utility needs when they have an engineering project, and they don't have the capacity organically inside their own company. And so if you've built trust with these companies, they contract with you, as Chris said, in a time and material type of fashion under your master service agreement to provide the engineering to them. Key is, as I mentioned before, is having the stamps, having the qualifications to do the work. And with our technology investments that we've made in this business in the past, now we believe the utilities we serve will have the benefit of having the AI technology, the technology tools we have and possibly the cybersecurity tools that we can deploy into those companies and into those projects. I hope that kind of helps.

Seth, let me just add one thing. When you think about major capital projects for utilities is the demand signal is rising and there needs to be more generation capacity brought on to the grid, about 5% of the budgets to build those capital projects is tied to the engineering effort, okay? So that's where -- that's the spot where we're serving. So that's the math. You think about the billions and ultimately, trillions is going to be invested in hardening the grid, new generation capacity. You've got to get that energy from the generating asset into a substation, into the ultimate end user, whether that's a data center or home, et cetera. And so we're -- with ENTRUST now, we're playing across that whole value chain on the engineering and design side. And the demand signal is very robust, and that's, again, without taking any of the construction risk on building the actual capital projects.

And I mentioned this in my prepared remarks, this doesn't give us exposure to construction risk. We're not getting into the utility construction business. That's something we don't think is core to us. And so this is a pure play power engineering, gas engineering play for us in a complementary fashion.

Our next question comes from the line of Tobey Sommer of Truist.

Could you describe how you might -- may be able to target growth faster than the market? Is this a question of amplifying the -- and growing the sales team, the combination enabling better performance and responsiveness to your customers? How do you differentiate yourself from a growth perspective within the market?

I think the key is capacity. Having capacity is the key, Tobey. And this is an area where utilities want folks that are in their geographic region, as you can appreciate. Every state, every municipality has slight tweaks to their engineering demands and the specifications with which energy is transmitted through their area. And so having that local understanding and then having the capacity to serve the market will give us a position to not only capture the 1/3 increase in spend on the top line, but also do more for these customers over the next 5, 10 years. And that's really the key here. And that's why I said in my prepared remarks that scale is increasingly important because the utility customers don't want to go to 5 shops to do a job. They would love to come to 1 shop and have you do it all. And that's what this puts us in the position to do.

And as we've already talked about with our technology insertion that not only adds capacity, but it adds competitiveness to make sure we're delivering at the most affordable rates to be able to -- and ensure that savings between our customers and Leidos ultimately. So I think those are some of the foundational aspects that will help us scale this business up on the trajectory it's in.

So my follow-up would be around your cyber and other AI opportunities. In your existing business, has that added capability led to project or customer wins such that it is a source of differentiation within the market?

Yes. And one area I mentioned in my prepared remarks was IT services. Obviously, another core of Leidos is providing IT services. And we've had the great success of being able to deliver IT services for some of our utilities now. That's an area that ENTRUST doesn't do, and we look forward to working with and talking to their customers about possibly also helping them with their IT infrastructure. And again, once you get -- help those customers with their IT infrastructure, then cyber resilience is again very critical, and we have tools and techniques to help those customers with that issue. So yes, in short.

Our next question comes from the line of Jonathan Siegmann with Stifel.

Tom and Chris, congratulations on the transaction.

Thank you.

So the company has had a long history and good success of building scale. It looks like you're doing it again in this business. Just at a real high level, what are you most excited about? Is it the revenue or the cost side that you really think it's going to be the kicker here? And then when we think about what we as external observers will have, do you intend to maybe give some more transparency on the business as it grows?

Yes. Thank you. The thing I'm most excited about is positioning Leidos to really be a player in helping this nation in a critical national security area. Our President and the EO I referenced in my prepared remarks has made it very clear that electrical and energy security is national security. We are a national security company at our core. And we've always had this crown jewel, but now this gives us scale. And it gives us scale at a time and a place when the demand is robust and the administrative support is so keen. And so I am very excited about positioning Leidos to be able to serve another aspect of this government's need to secure the homeland and make sure that our energy grid is as resilient and secure as possible. Chris?

Yes. No. I mean, I would say you asked if we're more excited about revenue or cost side, and I'd say both. But I mean this is predominantly around growth and scaling up this business. We've given you a little bit of visibility around our energy business in the past number of quarters. You'll hear more from us, obviously, about that going forward because this does move the needle. This has the power, on a combined basis, to really improve the overall growth rate and margin trajectory for Leidos. And so we're very excited about that. But the primary thing we expect out of this team and this combined business is to really drive the growth. The cost synergy side will take care of itself, and that's not eliminating positions, that's applying technology. So it's -- we've got a clear recipe for success there.

Our next question comes from the line of Noah Poponak with Goldman Sachs.

Tom, I guess, at a high level, when you came into the company, the company had -- prior to your arrival had done some M&A that took write-downs and -- or ended up having some question marks. I mean you obviously have a great balance sheet and cash flow profile that your investors like. Can you talk a little bit about how this is different than the past, or your level of confidence and visibility that this is different than the past? And why this -- a little bit more about how you feel you know this fits that improved strategy compared to some of the M&A historically?

Yes. Thank you for that, and happy to, Noah. So Obviously, as you referenced, I joined the company in 2023. And at the time I made very clear that I thought we had enough on our plate that I wanted to prove we could digest it effectively. And so we set about instilling a promises made, promises kept culture at Leidos, and we improved margins on the book of bill that we had in hand at the time. In 2024, as you know, we afforded ourselves the luxury of undertaking the year of deep strategic thinking, which uncovered 5 very specific growth pillars that we knew customer needs were growing, Leidos could serve those customer needs and make good money doing it. One of those was energy. I think that was a surprise to many people, but as we looked to our hidden jewels within Leidos, we knew we had this key capability in our energy infrastructure business. And we knew that the grid was becoming more and more of a national priority. And so it became one of our growth pillars. I have high confidence that we won't stub our toe in this acquisition for 2 primary reasons. We've done that due diligence eyes wide open, not just on an opportunistic, "Hey, there's an asset available, do you want to buy it," but really going out and cultivating the market to find the acquisition that was most synergistic to what we were today and what we wanted to become tomorrow. And that's how we found ENTRUST. I want to be clear with that. ENTRUST didn't come to us, we went out and cultivated the market to find ENTRUST. And then second, this is going to be in our Homeland Security business, our Homeland business. That is now the same leadership team that essentially did the Kudu acquisition last year and was very accretive from day 1. And so we're very excited about the muscle memory that this leadership team has exhibited, their ability to do rapid integration and provide synergies very quickly, and I'm very confident in that leadership team delivering the same, even though the scale of this is bigger.

I appreciate all that detail. And just 1 follow-up on the margins. Could you elaborate a little bit on how the legacy ENTRUST margins are -- where they are compared to the legacy Leidos energy infrastructure margin? And then in your slide on the pro forma that the high teens kind of splits the difference, is there an opportunity for that pro forma to land at the legacy ENTRUST given the scale and synergy and cross-pollinization learnings that you're discussing?

Yes. Noah, Chris here. And so the answer to the last part first, yes. We will be satisfied if we level out in the high teens and call it a day. I mean that's -- we noted on the slide that's our expectations for '26, but we're not telling you about what our expectations for '27 and '28 are now, but you can imagine that they're more robust. As it relates to our business, again, we've got a few more dimensions to it, as Tom pointed out, some of the IT work, some of the energy efficiency work. For the core piece that's most similar to what ENTRUST does, I'd say we're on par or even slightly better, but there's few more things in the portfolio. And now that's where we're confident. We have an opportunity to lift some of their margin performance up a little bit with technology. But again, I think we'll find in time that the power of these 2 businesses coming together will help those results be even better as we look to the future.

And I would also just add, promises made, promises kept. We want to put a bogey out there we know we can achieve. We're very excited about learning from the 3,100 Leidocians that are coming to us as a part of this acquisition for how they generated the profitability they generated. So it is a reciprocal synergy that we're looking forward to.

[Audio Gap] Gautam Khanna with Cowen.

I just had 2 questions. One, you mentioned this gets you in the #3 or #4 position in the market. Is that good enough? Or is this something you think you might add on to at some point to bolster your position even further? And then I was curious just in terms of the employee base at ENTRUST, are they mostly North American based? Or is there an opportunity to kind of move into lower-cost regions over time with respect to the employee base?

Yes. Thanks. I'll take the first part and maybe the second also and then kick it over to Chris. First, this does not suggest that we are done with M&A as we execute our NorthStar 2030 strategy. It also doesn't suggest we're going to immediately do another acquisition in this space. We're going to continue to cultivate possible inorganic plays across all 5 growth pillars. And we're also going to continue to invest in those growth pillars organically. And so this is the continuation of a shareholder-friendly capital philosophy that we've had. Now that we have a strategy, we're going to be very diligent in executing that strategy according to the growth pillars we have laid out. So maybe is the answer to your question. And that's why we're very excited about the fact that we've been able to take advantage of the good housekeeping we've proven over the last years to put ourselves in where we have balance sheet that has not only the capacity to do this deal, but any other deal that comes across those growth pillars. In terms of geography and where you do the engineering, yes, there is some Canadian exposure that comes with this business that we're very excited about because not only does that give us customer access in Canada, but it gives us a labor force in Canada that allows us to do some clever things with the clock in terms of doing engineering around a wider zone of time zones and also take advantage of labor rates that sometimes are less expensive in the United States or less expensive in Canada. So very excited about that opportunity, too. Chris, anything to add?

The only thing I would add, Gautam, is historically even it's small, but in our business, we've got some delivery capability coming out of India today for our energy business today. So again, as part of how we grow and scale this up, we'll certainly be looking for areas where we can capitalize on some cost arbitrage on the delivery model. But primarily having people in the location where your customers are is a paramount aspect of being successful with those clients.

[Audio Gap] Seth Seifman with JPMorgan.

Just wanted to ask, I guess, zooming out and looking at the wider portfolio, when you thought about making this investment, I imagine you were already quite advanced in this process at the time. But the President discussed looking for a very significant increase in the budget. The department is also very focused in making sure contractors are investing in their capabilities, and you have a business in Defense Systems that should be scaling up significantly in the coming years. So just to -- maybe if you could address sort of how you thought about investing here versus in defense? And second of all, that this -- the focus here would suggest that you have a high level of confidence in the ability of Defense Systems to ramp up in the coming years and that they have the capital and the capability that they need.

Yes. Seth. Thanks for the question. Again, we have 5 growth pillars and 4 of them are squarely in the Department of Defense, Department of War wheelhouse. And we plan to continue to resource those strategies and those growth pillars adequately. And if an inorganic play comes to pass in one of those growth pillars, we will be eager to jump on it. The timing of this just did work out that, again, as I said, the team did a great job in 2025, canvassing the environment for worthy acquisition targets for us that would give us everything we wanted that we identified as a part of our year of deep strategic thinking to support our energy growth pillar. And ENTRUST came to the top of the barrel, and they were keen to have an exit to a strategic player like us too. And so the -- it was a marriage made in heaven that we were very happy to fulfill, but you shouldn't think of it as a priority. It's not prioritizing one pillar over another, it's the result of good hard work by Vicki Schmanske and her team to find this asset and put us in a position to secure it at the beginning of this year.

Well, I just would -- just to build on that, I think that you addressed both his questions because there is an implied vote of confidence to our defense team in this too because they have laid a lot of groundwork, built off of the Dynetics acquisition from a number of years ago. And now if you look at -- yes, there could be inorganic that complements their portfolio. But I think what you see today is more organic investment along the lines of what the Department of War is looking for of how do you put some skin in the game? How do you come to the table with proven capability? How do you ramp up your capacity? We are thinking through and working on all those things in that part of the portfolio as we speak. So very excited about where that's going to.

And I'm showing no further questions at this time. I would now like to hand the call over to Stuart Davis for closing remarks.

Operator, thanks for your assistance on this morning's call, and we really appreciate everybody hopping on the call so early on a Monday morning, the day after a snowstorm. I appreciate your interest in Leidos. I'll be available all day for questions related to this acquisition. Have a great day.

This concludes today's conference. Thank you for participating. You may now disconnect.