Leidos Holdings, Inc.

Greetings and welcome to the Leidos Q2 2021 earnings call. At this time, all participants are in a 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. I would now like to turn the conference over to your host, Mr. Stuart Davis, Senior Vice President, Investor Relations. Please go ahead.

Thank you, Hector, and good morning, everyone. I'd like to welcome you to our second quarter fiscal year 2021 earnings conference call. Joining me today are Roger Krohn, our Chairman and CEO, and Chris Cage, our Chief Financial Officer. Today's call is being webcast on the Investor Relations portion of our website. where you'll also find the earnings release and presentation slides that we'll use during today's call. Turning to slide two of the presentation, 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, as shown on slide three, during the call, we will discuss GAAP and non-GAAP financial measures. A reconciliation between the two is included in today's press release and presentation slides. With that, I'll turn the call over to Roger Krohn, who will begin on slide four.

Thank you, Stuart, and thank you all for joining us this morning for our second quarter 2021 earnings conference call. Our results in the second quarter reflect our leadership position in the government technology market. I am tremendously proud of the way Leidos has responded throughout the pandemic as our employees and business partners continually delivered for our customers and shareholders. While we remain vigilant with the recent uptick in COVID-19 cases, Leidos is stronger than ever. with new quarterly record levels of revenue and backlog consistent with our industry-leading organic growth. As I look at the quarter, four messages stand out. First, our strong financial results demonstrate that our strategy is working. Second, our business development momentum is setting the stage for future growth. Third, we're effectively deploying capital to broaden our offerings in attractive markets. And fourth, we're building an engaged and effective workforce. I'll now drill down on each of these four key messages. Number one, our strong financial performance was highlighted by double-digit organic growth and adjusted EBITDA margins above our long-term targets. Revenue for the quarter were $3.45 billion, up 18% from the prior year on a total basis and up 16% organically. Adjusted EBITDA margins of 10.4% were in line with guidance and above the long-term target we established two years ago. After adjusting for the one-time gain in the second quarter of 2020, non-GAAP diluted EPS was up 37%. These results didn't just happen. Rather, they are a direct result of our strategy. We've differentiated ourselves within the market through scale, which creates a more competitive cost structure and expanded capability to take share and position in vital markets. We've also leveraged our cost structure to make key technology investments which further separates us from our peers. Number two, our business development engine continued the momentum that is driving our industry-leading organic growth. We achieved net bookings of $3.8 billion in the quarter, representing a book-to-bill ratio of 1.1, our 14th consecutive quarter with a book-to-bill ratio of 1 or greater. Our trailing 12-month book-to-bill ratio is now 1.2. As a result, total backlog at the end of the quarter stood at a record $33.5 billion, which was up 9% on a year-over-year basis. In our health segment, we were awarded a new fixed price contract with a ceiling value of almost a billion dollars to improve the health of military reservists before, during, and after deployment. Under this contract, known as the Reserve Health Readiness Program, or RHRP, will provide physical, mental health, and dental assessments, along with laboratory and diagnostic services supported by a secure IT infrastructure and customer service call center. America's more than a million Reserve Component personnel stand ready to support and defend our nation when it's called upon. It's our honor to support them. In our Defense Solutions segment, The Transportation Security Administration awarded us a $470 million prime contract to integrate transportation screening equipment at airports all around the country. Based on our policy, we only booked a small initial task order in the quarter, although we expect to achieve the full value over the life of the contract. This work is a reconfiguration of work we've been performing for over 12 years. And we also maintain screening equipment for TSA at all U.S. federalized airports. Helping TSA ensure freedom of movement for people and commerce is one of the core ways Leidos is making the world safer, healthier, and more efficient. In our civil segment, the Federal Aviation Administration notified us that they have given us initial tasking as part of a long-term extension for the continued systems integration, sustainment, and enhancement of the En-Route Automation Modernization, or ERAM, system. The ERAM system is critical for operations in the National Aerospace System and at the 20 air route traffic control centers in the continental U.S. We didn't book anywhere close to the $6.8 billion ceiling value, but it speaks to the confidence that the FAA has in Leidos. We expect to begin the 2022 government fiscal year with a continuing resolution. but customers will still be able to fund work in critical needs areas. Our positive outlook is bolstered by the level of proposal activity. At the end of the quarter, we had $49 billion in submits outstanding, of which $35 billion is new work for us. Number three. we're deploying capital to complete our offerings in attractive markets to spur profitable growth. In May, we completed the acquisition of Gibbs & Cox, which brings us world-class naval architecture, design, and engineering services. They designed 68% of the Navy's current surface combatant fleet and are truly a national asset. This deal enhances how we're viewed across the Navy and opens up significant market opportunity for us. Our strategic planning process had identified maritime as an attractive market where we were under-penetrated. To enable synergies, especially around unmanned surface and subsurface systems, Gibbs and Cox will be combined with Leidos' Maritime Systems Division and operate under Dynetics within the Defense Solutions segment. In addition, we're seeing early returns from our 1901 group acquisition, which we closed in January of this year. Most directly, 1901 is providing significant support to the NGEN program transition and operations. They've significantly expanded their workforce, grown the current enterprise IT operations center in Virginia, and accelerated the establishment of new engine service desk locations in San Diego, Norfolk, and Boise. 1901's platform-delivered IT services made them the best choice for the program's requirements in this area. 1901 was also instrumental in securing a $125 million fall-on contract with the Bureau of Alcohol, Tobacco, Firearms, and Explosives for managed IT services. 1901's strong customer relationships with the ATF, coupled with their efficient as-a-service delivery model, made them key to the bid and execution strategies. In addition to deploying capital to spurn growth, we were also committed to returning capital to shareholders. To that end, our board just approved a 6% increase to the quarterly dividend. This increase reflects the confidence of the board of directors and the management team in the quality of our earnings and our ability to generate cash. Number four. This is a people business, and this quarter offered further proof that we are an employer of choice that can attract the workforce needed to meet our financial commitments. During the quarter, we hired more than 4,500 people, and at the end of the quarter, we were more than 42,000 strong. Our headcount grew 6% sequentially and 11% year over year. Our ability to attract top talent in this manner is important as we staff up to successfully execute the new programs. One of the reasons we are attractive to job applicants is that we invest in talent management and career development. We regularly review talent and plan development actions, including rotations, at all levels throughout the company. As an example, Executive Vice President Jim Cantor recently announced his intent to retire after a distinguished 31-year career at Leidos. This enabled us to reconfigure our team to optimize performance given our rapid growth and the changes in market priorities. I asked Vicki Szymanski, who is leading our intelligence group, to assume the new role of executive vice president corporate operations. In her new role, Vicki will drive operational performance and implementation of strategic functional initiatives. Roy Stevens, who led business development and strategy, succeeded Vicki as the president of the intelligence group. In addition, I asked Chief Human Resources Officer Paul Angola to lead a strategic effort to chart our way forward in the national security space market. These changes will help us prepare for an uncertain future. A few weeks ago, we kicked off the million-dollar Move the Needle sweepstakes to encourage our employees to get vaccinated against COVID-19 and hasten our coming back together. At the time, all of our facilities were open and all vaccinated individuals were able to work without a mask. A lot has changed in the past weeks. the highly contagious Delta variant and the infection trends are disturbing. As we have throughout the pandemic, we'll comply with all CDC guidelines and most of our facilities will require masks regardless of vaccination status. While we do not expect that our customers will be shutting down their offices again, we cannot be certain. In the face of that uncertainty, We have decided to keep our current forward guidance in place, and Chris will walk you through that in more detail. For me, part of returning to normal is being able to get together face-to-face with our investors and analysts. It is our intent to host an Investor Day in New York on October 7th. We have a compelling story to tell, and we look forward to doing just that. We'll closely watch for COVID protocols from New York City and update you if our plans change. Finally, Frank Kendall has stepped down from our board to serve as the Secretary of the Air Force. I want to thank Frank for his service to Leidos, and more importantly, to the Air Force, the Department of Defense, and the nation. I'll now turn the call over to Chris Cage. I'm delighted to have Chris step up to the CFO role and join us on these calls.