Leidos Holdings, Inc.

Greetings, and welcome to Leidos' fourth quarter 2019 earnings results. At this time, all participants will be in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. As a reminder, this conference is being recorded. At this time, I'd turn the call over to Kelly Hernandez with Investor Relations. Please go ahead, Ms. Hernandez.

Thank you, Rob. And good morning, everyone. I'd like to welcome you to our fourth quarter 2019 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 January 3rd, 2020. 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 supplementary financial information, 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 year 2019 earnings conference call. We delivered strong fourth quarter results, including record organic revenue growth, increasing margins, and significant year-over-year non-gap earnings growth. Our growth and execution momentum accelerated throughout 2019 and has continued into 2020 with significant new program wins and the opportunity to create value from our two recently announced acquisitions. I am confident that we are growing the company with the right talent, the right capabilities, and the right strategy to continue to drive value for our customers, employees, and shareholders. Revenues for the quarter were $2.95 billion, up 11.6% from the prior year and 14% organically, reflecting broad-based strength with all of our segments growing double digits. Our top-line growth was accompanied by an increase in our adjusted EBITDA margins, which grew to 11% in the quarter, up 2%. 130 basis points compared to the prior year period. Together, these drove our non-GAAP EPS to $1.51 for the quarter. For the full year, we generated revenues of $11.1 billion, up 11% organically, and we expanded margins to 10.5% while growing non-GAAP earnings per share 18% to $5.17. Growing revenues while also increasing margins and thoughtfully deploying our cash enabled Leidos to achieve total shareholder return of 89% in 2019, which was the highest among our peers. Jim will go through more detail on the results in a moment, But I would like to take this time to acknowledge our talented employees who enabled these significant financial successes through their operational execution. Their commitment to our customers and to our strategy was instrumental in our success and is what makes Leidos, the great company we are today, a great place to work. And I want to thank all of them for their hard work during the year. With regard to organic growth and operations, we have achieved significant success over the last few months. We won our two largest re-competes, GSM02 and Hanford, as well as our largest takeaway program to date in the award of the Navy Next Gen Program, which carries a ceiling value of $7.7 billion. These wins truly demonstrate the power of the scale of the organization we have built, as well as the breadth of our innovative capabilities. GSM02 and NextGen are both incredibly complex digital transformation programs for two of our nation's most important networks, the DoD and the Navy, respectively. We are proud to have been entrusted with this responsibility and are confident we will provide the DoD, our sailors, and Marines around the world with the tools they need to gain a warfighting edge in the modern digital landscape. Combined, these programs alone, Hanford, GSM02, and NextGen, have provided us with more than $18 billion in single award IDIQ ceiling value and eight to ten years of visibility, further strengthening our business. While two of these programs have been protested, we expect those protests to be resolved in the second quarter. We have a good track record on winning defensive protests, and if we are able to extend that track record and successfully defend these wins, work would begin by the start of the third quarter. Due to the protests and the IDIQ structure, these wins have not benefited our bookings at all yet. That said, beyond these notable wins, our business development engine continues to extend its period of strong performance with $3 billion of net bookings in the fourth quarter, bringing the total full-year net bookings to 14.5 billion. We exited the year with more than 24 billion of total backlog, a record level, and more than twice our annualized revenue run rate. Beyond our organic operational execution, we have also been successful on the M&A front. In the recent months, we entered into agreements for two acquisitions that will help us to accelerate the execution of our strategy. First was Dianetics, which we announced in December and closed at the end of January. And the second was L3Harris' security detection and automation business, which we announced in early February. This builds on our acquisition of IMX in 2019, which is now part of our healthcare business. We have disciplined acquisition criteria that we've talked about before and we're pleased to acquire these strategically important properties that fit well within the company and were acquired at prices that made sense. These acquisitions help to broaden our portfolio of products and services in high growth, high margin areas, further expanding the scale of the business. We believe these transactions will position the company on a higher growth curve and yield significant positive value for our customers and shareholders over the long term. I am proud of all those at the company who collectively helped to drive successful agreements for all of these acquisitions. This momentum in both organic and inorganic growth is due to calculated strategic initiatives we have undertaken throughout the organization. Throughout 2019, we elevated our business development organization and processes to successfully leverage the scale of the organization and the innovation embodied in our technical capabilities, allowing us to repeatedly and efficiently write successful proposals and win new contracts. We deepened our collaboration and partnership with our customers by engaging them early and providing them with innovative solutions to solve their mission challenges. We invested in our people through improved benefits, more training and development opportunities, and increased flexibility which enabled us to beat our hiring targets and cultivate a deep bench of highly talented leaders to advance our organization. As a company We have rallied around driving growth without sacrificing margin, converting profits to cash, and then thoughtfully deploying that capital in a balanced manner to drive shareholder value. To that end, we deployed nearly a billion dollars of capital in 2019, roughly 70% of which was returned to shareholders through share repurchases and dividends with about 10% used for M&A and the remainder for CapEx and mandatory debt payments. This balanced approach is consistent with the capital allocation plan we laid out at our May investor day. Also in accordance with what we have said in the past, with our net leverage ratio estimated to be at about 3.7 times post-closing of the security detection and automation transaction, we will pivot our capital deployment initiatives to focus on debt reduction until this net leverage ratio again approaches our target level of 3.0. We anticipate reaching that level in the first quarter of 2021. As we look to 2020, we are focused on successfully executing all of the opportunities we have captured in 2019. From an organic perspective, we have significant wins in each of our businesses that we are committed to executing well. While some are re-competes, all of them will require us to continue to bring innovation to our customers and a fresh perspective focused on effectively and securely delivering their missions. On the takeaway work, we're focused on starting off on a great foundation, ramping our recruiting efforts to ensure we have the talent to commit to the contracts and successfully executing those programs to deliver on all of our commitments. With respect to our inorganic initiatives, there are two sets of activities underway. First on the Dynetics acquisition, We are pleased to welcome the 2,300 employees from Dynetics to the Leidos family. Dave King, the CEO of Dynetics, will continue to lead the business, which is now the fifth business group within the company. The Dynetics business will be consolidated into our defense solutions segment for external reporting purposes. Dave will serve as group president and has been appointed as the newest member of the Executive Leadership Team. Additionally, we have appointed a leader for the Integration Management Office, or IMO, for this transaction who will be supported by representatives from each of the functional areas. This cross-functional team will ensure that Leidos business processes are followed and that Dynetics business systems are properly connected with the Leidos corporate systems, leveraging the strengths of both businesses in these efforts. Our integration activities will largely focus on knowledge sharing between Dynetics and Leidos in order to support new opportunity development. Second, regarding the recently announced pending acquisition of L3Harris' security detection and automation businesses, Once the acquisition has closed, these businesses will be combined with our existing security products business, which resides within our civil group. We anticipate the integration activities for this transaction will be more extensive than those of either Dynetics or IMX. However, they will be significantly less than our prior IS and GS transaction. where we demonstrated our ability to integrate successfully. We have already identified a preliminary set of activities and key leaders that would drive the cost and revenue efficiencies we previously discussed as being a key aspect of the transaction. We have a great playbook from the IS and GS transaction, the Leidos Business Framework, that will drive the actions and activities needed to fully integrate the business. From a macro perspective, we see 2020 as an extension of the strength we saw in 2019. Outlays are projected to continue to rise at least through fiscal year 2022, given the large prior year unobligated balances. DoD's investment accounts, procurement and R&D, continue at historically high levels. The top technology priorities are consistent with last year's, with strong emphasis on space, hypersonics, cyber, and electronic warfare, and are directly aligned with our growth initiatives and technical capabilities. The President's Physical Year 21 budget request was released last week. The request sets discretionary spending levels at $741 billion, including overseas contingent operations, for defense roughly flat with the prior year. Our initial review of the available material shows budget increases directly aligned to our areas of strength, cyber, artificial intelligence, hypersonics, and space. The budget request of $590 billion for non-defense represents about a 10% decline from the prior year. While the agencies we have exposure to are far less impacted by the proposed cuts, the Democratic-led House is unlikely to accept significant decline in the non-defense agencies. We expect negotiations on agency-level appropriations to take place over the next few months and likely conclude by the summer. Overall, we are encouraged by the visibility and priorities defined by the budgets and expect to benefit from that at least through the next couple years. With that, I'll turn the call over to Jim Reagan, our Chief Financial Officer, for more details on our results in our 2020 outlook.