Roger Krone: Sheila, I would add, if I could, because I know you followed us for a long time. What’s been great about our civil business is that it’s growing. And we have a base of business in that segment that is sort of infrastructure support business. We run Antarctica. We’ve got the Hanford contract. We do some other work for DOE. And as great that work is, it traditionally does not carry the margin of the rest of the company. And so as Civil grows top line, you see the margin increase because we’re adding new business sort of at the margin and the mix is shifting in civil. So the more we grow civil and we hold the infrastructure business constant, the more growth in margin you’re going to see. And the team there has done a great job of growing.
Sheila Kahyaoglu: Great. Thank you very much.
Roger Krone: Yeah.
Chris Cage: Thank you.
Operator: The next question is from the line of Bert Subin with Stifel. Please proceed you’re your questions.
Bert Subin: Hey. Good morning.
Roger Krone: Good morning.
Bert Subin: Roger, maybe if I — or Chris, maybe if I follow up to an earlier question. If we look across the portfolio at Leidos in €˜23 just a couple of items you’ve got the continued aviation security recovery. You guys noted the growth in commercial energy. You’re going to have the annualization of the SSA task orders. You got the debt. This is just to name a few. All of which I would think would be mid-single growth, mid-single digit organic growth tailwinds. What are the offsetting mechanisms there that puts you down to that 2% to 5% range?
Chris Cage: You make it sound so easy, Bert, you’re right. There are a lot of tailwinds, no doubt about it. But we
Roger Krone: We’ve always talked about the DHMSM program coming off the peak. One of — by the way, I think one of the real marquee programs for the company, but we’re better than half done now, and we will start to slow down as we have talked about in the past. And that program has just been such a great performance program for us, both top line and bottom line and frankly, delivering on time and on schedule to our soldiers. So that’s one of the programs that’s coming down.
Chris Cage: I would also point there’s a couple of spots in our Intel business. It’s been fairly public, the focus Fox (ph) procurement process. And while that has some room to go ahead of it still to see how that fully plays out. That’s an area that could be — put some pressure on revenue growth if it doesn’t go our way. And then, we lost a program a year ago, and this is how long things take called items UFS. And so the good news is the Intel leadership team did a great job throughout 2022 to continue to support the customer during transition, but now we’re fully rolled off that program. So that’s a little bit of a headwind. But by and large, we’ve had great success on our recompetes. I really love the team’s performance there.
There are a lot of tailwinds that are known, but we also have seen customer behavior take longer. And especially if they’re worried about the budget environment transitioning into government fiscal year 2024. So our hope is, we’ll build momentum through the year. We’ll have some successes, and we’ll be able to update you in a positive direction.
Bert Subin: Yeah. That’s super helpful. Thanks. Maybe one item, Roger, that you had talked about before and I thought I gave some good color from DES. Obviously, that has the ability to be a significant driver on the sales side for the company. And you talked about that as being tens of millions of dollars in ’22 and then maybe doubling from that range in ’23 and then really starting to ramp by ’24, is that still how you’re looking at it or how should we think about the range of potential outcomes for that contract this year?
Roger Krone: Yeah. I think that’s a good way to build your model. And I was with a customer yesterday, actually, we had a long meeting on the program. We all want to move fast. This is about transitioning non-combat support organizations to new, what we call DoD net. And — but we want to do it the right way. We want to do it when we’re ready, and we all want to move fast because it will save money. It will help interoperability between all these support agencies, but we want to do it the right way. We don’t want to create a negative user experience for all the people that are supporting the military. And so the discussion was, well, okay, are we — can we move up some of the transformations and some of the transitions, and we’re looking at that.
So I think there is potential for it to be higher, but we’re not guiding to that. And we’ll talk to you quarter-by-quarter as to what our success has been and whether we’ve been able to increase the ramp. And I will tell you, we’re very enthusiastic about it in ’24 and ’25. As it fully ramps and we’re doing these conversions, how much more than what you described we can do in ’23, we have yet to see. But I can tell you, the customer wants to move fast, we want to move fast. But we all know if you — sometimes you move too fast and you create a negative user experience, you’re really not serving the user well, and we don’t want to get ahead of ourselves.
Bert Subin: Thanks.
Roger Krone: Yeah.
Chris Cage: Thanks, Bert.
Operator: Our next question comes from the line of Matt Akers with Wells Fargo. Please proceed with your question.
Matt Akers: Yeah. Hey, guys. Good morning. Thanks for the question.
Roger Krone: Good morning, Matt.
Matt Akers: I wanted to ask about the cash flow guidance for ’23. And I think if you back out Section 174, I think it’s kind of flattish year-over-year. I think the payroll tax goes away in ’23. Is there any other sort of offsets to that or working capital maybe that are preventing that from being higher?
Roger Krone: Well, again, Matt, with the growth we’ve had and the growth that we see ahead of us, there are some investments — modest investments in working capital for a few particular programs. If we’re able to win a program like FINS, for example, there’s an initial amount of equipment that you have to procure and bring on board to support the customer. So there are a few things like that in our pipeline that we’re anticipating. We finished the year at 58 days DSO, and that’s good performance. I think there’s opportunities to drive that even lower and we’re focused on that as a finance team with our lines of business leaders. So we thought we’d start the year at $700 million. I mean it’s not a never a slam dunk, but our focus is to continue to build momentum on the cash side. But nothing out of the ordinary as it relates to working capital investment, but there are a few programs that we are anticipating needing some support as we win them and grow them.
Matt Akers: Got it. Thanks. And then I guess it sounds like you’re doing some sort of contingency planning around if there’s a shutdown, are you willing to share what kind of quantify the impact would be if we do get a shutdown?
Roger Krone: Well, first of all, no, because we really haven’t — we haven’t gotten to that level of planning where we’ve — in order to have — to quantify, we’d have to pick a date and then go through and figure out which programs would be deemed essential and which programs would not be deemed essential, then how we would go mitigating. What we do, and unfortunately, we have done this way too many times as we get our contracts organization, and we go through our 3,000 or so contracts and try to understand how each contract would perform in a government shutdown and some are easy. They’re deemed essential. We know those will continue. Some we know will not be deemed essential. And then as part of our preparation, we start to have conversations with contracting officers about things that might be in the middle and work with them on ways that we could mitigate a shutdown.
And it just behooves us to be prepared. And by the way, we have learned the better prepared we are, the less likely it is, we’ll ever use the plan. but we would never want to maybe McCarthy and the President have a meeting. I think they’re going to meet again in a couple of weeks. And if it comes out of that and we get to June, and we’re not prepared, then we haven’t done our job to manage through a government shutdown as best we can. And that’s the process really that we have kicked off. And unfortunately, we have done this before. So we have a pretty well-developed playbook and we have gotten our playbook out and dusted it off.
Matt Akers: Thank you.
Roger Krone: Yeah.
Chris Cage: Thanks, Matt.
