Leidos Holdings, Inc.

Greetings, and welcome to the Leidos fourth quarter 2018 conference call. At 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 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kelly Hernandez, Investor Relations for Leidos. Please go ahead, Kelly.

Thank you, Kevin, and good morning, everyone. I'd like to welcome you to our fourth quarter and full year 2018 earnings conference call. Joining me today are Roger Krohn, our chairman and CEO, Jim Reagan, our chief financial officer, and other members of the Leidos management team. Today we will discuss our results for the quarter ending December 28, 2018. Roger will lead off the call with notable highlights from the quarter, as well as comments on the market environment and our company strategy. Jim will follow with a discussion of our financial performance and our guidance expectations. After these remarks from Roger and Jim, we'll open the call for your questions. 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, during the call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is included in the press release that we issued this morning and is also available in the presentation slides. The press release and presentation, as well as the supplementary financial information file, are provided on the investor relations section of our website at ir.leidos.com. With that, I'll turn the call over to Roger Krohn.

Thank you, Kelly, and thank you all for joining us this morning for our fourth quarter and full fiscal year 2018 earnings conference call. 2018 was a continuation of our great execution and was a year of transition as we pivoted the organization to focus on growth. We saw many successes, and I'm proud of our employees for driving these achievements. The government shutdown had a negligible effect on our fourth quarter results, and is expected to have an immaterial effect to our first quarter 2019 results as well. Now, I'd like to start this morning by discussing four key highlights from our results, bookings, growth, profitability, and cash generation, before focusing on what we see going forward in 2019 and beyond. First, 2018 was a record year for us in bookings and backlog. We booked $13.7 billion in net awards into backlog, resulting in a 1.3 book-to-bill for the year and a record backlog of $20.8 billion. These bookings, along with other single-award IDIQ positions we've won, will drive our growth this year and beyond. The strong momentum in our business development results has continued into 2019 with NASA's recent award of the NASA End User Services and Technology Program to Leidos. This is new work for us, a competitive takeaway, furthering our market share gains, although it is still subject to a protest. NEST is a single award, firm fixed price, IDIQ contract, with a potential value of $2.9 billion over 10 years. Second, in terms of growth, the improving win rates and ramp of revenues from our new awards allowed us to close out the year on a strong note with year-over-year revenue growth in Q4 at the highest pace we've had in two years. For the third quarter in a row, revenues grew year-over-year as new awards increasingly contribute to the expansion of our base business. Third, profitability was also a highlight for the year, as we again exceeded our target of 10% or higher for long-term adjusted EBITDA margin and delivered margins of 10.4% for the year. We continue to balance margin and growth as we drive to our long-term targets in both areas with revenue growth of 3% or more while maintaining adjusted EBITDA margins at 10% or higher. Finally, we continue to maximize the cash generated from the organization through the fourth quarter. For 2018, we generated more than three-quarters of a billion dollars of operating cash flow. a 46% increase from the prior year's level, despite the revenue growth in the fourth quarter. Driving cash collections from the business is truly a cross-functional effort. These results show that our teams across the organization did a great job in driving cash conversion. Throughout the year and continuing into the fourth quarter, we've benefited from many initiatives to monetize our balance sheet. We'll continue to explore additional such opportunities in 2019. Cash generation is important, and smart deployment of that cash is essential to driving shareholder value. In 2018, our performance allowed us to return over $600 million to our shareholders, or nearly 90% of our free cash flow through dividends and share repurchases. We returned $200 million to our shareholders through regular quarterly dividends and nearly $420 million as share repurchases, which allowed us to retire 6.5 million shares during the year. We also repaid $59 million of debt. These actions are consistent with our stated capital deployment philosophy. Now, we look forward to 2019 as we are focused on accelerating growth while continuing to execute our book of business. To drive this growth, we will leverage the strong defense budget and outlays, ramp-ups from our new program wins, and a strong pipeline of submitted bids, waiting decisions. We've entered the year with roughly $28 billion of bids outstanding. This pipeline includes several multibillion-dollar bids, such as our Department of Energy Hanford Mission Support Contract Recompete, our DISA Global Solutions Management Operations Program Recompete, as well as the NASA Nest bid, which I mentioned earlier. We're also submitting proposals on several other large new business and takeaway bids during 2019 and expect decisions on many of these large programs during the year. We've analyzed what's driven our improving win rates and our success in capturing new work. While it's clear that no single factor has led to this success, the three most prevalent areas are the strength of our technical solution, the competitiveness of our cost structure, and our past performance credentials, all made possible by our talented and dedicated employees. Further, it's clear that customers have confidence in our ability to solve their large, complex problems because of our size, scale, and depth. We continue to strengthen across all of these areas, including investing in our internal R&D so we can offer increasingly advanced technical solutions. One particular area where we have seen strong customer enthusiasm is in the application of artificial intelligence and machine learning. These technologies drive efficiencies in our customers' mission through automation and also provide deep analytical insight at speed. We also invest in AI ML security to make all of our data-rich information technology offerings the most reliable and secure in the industry. Our AI ML capabilities have already been instrumental to several recent program wins with our defense and intelligence customers. With our anticipated growth, we'll need more people to join the company. I'm pleased to say we have seen improvement in our hiring statistics as our recruiting and HR teams have implemented innovative methods to improve our success and efficiency in hiring new employees, as well as improved retention rates of our existing employees. We are also optimistic on the potential for a more efficient security clearance process with the renewed focus on this effort by the Department of Defense, which recently assumed the function from the Office of Personnel Management. When in place, this increased efficiency will mean that our employees spend less time waiting to start work on classified programs. Refining the process is a complex undertaking that will take time to implement, but we are encouraged by the initial progress. Now, we all continue to watch what is going on in the federal government. We are pleased with the last week's budget agreement that averts another shutdown. Even a partial shutdown impacts a broad array of vital government services that touch millions of Americans and impacts the important mission of our customers. While there is still uncertainty on the debt ceiling limits and the sequester caps, we remain optimistic about the actual budgets that will be agreed upon and the spending priorities in government fiscal 2020 and beyond. As we analyze the budgetary activity beyond the headlines, we are encouraged that the government spending priorities align well with our strategy and our areas of technical strength keeping us well positioned to drive growth. Finally, I'm pleased to announce that we have set May 14th as the date of our Investor Day, which will be held in New York City, as well as being webcast. The leadership team and I look forward to sharing our vision for the company and more details about our strategy at the event. I hope you will find time to join us. With that, I'll turn the call over to Jim Reagan, our Chief Financial Officer, for more details on our 2018 results and our 2019 outlook.