Leidos Holdings, Inc. (LDOS) Earnings Call Transcript & Summary

Well, thanks, everybody, for joining. We've got Chris Cage with us from Leidos. Chris, thanks for coming.

Gavin, happy to be here. Thanks for having us.

Appreciate it. Well, I'm just going to jump straight in and then maybe we'll take it back to high-level questions later, but I want to go right at the year and right at guidance.

Okay.

A strong start in the first quarter, 4% organic. That's kind of the high end of your range. Strong bookings, comps get easier in the second half. So talk a little bit about kind of what you've got left for the year in terms of how you land towards the high or low end of the range and what do you think about the midpoint today coming off of the strong first quarter?

While we are certainly pleased with the start to the year, you're right. We set out guidance in February for the year of 1% to 4% organic growth. And that was coming off the heels of a little bit of a challenging end of the year, COVID spiked up over the holidays. We didn't have a budget in hand at that point in time, right? Since that initial guidance was put in place, obviously, we feel better about the budget environment, we've got an omnibus out. Customers are now -- have clarity as far as what their funding sources are. And for Leidos, not only delivering 4% -- over 4% organic growth for the first quarter, but having a book-to-bill of 1.6x, which did not include any contribution from our Defense Enclave Services win, which I think you know is in protest. So we are feeling like there's more positives that have played out, feeling good about the trajectory we're on, but it's early. And we've seen, just like last year, disruptions can happen, they have happened in the past. And so let's give ourselves a little bit more runway to make sure the budget environment, which we think is very favorable, does translate into awards, a regular pace of activity with the customer set. And then hopefully, we'll carry that momentum throughout the year. But certainly, we feel that where we're positioned right now, the lower end of our guidance is probably less likely, but we still feel like we're squarely in the range that we set out at the beginning of the year.

Got it. So derisked a number of factors, but there are no visible headwinds that have since cropped up from original guidance.

Yes. Nothing that -- obviously, we'd love to win everything. You don't win them all. But from where we're positioned on the things that we needed to happen, right now, we've checked off a few of those things, and we look forward to continuing to check more of those off as we progress through the second and third quarter.

Okay. And then you talked about the ASR. I think it's $0.10 accretive. You also talked about investing with a strong demand signal to meet that. Can you talk a little bit more about that investment dynamic, about where you're spending? And what the ROI time is on that?

Sure. So you're right. We laid out our initial guidance for the year on EPS, $6.10 to $6.50. We did a stock repurchase program, which helped us, we'd said closer to the $0.10 contribution. Even with that, we feel like we're squarely in the range right now. And the investment environment, actually, it's a good place to be, right? You want a situation where there's a demand signal coming from customers to feel more bullish about their budget environments, to see emerging needs, and we want to be in a position to capitalize on those opportunities when we believe they could potentially set ourselves up for accelerating growth in certain areas into '23 and '24 and beyond. And so an example of a situation like that is in our space area. We've talked about -- we've been in the space business, not in a huge way, but it's proliferated various parts of the company for many years. And so as we're now making a strategic point to kind of flex that muscle a bit more and make more of a concerted effort to how do we become a bigger player in certain space areas, we're on an early stage program at this point in time as an example, where right now, it's paramount that you meet a required schedule to demonstrate a capability to put yourself in a position to win a follow-on phase and a follow-on phase after that, right? And we've seen that there's multiple competitors in this particular phase, one of which has acknowledged that they're not going to make the schedule. So it created an opportunity to say, can we differentiate ourselves by putting the resources behind maintaining schedule, which comes at the expense of the program margins on this prototype phase? We think that's a bet worth making, right, to demonstrate to the customer our capability to maintain one of our hallmarks, which is speed of execution, right, maintain that schedule. And we're very excited about the potential future phases that, that positions us to win. It will be competitive, but those are incremental growth opportunities that weren't part of the original line of thinking over this next 3-year time horizon. That's 1 example. We've seen in Dynetics usually is kind of the area where these new ideas emerge. And there's another situation where as the mission set need has transitioned away from the Middle East to great power competition, different weapon systems are potentially now needed. And working with our customer, we've seen a demand signal for something that's a variant of a product that we have today, how do we modify it with the incremental research and development activities to prove its ability to meet a different mission capability. And again, so we look at -- through a lens like that and see what the opportunity set could potentially be over a multiyear time horizon. And we're usually looking for, on an ROI basis, these types of investments are at least going to be mid-teens or greater potentially as far as a return possibility. We recognize we're not going to hit on all of them, but those are swings that we're willing to take in an environment where there's a bias towards more growth possibilities.

Got it. I want to come back to Dynetics specifically, but maybe carrying through on the budget dynamic. I mean how much of the fiscal '22 Omnibus are you seeing flow through? Is there a use-it-or-lose-it dynamic where the customers need to get it on and get it on contract? And then into fiscal '23, with the elevated budget request, and how quickly does that come through? Or is that just a longer-term structural shift in defense spend?

I do think that we are seeing some accelerated behaviors from the customers now that there's clarity budgets for '22. They certainly want to be in a position to get that obligated before the end of the government fiscal year to position for the potential for another continuing resolution as we transition to '23. And so it depends on the customer and their level of sophistication and their ability to actually move things through a contracting cycle. But we have, for example, seen a customer in our airborne ISR market come to us and said, we have some additional money, we're interested in expanding the capability that we have. It might not be for a new 5-year program, right? But for an intermediate term, how do you deliver more capability to us in this period of time where we have the funding available? And we're happy to look for ideas where we can help them in situations like that. So I think we're expecting that pace will ramp up here over the next few months, and we're very optimistic that, that will position us well through the summer for a heightened pace of award activity.

Got it. So if I were to frame that all within your Investor Day multiyear growth target of 5% to 6%, a little slower this year. Was that an initial consideration that this year would be slower within that, and the back half would be faster? Or should we think of this year as a bit of an outlier and 5% to 6% is the right starting point for the out-years?

Well, when we put together the multiyear framework, 5% to 6%, 3-year CAGR, '22, '23, '24, it was in October of last year. And as put together at that point in time, the environment was a little bit different. And we, as we lived and learned through, like I said, the surge in the Omicron variant and some of the customer behavior leading into '22, we saw that the pace of activity was a little bit slower, right? So things probably did push out a little bit to the right. And also, we knew some of the major programs would be a bit more back-end loaded. So there was a scenario where we could have got off to a little bit of a higher growth start. As we transitioned into this year's guidance, we wanted to be a little bit cautious given those dynamics that we experienced. But I think when you look at the fundamentals of that 3-year growth trajectory, it was always predicated on a couple of things. Number one, a customer budget environment that we said was approximately 4.5% budget growth. That's what we saw a year ago when we put that together. I would say that outlook has only improved since that point in time. And then, for us, a couple of our major market opportunities were going to be catalysts for growth into '23 and '24, one of which being a return to our aviation screening market, right, security checkpoint, security detection. We know that's depressed given worldwide travel have been down, especially in the international markets. So that's an area of potential growth catalysts looking ahead to '23 and '24. And then the other big catalyst would be what's happening with Dynetics. I know you're going to ask me more about that, but Dynetics is on some important programs, some of which are in prototype phases. They're meeting emerging demands of various customers. Hypersonics is a big area, indirect fire protection. These are programs that have a lot of room to run and ramp up as we transition from early phase, low-rate production prototype into, hopefully, more programs of record, more higher volume production. So those are some of the catalysts that are still in place. And then continuing to grow programs that we've recently won, maybe NextGen is a growth catalyst for us this year. We talked about in our health market, the Reserve Health Readiness program is a big program that we want. Unfortunately, that has been delayed a little bit to reaching its full potential. And now whereas it could have happened early this year, we now believe it's the fourth quarter of this year. So that will be a growth catalyst in the next year. And finally, the Defense Enclave Services program. If we successfully prevail to the protest period, we obviously believe that's a multiyear growth program for us, not just in '23 and '24, but beyond.

And DES is a big win, but that's just the biggest of a string, right, NGEN, GSM-O, a couple of others. And how do you think about scale as either a driver or a competitive differentiator? And whether or not the government is actually bundling larger contracts and that positions you better or not?

Well, we do like our chances on the bigger programs, right, and for a variety of reasons. Number one, we have a demonstrated past performance qualification to deliver on programs of that size and scale. And that does limit the competitive playing field a bit when programs get to the mega volume level. And so there's a handful of people that can potentially compete successfully that can meet the demand signal of the customer there. But that being said, I mean, there's more to it than just being a big provider. Scale has many advantages, but it's also the technical aspects. How are you going to evolve technically? How are you going in? We talked about digital modernization, transitioning customers onto new networks, taking them to the cloud, automating, those are things that we continue to invest in as differentiated capabilities. So we bring to bear the past performance qualification, the scale, which includes the technical talent to deliver, plus the innovations that we've invested in, whether it's internally funded, research and development focused on IT modernization, processes and tools, or in the case of the acquisition space, where we acquired a company like 1901 a little over a year ago, which brought capability and how we do and as-a-service delivery model for IT modernization. So I think it's a combination of factors. You have to understand the playing field. It helps significantly when you understand the customers' mission. To just be an IT provider and outsourced IT provider is one thing. But in our case, we are -- have deep heritage relationships with these customers. We understand the mission that the IT is going to help enable and that helps position us to put together a compelling proposal that's competitive on all fronts with the past performance qualifications that has enabled us to win multiple mega multibillion-dollar programs. And we still believe that there's many more opportunities in the pipeline when you look across not only the DoD space with what's the Army going to do, what is the Air Force going to do, but then the civilian agency set to where they're still early on in their journey of IT modernization.

Right. Maybe more specifically on DES, that could ramp up over time. I know you said don't divide the total contract value by 10%, but that's a contract that could have a pretty wide level of adoption. I mean is there any historical precedent of IT bundling across agencies that we can look at in terms of percent of ceiling exercised or pace of ramp?

I think it's going to be a little bit challenging to draw analogies. I mean this is so unique where you're talking about 22 individual DoD fourth estate agencies that ultimately have to migrate onto a modernized network environment. So it's kind of build it and they will come. And what you need to deliver is success with that first agency that you transition over, prove out what they're getting, better, faster, cheaper, safer, more cyber secure. And then you transition, you rinse and repeat with multiple other adoptions. It's not the same at all, but the analogy I think about to a degree is DHMSM, right? So we're deploying electronic health records to multiple DoD health installations, and those transitions are critical. But you build a framework for how you do it, how you navigate the adoption, how you navigate the deployment, how you transition and how you interface and deliver the training and everything that's required. So you have to have a framework like that that's repeatable, that you can apply many times over. So I think it's TBD as far as that adoption cycle goes, but we are going to work to make the process as smooth as possible such that those agencies are clamoring to come over, right? And that's our job, is to make them excited and enthusiastic to get on the transition time horizon and make that program a success.

Is that margin neutral or too early to say?

Well, it's early, right? So you're a multiyear program, and I think we've been consistent in this message. Any time you win a program, multiyear, 5-, 10-year program, oftentimes, the early phases, right, are not going to be the highest watermark for margins. You're getting into the environment, you're optimizing, you're ensuring you get off on a path to success. Over time, we -- our expectation is certainly that should be half the Defense Solutions segment margin profile. And if there's opportunities to drive it higher, of course, our teams are going to be highly motivated to deliver for the customer but to make that a success for our investors as well.

Got it. On Dynetics, maybe let's start with the margin topic since that kind of sounds similar to hardware that ramps up at a lower initial margin, at low rate of R&D, and then can eventually be much more accretive at run rate. How do we think about the Dynetics margin dynamics as the growth in that business picks up, as you lap, land or headwinds?

Right, so I mean Dynetics has got fantastic capability. And they are at various stages on multiple programs, many of which winning these early-stage programs on a cost reimbursable type contract arrangement with negotiated fee, which, at times, there's limitations on what the customer will pay for a situation like that where the risk is really on them from a cost perspective. So when you're proving yourself on those production programs, which you take hypersonics, I think we're transitioning now to a production phase on some of the hypersonics programs. As more orders get placed, as that volume ramps up, those are the situations where you're -- you create a contract incentive mechanism that puts a price point out there that gives the government certainty and gives us an opportunity to gain margin opportunities from efficiencies that are created. On our indirect fire protection family of programs, this is kind of a similar dynamic, right? You're going to be -- we've got a program right now for 16, if picked, enduring launchers that will be delivered over the course of the next 12 months-or-so. And then once those get through and prove they're meeting the requirements of the customer, now you're talking about a follow-on production-oriented program. So those have to make the journey, but there's also programs -- I mentioned space. And again, we don't -- we haven't been chosen as a successful follow-on bidder, but some of the programs we're going after now, we're bidding on those on a fixed price basis already, where there's a production opportunity where you can deliver and if you're successful, grow the margin. So I think that team -- first, be innovative, invest in the right capabilities. I talked about the investment opportunity on another weapon systems program, those are bought by the unit on a fixed price basis. So I think there are plenty of opportunities for the Dynetics business to not only expand the top line, but to find opportunities to expand the bottom line, and we're looking at that as a multiyear journey, '23, '24 and into '25.

I mean it sounds like a lot of unique growth drivers at Dynetics. And one thing that struck me in the quarter was you cited that as a growth driver, even with the Lander headwind. So I mean, what kind of growth can you achieve at Dynetics? And obviously, it will depend a lot on the transition of some of those initial programs, but what kind of growth rate do you think you can achieve there?

Well, I mean, I won't -- we haven't set a mark for Dynetics-specific growth targets. But I would tell you, again, some of the programs I just talked about, each one in their own rights could be multi-hundred million dollar programs, right, whereas they're not today. So you start to think about that possibility. And again, there'll be competitive dynamics, but there's also more emerging needs, right? So our goal is to find the next thing that gets into that prototype R&D phase. And believe me, we're looking at those opportunities today. So I feel very bullish. And quite honestly, that's not even talking about the possibilities on the human space flight side, right? We saw Lander a year ago. And unfortunately, that went the way of the billionaires and that might be where the massive market is going. But there are other opportunities within NASA that our team is still well connected there, and we are certainly very interested and motivated to finding opportunities to help NASA on their various missions over time. So I do feel like there are plenty of opportunities to turn these relatively small to midsized programs in Dynetics into multi-$100 million-type plus programs over the next 3-plus years.

That's great. And obviously, Dynetics has hypersonics and space exposure. Is there any way to parse out overall Leidos Dynetics or space exposure, and kind of what growth rate those have?

Well, it's early. I mean space, again, as we went through the strategic review process with Paul Engola leading that for us, we did look across the company and kind of aggregated up our space exposure and customer sets like NRO and NGA. And so the intent really is to organizationally, as we move forward, kind of align that more together so it can act like an integrated space business and find opportunities to grow. So to me, it's one that hasn't been a growth catalyst significantly for us in the past. As we look for more opportunities to grow in space, I view that as net accretive to growth, as an opportunity to expand. But it's still in the couple of hundred million dollar range as a starting point, so not an overly significant piece of the portfolio today.

What areas are you concentrated in the space?

Space domain awareness is a big area for us. We think that's an emerging customer need. There's a lot of demand out of space development agency for more situational awareness in space. ISR processing, space-based collection, right? How do we get more in the mode of helping customers process the information that's coming out of space from an intelligence-gathering, surveillance and reconnaissance perspective and image analysis, those types of things. So there's a couple of different strategic threads that the teams identified where best possibility to grow, best possibility to kind of enter the market in a way that isn't already saturated competitively and provide for potential for some long-term upside.

Maybe pivoting to health. I mean obviously, with the conflict in Ukraine, it seems like everybody is focused on the defense spending outlook, but health was one that you guys flagged as being one of your fastest growth areas for the next 3 years. I mean is that still the case? Can health still be one of the fastest-growing areas? Or do you have some of the now exam headwinds? Or how do you think about the multiyear health outlook?

Well, we're still very bullish on the health market overall. And obviously, we've had some great success on a couple of our more mega programs, the Defense Health Modernization program is at the -- kind of more of the steady state. We've really been ramping up the delivery and deployment of systems across the DoD, and that will continue into '23 and beyond. But then there's what's going on with the VA, which we don't have a meaningful role in today is that a growth opportunity. Other customers in the health market, right? They're looking for more -- from an IT modernization, data analytics perspective, we're seeing more and more demand signals, CMS, HHS, customer sets. And then you have the disability examination business where we've had a franchise position for many years. The team has done an excellent job of delivering for the veterans and for the VBA. We're providing services throughout the nation. We just won a critical recompete as part of that. There were additional awardees that have entered the market, not surprisingly because it's been a great market and there's a demand signal that's actually continuing to increase. But we also want to position to provide services internationally. And we hadn't been a provider of those services in the international market before. So that for us is an opportunity to counterbalance more competition domestically. So the real question is not only what's happening on the exam business we're doing today and how that volume will potentially change and evolve over time because we do believe there will be more presumptive cases, more need for examinations, but taking that model and extending it to other health managed services, right? It's been a very effective model from an efficiency, from a throughput perspective to get the veterans the claims, the benefits that they need, but also to manage the coordination of care. And so there's many other areas in the health environment where we think the coordination of care is not optimized, right? And so how do you drive more efficiencies into that process? And our team is actively looking at opportunities and talking to potential customers about expanding that capability in other ways. So I think health as a broader market is very attractive. We've certainly seen some competitors trying to find positions in the health IT space because it's been a growing and evolving market, and we don't see that slowing down anytime soon.

Got it. On the VBA contract, what is the net of kind of the domestic market share competition versus the international opportunity? And is that still a growth potential? Or is that a near-term headwind?

Well, I think the way we positioned it is, because we don't know yet about how the international will expand, net-net is probably a headwind to growth but within our guidance, right? So this was contemplated. It's what we expected, it's one of the areas within guidance that we expected to ramp down modestly. Now what could change to the positive? Number one is how you deliver services. Just because more competition has been introduced, it doesn't mean that's where the examinations are going to be directed. How we're delivering those services is predicated on quality, timeliness and customer service. That's the foundation of what we do and how we deliver. And the team that's been executing has lived and breathed that mantra for many years. And so if you're not able to meet the quality, timeliness and customer service standards that the VA demands and the veterans need, then that shifts the pendulum back to where they direct that case load. So I think it's too early to tell how that will be sorted out, but we're anticipating a fair and equitable distribution of the demand signal and that might not be the case. And then international, we're expecting -- we'll take a little bit of time to ramp up to see how much work share we can gain in that particular market. But net-net, all of that was contemplated in this year's guidance and our team's focus on just delivering excellent service like we always have.

Got it. Did you say VA EHR could be an opportunity? Or is that relatively small?

Well, it's speculative, right? All I would say is we have a very small role today, supporting somebody else that's a prime on that particular contract. Obviously, it's in the best interest of the veterans to have success on that program. We stand ready to do more. Obviously, there's a desire to make sure there's interoperability between the system that we're deploying on the DoD side with what ultimately gets deployed on the veteran side. But I think if you read the clippings, there are some challenges with that the VA particular program. And it's not something, again, in our guidance or outlook that we're counting on that being upside. But certainly, I think with what we bring to the table, there's more work that we can potentially do there over time to help, and we stand ready to do so.

When does DHMSM become a headwind? And is that a potential offset as VA ramps up?

I think you're looking more ahead to '24. And again, fully contemplated, when we gave the 3-year guidance, we knew DHMSM would have a period of time of moderating down in '24. But that is the base deployment program as we understand it today, right? But I would tell you that as you've rolled out this capability across the network of military health installations, there's increasing demand for taking full advantage of the system, additional modules, additional capabilities, how do you deploy more? How do you get more analytics, more information out of the system? How do you optimize? So think about that as an opportunity that's still ahead of us, right? You just deploy the base capability, but now the customer is very interested in taking full advantage of what's there now that you've gotten through the pain of transitioning from a legacy system to a new modern system. So I think our team is in active discussion about how else can we help you, what other needs are there, what other features would you like to potentially have us deploy. And so I would expect there to be opportunities that emerge on that front because those discussions have been part of the ongoing dialogue here over the last many months.

Okay. Maybe I'll ask on civil for a minute and then open up to the room if anyone has questions. In terms of the airport security business, what's the key metric we should be watching for when you think that fully recovers?

Well, it's a challenging one. Obviously, I've been traveling a lot here domestically. And I think anybody that has feels like, wow, it feels almost back to normal here in the States. And in some cases, we've seen flight level of activities higher than where they were in 2019. Internationally is the key for us, right? So the international markets need to see a rebound in the way the modernization opportunities are going to be funded in international airports is through ticket surcharges, right, driven by passenger demand. So they need to return to normal levels of flight activity. And I would -- we've used 2019 as a benchmark to say, where is the international airline travel relative to a 2019 level? So getting back to that level and sustaining that, I think, is critical to then having the customers have confidence that the source of funding is there to undertake modernization activities, to put new equipment into airport expansion or just to refresh existing screening equipment, baggage handling equipment within airports. So we're optimistic. I mean I would say that we've seen a few on a select basis, procurements come out in the international markets, but we've continued to say, hey, '23 at the earliest before we feel like that's rebounded to where it needs to be. And we're watching carefully what's going on with airport traffic or volume. At the same time, the team is looking for ways to continue to drive efficiency into our processes. We've added a lot of depth to our team that manages that line of business for us. We've got some great people on the team that we're very excited about. So we're positioning for that rebound to happen, and we look forward to that being a growth catalyst for us in the coming years.

I know that's key to recovering Civil margins. If you strip that out, is there anything else that has caused Civil margins to be lower over the last 1.5 years-or-so? Or is it largely SD&A?

SD&A is the main driver. When you look at Civil, it's a combination. There was a one-off thing in the first quarter that we think is a nonrecurring program hit from a joint venture. But stepping back from that, you look at some of the programs that we've won on the mega IT modernization side, like an AEGIS will not be accretive to margin, certainly not in the near term, right? So some of the mega programs have to be counterbalanced by what is going on in some of the other areas that are quite attractive for margins. We mentioned the examination -- I'm sorry, the screening business. Our commercial energy business is a nice piece of the portfolio. It's growing at a healthy rate. It's not a huge piece of civil, but it continues to make a more meaningful contribution, and that is above average margins. The work we do for the FAA has been under good long-term contract arrangements at more attractive margins. So it's continuing to win some of the digital modernization opportunities with civil customers, deploying repeatable processes like what 1901 brings to bear to kind of routinize the delivery mechanism to drive efficiencies in those programs. But ultimately, to get Civil back kind of above the corporate average, it's really where the screening business needs to contribute in a more meaningful way.

Got it. Makes sense. Great. Well, if anybody has any questions in the room, raise your hand and we can walk a mic over.

Just talk about, if you don't mind, capabilities that you would seek to acquire?

Thanks for the question, Rich. So we pay attention to what's going on in the market. And I think when Roger answers this question, we say any M&A opportunity kind of starts with, what's our strategy? And we look at, can we potentially accelerate access to a particular customer or our innovation engine, and that's where our CTO team is focused on a lot of activities across the digital modernization space. And so there might be some needs that will emerge there or cyber data analytics. You can see some of those as capabilities we'd be interested. Or you'd find something like what happened last year where we saw an opportunity with an acquisition to complement what Dynetics is doing in the hypersonics space, right, where the thermal protection system piece of the hypersonic strategy was going to be a critical growth area we felt over time. And how do you get in and take advantage of somebody that had a proprietary technology to kind of lock you in with a preferred position on a program like that. So I think, Rich, it would vary a little bit. But I mean, to me, mostly focused on where we can get enterprise scale, that's why I mentioned cyber data analytics, or really lock in a more strategic piece of a long-term program opportunity that we see has room to run like what's happening in Dynetics. Obviously, space is an area where there's a lot more properties coming to market, but I would tell you the price point that we're seeing on those is pretty scary. So it -- we're always going to be very thoughtful when we look at M&A opportunities, and we're very disciplined as far as valuations and business level commitments. And so things like that, there might be a lot of opportunities that we would look at, but we would be very selective on where we would make a move like that.

Well, you did a big ASR in the first quarter. What's your appetite for further capital deployment this year? And whether that's M&A or buybacks?

Well, I mean, so certainly, with the $500 million accelerated share repurchase, we kind of leaned into cash flow that we would generate throughout the course of the year as part of -- but you're right, Gavin. I mean if we execute on our plan and we deliver the $1 billion-plus of operating cash flow, which is our guidance for the year, there will be more capacity that gets created. But it's likely to be later in the year. I mean our priorities, certainly, we have some debt paydown obligations that we'll focus on, get our leverage to our target, and we're close. But what we have said is we're not interested in holding excess cash. And so I think what you'd see from us is if at that point in time, when we're comfortably at our leverage target, where we've got excess cash that's being generated and if there's not an M&A opportunity that we feel like complements our strategy and growth and certainly, share repurchases is an area that we would consider strongly.

Any others in the room? Maybe 1 more before we call it. Just on inflation, I think, relatively self-explanatory on cost plus and pass-through. But maybe can you talk about the dynamics of how that works on the fixed price, whether or not there's any risk to margins? And how those kind of contracts actually play out?

Well, so it's always something that we spend a lot of time thinking about. And you -- and on any time you're bidding on fixed price work, you're leaning into some risk, right, from a cost perspective. We try to be thoughtful as possible on how will we execute that. And there's usually many paths to how you can execute a program with the talent you bring on, where you bring them on, those types of factors. So when we build up our pricing rates and we do that every year, but we can refresh those more often, we're thoughtful around what we see from an inflation perspective. I would also tell you that customers are aware of this, and this won't be the case across the board, but they're sensitive to our ability to perform. They want to see everybody be successful. And we recently had a customer come to us in a fixed price arrangement and understood, paid the price of commodities, in this case, computers, significantly different than it was when you bid the contract 2 or 3 years ago. Let's reevaluate what a fair price point is for that particular obligation as far as the computer purchases. So we've seen examples like that. So our team, quite honestly, our contracts team is very focused on this, how do we make sure we get the right terms in our contract agreements to give ourselves the maximum protection. But it's our job to evaluate that risk, to be thoughtful on building in on the multiyear pricing, enough degrees of freedom, enough capacity to deliver successfully. And then we'll just have to navigate through it as everybody else as an industry and the customer set is, too.

So fixed price isn't just set in stone?

Well, again, it gives us the best opportunity for margin uplift, but it also is why there's a risk factor that goes along with that. I think that's where it's important you have companies that have invested in big process, from a program execution perspective, understand the levers of how to deliver, have the right oversight, have the buying power, the negotiating power on the procurement side, right? All those things factor into when you want to bet on somebody to take risk in an environment like this. And I think we have certainly built out that infrastructure and those processes that we can do it as thoughtfully as anybody.

Got it. Great. Well, Chris, thank you very much. Thank you, everybody.

Thanks for having me, Gavin. Appreciate it.