Leidos Holdings, Inc.

Greetings. Welcome to the Leidos first quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. In the interest of time, and to allow as many as possible to ask questions, please limit yourself to one question at that time. You may return to the queue for additional questions as time allows. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. Please note, this conference is being recorded. I will now turn the call over to Peter Burrell with Investor Relations. Peter, you may begin.

Thank you, Rob, and good morning, everyone. I'd like to welcome you to our first quarter 2021 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 April 2, 2021. 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 was 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 Crum.

Thank you, Peter, and thank you all for joining us this morning for our first quarter 2021 earnings conference call. As we communicated in our press release this morning, I'm pleased to announce that Chris Cage will be Leidos's next chief financial officer later this year. Chris will succeed Jim Reagan, who has chosen to retire following a long and distinguished career In particular, the last six years as my good friend and business partner. I'll have a few remarks on this transition before I hand the call over to Jim. But first, let's jump into the quarter. First quarter results reflect the perseverance, focus, and tremendous execution of our employees and business partners. New quarterly record levels of revenue, non-GAAP EPS, and backlog were achieved and significant organic growth was delivered across all business segments. This early momentum favorably positions Leidos to deliver on our full year financial commitments. Revenues for the quarter were $3.3 billion up 14.7% from the prior year and up 9% organically. underscoring our accelerated recovery from last year's pandemic headwinds and the early ramp of new business wins. Adjusted EBITDA margin of 11.7% up 240 basis points compared to the prior year period reflects strong program performance and the resolution of the longstanding MSA legal matters. which together delivered 45% growth on non-GAAP EPS of $1.73 for the quarter. Net bookings of $3.8 billion resulted in a book-to-bill of 1.2 times and 1.3 times on a trailing 12-month basis. This increase, driven by success in both our solutions and health segments, established a record backlog of $32.6 billion for a 13th consecutive quarter, providing greater clarity and confidence in near-term revenue growth expectations. I will now touch on a few of the major wins we received in the quarter that underpin our growth and backlog. In the health segment, the company was awarded a new prime contract to provide non-medical counseling to military service members and their families through the Military and Family Life Counseling Program, known as MFLIC. This important work will be conducted at approximately 100 U.S. military installations or nearby civilian communities. We currently estimate revenues will be approximately $1 billion over the potential seven-year life of the program. This new award is especially timely with May being Mental Health Awareness Month. Military members and their families experience unique stresses. These include fears for the safety of the service member and feeling anxious or overwhelmed by deployment-related challenges and responsibilities. Nearly one in four active duty service members show signs of a mental health condition. children of service members are especially vulnerable. One-third of children with a deployed parent have psychological challenges such as depression, anxiety, and behavior disorders. Through our work on the MFLCC program, we provide confidential counseling to alleviate stresses and enhance military members and their families' ability to cope with these challenges. counselors aim to prevent the escalation of stress into harmful conditions. About a quarter of our employees are veterans, so this program is meaningful to us on many levels. Next, in the civil segment, The company was awarded a prime contract by U.S. Customs and Border Protection to provide multi-energy portal systems for non-intrusive inspection of commercial vehicles at land and sea ports of entry. Under the contract, Leidos will integrate, deploy, and train CBP staff to use its VACUS MEP with low energy backscatter and high energy transmission cargo inspection system. The multiple award IDIQ contract has a total value of $480 million and a five-year base period of performance and options up to 10 years if exercised. And in the defense solutions segment, the company was awarded a prime contract by the Naval Undersea Warfare Center to provide engineering, technical, and management services for the Naval Array Technical Support Center. Leidos will be responsible for production engineering, technical and logistics support of the U.S. Navy and foreign governments' towed array assets. This single award IDIQ contract has a total estimated value of $149 million. Finally, the company was awarded contracts valued at $822 million if all options are exercised by U.S. national security and intelligence clients. Though the specific nature of many of these contracts is classified, they all encompass mission-critical services that help to counter global threats and strengthen national security. turning now to several notable accomplishments and events that took place in the quarter. We closed the 1901 group acquisition in January, and as anticipated, the business is being levered across all of our business segments in both the performance of backlog programs and new program bids. The inclusion of 1901 Group's cloud-based solutions and fully integrated service delivery platform will enhance performance on our customers' important missions and continue to differentiate Leidos' value proposition across the defense, intelligence, civil, and health markets we serve. Furthermore, as we shared with you on the February call, the Gibbs and Cox acquisition is nearing completion with yesterday's expiration of the HSR waiting period. With that gate cleared, we now expect the deal to close later in this month. Also, I want to take a moment to highlight the ongoing significant progress with the DoD Healthcare Management Systems Modernization Program, otherwise known as DMSUM. The MHS Genesis electronic health record system is now 30% deployed and is currently live and operational at more than 42 military treatment facility commands across the country with nearly 41,000 active users. Notably, during this unprecedented global healthcare crisis, the system has provided advanced capabilities to support clinicians and providers including 24 by seven access to medical and dental records and effectively tracking COVID-19 cases and mass vaccinations. Since its initial award, the program has been expanded to include the United States Coast Guard and the National Guard and Reserve. We remain on schedule to deliver MHS Genesis by the end of calendar year 2023. Shifting to the macro environment, while we are still awaiting the release of the President's 2022 detailed budget request and subsequent multi-year defense projections, we are encouraged by last month's release of the high-level budget request. While the recommended defense funding level was in line with our expectations, Our innovative technology and strategic investments remain squarely aligned with the administration's prioritization of certain critical need areas, such as digital modernization, cybersecurity, autonomy, and hypersonics. Additionally, we are very pleased with the proposed 16% increase in non-defense discretionary funding. This proposed growth supports the value proposition of our diverse business portfolio, which extends beyond defense and intelligence into the federal health and civil markets, including ports, borders, and airport security. And while a continuing resolution in the fall is feeling like a near certainty, The typical annual disruptions may be muted given the no growth request for defense and the reality that under a CR, agencies generally continue to receive stopgap funding in line with prior year's appropriation levels. With nearly $6 trillion of congressionally approved relief and stimulus funding since the start of the pandemic and a pending $2 trillion infrastructure request, we believe there could be additional opportunities for Leidos, particularly in our civil segment. Areas of interest include airport and FAA upgrades, as well as civil agency research and development. However, we will need to see the final details when they become available to better understand what is truly addressable over the multi-year infrastructure plan. With regard to the administration's decision to withdraw all troops from Afghanistan by early September, Leidos has been directed to leave the region within the same timeline. We currently estimate the revenue impact to be less than 1% of our Defense Solutions segment's current year revenue. While program-level customer discussions are still evolving, our best estimates have been incorporated into the guidance that Jim will cover later in the call. As we recently marked the one-year milestone of this devastating pandemic at the end of Q1, I want to provide you with another update on our Leidos Relief Foundation and now it has been assisting Leidos employees who have been impacted by the virus. Since March of 2020, the fund has raised and distributed over $1.7 million through generous personal donations from employees, members of the executive team, and the board of directors, including company match contributions. With those funds, over 500 Leidos families who have suffered a COVID-19 hardship or loss of a loved one have received financial assistance. The ongoing generosity of our colleagues is inspiring and a constant reminder of our shared values, no matter the challenge. Finally, as I noted at the top of the call, I will close my prepared remarks with a few comments on the upcoming CFO transition here at Leidos. On behalf of our Board of Directors and management team, I want to thank Jim for his countless contributions to this company and wish him all the best in his planned retirement. Jim joined us six years ago and has been my steadfast advisor and business partner. Jim and his team has grown the business over 160%, built an investment-grade balance sheet, and delivered significant total shareholder return. While Jim's contributions were critical in strategic planning and M&A deal structuring for key transactions, Value creation takes place in successful business transformations and building and nurturing culture and talent. And that is where Jim made the biggest impact for our employees, our customers and our shareholders. Thank you, Jim. However, I will save my goodbye since you'll be continuing to be an advisor through year end. Meanwhile, I'm pleased to share that our Board of Directors has elected Chris Cage as our next Chief Financial Officer, effective July 5th of this year, the beginning of our third quarter. Chris is a great example of the talent development and succession planning process here at Leidos. Chris joined the company in 1999, and many of you have had a chance to interact with him over the last several years as he has held a series of financial leadership roles with increasing responsibility, most recently as our Chief Accounting Officer. His financial experience and deep understanding of our business has prepared him and therefore our company for continued success. Since it's May 4th, before I turn the call over to Jim, I just wanted to say may 4th be with you. I will now turn the call over to Jim Reagan for more details on our first quarter results and guidance.