Leidos Holdings, Inc.

Greetings. Welcome to the light of second quarter 2020 earnings call. At this time, all participants are in a 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 on your telephone keypad. Please note this conference is being recorded. At this time, I'll now turn the conference over to Peter Burrell with Investor Relations. Please go ahead.

Thank you, Rob, and good morning, everyone. I'd like to welcome you to our second quarter 2020 earnings conference call. Joining me today are Roger Crone, 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 July 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 will 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 a supplementary financial information file, are provided on the investor relations section of our website at ir.leides.com. With that, I'll turn the call over to Roger Crum.

Thank you, Peter. And thank you all for joining us this morning for our second quarter 2020 earnings conference call. As we continue to navigate through these difficult times as a country and as a global community, I hope each of you are well and your families safe. Leidos' second quarter results demonstrate the resiliency of our business model, the value of our market diversity, and the strength of our team. as we delivered on commitments through the most challenging quarter I have seen in my career. We exited 2Q with a strong business capture win rate, record-setting backlog, resilient cash position, and improved capital structure. These factors galvanize our optimism for the future, despite the extended effects of the current pandemic. In the quarter, the business delivered revenue of $2.91 billion, reflecting 6.8% growth from the prior year. Adjusting for acquisition and divestiture activity and effectively taking into account a full quarter's worth of COVID-19 impacts in specific areas within the business, organic revenue contracted by 3% over the same period. We recorded our non-GAAP diluted earnings per share of $1.55, up 34% from the prior year. In addition, we generated $422 million of cash from operations, ending the quarter with a solid cash balance of $588 million. Net bookings of $4.6 billion yielded a book to bill of 1.6 for the quarter, as well as a 1.6 on a trailing 12-month basis. These impressive business capture measurements do not yet reflect material contributions from several notable single award IDIQs that were competitively won over the past several months. Upon receipt, those task orders will be captured in our bookings metrics in subsequent quarters. Adjusted EBITDA margin of 11.8% was greater than the prior year. The primary factor was the net gain resulting from the Vernetix legal settlement for patent infringement, which was largely offset by a full quarter of the anticipated COVID-19 impacts we discussed during last quarter's earnings call. The impact of COVID-19 in the second quarter was approximately $222 million in revenue and $78 million in non-GAAP operating income. While some of the Q2 impacts will be recovered in the second half of 2020, we expect more of the recovery to push into 2021 as the pace of reopenings began both later and slower in the second quarter than previously estimated. Additionally, the security clearance processing timeline for new employees continues to lengthen, and some programs, such as Navy NextGen, remain affected by ongoing protest activity. In the meantime, due to the critical nature of our work, all of our Leidos facilities have remained open and each has implemented safe workforce plans to protect the health of our returning colleagues. Per our guidelines, occupancy remains below 25% at this time, while more than half of our employee base continues to productively telework. Other than a small percentage that remain home in a ready state capacity, the remainder of our workforce reports to customer sites or other performance locations. From a subcontractor and supplier perspective, our business partner network remains resilient and in good health. We engage and monitor this important ecosystem daily. Lead times have improved during the course of the quarter, and our teammates continue to perform across all of our programs. Equally important, during the second quarter, recruiting and talent acquisition remained strong as evidenced by a nearly 8% growth in new hires compared to Q1. This metric excludes additions from M&A. Our ability to attract top talent in this manner is important as we staff up to successfully execute the new programs in our growing backlog which now stands at a record $30.7 billion. This core competency will also prove critical as we prepare the business for continued growth given the ongoing high pace of business capture activities across the diverse markets we serve. When we compare mid-March through June of 2019 versus the same period in 2020, We found that we submitted more proposals during the pandemic with an aggregate approximate value of $8 billion. Now turning to several notable awards. Leidos was awarded the Traveler Processing and Vetting Software Contract by the U.S. Customs and Border Protection. Under this new blanket purchase agreement, we will provide a full range of software development lifecycle services to support CBP's mission to safeguard America's borders and enhance the nation's global economic competitiveness. This single award, BPA, has a one-year base period of performance followed by four one-year option periods and a total estimated value of $960 million. The company was also awarded the Enterprise Standard Architecture V, also referred to as ESA V, task order to provide managed IT services for the Department of Justice, Bureau of Alcohol, Tobacco, Fire, Arms, and Explosives. The single award hybrid task order has a one 10-month and two one-year base periods of performance followed by six one-year option periods. It includes a ceiling value not to exceed $850 million if all options are exercised. Finally, our Dynetics subsidiary was awarded a sole-source contract for the production and sustainment of foreign radar simulators known as the Laboratory Intelligence Validated Emulator, or Live, family of products. The contract has a total estimated value of $356 million for production and sustainment for the next 10 years. On the M&A front, we remain focused on the successful integration of both Dynetics and the former L3Harris security detection and automation businesses. Both are progressing on schedule. Since the Dynetics deal closed in late January, our integration has focused on combining our legacy Leidos Innovation Center, we call it The Link, with our new Huntsville-based business. The link has a great track record of executing early-stage R&D for DARPA and the Air Force Research Lab, and through the combination with Dynetics, we see opportunities for rapid prototyping and producing a higher conversion rate of research projects to programs of record. Other early collaborations led to important wins, such as NASA's Human Lander Systems Contract under the agency's Artemis program. If down selected, the fall on contract to place the first woman on the lunar surface and return man could exceed $4 billion. With security detection and automation, key business systems integration decisions have been made that further our confidence that the annual cost synergies of at least $20 million can be captured by 2022. Additionally, we are pleased with the expansion of our checkpoint solutions that will promote the safety and health of the traveling public and those entrusted to provide security services. To that end, in the quarter, we received an award at Edinburgh Airport in Scotland to upgrade the airport's security tray return systems with antimicrobial tray technology. Also, the business was recently shortlisted for a five-year opportunity at Munich Airport for the manufacturing, installation, and service of explosive detection systems for cabin baggage. This work would represent an important step in our strategy to grow in the airport security solutions market. Turning now to the macro environment. Despite a likely continuing resolution in the fall, we expect minimal overall impacts to our business sector as the physical year 2021 budget levels are already set under the bipartisan budget agreement. Additionally, DOD has almost $125 billion in unobligated balances as of fiscal year 2019. Therefore, if budget authorities are flat, These balances can allow higher rates of outlay to address our customers' ongoing critical mission requirements. Looking through the Leidos lens, we are encouraged by our continued alignment with DoD's top 10 technology priorities. The ongoing execution of our long-term business strategy further mitigates potential future headwinds for our business, as does our portfolio diversity as approximately half of our business is aligned with the federal civil and health customers. With regard to our health business, I'd like to reiterate that yesterday we announced the appointment of Liz Porter as the new health group president. Liz has held that position in an acting capacity since early March. Prior to this role, she served as the operation manager for the civil groups federal energy, and environmental business. Liz's demonstrated leadership experience in program management, engineering, and business development will continue to position Leidos for growth in the expanding health markets. Before I hand the call over to Jim, I want to acknowledge the pain over the continued injustice and violence suffered by the African American community. Over the past few months, we have seen this pain and more tragedy. We all saw the killing of George Floyd in May and the tragedy in June as Rayshard Brooks in Atlanta was unnecessarily killed. I said this to our employees on our website and our social media platforms, and I want to say this again to you. Racism and social injustice have no place in our society or at Leidos, nor does any form of discrimination. Equality and justice must be a universal experience, and we must take action. And at Leidos, we are working to find new ways to engage on these critical topics in order for us to move forward together in unity. To start, we are partnering with the Equal Justice Initiative, who fights against racial injustice and poverty and promotes equal treatment in our criminal justice system for the most vulnerable. We have made a large donation in support of their important work, and I am moved by their focus on progress, education, and equal justice under law. Also, we are implementing inclusion training across our company and working to launch a Leidos Diversity and Inclusion Council, and we are hosting listening sessions with management for our employees across the enterprise. As CEO, I strongly embrace this responsibility, and I want to share that with you today. I will now turn the call over to Jim Reagan, our Chief Financial Officer, for more details on our second quarter results and guidance.